<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1998
REGISTRATION NO. 333-
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ESENJAY EXPLORATION, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 73-1421000
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
500 NORTH WATER STREET
SUITE 1100
CORPUS CHRISTI, TEXAS 78471
(512) 883-7464
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
MICHAEL E. JOHNSON
PRESIDENT
ESENJAY EXPLORATION, INC.
500 N. WATER STREET, SUITE 1100
CORPUS CHRISTI, TEXAS 78471
(512) 883-7464
(Name, Address and Telephone Number of Agent For Service)
--------------------------
WITH COPIES TO:
PORTER & HEDGES, L.L.P. VINSON & ELKINS L.L.P.
700 LOUISIANA 2300 FIRST CITY TOWER
HOUSTON, TEXAS 77002 1001 FANNIN STREET
(713) 226-0629 HOUSTON, TEXAS 77002
ATTN: SAMUEL N. ALLEN (713) 758-2222
ATTN: ALAN P. BADEN
--------------------------
Approximate date of commencement of proposed sale to the public.
As soon as practicable after the Registration Statement becomes effective.
--------------------------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. /X/
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $.01 per share................................ 5,750,000 $8,059
Representative's warrant.............................................. 210,000 (2)
Common Stock issuable upon exercise of the Representative's warrant... 210,000 $292
</TABLE>
(1) Includes Underwriters' over-allotment option.
(2) Pursuant to Rule 457(g), no registration fee is required for the
Representative's warrants.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATE AS MAY BE NECESSARY TO DELAY AN EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
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 SECTION 8(a),
MAY DETERMINE.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 21, 1998
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.
<PAGE>
5,000,000 SHARES
[LOGO]
COMMON STOCK
The 5,000,000 shares of common stock, par value $.01 per share ("Common
Stock"), offered hereby are being sold by Esenjay Exploration, Inc., a Delaware
corporation (the "Company").
The Common Stock is quoted on the Nasdaq Small-Cap Market under the symbol
"ESNJ." On May 20, 1998, the closing price of the Common Stock, as reported by
the Nasdaq Small-Cap Market, was $5.00 per share.
------------------------
FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" BEGINNING
ON PAGE 10.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)(3)
<S> <C> <C> <C>
Per Share.............................................. $ $ $
Total (3).............................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). Does not reflect additional compensation to
the Representative of the Underwriters (the "Representative") in the form of
(i) a nonaccountable expense allowance of $300,000 and (ii) warrants to
purchase up to 210,000 shares of Common Stock at an exercise price of $7.20
per share. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated to be
$350,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 additional shares of Common Stock, solely to cover over-allotments,
if any, upon the same terms and conditions as the shares offered hereby. 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 shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be made at the offices of Gaines, Berland Inc., New York, New York,
on or about June , 1998.
GAINES, BERLAND INC.
THE DATE OF THIS PROSPECTUS IS JUNE , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
IN ADDITION, CERTAIN UNDERWRITERS (INCLUDING SELLING GROUP MEMBERS, IF ANY) ALSO
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ SMALL-CAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. ON MAY 14,
1998, THE COMPANY CONSUMMATED A ONE-FOR-SIX REVERSE SPLIT OF THE COMPANY'S
COMMON STOCK (THE "REVERSE SPLIT"). ALL PER SHARE DATA SET FORTH HEREIN, UNLESS
OTHERWISE INDICATED, HAVE BEEN ADJUSTED TO REFLECT THE REVERSE SPLIT. UNLESS
OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. INVESTORS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS,"
BEGINNING ON PAGE 10. REFERENCES HEREIN TO THE "COMPANY" MEAN ESENJAY
EXPLORATION, INC., A DELAWARE CORPORATION, FORMERLY KNOWN AS FRONTIER NATURAL
GAS CORPORATION. CERTAIN TERMS USED HEREIN RELATING TO THE OIL AND NATURAL GAS
INDUSTRY ARE DEFINED IN A GLOSSARY OF CERTAIN INDUSTRY TERMS INCLUDED ELSEWHERE
IN THIS PROSPECTUS.
THE COMPANY
OVERVIEW
The Company is an independent energy company engaged in the exploration for
and development of natural gas and oil. The Company has assembled an inventory
of over 30 technology enhanced natural gas exploration projects along the Texas
and Louisiana Gulf Coast (the "Exploration Projects"). These Exploration
Projects include substantial interests in 28 projects the Company acquired on
May 14, 1998 (the "Acquisitions") from Esenjay Petroleum Corporation ("EPC") and
Aspect Resources LLC ("Aspect") pursuant to an Acquisition Agreement and Plan of
Exchange (as amended, the "Acquisition Agreement"). Cornerstone Ventures, L.P.,
a Houston, Texas, based investment banking firm with expertise in evaluating the
value of oil and gas exploration properties ("Cornerstone"), delivered to the
Company a written opinion that estimated the fair market value of the assets
acquired in the Acquisitions, as of January 23, 1998, to be $54.2 million. See
"Risk Factors--Uncertainty as to Estimates of Fair Market Values." The
Exploration Projects also include the Company's interest in the Starboard
Project in Terrebonne Parish, Louisiana, which consists of mineral leases and
options and a proprietary 3-D seismic survey over the Lapeyrouse Field. The
Company, EPC and Aspect have spent several years identifying and evaluating many
of the Exploration Projects.
In connection with the Acquisitions, an affiliate of Enron Corp. exercised
an option to exchange $3.8 million of debt Aspect owed to such Enron affiliate
for 675,000 shares of the Company's Common Stock that would otherwise have been
issued to Aspect in the Acquisitions, at an effective conversion rate of $5.63
per share. As a result of the Acquisitions and this exchange, EPC, Aspect and
the Enron affiliate own 43.91%, 36.27% and 5.74%, respectively, of the Company's
Common Stock.
Most of the Exploration Projects have been, are being, or will be enhanced
with 3-D seismic data in conjunction with computer aided exploration ("CAEX")
technologies. The 3-D seismic data acquired, when complete, will cover
approximately 1,500 square miles. A significant number of the Exploration
Projects have reached the drilling stage, and the Company has budgeted
approximately $25.0 million, in addition to funds already spent, to fund the
drilling of approximately 30 wells and to fund other exploration costs over the
next 12 months. The Company believes that the Exploration Projects represent a
diverse array of technology enhanced, 3-D seismic confirmed, ready to drill
natural gas exploration projects.
From November 1, 1997 (the effective date of the Acquisitions), through May
14, 1998 (the closing date of the Acquisitions), approximately $2.69 million was
spent for the Company's account to drill eight wells on the Exploration
Projects, of which seven have been completed or are awaiting completion, and one
was a dry hole, the cost of which was approximately $19,000. Two additional
wells are currently being drilled and two locations are awaiting drilling
equipment for additional wells.
3
<PAGE>
STRATEGY
The Company's strategy is to expand its reserves, production and cash flow
through the implementation of an exploration program that focuses on (i)
obtaining dominant positions in core areas of exploration; (ii) enhancing the
value of the Exploration Projects and reducing exploration risks through the use
of 3-D seismic and CAEX technologies; (iii) maintaining an experienced technical
staff with the expertise necessary to take advantage of the Company's
proprietary 3-D seismic and CAEX seismic data; (iv) reducing exploration risks
by focusing on the identification of potential moderate-depth gas reservoirs,
which the Company believes are conducive to hydrocarbon detection technologies;
and (v) retaining operational control over critical exploration decisions.
OBTAIN DOMINANT POSITION IN CORE AREAS. The Company has identified core
areas for exploration along the Texas and Louisiana Gulf Coasts that have
geological trends with demonstrated histories of prolific natural gas
production from reservoir rocks high in porosity and permeability with
profiles suitable for seismic evaluation. Unlike the Gulf of Mexico, where
3-D seismic data typically is owned and licensed by many companies that
compete intensely for leases, the private right of ownership of onshore
mineral rights enables individual exploration companies to proprietarily
control the seismic data within focused core areas. The Company believes
that by obtaining substantial amounts of proprietary 3-D seismic data and
significant acreage positions within its core areas, it will be able to
achieve a dominant position in focused portions of those areas. With such a
dominant position, the Company believes it can better control the core
areas' exploration opportunities and future production, and can attempt to
minimize costs through economies of scale and other efficiencies inherent in
its focused approach. Such cost savings and efficiencies include the ability
to use the Company's proprietary data to reduce exploration risks and lower
its leasehold acquisition costs by identifying and purchasing leasehold
interests only in those focused areas in which the Company believes
exploratory drilling is most likely to be successful.
USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. The Company attempts to enhance
the value of its Exploratory Projects through the use of 3-D seismic and
CAEX technologies, with an emphasis on direct hydrocarbon detection
technologies. These technologies create computer generated 3-dimensional
displays of subsurface geological formations that enable the Company's
explorationists to detect seismic anomalies in structural features that are
not apparent in 2-D seismic surveys. The Company believes that 3-D seismic
technology, if properly used, will reduce drilling risks and costs by
reducing the number of dry holes, optimizing well locations and reducing the
number of wells required to exploit a discovery. The Company believes that
3-D seismic surveys are particularly suited to its Exploration Projects
along the Texas and Louisiana Gulf Coasts.
EXPERIENCED TECHNOLOGICAL TEAM. The Company maintains an experienced
technical staff, including engineers, geologists, landmen and other
technical personnel. After the Acquisitions, the Company hired most of EPC's
technical personnel, who, in some instances, have worked together for over
15 years. In addition, the Company has entered into a geotechnical services
consulting agreement with Aspect on certain of the Exploration Projects
pursuant to which Aspect provides the Company geophysical expertise in
managing the design, acquisition, processing and interpretation of 3-D
seismic data in conjunction with CAEX data.
FOCUSED DRILLING OBJECTIVES. In addition to using 3-D seismic and CAEX
technologies, the Company seeks to reduce exploration risks by exploring at
moderate depths that are deep enough to discover sizeable gas accumulations
(generally 8,000 to 12,500 feet) and that also are conducive to direct
hydrocarbon detection, but not so deep as to be highly exposed to the
greater mechanical risks and drilling costs incurred in the deep plays in
the region. In conjunction with interpreting the 3-D seismic and CAEX data
relating to the Company's moderate depth wells, the Company anticipates it
will identify potential prospects in deep gas provinces that the Company may
elect to pursue.
4
<PAGE>
CONTROL OF EXPLORATION AND OPERATIONAL FUNCTIONS. The Company believes that
having control of the most critical functions in the exploration process
will enhance its ability to successfully develop its Exploration Projects.
The Company has a majority interest in many of the Exploration Projects,
including proprietary interests in most of the 3-D seismic data relating to
those projects. Although the Company has partners in the Exploration
Projects in which it does not own a majority interest, in most cases, the
Company owns a greater interest than any of its project partners. As a
result, in most of its Exploration Projects, the Company will be able to
influence the areas to explore, manage the land permitting and option
process, determine seismic survey areas, oversee data acquisition and
processing, prepare, integrate and interpret the data and identify each
prospect drillsite. In addition, the Company will be the operator of most of
the wells drilled within the Exploration Projects.
EXPLORATION PROJECTS
Most of the Exploration Projects are concentrated within the Downdip Frio,
Wilcox and Texas Hackberry core project areas in South Texas. The remaining
Exploration Projects consist of the Starboard Project, as well as other projects
in Texas, Louisiana and Mississippi, that either are in early stage exploration
areas that may develop into new core project areas, or non-core area projects,
which are projects that are not presently expected to be further expanded.
Each of the Exploration Projects differs in scope and character and consists
of one or more types of assets, such as 3-D seismic data, leasehold positions,
lease options, working interests in leases, royalty interests or other mineral
rights. The Company's percentage interest in each Exploration Project (the
"Project Interest") represents the portion of the interest in the Exploration
Project it shares with its other project partners. Therefore, the Company's
Project Interest in an Exploration Project should not be confused with the
working interest the Company will own when any given well is drilled. The
Company's working interest in the wells on each Exploration Project may be
higher or lower than its Project Interest.
The following table sets forth certain information about each of the
Exploration Projects. For further information, see "Business and
Properties--Exploration Projects."
5
<PAGE>
EXPLORATION PROJECTS
<TABLE>
<CAPTION>
ACRES LEASED OR
UNDER OPTION AT
MAY 15, 1998(1) SQUARE MILES OF 3-D
----------------------- SEISMIC DATA RELATING PROJECT
PROJECT AREAS GROSS NET TO PROJECT AREA(2) INTEREST
- - ----------------------------------------------- --------- ------------ ----------------------- ---------------
<S> <C> <C> <C> <C>
SOUTH TEXAS
DOWNDIP FRIO CORE AREA
Big Gas Sand................................. 24,700 5,557 65 22.5%
Blessing..................................... 10,672 10,298 22 24.0%
Tidehaven.................................... 9,145 4,301 28 40.5%
El Maton..................................... 7,277 6,547 29 46.5%
Midfield..................................... 2,228 1,518 21 37.5%
Matagorda I(3)............................... 11,444 7,243 50 74.0%
Matagorda II(4).............................. 7,480 5,793 60 66.0%
Southwest Pheasant........................... 10,000 7,500 10 75.0%
Geronimo..................................... 9,616 8,959 76 20.0%
Houston Endowment............................ 3,969 3,969 50 27.0%
Wolf Point................................... 1,520 1,520 8 45.5%
Sheriff Field................................ 54,000 40,500 72 75.0%
West Jeffco.................................. 13,500 6,075 60 45.0%
La Rosa...................................... 7,689 7,300 25 8.0%
Piledriver................................... 640 640 2 62.5%
WILCOX CORE AREA
Hall Ranch................................... 8,510 8,485 57 41.5%
Hordes Creek................................. 6,972 6,598 25 41.5%
Mikeska...................................... 7,239 6,553 31 38.0%
Duval, McMullen.............................. 1,979 1,979 12 90.0%
TEXAS HACKBERRY CORE AREA
Lox B........................................ 11,700 2,925 71 25.0%
West Port Acres.............................. 800 100 21 12.5%
Big Hill/Stowell............................. 10,000 5,000 56 50.0%
East Jeffco.................................. 24,000 12,000 65 50.0%
West Beaumont................................ 11,200 700 23 6.25%
LOUISIANA
Starboard.................................... 6,682 5,905 35 12.0%-48.0%
Tack......................................... 480 300 12 75.0%
OTHER TEXAS
Willacy County............................... 11,485 11,136 50 78.875%
Caney Creek.................................. 21,000 2,625 32 12.5
East Texas Pinnacle Reef (5)................. -- -- 400 --
MISSISSIPPI
Thompson Creek............................... 1,325 914 12 56.0%
Lipsmacker................................... 5,758 3,625 64 22.0%
--------- ------------ ------
Total...................................... 303,010 186,565 1,544
--------- ------------ ------
--------- ------------ ------
</TABLE>
- - ------------------------
(1) Gross acres refers to the number of acres leased or under option in which
the Company owns an undivided interest. Net acres were determined by
multiplying the gross acres leased or under option times the Company's
working interest therein.
(2) Represents 3-D seismic data acquired or to be acquired. See "Business and
Properties--Exploration Projects--Exploration Project Descriptions."
(3) The Company has entered into an agreement to sell a 26.7% Project Interest
in this Exploration Project for $694,200 for costs incurred before
commencement of drilling operations.
(4) The Company has entered into an agreement to sell a 26.7% Project Interest
in this Exploration Project for $694,200 for costs incurred before the
commencement of drilling operations.
(5) Consists of 400 square miles of 3-D seismic data to which Aspect has rights
pursuant to a license agreement, and in which the Company may acquire an
interest pursuant to a geophysical technical services consulting agreement
with Aspect.
6
<PAGE>
The Company's principal executive offices are located at 500 North Water
Street, Suite 1100, Corpus Christi, Texas 78471, and its telephone number at
such address is (512) 883-7464. The Company also maintains corporate finance and
business development offices at One Allen Center, Suite 2920, Houston, Texas
77002, and its telephone number at such address is (713) 739-7100.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. 5,000,000 shares
Common Stock outstanding after the
Offering(1)..................... 16,762,687 shares
Use of Proceeds................... To repay $7.8 million of indebtedness, for exploration
and development activities and for working capital. See
"Use of Proceeds."
Nasdaq Small-Cap Market Symbol.... ESNJ
</TABLE>
- - ------------------------
(1) Does not include (i) up to 750,000 shares of Common Stock issuable pursuant
to the Underwriters' over-allotment option; (ii) 291,667 shares of Common
Stock issuable upon conversion of the Company's Series A Warrants; (iii)
776,250 shares of Common Stock issuable upon the exercise of the Company's
Series B Warrants; (iv) 595,833 shares of Common Stock issuable upon the
exercise of additional outstanding warrants, including warrants to purchase
210,000 shares of Common Stock issued to the Representative in connection
with this Offering (the "Representative's Warrant"); and (v) 104,000 shares
of Common Stock issuable upon the exercise of outstanding employee stock
options. See "Risk Factors--Shares Eligible for Future Sale;
Management--Option Grants" and "Underwriting."
RISK FACTORS
Prospective purchasers of Common Stock should carefully consider all of the
information contained in this Prospectus, particularly the factors set forth
under "Risk Factors" beginning on page 10.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary financial data below sets forth (i) the historical financial
data as of and for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1997 and 1998; (ii) pro forma financial data giving
effect to the Acquisitions, the redemption of 85,961 shares of the Company's 12%
Cumulative Convertible Preferred Stock, par value $.01 per share (the "Preferred
Stock") which was called for redemption on May 14, 1998 and the use of proceeds
from the Company's credit facility with Duke Energy Financial Services, Inc.
(the "Duke Credit Facility"), as if each of such transactions had occurred on
January 1, 1997; and (iii) pro forma as adjusted financial data giving effect to
the use and application of the net proceeds of the sale of the Common Stock
offered hereby. The historical financial data are derived from the Company's
audited financial statements. The financial data as of and for the three month
period ended March 31, 1997 and 1998 are derived from the Company's unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
that the Company considers necessary for a fair presentation of the Company's
financial position as of such dates and the results of operations and cash flows
for such periods. Operating results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998. The statement of operations and balance
sheet data are provided for comparative purposes only and should be read in
conjunction with the Company's historical consolidated financial statements
included elsewhere in this Prospectus. The pro forma information presented is
not necessarily indicative of the combined financial results as they may be in
the future or as they might have been for the periods indicated had the
Acquisitions been consummated as of January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, PRO FORMA MARCH 31, PRO FORMA
---------------------- DECEMBER 31, ---------------------- MARCH 31,
1996 1997 1997 1997 1998 1998
---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1)............................... $3,166,792 $ 908,609 $ 908,609 $ 405,647 $ (16,586) $ (16,586)
Cost and expenses
Production and exploration costs(2)..... 2,450,771 3,065,394 8,585,067 1,048,502 60,197 1,316,964
Depletion, depreciation &
amortization(3)....................... 2,237,648 315,880 315,880 132,774 53,568 53,568
Impairment of oil and gas
properties(4)......................... 51,000 349,384 349,384 -- -- --
Interest expense(5)..................... 783,872 60,942 687,422 4,133 19,223 180,852
General and administrative
expenses(6)........................... 2,217,099 2,070,812 3,553,812 572,260 459,014 819,014
Other expenses(7)....................... 451,421 -- -- -- -- --
---------- ---------- ------------ ---------- ---------- ----------
Net income (loss)......................... (5,025,019) (4,953,803) (12,582,956) (1,352,022) (608,588) (2,386,984)
Cumulative preferred stock dividend....... 103,153 103,153 -- 25,788 25,788 --
---------- ---------- ------------ ---------- ---------- ----------
Net income (loss) applicable to common
shareholders............................ $(5,128,172) $(5,056,956) ($12,582,956) $(1,377,810) $ (634,376) $(2,386,984)
---------- ---------- ------------ ---------- ---------- ----------
---------- ---------- ------------ ---------- ---------- ----------
Net income (loss) per common share,
adjusted for 1:6 reverse stock split.... $ (4.31) $ (3.07) $ (1.07) $ (0.84) $ (0.38) $ (0.20)
---------- ---------- ------------ ---------- ---------- ----------
---------- ---------- ------------ ---------- ---------- ----------
Weighted average common shares
outstanding, adjusted for 1:6 reverse
stock split............................. 1,190,343 1,646,311 11,803,011 1,644,317 1,655,984 11,812,684
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED(8)
---------- ---------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................................. $(1,148,584) $(3,124,406) $ 15,927,532
Properties and equipment, net.......................................... 3,491,694 60,691,695 60,691,695
Total assets........................................................... 6,359,392 62,523,730 79,910,477
Long-term debt (excluding current maturities).......................... 2,893,055 4,607,785 1,059,723
Stockholders' equity................................................... 1,203,024 53,429,136 75,687,771
</TABLE>
- - ------------------------
Notes appear on following page.
8
<PAGE>
(1) Revenues decreased from $3.18 million for the year ended December 31, 1996
to $0.91 million for the same period of 1997, and from $0.41 million for the
three months ended March 31, 1997 to ($16,586) for the same period in 1998,
primarily as a result of ceased production from the Mobile Bay wells and
from the sale of producing properties. Negative revenues relate to the
effect of recognized losses on gas hedges in the quarter.
(2) Pro forma exploration costs include geological and geophysical, delay
rentals and exploration costs of $5.5 million and $1.3 million for the year
ended December 31, 1997 and for the three months ended March 31, 1998,
respectively, associated with the unproved prospects acquired from EPC and
Aspect pursuant to the Acquisition Agreement. Exploration costs for the
three months ended March 31, 1998 decreased $1.0 million from the same
period in 1997 due to dry holes drilled during 1997.
(3) Depletion, depreciation and amortization expense decreased from $2.2 million
for the year ended December 31, 1996 to $0.3 million for the same period in
1997, primarily due to the abandonment of previously producing wells in the
Mobil Bay prospect and the sale of certain oil and gas properties.
(4) Impairment of oil and gas properties increased from $51,000 in 1996 to
$349,384 in 1997 primarily due to the abandonment of previously producing
Mobile Bay wells.
(5) Interest expense decreased from $783,872 in 1996 to $60,942 in 1997
primarily due to the reduction in the Company's outstanding bank debt during
1997. Pro forma interest included interest associated with an EPC note
payable to Aspect of $24,490 and $11,132 for the year ended December 31,
1997 and for the three months ended March 31, 1998, respectively, which was
assumed by the Company and $601,990 and $150,497 associated with borrowings
under the Duke Credit Facility for the year ended December 31, 1997 and the
three months ended March 31, 1998, respectively.
(6) Pro forma general and administrative expenses include historical expense of
EPC in the amount of $1,483,000 and $360,000 for the year ended December 31,
1997 and for the three months ended March 31, 1998, respectively, which the
Company assumed in the Acquisitions.
(7) 1996 included other expense items for the purchase and settlements of
deferred gas contracts. There were no such expenses during 1997.
(8) As adjusted to reflect the receipt by the Company of the estimated net
proceeds from the issuance of the 5.0 million shares of Common Stock offered
hereby and the application of such net proceeds. See "Use of Proceeds" and
"Capitalization."
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus, including without limitation
statements under "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business and
Properties" regarding planned capital expenditures, the availability of capital
resources to fund capital expenditures, estimates of proved reserves, the number
of anticipated wells to be drilled in the future, the Company's financial
position, business strategy and other plans and objectives for future
operations, are forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance such expectations will prove to have been correct. There are
numerous uncertainties inherent in estimating quantities of proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the Company's control.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates made by different engineers often vary from one another. In
addition, results of drilling, testing and production after the date of an
estimate may justify revisions of such estimate and such revisions, if
significant, would change the schedule of any further production and development
drilling. Accordingly, reserve estimates generally are different from quantities
of oil and natural gas that ultimately are recovered. Additional important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed elsewhere in this Prospectus. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such factors.
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH
BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE
MAKING ANY INVESTMENT IN THE COMMON STOCK.
EXPLORATION RISKS; RELIANCE ON CAEX AND 3-D SEISMIC TECHNOLOGY
The Company's principal activity has changed from the acquisition,
production and marketing of natural gas and oil reserves to exploration and
development activities. Exploratory drilling is a speculative activity, and
there can be no assurance as to the success of the Company's drilling program.
The Company's strategy is to enhance the value of its Exploration Projects
through the use of 3-D seismic and CAEX technologies, with an emphasis on direct
hydrocarbon detection technologies. These technologies create computer generated
3-D displays of subsurface geological formations that enable the Company's
explorationists to detect seismic anomalies and structural features that are not
apparent in 2-D seismic surveys; however, these technologies require greater
pre-drilling expenditures than traditional drilling strategies. Even when fully
used and properly interpreted, 3-D seismic data and visualization techniques
only assist geoscientists in identifying subsurface structures and hydrocarbon
indicators, and do not conclusively allow the interpreter to know if
hydrocarbons will in fact be present in such structures. Exploratory drilling
and, to a lesser extent, development drilling involve a high degree of risk that
no commercial production will be obtained or that the production will be
insufficient to recover drilling and completion costs. The costs of drilling,
completing and operating wells are uncertain. The Company's drilling operations
may be curtailed, delayed or canceled as a result of numerous factors, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment. Furthermore, completion of
a well does not assure a profit on the investment or a recovery of drilling,
completion and operating costs. The failure of the Company's current exploration
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activities would have a material adverse effect on the Company's future results
of operations and financial condition. See "Business and Properties--Drilling
Activity."
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon various
assumptions, including assumptions required by the Securities and Exchange
Commission (the "Commission") as to oil and gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. The process of
estimating oil and gas reserves is complex, requiring significant decisions and
assumptions in the evaluation of available geological, geophysical, engineering
and economic data for each reservoir. As a result, such estimates are inherently
imprecise. Actual future production, oil and gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves may vary substantially from the Company's estimates. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this Prospectus. In addition, the
Company's proved reserves may be subject to downward or upward revision based
upon production history, results of future exploration and development,
prevailing oil and gas prices and other factors, many of which are beyond the
Company's control. Actual production, revenues, taxes, development expenditures
and operating expenses with respect to the Company's reserves will likely vary
from the estimates used, and such variances may be material.
Information concerning the Company's proved reserves contained in this
Prospectus is based on the Company's estimates. The Company has not relied upon
a reserve report from an independent petroleum engineer with respect to such
estimates. Although the Company believes its estimates of its proved reserves
are based on sound judgments and analysis, there can be no assurance that the
Company's estimates will be as accurate as those that might have been prepared
by an independent petroleum engineer.
Approximately 94% of the Company's total proved reserves at December 31,
1997 were undeveloped, which are by their nature less certain than proved
developed reserves. Recovery of such reserves will require significant capital
expenditures and successful drilling operations. The reserve data set forth in
the Company's estimates assumes that substantial capital expenditures will be
required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated. See "Business and Properties--Oil and Gas Reserves."
The present value of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
Commission requirements, the estimated future net cash flows from proved
reserves generally are based on prices and costs as of the date of the estimate,
whereas actual future prices and costs may be materially higher or lower. Actual
future net cash flows also will be affected by increases in consumption by gas
purchasers and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves, and thus their actual present
value, will be affected by the timing of both the production and the incurrence
of expenses in connection with the development and production of oil and gas
properties. In addition, the 10% discount factor, which the Commission requires
to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with the Company
or the oil and gas industry in general.
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION
The Company's revenue, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. The Company's ability to maintain or increase its
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borrowing capacity and to obtain additional capital on attractive terms also is
substantially dependent upon oil and gas prices. Prices for oil and natural gas
are subject to wide fluctuation in response to relatively minor changes in
supply and demand, market uncertainty and a variety of additional factors that
are beyond the Company's control. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of oil and gas imports and overall economic conditions. From time to time,
oil and gas prices have been depressed by excess domestic and imported supplies.
There can be no assurance that current price levels will be sustained.
Predicting future oil and natural gas price movements with any certainty is not
possible. Declines in oil and natural gas prices may adversely affect the
Company's financial condition, liquidity and results of operations and may
reduce the amount of the Company's oil and natural gas that can be produced
economically. Market prices for oil have generally declined since December 1997.
Additionally, substantially all of the Company's sales of oil and natural gas
are made in the spot market or pursuant to contracts based on spot market prices
and not pursuant to long-term fixed price contracts. With the objective of
reducing price risk, the Company from time to time enters into hedging
transactions with respect to a portion of its expected future production. There
can be no assurance, however, that such hedging transactions will reduce risk or
mitigate the effect of any substantial or extended decline in oil or natural gas
prices. Any substantial or extended decline in the prices of oil or natural gas
would have a material adverse effect on the Company's financial condition and
results of operations.
In addition, the marketability of the Company's production depends upon the
availability and capacity of gas gathering systems, pipelines and processing
facilities. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If market factors were to change dramatically, the financial impact
on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the control of the Company and represent
a significant risk. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "Business and
Properties--Marketing."
Volatile oil and gas prices make it difficult to estimate the value of
producing properties for acquisition and often cause disruption in the market
for oil and gas producing properties, as buyers and sellers have difficulty
agreeing on such value. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploration projects.
RISK OF PRICE RISK MANAGEMENT TRANSACTIONS
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, the Company has in the past and expects to continue to enter
into oil and gas hedging arrangements. These arrangements may include futures
contracts on the New York Mercantile Exchange, fixed price delivery contracts
and financial swaps. These hedging arrangements may apply to only a portion of
the Company's production and provide only partial price protection against a
decline in natural gas prices. While intended to reduce the effects of
volatility of the price of oil and natural gas, such transactions may limit
potential gains by the Company if oil and natural gas prices were to rise
substantially over the price established by the hedge. In addition, such
transactions may expose the Company to the risk of financial loss in certain
circumstances, including instances in which (i) production is less than
expected; (ii) there is a widening of price differentials between delivery
points for the Company's production and the delivery point assumed in the
arrangement; (iii) the counter parties to the Company's future contracts fail to
perform under the contracts; or (iv) a sudden, unexpected event has a material
impact on oil or natural gas prices.
The Company's only current swap arrangement is the swap arrangement required
by the Company's credit agreement with Bank of America NT&SA (the "Bank Credit
Agreement"). The swap agreement is for 62,500 MMBtu of the Company's monthly
Mid-Continent natural gas production for $1.566 per MMBtu for the period
beginning April 1, 1996 and ending January 31, 1999. The swap was reduced to
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31,250 MMBtu on September 25, 1996, in connection with the sale of the N.E.
Cedardale field. The Company recorded a loss of $212,000 on this swap reduction.
The Company's net gas production has been less than the volumes hedged. As of
March 31, 1998, the Company had an accrued liability of $179,947 to recognize
the projected loss from the hedge. The Company has not recently conducted an
active hedging program other than as required by the Bank Credit Agreement. In
that regard, the Company had net losses of $814,029 in 1996, which includes the
$212,000 loss on the swap reductions, and $375,410 in 1997 on its required
hedged positions.
HISTORY OF LOSSES; ACCUMULATED AND WORKING CAPITAL DEFICITS
For the years ended December 31, 1996 and 1997, the Company had net losses
of $5,025,019 and $4,953,803. The Company had a net loss of $608,588 for the
three months ended March 31, 1998. On a pro forma basis for the year ended
December 31, 1997 and the three months ended March 31, 1998, the Company had net
losses of $12,582,956 and $2,386,984, respectively. The Company anticipates that
it will continue to have net losses until it acquires or develops enough
additional producing gas and oil properties to achieve profitability. There can
be no assurance the Company will be able to do so.
SUBSTANTIAL CAPITAL REQUIREMENTS
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
combination of internally generated funds, equity and long-term debt financing,
and short-term financing arrangements. Based on its current operations, the
Company anticipates that its capital expenditures through the end of 1998 will
be funded from (i) proceeds from the sale of the Common Stock offered hereby;
(ii) the availability of credit under the Company's Bank Credit Agreement and
other credit facilities; (iii) sales of promoted interests in the Exploration
Projects to industry partners; and (iv) if the foregoing financing sources are
inadequate, the sale of interests in the Company's assets to unaffiliated third
parties. The availability of credit under the Bank Credit Agreement is subject
to several 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. The Company currently is attempting to renegotiate certain of the
terms of the Bank Credit Agreement to increase the borrowing capacity
thereunder, however, there can be no assurance that the Company will be
successful in doing so. The Company has a capital expenditure budget of $25.0
million for the 12 months following the date of this Prospectus. The proceeds of
this Offering and the borrowing capacity currently available under the Bank
Credit Agreement will not be sufficient to fund such budget in full. Therefore,
unless the Company finds additional sources of capital or negotiates an
amendment to the Bank Credit Agreement to create increased borrowing capacity,
the Company will be required to seek additional sources of capital to fund its
capital expenditure budget, sell interests in its Exploration Projects, or
curtail its drilling program. There can be no assurance that funds available to
the Company will be sufficient for the Company to carry out its proposed plans.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
MORTGAGED GAS AND OIL PROPERTIES; CREDIT AGREEMENT COVENANTS AND RESTRICTIONS
The Company has granted to Bank of America NT&SA a mortgage on substantially
all of the Company's proved developed gas and oil properties to secure repayment
under the Bank Credit Agreement. In addition, the Company granted a mortgage to
Duke Energy Financial Services, Inc. on substantially all of the assets acquired
in the Acquisitions to secure repayment under the Duke Credit Facility, however,
indebtedness under the Duke Credit Facility will be repaid with a portion of the
proceeds from this Offering, and upon such repayment, the mortgage will be
released. The party providing financing for the Starboard Project (the
"Starboard Project Financing") has been granted an overriding royalty interest
in the Starboard Project properties. Repayment of amounts owed are payable only
from the proceeds of
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the overriding royalty interest, but such payments are secured by a mortgage on
the Starboard Project properties. These liens limit the Company's ability to
borrow additional funds. The amount of borrowings under the Bank 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 either to accelerate
payment, repay a specified amount of the borrowings so as to have adequate
reserve value to support the borrowing, or provide additional collateral for the
loan. A failure by the Company to comply with the covenants and restrictions
contained in the Bank Credit Agreement, or obtain a waiver to such covenants and
restrictions, will constitute a default under the terms of the Bank Credit
Agreement and the Starboard Project Financing, resulting in the indebtedness
under both of those credit arrangements becoming immediately due and payable and
enabling the lenders to foreclose against the collateral for the loans. The
Company historically has not been, and currently is not, in compliance with all
its covenants under the Bank Credit Agreement, but has secured waivers of
default for past noncompliance. The Company expects, but cannot assume, that
waivers will continue to be granted in the future. Moreover, the Company
believes that upon consummation of this Offering, the Company will be in
compliance with all of the covenants of the Bank Credit Agreement. The Company
believes, but cannot assure, it will be able to continue to make the payments
required by the Bank Credit Agreement. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RESERVE REPLACEMENT
As is customary in the oil and gas exploration and production industry, the
Company's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless the
Company replaces its estimated proved reserves (through development, exploration
or acquisition), the Company's proved reserves generally will decline as they
are produced.
The Company's current strategy includes increasing its reserve base through
acquisitions of leaseholds with drilling potential and by continuing to exploit
its existing properties. There can be no assurance, however that the Company's
exploration and development projects will result in significant additional
reserves or that the Company will have continuing success drilling productive
wells at economically viable costs. Furthermore, while the Company's revenues
may increase if prevailing oil and gas prices increase significantly, the
Company's finding costs for additional reserves could also increase. For a
discussion of the Company's reserves, see "Business and Properties--Oil and Gas
Reserves."
OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled and that
title problems, compliance with governmental requirements, mechanical
difficulties or shortages or delays in the delivery of drilling rigs and other
equipment may limit the Company's ability to market its production. There can be
no assurance that new wells drilled by the Company will be productive or that
the Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells but
also from wells that are productive but do not produce sufficient net revenues
to return a profit after drilling, operating and other costs. In addition, the
Company's properties may be susceptible to hydrocarbon drainage from production
by other operators on adjacent properties.
Industry operating risks include 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, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.
Additionally, many of the Company's oil and gas operations are located in an
area that is
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subject to tropical weather disturbances, some of which can be severe enough to
cause substantial damage to facilities and possibly interrupt production. In
accordance with customary industry practice, the Company maintains insurance
against some, but not all, of the risks described above. There can be no
assurance that any insurance will be adequate to cover losses or liabilities.
The Company cannot predict the continued availability of insurance at premium
levels that justify its purchase. Losses and liabilities arising from uninsured
or under-insured events could have a material adverse effect on the financial
condition and results of operations of the Company.
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
may be subject to production curtailments. The curtailments may vary from a few
days to several months. In most cases the Company will be provided only limited
notice as to when production will be curtailed and the duration of such
curtailments. The Company is currently not curtailed on any of its production.
RISKS ASSOCIATED WITH THE ACQUISITIONS
PRINCIPAL SHAREHOLDERS. As a result of the Acquisitions, EPC owns
approximately 44% and Aspect owns approximately 36.27% of the Company's issued
and outstanding Common Stock. As a result, each of EPC and Aspect are in a
position to substantially influence the outcome of shareholder votes on the
election of directors and other matters. Moreover, EPC and Aspect together have
sufficient voting power to control the approval of any matter brought before the
Company's shareholders. EPC and Aspect have not entered into any agreement with
respect to the voting of their Common Stock. In addition, if EPC or Aspect were
to sell a significant number of their shares of Common Stock in the public
market, the prevailing market price of the Common Stock could be adversely
affected. See "--Shares Eligible for Future Sale."
MINORITY OWNERSHIP OF OIL AND GAS INTERESTS. The Company owns a minority
interest in some of the Exploration Projects. Operational decisions, such as the
selection of drill sites, when to drill wells, the amount to be expended on any
well, determining whether to conduct recompletion or other activities, and
similar matters will be made by the operators of the wells on each Exploration
Project. The interests of the operators of the wells and of the majority working
interest owners in many cases may not be aligned with the Company's interests.
Therefore, the Company may be unable to control many important aspects of the
operation and development of Exploration Projects on which it owns a minority
interest, and the development of those Exploration Projects may be conducted in
a fashion that is adverse to the Company's best interests.
UNCERTAINTY AS TO ESTIMATES OF FAIR MARKET VALUES
The Company engaged Cornerstone to deliver a written opinion to the
Company's Board of Directors (the "Cornerstone Opinion") to estimate the fair
market value of the assets acquired in the Acquisitions. The Cornerstone Opinion
estimates such fair market value to be approximately $54.2 million as of January
23, 1998. Cornerstone's estimate of the fair market value of the assets acquired
in the Acquisitions was based on oil and gas prices as of the date of the
Cornerstone Opinion. Prices for oil and gas generally have declined since such
date. There can be no assurance that Cornerstone's estimate of the fair market
value of such assets would be as high as that contained in the Cornerstone
Opinion if Cornerstone relied on current oil and gas prices in reaching its
opinion. Cornerstone's estimates of the fair market values of the assets do not
purport to be appraisals or necessarily reflect the prices at which such assets
could actually be sold. Because such estimates are inherently subject to
uncertainty and based upon numerous factors or events beyond the control of the
parties to the Acquisition Agreement or their respective advisors, no assurances
can be given that such estimates will prove to be accurate.
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various United States federal, state
and local governmental laws and regulations that change from time to time in
response to economic or political conditions. Matters
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subject to regulation include discharge permits for drilling operations,
drilling and abandonment bonds, reports concerning operations, the spacing of
wells, and unitization and pooling of properties, environmental protection, and
taxation. From time to time, regulatory agencies have imposed price controls and
limitations on production by restricting the rate of flow of oil and gas wells
below actual production capacity in order to conserve supplies of oil and gas.
In addition, the production, handling, storage, transportation and disposal of
oil and gas, by-products thereof and other substances and materials produced or
used in connection with oil and gas operations are subject to regulation under
laws and regulations primarily relating to protection of human health and the
environment. Failure to comply with these laws and regulations may result in the
assessment of administrative, civil, and criminal penalties, as well as
injunctive relief. The Company also may be subject to substantial clean-up costs
for any toxic or hazardous substance that may exist under any of its current
properties or properties that it has owned or operated in the past. To date,
expenditures related to complying with these laws and regulations and for
remediation of existing environmental contamination have not been significant in
relation to the Company's results of operations.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation. In addition,
the recent trend toward stricter standards in environmental legislation and
regulation is likely to continue. For instance, legislation has been proposed in
Congress from time to time that would reclassify certain crude oil and natural
gas exploration and production wastes as "hazardous wastes" which would make the
reclassified wastes subject to much more stringent handling, disposal and
clean-up requirements. If such legislation were to be enacted, it could have a
significant impact on the Company's operating costs, as well as the oil and gas
industry in general. The Company could incur substantial costs to comply with
environmental laws and regulations, and the Company is unable to predict the
ultimate cost of compliance with these requirements or their effect on its
production. See "Business and Properties-- Regulation."
TITLE DEFECTS
Title to the Company's oil and gas leases, including those purchased in the
Acquisitions, will not be examined until drill sites are selected. 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. Although title will be examined before
drilling on a site commences, as is customary in the industry, the Company does
not intend to purchase title insurance, and there can be no assurance that
losses relating to any lease will not result from title defects, defects in the
assignment of leasehold rights or prior encumbrances. See "Business and
Properties--Title to Properties."
COMPETITION FOR GAS AND OIL LEASES AND SEISMIC PERMITS
Substantial competition exists for gas and oil leases and there can be no
assurance the Company will be able to acquire the gas and oil leases it seeks.
Similar competition exists for seismic permits without which 2-D and 3-D seismic
surveys cannot be conducted. There can be no assurance the Company can obtain
the permits necessary to conduct seismic surveys it may desire to conduct. The
seismic permitting 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 a seismic survey is proposed to be conducted. See "Business and
Properties--Competition."
CONFLICTS OF INTEREST
Michael E. Johnson and Charles J. Smith each own 50% of EPC's common stock
and Alex M. Cranberg owns a controlling interest in Aspect. Their respective
relationships with EPC and Aspect create conflicts of interest with their
serving as directors of the Company. Aspect has retained a substantial interest
in many of the projects that Aspect transferred to the Company pursuant to the
Acquisition Agreement, and Aspect has the right to acquire oil and gas interests
in areas adjacent to those covered by the Exploration Projects. Aspect's
participation in these additional exploration projects creates a conflict
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of interest with the Company. The Acquisition Agreement provides, however, that
Aspect will not participate in any exploration project in the areas of mutual
interest created pursuant to the Acquisition Agreement. In addition, Aspect and
the Company have entered into an agreement that for a period of three years
beginning May 19, 1998, before selling any projects that Aspect owns now or may
own during such three year period in certain defined counties surrounding the
Exploration Projects, Aspect will first offer to sell such project to the
Company at a price and on terms identical to those initially offered to third
party purchasers. Nonetheless, Aspect will continue to participate in oil and
gas exploration activities outside the areas established by the Acquisition
Agreement and the areas adjacent thereto. Aspect is not obligated to offer the
Company a participation in those projects, and Aspect will be in competition
with the Company to that extent.
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major integrated and independent gas and oil companies for the
acquisition of desirable gas and oil properties and leases, for the equipment
and labor required to develop and operate such properties, and in the marketing
of natural gas to end-users. Many of these competitors have financial and other
resources substantially greater than those of the Company. In addition, many of
the Company's larger competitors may be better able to respond to factors that
affect the demand for oil and natural gas production, such as changes in
worldwide oil and natural gas prices and levels of production, the cost and
availability of alternative fuels and the application of government regulations.
The Company also competes in attracting and retaining technical personnel,
including geologists, geophysicists and other specialists. Although the Company
believes the technical staff EPC provided after consummation of the Acquisitions
enhances the Company's professional staff, there can be no assurance the Company
will be able to attract or retain technical personnel in the future. See
"Business and Properties--Competition."
DIVIDEND POLICY--COMMON STOCK
The Company does not currently pay cash dividends on its Common Stock and
does not anticipate paying dividends in the near future. The Company is
restricted under the terms of the Bank 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, unless it receives a waiver from such tests, is
restricted under the terms of the Bank Credit Agreement from making any dividend
payments or other distribution with respect to any class of its capital stock.
The Company believes that upon consummation of this Offering, the Company will
be in compliance with the Restricted Payment Tests.
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent upon the performance of certain of its
executive officers. The Company has not entered into employment agreements with
these executive officers. There can be no assurance the Company will be able to
enter into any such employment agreements or otherwise to retain such officers.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 15, 1998, the Company had a total of 11,762,687 shares of Common
Stock outstanding after giving effect to the Reverse Split and the Acquisitions.
Of these shares, 1,429,990 shares are freely transferable by persons other than
affiliates, as defined in regulations under the Securities Act, without
restriction or further registration under the Securities Act. An additional
225,985 shares of Common Stock outstanding 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
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shares are currently eligible for sale, subject to certain volume limitations
and restrictions on the manner of sale.
The Company issued 10,106,702 shares of Common Stock to EPC, Aspect, an
affiliate of Enron Corp. and certain of Aspect's employees as consideration for
the assets acquired in the Acquisitions and certain overriding royalty interests
relating thereto. Such shares, which constitute 85.92% of all of the issued and
outstanding Common Stock, are Restricted Securities, however, the Company has
filed a registration statement with respect to the Common Stock issued in the
Acquisitions, and the Commission has declared such registration statement
effective under the Securities Act. Although EPC, Aspect and such Enron Corp.
affiliate may resell the Common Stock issued to them pursuant to the Acquisition
Agreement pursuant to such registration statement, EPC and Aspect have indicated
they have no present intention to do so. In addition, EPC and Aspect have
entered into a written agreement with the Representative that they will not sell
any of their Common Stock until the expiration of 180 days after the date of
this Prospectus.
Approximately 1,767,750 shares of Common Stock are issuable upon the
exercise of existing options and warrants. Of such shares, 50,000 are issuable
on conversion of warrants with a conversion price of $3.00 per share issued to
EPC, Aspect and an affiliate of the Representative in connection with the Duke
Credit Facility and in connection with a previous credit facility the Company
entered into with an affiliate of Aspect, and repayment of indebtedness of which
was guaranteed by EPC and an affiliate of the Representative (the "Initial
Bridge Facility"). In addition (i) 291,667 shares are issuable upon conversion
of the Company's Series A Warrants at a conversion price of $36.00 per share;
(ii) 776,250 shares are issuable upon conversion of the Company's Series B
Warrants at a conversion price of $12.15 per share; (iii) 193,334 shares are
issuable upon exercise of warrants issued to the underwriters in connection with
certain of the Company's previous equity offerings at exercise prices ranging
from $12.15 per share to $34.50 per share; (iv) 210,000 shares are issuable upon
exercise of the Representative's Warrant at an exercise price of $7.20 per
share, and (v) 246,500 shares are issuable upon the exercise of additional
outstanding options and warrants with exercise prices ranging from $3.78 to
$24.00 per share. All of such shares have been or may be registered for resale
pursuant to registration rights agreements.
The sale of a material number of the shares of Common Stock eligible for
resale without restriction in the public markets or that will be eligible for
resale without restriction upon registration pursuant to applicable registration
rights agreements could have a material adverse effect on the trading price of
the Company's Common Stock.
YEAR 2000 COMPLIANCE
The Company has recognized the need to ensure its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company operates on an internally designed software package
that is compliant with the year 2000. The Company is attempting to identify
other potential areas of risk and has begun addressing these in its planning,
purchasing and daily operations. The total costs of connecting all internal
systems, equipment and operations to the year 2000 has not been fully
quantified, but it is not expected to be a material cost to the Company.
However, no estimates can be made as to the potential adverse impact resulting
from the failure of third party service providers and vendors to prepare for the
year 2000. If any interruptions occur, they may have a material adverse effect
on the Company's business, financial condition and results of operations.
Furthermore, there can be no assurance that the Company's customers and
suppliers are or will be year 2000 compliant. The failure of the Company's
customers and suppliers to achieve year 2000 compliance could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DISCRETIONARY ISSUANCE; ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") 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 shareholder
18
<PAGE>
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other
rights of holders of the Common Stock. In the event of issuance, the preferred
stock could be used, 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 shareholders
from receiving the maximum value for their shares. Although the Company has no
present intention to issue any preferred stock, there can be no assurance the
Company will not do so in the future.
In addition to the provision for the issuance of preferred stock, the
Company's Certificate of Incorporation and Bylaws include several other
provisions that may have the effect of inhibiting a change of control of the
Company. These include a classified Board of Directors, no shareholder action by
written consent and advance notice requirements for shareholder proposals and
director nominations. These provisions may discourage a party from making a
tender offer for or otherwise attempting to obtain control of the Company.
Moreover, as a Delaware corporation, the Company is subject to the provisions of
the Delaware General Corporation Law (the "DGCL") that could make it difficult
or tend to discourage attempts to acquire the Company. The DGCL includes
provisions that 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.
LIMITED LIABILITY OF DIRECTORS; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation, as permitted by the DGCL,
eliminates in some circumstances the monetary liability of the Company's
directors for breach of their fiduciary duty as directors. In those
circumstances the Company's directors will not be liable to the Company or its
shareholders for breach of such duty. The Company's Certificate of Incorporation
also provides that the Company shall indemnify its directors and officers to the
full extent permitted by the DGCL.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $22.6 million ($26.1 million if
the Underwriters' over-allotment option is exercised in full), assuming a public
offering price of $5.00 per share.
Of such net proceeds, the Company intends to use $7.8 million to repay
indebtedness under the Duke Credit Facility and the remainder for exploration
activities on the Exploration Projects, including the payment of approximately
$4.755 million of the aggregate $7.755 million of costs incurred by Aspect and
EPC on the Exploration Projects before the closing of the Acquisitions, and for
working capital and general corporate purposes. 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.
Borrowings under the Duke Credit Facility bear interest at the prime rate
plus 4.0% (12.5% as of the date hereof). All amounts outstanding under the Duke
Credit Facility mature no later than July 31, 1999. Proceeds from the Duke
Credit Facility were used to repay borrowings under the Initial Bridge Facility,
which was a $1.8 million credit facility that an affiliate of Aspect provided to
the Company to fund operational and exploration requirements before the closing
of the Acquisitions. Aggregate borrowings of $500,000, plus interest, under the
Initial Bridge Facility were repaid in full with the proceeds of the Duke Credit
Facility.
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 borrowing capacity available under the
Bank Credit Agreement and other sources, will be sufficient to satisfy its
contemplated capital and operating cash requirements through fiscal 1998,
however, such Offering proceeds and borrowing capacity under the Bank Credit
Agreement are not anticipated to be sufficient to fund the Company's capital
expenditure budget for the 12 months following the date hereof. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources." If cash flows do not develop as
anticipated, funds are not available under the Bank Credit Agreement or if the
Company's proposed plans or the basis for its assumptions change, the Company
may be required to obtain additional sources of capital or curtail its
exploration activities. Moreover, additional funds available under the Bank
Credit Agreement may not be available if the Company's then existing natural gas
and oil reserves are not sufficient to secure the additional borrowings. The
Company has used most of its existing assets to secure the Bank Credit
Agreement, the Starboard Project Financing and the Duke Credit Facility, 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
Offering for exploration and development activities. The actual allocation of
funds, however, will depend on the Company's success in exploring for, finding
and developing gas and oil reserves. If results do not meet the Company's
requirements (due to unanticipated expenses, lack of success or otherwise), it
may reallocate the proceeds among other current exploration and development
projects or pursue different exploration and development activities, or seek to
acquire additional natural gas or oil assets. The Company may use a portion of
the proceeds to acquire or lease other interests in prospects. Any decision to
make an acquisition will be dependent on consideration of a variety of factors,
including business prospects, purchase price and financial terms of the
transaction. The Company has no agreements, understandings or arrangements with
respect to any acquisition. Pending application of the net proceeds described
above, the Company will invest such net proceeds in short term investment grade
interest bearing securities.
20
<PAGE>
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
requirements and financial condition and other relevant factors. The Company
does not expect to declare or pay any dividends on Common Stock in the
foreseeable future. The Company also is restricted under the terms of the Bank
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 Bank 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 Bank Credit Agreement from making any dividend payments or
other distribution with respect to any class of its capital stock.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq Small-Cap Market under the symbol
"ESNJ." On May 20, 1998, the closing price of the Common Stock as reported by
the Nasdaq Small-Cap Market was $5.00.
The following table sets forth, for the periods indicated, the high and low
sales prices of the Common Stock as reported on the Nasdaq Small-Cap Market
after giving effect to the Reverse Split, assuming that such high and low sales
prices after giving effect to the Reverse Split are six times the pre-Reverse
Split prices.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter............................................................................. $ 16.125 $ 8.532
Second Quarter............................................................................ $ 16.125 $ 11.250
Third Quarter............................................................................. $ 16.500 $ 9.750
Fourth Quarter............................................................................ $ 17.625 $ 12.00
YEAR ENDED DECEMBER 31, 1997:
First Quarter............................................................................. $ 21.375 $ 12.375
Second Quarter............................................................................ $ 14.250 $ 10.125
Third Quarter............................................................................. $ 12.00 $ 3.75
Fourth Quarter............................................................................ $ 12.00 $ 4.125
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................................................. $ 7.125 $ 4.125
Second Quarter through May 20, 1998....................................................... $ 6.375 $ 4.313
</TABLE>
On May 20, 1998, there were approximately 94 common shareholders of record
and 2,670 beneficial owners of the Common Stock.
21
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
March 31, 1998; (ii) the pro forma capitalization of the Company at March 31,
1998 after giving effect to the Acquisitions, the redemption of the Preferred
Stock and the receipt and application of the proceeds from the Duke Credit
Facility; and (iii) the pro forma capitalization of the Company as adjusted to
give effect to the sale of the 5.0 million shares of Common Stock offered hereby
(at an assumed price to the public of $5.00 per share) and the application of
the estimated net proceeds therefrom as described under "Use of Proceeds." This
table should be read in conjunction with the financial statements and related
notes of the Company appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
-------------- ------------- -------------
<S> <C> <C> <C>
Long-term debt, excluding current maturities, net of
unamortized discount of $44,224 (1).............................. $ 2,893,055 $ 4,607,785 $ 1,059,723
Stockholders' equity:
Convertible Preferred Stock; $.01 par
value, 5,000,000 shares authorized; 85,961
issued and outstanding (0 shares outstanding
on a pro forma basis).......................................... 860 -- --
Common Stock; $.01 par value,
40,000,000 shares authorized; 1,655,984 shares issued and
outstanding; 11,812,684 shares pro forma and 16,812,684 shares
pro forma as adjusted (2)...................................... 16,560 118,127 168,127
Unamortized value of warrants issued (3)......................... (20,371) (20,371) (20,371)
Additional paid-in capital....................................... 14,751,425 66,876,830 89,085,465
Retained earnings (deficit)...................................... (13,545,450) (13,545,450) (13,545,450)
-------------- ------------- -------------
Total stockholders' equity..................................... 1,203,024 53,429,136 75,687,771
-------------- ------------- -------------
Total capitalization......................................... $ 4,096,079 $ 58,036,921 $ 76,747,494
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
- - ------------------------
(1) In addition to the amount of pro forma as adjusted long-term debt shown as
being repaid from the proceeds of the Offering, the Company intends to repay
amounts borrowed after March 31, 1998 that are not reflected in the table.
(2) Does not include 1,767,750 shares of Common Stock issuable upon the exercise
of outstanding warrants and options. See "Summary--The Offering."
(3) Common shares subscribed in 1993 but unpaid.
22
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The historical financial information for the year ended December 31, 1997
are derived from the Company's audited financial statements. The pro forma
consolidated statement of operations information for the year ended December 31,
1997 and for the three months ended March 31, 1998 combine the Company's
historical information as adjusted to give effect to the Acquisitions, the
redemption of the Preferred Stock and the use of proceeds from the Duke Credit
Facility as if they had occurred on January 1, 1997. The pro forma balance sheet
information as of March 31, 1998 is presented as if the Acquisitions had been
consummated on that date. The pro forma statements of operations and balance
sheet are provided for comparative purposes only and should be read in
conjunction with the Company's historical consolidated financial statements
included elsewhere in this Prospectus. The pro forma information presented is
not necessarily indicative of the combined financial results as they may be in
the future or as they might have been for the periods indicated had the
Acquisitions been consummated as of January 1, 1997 and March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------
COMPANY PRO FORMA REFINANCING
HISTORICAL ADJUSTMENTS TRANSACTION PRO FORMA
----------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
Gas and oil revenues...................................... $ 664,126 $ 664,126
Realized gain (loss) on commodity transaction............. (375,410) (375,410)
Gain (loss) on sale of assets............................. 452,020 452,020
Unrealized loss on commodity transactions................. (128,936) (128,936)
Operating fees............................................ 55,021 55,021
Other revenues............................................ 241,788 241,788
----------- ----------------- ----------- ------------
Total revenues.......................................... 908,609 908,609
----------- ----------------- ----------- ------------
Cost and expenses:
Lease operating expense................................... 427,240 427,240
Production taxes.......................................... 24,497 24,497
Transportation and gathering costs........................ 143,265 143,265
Depletion, depreciation and
amortization............................................ 315,880 315,880
Impairment of oil and gas properties...................... 349,384 349,384
Exploration costs......................................... 2,258,702 $5,519,673(a) 7,778,375
Delay rentals............................................. 211,690 211,690
Interest expense.......................................... 60,942 626,480(b)(f) 687,422
General and administrative................................ 2,070,812 1,483,000(e) 3,553,812
----------- ----------------- ----------- ------------
Total costs and expenses................................ 5,862,412 7,629,153 13,491,565
----------- ----------------- ----------- ------------
Net loss.................................................... (4,953,803) (7,629,153) (12,582,956)
----------- ----------------- ----------- ------------
Cumulative preferred stock dividend......................... 103,153 $(103,153)(d) --
----------- ----------------- ----------- ------------
Net loss available for common stockholders................ $(5,056,956) $(7,629,153) $ 103,153 $(12,582,956)
----------- ----------------- ----------- ------------
----------- ----------------- ----------- ------------
Net loss per common share................................. $ (3.07) $ (1.07)
----------- ------------
----------- ------------
Weighted average number of common shares outstanding........ 1,646,311 11,803,011
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------------
COMPANY REFINANCING
HISTORICAL PRO FORMA ADJUSTMENTS TRANSACTION PRO FORMA
------------ --------------------- ----------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
Gas and oil revenues.......................... $ 48,503 $ 48,503
Realized gain (loss) on commodity
transaction................................. (47,875) (47,875)
Gain (loss) on sale of assets................. 2,875 2,875
Unrealized loss on commodity transactions..... (51,011) (51,011)
Operating fees................................ 6,992 6,992
Other revenues................................ 23,930 23,930
------------ ----------- ----------- -------------
Total revenues.............................. (16,586) (16,586)
------------ ----------- ----------- -------------
Cost and expenses:
Lease operating expense....................... 69,773 69,773
Production taxes.............................. (1,090) (1,090)
Transportation and gathering costs............ 639 639
Depletion, depreciation and amortization...... 53,568 53,568
Exploration costs............................. 3,560 $ 1,256,767(a) 1,260,327
Delay rentals................................. (12,685) (12,685)
Interest expense.............................. 19,223 161,629 (b)(f 180,852
General and administrative.................... 459,014 360,000(e) 819,014
------------ ----------- ----------- -------------
Total costs and expenses.................... 592,002 1,778,396 2,370,398
------------ ----------- ----------- -------------
Net loss........................................ (608,588) (1,778,396) $ (2,386,984)
------------ ----------- ----------- -------------
Cumulative preferred stock dividend............. 25,788 (25,788 (d) --
------------ ----------- ----------- -------------
Net loss available for common stock........... $ (634,376) $ (1,778,396) $ 25,788 $ (2,386,984)
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
Net loss per common share..................... $ (0.38) $ (0.20)
------------ -------------
------------ -------------
Weighted average number of common shares
outstanding................................... 1,655,984 11,812,684
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------------------------------------------------------
COMBINED
COMPANY ENTITIES PRO FORMA REFINANCING
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTION PRO FORMA
------------ -------------- -------------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 188,495 $ 150,000(c) $ 338,495
Accounts receivable, net of allowance for
doubtful accounts of $7,915.............. 176,507 176,507
Prepaid and other expenses................. 141,074 141,074
Current portion of notes receivable from
EPC...................................... 466,664 $ (466,664)(h) --
Receivables from affiliates................ 97,765 $ 564,338(f) 662,103
------------ -------------- -------------------- -------------- -----------
Total current assets................... 1,070,505 564,338 150,000 (466,664) 1,318,179
Property and equipment:
Oil and gas properties....................... 3,635,538 19,866,800(g) 34,333,200(g) 3,000,000(b) 60,835,538
Other property and equipment................. 1,151,592 1,151,592
------------ -------------- -------------------- -------------- -----------
4,787,130 19,866,800 34,333,200 3,000,000 61,987,130
Less accumulated DD&A...................... (1,295,435) (1,295,435)
------------ -------------- -------------------- -------------- -----------
Property and equipment, net.............. 3,491,695 19,866,800 34,333,200 3,000,000 60,691,695
Other assets................................. 513,856 513,856
Notes receivable from EPC.................... 1,283,336 (1,283,336)(h) --
------------ -------------- -------------------- -------------- -----------
Total other assets..................... 1,797,192 (1,283,336) 513,856
Total assets........................... $ 6,359,392 $20,431,138 $34,483,200 $ 1,250,000 $62,523,730
------------ -------------- -------------------- -------------- -----------
------------ -------------- -------------------- -------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................... $ 824,400 $ 1,000,000(f) $ 1,824,440
Revenue distribution payable............... 74,325 74,325
Accrued expenses........................... 331,964 35,622(f) 367,586
Current portion of long-term debt.......... 988,360 564,338(f) $ 623,536(b) 2,176,234
------------ -------------- -------------- -----------
Total current liabilities.............. 2,219,089 1,599,960 623,536 4,442,585
Long-term debt............................... 1,846,165 1,714,730(b) 3,560,895
Non-recourse debt............................ 864,000 864,000
Accrued interest on non-recourse debt........ 227,114 227,114
------------ -------------- -------------- -----------
Total liabilities...................... 5,156,368 1,599,960 2,338,266 9,094,594
Stockholder's Equity:
Cumulative convertible preferred stock, $.01
par value.................................. 860 (860)(d) --
Common stock, $.01 par value................. 16,560 $ 101,567(c)(g) 118,127
Unamortized value of warrants issued......... (20,371) (20,371)
Paid-in capital.............................. 14,751,425 18,831,178 34,381,633(c)(g) (1,087,406)(d) 66,876,830
Retained deficit............................. (13,545,450) (13,545,450)
------------ -------------- -------------------- -------------- -----------
Total stockholders' equity............. 1,203,024 18,831,178 34,483,200 (1,088,266) 53,429,136
------------ -------------- -------------------- -------------- -----------
Total liabilities and stockholders' equity... $ 6,359,392 $20,431,138 $34,483,200 $ 1,250,000 $62,523,730
------------ -------------- -------------------- -------------- -----------
------------ -------------- -------------------- -------------- -----------
</TABLE>
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS AND BALANCE SHEET
(a) Geological and geophysical, delay rentals and exploratory dry hole costs for
the year ended December 31, 1997 and the three months ended March 31, 1998
amounted to $5,519,673 and $1,256,767, respectively. These amounts are
related to properties with no proved reserves, and are charged to expense
under the successful efforts method of accounting, whereas they had been
previously capitalized by EPC and Aspect under the full cost method of
accounting. All other costs incurred by EPC and Aspect related to the
acquired prospects are leasehold acquisitions costs which are capitalized
for both full cost and successful efforts.
(b) In conjunction with the Acquisition Agreement, the Company entered into the
Initial Bridge Facility with Aspect Management Corporation on January 19,
1998, to provide bridge financing for operations and initial prospect
development. The principal amount of $1.8 million bore interest at 18%, and
was payable in twelve equal monthly installments including interest
beginning no later than March 31, 1998. Subsequently, on February 23, 1998,
also in conjunction with the Acquisition Agreement, the Company replaced the
Initial Bridge Facility with the $7.8 million Duke Credit Facility. The Duke
Credit Facility bears interest at prime plus 4% (initially 12.5%), and is
payable in eleven monthly installments equal to one thirtieth ( 1/30th) of
the outstanding principal on July 31, 1998, with the first of such
installments commencing on August 31, 1998, and continuing thereafter
through June 30, 1999, with the remaining principal outstanding balance due
on July 31, 1999. On the date of the execution of the Duke Credit Facility,
the outstanding amount on the Initial Bridge Facility was $500,000. This
amount was subsequently transferred to the Duke Credit Facility. In
addition, the Company has called its Preferred Stock for redemption as part
of the Acquisitions, and as such, has drawn on the Duke Credit Facility for
the funds necessary to redeem the Preferred Stock. The redemption price plus
accrued and unpaid dividends at December 31, 1997 was $1,088,266. This
amount combined with the current outstanding amount on the Duke Credit
Facility is $4,838,266. Interest expense associated with the borrowings was
$601,990 and $150,497 for the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively. As of March 31, 1998, $1,290,204
was included as current portion of long-term debt, with the remaining
balance of $3,548,062 classified as long-term. To date, approximately $3.0
million of the outstanding amount has been used for prospect development,
with the remaining amounts used for operations.
(c) In connection with the Initial Bridge Facility discussed in Note (b), the
Company issued warrants to purchase 50,000 shares of Common Stock at an
exercise price of $3.00 per share. The $150,000 in proceeds from those
warrants are included in cash at March 31, 1998. In addition, $131,250 is
included in prepaid interest for the discount received between the grant
price and the market price on the date of the grant. Since the recipients
have guaranteed their pro rata share of the New Credit Facility, the prepaid
interest will be amortized over the term of the underlying debt of 17
months.
(d) In connection with the Acquisition Agreement discussed in Note (b) above,
the Company called its Preferred Stock for redemption at a redemption price
of $10.26 per share including all accrued and unpaid dividends. At March 31,
1998, the total redemption price for the 85,961 shares of outstanding
Preferred Stock was $1,088,266.
(e) Historical general and administrative expenses associated with personnel and
facilities of EPC that the Company assumed as a result of the Acquisitions
amounted to approximately $1,483,000 and $360,000 for the year and three
months ended December 31, 1997 and March 31, 1998, respectively.
(f) Additions to working capital include the following:
<TABLE>
<CAPTION>
ACQUIRED
ASSETS ADJUSTMENTS
-------------- ------------
<S> <C> <C>
Liabilities of EPC assumed by the Company.............................. $ (1,000,000)
Proceeds from Warrants................................................. $ 150,000
Accrued interest associated with EPC note payable to Aspect assumed by
the Company(1)....................................................... (35,622)
Transfer of advances to EPC to oil and gas properties.................. (466,664)
Accounts receivable from Aspect to EPC assumed by the Company.......... 564,338
Current portion of long-term debt...................................... (564,338) (617,576)
-------------- ------------
Total working capital (deficit)........................................ $ (1,035,622) $ (934,240)
-------------- ------------
-------------- ------------
</TABLE>
- - --------------------------
(1) EPC and Aspect have interests in common oil and gas prospects. Aspect
advanced EPC amounts to develop and explore those prospects. The
entities have no common ownership or interests outside of those
prospects.
(g) The Company issued 10,106,702 shares of Common Stock in exchange for working
interests in undeveloped oil and gas prospects with a historical full cost
basis of $19,866,800 and estimated fair market value of approximately $54.2
million based on the Cornerstone Opinion.
(h) Upon closing of the Acquisition Agreement, advances made to EPC to fund the
exploration and development of the the acquired prospects that became assets
of the Company, were transferred to oil and gas properties. These amounts
are included as notes receivable in the historical financial statements and
amount to $1,750,000, of which $466,664 is classified as current, with the
remaining balance of $1,283,336 classified as long-term.
26
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1996
and 1997 have been derived from the Company's audited consolidated financial
statements. The selected consolidated financial data as of and for the three
month periods ended March 31, 1997 and 1998 are derived from the Company's
unaudited consolidated financial statements. The unaudited consolidated
financial statements include all adjustments consisting of normal recurring
accruals that the Company considers necessary for a fair presentation of the
Company's financial position as of such dates and the results of operations and
cash flows for such periods. Operating results for the three months ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1997. Selected Financial Data should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements of the Company
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
---------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas revenues(1)......................................... $3,176,861 $ 664,126 $ 327,435 $ 48,503
Operating fees.................................................. 213,834 55,021 14,234 6,992
Other revenues(2)............................................... (223,903) 189,462 63,978 (72,081)
---------- ---------- ---------- ---------
Total revenues................................................ 3,166,792 908,609 405,647 (16,586)
---------- ---------- ---------- ---------
Costs and expenses:
Lease operating expense......................................... 556,925 427,240 96,698 69,773
Production taxes................................................ 207,969 24,497 8,784 (1,090)
Transportation and gathering costs.............................. 368,716 143,265 90,394 639
Depletion, depreciation and amortization(3)..................... 2,237,648 315,880 132,774 53,568
Impairment of oil and gas properties(5)......................... 51,000 349,384 -- --
Exploration costs(4)............................................ 1,317,161 2,258,702 852,626 3,560
Delay rentals(6)................................................ -- 211,690 -- (12,685)
Interest expense................................................ 783,872 60,942 4,133 19,223
General and administrative expense.............................. 2,217,099 2,070,812 572,260 459,014
Other costs and expenses(7) 451,421 -- -- --
---------- ---------- ---------- ---------
Total expenses................................................ 8,191,811 5,862,412 1,757,669 592,002
---------- ---------- ---------- ---------
Net loss...................................................... (5,025,019) (4,953,803) (1,352,022) (608,588)
Cumulative preferred stock dividend............................. 103,153 103,153 25,798 25,798
---------- ---------- ---------- ---------
Net income (loss) applicable to common stockholders............. $(5,128,172) $(5,056,956) $(1,377,810) $(634,376)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net income (loss) per common share(8)......................... $ (4.31) $ (3.07) $ (0.84) $ (0.38)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Weighted average number of common shares(8)..................... 1,190,343 1,646,311 1,644,317 1,655,984
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------- AS OF MARCH 31,
1996 1997 1998
---------- ---------- -------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......................................... $4,159,034 $ (413,377) $(1,148,584)
Property and equipment, net........................................ 3,435,924 3,144,370 3,491,695
Total assets....................................................... 9,631,192 4,576,008 6,359,392
Long-term debt (excluding current maturities)...................... 1,069,886 1,080,954 2,893,055
Stockholders' equity............................................... 6,738,826 1,804,820 1,203,024
</TABLE>
- - ------------------------------
(1) Oil and gas revenues decreased from $3.18 million in 1996 to $0.66 million
in 1997, and from $0.33 million for the three months ended March 31, 1997 to
$48,503 for the same period in 1998 primarily due to ceased production from
the Mobile Bay wells and the sale of producing properties.
(2) Other revenues increased from ($0.2) million in 1996 to $.2 million in 1997
primarily due to the gain on the sale of assets and a decrease in realized
losses on commodity transactions. Other revenues decreased from $63,978 for
the three months ended March 31, 1997 to ($72,081) for the same period in
1998 due to losses on commodity transactions.
(3) Depletion, depreciation and amortization decreased from $2.2 million in 1996
to $0.3 million in 1997 primarily due to the abandonment of previously
producing wells in the Mobile Bay prospect and the sale of certain oil and
gas properties.
27
<PAGE>
(4) Impairment of oil and gas properties increased from $51,000 in 1996 to
$349,384 in 1997 primarily due to the abandonment of previously producing
wells in the Mobile Bay prospect.
(5) Exploration costs and delay rentals increased from $1.3 million in 1996 to
$2.5 million in 1997 primarily due to the dry holes drilled in 1997.
Exploration costs and delay rentals decreased from $1.0 million for the
three months ended March 31, 1997 to ($9,125) for the same period in 1998
due to dry holes drilled in 1997.
(6) Interest expense decreased from $783,872 in 1996 to $60,942 in 1997
primarily due to the reduction in the Company's outstanding bank debt during
1997.
(7) 1996 includes other expense items for the purchase and settlement of
deferred gas contracts. There were no such expenses during 1997.
(8) Weighted average shares outstanding and net loss per common share have been
adjusted to reflect the 1:6 Reverse Split effected on May 14, 1998.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis reviews the Company's operations for
the years ended December 31, 1997 and 1996 and for the three months ended March
31, 1998 and 1997, and should be read in conjunction with its consolidated
Financial Statements and related notes thereto.
OVERVIEW
On May 14, 1998, the Company (i) consummated the Acquisitions, and in
connection therewith, issued 10,906,702 shares of its Common Stock to EPC,
Aspect and certain other persons in exchange for the Exploration Projects and
certain overriding royalty interests therein; (ii) completed a one-for-six
Reverse Split of its Common Stock; (iii) reincorporated in the State of Delaware
and changed its name to Esenjay Exploration, Inc.; and (iv) called for
redemption all of its issued and outstanding Preferred Stock. The Company
believes that the consummation of the Acquisitions, along with the addition of
experienced staff and management (many of whom have worked together for over 15
years), and the implementation of its corporate restructuring, positions the
Company as a technology driven exploration company with a diverse array of
technology enhanced exploration projects. The Company also believes consummating
the Acquisitions will enhance its ability to access capital markets.
Since November 1, 1997, which was the effective date of the Acquisitions,
eight wells have been drilled for the Company's account pursuant to the
Acquisition Agreement. Of these wells, seven have been completed or are being
completed and one was a dry hole. The Company also has two additional wells
drilling and two locations awaiting drilling equipment.
The opportunities set forth in the Company's Exploration Project portfolio
will require significant amounts of capital funding throughout the remainder of
1998 and into 1999. The Company's success in accessing this capital will have a
significant impact on its growth opportunities. See "--Liquidity and Capital
Resources."
The Company is on a successful efforts accounting basis, and booked the
Exploration Projects acquired pursuant to the Acquisition Agreement at their
estimated fair market value based on the Cornerstone Opinion. As a result of the
tax rules applicable to the acquisitions, the Company will likely not be able to
fully use its existing net operating loss carry forward in the future.
YEAR 2000
The Company has recognized the need to ensure its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company operates on an internally designed software package
that is compliant with the year 2000. The Company is attempting to identify
other potential areas of risk and has begun addressing these in its planning,
purchasing and daily operations. The total costs of connecting all internal
systems, equipment and operations to the year 2000 has not been fully
quantified, but it is not expected to be a material cost to the Company.
However, although no estimates can be made as to the potential adverse impact
resulting from the failure of third party service providers and vendors to
prepare for the year 2000, the Company intends to formulate a plan to deal with
potential year 2000 issues.
COMPARISON OF MARCH 31, 1998 TO MARCH 31, 1997
REVENUE. Total Revenues decreased 104.09% from $405,647 for the quarter
ended March 31, 1997 to a negative $16,586 for the quarter ended March 31, 1998.
Total gas and oil revenues decreased 85.19% from $327,435 to $48,503. The
decrease in gas and oil revenues was primarily attributable to ceased production
for the Mobile Bay wells which came on stream in December of 1995. Gas and oil
revenues associated with Mobile Bay declined from $131,087 for the
29
<PAGE>
quarter ended March 31, 1997, compared to no revenues for the quarter ended
March 31, 1998. A contributing factor to the decline in gas and oil revenues was
the sale of other interests and gas price fluctuations. The negative $16,586
resulted from a realized loss on commodity transactions of $48,875 in the
quarter. The Company recorded gas and oil revenues associated with these other
interests of $46,696 for the quarter ended March 31, 1997.
Gain on sale of assets decreased by $129,160 from $132,035 in the first
quarter 1997 to $2,875 in the first quarter of 1998. Operating fees to the
Company decreased from $14,234 in the first quarter of 1997 to $6,992 in the
first quarter of 1998. The Company realized losses from various commodity
transactions totaling $47,875 in the first quarter of 1998, compared to $121,937
in the first quarter of 1997. These swap agreement losses were attributable to
various transactions in which the Company hedged its future gas delivery
obligations as a requirement for its Bank Credit Agreement. The determination of
gains or losses is directly affected by the spot gas prices being higher or
lower than the hedge contracts in place for the same period. In addition to the
realized losses from commodity transactions, the Company accrued $51,011 for
unrealized losses for the quarter ended March 31, 1998. There were no accrued
losses for the quarter ended March 31, 1997. In addition to the foregoing, the
Company had other revenues of $23,930 in the first quarter of 1998 as compared
to $53,880 in the first quarter of 1997.
COSTS AND EXPENSES. Total costs and expenses of the Company decreased
66.36% from $1,757,669 in the first quarter of 1997 to $592,002 in the first
quarter of 1998. The decrease in costs and expenses was primarily attributable
to a combination of decreases in exploration costs, general and administrative
expenses, transportation and gathering costs, depletion, depreciation and
amortization expense, lease operating expense and production taxes. These
decreases were offset by interest expense increases.
Exploration costs decreased 99.58% from $852,626 for the first quarter of
1997 to $3,560 for the first quarter 1998. The exploration costs for the first
quarter 1998 reflect charges attributable to expensed investments, and costs
incurred for dry hole costs associated with exploratory drilling in 1997.
General and administrative expense ("G&A") decreased by 19.79% from $572,260
for the first quarter 1997 to $459,014 for the first quarter 1998. The decrease
was attributable to overhead reduction measures initiated during 1997.
Transportation and gathering costs decreased 99.29% from $90,394 for the
first quarter 1997 to $639 for the first quarter 1998. The decrease was almost
entirely attributable to the ceased production of the Mobile Bay wells.
Depletion, Depreciation and Amortization Expense ("DD&A") decreased by
59.65% from $132,774 for the first quarter of 1997 to $53,568 for the first
quarter of 1998. The decrease was primarily attributable to the July 1, 1997
sale of certain Company properties located in Texas, Oklahoma and Arkansas, and
the ceased production from the Mobile Bay wells.
Lease operating expense decreased 27.84% from $96,698 for the first quarter
1997 to $69,773 for the first quarter 1998. The reduction was attributable to
the sale of certain Company properties effective July of 1997, and a decline in
rework activity.
Production taxes declined 112.40% from $8,784 for the first quarter of 1997
to ($1,090) for the first quarter of 1998, due to reduced production as a result
of the sale of certain Company interest effective July 1, 1997, and due to a
production tax credit refund in the amount of $3,682 from the State of Oklahoma
for a production enhancement project completed August 17, 1994.
Interest expense increased 365.11% from $4,133 for the first quarter of 1997
to $19,223 for the first quarter of 1998. The increase was primarily attributed
to the Duke Credit Facility. The Company capitalized a large portion of its
interest in its Starboard Prospect, which capitalized amounts totaled $79,102
for the first quarter of 1998 and $56,866 for the first quarter of 1997.
30
<PAGE>
NET INCOME (LOSS). The net loss decreased from $1,352,022 to $608,588 for
the first quarter ended March 31, 1997 and March 31, 1998, respectively. This
decrease was due to the factors discussed above.
The net loss per common share decreased from a net loss of $0.84 per share
in the first quarter of 1997 to a net loss of $0.38 per share in the first
quarter of 1998, computed on a post-Reverse Split basis. This is reflective of
the increase in net loss of $743,434 from the first quarter of 1997 as compared
to the first quarter of 1998. As a result of the Common Stock offering completed
on August 14, 1996, and additional stock issued to an investment advisor during
1997, there were 1,655,984 weighted average common equivalent shares at March
31, 1998 as compared to approximately 1,644,317 at March 31, 1997.
COMPARISON OF 1997 TO 1996
REVENUE. Total revenues decreased 71.3% from $3,166,792 for the year ended
December 31, 1996, to $908,609 for the year ended December 31, 1997.
Total gas and oil revenues decreased 79.1% from $3,176,861 to $664,126. The
decrease in gas and oil revenues was primarily attributable to ceased production
from the Mobile Bay wells, which came on stream in December of 1995, and from
the sale of properties discussed below. A contributing factor in the decline in
gas and oil revenues was the sale of the Company's N.E. Cedardale field located
in Major County, Oklahoma in September 1996. The Company recorded gas and oil
revenues associated with these factors of $2,003,251 for 1996 and $62,471 for
1997. The remainder of this decrease is primarily attributable to sales of other
interests and gas price fluctuations. Operating fees to the Company decreased
from $213,834 for the year 1996 to $55,021 for the year 1997, due to the sale of
a substantial portion of the Company's operated properties. The decrease in gas
and oil revenues was partially offset by an increase in gain on sale of assets
of $201,583, from $250,437 reported for 1996, to $452,020 reported for 1997. The
increase is due to the sell down of certain Company prospects and the sale of
certain Company properties located in Texas, Oklahoma and Arkansas. The Company
realized losses from various commodity transactions totaling $375,410 for the
year ended December 31, 1997. The decrease in the loss is primarily attributable
to the amended swap agreement with Bank of America in September of 1996, which
decreased the volume of the swap agreements. This compares to a realized loss of
$814,029 for the same period 1996. Settlement costs in connection with the
amendment to the swap agreement with Bank of America totaling $212,000 are
included in the 1996 realized losses from commodity transactions. These swap
agreement losses were attributable to various transactions in which the Company
hedged its future gas delivery obligations as a requirement under the Bank
Credit Agreement. The determination of gains or losses is directly affected by
the spot gas prices being higher or lower than the hedge contracts for the same
period. In addition to the realized losses from commodity transactions, the
Company accrued $128,936 for unrealized losses for the year ended December 31,
1997. This was the amount by which the hedges in place exceeded the production.
There were no accrued losses at December 31, 1996. The Company also had other
revenues of $241,788 for the year ended December 31, 1997 as compared to
$339,689 for the year ended December 31, 1996. The reduction is primarily
attributable to reduced revenues realized from the performance of exploratory
and geophysical data processing on a fee basis. Included in the year ended
December 31, 1997 other revenue is a net gain of $25,794 from the Company's
officers deferred compensation settlement, which was executed on August 15,
1997.
COSTS AND EXPENSES. Total costs and expenses decreased 28.4% from $8,191,811
in 1996 to $5,862,412 in 1997. Although there were increases in exploration
costs, delay rentals and unrealized loss on commodity transactions there were
decreases in lease operating expenses, production taxes, transportation,
depreciation, interest expense, cost of settling gas contracts and futures
contracts and general and administrative expenses, which resulted in the net
decrease as more fully described below.
Exploration costs increased 71.5% from $1,317,161 in 1996 to $2,258,702 in
1997. The exploration costs in 1997 reflect $380,464 of charges attributable to
expensed investments, and $1,772,746 of dry hole costs. The increase was due to
increased exploratory drilling.
31
<PAGE>
Delay rental transactions were $211,690 for the year ended December 31,
1997. This increase was primarily attributed to rental obligations of the
Company's Starboard Project in Terrebonne Parish, Louisiana. There were no such
transactions for the same period in 1996.
Lease operating expense decreased 23.3% from $556,925 in 1996 to $427,240 in
1997. The reduction in lease operating costs was attributable to the sale of
operated properties, including the N.E. Cedardale field sale in September of
1996, and a decline in rework activities. Of the year ended December 31, 1997
total lease operation costs, $99,809 was attributable to plugging and
abandonment costs of the Company's Mobile Bay wells, which were plugged during
1997. Production taxes declined 88.2% from $207,969 in 1996 to $24,497 in 1997
due to reduced production as a result of the sale of certain of the Company's
properties, including the N.E. Cedardale field and other properties in Texas,
Arkansas and Oklahoma.
Transportation and gathering costs decreased from $368,716 in 1996 to
$143,265 in 1997. The decrease was almost entirely attributable to the ceased
production of the Mobile Bay wells.
DD&A expense decreased by 85.9% from $2,237,648 in 1996 to $315,880 in 1997.
The decrease was primarily attributable to the sale of certain of the Company's
properties, including the N.E. Cedardale field.
Interest expense decreased to $60,942 in 1997 from $783,872 in 1996. The
decrease was primarily attributable to the substantial loan principal repayment
made to Bank of America under the Credit Agreement. During 1997, the Company
capitalized a large portion of its interest in its ongoing Starboard Project,
which capitalized amounts totaled $107,387 in 1996 and $235,977 in 1997.
Cost of settling gas contracts and futures contracts was attributable to the
settlement of a gas sales contract with Waldorf Corporation ($368,690) and the
settlement of a gas swap agreement, due to a reduction in quantities covered
thereunder in connection with the sale of the N.E. Cedardale field ($212,000)
for the year ended December 31, 1996. The Company incurred no similar costs in
1997.
G&A expenses decreased by 6.5% from $2,217,099 in 1996 to $2,070,812 in
1997. This was primarily attributable to overhead reduction measures initiated
during 1997.
Impairment of Oil and Gas Properties increased from $51,000 in 1996 to
$349,384 in 1997. This was primarily due to the abandonment of previously
producing wells, of which $323,353 was attributable to the Company's Mobile Bay
wells.
NET INCOME (LOSS). The net loss decreased from $5,025,019 to $4,953,803 for
the year ended December 31, 1996, and December 31, 1997, respectively. This
decrease was due to the factors discussed above.
The net loss per common share decreased from a net loss of $4.31 per share
in 1996 to a net loss of $3.07 per share in 1997, computed on a post-Reverse
Split basis. This is reflective of the decrease in the net loss of $71,217 from
the year ended December 31, 1996 to the year ended December 31, 1997 and a
change in the number of weighted average equivalent shares outstanding. As a
result of the Common Stock offering finalized on August 14, 1996, there were
approximately 1,646,311 weighted average common equivalent shares at December
31, 1997, as compared to approximately 1,190,343 weighted average common
equivalent shares at December 31, 1996.
KNOWN AND ANTICIPATED TRENDS, CONTINGENCIES AND DEVELOPMENTS IMPACTING FUTURE
OPERATING RESULTS
The Company's future operating results will be substantially dependent upon
the success of the Company's efforts to develop the properties acquired in the
Acquisitions, as well as the Starboard Project and other prospects. Because the
Company divested substantially all of its oil and gas properties in the
Mid-Continent region by the end of 1996, revenues from the operation and sale of
such properties have been substantially reduced during 1997 and will be reduced
in future years. Further, following a sharp and unexpected drop in production
from the Company's Mobile Bay wells during the fourth quarter of 1996,
32
<PAGE>
the Company's share of revenues from Mobile Bay was substantially reduced during
1997. Revenues from the operation of the Mid-Continent and Mobile Bay properties
and the sale of Mid-Continent properties constituted the substantial majority of
the Company's revenues during 1996.
As a result of the loss of revenues from the Mid-Continent region and Mobile
Bay, the Company's revenues during 1997 were sharply reduced. While management
believes that the Acquisitions and the Starboard Project represent the most
promising prospects in the Company's history, none of those prospects are
currently producing revenue to the Company, and each will require substantial
outlays of capital to explore, develop and produce.
LIQUIDITY AND CAPITAL RESOURCES
The Company has budgeted $25.0 million to fund the drilling of approximately
30 wells on the Exploration Projects and other exploration costs over the next
12 months. The Company's sources of financing include the proceeds of this
Offering, the borrowing capacity under the Bank Credit Agreement and other
credit facilities, the sale of promoted interests in the Exploration Projects to
industry partners and cash provided from operations. The Company anticipates it
will receive approximately $22.6 million in net proceeds from this Offering. Of
such proceeds, $7.8 million will be used to repay the Duke Credit Facility, and
the remainder will be used for exploration activities on the Exploration
Projects, including the payment of approximately $4.755 million of the aggregate
$7.755 million of costs incurred by Aspect and EPC on the Exploration Projects
before the closing of the Acquisition and for working capital and general
corporate purposes. Based on the foregoing, the Company will require additional
sources of capital to fund its exploration budget over the next 12 months. The
Company currently is attempting to renegotiate the terms of the Bank Credit
Agreement to obtain additional borrowing capacity thereunder. If the Company is
unable to obtain such additional borrowing capacity thereunder, or is unable to
access additional sources of outside financing, the Company will either have to
sell interests in its Exploration Projects to fund its exploration program or
curtail its exploration activities over the next 12 months. Such curtailing of
exploration activities could include reducing the number of wells drilled,
slowing exploratary activities on projects that the Company operates, selling
interests in the Company's project inventory or a combination of the foregoing.
The Company historically has addressed its long-term liquidity needs through
the issuance of debt and equity securities, through bank credit and other credit
facilities and with cash provided by operating activities. Its major obligations
at March 31, 1998, consisted principally of (i) servicing loans under the Bank
Credit Agreement and other loans, (ii) servicing the Duke Credit Facility; (iii)
servicing the Starboard Project Financing, (iii) payment of preferred stock
dividends, (iv) funding of the Company's exploration activities, and (v) funding
of the day-to-day general and administrative costs. The Company also had
unrealized losses on commodity transactions of $179,947 for the period ended
March 31, 1998.
The Company booked the assets acquired in the Acquisitions at $54.2 million,
which was the estimated fair market value of such assets as determined by
Cornerstone. Items effected by the Acquisitions include (i) an increase in the
Company's current liabilities by the assumption of approximately $4.755 million
of net post-effective date costs related to the assets acquired in the
Acquisitions, plus $1 million of additional current liabilities assumed from EPC
pursuant to the Acquisition Agreement, (ii) an increase in overhead resulting
from the hiring of additional technical staff and additional management; and
(iii) adopting a business plan that budgets over $25 million net to the
Company's interest in exploratory costs over the next 12 months. Certain costs
associated with these obligations may be offset by future revenues from wells
drilled since the effective date of the Acquisitions and other revenue
anticipated from wells scheduled to be drilled in the second and third quarters
of 1998. The Company cannot, however, assure that such revenues will be
forthcoming, nor can it project the revenues anticipated from such sources over
the next 12 months.
33
<PAGE>
Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of financing and its operational results.
The Company continues to examine alternative sources of long-term capital,
including bank borrowings, the issuance of debt instruments, the sale of common
stock or other equity securities, the issuance of net profits interests, sales
of promoted interests in its Exploration Projects, and various forms of joint
venture financing. In addition, the prices the Company receives for its future
oil and natural gas production and the level of the Company's production will
have a significant impact on future operating cash flows.
WORKING CAPITAL. At March 31, 1998, the Company had a cash balance of
$188,495 and a working capital deficit of $1,148,584 as compared to a cash
balance of $690,576 and a working capital deficit of $413,377 at December 31,
1997. The decrease in cash and working capital was primarily attributable to the
operating loss incurred during the quarter.
In addition to the changes in cash, the decrease in working capital was
attributable to several other factors. Current asset decreases of $45,357 in
accounts receivable (due to reduced exploration activity) and $108,254 in
prepaid and other expenses (primarily due to expensing of previously prepaid
amounts related to the Starboard Project) were offset by the $466,664 current
portion of notes receivable from affiliates. These notes represented the current
portion of loans from the Company to EPC that were used to fund post-effective
date costs on Exploration Projects acquired from EPC. Primary changes in current
liabilities were a $86,956 reduction in accounts payable (due to reduced
exploration activity) and a $587,275 increase in the current portion of
long-term debt, which relates to the current portion of debt under the Duke
Credit Facility.
CASH FLOWS. Cash flows used in operations totaled $756,522 for the quarter
ended March 31, 1998. Of particular significance is a cost of $344,896 in other
assets, which primarily relates to capitalized costs of the Acquisitions and
certain financing transactions. Cash flows used in investing activities totaled
$2,151,578. Cash flows used in investing activities included $403,250 of capital
expenditures on gas and oil properties, including $3,560 in exploration costs
that were included in the operating loss for the period but were excluded from
operating cash flows, and $1,750,000 that represents a note receivable from EPC.
Cash flows from financing activities reflected cash provided by financings
of $2,406,019 for the first quarter of 1998. Cash flows from financing
activities consisted of proceeds from debt issuance of $3,000,000 from the Duke
Credit Facility offset by repayments on long-term debt of $593,981.
Set forth below is a description of the Company's credit facilities.
BANK CREDIT AGREEMENT. The Bank Credit Agreement is a $15.0 million credit
facility with Bank of America NT&SA as lender. As of May 19, 1998, the Company
had $168,888 outstanding under the Bank Credit Agreement and had $2.5 million of
additional borrowing capacity thereunder. The borrowing capacity under the Bank
Credit Agreement is subject to reduction based upon the value of the oil and gas
properties securing the loans thereunder. The Bank Credit Agreement is secured
by a first mortgage on all of the Company's proved producing properties owned as
of March 31, 1998. The Company does not currently intend to borrow additional
amounts under this facility, but has begun discussions with the lender to
restructure the facility to more appropriately serve the Company's current and
anticipated needs throughout the balance of this year. The lender has indicated
an intention and desire to do so, but no agreement has yet been reached, and
there is no assurance that such an agreement will be forthcoming. The Company
presently is in noncompliance with the minimum cash flow covenants of the Bank
Credit Agreement, but has secured a waiver of various covenants through June 30,
1998. The Company anticipates that the lender will waive the noncompliance in
the future, but there is no current assurance that it will do so.
The Bank Credit Agreement required the Company to enter into a swap
agreement on 62,500 MMBtu of its monthly Mid-Continent natural gas production
for $1.566 per MMBtu for the period
34
<PAGE>
beginning April 1, 1996 and ending January 31, 1999. The swap, which is the
Company's only current hedge, was reduced to 31,250 MMBtu on September 25, 1996,
in connection with the sale of the N.E. Cedardale field. The Company recorded a
loss of $212,000 on this swap reduction. The Company's net gas production
currently is less then the volumes hedged. As of December 31, 1997, the Company
had an accrued liability of $128,936 to recognize the projected loss from the
hedge. The Company has not recently conducted an active hedging program other
than as required by the Bank Credit Agreement. In that regard, the Company had
net losses of $814,029 in 1996, which includes the $212,000 loss on the swap
reductions, and $375,410 in 1997 on its required hedged positions.
THE DUKE CREDIT FACILITY. The Duke Credit Facility is a $7.8 million
facility that can be used for certain defined purposes. As of May 19, 1998, the
Company has borrowed $5.35 million under the Duke Credit Facility. Of the $5.35
million borrowed, $1.25 million was used for general corporate purposes and
costs of exploration, and $3.0 million was loaned to EPC to pay exploration
costs associated with EPC's interests in the Exploration Projects conveyed by
EPC to the Company upon closing of the Acquisitions and $1.1 million was used to
fund the redemption of the Preferred Stock. It is anticipated that an additional
$2.45 million will be used to fund exploration costs and working capital.
The Duke Credit Facility bears interest at the rate of a national prime rate
plus 4% per annum. The lender also receives cash payments equal to an overriding
royalty of 0.6% of the Company's interest in wells drilled by the Company while
the Duke Credit Facility is outstanding. In addition, the lender has the right
to gather, process, and transport and market, at competitive market rates,
natural gas produced from a majority of the projects the Company acquired
pursuant to the Acquisitions until the earlier to occur of five years from the
date of the Duke Credit Facility or until the lender has marketed one hundred
Bcf of natural gas from those properties. The Duke Credit Facility is secured by
mortgages on most of the Company's undeveloped exploration projects. The Duke
Credit Facility is repayable in 12 monthly payments commencing August 31, 1998,
or sooner, if the borrower sells interests in the collateral or closes any
underwritten public offering of securities. A portion of the proceeds of this
Offering will be used to repay the Duke Credit Facility in full. See "Use of
Proceeds."
STARBOARD PROJECT FINANCING. The Starboard Project Financing is an $864,000
facility pursuant to which the lender has agreed to advance to the Company an
amount equal to up to 50% of certain costs related to the development of the
Starboard Project, including acquisition of leasehold interests and the design,
permitting and implementation, conducting, processing and interpretation of a
3-D seismic survey over the Starboard Project area. The borrowings are secured
by a first mortgage on the properties comprising the Starboard Project.
Borrowings under the Starboard Project Financing are repayable solely from
revenues attributable to an overriding royalty interest granted to the lender
equal to 8% of the Company's original interest in the Starboard Project, which
is payable until such time as the lender has received an amount equal to the
loan borrowings plus costs and a 15% internal rate of return. After such funds
have been repaid, the overriding royalty interest is reduced to 2%. The Company
has drawn its entire borrowing capacity under the Starboard Project Financing,
therefore, Starboard Project Financing will not be available to provide
additional funds for development of the Starboard Project.
The Company expects that if it does not complete this Offering or secure
additional financing or other sources of capital it will deplete its current
cash reserves and fully use its credit facilities by the third quarter of 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share"
and SFAS No. 129, "Disclosure Information about Capital Structure," which have
been reflected in the Company's year-end 1997 financial statements. In 1997,
FASB also issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information," each
of which require expanded disclosures effective for 1998. The Company does not
expect the application of these statements to have a material effect on its
financial position, liquidity or results of operations.
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BUSINESS AND PROPERTIES
GENERAL
The Company is an independent energy company engaged in the exploration for
and development of natural gas and oil. The Company has assembled an inventory
of over 30 technology enhanced natural gas Exploration Projects along the Texas
and Louisiana Gulf Coasts. These Exploration Projects include substantial
interests in 28 projects the Company acquired on May 14, 1998 pursuant to the
Acquisition Agreement. Cornerstone delivered to the Company a written opinion
that estimated the fair market value of the assets acquired in the Acquisitions,
as of January 23, 1998, to be $54.2 million. See "Risk Factors-- Uncertainty as
to Estimates of Fair Market Values." The Exploration Projects also include the
Company's interest in the Starboard Project in Terrebonne Parish, Louisiana,
which consists of mineral leases and options and a proprietary 3-D seismic
survey over the Lapeyrouse Field. The Company, EPC and Aspect have spent several
years identifying and evaluating many of the Exploration Projects.
In connection with the Acquisitions, an affiliate of Enron Corp. exercised
an option to exchange $3.8 million of debt Aspect owed to such Enron affiliate
for 675,000 shares of the Company's Common Stock that would otherwise have been
issued to Aspect in the Acquisitions, at an effective conversion rate of $5.63
per share. As a result of the Acquisitons and this exchange, EPC, Aspect and the
Enron affiliate own 43.91%, 36.27%, and 5.74%, respectively, of the Company's
Common Stock.
Most of the Exploration Projects have been, are being, or will be enhanced
with 3-D seismic data in conjunction with CAEX technologies. The 3-D seismic
data acquired, when complete, will cover approximately 1,500 square miles. A
significant number of the Exploration Projects have reached the drilling stage,
and the Company has budgeted approximately $25.0 million, in addition to funds
already spent, to fund the drilling of approximately 30 wells and to fund other
exploration costs over the next 12 months. The Company believes that its
Exploration Projects represent a diverse array of technology enhanced, 3-D
seismic confirmed, ready to drill natural gas exploration projects.
From November 1, 1997 (the effective date of the Acquisitions) through May
14, 1998 (the closing date of the Acquistions), approximately $2.69 million has
been spent for the Company's account to drill eight wells on the Exploration
Projects, of which seven have been completed or are awaiting completion, and one
was a dry hole, the cost of which was approximately $19,000. Two additional
wells are currently being drilled and two locations are awaiting drilling
equipment for additional wells.
STRATEGY
The Company's strategy is to expand its reserves, production and cash flow
through the implementation of an exploration program that focuses on (i)
obtaining dominant positions in core areas of exploration; (ii) enhancing the
value of the Exploration Projects and reducing exploration risks through the use
of 3-D seismic and CAEX technologies; (iii) maintaining an experienced technical
staff with the expertise necessary to take advantage of the Company's
proprietary 3-D seismic and CAEX seismic data; (iv) reducing exploration risks
by focusing on the identification of potential moderate-depth gas reservoirs,
which the Company believes are conducive to hydrocarbon detection technologies;
and (v) retaining operational control over critical exploration decisions.
OBTAIN DOMINANT POSITION IN CORE AREAS. The Company has identified core
areas for exploration along the Texas and Louisiana Gulf Coasts that have
geological trends with demonstrated histories of prolific natural gas
production from reservoir rocks high in porosity and permeability with
profiles suitable for seismic evaluation. Unlike the Gulf of Mexico, where
3-D seismic data typically is owned and licensed by many companies that
compete intensely for leases, the private right of ownership of onshore
mineral rights enables individual exploration companies to proprietarily
control the seismic data within focused core areas. The Company believes
that by obtaining substantial amounts of proprietary 3-D seismic data and
significant acreage positions within its core areas, it will be able to
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achieve a dominant position in focused portions of those areas. With such
dominant position, the Company believes it can better control the core
areas' exploration opportunities and future production, and can attempt to
minimize costs through economies of scale and other efficiencies inherent in
its focused approach. Such cost savings and efficiencies include the ability
to use the Company's proprietary data to reduce exploration risks and lower
its leasehold acquisition costs by identifying and purchasing leasehold
interests only in those focused areas in which the Company believes
exploratory drilling is most likely to be successful.
USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. The Company attempts to enhance
the value of its Exploratory Projects through the use of 3-D seismic and
CAEX technologies, with an emphasis on direct hydrocarbon detection
technologies. These technologies create computer generated 3-dimensional
displays of subsurface geological formations that enable the Company's
explorationists to detect seismic anomalies in structural features that are
not apparent in 2-D seismic surveys. The Company believes that 3-D seismic
technology, if properly used, will reduce drilling risks and costs by
reducing the number of dry holes, optimizing well locations and reducing the
number of wells required to exploit a discovery. The Company believes that
3-D seismic surveys are particularly suited to its Exploration Projects
along the Texas and Louisiana Gulf Coasts.
EXPERIENCED TECHNOLOGICAL TEAM. The Company maintains an experienced
technical staff, including engineers, geologists, landmen and other
technical personnel. After the Acquisitions, the Company hired most of EPC's
technical personnel, who, in some instances, have worked together for over
15 years. In addition, the Company has entered into a geotechnical services
consulting agreement with Aspect on certain of the exploration projects
pursuant to which Aspect provides the Company geophysical expertise in
managing the design, acquisition, processing and interpretation of 3-D
seismic data in conjunction with CAEX data.
FOCUSED DRILLING OBJECTIVES. In addition to using 3-D seismic and CAEX
technologies, the Company seeks to reduce exploration risks by exploring at
moderate depths that are deep enough to discover sizeable gas accumulations
(generally 8,000 to 12,500 feet) and that also are conducive to direct
hydrocarbon detection, but not so deep as to be highly exposed to the
greater mechanical risks and drilling costs incurred in the deep plays in
the region. In conjunction with interpreting the 3-D seismic and CAEX data
relating to the Company's moderate depth wells, the Company anticipates it
will identify potential prospects in deep gas provinces that the Company may
elect to pursue.
CONTROL OF EXPLORATION AND OPERATIONAL FUNCTIONS. The Company believes that
having control of the most critical functions in the exploration process
will enhance its ability to successfully develop its Exploration Projects.
The Company has acquired a majority interest in many of the Exploration
Projects, including proprietary interests in most of the 3-D seismic data
relating to those projects. Although the Company has partners in many of the
Exploration Projects in which it does not own a majority interest, in most
cases, the Company owns a greater interest than any of its project partners.
As a result, in most of its Exploration Projects, the Company will be able
to influence the areas to explore, manage the land permitting and option
process, determine seismic survey areas, oversee data acquisition and
processing, prepare, integrate and interpret the data and identify each
prospect drillsite. In addition, the Company will be the operator of most of
the wells drilled within the Exploration Projects.
Concurrent with the closing of the Acquisitions, the Company took several
steps to further its newly implemented business strategy. The Company changed
its name from Frontier Natural Gas Corporation to Esenjay Exploration, Inc., so
it would be identified with its exploration activities. It completed a
one-for-six reverse stock split that provided adequate available shares to issue
to close the Acquisitions and conduct its business into the future. In addition,
the Company reincorporated in Delaware, the leading state for incorporations in
the United States and the one it believes has the most extensive and
well-developed body of corporate law. The Company believes that the consummation
of the Acquisitions, along with the
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addition of experienced staff and management (many of whom have worked together
for over 15 years), and the implementation of its corporate restructuring,
positions the Company as a technology driven exploration company with a diverse
array of technology enhanced projects.
EXPLORATION PROJECTS
The Exploration Projects include substantial interests in 30 projects
located primarily along the Texas Gulf Coast. Through December 31, 1997, EPC and
Aspect had incurred historical exploration and development costs of $15,563,458
on the projects acquired in the Acquisitions, and the Company had incurred
historical exploration and development costs of $2,185,000 on the Starboard
Project. These costs include costs associated with leasehold acquisitions,
geological and geophysical analysis, delay rentals and dry hole costs. Most of
the Exploration Projects have been, are being, or will be enhanced with 3-D
seismic data and CAEX technologies. The 3-D seismic data acquired will, when
complete, cover approximately 1,500 square miles.
Many of the Exploration Projects acquired in the Acquisitions have
participants other than EPC and Aspect. EPC delivered over 90% of its interests
in its contributed Exploration Projects to the Company and retained the balance.
Aspect delivered 100% of its interests in several Exploration Projects and
delivered at least 50% of its interest in most of its remaining contributed
Exploration Projects. EPC and Aspect are responsible for their pro rata costs
attributable to their retained interests.
Most of the Exploration Projects are concentrated within the Downdip Frio,
Wilcox and Texas Hackberry core project areas. The Downdip Frio core area
generally is in the middle Texas Gulf Coast where the Company believes Frio
targets exist at moderate depths. The Wilcox core area generally is in the
middle Texas Gulf Coast in an area the Company believes to have prospects for
Wilcox sand exploration. The Texas Hackberry core area is located in Jefferson
and Orange Counties, Texas, in an area in which the Company believes offers
drilling opportunities in the Hackberry (Frio) formations, as well as Miocene
and deeper Vicksburg sands. Other Exploration Projects consist of the Starboard
Project, as well as other projects in Louisiana and Mississippi that either are
in early stage exploration areas that may develop into new core project areas,
or non-core area projects, which are projects that are not presently expected to
be further expanded.
Each of the Exploration Projects differs in scope and character and consists
of one or more types of assets, such as 3-D seismic data, leasehold positions,
lease options, working interests in leases, royalty interests or other mineral
rights. The Company's percentage interest in each Exploration Project (a
"Project Interest") represents the portion of the interest in the Exploration
Project it shares with its other project partners. Therefore, the Company's
Project Interest in an Exploration Project should not be confused with the
working interest that the Company will own when a given well is drilled. The
Company's working interest in the wells on each Exploration Project may be
higher or lower than its Project Interest.
The following table sets forth certain information about each of the
Exploration Projects:
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EXPLORATION PROJECTS
<TABLE>
<CAPTION>
ACRES LEASED OR UNDER
OPTION AT MAY 15,
1998(1) SQUARE MILES OF 3-D
---------------------- SEISMIC DATA RELATING
PROJECT AREAS GROSS NET TO PROJECT AREA (2) PROJECT INTEREST
- - --------------------------------------------- --------- ----------- ----------------------- -----------------
<S> <C> <C> <C> <C>
SOUTH TEXAS
DOWNDIP FRIO CORE AREA
Big Gas Sand............................... 24,700 5,557 65 22.5%
Blessing................................... 10,672 10,298 22 24.0%
Tidehaven.................................. 9,145 4,301 28 40.5%
El Maton................................... 7,277 6,547 29 46.5%
Midfield................................... 2,228 1,518 21 37.5%
Matagorda I(3)............................. 11,444 7,243 50 74.0%
Matagorda II(4)............................ 7,480 5,793 60 66.0%
Southwest Pheasant......................... 10,000 7,500 10 75.0%
Geronimo................................... 9,616 8,959 76 20.0%
Houston Endowment.......................... 3,969 3,969 50 27.0%
Wolf Point................................. 1,520 1,520 8 45.5%
Sheriff Field.............................. 54,000 40,500 72 75.0%
West Jeffco................................ 13,500 6,075 60 45.0%
La Rosa.................................... 7,689 7,300 25 8.0%
Piledriver................................. 640 640 2 62.5%
WILCOX CORE AREA
Hall Ranch................................. 8,510 8,485 57 41.5%
Hordes Creek............................... 6,972 6,598 25 41.5%
Mikeska.................................... 7,239 6,553 31 38.0%
Duval, McMullen............................ 1,979 1,979 12 90.0%
TEXAS HACKBERRY CORE AREA
Lox B...................................... 11,700 2,925 71 25.0%
West Port Acres............................ 800 100 21 12.5%
Big Hill/Stowell........................... 10,000 5,000 56 50.0%
East Jeffco................................ 24,000 12,000 65 50.0%
West Beaumont.............................. 11,200 700 23 6.25%
LOUISIANA
Starboard.................................. 6,682 5,905 35 12.0%-48.0%
Tack....................................... 480 300 12 75.0%
OTHER TEXAS
Willacy County............................. 11,485 11,136 50 78.875%
Caney Creek................................ 21,000 2,625 32 12.5%
East Texas Pinnacle Reef(5)................ -- -- 400 --
MISSISSIPPI
Thompson Creek............................... 1,325 914 12 56.0%
Lipsmacker................................... 5,758 3,625 64 22.0%
--------- ----------- -----
Total.................................... 303,010 186,565 1,544
--------- ----------- -----
--------- ----------- -----
</TABLE>
- - ------------------------
(1) Gross acres refers to the number of acres leased or under option in which
the Company owns an undivided interest. Net acres were determined by
multiplying the gross acres leased or under option times the Company's
working interest therein.
(2) Represents 3-D seismic data acquired or to be acquired. See "--Exploration
Projects--Exploration Project Descriptions."
(3) The Company has entered into an agreement to sell a 26.7% Project Interest
in this Exploration Project for $694,200 for costs incurred before
commencement of drilling operations.
(4) The Company has entered into an agreement to sell a 26.7% Project Interest
in this Exploration Project for $694,200 for costs incurred before the
commencement of drilling operations.
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(5) Consists of 400 square miles of 3-D seismic data to which Aspect has rights
pursuant to a license agreement, and to which the Company may acquire on
interest pursuant to a geophysical technical services agreement with Aspect.
EXPLORATION PROJECT DESCRIPTIONS. Set forth below is a description of the
Exploration Projects. The amounts specified for the interests in the Exploration
Projects and gross and net acreage of each Exploration Project were determined
as of the date of this Prospectus. Estimates of drilling and completion costs
are gross amounts and are not necessarily net to the Company's interests in the
related Exploration Projects. In addition, predictions of well costs are
estimates only, and actual costs may vary based on, among other factors, down
hole conditions and costs for drilling rigs at the time of drilling. In
prospects where 3-D seismic surveys are not yet shot, processed and interpreted,
such data may, when available, enhance or condemn previously identified
prospects or leads.
DOWNDIP FRIO CORE AREA PROJECTS
BIG GAS SAND. The Company has a 22.5% Project Interest in this 3-D seismic
project, which consists of approximately 24,700 gross (5,557 net) acres of
leases and options in Galveston County, Texas. The primary geological areas the
Company has identified for potential drilling are the Frio and Vicksburg sands.
An onshore seismic survey is scheduled for mid-1998. The estimated cost to drill
and complete a shallow well is approximately $900,000 with deeper wells costing
over $3.5 million.
BLESSING. The Company has a 24.0% Project Interest in this project, which
consists of approximately 10,672 gross (10,298 net) acres of leases and options
under 22 square miles of 3-D seismic coverage in Matagorda County, Texas. A 3-D
seismic survey was conducted in conjunction with the Tidehaven 3-D shoot. See
"--Tidehaven Project". The Company has generated several upper Frio prospect
leads from this 3-D data set. The Company has drilled an upper Frio Sands well.
The Company's working interest in the well is 33.935%, although the Company's
Project Interest in the remaining portion of the project is 24.0%. The deepest
pay zone in the well currently has been flow tested at a rate exceeding two
million cubic feet of gas and 35 bbls of condensate per day. The Company
believes other pay zones exist up-hole and are behind pipe. The estimated costs
of drilling and completing a shallow well in this project area are approximately
$550,000. The estimated cost to drill and complete a deep well is approximately
$1.3 million.
TIDEHAVEN. The Company has a 40.5% Project Interest in this project, which
consists of leases and options covering over 9,145 gross (4,301 net) acres in
Matagorda County, Texas. These leases overlay a series of known field pays and
multiple fault blocks made this structure a 3-D seismic candidate. Initial
interpretation of the 28 square mile 3-D seismic data set is nearly complete.
The Company has drilled and is in the process of completing a well in the lower
Frio. The estimated cost to drill and complete a well ranges from approximately
$550,000 to $1.5 million, depending upon depth.
EL MATON. The Company has a 46.5% Project Interest in this project, which
consists of leases and options covering approximately 7,277 gross (6,547
net)acres in Matagorda County, Texas. A 29 square mile 3-D seismic survey was
started in late May 1997 as an extension of the Tidehaven shoot. This seismic
survey has been completed and is in the interpretation phase. The geologic
setting and target zones are the same as for Tidehaven. The Company believes
that the information obtained at Tidehaven will benefit the El Maton Project.
The Company has identified several prospect leads. The estimated cost to drill
and complete a well ranges from approximately $550,000 to $1.5 million,
depending upon depth.
MIDFIELD. The Company has a 37.5% Project Interest in this project, which
consists of leases and options covering approximately 2,228 gross (1,518 net)
acres in Matagorda County, Texas. The project is an extension of the Tidehaven,
Blessing and El Maton 3-D seismic shoots. All four of these 3-D seismic surveys
have been merged. The Midfield Project is adjacent to, and up basin from, the El
Maton Project. The geologic setting and target zones are similar to Tidehaven.
Initial data interpretation on a 21 square mile 3-D seismic survey over this
acreage has been disappointing for the zones that have historically been
productive in the area; however, the data has revealed two potential shallow
drilling locations. These locations require additional geological interpretation
before drilling can be scheduled. The estimated cost to drill and complete a
well is approximately $550,000.
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MATAGORDA I. The Company has a 74.0% Project Interest in this project,
which consists of approximately 11,444 gross (7,243 net) acres of lease options
in Matagorda County, Texas. Review of existing 2-D seismic data suggests to the
Company that several undrilled fault segments may exist. The Company believes
that deeper sand objectives have not been adequately tested. A 3-D seismic
survey is scheduled for mid-year 1998 as part of an adjacent project. See
"--Matagorda II Project". The Company has entered into an agreement to sell a
26.7% Project Interest in this project for $675,000 through pre-drilling. The
estimated cost to drill and complete a shallow well is approximately $550,000,
with deeper wells costing approximately $1.3 million.
MATAGORDA II. The Company has a 66.0% Project Interest in this project,
which consists of approximately 7,480 gross (5,793 net) acres of lease options
in Matagorda County, Texas. A 1,000 acre wildcat prospect has been identified
for the entire package of Tex Miss sands. In addition, two exploitation/
development prospects have been generated within the project area and are
scheduled for a 3-D seismic survey mid-year 1998. The Matagorda II 3-D seismic
shoot will be completed in conjunction with the Matagorda I Project. The Company
has entered into an agreement to sell a 26.7% Project Interest in this project
for $675,000 through pre-drilling. The estimated cost to drill and complete a
shallow well is approximately $550,000, with deeper wells costing approximately
$1.3 million.
SOUTHWEST PHEASANT. The Company has a 75.0% Project Interest in this
project, which consists of 10,000 gross (7,500 net) acres of lease options in
Matagorda County, Texas. The primary target objectives are the middle and lower
Frio sands. A portion of the project area is covered by an old Mobil 3-D seismic
survey that has been reprocessed and reinterpreted. The Company has identified
several shallow prospects. Interpretation of deeper formations is not yet
complete. The estimated cost to drill and complete a shallow well is
approximately $550,000, with deeper wells costing approximately $1.3 million.
GERONIMO. The Company has a 20.0% Project Interest, which consists of
approximately 9,616 gross (8,959 net) acres of leases and options in San
Patricio County, Texas. A 76 square mile 3-D seismic survey has been shot, and
the Company has identified several prospective drillsites. One well has been
drilled that is currently being completed in one of two potential pay sands, and
is currently flowing at a rate of approximately 60 bbls of oil and 120 Mcfgd. A
deep Vicksburg test well is currently scheduled to be drilled in 1998. The
estimated cost to drill and complete a well is approximately $600,000 for a
shallow well and approximately $1.2 million for an intermediate depth well, with
deeper Vicksburg wells costing over $4.0 million.
HOUSTON ENDOWMENT. The Company has a 27.0% Project Interest, which consists
of approximately 3,969 gross and net acres of leases and options in San Patricio
and Aransas Counties, Texas. A 50 square mile 3-D seismic survey has been
acquired. EPC drilled one dry hole within the project area before execution of
the Acquisition Agreement. The Company believes the dry hole provided subsurface
data that has set up an updip location to be drilled. The Company plans to drill
two wells within the project area in 1998. One of the wells will be drilled to
test the shallower sands. The second well will test deeper formations.
Additionally several shallow and deep prospects remain to be drilled. The
estimated cost to drill and complete a shallow well is approximately $700,000
with deeper wells costing approximately $1.3 million.
WOLF POINT. The Company has a 45.5% Project Interest, which consists of
approximately 1,520 gross and net acres of state leases in Calhoun County,
Texas. EPC drilled and completed five successful wells within the 3-D seismic
survey area before the Effective Date of the Acquisitions. The prospects require
directional drilling. Known field pays from this area are from the 7,200 foot
Frio, 7,500 foot Frio, 7,700 foot Frio, Broughton, Oats, Upper Middle and Lower
Melbourne sands. Additional geophysical interpretation is being conducted in an
attempt to identify direct hydrocarbon indicators. The Company has delineated
several potential drill sites. The estimated cost to drill and complete a well
is approximately $900,000.
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SHERIFF FIELD. The Company has a 75.0% Project Interest, which consists of
approximately 54,000 gross (40,500 net) acres of lease options in Calhoun
County, Texas. The Company believes this area is lightly explored for part of
the Lower Frio and Vicksburg formations southwest of Lavaca Bay. An independent
oil company has contracted to purchase this acreage block, which has not yet
been shot with 3-D seismic. This sale would net the Company approximately $1.2
million if consummated; however, the party that contracted to purchase such
acreage block has refused to close the transaction. Although Aspect has
instituted legal proceedings to compel the closing of the transaction, there can
be no assurance that Aspect will be successful in such proceedings.
WEST JEFFCO. The Company has a 45.0% Project Interest, which contains
13,500 gross (6,075 net) acres of lease options in Jefferson County, Texas.
Numerous prospect leads have been generated within the area via log shows,
detailed structural mapping and 2-D seismic data. Deep exploration zones also
are targeted. Before drilling, the Company plans to shoot a 3-D seismic survey
that is scheduled to start in the third quarter of 1998. The estimated cost to
drill and complete a shallow well is approximately $650,000, with deeper wells
costing approximately $1.6 million.
LA ROSA. The Company has a non-operating 8.0% Project Interest, which
consists of approximately 7,689 gross (7,300 net) acres of leases and options in
Refugio County, Texas. A 25 square mile 3-D seismic shoot has been acquired and
interpreted. The Company believes the prospective targets are multipay Frio with
the upside of the project being the wildcat potential of the Vicksburg. Two
wells have been drilled since the Effective Date of the Acquisition Agreement
for the Company's account. One of these wells has been completed as a Frio sand
producer and is awaiting a pipeline connection, and the other well was a dry
hole. The estimated cost to drill and complete a Frio sand well is approximately
$450,000.
PILEDRIVER. The Company has a 62.5% Project Interest, which consists of 640
gross and net acres of leases located in Chambers County, Texas. The objectives
are two Frio sands. One of these target sands had what the Company believes to
be a significant gas test at the top of the sand in a well that it believes is
down dip to the Company's acreage recently conducted by Western Geophysical. The
Company intends to acquire and interpret 3-D seismic data over the project area
before making any drilling decisions. The estimated cost to drill and complete a
well is approximately $1.85 million.
WILCOX CORE AREA PROJECTS
HALL RANCH. The Company has a 41.5% Project Interest, which consists of
leases and options covering approximately 8,510 gross (8,485 net) acres under a
57 square mile 3-D seismic survey in Karnes County, Texas. The Company believes
the Hall Ranch area is on an under-explored ridge on trend with several
producing fields. Multiple potential pay zones in four expanded fault blocks
have been delineated in the Wilcox sands from approximately 8,000 to 17,000
feet. Known field pays are from Wilcox reservoirs in the Migura, Roeder, Bunger,
Hackney, Middle Wilcox L series sands, and the Upper Wilcox. The Company has
delineated several potential drill sites. The Company has drilled and run
production casing on its first well on this project. Based upon review of
electrical logs, the Company believes this well has made a gas discovery in the
First Roeder and Migura sections of the Wilcox sands. This well was drilled at a
location in which the Company owns a 20.75% working interest. The Company owns a
41.5% working interest in the offset locations. The estimated cost to drill and
complete a well ranges from approximately $270,000 to $600,000 for shallow
wells, while wells completed in the deep zones (to 12,500 feet) cost
approximately $2.0 million.
HORDES CREEK. The Company has a 41.5% Project Interest, which contains
leases and options on approximately 6,972 gross (6,598 net) acres located in
Goliad County, Texas. The Company believes Hordes Creek has potential in the
Miocene, Frio, Yegua, and the Upper, Middle, and Lower Wilcox. Preliminary
migrated 3-D seismic data covering 25 square miles is being interpreted, and the
Company has identified five potential drilling locations. The Company currently
is attempting to delineate additional prospect leads from this data set. The
Company has drilled its first well in the project, which is currently
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preparing to complete in the Upper Wilcox. The estimated cost to drill and
complete a 9,500 foot well is approximately $800,000.
MIKESKA. The Company has a 38.0% Project Interest, which consists of leases
covering approximately 7,239 gross (6,553 net) acres located in Live Oak County,
Texas. Multiple pay potential exists from 8,500 feet to at least 16,000 feet.
This portion of the Wilcox trend contains known pays from the Hockley, four
Queen City sands, four Slick sands, six Luling sands, three Tom Lyne sands and
three to five House sands. A 31 square mile 3-D seismic survey has been shot and
the data is being interpreted. The Company has identified several drill sites. A
well has been drilled and is currently waiting to be completed in the Upper
Wilcox formation. The estimated cost to drill and complete a shallow well is
approximately $800,000, with deeper wells costing approximately $1.4 million.
DUVAL, MCMULLEN. The Company has a 90.0% Project Interest, which consists
of approximately 1,979 gross and net acres of options in Duval and McMullen
Counties, Texas. The Company's immediate plans are to acquire a one year old
proprietary 3-D seismic survey and interpret the 3-D seismic data before
drilling. The estimated cost to drill and complete a shallow well is
approximately $800,000, with deeper wells costing approximately $1.2 million.
TEXAS HACKBERRY CORE AREA PROJECTS
LOX B. The Company has a 25.0% Project Interest, which consists of 11,700
gross (2,925 net) acres of leases and options in Jefferson County, Texas. The
primary objectives of this project are the Hackberry and Vicksburg formations.
The acreage has been evaluated with 71 square miles of 3-D seismic data. The
Company believes it has identified several potential prospects through the use
of seismicly detected hydrocarbon indicators. The 3-D seismic survey has been
merged with the West Port Acres data, and ultimately will be merged with the Big
Hill/Stowell and East Jeffco 3-D seismic surveys described below. The first
prospect will likely be drilled in mid-1998. The estimated cost to drill and
complete a Hackberry well is approximately $900,000.
WEST PORT ACRES. The Company has a 12.5% Project Interest, on which 800
gross (100 net) acres of leases in Jefferson County, Texas have been acquired
and a 21 square mile 3-D seismic survey has been conducted. The Company has
identified several Hackberry prospects. The estimated cost to drill and complete
a Hackberry well is approximately $1.5 million
BIG HILL/STOWELL. The Company has a 50.0% Project Interest, which consists
of over 10,000 gross (5,000 net) acres of leases and options in Jefferson
County, Texas. The initial seismic interpretation has been completed and the
Company has generated several prospects, some of which are scheduled for 1998
drilling. The estimated cost to drill and complete a shallow well is
approximately $700,000, with deeper wells costing approximately $1.5 million.
EAST JEFFCO. The Company has a 50.0% Project Interest, which consists of
24,000 (12,000 net) gross acres of leases and options in Jefferson County,
Texas. The Company is participating in a 65 square mile 3-D seismic survey that
is currently being shot, with Hackberry sands being the primary target. The
Company believes additional potential exists in the shallow Frio and deeper
Vicksburg formations. The estimated cost to drill and complete a Hackberry well
ranges from approximately $1.0 million to $1.5 million.
WEST BEAUMONT. The Company has a 6.25% Project Interest, which consists of
11,200 gross (700 net) acres of leases and options in Jefferson County, Texas. A
22.5 square mile 3-D seismic survey has been received and will be interpreted by
the Company. The estimated cost to drill and complete a Hackberry well is
approximately $1.3 million.
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<PAGE>
LOUISIANA PROJECTS
STARBOARD. The Company has working interests in the leases over this
project ranging from 12.0% to 48.0%, depending upon the target formation depths.
A project consists of 6,682 gross (5,905 net) acres of leases in the Lapeyrouse
Field in Terrebonne Parish, Louisiana. The Company's partners include Fina Oil
and Chemical Company, two affiliates of public utilities, and a development
drilling financing commitment from Bank of America Illinois. The 3-D seismic
data has been shot, processed and interpreted. The project includes both
developmental and exploratory locations. After seismic interpretation, three
initial wells have been proposed, two of which are exploratory and one of which
is developmental. Drilling is expected to commence in the third quarter of 1998.
The estimated cost to drill and complete a well is approximately $4.4 million to
$7.5 million depending upon depth.
TACK. The Company has a 75.0% project interest which consists of 480 gross
(300 net) acres of leases in Cameron Parish, Louisiana. The primary target
objectives are in the Miocene series of sands. The Company is currently
interpreting a full fold, 12 square mile 3-D seismic shoot. The estimated cost
to drill and complete a well is approximately $1.3 million.
OTHER TEXAS PROJECTS
WILLACY COUNTY. The Company has a 78.875% Project Interest, which consists
of approximately 11,485 gross (11,136 net) acres of leases and options in
Willacy County, Texas. This project includes separate geologic structures known
by four different field names. The pre 3-D seismic geologic study of this area
has identified six possible drilling locations. These locations were selected
based on subsurface well correlation and production analysis. A 50 square mile
3-D seismic survey is scheduled to be shot in the third quarter of 1998. The
estimated cost to drill and complete a well is approximately $550,000.
CANEY CREEK. The Company has a 12.5% Project Interest, which consists of
options and leases covering 21,000 gross (2,625 net) acres in Matagorda and
Wharton Counties, Texas. The project targets the Frio and Yegua reservoirs. A 32
square mile 3-D seismic survey has been conducted and the interpretation of the
data is currently being conducted. The estimated cost to drill and complete a
shallow well is approximately $700,000, with deeper wells costing approximately
$2.0 million.
EAST TEXAS PINNACLE REEF TREND. Aspect and certain of its affiliates have
licenses covering approximately 400 square miles of 3-D seismic data pertaining
to the East Texas Cotton Valley Reef Trend. This seismic data is recently
acquired and most of it is proprietary. Currently, there is no acreage position
or defined drilling opportunity associated with this project. The Company
intends to enter into a joint venture with Aspect or its affiliates to attempt
to generate drillable prospects. The joint venture will, if consummated, be
subject to the terms of any licensing or other agreements currently in effect.
MISSISSIPPI PROJECTS
THOMPSON CREEK. The Company has a 56.0% Project Interest, which consists of
approximately 1,325 gross (914 net) acres of leases and options in Wayne County,
Mississippi. The Company has generated a prospect from subsurface and 2-D
seismic data indicating multiple potential oil pays ranging from 7,000 feet to
17,000 feet in depth. However, the Company intends to acquire and interpret 3-D
seismic data before commencing drilling. Approximately 12 square miles of full
fold 3-D seismic data will be necessary to image the acreage position. A 3-D
seismic survey is being conducted by a seismic vendor over this area and the
processed data should be delivered in the third quarter of 1998. The estimated
cost to drill and complete a 15,500 foot Cotton Valley well is approximately
$1.5 million.
LIPSMACKER. The Company has a 22.0% Project Interest, which consists of
approximately 5,758 gross (3,625 net) acres of leases and options in Choctaw,
Alabama and Clarke Counties, Mississippi. EPC
44
<PAGE>
completed a 64 square mile 3-D seismic survey in the fall of 1996, and while
several drilling locations were tested, the results generally were
disappointing. The Company believes there are two remaining drillable locations.
The Company is currently evaluating whether it will invest its own capital in
drilling these wells. The estimated cost to drill and complete a well is
approximately $1.2 million.
CAEX TECHNOLOGY AND 3-D SEISMIC
The Company, either directly or through its partners, uses CAEX technology
to collect and analyze geological, geophysical, engineering, production and
other data obtained about potential gas or oil prospects. The Company uses this
technology to correlate density and sonic characteristics of subsurface
formations obtained from 2-D seismic surveys with like data from similar
properties, and uses computer programs and modeling techniques to determine the
likely geological composition of a prospect and potential locations of
hydrocarbons.
Once all available data has been analyzed to determine the areas with the
highest potential within a prospect area, the Company may conduct 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 calculations
needed to process such data are made possible by computer programs and advanced
computer hardware.
While large oil companies have used 3-D seismic and CAEX technologies for
approximately 20 years, these methods were not affordable by smaller,
independent gas and oil companies until more recently, when improved data
acquisition equipment and techniques and computer technology became available at
reduced costs. The Company began using 3-D seismic and CAEX technologies in 1992
and is using these technologies on a continuing basis. The Company believes that
its use of CAEX and 3-D seismic technology may provide it with certain
advantages in the exploration process over those companies that do not use this
technology. These advantages include better delineation of the subsurface, which
can reduce exploration risks and help optimize well locations in productive
reservoirs. The Company believes these advantages can be readily validated based
upon general industry experience as well as the experiences of Aspect and EPC.
Because computer modeling generally provides clearer and more accurate projected
images of geological formations, the Company believes it is better able to
identify potential locations of hydrocarbon accumulations and the desirable
locations for wellbores. However, the Company has not used the technology
extensively enough to arrive at any conclusion regarding the Company's ability
to interpret and use the information developed from the technology.
EXPLORATION AND DEVELOPMENT
The Company considers the Gulf Coast to be the premier area in the United
States to explore for significant new reserves. This conclusion is based on
several characteristics including (i) a large number of productive intervals
throughout a significant sedimentary section, (ii) numerous wells with which to
calibrate 3-D seismic data and (iii) complicated geological formations that the
Company believes 3-D seismic technology is particularly well suited to
interpretation. In 1994, the Company began devoting more of its energy to the
Gulf Coast region. The Company initially entered this area by evaluating the
onshore shallow Frio/Miocene Trend. Its emphasis expanded to include larger
exploration targets represented by large geological features such as those
present in the Starboard Project. Upon completion of the Acquisitions, the
Company spread its focus over 30 exploration projects along the Gulf Coast and
intends to expand its project inventory in these areas. The Company's
Exploration Project inventory is along the Gulf Coast of Texas, Louisiana,
Alabama and Mississippi. The focus is on natural gas exploration prospects with
a numerical concentration along the Texas Gulf Coast, many of which were
delineated by seismic hydrocarbon indicators. Additional 2-D and 3-D seismic
surveys may be required to evaluate these areas more fully, and when determined
appropriate, the Company intends to acquire acreage and drill wells as indicated
by the evaluations.
45
<PAGE>
The Company intends to drill prospects where the formations being tested are
known to be productive in the general area and where it believes 3-D seismic can
be used to increase resolution and thereby reduce risk. The extent to which the
Company will pursue its activities in the Gulf Coast region will be determined
by the availability of the Company's resources and the availability of joint
venture partners.
ACQUISITIONS AND DIVESTMENTS
The Company has periodically acquired producing natural gas and oil
properties. In connection with each acquisition, the Company considers (i)
current and historic production levels and reserve estimates, (ii) exploitation;
(iii) capital requirements; (iv) proximity of product markets; (v) regulatory
compliance; (vi) acreage potential; and (vii) existing production transportation
capabilities. The Company also considers the historic financial operating
results and cash flow potential of each acquisition opportunity and whether the
acquisition will improve the operations of other acquired properties. Evaluation
of the merits of a particular acquisition is based, to the extent relevant, on
all of the above factors as well as other factors deemed relevant by the
Company's management.
The Company has currently deemphasized its producing property acquisition
activities. The Company intends to limit its near term producing property
acquisitions to opportunities that facilitate its exploration activities. The
Company may readdress this approach if it identifies an opportunity it believes
to be of exceptional benefit to its shareholders.
In September 1996, the Company completed the sale of its N.E. Cedardale
field in Major County Oklahoma to OXY USA, Inc., for consideration totaling
$3,550,000. The properties sold represented a substantial portion of the
Company's Oklahoma production. The divestiture of the Oklahoma properties
further facilitated the Company's focus of its resources on its Gulf Coast
projects and reduced debt service requirements over the next three years in an
amount greater than the anticipated net revenue from the properties sold. The
sale included cash of $2,840,000 and certain exchange properties that were
concurrently sold to a third party for $710,000, netting the Company $3,550,000.
HEDGING ACTIVITIES AND MARKETING
The Company markets its natural gas through monthly spot sales. Because
sales made under spot sales contracts 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, as required by the Bank
Credit Agreement, entered into a swap agreement on 62,500 MMBtu of its monthly
Mid-Continent natural gas production for $1.566 per MMBtu for the period
beginning April 1, 1996 and ending January 31, 1999. The swap, which is the
Company's only current hedge, was reduced to 31,250 MMBtu on September 25, 1996,
in connection with the sale of the N.E. Cedardale field. The Company recorded a
loss of $212,000 on this swap reduction. The Company's net gas production
currently is less then the volumes hedged. As of March 31, 1998 the Company had
an accrued liability of $179,947 to recognize the projected loss from the
hedges. The Company has not recently conducted an active hedging program other
than as required by the Credit Agreement. In that regard, the Company had net
losses of $814,029 in 1996, which includes the $212,000 loss on the swap
reductions, and $375,410 in 1997 on its required hedged positions.
All of the Company's oil production is now sold under market-sensitive 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 1996 or 1997. The Company does not believe the loss
of any existing purchaser would have a material adverse effect on the Company.
In December 1991, the Company entered into and performed under a seven-year
fixed price contract with an industrial end-user, Waldorf Corporation, for the
delivery of 7.1 Bcf of natural gas. The contract included certain prepayments to
the Company. The agreement was satisfied in January 1996 when the Company
entered into an agreement with Waldorf to terminate the agreement as of January
31, 1996. The
46
<PAGE>
Company paid Waldorf $2,181,489, which represents a return of Waldorf's advance
on 2,490,103 MMBTU's of natural gas, plus a settlement payment of $313,912. The
Company has been able to sell all natural gas production to other sources at
equal or higher prices since the termination of the contract. The Company
anticipates that it will be able to continue to sell all available natural gas
production in the foreseeable future.
The lender under the Duke Credit Facility has the right to gather, process,
transport and market, at competitive market rates, natural gas produced from a
majority of the projects the Company acquired pursuant to the Acquisitions until
the earlier to occur of five years from the date of the Duke Credit Facility or
until the lender has marketed 100 Bcf of natural gas under the Duke Credit
Facility.
PRINCIPAL AREAS OF OPERATIONS
The Company owns and operates producing properties located in four states
with proved reserves located primarily in Louisiana, Oklahoma and Texas. Before
the Acquisitions, the Company owned interests in six wells it operates and also
owned non-operated interests in approximately 27 producing wells in Oklahoma,
Louisiana and Texas. Daily production from both operated and non-operated wells
net to the Company's interest averaged 332.34 Mcf per day and 19.96 Bbls of oil
per day for the year ended December 31, 1997. These properties have provided the
Company's revenues to date. Pursuant to the Acquisitions, the Company acquired
interests in seven wells that are complete or being completed, six of which are
being operated by the Company. Initial production rates are not available on
these wells.
GAS AND OIL RESERVES
Set forth below is certain information concerning 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 dates set
forth below. The Company has not obtained a report of an independent petroleum
engineer with respect to the reserve estimates set forth below. The estimates do
not include any amounts for reserves on interests acquired pursuant to the
Acquisitions. The estimates were based upon a review of production histories and
other geologic, economic, ownership and engineering data. In determining the
estimates of the reserve quantities that are economically recoverable, the
Company used selling prices and estimated development and production costs in
effect as of the dates of such estimates and, where no prior sales existed,
selling prices and production 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
information regarding the Company's gas and oil reserves at December 31, 1997.
<TABLE>
<CAPTION>
GAS
GAS OIL EQUIVALENT
(MCF) (BBL) (MCFE)(1)
---------- --------- ----------
<S> <C> <C> <C>
Proved developed reserves................................ 521,345 24,358 667,493
Proved undeveloped reserves.............................. 4,979,018 90,041 5,519,264
Total proved reserves.................................... 5,500,363 114,399 6,186,757
</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.
47
<PAGE>
ESTIMATE OF FUTURE NET REVENUE FROM PROVED RESERVES. The following table
sets forth summary information regarding estimated future net revenue and the
present value of future net revenue from the Company's net proved reserves as of
December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Estimated total future net revenue (1).......................................... $8,283,153
Present value of future net revenue (2)......................................... $4,025,657
</TABLE>
- - ------------------------
(1) Estimated future net revenue represents estimated future gross revenue to be
generated from the production of proved reserves, net of estimated
production 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
amortization.
(2) 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, and each
of such wells was productive. In 1994, the Company drilled five exploratory
wells, of which four were productive, and one developmental well, which was not
productive. In 1995, the Company drilled seven exploratory wells of which four
were productive. In 1996, the Company participated in the drilling of four wells
of which two were productive. In 1997, the Company participated in eight wells,
drilled one sidetrack operation in an existing wellbore, which operations have
resulted in two successful completions, six dry holes, and one unsuccessful
sidetrack operation due to mechanical difficulties. Since November 1, 1997 (the
effective date of the Acquisitions) through May 14, 1998 (the closing date of
the Acquisitions) eight wells have been drilled for the Company's account
pursuant to the Acquisition Agreement, of which seven have been completed or are
awaiting completion, and one well was a dry hole. Two additional wells are
currently being drilled and two locations are awaiting drilling equipment for
additional wells.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding the Company's
ownership as of
December 31, 1997 of productive gas and oil wells in the areas indicated.
<TABLE>
<CAPTION>
GAS OIL
---------------------- ----------------------
GROSS NET GROSS NET
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Oklahoma........................................................ 5 .04 8 .20
Texas........................................................... 1 0.07 5 2.22
Louisiana....................................................... 2 0.79 -- --
Kansas.......................................................... 1 0.10 -- --
- --
--- ---
Total......................................................... 9 1.00 13 2.42
- --
- --
--- ---
--- ---
</TABLE>
48
<PAGE>
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>
YEAR ENDED
DECEMBER 31,
------------------------
1996 1997
------------ ----------
<S> <C> <C>
Net Production:
Oil (Bbl)....................................................... 9,276 7,286
Gas (Mcf)....................................................... 1,406,016 121,304
Gas equivalent (Mcfe)........................................... 1,461,672 165,020
Average sales price:
Oil ($per Bbl).................................................. $ 20.99 $ 20.28
Gas ($per Mcf).................................................. $ 2.18 $ 2.06
Average production expenses and taxes
($per Mcfe)(1)................................................ $ 0.78 $ 2.13
</TABLE>
- - ------------------------
(1) Includes $164,792 in costs associated with fulfillment of contractual
transportation obligations on the Company's Mobil Bay Properties. If this
amount were not included, the average production taxes and excess for Mcfe
would have been $1.13.
LEASEHOLD ACREAGE
The following table sets forth as of December 31, 1997, the gross and net
acres of proved developed and proved undeveloped gas and oil leases which the
Company holds or has the right to acquire. The information set forth below does
not include the acreage acquired in the Acquisitions.
<TABLE>
<CAPTION>
PROVED UNDEVELOPED
PROVED DEVELOPED
-------------------- --------------------
STATE GROSS NET GROSS NET
- - -------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Oklahoma................................................ 38,606 14,091 1,370 452
Texas................................................... 10,742 1,999 54 54
Alabama................................................. 5,156 4,877 5,710 1,805
Arkansas................................................ 1,672 357 6,360 2,544
Louisiana............................................... 1,474 449 4,075 3,397
Kansas.................................................. 1,600 126 -- --
--------- --------- --------- ---------
Total............................................. 59,250 21,899 17,569 8,252
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
49
<PAGE>
COMPETITION
The gas and oil industry is highly competitive in all of its phases. The
Company encounters strong competition from other gas and oil companies in all
areas of its operations, including the acquisition of exploratory and producing
properties, the permitting and conducting of seismic surveys and the marketing
of gas and oil. Many of these competitors possess greater financial, technical
and other resources than the Company. Competition for the 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 the Company establishes from time to time for the minimum projected
return on investment. Competition also may be presented by alternative fuel
sources, including heating oil and other fossil fuels, There has been increased
competition for lower risk development opportunities and for available sources
of financing. In addition, the marketing and sale of natural gas and processed
gas are competitive. Because the primary markets for natural gas liquids are
refineries, petrochemical plants and fuel distributors, prices generally are set
by or in competition with the prices for refined products in the petrochemical,
fuel and motor gasoline markets.
REGULATION
GENERAL. The gas and oil industry is extensively regulated by federal,
state and local authorities. In particular, gas and oil production operations
and economics are affected by price controls, environmental protection statutes,
tax statutes and other laws and regulations relating to the petroleum industry,
as well as changes in such laws, changing administrative regulations and the
interpretations and application of such laws, rules and regulations. Gas and oil
industry legislation and agency regulation are under constant review for
amendment and expansion for a variety of political, economic and other reasons.
Numerous regulatory authorities, federal, and state and local governments issue
rules and regulations binding on the gas and oil industry, some of which carry
substantial penalties for failure to comply. The regulatory burden on the gas
and oil industry 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 Company 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
Company intends to conduct seismic surveys. As a result, the Company may not be
able to conduct seismic surveys covering its entire area of interest. Moreover,
3-D seismic surveys typically are conducted from various locations both inside
and outside the area of interest to obtain the most detailed data of the
geological features within the area. To the extent that the Company is unable to
obtain permits to access locations to conduct the seismic surveys, the data
obtained may not be as detailed as might otherwise be available.
EXPLORATION AND PRODUCTION. The Company's operations are subject to various
regulations at the federal, state and local levels. Such regulations include (i)
requiring permits for the drilling of wells; (ii) maintaining bonding
requirements 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 also are subject to various conservation regulations. These
include the regulation of the size of drilling and spacing units, the density of
wells that may be drilled, and the unitization or pooling of gas and oil
properties. In addition, state conservation laws establish maximum rates of
production from gas and oil wells, generally prohibiting the venting or flaring
of gas, and impose certain requirements regarding the 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. Recently enacted legislation and
regulatory action in Texas and Oklahoma is intended to reduce the total
production of natural gas in those states. Although such
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<PAGE>
restrictions have not had a material impact on the Company's operations to date,
the extent of any future impact therefrom cannot be predicted.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION. Federal legislation
and regulatory controls in the United States have historically affected the
price of the natural gas produced by the Company and the manner in which such
production is marketed. The transportation and sale for resale of natural gas in
interstate commerce are regulated by the Federal Energy Regulatory Commission
("FERC") pursuant to the Natural Gas Act and the Natural Gas Policy Act of 1978
("NGPA"). The maximum selling prices of natural gas were formerly established
pursuant to regulation. However, on July 26, 1989, the Natural Gas Wellhead
Decontrol Act of 1989 ("Decontrol Act") was enacted, which terminated wellhead
price controls on all domestic natural gas on January 1, 1993 and amended the
NGPA to remove completely by January 1, 1993 price and nonprice controls for all
"first sales" of natural gas, which will include all sales by the Company of its
own production. Consequently, sales of the Company's natural gas currently may
be made at market prices, subject to applicable contract provisions. The FERC's
jurisdiction over natural gas transportation was unaffected by the Decontrol
Act.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to gas buyers and sellers
on an open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and transportation of natural gas. Commencing in April
1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C (collectively,
"Order No. 636"), which, among other things, require interstate pipelines to
"restructure" their services to provide transportation separate or "unbundled"
from the pipelines' sales of gas. Also, Order No. 636 requires interstate
pipelines to provide open-access transportation on a nondiscriminatory basis
that is equal for all natural gas shippers. Order No. 636 has been implemented
through decisions and negotiated settlements in individual pipeline services
restructuring proceedings. In many instances, the result of Order No. 636 and
related initiatives has been to substantially reduce or eliminate the interstate
pipelines' traditional role as wholesalers of natural gas, and has substantially
increased competition and volatility in natural gas markets. The FERC has issued
final orders in virtually all Order No. 636 pipeline restructuring proceedings.
In July 1996, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636 and remanded certain issues for further
explanation or clarification. Numerous petitions for review of the individual
pipeline restructuring orders are currently pending in that court. The issues
remanded for further action do not appear to materially affect the Company.
Proceedings on the remanded issues are currently ongoing before the FERC
following its issuance of Order No. 636-C in February 1997. Although it is
difficult to predict when all appeals of pipeline restructuring orders will be
completed or their impact on the Company, the Company does not believe that it
will be affected by the restructuring rule and orders any differently than other
natural gas producers and marketers with which it competes.
Although Order No. 636 does not regulate natural gas production operations,
the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural gas industry under
Order No. 636 will have on the Company and its natural gas marketing efforts.
Although Order No. 636 could provide the Company with additional market access
and more fairly applied transportation service rates, terms and conditions, it
could also subject the Company to more restrictive pipeline imbalance tolerances
and greater penalties for violation of those tolerances. The Company does not
believe, however, that it will be affected by any action taken with respect to
Order No. 636 materially differently than other natural gas producers and
marketers with which it competes.
The FERC has recently announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction, the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
51
<PAGE>
for resale in the secondary market, the price that shippers can charge for their
released capacity, and the use of negotiated and market-based rates and terms
and conditions for interstate gas transmission. Several pipelines have obtained
FERC authorization to charge negotiated rates as an alternative to traditional
cost-of-service rate making methodology. In February 1997, the FERC announced a
broad inquiry into issues facing the natural gas industry to assist the FERC in
establishing regulatory goals and priorities in the post-Order No. 636
environment. In December 1997, the FERC requested comments on the financial
outlook of the natural gas pipeline industry, including among other matters,
whether the FERC's current rate making policies are suitable in the current
industry environment. In April 1998, the FERC issued a new rule to further
standardize pipeline transaction tariffs that, as the result of newly
standardized provisions regarding firm intra day transportation nominations,
could adversely affect the reliability of scheduled interruptible transportation
service on some pipelines. While any resulting FERC action would affect the
Company only indirectly, any new rules and policy statements may have the effect
of enhancing competition in natural gas markets.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the operations of
the Company. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future. The regulatory burden on the oil and natural gas industry
increases the Company's cost of doing business and, consequently, affects its
profitability and cash flow. In as much as such laws and regulations are
frequently expanded, amended or reinterpreted, the Company is unable to predict
the future cost or impact of complying with such regulations.
LOUISIANA LEGISLATION. The Louisiana legislature passed Act 404 in 1993,
which permits a party transferring an oil field site to establish a
site-specific trust account for such oil field. If the site-specific trust
account is established in accordance with the requirements of the statute, the
party transferring the oil field site shall not thereafter be held liable by the
state for any site restoration costs or actions associated with the transferred
oil field site. The parties to a transfer may elect not to establish a site-
specific trust account, however, in the absence of such an account, the
transferring party will continue to have liability for the costs of restoration
of the site. If 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 determine the site
restoration requirements existing at the time of transfer. Based upon the site
restoration assessment, the parties to the transfer must propose to the DNR a
funding schedule for the site-specific trust account, providing for some
contribution to the account at the time of transfer and at least quarterly
payment thereafter. If the DNR approves the establishment and funding of the
site-specific trust account, 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.
OIL SALES AND TRANSPORTATION RATES. The FERC also regulates rates and
service conditions for interstate transportation of crude oil, liquids and
condensate, which can affect the amount the Company receives from the sale of
these products. Rates for such transportation are generally subject to an
indexing system under which rates may be increased as long as they do not exceed
an index rate that is tied to inflation. Over time, this indexing system could
have the effect of increasing the cost of transporting crude oil, liquids and
condensate by pipeline. Sales of crude oil, condensate and gas liquids by the
Company are not regulated and are made at market prices. The price the Company
receives from the sale of these products is affected by the cost of transporting
the products to market.
52
<PAGE>
ENVIRONMENTAL MATTERS. The Company's oil and natural gas exploration,
development and production operations are subject to stringent federal, state
and local laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Numerous
governmental agencies, such as the U.S. Environmental Protection Agency ("EPA"),
issue regulations to implement and enforce such laws, which often require
difficult and costly compliance measures that carry substantial administrative,
civil and criminal penalties or may result in injunctive relief for failure to
comply. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentrations of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit construction or drilling
activities on certain lands lying within wilderness, wetlands, ecologically
sensitive and other protected areas, require remedial action to prevent
pollution from former operations, such as plugging abandoned wells, or closing
pits, and impose substantial liabilities for pollution resulting from the
Company's operations. In addition, these laws and regulations may restrict the
rate of oil and natural gas production below the rate that would otherwise
exist. The regulatory burden on the oil and gas industry increases the cost of
doing business and consequently affects its profitability. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, storage, transport, disposal or
cleanup requirements could have a material adverse effect on the Company's
operations and financial position, as well as those of the oil and gas industry
in general. While management believes that the Company is in substantial
compliance with current applicable environmental laws and regulations and the
Company has neither experienced any material adverse effect nor experts any
significant capital expenditures from compliance with these environmental
requirements, there is no assurance that this trend will continue in the future.
The Comprehensive Environmental Response, Compensation and Liability Act, as
amended ("CERCLA"), also known as "Superfund," and comparable state laws imposes
liability without regard to fault or the legality of the original conduct, on
certain classes of persons who are considered to be responsible for the release
of a "hazardous substance" into the environment. These persons include (i) the
current owner and operator of a facility from which hazardous substances are
released, (ii) owners and operators of the facility at the time the disposal of
hazardous substances took place, (iii) generators of hazardous substances who
arranged for the disposal or treatment at or transportation to such facility of
hazardous substances and (iv) transporters of hazardous substances to disposal
or treatment facilities selected by them. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources and for the costs of certain health studies, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release of hazardous
substances or other pollutants into the environment. Furthermore, although
petroleum, including crude oil and natural gas, is exempt from CERCLA, at least
two courts have ruled that certain wastes associated with the production of
crude oil may be classified as "hazardous substances" under CERCLA, and thus
such wastes may become subject to liability and regulation under CERCLA.
Regulatory programs aimed at remediation of environmental releases could have a
similar impact on the Company.
The Resource Conservation and Recovery Act, as amended ("RCRA"), generally
does not regulate most wastes generated by the exploration and production of oil
and gas. RCRA specifically excludes from the definition of hazardous waste
"drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy." However, these wastes may be regulated by EPA or state agencies as
solid waste. Moreover, ordinary industrial wastes, such as paint wastes, waste
solvents, laboratory wastes, and waste compressor oils, may be regulated as
hazardous waste. Pipelines used to transfer oil and gas may also generate some
hazardous wastes. Although the costs of managing solid and hazardous waste may
be significant, the Company does not expect to experience more burdensome costs
than similarly situated companies involved in oil and gas exploration and
production.
53
<PAGE>
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although the Company has used operating and disposal
practices that were standard in the industry at the time, hydrocarbons or other
wastes may have been disposed of or released on or under the properties owned or
leased by the Company or on or under other locations where such wastes have been
taken for disposal. In addition, many of these properties have been operated by
third parties whose treatment and disposal or release of hydrocarbons or other
wastes was not under the Company's control. These properties and the wastes
disposed thereon may be subject to CERCLA, RCRA, and analogous state laws. Under
such laws, the Company could be required to remove or remediate previously
disposed wastes (including waste disposal of or released by prior owners or
operators), or property contamination (including groundwater contamination by
prior owners or operators), or to perform remedial plugging or pit closure
operations to prevent future contamination.
The Federal Water Pollution Control Act of 1972 as amended ("FWPCA"), also
known as the Clean Water Act ("CWA") and analogous state laws, impose
restrictions and strict controls regarding the discharge of pollutants including
produced waters and other oil and gas wastes, into state waters or waters of the
United States. The discharge of pollutants into regulated waters is prohibited,
except in accord with the terms of a permit issued by EPA or the state. These
proscriptions also prohibit certain activity in wetlands unless authorized by a
permit issued by the U.S. Army Corps of Engineers. Sanctions for unauthorized
discharges include administrative, civil and criminal penalties, as well as
injunctive relief.
The Oil Pollution Act of 1990, as amended ("OPA"), pertains to the
prevention of and response to spills or discharges of hazardous substances or
oil into navigable waters of the United States. Under OPA, a person owning or
operating a facility or equipment (including land drilling equipment) from which
there is a discharge or threat of a discharge of oil into or upon navigable
waters or adjoining shorelines is liable, regardless of fault, as a "responsible
party" for removal costs and damages. Federal law imposes strict, joint and
several liability on facility owners for containment and clean-up costs and
certain other damages, including natural resource damages, arising from a spill.
The OPA establishes a liability limit for onshore facilities of $350 million;
however, a party cannot take advantage of this liability limit if the spill is
caused by gross negligence or willful misconduct or resulted from a violation of
a federal safety, construction, or operating regulation. If a party fails to
report a spill or cooperate in the cleanup, the liability limits otherwise do
not apply. Federal regulations under the OPA and FWPCA also require certain
owners and operators of facilities that store or otherwise handle oil, such as
the Company, to prepare and implement spill prevention, control and
countermeasure plans and spill response plans relating to possible discharge of
oil into surface waters. The Company believes that it is in substantial
compliance with the requirements of the OPA and FWPCA and that any
non-compliance would not have a material adverse effect on the Company.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried
working, net profits, working and other similar interests and contractual
arrangements customary in the gas and oil industry, liens for current taxes not
yet due and 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).
Investigations including a title opinion of local counsel generally are made
before commencement of drilling operations. The Company has granted to an
affiliate of a major public utility a mortgage on its interest in the Starboard
Project to secure repayment of the funding provided by the affiliate and
relating to the prospect, and has granted to Bank of America NT&SA a mortgage on
virtually all remaining producing gas and oil properties to secure repayment
under the Bank 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
54
<PAGE>
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.
The Company maintains a gas and oil lease operator insurance 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 insurance will be adequate to cover any losses or exposure to liability.
The Company also carries comprehensive general liability policies and an
umbrella policy. The Company and its subsidiaries carry workers' compensation
insurance in all states in which they operate. The Company maintains various
bonds as required by state and federal regulatory authorities. Although the
Company believes these policies are customary in the industry, they do not
provide complete coverage against all operating risks. An uninsured or partially
insured claim, if successful and of sufficient magnitude, could have a material
adverse effect on the Company and its financial condition. If the Company
experiences significant claims or losses, the Company's insurance premiums could
be increased, which may adversely affect the Company and its financial
condition, or limit the ability of the Company to obtain coverage. Any
difficulty in obtaining coverage may impair the Company's ability to engage in
its business activities.
FACILITIES
The Company leases approximately 7,600 square feet of office space in
Houston, Texas, at an annual rent of $117,068. The lease expires in September
2001. In connection with the Acquisitions, the Company assumed a lease (the
"Lease") for 8,242 square feet of Esenjay's office space in Corpus Christi,
Texas. The monthly rent is $7,555, and the Lease expires on June 30, 1998. The
Company believes it will be able to renew the lease on acceptable terms. The
Company currently is leasing more office space than it needs in Houston, and
intends to sublet a portion of its office space in 1998.
EMPLOYEES
The Company has five full-time and one part-time employees in its Houston,
Texas office, and 26 employees in its Corpus Christi, Texas office. Their
functions include management, production, engineering, geology, land, legal, gas
marketing, accounting, financial planning and administration. Certain operations
of the Company's field activities are accomplished through independent
contractors who are supervised by the Company. The Company believes its
relations with its employees and contractors are good. No employees of the
Company are represented by a union.
LEGAL PROCEEDINGS
EPC was a defendant in a lawsuit regarding injuries to a oil field worker
not employed by the Company that resulted in a judgment against EPC of
approximately $17,700,000. The judgment was settled by EPC's insurers, who
agreed to make cash payments to the plaintiff, and by EPC who agreed to
implement a mutually agreeable work safety plan in exchange for approximately
$6.0 million in punitive damages that otherwise would have been payable to the
plaintiff. The settlement was entered into and approved by the court entering an
agreed judgment on December 3, 1997. On approximately April 16, 1998, the
plaintiff filed an action against both EPC and the Company alleging, in part,
that EPC has failed and refused to implement an appropriate safety plan and
entered negotiations with the Company to convey material assets to it which, if
consummated, would negate plaintiffs benefits to be obtained by EPC's safety
plan, thereby fraudulently inducing plaintiff to settle the judgment against
EPC. The Company believes the claims are not supported by the facts and are
without merit. The Company and EPC intend to vigorously defend the claims.
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ------------------------------ --- -------------------------------------------------
<S> <C> <C>
David W. Berry(1)............. 48 Chairman of the Board
Alex M. Cranberg(1)(2)........ 43 Vice Chairman of the Board
Michael E. Johnson(1)......... 50 Director, President and Chief Executive Officer
Charles J. Smith(1)........... 71 Director
Alex B. Campbell(3)........... 40 Director
William D. Dodge, III(2)...... 45 Director
Jack P. Randall(2)(3)......... 48 Director
Hobart A. Smith(3)............ 61 Director
David B. Christofferson....... 49 Senior Vice President, Secretary and General
Counsel
</TABLE>
- - ------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
DAVID W. BERRY has served as President of the Company since the
incorporation of its predecessor in August 1988, and has served as Chairman of
the Board of Directors since 1991. In 1978, he formed Berry Petroleum
Corporation, which was a regional natural gas and oil exploration company. In
1976 he co-founded Vulcan Energy Corporation, a Tulsa, Oklahoma based
exploration and production company. Mr. Berry has served as the State Finance
Chairman of the Oklahoma State Republican Party, as a Trustee for the Oklahoma
Museum of Art and on the United States Senatorial Trust Committee. Mr. Berry is
a member of the Texas Independent Producers and Royalty Owners Association.
ALEX M. CRANBERG has been a director of the Company since the consummation
of the Acquisitions. He has been President of Aspect Management Corporation, the
manager of Aspect, since its inception in 1993. He joined Houston Oil and
Minerals Corp. in 1977 where he served in various engineering and financial
roles. He has managed the oil and gas portfolio of General Atlantic Partners, a
private investment firm, since 1981. He is on the Board of Directors of Brigham
Exploration, Inc., a public company, and Westport Oil and Gas, Inc., a private
exploration and production company active in the Rocky Mountain and Gulf Coast
Regions. He received a BS in petroleum engineering from the University of Texas
and an MBA from Stanford University.
MICHAEL E. JOHNSON has been a director, President and Chief Executive
Officer of the Company since the consummation of the Acquisitions. He was
President of EPC from 1978 until joining the Company. Mr. Johnson was an
operations engineer for Atlantic Richfield Co. from 1971 to 1976 and worked for
Tana Oil and Gas before co-founding EPC, where he has managed all exploration
activities, coordinated outside technical support and raised capital from
industry partners. He received a BS degree in mechanical engineering from the
University of Southwestern Louisiana.
CHARLES J. SMITH has been a director of the Company since the consummation
of the Acquisitions. He has served as Chairman and Chief Executive Officer of
EPC since its formation in 1978. Mr. Smith acts as EPC's senior land and
administrative officer. He was a practicing attorney specializing in oil and gas
law from 1963 to 1987. Before 1963, he was a petroleum landman for Humble Oil
and Refining Company. Mr. Smith received a BBA in industrial management from the
University of Texas and was admitted to
56
<PAGE>
practice law in Texas in 1959 after attending South Texas School of Law and the
completion of off-campus studies.
ALEX B. CAMPBELL has been a director of the Company since the consummation
of the Acquisitions. He has been Vice President of Aspect Management Corporation
since August 1996 and is responsible for land and corporate development and
legal issues. He served as landman for Grynberg Petroleum and TXO Production
Corp. from 1980 to 1984, focusing on the Rocky Mountain Region, then as division
landman for Lario Oil & Gas Company from 1984 to 1996, where he was responsible
for administration, prospect marketing, contract lease negotiation, exploration
permitting, surface owner negotiations and property acquisition negotiation and
due diligence. He has a BA in business/pre-law from Colorado State University,
and an MBA from Colorado State University.
WILLIAM D. DODGE, III has been a director of the Company since consummation
of the Acquisitions. He has been Regional President of Pacific Southwest Bank,
Corpus Christi, Texas since 1995. He has been active in banking since 1977,
including serving as President of The Bank of Robstown, Texas from 1982 until
1995. He also serves in a number of civic roles, including as Chairman of the
Port of Corpus Christi Authority, and serving on the Board of Directors of
Columbia Northwest Hospital. Mr. Dodge is a member of the Editorial Review Board
SAM Advanced Management Journal at the Texas A&M University-Corpus Christi
College of Business. He received a BA degree from the University of Texas at
Austin and attended the Southwestern Graduate School of Banking, Southern
Methodist University.
JACK P. RANDALL has been a director of the Company since the consummation of
the Acquisitions. He founded Randall & Dewey, Inc. in 1989 and has served as its
President since that time. Randall & Dewey is a Houston, Texas, based
transaction advisory firm focusing on oil and gas mergers, acquisitions,
divestments, trades and alliances. Before founding Randall & Dewey, he was with
Amoco Production Company from 1975 to 1989, where his service included acting as
Manager of Acquisitions and Investments. Mr. Randall is a member of the Board of
Directors of Crosstimbers Oil Company, the chairman of the Petroleum Engineering
Visiting Committee at the University of Texas at Austin, and a member of the
Implementation Advisory Committee for the Oil Recovery Center of Excellence at
the University of Texas at Austin. He also is a member of the Society for
Petroleum Engineers, the American Petroleum Institute and the Independent
Petroleum Association of America. He received BS and MS degrees in engineering
from the University of Texas.
HOBART A. SMITH has been a director of the Company since the consummation of
the Acquisitions. He has served as a director of Harken Energy Corporation since
1997 and a consultant to Smith International, Inc. since 1991. From 1987 to
1991, Mr. Smith was Vice President of Customer Relations for Smith
International, Inc. From 1965 to 1987, he held numerous positions, including
many executive offices with Smith Tool, Inc., a subsidiary of Smith
International, Inc. Mr. Smith has more than 30 years of experience in the oil
services industry. Mr. Smith received a BA from Claremont McKenna College.
DAVID B. CHRISTOFFERSON joined the Company in 1989 and served as a director
until the consummation of the Acquisitions. Mr. Christofferson currently is
Senior Vice President, Secretary and General Counsel of the Company. He also
serves as its Principal Financial Officer. Mr. Christofferson has been active in
the natural gas and oil industry for over 20 years. He also served as General
Counsel to two independent natural gas and oil companies and to a natural gas
marketing company. Mr. Christofferson is a member of the Texas Independent
Producers and Royalty Owners Association. He received a BBA in finance and a
Juris Doctor from the University of Oklahoma. He also received a Masters of
Divinity degree from Phillips University. He is admitted to practice law in
Oklahoma.
KEY OFFICERS
In addition to the directors and executive officers listed above, the
following former EPC employees have significant responsibilities with the
Company.
HOWARD E. WILLIAMS, 55, is Vice President and Treasurer. Mr. Williams joined
EPC in 1981 and became the Company's Principal Accounting Officer upon
consummation of the Acquisitions. He is
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<PAGE>
responsible for supervising and coordinating all of the Company's accounting
activities. Before joining EPC, Mr. Williams practiced public accounting for 17
years with "Big 8," regional and local accounting firms. Mr. Williams is a
graduate of Texas A&I University with a BBA in Accounting.
LINDA D. SCHIBI, 41, is Vice President-Land. Mrs. Schibi joined EPC in 1978
and became the Company's Land Manager in charge of the day-to-day land
operations upon consummation of the Acquisitions. She coordinates the activities
of outside landmen and supervises in-house land department operations. Mrs.
Schibi also functions as oil and gas marketing manager with responsibility for
the marketing of the Company's operated oil and gas properties. She is a
Certified Petroleum Landman. She attended Del Mar College.
DALE W. ALEXANDER, 42, is Vice President-Exploitation. He served EPC as a
consultant in the area of reservoir and exploitation engineering from 1991 until
the consummation of the Acquisitions, when he became the Company's Vice
President--Exploration. Mr. Alexander is responsible for determining pre-drill
economics, risk weighting drilling projects and coordination of reserve reports.
From 1988 to 1991, he was with Kamlock Oil & Gas Company. He was an
exploitation/reservoir engineer for EPC from 1983 to 1988. He also has worked
for Champlin Petroleum Company, and Union Oil of California. Mr. Alexander has a
BS in Petroleum Engineering from the University of Texas.
MICHAEL E. MOORE, 40, is Vice President-Exploration. Mr. Moore joined EPC in
1982 as a staff geologist and became the Company's Exploration Manager upon
consummation of the Acquisitions. Mr. Moore is responsible for reviewing all
outside geological projects as well as supervising the activities of in-house
and retainer geological staff. He previously was employed as a field geologist
with J.R. Weber, Inc., a consulting firm in Denver, Colorado. He received a BS
in Geology from the University of Texas.
WILLIAM L. JACKSON, 42, is Senior Vice President-Operations. Mr. Jackson
joined EPC in 1982 and, upon consummation of the Acquisitions, became the
Company's Chief Engineering Officer responsible for all oil and gas drilling,
completion, workover, and production operations. He previously served with Acock
Engineering and Mueller Engineering as an on-site petroleum engineering
consultant on drilling and workovers for oil and gas wells in the South Texas
area. He received a BS in Petroleum Engineering and an MBA from the University
of Texas.
58
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation, including bonuses, paid by
the Company during each of the three fiscal years ended December 31, 1995, 1996
and 1997 to the Chief Executive Officer and to its other executive officers
(other than the Chief Executive Officer) of the Company and its subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
----------------------------------
AWARDS OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(1) COMPENSATION
- - --------------------------------------------------- --------- ---------- --------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
David W. Berry..................................... 1997 $ 134,400 -- 32,000(2) $ 44,965 (3)
Chairman of the Board, 1996 124,000 -- 20,000(2) 20,145 (3)
Chief Executive Officer 1995 120,000 -- -- 18,367 (3)
and President
David B. Christofferson............................ 1997 $ 112,000 -- 58,667(2) $ 47,888 (4)
Director, Executive Vice 1996 103,000 -- 16,667(2) 22,469 (4)
President, Chief Financial 1995 85,000 5,000 -- 20,080 (4)
Officer and Secretary
S. Gordon Reese, Jr. (5)........................... 1997 $ 100,000 -- -- $ 6,553 --
Senior Vice President 1996 98,900 -- 16,250 -- --
1995 70,000 35,000 -- -- --
Michael A. Barnes(6)............................... 1997 $ 100,000 -- 4,167 -- --
Vice President of 1996 61,750 -- 4,167 -- --
Exploration and 1995 -- -- -- -- --
Production
</TABLE>
- - ------------------------
(1) Represents the number of shares issuable pursuant to vested and non-vested
stock options after giving effect to the Reverse Split.
(2) In 1997 all stock options previously granted to Mr. Berry and Mr.
Christofferson were canceled and new stock options were granted to them
pursuant to the Employee Option Plan--1997 (the "1997 Plan"). Amounts stated
for 1997 include regrants of such canceled options. See "--Option
Repricings" and "--Employment Agreements."
(3) In 1997, the Company settled its deferred compensation liability to Mr.
Berry for a payment of $80,537. Of this amount, a total of $56,063 had been
reported as earned compensation in the years 1993-96, and the balance of
$24,474 is reported as earned in 1997.
(4) In 1997, the Company settled its deferred compensation liability to Mr.
Christofferson for a payment of $95,170. Of this amount, a total of $72,694
had been reported as earned compensation in the years 1993-96, and the
balance of $22,476 is reported as earned in 1997. See "--Deferred
Compensation."
(5) Mr. Reese ceased to be an officer of the Company on December 31, 1997.
(6) Mr. Barnes ceased to be an officer of the Company upon consummation of the
Acquisitions.
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<PAGE>
OPTION GRANTS
The following table sets forth certain information relating to option grants
made in 1997 to the individuals named in the Summary Compensation Table above.
See "--Executive Compensation."
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK
NUMBER OF GRANTED TO PRICE APPRECIATION MARKET
SECURITIES OF EMPLOYEES FOR PRICE
UNDERLYING IN FISCAL EXERCISE OPTION TERM(3) ON
OPTIONS 1997 PRICE PER EXPIRATION ------------------ GRANT
NAME GRANTED(1) YEAR(2) SHARE(1) DATE 5% 10% DATE
- - ---------------------------------------- ------------- ---------- --------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Berry.......................... 32,000(4) 30% $3.78 11/07 $136,000 $316,000 $ 95,040(8)
David B. Christofferson................. 58,667(4) 54% $3.78 11/07 $249,920 $580,820 $ 174,240(8)
S. Gordon Reese, Jr.(5)................. -- -- -- -- -- -- --
Michael A. Barnes(6).................... 4,167(7) 4% $7.68 4/07 $ 1,500 $ 25,000 $ 17,250
</TABLE>
- - ------------------------
(1) After giving effect to the Reverse Split.
(2) Based on options to purchase a total of 107,667 shares of Common Stock
(after giving effect to the Reverse Split) granted during 1997, of which
7,500 (or 7%) have expired.
(3) Potential values stated are the result of using the Commission's method of
calculating 5% and 10% appreciation in value from the date of grant to the
end of the option term. Such assumed rates of appreciation and potential
realizable values are not necessarily indicative of the appreciation, if
any, that may be realized in future periods.
(4) Consists of options issued under the 1997 Plan, all of which are currently
exercisable. Such options were issued in 1997 in replacement of certain
options and stock appreciation rights issued in previous years. See
"--Option Repricings."
(5) Mr. Reese ceased to be an executive officer of the Company on December 31,
1997.
(6) Mr. Barnes ceased to be an officer of the Company upon consummation of the
Acquisitions.
(7) All options were granted under the 1997 Plan. One-third of the options are
currently exercisable and the remaining two-thirds become exercisable over
1998 and 1999.
(8) See "--Option Repricings."
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<PAGE>
OPTION REPRICINGS
In the last quarter of 1997, the Company determined to attempt to consummate
a significant corporate transaction to satisfy the Company's need for additional
capital resources. In connection with pursuing such a transaction, Mr. Berry and
Mr. Christofferson entered into Incentive Agreements and Contract Settlement
Agreements with the Company pursuant to which each of Mr. Berry and Mr.
Christofferson were entitled to receive certain Incentive Payments and Contract
Settlement Payments upon the consummation of such a transaction. The Acquisition
Agreement qualified as such a transaction, and their existing employment
agreements terminated upon the consummation of the Acquisitions.
In negotiating the terms of the Incentive Agreements and Contract Settlement
Agreements, Mr. Berry and Mr. Christofferson determined that their existing
stock options would expire 90 days after their termination of employment. The
Compensation Committee of the Board of Directors, which was comprised of outside
directors, recognized that the expiration of those options would result in a
disincentive for Mr. Berry and Mr. Christofferson to help the Company pursue a
significant corporate transaction. Therefore, the Compensation Committee
determined that Mr. Berry's and Mr. Christofferson's existing stock options
should be canceled and replaced with new stock options that would terminate on
the date their old options would have expired if their employment with the
Company was not terminated. As an added incentive, the Compensation Committee
determined to reprice Mr. Berry's and Mr. Christofferson's options so they could
more readily benefit from any upturn in the Company's Common Stock trading price
upon the consummation of a significant corporate transaction.
When determining the price at which Mr. Berry's and Mr. Christofferson's new
options would be exercisable, the Compensation Committee took the average
closing price of the Company's Common Stock on the Nasdaq Small-Cap Market over
the 20 day trading period immediately preceding the option reprice date, and
multiplied such average trading price by 0.65. The Compensation Committee
believed that the discount to the average trading price was appropriate because
the shares of Common Stock issuable upon exercise of the repriced options would
not be freely tradeable and the discount was appropriate to reflect the actual
fair market value of the illiquid shares that would be received upon the
exercise of the new options.
The following table sets forth certain information with respect to
replacement stock options granted to Mr. Berry and Mr. Christofferson during the
year ended December 31, 1997, which are also reported above under "--Option
Grants."
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
OF
UNDERLYING
OPTIONS / MARKET PRICE OF
SARS STOCK AT TIME OF EXERCISE PRICE AT NEW
REPRICED OR REPRICING OR TIME OF REPRICING EXERCISE
NAME DATE AMENDED(1) AMENDMENT(1) OR AMENDMENT(1) PRICE(1)
- - --------------------------------------- --------- ----------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
David W. Berry......................... 12/3/97 20,000(2) $ 5.82 $ 9.72 $ 3.78
President and Chief Executive Officer 12/3/97 4,000(3) $ 5.82 $ 18.60 $ 3.78
David B. Christofferson................ 12/3/97 30,000(4) $ 5.82 $ 10.08 $ 3.78
Executive Vice President, General 12/3/97 4,000(3) $ 5.82 $ 18.60 $ 3.78
Counsel and Secretary 12/3/97 16,667(2) $ 5.82 $ 8.82 $ 3.78
<CAPTION>
LENGTH OF
ORIGINAL OPTION
TERM REMAINING AT
DATE OF REPRICING
OR AMENDMENT
NAME (MONTHS)
- - --------------------------------------- -----------------
<S> <C>
David W. Berry......................... 102
President and Chief Executive Officer 69
David B. Christofferson................ 62
Executive Vice President, General 69
Counsel and Secretary 102
</TABLE>
- - --------------------------
(1) After giving effect to the Reverse Split.
(2) Consists of options to purchase shares of Common Stock pursuant to the 1996
Plan.
(3) Consists of units, each of which included an option to purchase one share of
Common Stock and a stock appreciation right ("SAR") equal to two times the
difference between the exercise price of the option and the
61
<PAGE>
market value of the SAR at the date of exercise, so that one unit had the
value of three options, all issued pursuant to the 1993 MISP.
(4) Consists of options to purchase 30,000 shares of Common Stock (after giving
effect to the Reverse Split) pursuant to the Company's 1993 Incentive Stock
Option Plan.
OPTION EXERCISE AND YEAR-END VALUES
The following table sets forth certain information as of December 31, 1997
with respect to the unexercised options to purchase Common Stock to the
individuals named in the Summary Compensation Table above. See "--Executive
Compensation." None of such individuals exercised any stock options during 1997.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE
MONEY-OPTIONS AT DECEMBER
OPTIONS AT DECEMBER 31, 1997 31, 1997(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - --------------------------------------------------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
David W. Berry........................................... 32,000 -- $ 28,992 --
David B. Christofferson.................................. 58,667 -- $ 53,192 --
S. Gordon Reese, Jr...................................... -- -- -- --
Michael A. Barnes........................................ 1,389 2,778 -- --
</TABLE>
- - ------------------------
(1) Based on the last sale price of the Common Stock on the Nasdaq Small-Cap
Market on December 31, 1997 of $4.68 (as adjusted for the Reverse Split).
DEFERRED COMPENSATION
Pursuant to employment agreements with Messrs. Berry, Orgill and
Christofferson, deferred compensation accrued annually payable at the rate of
$9,000 per year for each year the executive was employed by the Company. The
payment of such compensation is deferred until retirement at which time it is
payable for a period of 15 years. In lieu of receiving such deferred
compensation upon retirement, in 1997 the Company paid Mr. Berry $80,537 and Mr.
Christofferson $95,170, which amounts were based upon a present value
calculation of the deferred compensation accrued as of August 30, 1997.
OPTION PLANS
MANAGEMENT INCENTIVE STOCK PLAN--1993. The MISP-1993 authorized the
issuance of up to 40,000 units (after giving effect to the Reverse Split). Each
unit consists of (i) an option to purchase one share of Common Stock and (ii) a
cash payment ("Stock Appreciation Right" or "SAR") to be made by the Company
when the option is exercised. The value of the SAR is equal to twice the amount
by which the fair market value of the Common Stock on the date of exercise of
the option exceeds the exercise price. Currently, all units have expired or have
been canceled by the Board of Directors other than 6,000 units currently
outstanding, all of which expire by August 1998.
STOCK INCENTIVE OPTION PLAN--1996. The 1996 Plan authorized the issuance of
up to 58,334 options (after giving effect to the Reverse Split) to purchase one
share of Common Stock. Currently, all options have expired or have been canceled
by the Board of Directors other than 9,500 options currently outstanding, all of
which expire by August 1998.
EMPLOYEE OPTION PLAN--1997. The 1997 Plan authorizes the issuance of up to
115,892 options (after giving effect to the Reverse Split) to purchase one share
of Common Stock. Options to purchase 96,000 shares are currently outstanding.
62
<PAGE>
In addition, the Company intends to implement a new employee stock option
plan in which all of the Company's employees will be eligible to participate.
Shares issuable under such plan are not anticipated to exceed 5.0% of the issued
and outstanding shares of Common Stock after the Offering, however, the terms of
such plan have not be finalized.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of May 14, 1998, with
respect to the Common Stock owned by (i) each person known by management to own
beneficially more than 5% of the Company's outstanding Common Stock; (ii) each
of the Company's directors and executive officers; and (iii) all directors and
executive officers of the Company as a group. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES(2)(3)
------------------------
NUMBER OF BEFORE AFTER
NAME OF BENEFICIAL OWNER SHARES(1) OFFERING OFFERING
- - --------------------------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Esenjay Petroleum Corporation.............................................. 5,177,760(4) 43.97% 30.87%
1100 CCNB Center South
500 North Water Street
Corpus Christi, Texas 78471
Aspect Resources LLC....................................................... 4,285,190(5) 36.37% 25.54%
511 16th Street, Suite 300
Denver, Colorado 80202
Joint Energy Development Investments II Limited Partnership................ 675,000 5.74% 4.02%
1200 17th St., Suite 2750
Denver, Colorado 80202
David W. Berry............................................................. 142,155(6) 1.20% 25.60%
Alex M. Cranberg........................................................... 4,297,090(7) 36.47%
511 16th Street, Suite 300
Denver, Colorado 80202
Michael E. Johnson......................................................... 5,177,760(8) 43.97% 30.87%
1100 CCNB Center South
500 North Water Street
Corpus Christi, Texas 78471
Charles J. Smith........................................................... 5,177,760(8) 43.97% 30.87%
1100 CCNB Center South
500 North Water Street
Corpus Christi, Texas 78471
Alex B. Campbell........................................................... -- * *
William D. Dodge, III...................................................... -- * *
Jack P. Randall............................................................ -- * *
Hobart A. Smith............................................................ -- * *
David B. Christofferson.................................................... 68,000(9) *
Directors and executive officers as a group (9 persons)(10)................ 222,055 1.87% 1.32%
</TABLE>
- - ------------------------
* Less than 1%.
(1) Includes all shares with respect to which each person, executive officer or
director who directly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares the power to vote or to direct
voting of such shares or to dispose or to direct the disposition of such
shares. Includes shares that may be purchased under stock options
exercisable within 60 days.
63
<PAGE>
(2) Based on 11,762,687 shares of Common Stock outstanding at May 14, 1998 plus,
for each beneficial owner, those number of shares underlying exercisable
options held by each executive officer or director.
(3) Percent of class for any shareholder listed is calculated without regard to
shares of Common Stock issuable to others upon exercise of outstanding stock
options. Any shares a shareholder is deemed to own by having the right to
acquire by exercise of an option or warrant are considered to be outstanding
solely for the purpose of calculating that shareholder's ownership
percentage.
(4) Includes 12,500 shares of Common Stock issuable upon the exercise of
warrants.
(5) Includes 18,750 shares of Common Stock issuable upon the exercise of
warrants.
(6) Includes options to purchase 32,000 shares of Common Stock that are
currently exercisable.
(7) Includes (i) 11,900 shares of Common Stock owned and (ii) 4,285,190 shares
of Common Stock owned by Aspect, which includes 18,750 shares issuable upon
the exercise of warrants, as to which Mr. Cranberg disclaims beneficial
ownership.
(8) Includes 5,165,260 shares of Common Stock owned, and 12,500 shares of Common
Stock issuable upon exercise of currently exercisable warrants held by, EPC,
as to which Messrs. Johnson and Smith disclaim beneficial ownership.
(9) Includes options to purchase 58,667 shares of Common Stock that are
currently exercisable.
(10) Includes 63,250 shares issuable pursuant to options held by executive
officers and directors that are currently exercisable. Does not include any
shares as to which beneficial ownership is disclaimed.
CERTAIN TRANSACTIONS
The Company and Aspect Management Corporation, the manager of Aspect
("Aspect Management"), have entered into a Geotechnical Services Consulting
Agreement pursuant to which Aspect Management is to perform geotechnical
services for the Company in connection with certain oil and gas properties to
which both parties share an ownership interest. To the extent that Aspect
Management pays or advances costs or expenses associated with certain assets on
behalf of the Company, and to the extent Aspect Management hires independent
contractors, such costs and expenses will be billed to the Company. Aspect
Management must obtain the Company's approval to enter into any related contract
or agreement that has a cost exceeding $50,000 net to the Company. The Company
must pay Aspect Management for services rendered in an amount equal to Aspect's
employee costs, overhead costs and general and administrative costs associated
with the services rendered thereunder. The agreement terminates on May 14, 2002,
unless terminated by either party with 90 days' written notice to the other
party.
The Company and Aspect Management have entered into a Land Services
Consulting Agreement pursuant to which Aspect Management will provide certain
land-related services to the Company in connection with oil and gas properties
to which the Company and Aspect share an ownership interest. To the extent that
Aspect Management pays or advances costs or management expenses associated with
assets, and to the extent Aspect Management hires independent contractors, such
cost and expenses will be billed to the Company. The Company must pay Aspect
Management for services rendered in an amount equal to Aspect's employee costs,
overhead costs and general and administrative costs associated with the services
rendered thereunder. The agreement will be effective until May 14, 2002, unless
terminated by either party by giving the other party 90 days' written notice.
Aspect received warrants to purchase 9,375 shares of Common Stock at an
exercise price of $3.00 per share in connection with providing financing under
the Initial Bridge Facility, and received warrants to purchase an additional
9,375 shares of Common Stock at an exercise price of $3.00 per share in
connection with guaranteeing a portion of the indebtedness under the Duke Credit
Facility. In addition, EPC received
64
<PAGE>
warrants to purchase an aggregate of 12,500 shares of Common Stock at an
exercise price of $3.00 per share in connection with guaranteeing a portion of
the indebtedness under the Initial Bridge Facility and under the Duke Credit
Facility.
The Company and EPC have entered into an agreement pursuant to which the
Company loaned to EPC $3.0 million of the proceeds from the Duke Credit Facility
to be used for exploration activities on the Exploration Projects acquired from
EPC pursuant to the Acquisitions. EPC is required to repay such loan, plus
accrued interest, at the rate of prime plus 4.0% (12.5% as of the date hereof),
upon the payment by the Company to EPC of the first $3.0 million of
post-effective date costs incurred by EPC on exploration activities on such
Exploration Projects.
Mr. Berry and Mr. Christofferson (each an "Employee") each entered into an
Incentive Agreement and a Contract Settlement Agreement, and their employment
agreements with the Company were terminated upon the closing of the
Acquisitions. Pursuant to the Incentive Agreements and Contract Settlement
Agreements, the Company agreed that if the Company closes a significant
corporate transaction, and the Employee does not resign as an executive officer
before that time, the Company would pay an Incentive Payment of $134,000 to Mr.
Berry and $112,000 to Mr. Christofferson, as well as a Contract Settlement
Payment of $134,000 to Mr. Berry and $112,000 to Mr. Christofferson, at which
time Mr. Berry and Mr. Christofferson would be released from all further
obligations to the Company other than contractual confidentiality obligations.
Each of the Incentive Payments and the Contract Settlement Payments are in the
form of promissory notes bearing interest at the rate of 10% per year payable by
the Company to the Employees, with the principal amount being paid at a minimum
of $5,000 per month, beginning the first day of the third month after the
closing of the significant corporate transaction, and all principal and accrued
interest being due and payable upon the earlier of September 30, 1998, or the
completion of a public sale of any equity or debt securities of the Company,
whichever is earlier. Each of the employees, at their discretion, may defer
payment of up to 50% of the principal amount due until January 15, 1999. The
Contract Settlement Payments are intended to satisfy the Employees existing
employment contracts. Incentive Payments are intended to compensate the
Employees for their services in soliciting, negotiating and closing a
significant corporate transaction and not in satisfaction of any prior
obligations to the Company. The Incentive Payments are in addition to any other
obligations or payments due to the Employees, including the settlement of their
previously existing employment contracts. In addition, as an inducement to the
Employees to continue to solicit and close a change of control transaction, and
regardless of whether such a transaction occurs, all of the stock options
previously granted to the employees by the Company were canceled, and the
Company issued to each of the employees new stock options pursuant to the
Employee Option Plan. See "--Option Grants" and "--Option Repricing."
The Acquisitions constituted a significant corporate transaction pursuant to
which the Incentive Payments and Contract Settlement Payments are payable to Mr.
Berry and Mr. Christofferson. Mr. Berry and Mr. Christofferson have no further
contractual obligations to the Company other than confidentiality obligations
and any contractual arrangements they may negotiate with the Company in the
future.
Effective May 1, 1996, Jeffrey Orgill and the Company agreed to the
termination of Mr. Orgill's employment agreement and Mr. Orgill resigned as Vice
President of Exploration and Production as of May 1, 1996. Mr. Orgill entered
into a consulting agreement with the Company effective May 1, 1996 that expired
in March 1998. Mr. Orgill was paid $10,000 per month under the terms of the
consulting agreement and the Company paid $120,000 to Mr. Orgill during 1997 for
consulting services.
The Company made advances to officers and affiliates of the Company during
1996 and 1997 of $51,143 and $48,380, respectively, and received repayments of
$18,741 and $99,216, respectively. The December 31, 1996 and 1997 receivables
include approximately $47,787 and $47,787, respectively, from an affiliated
partnership for which the Company serves as the managing general partner.
During 1996, as a part of the Company's relocation to Houston, Texas, the
Company purchased the homes of David W. Berry and David B. Christofferson, both
officers of the Company, for $191,395 and
65
<PAGE>
$178,000, respectively. These amounts in each case were ascertained by averaging
two independent MAI appraisals to determine fair market value. The Company
subsequently sold the homes at a sales contract price of $176,200 and $178,000,
respectively, pursuant to which sales contracts the Company received net sales
proceeds after commissions and other selling expenses of $158,847 and $165,626,
respectively.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock, $.01 par value per share.
As of May 15, 1998, 11,762,687 shares of Common Stock were issued and
outstanding.
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 applicable
to any then outstanding class of preferred stock, the holders of Common Stock
are entitled to receive such dividends, if any, as may be declared by the Board
of Directors from time to time out of legally available funds. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company that are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of holders of any class of preferred stock then
outstanding. The holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges 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 future.
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more
series with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations and restrictions thereof, as are determined by resolution of the
Board of Directors of the Company. The issuance of preferred stock, while
providing flexibility in connection with possible financing, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
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.
PROVISIONS AFFECTING CONTROL OF THE COMPANY
In addition to the control that will be vested in the existing stockholders
of the Company upon consummation of the Offering, the Company's Certificate of
Incorporation and Bylaws may affect control of the Company.
SIZE AND CLASSIFIED BOARD. The Company's Board of Directors currently
consists of eight members. However, the Company's Certificate of Incorporation
provides that the number of directors should be no less than four and no more
than fourteen, and such number may be determined from time to time under the
Bylaws or upon resolution of the Board of Directors. Directors need not be
stockholders. In case of vacancies in the Board of Directors, including
vacancies occurring by reason of an increase in the number of directors, a
majority of the remaining members of the Board, even though less than a quorum,
may elect directors to fill to such vacancies to hold office until the next
annual meeting of the stockholders or until their successors are elected and
qualify. The Company's Certificate of Incorporation also classifies the
Company's Board of Directors into three classes serving staggered, three-year
terms. Classification of the Board of Director's could have the effect of
extending the time during which the existing Board of
66
<PAGE>
Directors could control the operating policies of the Company even though
opposed by the holders of a majority of the outstanding shares of the Common
Stock.
REMOVAL OF DIRECTORS. Under the DGCL, a director of a corporation generally
may be removed, with or without cause, by the holders of a majority of the
shares entitled to vote at an election of directors. However, unless the
corporation's certificate of incorporation provides otherwise, if the
corporation's board of directors is classified, such as the Company's Board,
directors may be removed only for cause and only by stockholder action.
Generally, the vote for removal would require the affirmative vote of a majority
of shares entitled to vote at an election of directors.
DELAWARE LAW PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. Generally, Section 203 prohibits the Company from engaging in a "business
combination" (as defined in Section 203 of the DGCL) with an "interested
stockholder" (defined generally as a person owning 15% or more of the Company's
outstanding voting stock) for three years following the date that person becomes
an interested stockholder, unless (i) before that person became an interested
stockholder, the Company's Board of Directors either approved the transaction
which resulted in the stockholder becoming an interested stockholder or approved
the business combination; (ii) upon completion of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the Company and by employee stock plans that do not provide employees with
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer); or (iii) following the
transaction in which that person became an interested stockholder, the business
combination is approved by the Company's Board of Directors and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock not owned by the interested
stockholder.
Section 203 restrictions also do not apply to certain business combinations
proposed before the consummation or abandonment of and after the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was either not an interested stockholder during the previous
three years or who became an interested stockholder with the approval of the
Company's Board of Directors. The extraordinary transaction must be approved or
not opposed by a majority of the Board of Directors who were directors before
any person became an interested stockholder in the previous three years or who
were recommended for election or elected to succeed such directors by a majority
of such directors then in office.
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with EPC and
Aspect with respect to the 9,368,367 shares of Common Stock they received in the
Acquisitions and the 31,250 shares of Common Stock issuable upon the exercise of
their warrants to purchase Company Stock. The agreement grants to EPC and Aspect
up to three demand and unlimited piggyback registrations. The Company has filed
a shelf registration statement with respect to all of such shares of Common
Stock. Such registration statement also covers (i) 675,000 shares of Common
Stock issued to an affiliate of Enron Corp. in the Acquisitions, (ii) 63,335
shares of Common Stock issued to certain of Aspect's employees in the
Acquisitions, (iii) 32,000 shares of Common Stock issuable upon the exercise of
stock options held by Mr. Berry and (iv) 68,000 shares of Common Stock on behalf
of Mr. Christofferson, of which 58,667 shares are issuable upon the exercise of
options.
The Company has entered into a registration rights agreement with Hi-Chicago
Trust with respect to 12,500 shares of Common Stock and 50,000 shares of Common
Stock issuable upon the exercise of a warrant. Such agreement grants to
Hi-Chicago Trust two demand and unlimited piggyback registrations.
67
<PAGE>
The Company has filed a registration statement with respect to the Common Stock
and the shares issuable upon exercise of the warrant, and such registration
statement has been declared effective under the Securities Act.
The Company also has entered into a registration rights agreement with
Weisser, Johnson & Co. with respect to 250,00 shares of Common Stock and a
registration rights agreement with LaSalle Street Natural Resources Corporation
with respect to 250,000 shares of Common Stock. In addition, the Representative
has registration rights with respect to the 210,000 shares of Common Stock
issuable upon the exercise of the Representative's Warrant.
Each of these registration rights agreements contain provisions that permit
the managing underwriter in an underwritten public offering to cut back the
number of shares of Common Stock requested to be included in a piggyback
registration if the managing underwriter believes that the number of shares
requested to be included is greater than the number of shares that can be sold.
TRANSFER AGENT AND REGISTRAR
The transfer and registrar for the Common Stock is Bank One Oklahoma.
68
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Gaines, Berland Inc. is acting as
representative (the "Representative"), have severally agreed to purchase from
the Company the respective number of shares of Common Stock set forth opposite
their names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- - ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Gaines, Berland Inc..................................................................................
----------
Total............................................................................................ 5,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other considerations. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased.
The Underwriters, through the Representative, have advised the Company that
they propose to offer the Common Stock initially at the public offering price
set forth on the cover page of this Prospectus; that the Underwriters may allow
to selected dealers a concession of $ per share; and that such dealers may
reallow a concession of $ per share to certain other dealers. After the
public offering, the offering price and other selling terms may be changed by
the Underwriters. The Common Stock is included for quotation on the Nasdaq
Small-Cap Market.
The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to an aggregate of 750,000 additional shares of Common Stock,
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown in the above table bears to the 5,000,000
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotment made in connection with the sale of the shares of
Common Stock offered hereby.
The Company, its officers and directors, EPC and certain of its affiliates
and Aspect have agreed that they will not sell or dispose of any shares of
Common Stock for a period of 180 days after the later of the date on which the
Registration Statement is declared effective by the Commission or the first date
on which the shares are bona fide offered to the public, without the prior
written consent of the Representative.
In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, a warrant (the
"Representative's Warrant") to purchase from the Company up to 210,000 shares of
Common Stock. The Representative's Warrant is exercisable, in whole or in part,
at an exercise price of $7.20 per share at any time during the three-year period
commencing one year after the
69
<PAGE>
effective date of the Registration Statement of which this Prospectus is a part.
The Representative's Warrant contains provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the Representative's Warrant should any one or more of certain specified events
occur. The Representative's Warrant grants to the holders thereof certain rights
of registration for the securities issuable upon exercise of the
Representative's Warrant.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities Act
or to contribute to payments that the Underwriters may be required to make in
respect thereof. The Company has agreed to pay to the Representative a
nonaccountable expense allowance of $300,000.
As permitted by Rule 103 under the Exchange Act certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq Small-Cap Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (i) a passive market
maker's net daily bid purchase of the Common Stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calender months (or any 60 consecutive days ending within the 10 days)
immediately preceeding the filing date of the registration statement of which
this Proscectus forms a part, (ii) a passive market maker may not effect
transaction or display bids for the Common Stock at a price that exceeds the
highest independent bid for the Common stock by persons who are not passive
market makers and (iii) bids made by passive market makers must be identified as
such.
The Company and the Representative entered into an engagement letter dated
December 3, 1997, pursuant to which the Representative agreed to provide
financial advisory services to the Company. In connection with such engagement,
the Representative acted as the Company's financial advisor in connection with
the Acquisitions and rendered an opinion that, subject to certain assumptions
and analyses set forth in such opinion, the consideration paid to EPC and Aspect
pursuant to the Acquisition Agreement was fair to the Company's shareholders
from a financial point of view. The Company agreed to pay the Representative
$200,000 and reimburse the Representative for $15,000 of expenses incurred
before execution of the engagement letter and to further reimburse the
Representative for additional out-of-pocket expenses reasonably incurred in
connection with its engagement, including the reasonable fees and disbursements
of the Representative's legal counsel. Such fees and expenses were for financial
advice in connection with the Acquisitions, including the fairness opinion
related thereto. The Company also agreed to pay the Representative a fee equal
of $200,000 upon the closing of any additional equity funding or mezzanine
funding not underwritten by the Representative in excess of $10.0 million within
18 months of the date of the engagement letter, provided the Acquisitions have
been completed. Such $200,000 fee is not payable if the Company completes an
underwritten public offering with the Representative as the underwriter within
such 18 month period. This Offering constitutes an underwritten public offering
that cancels the Company's obligations to pay such $200,000 fee.
The Representative has performed underwriting and financial advisory
services for the Company in the past and anticipates it will continue to provide
such services in the future. In connection with prior services, the
Representative was issued 67,500 shares of Common Stock and warrants to purchase
67,500 shares of the Company's Common Stock at an exercise price of $12.15 per
share.
An affiliate of the Representative participated in 37.5% of Aspect's
obligation to lend funds to the Company under the Initial Bridge Facility and
granted a limited guaranty of the Company's repayment obligations under the Duke
Credit Facility, and in exchange for such participation and guaranty, received
warrants to purchase an aggregate of 18,750 shares of Common Stock at an
exercise price of $3.00 per share.
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<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby are
being passed upon for the Company by Porter & Hedges, L.L.P., Houston, Texas.
Certain legal matters relating to this offering will be passed upon for the
Underwriter by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements at December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, included in this
Prospectus have been audited by Deloitte & Touche LLP independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon such reports given upon the authority of that firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form SB-2
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act.
This Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement for
further information with respect to the Company and the Securities offered
hereby. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance,
reference is made to the copy of such document so filed. Each such statement is
qualified in its entirety by such reference.
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Facilities
maintained by the Commission at its principal offices at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices at 7 World Trade Center,
13th Floor, New York, New York 10048, and the Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Such information also may be
obtained on the Internet through the Commission's EDGAR database at
HTTP://WWW.SEC.GOV.
71
<PAGE>
GLOSSARY OF CERTAIN INDUSTRY TERMS
The terms used in this Prospectus are defined as set forth below. All
volumes of natural gas referred to herein are stated at the legal pressure base
of the state or area where the reserves exist and at 60 degrees Fahrenheit and,
in most instances, are rounded to the nearest major multiple.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BBLS/D. Stock tank barrels per day.
BCF. Billion cubic feet.
BCFE. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
COMPLETION. The installation of permanent equipment for the production of
oil or gas or, in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DRY HOLE OR WELL. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
EXPLORATORY WELL. A Well drilled to find and produce oil or gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil or gas in another reservoir or to extend a known reservoir.
FARM-IN OR FARM-OUT. An agreement whereunder the owner of a working
interest in an oil and natural gas lease assigns the working interest or a
portion thereof to another party who desires to drill on the leased acreage.
Generally, the assignee is required to drill one, or more wells in order to earn
its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."
FIELD. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
FINDING COSTS. Costs associated with acquiring and developing proved oil
and natural gas reserves which are capitalized by the Company pursuant to
generally accepted accounting principles, including all costs involved in
acquiring acreage, geological and geophysical work and the cost of drilling and
completing wells.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
MCF. One thousand cubic feet of gas.
MCF/D. One thousand cubic feet of gas per day.
72
<PAGE>
MCFE. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MMCF One million cubic feet.
MMCF/D. One million cubic feet per day.
MMCFE. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids,
which approximates the relative energy content of crude oil, condensate and
natural gas liquids as compared to natural gas. Prices have historically been
higher or substantially higher for crude oil than natural gas on an energy
equivalent basis.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
NORMALLY PRESSURED RESERVOIRS. Reservoirs with a formation-fluid pressure~
equivalent to 0.465 psi per foot of depth from the surface. For example, if the
formation pressure is 4,650 psi at 10,000 feet, then the pressure is considered
to be normal.
PRESENT VALUE. When used with respect to oil and natural gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
nonproperty-related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
PRODUCTIVE WELL. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
PROVED DEVELOPED NONPRODUCING RESERVES. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED LOCATION. A site on which a development well can be
drilled consistent with-spacing rules for purposes of recovering proved
undeveloped reserves.
PROVED UNDEVELOPED RESERVES. 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.
RECOMPLETION. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
RESERVOIR. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
73
<PAGE>
ROYALTY INTEREST. An interest in an oil and natural gas property entitling
the owner to a share of oil or gas production free of costs of production.
3-D SEISMIC. Advanced technology method of detecting accumulations of
hydrocarbons identified through a three-dimensional picture of the subsurface
created by the collection and measurement of the intensity and timing of sound
waves transmitted into the earth as they reflect back to the surface.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains proved
reserves.
WORKING INTEREST. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
WORKOVER. Operations on a producing well to restore or increase production.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996....................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996............. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Condensed Consolidated Balance Sheet (unaudited) as of March 31, 1998 and December 31, 1997................ F-24
Condensed Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997
(unaudited).............................................................................................. F-25
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997
(unaudited).............................................................................................. F-26
Notes to Condensed Consolidated Financial Statements (unaudited)........................................... F-27
</TABLE>
F-1
<PAGE>
ESENJAY EXPLORATION, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Esenjay Exploration, Inc.
We have audited the accompanying consolidated balance sheets of Esenjay
Exploration, Inc. (formerly Frontier Natural Gas Corporation) and subsidiaries
(the "Company") as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Deloitte & Touche LLP
Houston, Texas
March 27, 1998(May 14, 1998 with
respect to the second
paragraph of Note 2 and
the third and fourth
paragraphs of Note 10)
F-2
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 690,576 $4,956,656
Accounts receivable, net of allowance for doubtful accounts of $15,488 at December
31, 1997 and $10,533 at December 31, 1996........................................ 221,864 366,498
Prepaid expenses and other......................................................... 249,328 282,317
Receivables from affiliates........................................................ 105,171 152,419
------------- ------------
Total current assets............................................................. 1,266,939 5,757,890
Property and equipment:
Gas and oil properties, at cost--successful efforts method of accounting........... 3,235,848 5,280,115
Other property and equipment....................................................... 1,169,127 1,074,727
------------- ------------
4,404,975 6,354,842
Less accumulated depletion, depreciation and amortization.......................... (1,260,605) (2,918,918)
------------- ------------
3,144,370 3,435,924
Other assets......................................................................... 164,699 437,378
------------- ------------
Total assets..................................................................... $ 4,576,008 $9,631,192
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 911,396 $ 725,222
Revenue distribution payable....................................................... 68,131 360,163
Current portion of long-term debt.................................................. 401,085 304,540
Accrued and other liabilities...................................................... 299,704 208,931
------------- ------------
Total current liabilities........................................................ 1,680,316 1,598,856
Long-term debt....................................................................... 22,680 325,394
Non-recourse debt.................................................................... 864,000 681,618
Accrued interest on non-recourse debt................................................ 194,274 62,874
Other long-term liabilities.......................................................... 9,918 223,624
------------- ------------
Total liabilities................................................................ 2,771,188 2,892,366
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock $.01 par value; 5,000,000 shares authorized;
85,961 shares issued and outstanding at December 31, 1997 and 1996; ($856,910
aggregate redemption and liquidation preference at December 31, 1997 and 1996)... 860 860
Common stock:
Class A Common stock, $.01 par value; 40,000,000 shares authorized; 1,655,984 and
1,644,317 outstanding at December 31, 1997 and December 31, 1996, respectively
(1)............................................................................ 16,560 16,443
Unamortized value of warrants issued............................................... (27,163) (54,325)
Common stock subscribed............................................................ -- 45,000
Common stock subscription receivable............................................... -- (45,000)
Additional paid-in capital (1)..................................................... 14,751,425 14,681,542
Accumulated deficit................................................................ (12,936,862) (7,905,694)
------------- ------------
Total stockholders' equity....................................................... 1,804,820 6,738,826
------------- ------------
Total liabilities and stockholders' equity....................................... $ 4,576,008 $9,631,192
------------- ------------
------------- ------------
</TABLE>
- - --------------------------
(1) After giving effect to the 1:6 reverse stock split effected on May 14, 1998.
See Note 10.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Gas and oil revenues.............................................................. $ 664,126 $ 3,176,861
Realized gain (loss) on commodity transactions.................................... (375,410) (814,029)
Unrealized loss on commodity transactions......................................... (128,936) --
Gain on sale of assets............................................................ 452,020 250,437
Operating fees.................................................................... 55,021 213,834
Other revenues.................................................................... 241,788 339,689
------------- -------------
Total revenues.................................................................. 908,609 3,166,792
------------- -------------
Costs and expenses:
Lease operating expense........................................................... 427,240 556,925
Production taxes.................................................................. 24,497 207,969
Transportation and gathering costs................................................ 143,265 368,716
Gas purchases under deferred contract............................................. -- 82,461
Depletion, depreciation and amortization.......................................... 315,880 2,237,648
Impairment of oil and gas properties.............................................. 349,384 51,000
Exploration costs................................................................. 2,258,702 1,317,161
Interest expense.................................................................. 60,942 783,872
Deferred gas contract settlement.................................................. -- 368,960
General and administrative expense................................................ 2,070,812 2,217,099
Delay rentals..................................................................... 211,690 --
------------- -------------
Total costs and expenses........................................................ 5,862,412 8,191,811
------------- -------------
Loss before provision for income taxes.............................................. (4,953,803) (5,025,019)
Benefit (provision) for income taxes................................................ -- --
------------- -------------
Net loss............................................................................ (4,953,803) (5,025,019)
Cumulative preferred stock dividend................................................. 103,153 103,153
------------- -------------
Net loss applicable to common stockholders.......................................... $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
Net loss per common share(1)........................................................ $ (3.07) $ (4.31)
------------- -------------
------------- -------------
Weighted average number of common shares outstanding(1)............................. 1,646,311 1,190,343
</TABLE>
- - ------------------------
(1) After giving effect to the 1:6 reverse stock split effected on May 14, 1998.
See Note 10.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A COMMON UNAMORTIZED
PREFERRED STOCK SHARES(1) VALUE OF ADDITIONAL
------------------------ -------------------- WARRANTS PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT ISSUED CAPITAL(1) DEFICIT
----------- ----------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... 85,961 $ 860 843,067 $ 8,431 -- $ 7,909,032 $ (2,854,887)
Issuance of common stock........ -- -- 801,250 8,012 -- 6,657,010 --
Warrant issued for services..... -- -- -- -- $ (82,500) 115,500 --
Cumulative preferred stock
dividend...................... -- -- -- -- -- -- (25,788)
Amortization of warrants........ 28,175
Net loss........................ -- -- -- -- -- -- (5,025,019)
----------- ----- --------- --------- ------------ ----------- ------------
Balance, December 31, 1996...... 85,961 860 1,644,317 16,443 (54,325) 14,681,542 (7,905,694)
----------- ----- --------- --------- ------------ ----------- ------------
Issuance of common stock........ -- -- 11,667 117 -- 69,883 --
Cumulative preferred stock
dividend...................... -- -- -- -- -- -- (77,365)
Amortization of warrants........ -- -- -- -- 27,162 -- --
Net loss........................ -- -- -- -- -- -- (4,953,803)
----------- ----- --------- --------- ------------ ----------- ------------
Balance, December 31, 1997...... 85,961 $ 860 1,655,984 $ 16,560 $ (27,163) $14,751,425 $(12,936,862)
----------- ----- --------- --------- ------------ ----------- ------------
----------- ----- --------- --------- ------------ ----------- ------------
</TABLE>
- - ------------------------
(1) After giving effect to the 1:6 reverse stock split effected on May 14, 1998.
See Note 10.
The accommpanying notes are an integral part of these financial statements.
F-5
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ (4,953,803) $ (5,025,019)
Adjustments to reconcile net loss to net cash (used) in operating activities:
Depletion, depreciation and amortization....................................... 315,880 2,237,648
Impairment of oil and gas properties........................................... 349,384 51,000
Deferred gas contract settlement............................................... -- 368,960
Gain on sale of assets......................................................... (452,020) (250,437)
Gain on settlement of deferred compensation agreement.......................... (25,794) --
Deferred revenues under gas contract........................................... -- (74,400)
Amortization of financing costs and warrants................................... 46,128 710,573
Unrealized loss on commodity transitions....................................... 128,936 --
Exploration costs.............................................................. 2,258,702 1,317,161
Changes in operating assets and liabilities:
Trade and affliliate receivables............................................. 191,882 303,975
Prepaid expenses and other................................................... 198,418 (103,580)
Other assets................................................................. 272,679 (191,791)
Accounts payable............................................................. 186,174 (279,119)
Revenue distribution payable................................................. (292,032) (132,909)
Accrued and other............................................................ (118,936) (2,647)
------------- -------------
Net cash (used) in operating activities........................................ (1,894,402) (1,070,585)
------------- -------------
Cash flows used in investing activities:
Capital expenditures--gas and oil properties..................................... (3,023,253) (3,515,841)
Capital expenditures--other property and equipment............................... (159,679) (203,808)
Proceeds from sale of assets..................................................... 1,002,540 4,671,088
------------- -------------
Net cash provided by (used) in investing activities............................ (2,180,392) 951,439
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of debt................................................... 182,382 4,717,280
Repayments of long-term debt..................................................... (296,303) (3,745,369)
Debt issuance cost............................................................... -- (183,387)
Payment for settlement of deferred gas contract.................................. -- (2,181,489)
Preferred stock dividends paid................................................... (77,365) (25,788)
Net proceeds from issuance of common stock....................................... -- 6,430,647
------------- -------------
Net cash (used) in by financing activities..................................... (191,286) 5,011,894
------------- -------------
Net increase (decrease) in cash and cash equivalents............................... (4,266,080) 4,892,748
Cash and cash equivalents at beginning of year..................................... 4,956,656 63,908
------------- -------------
Cash and cash equivalents at end of year........................................... $ 690,576 $ 4,956,656
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest........................................................... $ 141,356 $ 818,769
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statments.
F-6
<PAGE>
ESENJAY EXPLORATION, INC.
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
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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
acquired wells, productive exploratory wells, and development wells are
capitalized. Exploratory dry hole costs, geological and geophysical costs, and
lease rentals on non-producing leases are expensed as incurred. Gas and oil
leasehold 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
allowances 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 approximately
$349,384 and $51,000 in 1997 and 1996, respectively, in impairment of gas and
oil properties, due to changes in reserve estimates.
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
liability method which requires the recognition of deferred tax liabilities and
assets for the tax effects of temporary differences between the financial and
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.
Gains and losses on these contracts are recognized in the period in which
revenue from the related gas and oil production is recorded or when the
contracts are closed. To the extent that the quantities hedged under the
commodity transaction exceed current production, the Company recognizes gains or
losses on the overhedged amount.
F-7
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CAPITALIZED INTEREST--The Company capitalizes interest costs incurred on
exploration projects. The interest capitalized for the years ended December 31,
1997 and 1996 was approximately $235,977 and $107,000, 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 the Company's
sales of gas exceed its pro-rata ownership in a well, a liability 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, 1997, the Company's gas
balancing position was approximately 29,244 MCF overproduced.
EXPLORATION COSTS--The Company expenses exploratory dry hole costs,
geological and geophysical costs, and impairment of unproved properties. During
1996, $43,000 of such costs represented geological and geophysical costs
expensed as required under the successful efforts method of accounting. There
were no such costs incurred in 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Statement of Financial Accounting
Standards No. 107. "Disclosures about Fair Value of Financial Instruments"
requires disclosure regarding the fair value of financial instruments for which
it is practical to estimate that value. The carrying amount of cash and cash
equivalents, accounts receivable and accounts payable, approximates fair market
value because of the short maturity of those instruments. The fair value of the
Company's long-term debt is estimated to approximate carrying value based on the
borrowing rates currently available to the Company for bank loans with similar
terms and average maturities.
The Company has interest rate and gas swap agreements that subject it to
off-balance sheet risk. The unrealized losses on these contracts, as disclosed
in the following footnotes, are based on market quotes. These unrealized losses
are not recorded in the consolidated financial statements to the extent the
swaps qualify for hedge accounting.
STOCK-BASED COMPENSATION--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 establishes a
fair value method and disclosure standards for stock-based employee compensation
arrangements, such as stock purchase plans and stock options. It also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees, requiring that such transactions be accounted
for based on fair value. As allowed by SFAS 123, the Company will continue to
follow the provisions of Accounting Principles Board Opinion No. 25 ("APB") for
its stock-based employee compensation arrangements. SFAS 123 requires entities
that elect to continue to measure compensation cost using APB 25 to disclose
proforma information computed as if the fair value based accounting method of
SFAS 123 had been applied for all awards granted after December 15, 1994.
EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share" and Statement of Financial Accounting Standards No. 129
("SFAS 129"), "Disclosure of Information about Capital Structure." SFAS 128
establishes standards for computing and presenting earnings per share ("EPS")
and requires restatement of all prior-period EPS data presented. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. Basic earnings per share has been computed by dividing net income to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income to common
shareholders (as adjusted) by the weighted
F-8
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
average number of common shares outstanding plus dilutive potential common
shares. For the years ended December 31, 1997 and 1996 all potentially diluted
securities are anti-dilutive and therefore are not included in the earnings per
share calculation.
The following table presents information necessary to calculate basic and
diluted earnings per share for periods indicated, with 1996 being restated to
conform with the requirements of the Statement of Financial Accounting Standards
No. 128 Earning Per Share, described below.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted Average Common Shares Outstanding as Restated for the 1:6 Reverse Stock
Split Effected on May 14, 1998 (See Note 10)................................... 1,646,311 1,190,343
Basic (Loss) Per Share, as Restated.............................................. $ (3.07) $ (4.31)
------------- -------------
------------- -------------
EARNINGS FOR BASIC COMPUTATION
Net (Loss)....................................................................... $ (4,953,803) $ (5,025,019)
Preferred Share Dividends........................................................ (103,153) (103,153)
------------- -------------
Net Income (Loss) to Common Shareholders (Basic (Loss) Per Share Computation).... $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
</TABLE>
RECLASSIFICATION--Certain reclassifications have been made to the 1996
financial statements to conform them to the classification used in 1997.
2. GOING CONCERN:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced a significant decline in operations including declines in ongoing
gas and oil production. These declines have created a significant working
capital deficit and depleted cash reserves. As a result of the declining
positions, the Company has also failed to meet its financial debt covenants
although it has secured a waiver through the earlier of the consummation of the
Acquisitions or June 1998. In the event that the Company is not able to secure
future waivers and the debt is ultimately called, the Company may not be able to
timely meet this demand.
The Company has prepared an operating budget for 1998 which projects a
negative cash flow. Such negative cash flows are expected to further deplete
existing cash balances. The Company has obtained a bridge financing arrangement
from Duke Energy Financial Services, Inc. in connection with the proposed
Acquisitions discussed in Note 10. Such Acquisition was approved by the
Company's stockholders and consummated on May 14, 1998. Nevertheless, if the
Company is unsuccessful in its attempt to secure permanent financing and/or
equity capital, the Company will be required to sell substantial interests in
its exploration projects in order to continue as a going concern. The Company is
actively pursuing various sources of permanent financing and/or equity capital.
3. STOCKHOLDERS' EQUITY:
As a result of the Company's 1:6 reverse stock split effected May 14, 1998,
all numbers of common shares and per share amounts have been restated for all
periods. See Note 10.
F-9
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
Effective November 12, 1993, the Company completed its initial public
offering of 350,000 Units of its securities. Each unit consisted of two (2)
shares of cumulative convertible preferred stock (valued at $10.00 per share),
one-sixth ( 1/6) share of common stock (valued at $24.00) and one-sixth ( 1/6)
warrant ("Series A Warrant") (valued at $0.60). During 1995, the Company offered
to exchange one (1) share of cumulative convertible preferred stock plus all
unpaid and accrued preferred dividends for two-third's ( 2/3) share of common
stock and two (2) Series A Warrants for a limited period. The Company concluded
its offer on May 26, 1995 with a total of 603,939 shares of convertible
preferred stock tendered. As a result of the offering, the Company issued
402,626 shares of Common Stock and 201,313 Series A Warrants. After May 26,
1995, the exchange ratio reverted to the original conversion terms. The Company
reflected the market value of the additional one-third ( 1/3)share of common
stock paid as a one-time premium to induce conversion of the cumulative
convertible preferred 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, 1997 and
1996, 85,961 shares of cumulative convertible preferred stock were outstanding.
In connection with the debt financing obtained 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 (See--"Warrants") in consideration
for assisting with obtaining the financing. The Company paid $200,000 in cash
and issued 25,000 shares of the Company's common stock to the advisor on June 6,
1996. These shares have been valued at $234,375, the fair market value at the
date granted.
On August 14, 1996, the Company closed the sale of a public offering of
1,350,000 Units of its securities. Subsequently, the Company sold an additional
over all allotment of 202,500 Units. Each Unit consisted of one-half ( 1/2)
share of Common Stock and one-half ( 1/2) Series B Redeemable Common Stock
Purchase Warrant ("Series B Warrants"). The price for each Unit was $30.375. The
net proceeds, after underwriter's commission and expenses, was approximately
$6,431,000.
CONVERTIBLE PREFERRED STOCK--The Board of Directors of the Company has
adopted a Certificate of Designations creating a series of convertible preferred
stock consisting of 1,000,000 shares, par value $.01 per share, none of which
was outstanding as of December 31, 1997 and 1996. Shares of the convertible
preferred stock may be issued from time to time in one or more series with such
designations, voting powers, if any, preferences, and relative participating,
optional or other special rights, and such qualifications, limitations and
restrictions thereof, as are determined by resolution of the Board of Directors
of the Company. 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 senior as to liquidation rights to the
cumulative convertible preferred stock has been paid in full.
CUMULATIVE CONVERTIBLE PREFERRED STOCK--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
from the date of issuance of the cumulative convertible preferred stock. During
1997 and 1996, $77,365 and $25,788 was declared and paid in cumulative preferred
stock dividends. The Company has undeclared and unpaid dividends in the amount
of $180,518 ($1.50 per share) on its cumulative preferred stock for the period
from May 1, 1995 to
F-10
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
December 31, 1997. The Company is not required 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.
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
provisions 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 dividends,
the number of directors of the Company will be increased by two and the holders
of preferred stock will be entitled to elect these 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
cumulative convertible preferred stock and prior to the redemption thereof, the
holders of cumulative convertible preferred stock shall have the right,
exercisable at their option, to convert any or all of such shares into common
stock at the rate of conversion described below. During 1997 no 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, exceed $13.00, then, effective as of the closing of
business on the tenth such trading day, all shares of cumulative convertible
preferred stock then outstanding shall immediately and automatically be
converted into shares of common stock and warrants at the rate of conversion
described below.
CONVERSION RATE--The conversion rate for the cumulative convertible
preferred stock (i.e., the number of shares of common stock into which each
share of cumulative convertible preferred stock is convertible) is determined by
dividing the conversion price then in effect by $30.00. The initial conversion
price is $60.00; therefore, the cumulative convertible preferred stock is
initially convertible into common stock and Series A Warrants at the conversion
rate of one-third ( 1/3) share of common stock and one-third ( 1/3) Series A
Warrant for each share of cumulative convertible preferred stock converted.
WARRANTS--Each Series A Warrant issued in the initial public offering and in
the conversion of the cumulative convertible preferred stock entitles the holder
thereof to purchase one-sixth ( 1/6) share of common stock at a price equal to
$36.00, until five years from the effective date of the initial public offering.
The Warrants will, unless exercised or amended, expire on November 13, 1998.
Outstanding Series A Warrants may be redeemed by the Company for $1.25 each on
30 days notice. As of December 31, 1997 and 1996, there were 263,013 Series A
Warrants outstanding.
F-11
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
Each Series B Warrant issued in the August 1996 public securities offering
entitles the holder to purchase one-sixth ( 1/6) share of common stock for
$12.15 commencing August 8, 1997, and ending August 8, 2001. Each Series B
Warrant is redeemable by the Company with the prior consent of the underwriter
at a price of $0.06 per Series B Warrant, at any time after the Series B
Warrants become exercisable, upon not less than 30 days 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 consecutive trading days ending on the third
day prior to the date on which the notice of redemption is given.
The Company has also issued a common stock warrant to purchase 4,167 shares
of common stock at $24.00 per share in connection with a loan agreement. This
warrant expires five (5) years from the effective date of the Company's initial
public offering. The loan was paid in full in 1993.
The Company and Hi-Chicago Trust agreed to a settlement in December 1995
whereby the Company issued 12,500 shares of common stock and a stock purchase
warrant to purchase up to 50,000 shares of common stock at an exercise price of
$18.00 per share to settle a claim asserted by Hi-Chicago Trust. 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 $36.00 per share for sixty consecutive trading days. The issued shares
are unregistered.
In 1996, the Company issued to a bank providing financing, a warrant to
purchase up to 41,667 shares of common stock for a period of five years
beginning January 3, 1996, 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 has recorded the warrants at a
value of approximately $82,500 as unamortized value of warrants issued. The
warrants are being amortized using the interest method with an unamortized
balance of $27,163 at December 31, 1997.
The Company has also issued a warrant to purchase 41,667 shares of the
Company's common stock at $12.00 per share to a financial advisor. The warrant
has a five year term commencing on January 12, 1996 and provides for
anti-dilution protection, registration rights, and permits 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 additional funds are not
borrowed from the bank, a portion of the warrants will be returned. The Company
has 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.
On January 15, 1997, the Board of Directors authorized the Company to enter
into an agreement with Riches In Resources, Inc. to perform investor relations
services for the Company on a fee basis through January 15, 1999, and month to
month thereafter, which fee may be paid either in cash or in common stock at the
election of the Company. The Company elected to compensate Riches In Resources,
Inc. partially in cash and partially in stock, therefore Riches In Resources,
Inc. was issued 11,667 shares of common stock during 1997. At December 31, 1997,
the Company had prepaid consultant costs of $17,701 in association with this
transaction.
In the first quarter of 1998, the Company, in connection with a financing
arrangement, issued warrants to purchase 25,000 shares of common stock at an
exercise price of $3.00 per share.
EMPLOYEE OPTION PLAN--1997--The plan authorizes the issuance of up to
115,892 options to purchase one (1) share of common stock. Options to purchase
100,167 shares of common stock at prices ranging from $3.78 to $11.28 are
currently outstanding of which 5,167 expire in June of 1998.
F-12
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
Under the plan, the Board may grant options to officers and other employees
and shall provide for an automatic receipt of options by directors who are not
full time employees. Each option shall consist of an option to purchase one
share of common stock at an exercise price that shall be at least the fair
market value of the Common stock on the date of the grant of the option.
However, the Board may authorize vesting options as it deems necessary; such is
the case of certain officers reissued options under this plan during 1997.
Unless otherwise so designated, the options shall be exercisable at a rate of
33 1/3% on January 1, the year following the effective date of the grant, and
33 1/3% each January 1 thereafter. The Option holder's right is cumulative.
Unless otherwise designated by the Board, if the employment of the Option holder
is terminated for any reason, all unexercised Options shall terminate, be
forfeited and shall lapse within three months thereafter. The options have a
maximum life of ten years from the date of issuance.
STOCK INCENTIVE OPTION PLAN--1996--The 1996 stock incentive option plan was
approved by the Company's stockholders in June, 1996, and 58,333 shares of
common stock were initially reserved for issuance thereunder.
Currently, all options under the plan have expired or have been canceled by
the Board of Directors other than 21,667 options currently outstanding, of which
19,333 expire by June of 1998.
MANAGEMENT INCENTIVE STOCK PLAN
The Plan initially authorized the issuance of up to 40,000 units. Each unit
consists of (i) an option to purchase one (1) share of Common Stock and (ii) a
cash payment ("Stock Appreciation Right" or "SAR") to be made by the Company
when the option is exercised. The value of the SAR is equal to twice the amount
by which the fair market value of the Common Stock on the date of the exercise
of the option exceeds the exercise price. Currently all units have expired or
have been canceled by the Board of Directors other than 8,000 units currently
outstanding, 7,000 of which expire by June 1998.
The following table summarizes activity under the Company's stock option
plans for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
EMPLOYEE
INCENTIVE MANAGEMENT STOCK INCENTIVE OPTION
STOCK OPTION PLAN INCENTIVE STOCK PLAN OPTION PLAN--1997 PLAN--1997
------------------------ ------------------------ ------------------------ -----------
1997 1996 1997 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares available for grant.... -- 30,000 -- 20,000 1,333 58,533 115,892
Shares under option at end of
period...................... -- 30,000 8,000 18,667 20,333 57,000 100,167
Option price per share........ -- $ 10.074 $12.00-21.00 $12.00-21.00 $8.82-12.75 $8.82-12.75 $3.78-11.28
Shares exerciseable at end of
period...................... -- 26,000 8,000 17,000 6,778 -- 90,667
Sales exercised during the
period...................... -- -- -- -- -- -- --
Sales canceled................ 30,000 -- 10,667 17,000 36,667 --
Weighted option price......... -- $ 10.074 $ 18.12 $ 18.54 $ 10.02 $ 9.414 $ 4.20
</TABLE>
STOCK OPTION PLANS--The Company has three fixed option plans which reserve
shares of common stock for issuance to executives, key employees and directors.
The Company has adopted the disclosure-only
F-13
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation". Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
three stock option plans been determined based on fair value at the grant date
for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net loss applicable to common stockholders and net loss per common and
common equivalent share would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net loss applicable to common stockholders--as reported............................ $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
Net loss applicable to common stockholders--pro forma.............................. $ (5,679,620) $ (5,296,335)
------------- -------------
------------- -------------
Net loss per common share--as reported............................................. $ (3.07) $ (4.32)
------------- -------------
------------- -------------
Net loss per common share--pro forma............................................... $ (3.42) $ (4.44)
------------- -------------
------------- -------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividends; expected volatility of 60%; risk-free interest rate
of 5.71% and 6.50% in 1997 and 1996, respectively; and expected lives of five
(5) years.
OPTION REPRICINGS
In the last quarter of 1997, the Company determined to attempt to consummate
a significant corporate transaction in order to satisfy the Company's need for
additional capital resources. In connection with pursuing such a transaction,
Mr. Berry and Mr. Christofferson entered into Incentive Agreements and Contract
Settlement Agreements with the Company pursuant to which each of Mr. Berry and
Mr. Christofferson are entitled to receive certain Incentive Payments and
Contract Settlement Payments upon the consummation of such a transaction. Their
existing employment agreements will terminate upon the consummation of a
significant corporate transaction.
In negotiating the terms of the Incentive Agreements and Contract Settlement
Agreements, Mr. Berry and Mr. Christofferson determined that their existing
stock options would expire 90 days after their termination of employment. The
Compensation Committee of the Board of Directors which was comprised of Messrs.
Sweeny and Elliott, each of whom was an outside director, recognized that the
expiration of those options would result in a disincentive for Mr. Berry and Mr.
Christofferson to help the Company pursue a significant corporate transaction.
Therefore, the Compensation Committee determined that Mr. Berry's and Mr.
Christofferson's existing stock options should be canceled and replaced with new
stock options that would terminate not sooner than the date their old options
would have expired if their employment with the Company was not terminated. As
an added incentive, the Compensation Committee determined to reprice Mr. Berry's
and Mr. Christofferson's options so they could more readily benefit from any
upturn in the Company's Common Stock trading price upon the consummation of a
significant corporate transaction.
When determining the price at which Mr. Berry's and Mr. Christofferson's new
options would be exercisable, the Compensation Committee took the average
closing price of the Company's Common Stock on the Nasdaq Small-Cap Market over
the 20 day trading period immediately preceding the option
F-14
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
reprice date, and multiplied such average trading price by 65%. The Compensation
Committee believed that the discount to the average trading price was
appropriate because the shares of Common Stock issuable upon exercise of the
repriced options would not be freely tradeable and the discount was appropriate
to reflect the actual fair market value of the illiquid shares that would be
received upon the exercise of the new options.
The following table sets forth certain information with respect to
replacement stock options granted to Mr. Berry and Mr. Christofferson during the
year ended December 31, 1997, which are also reported above under "--Option
Grants."
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES OF LENGTH OF ORIGINAL
UNDERLYING MARKET PRICE OF EXERCISE OPTION TERM
OPTIONS/SARS STOCK AT TIME OF PRICE AT TIME NEW REMAINING AT DATE
REPRICED OR REPRICING OR OF REPRICING EXERCISE OF REPRICING OR
NAME DATE AMENDED AMENDMENT OR AMENDMENT PRICE AMENDMENT (MONTHS)
- - ----------------------------------- --------- ------------- ----------------- ------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
David W. Berry..................... 12/3/97 20,000(1) $ 5.82 $ 9.72 $ 3.78 102
President and 12/3/97 4,000(2) $ 5.82 $ 18.60 $ 3.78 69
Chief Executive Officer
David B. Christofferson............ 12/3/97 30,000(3) $ 5.82 $ 10.08 $ 3.78 62
Executive Vice 12/3/97 4,000(2) $ 5.82 $ 18.60 $ 3.78 69
President, General 12/3/97 16,667(1) $ 5.82 $ 8.82 $ 3.78 102
Counsel and Secretary
</TABLE>
- - ------------------------
(1) Consists of options to purchase shares of Common Stock pursuant to the Stock
Incentive Option Plan--1996.
(2) Consists of units, each of which included an option to purchase one (1)
share of Common Stock and a stock appreciation right ("SAR") equal to two
times the difference between the exercise price of the option and the market
value of the SAR at the date of exercise, so that one (1) unit had the value
of three (3) options, all issued pursuant to the Management Incentive Option
Plan.
(3) Consists of options to purchase 30,000 shares of Common Stock pursuant to
the Company's 1993 Incentive Stock Option Plan.
4. SALE OF GAS AND OIL ASSETS AND SEISMIC DATA:
On September 27, 1996, the Company sold its N.E. Cedardale field located in
Major County, Oklahoma to OXY USA Inc., for consideration totaling $3,550,000
which included cash of $2,840,000 and certain exchange properties which were
concurrently sold to a third party for $710,000. The sale was effective
September 1, 1996 and the Company incurred a loss of $10,523. The properties
sold represented a substantial portion of the Company's production. In
connection with the sale, the Company recorded a loss of $212,000 resulting from
the reduction in the quantity of gas covered by a swap agreement. The Company
sold various other properties in a number of different transactions during 1997
and 1996. These sales resulted in an aggregate gain of approximately $485,813
and $272,000 for 1997 and 1996, respectively.
F-15
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. 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.
The Company was committed to deliver 7,100,000 MMBTU of gas to the purchaser
over a period of seven years beginning December 1, 1991. The Company was allowed
to deliver gas to satisfy the commitment from its own reserves or from
purchasing gas on the open market. The Company delivered 44% from purchases on
the open market for the year ended December 31, 1996 as follows:
<TABLE>
<CAPTION>
FOR YEAR ENDED
DECEMBER 31,
1996 (MMBTU)
---------------
<S> <C>
Gas purchased on open market.................................................. 43,783
Gas delivered from Company reserves........................................... 55,417
------
Total deliveries.............................................................. 99,200
------
------
</TABLE>
The purchase price under the contract was fixed at $1.50 per MMBTU over the
life of the contract. The contract required the prepayment by the purchaser of
$0.75 per MMBTU for the remaining contract obligations. 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 of gas plus a
settlement payment of $313,912.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Note payable pursuant to a credit agreement with a bank of $293,888 and $493,888 ended
December 31, 1997 and 1996 respectively, interest at LIBOR rate (reserve adjusted),
plus one and seven-eighths percent (1.875%) (7.25% at December 31, 1997 and 1996),
payable in monthly installments, due in various monthly amounts through December,
1998, collateralized by producing oil and gas properties; net of discount of $18,966
and $37,931 ending December 31, 1997 and 1996 respectively.......................... $ 274,922 $ 455,956
Non-recourse loan, payable out of an 8% ORRI on the Starboard Prospect, interest
accrued at 15%...................................................................... 864,000 681,618
Note payable to bank, interest at 7.49% to 12.5%, payable in monthly installments, due
in various amounts through 2001, collateralized by other property and equipment..... 48,843 73,978
Note payable, interest at 12%, payable monthly, principal due December 31, 1997....... 100,000 100,000
------------ ------------
1,287,765 1,311,552
Less current portion.................................................................. 401,085 304,540
------------ ------------
$ 886,680 $ 1,007,012
------------ ------------
------------ ------------
</TABLE>
F-16
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
Maturities of long-term debt (excluding non-recourse debt, which is solely
dependent upon the successful development and future production, if any, of the
Starboard Prospect) are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
YEAR 1997
- - ------------------------------------------------------------------- ---------------
<S> <C>
1998............................................................... $ 401,085
1999............................................................... 16,459
2000............................................................... 6,221
2001............................................................... --
2002............................................................... --
</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
which was used to terminate the Gas Sales Agreement and repay the deferred gas
revenues incurred under the Gas Sales Agreement, payoff the note payable to a
bank due August 1, 1996, pay the bank fees related to the financing with the
remainder being used to pay current liabilities.
The remaining funds are to be available for specified future drilling and
acquisition activities of the Company subject to the approval of the bank. The
Company repaid a substantial portion of this borrowing with proceeds from the
sale of its N.E. Cedardale properties in September of 1996. Due to this early
repayment of borrowings, the Company reduced debt issuance costs by $293,000 and
discount on notes payable by $207,000 and recorded these amounts as interest
expense. The loan is secured 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 the limitations on
additional borrowing, and sales of significant properties, working capital,
cash, and net worth maintenance requirements and a minimum debt to net worth
ratio. As additional consideration for the loan, the Company assigned the bank
an overriding royalty interest in the mortgaged properties. The required
covenants during 1997 are as follows:
<TABLE>
<CAPTION>
COVENANT, AS DEFINED
- - --------------------------------------------------------------------------------
<S> <C>
Tangible Net Worth.............................................................. $ 5,000,000
Current Ratio................................................................... 1.1 : 1.0
Debt to Capitalization.......................................................... 0.6 : 1.0
Cash Flow Ratio................................................................. 3.0 : 1.0
Cash on Hand.................................................................... $ 200,000
Working Capital................................................................. $ 400,000
</TABLE>
The Company does not believe it will be able to comply with certain of the
covenants. The Company has obtained a waiver of the covenant through June 30,
1998. Management believes that the Company will require an additional waiver or
waivers during 1998.
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% (.0125%) on the unused portion of the commitment amount. The
unrealized loss on the interest rate swap agreement was $28,000 at December 31,
1996. At December 31, 1997 the unrealized loss was $21,910.
F-17
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
On March 12, 1996, the Company completed a financial package with a group
funded by a public utility to evaluate and develop a project in Terrebonne
Parish, Louisiana. This group will participate in 48% of all costs of 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 secured by a mortgage on the Company's interest in the
project. As of December 31, 1997, the Company has received advances aggregating
$864,000 on the non-recourse loan. 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. Future funding will be provided as costs are incurred.
7. INCOME TAXES:
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net operating tax loss carryforward............................. $ 4,332,710 $ 3,494,442
Property and equipment.......................................... (2,936,284) (1,942,813)
Employee benefits............................................... -- 76,032
Valuation allowance............................................. (3,254,886) (1,627,661)
------------- -------------
Net deferred tax asset (liability)............................ $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Company has recorded a deferred tax valuation allowance since, based on
an assessment of all available historical 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 net operating loss carryforwards
("NOLs") at December 31, 1997, of approximately $12,743,267, which may be used
to offset future taxable income. The operating loss carryforwards expire in the
tax years 2006 through 2012.
The ability of the Company to utilize NOLs and tax credit carryforwards to
reduce future federal income taxes of the Company may be subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
One such limitation is contained in Section 382 of the Code which imposes an
annual limitation on the amount of a corporation's taxable income that can be
offset by those carryforwards in the event of a substantial change in ownership
as defined in Section 382 ("Ownership Change"). In general, Ownership Change
occurs if during a specified three-year period there are capital stock
transactions, which result in an aggregate change of more than 50% in the
beneficial ownership of the stock of the Company. The Company may have incurred
such an Ownership Change.
8. RELATED PARTY TRANSACTIONS:
The Company made advances to officers and affiliates of the Company during
1997 and 1996 of $48,380 and $51,143, respectively, and received repayments of
$99,216 and $18,741, respectively. The December 31, 1997 and 1996 receivables
include approximately $47,787, from an affiliated partnership for which the
Company serves as the managing general partner. During 1996, as a result of the
Company's relocation, the Company purchased the homes of two officers for a
total aggregate cost of approximately $369,000. The houses were sold for a total
aggregate sales price of approximately $354,000 and the net amount realized by
the Company was approximately $324,000.
F-18
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under lease agreements, which are classified
as operating leases. Lease expense under these agreements was $112,432 in 1997
and $106,440 in 1996. A summary of future minimum rentals on these
non-cancelable operating leases is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
YEAR 1997
- - ------------------------------------------------------------------- ---------------
<S> <C>
1998............................................................... $ 117,068
1999............................................................... $ 117,068
2000............................................................... $ 117,068
2001............................................................... $ 78,045
</TABLE>
The Company has entered into employment agreements with two officers. Two of
these agreements expire December 31, 1999 (and automatically renew for
additional one-year terms each December 31 unless specifically terminated by
either the Company or individual). The Company has entered into an incentive
agreement and a contract settlement agreement with two officers. Their
employment agreements with the Company will be terminated upon the closing of
the Acquisitions.
Pursuant to the incentive agreements and contract settlement agreements, in
the event the Acquisitions are closed, or in the event there is another
transaction which results in a change of control of the Company, it will pay
incentive payments totaling $246,000, as well as contract settlement payments
totaling $246,000. Each of the incentive payments and the contract settlement
payments may be paid in the form of promissory notes due not later than
September 30, 1998.
The Company is party to various lawsuits arising in the normal course of
business. Management believes the ultimate outcome of these matters will not
have a material effect on the Company's consolidated financial position, results
of operations, and net cash flows.
Pursuant to the credit agreement with the bank, the Company entered into a
natural gas swap 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. The swap was amended to 31,250 MMBTU on September 25, 1996,
due to the sale of the N.E. Cedardale field. The Company recorded a loss of
$212,000 in connection with this reduction in quantities covered by the swap
agreement. Currently the Company's monthly natural gas production is
substantially less than the natural gas swap that is in place. The total
unrealized loss on the amended swap agreement was $128,936 at December 31, 1997.
The Company has a hedge in place, which limits the potential cost per MMBTU it
may have to settle at a price of $3.13 per MMBTU, for 31,250 MMBTU per month in
January and February 1998.
10. SUBSEQUENT EVENT
On January 19, 1998, the Company entered into the Acquisition Agreement with
EPC and Aspect. Pursuant to the terms and conditions of the Acquisition
Agreement and subject to approval by the Company's shareholders the Company will
purchase from EPC (the "EPC Assets") and Aspect (the "Aspect Assets") certain
undeveloped oil and gas exploration projects in the onshore Gulf Coast area (the
"Acquisitions"). The Company will issue up to 5,165,985 shares of Common Stock
to EPC in exchange for the EPC Assets, and will issue up to 4,941,440 shares of
Common Stock to Aspect or its assigns in exchange for the Aspect Assets. As part
of the Acquisition, the Company intends to redeem its Cumulative Committee
Preferred Stock at its redemption price of $10.00 per share plus all accrued and
unpaid dividends.
F-19
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENT (CONTINUED)
In conjunction with the Acquisition Agreement, Aspect committed to lend the
Company up to $1,800,000, and in January and February advanced $500,000 on said
credit facility. The facility was repaid by the Company on February 23, 1998,
when the Company entered into a $7,800,000 credit agreement with Duke Energy
Financial Services, Inc. Said new credit facility provides for up to $4,800,000
prior to closing of the Acquisitions, $1,800,000 of which can be used directly
by the Company and $3,000,000 to be utilized solely to loan to EPC to pay
exploratory costs incurred on the EPC Assets after the effective date of the
Acquisitions and prior to closing thereof. An additional $3,000,000 will be
available to the Company after closing of the Acquisitions to pay additional
exploratory costs. The credit facility bears interest at a national prime rate
plus 4%. In addition, the lender will be paid cash payments equal to an
overriding royalty of 0.6% of production attributable to the Company's interest
in wells drilled by the Company while the credit facility is outstanding. The
lender also has a right to gather, process, transport and market, at competitive
market rates, natural gas produced from a majority of the projects the Company
intends to acquire pursuant to the Acquisitions. The facility is secured by
mortgages on most of the Company's undeveloped exploration projects. The assets
to be acquired in the acquisition will be subject to such mortgages. The
facility is repayable in eleven monthly payments equal to 1/30 of the principal
plus interest, plus a final monthly payment of all remaining principal plus
interest commencing August 31, 1998, or sooner in the event the Company sells
interests in the collateral or closes any underwritten public offering of
securities.
On May 14, 1998 a Special Meeting of Stockholders of the Company was held
pursuant to a solicitation of proxy mailed on or about April 24, 1998 to all the
stockholders of record as of the close of business on April 1, 1998. The
stockholders approved and ratified the following:
<TABLE>
<S> <C>
(i) the approval of the Acquisitions;
(ii) the approval of a 1:6 reverse split of the presently outstanding Common Stock;
(iii) the approval of the reincorporation of the Company in the state of Delaware and a
change in the Company's name to Esenjay Exploration, Inc.; and
(iv) the election of seven directors.
</TABLE>
As a result of the above stockholder actions, the Acquisitions were closed,
the Company's preferred stock was called for redemption and the reverse split,
reincorporation and name change were effected. Accordingly, all numbers of
common shares and per share calculations have been restated to reflect the 1:6
reverse stock split.
The Acquisition Agreement calls for the Company to issue up to 5,165,260
shares of Common Stock after giving effect to the reverse split to EPC in
exchange for undeveloped oil and gas prospects and to issue up to 4,941,440
shares of Common Stock after giving effect to the reverse split to Aspect and
its assigns for the Aspect assets. The combined assets of Aspect and EPC have a
historical full cost basis of $19.9 million and a fair market value of
$54,200,000. In addition, after the effective date and prior to the date of
closing, EPC incurred approximately $3,800,000 in exploration and development
costs associated with the prospects and Aspect incurred approximated $3,955,000
in such costs, all of which incurred costs are for the account of the Company.
F-20
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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
certainty to be recoverable in the future from known gas and oil reservoirs
under existing economic and operating conditions (i.e. price and costs as of the
date the estimate is made). Proved developed (producing and non-producing)
reserves are those proved reserves which can be expected to be recovered through
existing wells with existing equipment and operating methods. Proved undeveloped
gas and oil reserves are 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.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation.
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 amortization of
costs capitalized:
COSTS INCURRED IN GAS AND OIL EXPLORATION AND PRODUCTION ACTIVITIES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Acquisition of properties
Proved.................................................................... $ 765,678 $ 1,305,219
Unproved.................................................................. 242,205 644,323
Exploration costs........................................................... 1,861,432 182,147
Development costs........................................................... 153,938 313,152
------------ ------------
Total costs incurred.................................................... $ 3,023,253 $ 2,444,841
------------ ------------
------------ ------------
</TABLE>
CAPITALIZED COSTS:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
Proved and unproved properties being amortized............................. $ 1,181,811 $ 4,681,518
Unproved properties not being amortized.................................... 2,054,037 598,596
Less accumulated amortization.............................................. (438,044) (2,277,984)
------------ -------------
Net capitalized costs.................................................. $ 2,797,804 $ 3,002,130
------------ -------------
------------ -------------
</TABLE>
ESTIMATED QUANTITIES OF PROVED GAS AND OIL RESERVES:
The estimates of proved producing reserves were estimated. Proved reserves
cannot be measured exactly because the estimation of reserves involves numerous
judgmental and arbitrary determinations.
F-21
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
Accordingly, reserve estimates must be continually revised as a result of new
information obtained from drilling and production history or as a result of
changes in economic conditions.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS
LIQUIDS (BARRELS)
NATURAL GAS (MCF) ---------------------
--------------------------
YEARS ENDED DECEMBER
YEARS ENDED DECEMBER 31, 31,
-------------------------- ---------------------
1997 1996 1997 1996
----------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of period......................................... 8,901,555 18,564,141 183,735 279,501
Purchases of minerals-in-place.............................. -- 2,615,187 -- 84,096
Sales of minerals-in-place.................................. (159,528) (10,092,754) (3,857) (187,006)
Revisions of previous estimates............................. (3,129,076) (791,059) (59,121) 8,534
Extensions, discoveries and other additions................. 8,715 12,056 928 7,886
Production.................................................. (121,304) (1,406,016) (7,286) (9,276)
----------- ------------- --------- ----------
End of period............................................... 5,500,363 8,901,555 114,399 183,735
----------- ------------- --------- ----------
----------- ------------- --------- ----------
Proved developed reserves:
Beginning of period......................................... 985,524 7,307,717 46,420 72,515
----------- ------------- --------- ----------
----------- ------------- --------- ----------
End of period............................................... 521,345 985,524 24,358 46,420
----------- ------------- --------- ----------
----------- ------------- --------- ----------
</TABLE>
Reserves of wells, which have performance history, were estimated through
analysis of production trends and other appropriate performance relationships.
Where production and reservoir data were limited, the volumetric method was used
and it is more susceptible to subsequent revisions.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
The standardized measure of discounted future net cash flows is based on
criteria established by Financial Accounting Standards Board Statement No. 69,
"Accounting for Oil and Gas Producing Activities" and is not intended to be a
"best estimate" of the fair value of the Company's oil and gas properties. For
this to be the case, forecasts of future economic conditions, varying price and
cost estimates, varying discount rates and consideration of other than proved
reserves (i.e., probable reserves) would have to be incorporated into the
valuations.
Future net cash inflows are based on the future production of proved
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
consideration of price changes only to the extent fixed and determinable and
with consideration of the timing of gas sales under existing contracts or spot
market sales) to estimated future production of proved reserves. Average year
end prices used in determining future cash inflows for natural gas and oil for
the periods ended December 31, 1997 and 1996 were as follows: 1997--$2.46 per
MCF--Gas, $15.70 per barrel--Oil; 1996--$4.13 per MCF--Gas, $24.42 per
barrel--Oil, respectively. Future net cash flows are then calculated by reducing
such estimated cash inflows by the estimated future expenditures (based on
current costs) to be incurred in developing and producing the proved reserves
and by the estimated future income taxes. Estimated future income taxes are
computed by applying the appropriate year-end tax rate to the future pretax net
cash flows relating to the Company's estimated proved oil and gas reserves. The
estimated future income taxes give effect to permanent differences and tax
credits and allowances.
F-22
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
The following table sets forth the Company's estimated standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Future cash inflows................................................................ $ 15,752,040 $ 41,251,837
Future development and production costs............................................ (7,468,887) (8,288,416)
Future income tax expenses......................................................... (365,224) (6,628,489)
------------- -------------
Future net cash flows.............................................................. 7,917,929 26,334,932
Discount........................................................................... (4,019,429) (9,576,388)
------------- -------------
Standardized measure of discounted future net cash flows........................... $ 3,898,500 $ 16,758,544
------------- -------------
------------- -------------
</TABLE>
The following table sets forth changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Standardized measure of discounted future cash flows--beginning of period......... $ 16,758,544 $ 16,404,620
Sales of oil and gas produced, net of operating expenses.......................... (312,198) (1,977,577)
Net changes in sales prices and production costs.................................. (10,601,580) 7,177,867
Extensions, discoveries and improved recovery, less related costs................. 30,952 187,877
Change in future development costs................................................ (433,134) (17,400)
Previously estimated development costs incurred during the year................... 162,610 115,440
Revisions of previous quantity estimates.......................................... (4,973,603) (1,940,104)
Accretion of discount............................................................. 2,169,632 2,004,973
Net change of income taxes........................................................ 4,810,619 (1,292,670)
Purchases of minerals-in-place.................................................... -- 7,787,886
Sales of minerals-in-place........................................................ (371,728) (11,270,558)
Changes in production rates (timing) and other.................................... (3,341,614) (421,810)
-------------- --------------
Standardized measure of discounted future cash flows--end of period............... $ 3,898,500 $ 16,758,544
-------------- --------------
-------------- --------------
</TABLE>
F-23
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 188,495 $ 690,576
Accounts receivable, net of allowance for doubtful accounts of $7,915 at March 31,
1998 and 15,488 at December 31, 1997............................................ 176,507 221,864
Prepaid expenses and other........................................................ 141,074 249,328
Current portion notes receivable from EPC......................................... 466,664 --
Receivables from affiliates....................................................... 97,765 105,171
------------- -------------
Total current assets............................................................ 1,070,505 1,266,939
Property and equipment:
Gas and oil properties, at cost-successful efforts method of accounting........... 3,635,538 3,235,848
Other property and equipment...................................................... 1,151,592 1,169,127
------------- -------------
4,787,130 4,404,975
Less accumulated depletion, depreciation and amortization......................... (1,295,435) (1,260,605)
------------- -------------
3,491,695 3,144,370
Other assets........................................................................ 513,856 164,699
Notes receivable from EPC........................................................... 1,283,336 --
------------- -------------
Total assets.................................................................... $ 6,359,392 $ 4,576,008
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 824,440 $ 991,396
Revenue distribution payable...................................................... 74,325 68,131
Current portion of long-term debt................................................. 988,360 401,085
Accrued and other liabilities..................................................... 331,964 299,704
------------- -------------
Total current liabilities....................................................... 2,219,089 1,680,316
Long-term debt...................................................................... 1,846,165 22,680
Non-recourse debt................................................................... 864,000 864,000
Accrued interest on non-recourse debt............................................... 227,114 194,274
Other long-term liabilities......................................................... -- 9,918
------------- -------------
Total liabilities............................................................... 5,156,368 2,771,183
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, 1998 and December
31, 1997 ($859,610 aggregate liquidation preference at March 31, 1998 and
December 31, 1997).............................................................. 860 860
Common Stock:
Class A common stock, $.01 par value, 40,000,000 shares authorized; 1,655,984
outstanding at March 31, 1998 and December 31, 1997(1)........................ 16,560 16,560
Unamortized value of warrants issued.............................................. (20,371) (27,163)
Additional paid-in capital (1).................................................... 14,751,425 14,751,425
Accumulated Deficit............................................................... (13,545,450) (12,936,862)
------------- -------------
Total stockholders' equity...................................................... 1,203,024 1,804,820
------------- -------------
Total liabilities and stockholders' equity...................................... $ 6,359,392 $ 4,576,008
------------- -------------
------------- -------------
</TABLE>
- - ------------------------
(1) After giving effect to the 1:6 reverse stock split effected on May 14, 1998.
See Note 6.
The accompanying notes are an integral part of these financial statements
F-24
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
----------- -------------
<S> <C> <C>
Revenues:
Gas and oil revenues................................................................ $ 48,503 $ 327,435
Realized gain (loss) on commodity transactions...................................... (47,875) (121,937)
Unrealized loss on commodity transactions........................................... (51,011) --
Gain on sale of assets.............................................................. 2,875 132,035
Operating fees...................................................................... 6,992 14,234
Other revenues...................................................................... 23,930 53,880
----------- -------------
Total revenues.................................................................... (16,586) 405,647
----------- -------------
Costs and expenses:
Lease operating expense............................................................. 69,773 96,698
Production taxes.................................................................... (1,090) 8,784
Transportation and gathering costs.................................................. 639 90,394
Depletion, depreciation and amortization............................................ 53,568 132,774
Exploration costs................................................................... 3,560 852,626
Interest expense.................................................................... 19,223 4,133
General and administrative expense.................................................. 459,014 572,260
Delay rentals....................................................................... (12,685) --
----------- -------------
Total costs and expenses.......................................................... 592,002 1,757,669
----------- -------------
Loss before provision for income taxes................................................ (608,588) (1,352,022)
Benefit (provision) for income taxes.................................................. -- --
----------- -------------
Net loss.............................................................................. (608,588) (1,352,022)
Cumulative preferred stock dividend................................................... 25,788 25,788
----------- -------------
Net loss applicable to common stockholders............................................ $ (634,376) $ (1,377,810)
----------- -------------
----------- -------------
Net loss per share(1)................................................................. $ (0.38) $ (1.16)
----------- -------------
----------- -------------
Weighted average number of common shares outstanding(1)............................... 1,655,984 1,644,317
</TABLE>
- - ------------------------
(1) After giving effect to the 1:6 reverse stock split effected May 14, 1998.
See Note 6.
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................. $ (608,588) $(1,352,022)
Adjustments to reconcile net loss to net cash (used) in operating activities:
Depletion, depreciation and amortization............................................ 53,568 132,774
Impairment of oil and gas properties................................................ -- --
Gain on sale of assets.............................................................. (2,875) (132,035)
Amortization of financing costs and warrants........................................ 21,564 30,343
Unrealized loss on commodity transactions........................................... 51,011 --
Exploration costs................................................................... 3,560 852,626
Changes in operating assets and liabilities
Trade and affiliate receivables................................................... 52,763 (23,282)
Prepaid expenses and other........................................................ 108,254 170,295
Other assets...................................................................... (359,188) (1,028)
Accounts payable.................................................................. (86,956) (11,760)
Revenue distribution payable...................................................... 6,194 (173,684)
Accrued and other................................................................. 4,171 (158,993)
---------- -----------
Net cash (used) in operating activities........................................... (756,522) (348,280)
---------- -----------
Cash flows used in investing activities:
Capital expenditures--gas and oil properties.......................................... (403,250) (1,330,312)
Capital expenditures--other property and equipment.................................... (13,328) (73,646)
Notes receivable from EPC............................................................. (1,750,000) --
Proceeds from sale of assets.......................................................... 15,000 540,568
---------- -----------
Net cash provided by (used) in investing activities................................. (2,151,578) (863,390)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt........................................................ 3,000,000 225,534
Repayments of long-term debt.......................................................... (593,981) (74,443)
Debt issuance costs................................................................... -- --
Preferred stock dividends paid........................................................ -- (25,788)
---------- -----------
Net cash provided by (used) in financing activities................................. 2,406,019 125,303
---------- -----------
Net increase (decrease) in cash and cash equivalents.................................. (502,081) (1,086,867)
Cash and cash equivalents at beginning of period........................................ 690,576 4,956,686
---------- -----------
Cash and cash equivalents at end of period.............................................. $ 188,495 $ 3,869,789
---------- -----------
---------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest................................................................ $ 98,325 $ 34,157
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited condensed consolidated financial statements of
Esenjay Exploration, Inc. and its subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Interim results are not necessarily indicative of results
for a full year.
A summary of the Company's significant accounting policies is presented on
pages 30 and 31 of its 1997 Form 10KSB/A filed with the SEC. Users of financial
information are encouraged to refer to the footnotes contained therein when
reviewing interim financial results. There have been no material changes in the
accounting policies followed by the Company during 1998.
The accompanying interim financial statements contain all the material
adjustments, which are in the opinion of management, consistent with the
adjustments necessary to present the fairly stated consolidated financial
position, results of operations, cash flows and stockholder's equity of the
Company for the interim period. Certain prior period amounts have been
reclassified to conform with the current period presentation.
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Note payable pursuant to a credit agreement with a bank of $218,888 at March 31, 1998
and $293,888 at December 31, 1997, interest at LIBOR rate (reserve adjusted), plus
one and seven-eights percent (1.875%)(7.25% at March 31, 1998 and December 31,
1997), payable in monthly installments, due in various monthly amounts through
December 1998, collateralized by producing oil and gas properties, net of discount
of $14,224 at March 31, 1998 and $18,966 at December 31, 1997...................... $ 204,664 $ 274,922
Non-recourse loan, payable out of an 8% ORRI on the Starboard Prospect, interest
accrued at 15%..................................................................... 864,000 864,000
Notes payable to bank, interest at 7.49% to 12.5%, payable in monthly installments,
due in various amounts through 2001, collateralized by other property and
equipment.......................................................................... 29,861 48,843
Note payable, interest at 12%, payable monthly, principal due December 31, 1997...... 100,000 100,000
Note payable pursuant to a credit agreement with an energy lending institution,
$2,500,000 at March 31, 1998, interest at prime rate plus 4% payable monthly,
principal due in eleven monthly installments commencing August 31, 1998............ 2,500,000 --
------------ ------------
3,698,525 1,287,765
Less current portion................................................................. 988,360 401,085
------------ ------------
$ 2,710,165 $ 886,680
------------ ------------
------------ ------------
</TABLE>
F-27
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. LONG-TERM DEBT: (CONTINUED)
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, payoff the note payable to a
bank due August 1, 1996, pay the bank fees related to the financing with the
remainder being used to pay current liabilities. The remaining funds will be
available for specified future drilling and acquisition activities of the
Company subject to the approval of the bank. The Company repaid a substantial
portion of this borrowing with proceeds from the sale of its N.E. Cederdale
properties in September of 1996. Due to this early repayment of borrowings, the
Company reduced debt issuance costs by $293,000 and discount on notes payable by
$207,000 and recorded these amounts as interest expense. The loan is secured 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
restriction, among which are the limitations on additional borrowing, and sales
of significant properties, working capital, cash, and net worth maintenance
requirements and minimum debt to net worth ratio. As additional consideration
for the loan, the Company assigned the bank an overriding royalty interest in
the mortgaged properties. The required covenants during 1998 are as follows:
<TABLE>
<CAPTION>
COVENANT AS DEFINED
- - --------------------------------------------------------------------------------
<S> <C>
Tangible Net Worth.............................................................. $ 5,000,000
Current Ratio................................................................... 1,1:1,0
Debt to Capitalization.......................................................... 0.6:1.0
Cash Flow Ratio................................................................. 3.0:1.0
Cash on Hand.................................................................... $ 200,000
Working Capital................................................................. $ 400,000
</TABLE>
The Company has not been able and, does not believe it will be able, to
comply with certain of the covenants. The Company has obtained a waiver of the
covenants through June 30, 1998. Management believes that the Company will
require an additional waiver or waivers during 1998.
In addition, the Company entered into an interest rate swap guaranteeing a
fixed interest rate of 8.28% on the loan, and the Company will have paid fees of
one-eighth of 1% (.0125%) on the unused portion of the commitment amount. On
April 24, 1998, the Company settled this swap agreement resulting in a realized
loss of $28,500.
On March 12, 1996, the Company completed a financial package with a group
funded by a public utility to evaluate and develop a project in Terrebonne
Parish, Louisiana. This group will participate in 48% of all costs of evaluation
and development of the project area and provide a non-recourse loan to fund 48%
of 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. As of March 31, 1998, the Company has received advances aggregating
$864,000 on the non-recourse loan. 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. Future funding will be provided as costs are incurred. The
loan is now fully funded.
In conjunction with the Acquisition Agreement, Aspect committed to lend the
Company up to $1,800,000, and in January and February advanced $500,000 on said
credit facilty. The facility was repaid by the Company on February 23, 1998,
when the Company entered into a $7,800,000 credit agreement with Duke Energy
Financial Services, Inc (the "Duke Credit Facililty"). The Duke Credit Facility
provides for
F-28
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. LONG-TERM DEBT: (CONTINUED)
borrowings of up to $4,800,000 prior to closing of the Acquisitions, $1,800,000
of which was used directly by the Company and $3,000,000 of which was loaned to
EPC to pay exploratory costs incurred on the assets acquired from EPC in the
Acquisitions after the effective date of the Acquisitions and prior to closing
thereof. An additional $3,000,000 became available to the Company after closing
of the Acquisitions to pay additional exploratory costs and to fund the costs of
redemption of the Company's convertible preferred stock. The Duke Credit
Facility bears interest at a national prime rate plus 4.0%. In addition, the
lender will be paid cash payments equal to an overriding royalty of 0.6% of the
Company's interest in wells drilled by the Company while the credit facility is
outstanding. The lender also has a right to gather, process, transport and
market, at competitive market rates, natural gas produced from a majority of the
projects the Company acquired pursuant to the Acquisitions. The facility is
secured by mortgages on most of the Company's undeveloped exploration projects.
The assets acquired in the Acquisitions are subject to such mortgages. The
facility is repayable in eleven monthly payments equal to 1/30 of the principal
plus interest, plus a final monthly payment of all remaining principal plus
interest commencing August 31, 1998, or sooner in the event the Company sells
interests in the collateral or closes any underwritten public offering of
securities.
3. DISPOSITION OF OIL AND GAS PROPERTIES
In the first quarter of 1997 the Company divested its interest in a well
located in Oklahoma and promoted its interest in a prospect located in South
Louisiana for a total of $381,321 and realized a gain of $166,143. This gain was
partially offset by a realized loss of $34,108 which was associated with the
relocation of the Company headquarters to Houston, Texas. There was no such
activity in the first quarter of 1998.
4. NOTES RECEIVABLE FROM EPC
The Duke Credit Facility provides for borrowings of up to $4,800,000 prior
to the closing of the Acquisitions, of which $3,000,000 was used to make loans
to EPC to pay exploratory costs incurred on the assets acquired by the Company
in the Acquisitions, which costs were incurred after the effective date of the
Acquisition Agreement and prior to closing. The Duke Credit Facility bears an
interest rate at a national prime rate plus 4.0%. The Duke Credit Facility is
repayable in eleven monthly payments equal to 1/30 of the principal, plus
interest, and a final monthly payment of the remaining principal and interest,
commencing on August 31, 1998. As of March 31, 1998, the funds expended in
connection with these exploratory costs were $1,750,000, of which $466,664
represented the current portion and $1,283,336 represented the long-term
portion.
5. COMMITMENTS AND CONTINGENCIES
The Company previously entered into employment agreements with two officers
that covered periods through December 31, 1999. In 1997 the Company entered into
incentive agreements and contract settlement agreements with the two officers.
Pursuant to the incentive agreements and contact settlement agreements, upon the
closing of the Acquisitions, the Company became obligated to pay incentive
payments totaling $246,000, as well as contract settlement payments totaling
$246,000 to said officers. Each of the incentive payments and the contract
payments may be paid in the form of promissory notes due not
F-29
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
later than September 30, 1998. Upon closing of the Acquisitions the employment
agreements were settled by execution of such promissory notes.
The Company is a party to various lawsuits arising in the normal course of
business. Management believes the ultimate outcome of these matters will not
have a material effect on the Company's consolidated financial position, results
of operations and net cash flows.
Pursuant to the credit agreement with the bank, the Company entered into a
natural gas swap 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. The swap was amended to 31,250 MMBTU on September 25, 1996,
due to the sale of the N.E. Cedardale field. The Company recorded a loss of
$212,000 in connection with this reduction in quantities covered by the swap
agreement. Currently the Company's monthly natural gas production is
substantially less than the natural gas swap that is in place. The total
unrealized loss on the amended swap agreement was $179,947 at March 31, 1998.
6. SUBSEQUENT EVENT
On May 14, 1998 a Special Meeting of Stockholders of the Company was held
pursuant to a solicitation of proxy mailed on or about April 24, 1998 to all the
stockholders of record as of the close of business on April 1, 1998. The
stockholders approved and ratified the following:
<TABLE>
<S> <C>
(i) the approval of the Acquisition Agreement;
(ii) the approval of a 1:6 reverse split of the presently outstanding Common Stock;
(iii) the approval of the reincorporation of the Company in the state of Delaware and a
change of the Company's name to Esenjay Exploration, Inc.; and
(iv) the election of seven directors.
</TABLE>
As a result of the above stockholder actions, the Acquisitions were closed,
the Company's preferred stock was called for redemption and the reverse split,
reincorporation and name change were effected. Accordingly, all numbers of
common shares and per share calculations have been restated to reflect the 1:6
reverse stock split.
The Acquisition Agreement calls for the Company to issue up to 5,165,260
shares of Common Stock after giving effect to the reverse split to EPC in
exchange for undeveloped oil and gas prospects and to issue up to 4,941,440
shares of Common Stock after giving effect to the reverse split to Aspect and
its assigns for the Aspect assets. The combined assets of Aspect and EPC have a
historical full cost basis of $19.9 million and a fair market value of
$54,200,000. In addition, after the effective date and prior to the date of
closing, EPC incurred approximately $3,800,000 in exploration and development
costs associated with the prospects and Aspect incurred approximated $3,955,000
in such costs, all of which incurred costs were for the account of the Company.
F-30
<PAGE>
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- - -------------------------------------------
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Cautionary Statement Regarding Forward-Looking Statements................. 10
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 21
Price Range of Common Stock............................................... 21
Capitalization............................................................ 22
Pro Forma Financial Statements............................................ 23
Selected Financial Data................................................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 29
Business and Properties................................................... 36
Management................................................................ 56
Principal Stockholders.................................................... 63
Certain Transactions...................................................... 64
Description of Securities................................................. 66
Underwriting.............................................................. 69
Legal Matters............................................................. 71
Experts................................................................... 71
Available Information..................................................... 71
Glossary of Certain Industry Terms........................................ 72
Index to Financial Statements............................................. F-1
</TABLE>
5,000,000 SHARES
[LOGO]
COMMON STOCK
--------------------------
P R O S P E C T U S
--------------------------
GAINES, BERLAND INC.
JUNE , 1998
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law (the "DGCL") 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 director, 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 enterprise, against expenses (including attorneys' fees) judgments, fines,
and amounts paid in settlement actually and reasonably incurred by him in
connection 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 DGCL 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, employee, 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 and except 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 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 DGCL provides that to the extent that a present or former director or
officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit, or proceeding referred to in the statute, or in
defense of any claim, issue, or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
The Registrant's Certificate of Incorporation contains provisions which
indemnify and exculpate the directors and officers of the Registrant from and
against certain liabilities. The Registrant's Certificate of Incorporation
provides that each person who at any time is or was a director or officer of the
Registrant, and is threatened to be or is made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, by reason of the fact that such
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant as a director, officer, partner, venturer,
proprietor, member, employee, trustee, agent or similar functionary of another
domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or non-profit
enterprise, whether the basis of the proceeding is an alleged action in such
person's official capacity or in another capacity while holding such office,
shall be indemnified and held harmless by the Registrant to the fullest extent
authorized by the DGCL, except that such person shall not be indemnified if he
is convicted of a crime in a criminal proceeding. The Registrant's Certificate
of Incorporation 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 liability (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 involve intentional
II-1
<PAGE>
misconduct or a knowing violation of law, (c) for acts or omissions specified in
Section 174 of the DGCL regarding the unlawful payment of dividends and the
unlawful purchase or redemption 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
registration of the securities being registered will be borne by the Company.
All of the amounts shown are estimates except the registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 8,059
Legal fees and expenses........................................... 175,000
Accounting fees and expenses...................................... 50,000
Printing and engraving expenses................................... 75,000
Blue sky fees and expenses........................................ 15,000
Nasdaq application fees........................................... 3,259
Miscellaneous..................................................... 23,682
---------
TOTAL EXPENSES:............................................... $ 350,000
---------
---------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The per share data set forth below has been adjusted to reflect the one for
six reverse split of Common Stock effected by the Company on May 14, 1998.
<TABLE>
<CAPTION>
DATE OF PERSONS TO WHOM TYPE OF AMOUNT OF
TRANSACTION SECURITIES WERE SOLD SECURITIES SECURITIES SOLD DESCRIPTION OF THE TRANSACTION
- - ----------- -------------------- ---------- ------------------ ----------------------------------------------------
<C> <S> <C> <C> <C>
9/95 Weisser, Johnson & Common 3,334 shares Issued in exchange for services rendered, pursuant
Co. Capital Corp. Stock to the exemption from registration provided by
Section 4(2) of the Securities Act.
12/95 Hi-Chicago Trust Common 12,500 shares Issued in connection with settlement of litigation,
Stock pursuant to the exemption from registration provided
by Section 4(2) of the Securities Act.
12/95 Hi-Chicago Trust Common Warrant to Issued in connection with settlement of litigation,
Stock purchase 50,000 pursuant to the exemption from registration provided
Purchase shares of Common by Section 4(2) of the Securities Act.
Warrant Stock for $18.00
per share;
exercisable for
five years from
date of issuance.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
DATE OF PERSONS TO WHOM TYPE OF AMOUNT OF
TRANSACTION SECURITIES WERE SOLD SECURITIES SECURITIES SOLD DESCRIPTION OF THE TRANSACTION
- - ----------- -------------------- ---------- ------------------ ----------------------------------------------------
<C> <S> <C> <C> <C>
1/96 LaSalle Street Common Warrant to Issued as additional consideration for Credit
Natural Resources Stock purchase 41,667 Agreement, pursuant to the exemption from
Corporation (an Purchase shares of Common registration provided by Section 4(2) of the
affiliate of Bank of Warrant Stock for $18.00 Securities Act.
America Illinois) per share;
exercisable for
five years from
date of issuance.
1/96 Weisser, Johnson & Common Warrant to Issued in consideration of services rendered,
Co. Capital Stock purchase 41,667 pursuant to the exemption from registration provided
Corporation Purchase shares of Common by Section 4(2) of the Securities Act.
Warrant Stock for $12.00
per share;
exercisable for
five years from
date of issuance.
1/96 Weisser, Johnson & Common 25,000 shares Issued in consideration of services rendered,
Co. Capital Stock pursuant to the exemption from registration provided
Corporation by Section 4(2) of the Securities Act.
8/96 Gaines, Berland Inc. Common Options to Issued in consideration of underwriting and
Stock purchase 67,500 financial advisory services provided to the Company,
Options shares of Common pursuant to an exemption from registration provided
Stock for $27.00 by Section 4(2) of the Securities Act.
per share;
exercisable for
four years
starting one year
after the date of
issuance
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
DATE OF PERSONS TO WHOM TYPE OF AMOUNT OF
TRANSACTION SECURITIES WERE SOLD SECURITIES SECURITIES SOLD DESCRIPTION OF THE TRANSACTION
- - ----------- -------------------- ---------- ------------------ ----------------------------------------------------
<C> <S> <C> <C> <C>
8/96 Gaines, Berland Inc. Common Warrant to Issued in consideration of underwriting and
Stock purchase 67,500 financial advisory services provided to the Company,
Purchase shares of Common pursuant to an exemption from registration provided
Warrant Stock for $12.15 by Section 4(2) of the Securities Act.
per share;
exercisable for
four years
starting one year
from the date of
issuance.
1/98 Aspect Resources LLC Common Warrant to Issued in consideration of financing provided to the
Stock purchase 9,375 Company, pursuant to an exemption from registration
Purchase shares of Common provided by Section 4(2) of the Securities Act.
Warrant Stock for $3.00
per share;
exercisable for
one year from the
date of issuance
1/98 Esenjay Petroleum Common Warrant to Issued in consideration of a guaranty of financing
Corporation Stock purchase 6,250 provided to the Company, pursuant to an exemption
Purchase shares of Common from registration provided by Section 4(2) of the
Warrant Stock at an Securities Act.
exercise price of
$3.00 per share;
exercisable for
one year from the
date of issuance.
1/98 Gaines, Berland Common Warrant to Issued in consideration of a guaranty of financing
Energy Fund, L.P. Stock purchase 9,375 provided to the Company, pursuant to an exemption
Purchase shares of Common from registration provided by Section 4(2) of the
Warrant Stock for $3.00 Securities Act.
per share;
exercisable for
one year from the
date of issuance.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
DATE OF PERSONS TO WHOM TYPE OF AMOUNT OF
TRANSACTION SECURITIES WERE SOLD SECURITIES SECURITIES SOLD DESCRIPTION OF THE TRANSACTION
- - ----------- -------------------- ---------- ------------------ ----------------------------------------------------
<C> <S> <C> <C> <C>
1/98 Aspect Resources LLC Common Warrant to Issued in consideration of a guaranty of financing
Stock purchase 9,375 provided to the Company, pursuant to an exemption
Purchase shares of Common from registration provided by Section 4(2) of the
Warrant Stock at an Securities Act.
exercise price of
$3.00 per share;
exercisable for
one year from the
date of issuance.
1/98 Esenjay Petroleum Common Warrant to Issued in consideration of a guaranty of financing
Corporation Stock purchase 6,250 provided to the Company, pursuant to an exemption
Purchase shares of Common from registration provided by Section 4(2) of the
Warrant Stock at an Securities Act.
exercise price of
$3.00 per share;
exercisable for
one year from the
date of issuance.
1/98 Gaines, Berland Common Warrant to Issued in consideration of a guaranty of financing
Energy Fund, L.P. Stock purchase 9,375 provided to the Company, pursuant to an exemption
Purchase shares of Common from registration provided by Section 4(2) of the
Warrant Stock for $3.00 Securities Act.
per share;
exercisable for
one year from the
date of issuance.
5/98 Esenjay Petroleum Common 5,165,311 shares Issued in consideration of assets acquired by the
Corporation Stock Company, pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act.
5/98 Aspect Resources LLC Common 4,203,106 shares Issued in consideration of assets acquired by the
Stock Company, pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act.
5/98 R. Michael Looney Common 23,334 Issued in consideration of assets acquired by the
Stock shares Company, pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
DATE OF PERSONS TO WHOM TYPE OF AMOUNT OF
TRANSACTION SECURITIES WERE SOLD SECURITIES SECURITIES SOLD DESCRIPTION OF THE TRANSACTION
- - ----------- -------------------- ---------- ------------------ ----------------------------------------------------
<C> <S> <C> <C> <C>
5/98 Steven L. Creger Common 16,667 Issued in consideration of assets acquired by the
Stock Company, pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act.
5/98 James A. Rogers Common 23,334 Issued in consideration of assets acquired by the
Stock Company, pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act.
5/98 Joint Energy Common 675,000 Issued in consideration of assets acquired by the
Development Stock Company, pursuant to an exemption from registration
Investments II provided by Section 4(2) of the Securities Act.
Limited Partnership
</TABLE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
1** Form of Underwriting Agreement.
3(a)* Certificate of Incorporation of the Company.
3(b)* Certificate of Amendment to the Certificate of Incorporation of Frontier Natural Gas Corporation, filed
with the Secretary of State of Oklahoma on May 14, 1998, to effect a one for six reverse split of the
common stock of Frontier Natural Gas Corporation.
3(c)* By-Laws of the Company.
5(a)** Opinion of Porter & Hedges, L.L.P.
10(a) Contract Settlement Agreement between Frontier Natural Gas Corporation and David W. Berry dated
effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as Exhibit
10(b).
10(b) Contract Settlement Agreement between Frontier Natural Gas Corporation and David B. Christofferson
dated effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as
Exhibit 10(d).
10(c) Frontier Natural Gas Corporation Incentive Stock Option Plan as currently in effect is incorporated by
reference to the Company's Registration Statement 33-69640-FW dated September 29, 1993, wherein the
same appears as Exhibit 10.5.
10(d) Engagement Agreement between Weisser, Johnson & Co. Capital Corporation and Frontier Natural Gas
Corporation dated May 10, 1995 as amended January 12, 1996, as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995
dated March 29, 1996, wherein the same appears as Exhibit 10(h).
10(e) Common Stock Purchase Warrant with Hi-Chicago Trust as currently in effect as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 dated March
29, 1996, wherein the same appears as Exhibit 10(i).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(f) $15,000,000 Credit Agreement dated as of January 3, 1996, between Frontier Natural Gas Corporation as
the borrower and Bank of America Illinois, as the lender, as currently in effect and incorporated by
reference to the Company's report on Form 8-K dated January 9, 1996.
10(g) $15,000,000 Credit Agreement dated as of January 3, 1996, between Frontier Natural Gas Corporation as
the borrower and Bank of America Illinois, as the lender, Amendment No. 1 to Credit Agreement, dated
November 1, 1996, as currently in effect, as incorporated by reference to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997 dated March 31, 1997, wherein the same
appears as Exhibit 10(m).
10(h) Lease Agreement dated July 16, 1996, by and between the Company and Allen Center Company as
incorporated by reference to the Company's registration statement 333-06261 dated July 31, 1996,
wherein the same appears as Exhibit 10.23.
10(i) Loan Agreement by and between Frontier Natural Gas Corporation and 420 Energy Investments, Inc. dated
March 1, 1996, as currently in effect as incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29, 1996, wherein the same
appears as Exhibit 10(r).
10(j) Warrant Agreement between Frontier Natural Gas Corporation and LaSalle Street Natural Resources
Corporation dated as of January 3, 1996, as currently in effect as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29,
1996, wherein the same appears as Exhibit 10(s).
10(k) Frontier Natural Gas Corporation Stock Incentive Plan 1996 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995
dated March 29, 1996, wherein the same appears as Exhibit 10(t).
10(l) 3-D Seismic Participation Agreement dated May 30, 1996, by and between Frontier Natural Gas Corporation
and Fina Oil and Chemical Company.
10(m)* Unit Purchase Option Agreement between Frontier Natural Gas Corporation and Gaines, Berland Inc. dated
August 8, 1996.
10(n) Frontier Natural Gas Corporation Employee Option Plan-1997 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997
dated April 6, 1998, wherein the same appears as Exhibit 10(o).
10(o) Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier National
Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April
6, 1998, wherein the same appears as Exhibit 2.
10(p) Credit Agreement by and between Frontier Natural Gas Corporation and Duke Energy Financial Services,
Inc. dated as of February 23, 1998, as currently in effect as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April 6,
1998, wherein the same appears as Exhibit 10(p).
10(q)* Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 14, 1998.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(r)* Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 14, 1998.
10(s)* Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 14,
1998.
10(t)* Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 23, 1998.
10(u)* Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 23, 1998.
10(v)* Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 23,
1998.
10(w) Plan and Agreement of Merger dated as of May 14, 1998, by and between Esenjay Exploration, Inc., a
Delaware corporation, and Frontier Natural Gas Corporation as incorporated by reference to the
Company's Proxy Statement filed with the Securities and Exchange Commission on April 24, 1998,
wherein the same appeared as Appendix F.
10(x)* First Amendment to Acquisition Agreement and Plan of Exchange dated as of April 20, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(y)* Second Amendment to Acquisition Agreement and Plan of Exchange dated as of May 13, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(z)* Exchange Agreement dated as of May 13, 1998, by and between Frontier Natural Gas Corporation, and R.
Michael Looney, James E. Rogers and Steven L. Creger.
10(aa)* Exchange Agreement entered into as of May 14, 1998, by and between Frontier Natural Gas Corporation,
and Joint Energy Development Investments II Limited Partnership.
10(bb)* Frontier Natural Gas Corporation Section 351 Plan of Exchange, among Frontier Natural Gas Corporation,
Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(cc)* Registration Rights Agreement dated as of May 14, 1998, by and among Esenjay Petroleum Corporation,
Aspect Resources LLC, and Frontier Natural Gas Corporation.
10(dd)* Assignment and Assumption Agreement dated as of May 14, 1998, by and between Frontier Natural Gas
Corporation, and Aspect Resources LLC.
10(ee)* Assignment and Assumption Agreement dated as of May 14, 1998, by and between Frontier Natural Gas
Corporation, and Esenjay Petroleum Corporation.
10(ff)* Geotechnical Services Consulting Agreement effective May 14, 1998, by and among Frontier Natural Gas
Corporation, and Aspect Management Corporation.
10(gg)* Land Services Consulting Agreement effective May 14, 1998, by and between Frontier Natural Gas
Corporation, and Aspect Management Corporation.
10(hh)* Bill of Sale and Assignment entered into as of May 14, 1998, by James E. Rogers, R. Michael Looney and
Steven L. Creger, for the benefit of Frontier Natural Gas Corporation.
10(ii)* Letter Agreement dated May 14, 1998, between Aspect Resources LLC and Frontier Natural Gas Corporation,
regarding a right of first offer arrangement involving the Halo Region.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(jj)* Form of Partial Assignment, Bill of Sale and Conveyance dated effective November 1, 1997, from Esenjay
Petroleum Corporation to Esenjay Exploration, Inc., used in connection with the conveyance of oil and
gas properties from Esenjay Petroleum Corporation to Frontier Natural Gas Corporation, pursuant to
the Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier
Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(kk)* Form of Partial Assignment, Bill of Sale and Conveyance dated effective November 1, 1997, from Aspect
Resources LLC to Esenjay Exploration, Inc., used in connection with the conveyance of oil and gas
properties from Aspect Resources LLC to Frontier National Gas Corporation, pursuant to the
Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier
National Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(ll)* Letter Agreement dated January 12, 1998, between Bank of America National Trust and Savings
Association, Frontier Natural Gas Corporation, Frontier, Inc., Frontier Acquisition Corporation, and
Frontier Exploration and Production Corporation, regarding the Credit Agreement dated as of January
3, 1996, as amended.
11 See Note 1 to the audited consolidated financial statements.
21 A list of the Company's subsidiaries is incorporated by reference to the Company's Annual Report on
Form 10-KSB for fiscal year ended December 31, 1997 dated April 6, 1998.
23(a)** Consent of Porter & Hedges, L.L.P. included in Exhibit 5(a).
23(b)* Consent of Deloitte & Touche LLP.
24(a)* Power of Attorney dated May 14, 1998 from Michael E. Johnson to David B. Christofferson.
24(b)* Power of Attorney dated May 14, 1998 from Alex M. Cranberg to David B. Christofferson.
24(c)* Power of Attorney dated May 14, 1998 from Alex B. Campbell to David B. Christofferson.
24(d)* Power of Attorney dated May 14, 1998 from Charles J. Smith to David B. Christofferson.
24(e)* Power of Attorney dated May 14, 1998 from Hobart A. Smith to David B. Christofferson.
24(f)* Power of Attorney dated May 14, 1998 from Jack P. Randall to David B. Christofferson.
</TABLE>
- - ------------------------
* Filed herewith.
** To be filed by Amendment.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to officers, directors and controlling persons of the
Registrant pursuant to the provisions described under Item 24 of this
registration statement, 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 such Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, 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 public policy as expressed in such Act and will be
governed by the final adjudication of such issue.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant 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 authorized
in the City of Houston, State of Texas on May 20, 1998.
<TABLE>
<S> <C> <C>
ESENJAY EXPLORATION, INC.
By: * /s/ MICHAEL E. JOHNSON
-----------------------------------------
Michael E. Johnson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
NAME TITLE DATE
- - ------------------------------ -------------------------- -------------------
* /s/ MICHAEL E.
JOHNSON President, Chief Executive
- - ------------------------------ Officer, and Director May 20, 1998
Michael E. Johnson
/s/ DAVID W.
BERRY
- - ------------------------------ Chairman of the Board May 20, 1998
David W. Berry
/s/ DAVID B. CHRISTOFFERSON
- - ------------------------------ Principal Financial May 20, 1998
David B. Christofferson Officer
/s/ HOWARD E. WILLIAMS
- - ------------------------------ Chief Accounting Officer May 20, 1998
Howard E. Williams
* /s/ ALEX M.
CRANBERG
- - ------------------------------ Vice Chairman of the Board May 20, 1998
Alex M. Cranberg
* /s/ ALEX B.
CAMPBELL
- - ------------------------------ Director May 20, 1998
Alex B. Campbell
II-10
<PAGE>
NAME TITLE DATE
- - ------------------------------ -------------------------- -------------------
* /s/ CHARLES J.
SMITH
- - ------------------------------ Director May 20, 1998
Charles J. Smith
- - ------------------------------ Director May 20, 1998
William D. Dodge, III
* /s/ HOBART A.
SMITH
- - ------------------------------ Director May 20, 1998
Hobart A. Smith
* /s/ JACK P.
RANDALL
- - ------------------------------ Director May 20, 1998
Jack P. Randall
*By: /s/ DAVID B.
CHRISTOFFERSON
-------------------------
David B. Christofferson
ATTORNEY-IN-FACT
II-11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
1** Form of Underwriting Agreement.
3(a)* Certificate of Incorporation of the Company.
3(b)* Certificate of Amendment to the Certificate of Incorporation of Frontier Natural Gas Corporation, filed
with the Secretary of State of Oklahoma on May 14, 1998, to effect a one for six reverse split of the
common stock of Frontier Natural Gas Corporation.
3(c)* By-Laws of the Company.
5(a)** Opinion of Porter & Hedges, L.L.P.
10(a) Contract Settlement Agreement between Frontier Natural Gas Corporation and David W. Berry dated
effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as Exhibit
10(b).
10(b) Contract Settlement Agreement between Frontier Natural Gas Corporation and David B. Christofferson
dated effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as
Exhibit 10(d).
10(c) Frontier Natural Gas Corporation Incentive Stock Option Plan as currently in effect is incorporated by
reference to the Company's Registration Statement 33-69640-FW dated September 29, 1993, wherein the
same appears as Exhibit 10.5.
10(d) Engagement Agreement between Weisser, Johnson & Co. Capital Corporation and Frontier Natural Gas
Corporation dated May 10, 1995 as amended January 12, 1996, as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995
dated March 29, 1996, wherein the same appears as Exhibit 10(h).
10(e) Common Stock Purchase Warrant with Hi-Chicago Trust as currently in effect as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 dated March
29, 1996, wherein the same appears as Exhibit 10(i).
10(f) $15,000,000 Credit Agreement dated as of January 3, 1996, between Frontier Natural Gas Corporation as
the borrower and Bank of America Illinois, as the lender, as currently in effect and incorporated by
reference to the Company's report on Form 8-K dated January 9, 1996.
10(g) $15,000,000 Credit Agreement dated as of January 3, 1996, between Frontier Natural Gas Corporation as
the borrower and Bank of America Illinois, as the lender, Amendment No. 1 to Credit Agreement, dated
November 1, 1996, as currently in effect, as incorporated by reference to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997 dated March 31, 1997, wherein the same
appears as Exhibit 10(m).
10(h) Lease Agreement dated July 16, 1996, by and between the Company and Allen Center Company as
incorporated by reference to the Company's registration statement 333-06261 dated July 31, 1996,
wherein the same appears as Exhibit 10.23.
10(i) Loan Agreement by and between Frontier Natural Gas Corporation and 420 Energy Investments, Inc. dated
March 1, 1996, as currently in effect as incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29, 1996, wherein the same
appears as Exhibit 10(r).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(j) Warrant Agreement between Frontier Natural Gas Corporation and LaSalle Street Natural Resources
Corporation dated as of January 3, 1996, as currently in effect as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29,
1996, wherein the same appears as Exhibit 10(s).
10(k) Frontier Natural Gas Corporation Stock Incentive Plan 1996 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995
dated March 29, 1996, wherein the same appears as Exhibit 10(t).
10(l) 3-D Seismic Participation Agreement dated May 30, 1996, by and between Frontier Natural Gas Corporation
and Fina Oil and Chemical Company.
10(m)* Unit Purchase Option Agreement between Frontier Natural Gas Corporation and Gaines, Berland Inc. dated
August 8, 1996.
10(n) Frontier Natural Gas Corporation Employee Option Plan-1997 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997
dated April 6, 1998, wherein the same appears as Exhibit 10(o).
10(o) Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier National
Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April
6, 1998, wherein the same appears as Exhibit 2.
10(p) Credit Agreement by and between Frontier Natural Gas Corporation and Duke Energy Financial Services,
Inc. dated as of February 23, 1998, as currently in effect as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April 6,
1998, wherein the same appears as Exhibit 10(p).
10(q)* Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 14, 1998.
10(r)* Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 14, 1998.
10(s)* Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 14,
1998.
10(t)* Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 23, 1998.
10(u)* Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 23, 1998.
10(v)* Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 23,
1998.
10(w) Plan and Agreement of Merger dated as of May 14, 1998, by and between Esenjay Exploration, Inc., a
Delaware corporation, and Frontier Natural Gas Corporation as incorporated by reference to the
Company's Proxy Statement filed with the Securities and Exchange Commission on April 24, 1998,
wherein the same appeared as Appendix F.
10(x)* First Amendment to Acquisition Agreement and Plan of Exchange dated as of April 20, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(y)* Second Amendment to Acquisition Agreement and Plan of Exchange dated as of May 13, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(z)* Exchange Agreement dated as of May 13, 1998, by and between Frontier Natural Gas Corporation, and R.
Michael Looney, James E. Rogers and Steven L. Creger.
10(aa)* Exchange Agreement entered into as of May 14, 1998, by and between Frontier Natural Gas Corporation,
and Joint Energy Development Investments II Limited Partnership.
10(bb)* Frontier Natural Gas Corporation Section 351 Plan of Exchange, among Frontier Natural Gas Corporation,
Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(cc)* Registration Rights Agreement dated as of May 14, 1998, by and among Esenjay Petroleum Corporation,
Aspect Resources LLC, and Frontier Natural Gas Corporation.
10(dd)* Assignment and Assumption Agreement dated as of May 14, 1998, by and between Frontier Natural Gas
Corporation, and Aspect Resources LLC.
10(ee)* Assignment and Assumption Agreement dated as of May 14, 1998, by and between Frontier Natural Gas
Corporation, and Esenjay Petroleum Corporation.
10(ff)* Geotechnical Services Consulting Agreement effective May 14, 1998, by and among Frontier Natural Gas
Corporation, and Aspect Management Corporation.
10(gg)* Land Services Consulting Agreement effective May 14, 1998, by and between Frontier Natural Gas
Corporation, and Aspect Management Corporation.
10(hh)* Bill of Sale and Assignment entered into as of May 14, 1998, by James E. Rogers, R. Michael Looney and
Steven L. Creger, for the benefit of Frontier Natural Gas Corporation.
10(ii)* Letter Agreement dated May 14, 1998, between Aspect Resources LLC and Frontier Natural Gas Corporation,
regarding a right of first offer arrangement involving the Halo Region.
10(jj)* Form of Partial Assignment, Bill of Sale and Conveyance dated effective November 1, 1997, from Esenjay
Petroleum Corporation to Esenjay Exploration, Inc., used in connection with the conveyance of oil and
gas properties from Esenjay Petroleum Corporation to Frontier Natural Gas Corporation, pursuant to
the Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier
Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(kk)* Form of Partial Assignment, Bill of Sale and Conveyance dated effective November 1, 1997, from Aspect
Resources LLC to Esenjay Exploration, Inc., used in connection with the conveyance of oil and gas
properties from Aspect Resources LLC to Frontier National Gas Corporation, pursuant to the
Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier
National Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(ll)* Letter Agreement dated January 12, 1998, between Bank of America National Trust and Savings
Association, Frontier Natural Gas Corporation, Frontier, Inc., Frontier Acquisition Corporation, and
Frontier Exploration and Production Corporation, regarding the Credit Agreement dated as of January
3, 1996, as amended.
11 See Note 1 to the audited consolidated financial statements.
21 A list of the Company's subsidiaries is incorporated by reference to the Company's Annual Report on
Form 10-KSB for fiscal year ended December 31, 1997 dated April 6, 1998.
23(a)** Consent of Porter & Hedges, L.L.P. included in Exhibit 5(a).
23(b)* Consent of Deloitte & Touche LLP.
24(a)* Power of Attorney dated May 14, 1998 from Michael E. Johnson to David B. Christofferson.
24(b)* Power of Attorney dated May 14, 1998 from Alex M. Cranberg to David B. Christofferson.
24(c)* Power of Attorney dated May 14, 1998 from Alex B. Campbell to David B. Christofferson.
24(d)* Power of Attorney dated May 14, 1998 from Charles J. Smith to David B. Christofferson.
24(e)* Power of Attorney dated May 14, 1998 from Hobart A. Smith to David B. Christofferson.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- - --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
24(f)* Power of Attorney dated May 14, 1998 from Jack P. Randall to David B. Christofferson.
</TABLE>
- - ------------------------
*Filed herewith.
** To be filed by Amendment.
<PAGE>
CERTIFICATE OF INCORPORATION
OF
ESENJAY EXPLORATION, INC.
The undersigned, a natural person acting as incorporator under the
General Corporation Law of the State of Delaware as the same exists or may
hereafter from time to time be amended (the "DGCL"), hereby makes this
Certificate of Incorporation for such corporation.
ARTICLE I
NAME
The name of this corporation is Esenjay Exploration, Inc. (the
"Corporation").
ARTICLE II
OFFICE/AGENT
The address of the registered office in the State of Delaware is located
at the Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801, New Castle County. The name of its registered agent at such address
is the Corporation Trust Company.
ARTICLE III
DURATION
The duration of the existence of the Corporation is perpetual.
ARTICLE IV
PURPOSES
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which a corporation may be organized
under the DGCL.
ARTICLE V
AUTHORIZED CAPITAL
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is 45,000,000, divided into classes as follows:
(A) 40,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), and (B) 5,000,000 shares of Preferred Stock, par value $.01 per
share (the "Preferred Stock").
<PAGE>
ARTICLE VI
ATTRIBUTES OF STOCK
The designations, powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, for each class of stock
of the Corporation shall be as follows:
COMMON STOCK. Each share of Common Stock shall be equal to each other
share of Common Stock and, when issued, shall be fully paid and
non-assessable, and the personal property of stockholders shall not be liable
for corporate debts. Subject to any preferential rights of the holders of
Preferred Stock, the holders of Common Stock of the Corporation shall each be
entitled to share in any dividends of the Corporation ratably, if, as, and
when declared by the Board of Directors.
PREFERRED STOCK.
Shares of Preferred Stock may be issued from time to time in one or more
series as determined by the Board of Directors. All shares of Preferred Stock
shall be of equal rank and shall be identical, except in respect of the
particulars fixed by the Board of Directors for each series as provided
herein. All shares of any one series shall be identical in all respects with
all the other shares of such series, except that shares of any one series
issued at different times may differ as to the dates from which dividends
thereon shall be cumulative.
The Board of Directors is hereby authorized, by resolution or
resolutions to provide, out of the unissued shares of Preferred Stock not
then allocated to any series of Preferred Stock, for a series of Preferred
Stock. Before any shares of any such series are issued, the Board of
Directors shall fix and determine, and is hereby expressly empowered to fix
and determine, by resolution or resolutions, the following provisions of the
shares thereof:
A. the designation of such series and the number of shares which
shall constitute such series;
B. the annual dividend rate payable on shares of such series,
expressed in a dollar amount per share, and the date or dates from which
such dividends shall commence to accrue and shall be cumulative;
C. the price or prices at which and the terms and conditions, if
any, on which shares of such series may be redeemed;
2
<PAGE>
D. the amounts payable upon shares of such series, in the event of
the voluntary or involuntary liquidation, distribution of assets (other
than payment of dividends), dissolution, or winding up of the affairs of
the Corporation;
E. the sinking funds or mandatory redemption provisions, if any, for
the redemption or purchase of shares of such series;
F. the extent of the voting powers, if any, of the shares of such
series;
G. the terms and conditions, if any, on which shares of such series
may be converted into shares of stock of the Corporation of any class or
classes; and
H. any other preferences and relative, participating, optional or
other special rights, and any qualifications, limitations or restrictions
of such preferences or rights, of shares of such series.
ARTICLE VII
BOARD OF DIRECTORS
The number of directors of this Corporation shall be no less than four
(4) and no more than fourteen (14), and such number may be determined from
time to time under the Bylaws or upon resolution of the Board of Directors.
Directors and officers need not be stockholders. In case of vacancies in the
Board of Directors, including vacancies occurring by reason of an increase in
the number of directors, a majority of the remaining members of the Board,
even though less than a quorum, may elect directors to fill such vacancies to
hold office until the next annual meeting of the stockholders or until their
successors are elected and qualify.
The Board of Directors shall be divided into three classes, as nearly
equal in number as reasonably possible, with the term of office of the first
class to expire at the annual meeting of stockholders to be held in 2000, the
term of office of the second class to expire at the annual meeting of
stockholders to be held in 1999, and the term of office of the third class to
expire at the annual meeting of stockholders to be held in 1998. At each
annual meeting of stockholders following such initial classification and
election, directors elected to succeed those directors whose terms expire
shall be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election.
The number of directors constituting the Corporation initial Board of
Directors is seven (7), and the name and mailing addresses of the individuals
who will serve as directors until the first annual meeting of stockholders or
until their successors are elected and qualify are:
CLASS I DIRECTOR WHOSE TERM WILL EXPIRE IN 2000
3
<PAGE>
Alex M. Cranberg
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78471
Michael E. Johnson
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78471
Jack P. Randall
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78471
CLASS II DIRECTOR WHOSE TERM WILL EXPIRE IN 1999
David W. Berry
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78471
Alex B. Campbell
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78471
Charles J. Smith
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78471
CLASS III DIRECTOR WHOSE TERM WILL EXPIRE IN 1998
William D. Dodge III
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78741
ARTICLE VIII
INDEMNIFICATION
A. MANDATORY INDEMNIFICATION. Each person who at any time is or was a
director or officer of the Corporation, and is threatened to be or is made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative (a
"Proceeding"), by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, member,
employee, trustee, agent or similar functionary of another
4
<PAGE>
domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or
non-profit enterprise, whether the basis of a Proceeding is an alleged action
in such person's official capacity or in another capacity while holding such
office, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the DGCL, or any other applicable law as may
from time to time be in effect (but, in the case of any such amendment or
enactment, only to the extent that such amendment or law permits the
Corporation to provide broader indemnification rights than such law prior to
such amendment or enactment permitted the Corporation to provide), except
that such person shall not be indemnified if he is convicted of a crime in a
criminal Proceeding, against all expense, liability and loss (including,
without limitation, court costs and attorneys' fees, judgments, fines, excise
taxes or penalties, and amounts paid or to be paid in settlement) actually
and reasonably incurred or suffered by such person in connection with a
Proceeding, and such indemnification shall continue as to a person who has
ceased to be a director or officer of the Corporation or a director, officer,
partner, venturer, proprietor, member, employee, trustee, agent or similar
functionary of another domestic or foreign corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit plan or other
for-profit or non-profit enterprise, and shall inure to the benefit of such
person's heirs, executors and administrators. The Corporation's obligations
under this Section A include, but are not limited to, the convening of any
meeting, and the consideration of any matter thereby, required by statute in
order to determine the eligibility of any person for indemnification.
B. PREPAYMENT OF EXPENSES. Expenses incurred by a director or officer
of the Corporation in defending a Proceeding shall be paid by the Corporation
in advance of the final disposition of such Proceeding to the fullest extent
permitted by, and only in compliance with, the DGCL or any other applicable
laws as may from time to time be in effect, including, without limitation,
any provision of the DGCL which requires, as a condition precedent to such
expense advancement, the delivery to the Corporation of an undertaking, by or
on behalf of such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is not entitled
to be indemnified under Section A of this Article VIII or otherwise.
Repayments of all amounts so advanced shall be upon such terms and
conditions, if any, as the Corporation's Board of Directors deems appropriate.
C. VESTING. The Corporation's obligation to indemnify and to prepay
expenses under Sections A and B of this Article VIII shall arise, and all
rights granted to the Corporation's directors and officers hereunder shall
vest, at the time of the occurrence of the transaction or event to which a
Proceeding relates, or at the time that the action or conduct to which such
Proceeding relates was first taken or engaged in (or omitted to be taken or
engaged in), regardless of when such Proceeding is first threatened,
commenced or completed. Notwithstanding any other provision of this
Certificate of Incorporation or the Bylaws of the Corporation, no action
taken by the Corporation, either by amendment of this Certificate of
Incorporation or the Bylaws of the Corporation or otherwise, shall diminish
or adversely affect any rights to indemnification or prepayment of expenses
granted under Sections A and B of this Article VIII which shall have become
vested as aforesaid prior to the date that such amendment or other corporate
action is effective or taken, whichever is later.
5
<PAGE>
D. ENFORCEMENT. If a claim under Section A or Section B or both
Sections A and B of this Article VIII is not paid in full by the Corporation
within thirty (30) days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit in a court of
competent jurisdiction against the Corporation to recover the unpaid amount
of the claim and, if successful in whole or in part, the claimant shall also
be entitled to be paid the expense of prosecuting such claim. It shall be a
defense to any such suit (other than a suit brought to enforce a claim for
expenses incurred in defending any Proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the DGCL, other applicable law, or
this Article VIII to indemnify the claimant for the amount claimed, but the
burden of proving such defense shall be on the Corporation. The failure of
the Corporation (including its Board of Directors, independent legal counsel,
or stockholders) to have made a determination prior to the commencement of
such suit as to whether indemnification is proper in the circumstances based
upon the applicable standard of conduct set forth in the DGCL, other
applicable law, or this Article VIII shall neither be a defense to the action
nor create a presumption that the claimant has not met the applicable
standard of conduct. The termination of any Proceeding by judgment, order,
settlement, or upon a plea of NOLO CONTENDERE or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith and
in a manner which such person reasonably believed to be in or not opposed to
the best interests of the Corporation.
E. NONEXCLUSIVE. The indemnification provided by this Article VIII
shall not be deemed exclusive of any other rights to which a person seeking
indemnification may be entitled under any statute, bylaw, other provisions of
this Certificate of Incorporation, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office.
F. PERMISSIVE INDEMNIFICATION. The rights to indemnification and
prepayment of expenses which are conferred to the Corporation's directors and
officers by Sections A and B of this Article VIII may be conferred upon any
employee or agent of the Corporation if, and to the extent, authorized by the
Board of Directors.
G. INSURANCE. The Corporation shall have power to purchase and
maintain insurance, at its expense, on behalf of any person who 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, partner, venturer,
proprietor, member, employee, trustee, agent or similar functionary of
another domestic or foreign corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other for-profit or
non-profit enterprise against any expense, liability or loss asserted against
such person and incurred by such person in any such capacity, or arising out
of such person's status as such, whether or not the Corporation would have
the power to indemnify such person against such expense, liability or loss
under the provisions of this Article VIII, the Corporation's Bylaws, the DGCL
or other applicable law.
6
<PAGE>
H. IMPLEMENTING ARRANGEMENTS. Without limiting the power of the
Corporation to procure or maintain insurance or other arrangement on behalf
of any of the persons as described in paragraph G of this Article VIII, the
Corporation may, for the benefit of persons eligible for indemnification by
the Corporation, (1) create a trust fund, (2) establish any form of
self-insurance, (3) secure its indemnity obligation by grant of a security
interest or other lien on the assets of the Corporation, or (4) establish a
letter of credit, guaranty or surety arrangement.
ARTICLE IX
LIMITED DIRECTOR LIABILITY
No director of the Corporation shall be personally liable to the
Corporation or to its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that this Article IX shall not
eliminate or limit the liability of a director:
A. for any breach of the director's duty of loyalty to the
Corporation or its stockholders;
B. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
C. under Section 174 of the DGCL, as it may hereafter be amended
from time to time, for any unlawful payment of a dividend or
unlawful stock purchase or redemption; or
D. for any transaction from which the director derived an improper
personal benefit.
If the DGCL is amended to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the DGCL, as so amended. No amendment to or repeal of
this Article IX will apply to, or have any effect on, the liability or
alleged liability of any director of the Corporation for or with respect to
any acts or omissions of the director occurring prior to such amendment or
repeal.
ARTICLE X
COMPROMISE OR ARRANGEMENT BY
CORPORATION WITH CREDITORS OR STOCKHOLDERS
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a
summary way of this Corporation or of any creditor or stockholder thereof or
on the application of any receiver or receivers appointed for this
Corporation under Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under Section 279 of Title 8 of the Delaware
Code order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority
in number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and
to any reorganization of this Corporation as a consequence of such compromise
or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the application has
been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation as the
case may be, and also on this Corporation.
7
<PAGE>
ARTICLE XI
ACTION BY WRITTEN CONSENT
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at an annual or special meeting of the
stockholders of the Corporation, and no action required to be taken or that
may be taken at any annual or special meeting of stockholders of the
Corporation may be taken without a meeting.
ARTICLE XII
INCORPORATOR
The name and mailing address of the incorporator is:
Allen T. Snyder
Porter & Hedges, L.L.P.
700 Louisiana, Suite 3500
Houston, Texas 77002-2764
I, the undersigned, being the incorporator hereinafter named, for the
purpose of forming a corporation pursuant to the DGCL, do make this
certificate, hereby declaring under the penalties of perjury, that this is my
act and deed and that the facts stated herein are true, and accordingly, set
my hand this 11th day of May, 1998.
/s/ Allen T. Snyder
-------------------------------------
Allen T. Snyder, INCORPORATOR
8
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
FRONTIER NATURAL GAS CORPORATION
The undersigned Oklahoma corporation, for the purposes of amending its
Certificate of Incorporation as provided in section 1077 of the Oklahoma General
Corporation Act, hereby certifies:
1. The name of the corporation is Frontier Natural Gas Corporation (the
"Corporation").
2. Article V of the Certificate of Incorporation of the Corporation is
amended to add the following provisions:
"Each six shares of the Company's Common Stock, par value $.01
per share, issued as of the date and time immediately preceding
May 14, 1998, the effective date of a reverse stock split (the
"Split Effective Date"), shall be automatically changed and
reclassified, as of the Split Effective Date and without further
action, into one fully paid and nonassessable share of the
Company's Common Stock, par value $.01 per share; PROVIDED,
HOWEVER, that any fractional interests resulting from such change
in classification shall be rounded upward to the next whole
share."
3. At a meeting of the Board of Directors, a resolution was duly adopted
setting forth proposed amendments to the Certificate of Incorporation of the
Corporation, declaring said amendments to be advisable and calling a meeting of
the shareholders of the Corporation for consideration thereof. Thereafter,
pursuant to said resolution of its Board of Directors, a meeting of the
shareholders of the Corporation was duly called and held, at which meeting the
necessary number of shares as required by statute were voted in favor of the
amendments.
SUCH AMENDMENT(S) WAS DULY ADOPTED IN ACCORDANCE WITH 18 O.S., Section
1077.
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Amendment to be signed by David W. Berry, its President and attested by David
B. Christofferson, its Secretary, this 14th day of May, 1998.
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
---------------------------------------------
David W. Berry, PRESIDENT
ATTEST:
/s/ David B. Christofferson
- - ----------------------------------
David B. Christofferson, SECRETARY
STATE OF TEXAS )
)
COUNTY OF HARRIS )
BEFORE ME personally appeared David W. Berry, known to me or proved to
me on the basis of satisfactory evidence to be the person whose name is
subscribed to the foregoing instrument, and known to me to be the President
of Frontier Natural Gas Corporation, an Oklahoma corporation, and
acknowledged to me that he executed said instrument for the purposes and
consideration therein expressed, and as the act of said corporation and
declared that the statements therein contained are true.
WITNESS my hand and official seal this 14th day of May, 1998.
/s/ Allison Wallace
-------------------------------------------------
NOTARY PUBLIC IN AND FOR THE
STATE OF TEXAS
/s/ Allison Wallace
-------------------------------------------------
NOTARY PUBLIC PRINTED NAME
MY COMMISSION EXPIRES: 12/7/99
--------------------------
2
<PAGE>
BYLAWS
OF
ESENJAY EXPLORATION, INC.
<PAGE>
INDEX
ARTICLE I STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Special Meetings . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3. Notice or Meetings . . . . . . . . . . . . . . . . . . . . 1
Section 1.4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.5. Adjournment. . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.6. Organization . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.7. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.8. Business at Stockholders Meetings. . . . . . . . . . . . . 3
ARTICLE II BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. Number and Term of Office. . . . . . . . . . . . . . . . . 4
Section 2.2. Chairman of the Board. . . . . . . . . . . . . . . . . . . 4
Section 2.3. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.4. Notice of Special Meetings.. . . . . . . . . . . . . . . . 4
Section 2.5. Quorum and Organization of Meetings. . . . . . . . . . . . 4
Section 2.6. Committees . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.7. Action Without Meetings. . . . . . . . . . . . . . . . . . 5
Section 2.8. Telephone Meetings . . . . . . . . . . . . . . . . . . . . 6
Section 2.9. Nominations. . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.1. Executive Officers . . . . . . . . . . . . . . . . . . . . 7
Section 3.2. Powers and Duties. . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV RESIGNATIONS, REMOVALS, AND VACANCIES . . . . . . . . . . . . . . . 7
Section 4.1. Resignations . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.2. Removals . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.3. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE V CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.1. Stock Certificates . . . . . . . . . . . . . . . . . . . . 8
Section 5.2. Transfer of Shares . . . . . . . . . . . . . . . . . . . . 8
Section 5.3. Fixing Record Date . . . . . . . . . . . . . . . . . . . . 8
Section 5.4. Lost Certificates. . . . . . . . . . . . . . . . . . . . . 9
Section 5.5. Regulations. . . . . . . . . . . . . . . . . . . . . . . . 9
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ARTICLE VI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.1. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.2. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.3. Notices and Waivers Thereof. . . . . . . . . . . . . . . .10
Section 6.4. Stock of Other Corporations or Other Interests . . . . . .10
ARTICLE VII AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .11
ii
<PAGE>
ESENJAY EXPLORATION, INC.
A DELAWARE CORPORATION
BYLAWS
ARTICLE I
STOCKHOLDERS
SECTION 1.1. ANNUAL MEETING.
An annual meeting of stockholders for the purpose of electing directors and
of transacting such other business as may come before it shall be held each year
at such date, time, and place, either within or without the State of Delaware,
as may be specified by the Board of Directors.
SECTION 1.2. SPECIAL MEETINGS.
Special meetings of stockholders for any purpose or purposes may be held at
any time only upon call of a majority of the Board of Directors, at such time
and place either within or without the State of Delaware as may be stated in the
notice.
SECTION 1.3. NOTICE OR MEETINGS.
Written notice of stockholders meetings, stating the place, date, and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten (10) days
but not more than sixty (60) days before the date of the meeting, unless a
different period is prescribed by law.
SECTION 1.4. QUORUM.
Except as otherwise provided by law or in the Certificate of Incorporation
or these Bylaws, at any meeting of stockholders, the holders of a majority of
the outstanding shares of each class of stock entitled to vote at the meeting
shall be present or represented by proxy in order to constitute a quorum for the
transaction of any business. In the absence of a quorum, a majority in interest
of the stockholders present who are entitled at the time to vote or the chairman
of the meeting may adjourn the meeting from time to time in the manner provided
in Section 1.5 of these Bylaws until a quorum shall attend.
<PAGE>
SECTION 1.5. ADJOURNMENT.
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment was taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days, or if
after the adjournment, a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 1.6. ORGANIZATION.
The Chairman of the Board, if any, or in his absence the President, or in
their absence any Vice President, shall call to order meetings of stockholders
and shall act as chairman of such meetings. The Board of Directors or, if the
Board fails to act, the stockholders may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the President, and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.
SECTION 1.7. VOTING.
Except as otherwise provided by law or in the Certificate of Incorporation
or these Bylaws and except for the election of directors, at any meeting duly
called and held at which a quorum is present, a majority of the votes cast at
such meeting upon a given question by the holders of outstanding shares of stock
of all classes of stock of the Corporation entitled to vote thereon who are
present in person or by proxy shall decide such question. At any meeting duly
called and held for the election of directors at which a quorum is present,
directors shall be elected by a plurality of the votes cast by the holders
(acting as such) of shares of stock of the Corporation entitled to elect such
directors. The Board of Directors in advance of any stockholders' meeting may
appoint one or more inspectors to act at the meeting or any adjournment thereof.
If inspectors are not so appointed, the person presiding at a stockholders'
meeting may, and on the request of any stockholder entitled to vote thereat
shall, appoint one or more inspectors. In case any person appointed as
inspector fails to appear or act, the vacancy may be filled by the Board in
advance of the meeting or at the meeting by the person present thereat. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to discharge the duties of inspector at such meeting with
strict impartiality and according to the best of his ability.
2
<PAGE>
SECTION 1.8. BUSINESS AT STOCKHOLDERS MEETINGS.
At an annual or special meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before a meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) brought before the meeting by or at the direction of
the Board of Directors, (c) properly brought before an annual meeting by a
stockholder or (d) if, and only if, the notice of a special meeting provides for
business to be brought before the meeting by stockholders, properly brought
before the meeting by a stockholder. For business to be properly brought before
the meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than forty (40) days
prior to the meeting; provided, however, that in the event less than forty-five
(45) days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the tenth day following the day on which such notice of
the date of the meeting was mailed or such disclosure was made, but not less
than five days prior to the meeting. A stockholder's notice to the Secretary
shall set forth (a) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting,
(b) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.8. The
chairman of a meeting shall, if the facts warrant, determine that business was
not properly brought before the meeting and in accordance with the provisions of
this Section 1.8, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1. NUMBER AND TERM OF OFFICE.
The business, property, and affairs of the Corporation shall be managed by
or under the direction of a Board of at least four (4) and no more than fourteen
(14) directors; provided, however, that the Board, by resolution adopted by vote
of a majority of the then authorized number of directors, may increase or
decrease the number of directors within such minimum and maximum limitations.
The directors shall be elected by the holders of shares entitled to vote thereon
at the annual meeting of stockholders, and each shall serve as provided herein
and until his respective successor has been elected and qualified. The
directors shall be divided into three (3) classes, as nearly equal in number as
reasonably possible, with the terms of office of the first class to expire at
3
<PAGE>
the 2000 annual meeting of stockholders, the term of office of the second class
to expire at the 1999 annual meeting of stockholders and the term of office of
the third class to expire at the 1998 annual meeting of stockholders. At each
annual meeting of stockholders following such initial classification and
election, directors elected to succeed those directors whose terms expire shall
be elected for a term of office to expire at the third succeeding annual meeting
of stockholders after their election.
SECTION 2.2. CHAIRMAN OF THE BOARD.
The directors may elect one of their members to be Chairman of the Board of
Directors. The Chairman shall be subject to the control of and may be removed
by the Board of Directors. He shall perform such duties as may from time to
time be assigned to him by the Board.
SECTION 2.3. MEETINGS.
The annual meeting of the Board of Directors, for the election of officers
and the transaction of such other business as may come before the meeting, shall
be held without notice at the same place as, and immediately following, the
annual meeting of the stockholders.
Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time and
place as shall be designated in the notice of the meeting whenever called by the
Chairman of the Board, the President or by a majority of the directors then in
the office.
SECTION 2.4. NOTICE OF SPECIAL MEETINGS.
The Secretary, or in his absence, any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail or overnight courier at least five
(5) days before the meeting, or by facsimile, telegram, cable, or personal
service at least three (3) days before the meeting. Unless otherwise stated in
the notice thereof, any and all business may be transacted at any meeting
without specification of such business in the notice.
SECTION 2.5. QUORUM AND ORGANIZATION OF MEETINGS.
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except
as otherwise provided by law or in the Certificate of Incorporation or these
Bylaws, a majority of the directors present at any meeting at which a quorum is
present may decide any question brought before such meeting.
4
<PAGE>
Meetings shall be presided over by the Chairman of the Board, if any, or in
his absence by the President, or in the absence of both by such other person
as the directors may select. The Secretary of the Corporation shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
SECTION 2.6. COMMITTEES.
The Board of Directors may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified as members of a committee and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent provided in the resolution of the Board of Directors, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business, property, and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have power or authority in reference to
amending the Certificate of Incorporation of Corporation (except that a
committee may, to the extent authorize in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
pursuant to authority expressly granted to the Board of Directors by the
Corporation's Certificate of Incorporation, fix any of the preferences or rights
of such shares relating to dividends, redemption, dissolution, any distribution
of assets of the Corporation, or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the same
or any other class or classes of stock of the Corporation), adopting an
agreement of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of the State of Delaware, recommending to the stockholders the
sale, lease, or exchange of all or substantially all of the Corporation's
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of dissolution, or amending these Bylaws; and,
unless the resolution expressly so provided, no such committee shall have the
power or authority to declare a dividend, to authorize the issuance of stock, or
to adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of the State of Delaware. Each committee which may be
established by the Board of Directors pursuant to these Bylaws may fix its own
rules and procedures. Notice of meetings of committees, other than of regular
meetings provided for by the rules, shall be given to committee members. All
action taken by committees shall be recorded in minutes of the meetings.
SECTION 2.7. ACTION WITHOUT MEETINGS.
Nothing contained in these Bylaws shall be deemed to restrict the power of
members of the Board of Directors or of any committee designated by the Board to
take any action required or permitted to be taken by them without a meeting.
5
<PAGE>
SECTION 2.8. TELEPHONE MEETINGS.
Nothing contained in these Bylaws shall be deemed to restrict the power of
members of the Board of Directors, or any committee designated by the Board, to
participate in a meeting of the Board, or committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
SECTION 2.9. NOMINATIONS.
Nominations for the election of directors shall be made by the Board of
Directors or by any stockholder entitled to vote in the election of directors
generally. However, any stockholder entitled to vote in the election of
directors generally may nominate one or more persons for election as directors
at a meeting only if timely notice of such stockholder's intent to make such
nomination or nominations has been given in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
fewer than forty (40) days prior to the meeting; provided, however, that in the
event that less than forty-five (45) days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received no later than the close of business
on the tenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. Each such notice shall
set forth (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote for the election of directors on the date of such notice and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholders as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Corporation if so elected.
If the chairman of the meeting for the election of directors determines
that a nomination of any candidate for election as a director at such meeting
was not made in accordance with the applicable provisions of this Section 2.9,
such nomination shall be void.
6
<PAGE>
ARTICLE III
OFFICERS
SECTION 3.1. EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a President, one or more
Vice Presidents, a Treasurer, and a Secretary, each of whom shall be elected by
the Board of Directors. The Board of Directors may elect or appoint such other
officers (including a Controller and one or more Assistant Treasurers and
Assistant Secretaries) as it may deem necessary or desirable. Each officer
shall hold office for such term as may be prescribed by the Board of Directors
from time to time. Any person may hold at one time two or more offices.
SECTION 3.2. POWERS AND DUTIES.
The Chairman of the Board, if any, or, in the absence of the Chairman of
the Board, the President, shall preside at all meetings of the stockholders and
of the Board of Directors. The President shall be the chief executive officer
of the Corporation. In the absence of the President, a Vice President appointed
by the President or, if the President fails to make such appointment, by the
Board, shall perform all the duties of the President. The officers and agents
of the Corporation shall each have such powers and authority and shall perform
such duties in the management of the business, property, and affairs of the
Corporation as generally pertain to their respective offices, as well as such
power and authorities and such duties as from time to time may be prescribed by
the Board of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
SECTION 4.1. RESIGNATIONS.
Any director or officer of the Corporation, or any member of any committee,
may resign at any time by giving written notice to the Board of Directors, the
President, or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein or, if the time be not specified therein,
then upon receipt thereof. The acceptance of such resignation shall not be
necessary to make it effective.
7
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SECTION 4.2. REMOVALS.
The Board of Directors, by a vote of not less than a majority of the entire
Board, at any meeting thereof or by written consent, at any time may, to the
extent permitted by law, remove with or without cause from office or terminate
the employment of any officer or member of any committee and may, with or
without cause, disband any committee. Any director or the entire Board of
Directors may be removed, with cause, by the holders of a majority of the shares
entitled at the time to vote at an election of directors.
SECTION 4.3. VACANCIES.
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from increase in the number of directors, may be filled
at any time by a majority of the directors then in office (even though less than
a quorum remains) or, in the case of any vacancy in the office of any director,
by the stockholders who are at the time entitled to vote at an election of
directors, and, subject to the provisions of this Article IV, the person so
chosen shall hold office until his successor shall have been elected and
qualified.
ARTICLE V
CAPITAL STOCK
SECTION 5.1. STOCK CERTIFICATES.
The certificates for shares of the capital stock of the Corporation shall
be in such form as shall be prescribed by law and approved, from time to time,
by the Board of Directors.
SECTION 5.2. TRANSFER OF SHARES.
Shares of the capital stock of the Corporation may be transferred on the
books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
SECTION 5.3. FIXING RECORD DATE.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action.
the Board of Directors may fix, in
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advance, a record date, which, unless otherwise provided by law, shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other actions.
SECTION 5.4. LOST CERTIFICATES.
The Board of Directors or any transfer agent of the Corporation may
direct a new certificate or certificates representing stock of the
Corporation to be issued in place of any certificate or certificates
theretofore issued by the Corporation, alleged to have been lost, stolen, or
destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen, or destroyed. When authorizing
such issue of a new certificate or certificates, the Board of Directors (or
any transfer agent of the Corporation authorized to do so by a resolution of
the Board of Directors) may, in its discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as the Board of Directors (or any transfer
agent so authorized) shall direct to indemnify the Corporation against any
claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen, or destroyed or the issuance
of such new certificate or certificates, and such requirement may be general
or confined to specific instances.
SECTION 5.5. REGULATIONS.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issuance,
transfer, registration, cancellation, and replacement of certificates
representing stock of the Corporation.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. CORPORATE SEAL.
The corporate seal shall have inscribed thereon the name of the Corporation
and shall be in such form as may be approved from time to time by the Board of
Directors.
SECTION 6.2. FISCAL YEAR.
The fiscal year of the Corporation shall begin on the 1st day of January in
each year and terminate on the 31st day of December in each succeeding year.
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SECTION 6.3. NOTICES AND WAIVERS THEREOF.
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these Bylaws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail or overnight courier, or, in the case of directors or
officers, by facsimile, telegram, or cable, addressed to such address as appears
on the books of the Corporation. Any notice given by facsimile, telegram, or
cable shall be deemed to have been given when it shall have been transmitted and
any notice given by mail or overnight courier, shall be deemed to have been
given when it shall have been deposited with an overnight courier, or in the
United States mail with postage thereon prepaid. Whenever any notice is
required to be given by law, the Certificate of Incorporation, or these Bylaws,
a written waiver thereof, signed by the person entitled to such notice, whether
before or after the meeting or the time stated therein, shall be deemed
equivalent in all respects to such notice to the full extent permitted by law.
SECTION 6.4. STOCK OF OTHER CORPORATIONS OR OTHER INTERESTS.
Unless otherwise ordered by the Board of Directors, the President, the
Secretary, and such attorneys or agents of the Corporation as may be from time
to time authorized by the Board of Directors or the President, shall have full
power and authority on behalf of this Corporation to attend and to act and vote
in person or by proxy at any meeting of the holders of securities of any
corporations or other entity in which this Corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President, the Secretary, or such attorneys or
agents, may also execute and deliver on behalf of the Corporation powers of
attorney, proxies, consents, waivers, and other instruments relating to the
shares or securities owned or held by this Corporation.
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ARTICLE VII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the Bylaws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board of Directors shall have power equal in all
respects to that of the stockholders to adopt, amend, or repeal the Bylaws by
vote of not less than a majority of the entire Board. However, any Bylaws
adopted by the Board may be amended or repealed by vote of the holders of a
majority of the shares entitled at the time to vote for the election of
directors.
ADOPTED AND APPROVED as of this 14th day of May, 1998.
/s/ David B. Christofferson
------------------------------------
David B. Christofferson, SECRETARY
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THE REGISTERED HOLDER OF THIS PURCHASE OPTION, BY ITS ACCEPTANCE HEREOF,
AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT
AS HEREIN PROVIDED.
NOT EXERCISABLE PRIOR TO AUGUST 8, 1997. VOID AFTER 5:00 P.M. EASTERN TIME,
AUGUST 8, 2001.
UNIT PURCHASE OPTION
FOR THE PURCHASE OF
135,000 UNITS
OF
FRONTIER NATURAL GAS CORPORATION
(AN OKLAHOMA CORPORATION)
1. PURCHASE OPTION.
THIS CERTIFIES THAT, in consideration of one hundred dollars
($100.00) duly paid by or on behalf of Gaines, Berland Inc. ("Holder"), as
registered owner of this Purchase Option, to Frontier Natural Gas Corporation
("Company"), Holder is entitled, at any time or from time to time at or after
August 8, 1997 ("Commencement Date"), and at or before 5:00 p.m., Eastern
Time, August 8, 2001, ("Expiration Date"), but not thereafter, to subscribe
for, purchase and receive, in whole or in part, up to 135,000 Units of
securities of the Company ("Units"). Each Unit consists of three (3) shares
of Common Stock of the Company, $.01 par value ("Common Stock") and three (3)
Common Stock Purchase Warrants, each Warrant to purchase one share of Common
Stock ("Warrant(s)") during the period commencing on one year and expiring
five years from the effective date ("Effective Date") of the registration
statement on Form SB-2 (File No. 333-06261) ("Registration Statement")
pursuant to which the Company has registered Units, shares of Common Stock
and Warrants to purchase common stock. Each Warrant is the same as the
warrants that have been registered for sale to the public ("Public Warrants")
pursuant to the Registration Statement. The Units, shares of Common Stock and
Warrants are sometimes collectively referred to herein as the "Securities".
If the Expiration Date is a day on which banking institutions are authorized
by law to close, then this Purchase Option may be exercised on the next
succeeding day which is not such a day in accordance with the terms herein.
During the period ending on the Expiration Date, the Company agrees not to
take any action that would terminate the Purchase Option. This Purchase
Option is initially exercisable at $7.948 per Unit purchased; provided,
however, that, upon the occurrence of any of the events specified in Section
6 hereof, the rights granted by this Purchase Option, including the exercise
price and the number of Units to be received upon such exercise, shall be
adjusted
<PAGE>
as therein specified. The term "Exercise Price" shall mean the initial
exercise price or the adjusted exercise price, depending on the context.
2. EXERCISE.
2.1 EXERCISE FORM. In order to exercise this Purchase Option, the
exercise form attached hereto must be duly executed and completed and
delivered to the Company, together with this Purchase Option and payment of
the Exercise Price in cash or by certified check or official bank check for
the Securities being purchased. If the subscription rights represented hereby
shall not be exercised at or before 5:00 p.m., Eastern time, on the
Expiration Date, this Purchase Option shall become and be void without
further force or effect, and all rights represented hereby shall cease and
expire.
2.2 CASHLESS EXERCISE.
2.2.1 DETERMINATION OF AMOUNT. In lieu of the payment of the
Exercise Price in the manner required by Section 2.1, the Holder shall have
the right (but not the obligation) to pay the Exercise Price for the
Securities being purchased with this Purchase Option upon exercise by the
surrender to the Company of any exercisable but unexercised portion of this
Purchase Option having a "Value" (as defined below), at the close of trading
on the last trading day immediately preceding the exercise of this Purchase
Option, equal to the Exercise Price multiplied by the number of Units being
purchased upon exercise ("Cashless Exercise Right"). The sum of (a) the
number of Units being purchased upon exercise of the non-surrendered portion
of this Purchase Option pursuant to this Cashless Exercise Right and (b) the
number of Units underlying the portion of this Purchase Option being
surrendered, shall not in any event be greater than the total number of Units
purchasable upon the complete exercise of this Purchase Option if the
Exercise Price were paid in cash. The "Value" of the portion of the Purchase
Option being surrendered shall equal the remainder derived from subtracting
(a) the Exercise Price multiplied by the number of Units underlying the
portion of this Purchase Option being surrendered from (b) the Market Price
of the Units multiplied by the number of Units underlying the portion of this
Purchase Option being surrendered. As used herein, the term "Market Price" at
any date shall be deemed to be the addition of the Common Stock and Public
Warrants on such date, or, in case no such reported sales take place on such
day, the average of the last reported sale prices for the immediately
preceding three trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock and Public Warrants
are listed or admitted to trading, or, if the Common Stock and Public
Warrants are not listed or admitted to trading on any national securities
exchange or if any such exchange on which the Common Stock and Public
Warrants are listed is not their respective principal trading market, the
last reported sale prices as furnished by the NASD through the Nasdaq
National Market or SmallCap Market, or, if applicable, the OTC Bulletin
Board, or if the Common Stock and Public Warrants are not listed or admitted
to trading on the Nasdaq National Market or SmallCap Market or OTC Bulletin
Board or similar organization, as determined in good faith by resolution of
the Board of Directors of the Company, based on the best information
available to it.
2.2.2. MECHANICS OF CASHLESS EXERCISE. The Cashless Exercise Right
may be exercised by the Holder on any business day on or after the
Commencement Date and not later
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than the Expiration Date by delivering the Purchase Option with a duly
executed exercise form attached hereto with the cashless exercise section
completed to the Company, exercising the Cashless Exercise Right and
specifying the total number of Units the Holder will purchase pursuant to
such Cashless Exercise Right.
3. TRANSFER.
3.1 GENERAL RESTRICTIONS. The registered Holder of this Purchase
Option, by its acceptance hereof, agrees that it will not sell, transfer or
assign or hypothecate this Purchase Option prior to the Commencement Date to
anyone other than (i) an officer of Gaines, Berland Inc. ("Underwriter") or
an officer or partner of any Selected Dealer or member of the underwriting
syndicate in connection with the Company's public offering with respect to
which this Purchase Option has been issued, or (ii) any Selected Dealer or
member of the underwriting syndicate. On and after the Commencement Date,
transfers to others may be made subject to compliance with or exemptions from
applicable securities laws. In order to make any permitted assignment, the
Holder must deliver to the Company the assignment form attached hereto duly
executed and completed, together with the Purchase Option and payment of all
transfer taxes, if any, payable in connection therewith. The Company shall
immediately transfer this Purchase Option on the books of the Company and
shall execute and deliver a new Purchase Option or Purchase Options of like
tenor to the appropriate assignee(s) expressly evidencing the right to
purchase the aggregate number of Units purchasable hereunder or such portion
of such number as shall be contemplated by any such assignment.
3.2 RESTRICTIONS IMPOSED BY THE ACT. This Purchase Option and the
Securities underlying this Purchase Option shall not be transferred unless
and until (i) the Company has received the opinion of counsel for the Holder
that this Purchase Option or the Securities, as the case may be, may be
transferred pursuant to an exemption from registration under the Act and
applicable state law, the availability of which is established to the
reasonable satisfaction of the Company (the Company hereby agreeing that the
opinion of Graubard Mollen & Miller shall be deemed satisfactory evidence of
the availability of an exemption), or (ii) a registration statement relating
to such Purchase Option or Securities, as the case may be, has been filed by
the Company and declared effective by the Securities and Exchange Commission
and is current and compliance with applicable state law.
4. NEW PURCHASE OPTIONS TO BE ISSUED.
4.1 PARTIAL EXERCISE OR TRANSFER. Subject to the restrictions in
Section 3 hereof, this Purchase Option may be exercised or assigned in whole
or in part. In the event of the exercise or assignment hereof in part only,
upon surrender of this Purchase Option for cancellation, together with the
duly executed exercise or assignment form and funds sufficient to pay the
Exercise Price, the Company shall cause to be delivered to the Holder without
charge a new Purchase Option of like tenor to this Purchase Option in the
name of the Holder evidencing the right of the Holder to purchase the
aggregate number of Units purchasable hereunder as to which this Purchase
Option has not been exercised or assigned.
4.2 LOST CERTIFICATE. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Purchase Option and of reasonably satisfactory
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indemnification, the Company shall execute and deliver a new Purchase Option
of like tenor and date. Any such new Purchase Option executed and delivered as
a result of such loss, theft, mutilation or destruction shall constitute a
substitute contractual obligation on the part of the Company.
5. REGISTRATION RIGHTS.
5.1 DEMAND REGISTRATION.
5.1.1 GRANT OF RIGHT. The Company, upon written demand ("Initial
Demand Notice") of the Holder(s) of at least 51% of the Purchase Options
and/or the underlying Units ("Majority Holders"), agrees to register on one
occasion, all or any portion of the Purchase Options requested by the
Majority Holders in the Initial Demand Notice and all of the Securities
underlying such Purchase Options, including the Units, the Common Stock, the
Warrants and the Common Stock underlying the Warrants (collectively the
"Registrable Securities"). On such occasion, the Company will file a
Registration Statement covering the Registrable Securities within sixty days
after receipt of the Initial Demand Notice and use its best efforts to have
such registration statement declared effective promptly thereafter. Should
this registration or the effectiveness thereof be delayed by the Company, the
exercisability of the Purchase Options shall be extended for a period of time
equal to the delay in registering the Registrable Securities; provided,
however, that such extension date shall not extend beyond five years from the
Effective Date. Moreover, if the Company fails to comply with the provisions
of this Section 5.1.1, the Company shall, in addition to any other equitable
or other relief available to the Holder(s), be liable for any and all
incidental, special and consequential damages sustained by the Holder(s). The
demand for registration may be made at any time during a period of four years
beginning one year from the Effective Date. The Company covenants and agrees
to give written notice of its receipt of any Initial Demand Notice by any
Holder(s) to all other registered Holders of the Purchase Options and/or the
Registrable Securities within ten days from the date of the receipt of any
such Initial Demand Notice.
5.1.2 TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall pay
any and all underwriting commissions and the expenses of any legal counsel
selected by the Holders to represent them in connection with the sale of the
Registrable Securities. The Company agrees to use its best efforts to cause
the filing required herein to become effective promptly and to qualify or
register the Registrable Securities in such states as are reasonably requested
by the Holder(s); provided, however, that in no event shall the Company be
required to register the Registrable Securities in a state in which such
registration would cause (i) the Company to be obligated to register or
license to do business in such state, or (ii) the principal stockholders of
the Company to be obligated to escrow their shares of capital stock of the
Company. The Company shall cause any registration statement filed pursuant to
the demand rights granted under Section 5.1.1 to remain effective for a
period of at least nine consecutive months from the date that the Holders of
the Registrable Securities covered by such registration statement are first
given the opportunity to sell all of such securities.
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<PAGE>
5.2 "PIGGY-BACK" REGISTRATION.
5.2.1 GRANT OF RIGHT. In addition to the demand right of
registration, the Holders of the Purchase Options shall have the right for a
period of six years commencing one year from the Effective Date, to include
the Registrable Securities as part of any other registration of securities
filed by the Company (other than in connection with a transaction
contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8).
5.2.2 TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the Holders shall
pay any and all underwriting commissions and the expenses of any legal
counsel selected by the Holders to represent them in connection with the sale
of the Registrable Securities. In the event of such a proposed registration,
the Company shall furnish the then Holders of outstanding Registrable
Securities with not less than thirty days written notice prior to the
proposed date of filing of such registration statement. Such notice to the
Holders shall continue to be given for each registration statement filed by
the Company until such time as all of the Securities have been sold by the
Holder. The holders of the Securities shall exercise the "piggy-back" rights
provided for herein by giving written notice, within thirty (30) days of the
receipt of the Company's notice of its intention to file a registration
statement. The Company shall cause any registration statement filed pursuant
to the above "piggyback" rights to remain effective for at least nine months
from the date that the Holders of the Securities are first given the
opportunity to sell all of such securities.
5.3 GENERAL TERMS.
5.3.1 INDEMNIFICATION. The Company shall indemnify the Holder(s)
of the Securities to be sold pursuant to any registration statement hereunder
and each person, if any, who controls such Holders within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange Act of
1934, as amended ("Exchange Act"), against all loss, claim, damage, expense
or liability (including all reasonable attorneys' fees and other expenses
reasonably incurred in investigating, preparing or defending against any
claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only
to the same extent and with the same effect as the provisions pursuant to
which the Company has agreed to indemnify the Underwriter contained in
Section 5 of the Underwriting Agreement between the Underwriter and the
Company, dated the Effective Date. The Holder(s) of the Securities to be sold
pursuant to such registration statement, and their successors and assigns,
shall severally, and not jointly, indemnify the Company, against all loss,
claim, damage, expense or liability (including all reasonable attorneys' fees
and other expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may become subject
under the Act, the Exchange Act or otherwise, arising from information
furnished by or on behalf of such Holders, or their successors or assigns, in
writing, for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained in Section 5 of
the Underwriting Agreement pursuant to which the Underwriter has agreed to
indemnify the Company.
5.3.2 EXERCISE OF WARRANTS. Nothing contained in this Purchase
Option shall be construed as requiring the Holder(s) to exercise their
Purchase Options or Warrants prior to or after the initial filing of any
registration statement or the effectiveness thereof.
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<PAGE>
5.3.3 EXCLUSIVITY. The Company shall not permit the inclusion of
any securities other than the Registrable Securities to be included in any
registration statement filed pursuant to Section 5.1 hereof without the prior
written consent of the Majority Holders of the Securities.
5.3.4 DOCUMENTS DELIVERED TO HOLDERS. The Company shall furnish
to each Holder participating in any of the foregoing offerings and to each
underwriter of any such offering, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and, if such
registration includes an underwritten public offering, an opinion dated the
date of the closing under any underwriting agreement related thereto), and
(ii) a "cold comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten public
offering, a letter dated the date of the closing under the underwriting
agreement) signed by the independent public accountants who have issued a
report on the Company's financial statements included in such registration
statement, in each case covering substantially the same matters with respect
to such registration statement (and the prospectus included therein) and, in
the case of such accountants' letter, with respect to events subsequent to
the date of such financial statements, as are customarily covered in opinions
of issuer's counsel and in accountants' letters delivered to underwriters in
underwritten public offerings of securities. The Company shall also deliver
promptly to each Holder participating in the offering requesting the
correspondence and memoranda described below and to the managing underwriter
copies of all correspondence between the Commission and the Company, its
counsel or auditors and all memoranda relating to discussions with the
Commission or its staff with respect to the registration statement and permit
each Holder and underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the
Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.
5.3.5 UNDERWRITING AGREEMENT. Upon a request for registration
pursuant to Section 5.1, the Company shall enter into an underwriting
agreement with the managing underwriter(s) selected by any Holders whose
Registrable Securities are being registered pursuant to this Section 5. Such
agreement shall be reasonably satisfactory in form and substance to the
Company, each Holder and such managing underwriters, and shall contain such
representations, warranties and covenants by the Company and such other terms
as are customarily contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Securities and may, at their
option, require that any or all the representations, warranties and covenants
of the Company to or for the benefit of such underwriters shall also be made
to and for the benefit of such Holders. Such Holders shall not be required to
make any representations or warranties to or agreements with the Company or
the underwriters except as they may relate to such Holders, their shares and
their intended methods of distribution.
5.3.6 DOCUMENTS TO BE DELIVERED BY HOLDER(S). Each of the
Holder(s) participating in any of the foregoing offerings shall furnish to
the Company a completed and
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executed questionnaire provided by the Company requesting information
customarily sought of selling securityholders.
6. ADJUSTMENTS.
6.1 ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES. The
Exercise Price and the number of Units underlying the Purchase Option shall
be subject to adjustment from time to time as hereinafter set forth:
6.1.1 STOCK DIVIDENDS - SPLIT-UPS. If after the date hereof, and
subject to the provisions of Section 6.2 below, the number of outstanding
shares of Common Stock is increased by a stock dividend payable in shares of
Common Stock or by a split-up of shares of Common Stock or other similar
event, then, on the effective date of such stock dividend or split-up, the
number of Units purchasable hereunder shall be increased in proportion to
such increase in outstanding shares.
6.1.2 AGGREGATION OF SHARES. If after the date hereof, and
subject to the provisions of Section 6.2, the number of outstanding shares of
Common Stock is decreased by a consolidation, combination or
reclassification of shares of Common Stock or other similar event, then, upon
the effective date of such consolidation, combination or reclassification,
the number of Units purchasable hereunder shall be decreased in proportion to
such decrease in outstanding shares.
6.1.3 ADJUSTMENTS IN EXERCISE PRICE. Whenever the number of Units
purchasable upon the exercise of this Purchase Option is adjusted, as
provided in this Section 6.1, the Exercise Price shall be adjusted (to the
nearest cent) by multiplying such Exercise Price immediately prior to such
adjustment by a fraction (x) the numerator of which shall be the number of
Units purchasable upon the exercise of this Purchase Option immediately prior
to such adjustment, and (y) the denominator of which shall be the number of
Units so purchasable immediately thereafter.
6.1.4 REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. If
after the date hereof any capital reorganization or reclassification of the
Common Stock of the Company, or consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its assets to
another corporation or other similar event shall be effected, then, as a
condition of such reorganization, reclassification, consolidation, merger, or
sale, lawful and fair provision shall be made whereby the Holders shall
thereafter have the right to purchase and receive, upon the basis and upon
the terms and conditions specified in the Purchase Option and in lieu of the
securities of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented thereby, such shares of stock,
securities, or assets as may be issued or payable with respect to or in
exchange for the number of securities equal to the number of securities
immediately theretofore purchasable and receivable upon the exercise of the
rights represented by the Purchase Option, had such reorganization,
reclassification, consolidation, merger, or sale not taken place and in such
event appropriate provision shall be made with respect to the rights and
interests of the Holders to the end that the provisions hereof (including,
without limitation, provisions for adjustments of the Exercise Price and of
the number of Units purchasable upon the exercise of the Purchase Option)
shall thereafter be applicable,
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as nearly as may be in relation to any share of stock, securities, or assets
thereafter deliverable upon the exercise hereof. The Company shall not effect
any such consolidation, merger, or sale unless prior to the consummation
thereof the successor corporation (if other than the Company) resulting from
such consolidation or merger, or the corporation purchasing such assets,
shall assume by written instrument executed and delivered to the Holders
evidencing its obligation to deliver such shares of stock, securities, or
assets as, in accordance with the foregoing provisions, such Holders may be
entitled to purchase.
6.1.5 CHANGES IN FORM OF PURCHASE OPTION. This form of Purchase
Option need not be changed because of any change pursuant to this Section,
and Purchase Options issued after such change may state the same Exercise
Price and the same number of Units as are stated in the Purchase Options
initially issued pursuant to this Agreement. The acceptance by any Holder of
the issuance of new Purchase Options reflecting a required or permissive
change shall not be deemed to waive any rights to a prior adjustment or the
computation thereof.
6.2 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be
required to issue certificates representing fractions of Units, shares of
Common Stock or Warrants upon the exercise or transfer of the Purchase
Option, nor shall it be required to issue scrip or pay cash in lieu of any
fractional interests, it being the intent of the parties that all fractional
interests shall be eliminated by rounding any fraction up or down to the
nearest whole number of Warrants, shares of Common Stock or other securities,
properties or rights.
7. RESERVATION AND LISTING. The Company shall at all times reserve and
keep available out of its authorized shares of Common Stock, solely for the
purpose of issuance upon exercise of the Purchase Options, Units or the
Warrants, such number of shares of Common Stock or other securities,
properties or rights as shall be issuable upon the exercise thereof. The
Company covenants and agrees that, upon exercise of the Purchase Options and
payment of the Exercise Price therefor, all shares of Common Stock and other
securities issuable upon such exercise shall be duly and validly issued,
fully paid and non-assessable and not subject to preemptive rights of any
stockholder. The Company further covenants and agrees that upon exercise of
the Warrants underlying the Units included in this Purchase Option and
payment of the respective Warrant exercise price therefor, all shares of
Common Stock and other securities issuable upon such exercises shall be duly
and validly issued, fully paid and non-assessable and not subject to
preemptive rights of any stockholder. As long as the Purchase Options shall be
outstanding, the Company shall use its best efforts to cause all (i) Units,
(ii) Common Stock and (iii) Warrants, issuable upon exercise of the Purchase
Options to be listed (subject to official notice of issuance) on all
securities exchanges (or, if applicable on Nasdaq) on which the Units, Common
Stock or the Public Warrants issued to the public in connection herewith are
then listed and/or quoted.
8. CERTAIN NOTICE REQUIREMENTS.
8.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be
construed as conferring upon the Holders the right to vote or consent or to
receive notice as a stockholder for the election of directors or any other
matter, or as having any rights whatsoever as a stockholder of the Company.
If, however, at any time prior to the expiration of the Purchase Options and
their exercise, any of the events described in Section 8.2 shall occur, then,
in one or more of said events, the Company shall give notice of such event at
least fifteen days prior to the
8
<PAGE>
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
conversion or exchange of securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of the closing of the
transfer books, as the case may be.
8.2 EVENTS REQUIRING NOTICE. The Company shall be required to give the
notice described in this Section 8 upon, one or more of the following events:
(i) if the Company shall take a record of the holders of its shares of Common
Stock for the purpose of entitling them to receive a dividend or distribution
payable otherwise than in cash, or a cash dividend or distribution payable
otherwise than out of retained earnings, as indicated by the accounting
treatment of such dividend or distribution on the books of the Company, or
(ii) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible
into or exchangeable for shares of capital stock of the Company, or any
option, right or warrant to subscribe therefor, or (iii) a dissolution,
liquidation or winding up of the Company (other than in connection with a
consolidation or merger) or a sale of all or substantially all of its
property, assets and business shall be proposed.
8.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall, promptly
after an event requiring a change in the Exercise Price pursuant to Section
6.1 hereof, send notice to the Holders of such event and change ("Price
Notice"). The Price Notice shall describe the event causing the change and
the method of calculating same and shall be certified as being true and
accurate by the Company's President and Chief Financial Officer.
8.4 TRANSMITTAL OF NOTICES. All notices, requests, consents and other
communications under this Purchase Option shall be in writing and shall be
deemed to have been duly made on the date of delivery if delivered personally
or sent by overnight courier, with acknowledgement of receipt to the party to
which notice is given, or on the fifth day after mailing if mailed to the
party to whom notice is to be given, by registered or certified mail, return
receipt requested, postage prepaid and properly addressed as follows: (i) if
to the registered Holder of the Purchase Option, to the address of such
Holder as shown on the books of the Company, or (ii) if to the Company, to
its principal executive office.
9. MISCELLANEOUS.
9.1 AMENDMENTS. The Company and the Underwriter may from time to time
supplement or amend this Purchase Option without the approval of any of the
Holders in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
other provisions herein, or to make any other provisions in regard to matters
or questions arising hereunder which the Company and the Underwriter may deem
necessary or desirable and which the Company and the Underwriter deem shall
not adversely affect the interest of the Holders. All other modifications or
amendments shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9
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9.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any of the terms or provisions of this
Purchase Option.
9.3 ENTIRE AGREEMENT. This Purchase Option (together with the other
agreements and documents being delivered pursuant to or in connection with
this Purchase Option) constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof, and supersedes all prior
agreements and understandings of the parties, oral and written, with respect
to the subject matter hereof.
9.4 BINDING EFFECT. This Purchase Option shall inure solely to the
benefit of and shall be binding upon, the Holder and the Company and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or
claim under or in respect of or by virtue of this Purchase Option or any
provisions herein contained.
9.5 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Purchase Option
shall be governed by and construed and enforced in accordance with the law of
the State of New York, without giving effect to principles of conflicts of
law. The Company hereby agrees that any action, proceeding or claim against
it arising out of, or relating in any way to this Purchase Option shall be
brought and enforced in the courts of the State of New York or the United
States District Court for the Southern District of New York, and irrevocably
submits to such jurisdiction, which jurisdiction shall be exclusive. The
Company hereby waives any objection to such exclusive jurisdiction and that
such courts represent an inconvenient forum. Any process or summons to be
served upon the Company may be served by transmitting a copy thereof by
registered or certified mail, return receipt requested, postage prepaid,
addressed to it at the address set forth in Section 8 hereof. Such mailing
shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim. The Company agrees that the
prevailing party(ies) in any such action shall be entitled to recover from
the other party(ies) all of its reasonable attorneys' fees and expenses
relating to such action or proceeding and or incurred in connection with the
preparation therefor.
9.6 WAIVER, ETC. The failure of the Company or the Holder to at any time
enforce any of the provisions of this Purchase Option shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Purchase Option or any provision hereof or the right of the
Company of any Holder to thereafter enforce each and every provision of this
Purchase Option. No waiver of any breach, non-compliance or non-fulfillment
of any of the provisions of this Purchase Option shall be effective unless
set forth in a written instrument executed by the party or parties against
whom or which enforcement of such waiver is sought; and no waiver of any such
breach, non-compliance or non-fulfillment shall be construed or deemed to be
a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
9.7 EXECUTION IN COUNTERPARTS. This Purchase Option may be executed in
one or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of
which taken together shall constitute one and the same agreement, and shall
become effective when one or more counterparts has been signed by each of the
parties hereto and delivered to each of the other parties hereto.
10
<PAGE>
9.8 EXCHANGE AGREEMENT. As a condition of the Holder's receipt and
acceptance of this Purchase Option Holder agrees that, at any time prior to
the complete exercise of this Purchase Option by Holder, if the Company and
the Underwriter enter into an agreement ("Exchange Agreement") pursuant to
which they agree that all outstanding Purchase Options will be exchanged for
securities or cash or a combination of both, then Holder shall agree to such
exchange and become a party to the Exchange Agreement.
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the 8th day of August, 1996.
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
-----------------------------------
Name: David W. Berry
Title: President
11
<PAGE>
Form to be used to exercise Purchase Option:
Frontier Natural Gas Corporation
One Benham Place
9400 North Broadway
Oklahoma City, Oklahoma 73114
Date: , 19
--------------- --
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase ____ Units of Frontier Natural Gas
Corporation and hereby makes payment of $___________ (at the rate of $________
per Unit in payment of the Exercise Price pursuant thereto). Please issue the
Common Stock and Warrants comprising the Units as to which this Purchase
Option is exercised in accordance with the instructions given below.
OR
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase __________ Units of Frontier Natural Gas
Corporation by surrender of the unexercised portion of the within Purchase
Option (with a "Value" of $__________ based on a "Market Price" of
$___________). Please issue the Common Stock and Warrants comprising the
Units in accordance with the instructions given below.
---------------------------------
Signature
---------------------------------
Signature Guaranteed
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
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<PAGE>
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES OR BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE
NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST
OR PARTICIPATION HEREIN OR THEREIN, MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR
DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS
AMENDED, AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER AND
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
WARRANT
to Purchase Common Stock of
FRONTIER NATURAL GAS CORPORATION
THIS IS TO CERTIFY THAT GAINES BERLAND ENERGY FUND, L.P., a Delaware
limited partnership ("Gaines Berland"), or its assigns, is entitled to
purchase in whole or in part from time to time from FRONTIER NATURAL GAS
CORPORATION, an Oklahoma corporation ("Frontier"), on or after the Date of
Issuance (as hereinafter defined), but not later than 5:00 p.m., Houston
time, on the Expiration Date (as hereinafter defined), 56,250 Stock Units (as
hereinafter defined and subject to adjustment as provided herein) at a
purchase price per Stock Unit equal to the Exercise Price (as hereinafter
defined), subject to the terms and conditions hereinbelow provided.
SECTION 1. CERTAIN DEFINITIONS.
1.01 DEFINED TERMS. For purposes of this Warrant, in addition to the
terms defined elsewhere herein, the following terms shall have the meanings
set forth in this Section 1:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock
issued by Frontier on or after the Date of Issuance, other than (i) the
Warrant Stock, (ii) the shares of Common Stock described as being issued and
outstanding on the Date of Issuance in SECTION 8.07, and (iii) shares of
Common Stock issued or to be issued to employees, directors, advisors or
consultants of Frontier in connection with equity incentive plans.
"AFFILIATE" shall mean, as to any Person, any other Person which directly
or indirectly controls, or is under common control with or is controlled by,
such Person and, if such Person is an individual, any member of the immediate
family (including parents, spouse and children) of such individual or one or
more members of such immediate family and any Person who is controlled by any
such member or trust. As used in this definition, "control" (including the
correlative terms "controlled by"
<PAGE>
and "under common control with") shall mean possession, directly or
indirectly, of the power to direct or cause the direction of the management
or policies of a Person (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise), PROVIDED
that, in any event, any Person which owns directly or indirectly 40% or more
of the securities having ordinary voting power for the election of directors
or other governing body of a corporation or 40% or more of the partnership or
other ownership interests of any other Person will be deemed to control such
corporation or other Person. Notwithstanding the foregoing, (i) no individual
shall be deemed to be an Affiliate of a corporation solely by reason of his
or her being an officer or director of such corporation, and (ii) neither
Gaines Berland nor any of its Affiliates shall be deemed to be an Affiliate
of Frontier.
"ASPECT" shall mean Aspect Resources LLC, a Colorado limited liability
company.
"COMMON STOCK" shall mean Frontier's authorized Common Stock, par value
$.01 per share, as constituted on the date hereof, and any stock into which
such Common stock may thereafter be converted or changed, and also shall
include any other stock of Frontier of any other class that is not preferred
as to dividends or distributions in liquidation over any other class of any
other stock of Frontier.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into, or exercisable or
exchangeable for, Additional Shares of Common Stock, either immediately or
upon the arrival of a specified date or the happening of a specified event.
"CURRENT ADJUSTMENT PRICE," per share of Common Stock, for the purposes
of any provision of this Warrant at the date herein specified, shall be
deemed to be the average of the daily market prices on such date and the five
(5) consecutive trading days immediately prior to such date. The market price
for each such trading day shall be (a) if the Common Stock is traded on a
national securities exchange, its last bid price on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid, all as made available over the
Consolidated Last Sale Reporting System of the CTA Plan or, if the Common
Stock is not then eligible for reporting over such system, its last bid price
on such trading day on such national securities exchange or, if there was no
bid on that day, on the next preceding trading day on which there was a bid
on such national securities exchange or (b) if the principal market for the
Common Stock is the over-the-counter market, (i) its last bid price on such
trading day or, if there was no bid on that day, the last bid price on the
next preceding trading day on which there was a bid, all as made available
over the Consolidated Last Sale Reporting System of the CTA Plan, or (ii) if
the Common Stock is not then eligible for reporting over the Consolidated
Last Sale Reporting System of the CTA Plan and the Common Stock is quoted on
the NASDAQ, the last bid price reported on NASDAQ on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid or (iii) if the Common Stock is not
reported or quoted on NASDAQ, the closing bid quotations as quoted in each of
The Wall Street Journal, the National Quotation Bureau pink sheets, the
Salomon Brothers quotation sheets, quotation sheets of registered
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<PAGE>
marketmakers, as applicable, and, if necessary, dealers' telephone
quotations. If the Current Adjustment Price per share of Common Stock cannot
be ascertained by any of the foregoing methods, the Current Adjustment Price
per share of Common Stock shall be deemed to be the Fair Value per share of
Common Stock.
"CURRENT WARRANT PRICE," per share of Common Stock, for the purpose of
any provision of this Warrant at the date herein specified, shall mean the
amount equal to the quotient resulting from dividing the Exercise Price per
Stock Unit in effect on such date by the number of shares (including any
fractional share) of Common Stock comprising a Stock Unit on such date.
"DATE OF ISSUANCE" shall mean January 15, 1998.
"EXERCISE PRICE" per Stock Unit shall mean fifty cents ($.50).
"EXPIRATION DATE" shall mean the later of (i) one year from the Date of
Issuance, or (ii) thirty (30) days after the Holder's receipt of written
notice from Frontier that all amounts advanced under that Credit Agreement,
dated January 12, 1998, by and between Frontier and Aspect have been
repaid and all of the obligations of the Lender (as such term is defined in
the Credit Agreement) under the Credit Agreement have terminated.
"FAIR VALUE" per share of Common Stock (or other property as the case may
be) shall mean the price that could be obtained from an independent third
party for all of the issued and outstanding shares of Common Stock of
Frontier in an arm's length transaction in which the seller would not be
under any compulsion to sell and the purchaser would not be under any
compulsion to purchase. Fair Value shall be determined as follows: Frontier
and the Holders of Warrants entitled to purchase a majority of the Stock
Units covered by all the Warrants shall each designate a representative, and
such representatives will meet and use their best efforts to reach an
agreement on the Fair Value. If the representatives designated by Frontier
and such Holders are unable to reach such an agreement, then the Holders of
Warrants entitled to purchase a majority of the Stock Units covered by all
the Warrants will submit a list of at least three Independent Appraisers.
Frontier shall select one of the Independent appraisers set forth on such
list. The Independent Appraiser so selected by Frontier will determine the
Fair Value of a share of Common Stock (or other property, as the case may be)
and its determination thereof will be final and binding on all parties
concerned, absent manifest error. Frontier will provide the Independent
Appraiser so selected by Frontier with all information about Frontier which
such Independent Appraiser reasonably deems necessary for determining the Fair
Value. The fees and expenses of the appraisal process (including those of the
Independent Appraiser) will be paid by Frontier. Frontier may require that
the Independent Appraiser keep confidential any non-public information
received as a result of this paragraph pursuant to reasonable confidentiality
arrangements.
"FRONTIER" shall have the meaning set forth in the preamble of this
Warrant.
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<PAGE>
"GAINES BERLAND" shall have the meaning set forth in the preamble of
this Warrant.
"HOLDER" shall mean any Person who acquires Warrants or Warrant Stock
pursuant to the provisions of this Warrant including any transferees of
Warrants or Warrant Stock.
"INCLUDE" and "INCLUDING" shall be construed as if followed by the
phrase, "without being limited to,".
"INDEPENDENT APPRAISER" shall mean an appraiser which is a nationally
recognized independent expert experienced in valuing businesses similar to
the principal business of Frontier.
"LIEN" means any lien, mortgage, security interest, pledge, charge,
deposit, production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement, or lease,
license or other arrangement substantially equivalent thereto, other than
preferential purchase rights and consents to assignment.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation system.
"NON-TRANSFERABLE RIGHTS" shall have the meaning assigned to such term
in the definition of Rights Plan.
"PERSON" shall mean a corporation, an association, a partnership, a
limited liability company, a bank, an employee benefit plan, a joint venture,
an organization, an individual, a trust or any unit of federal, state or
local government.
"RIGHTS CERTIFICATE" shall have the meaning assigned to such term in the
definition of Rights Plan.
"RIGHTS PLAN" shall mean a shareholder rights plan implemented by
Frontier to deter a hostile acquisition, pursuant to which holders of shares
of Common Stock (a) are issued rights that are not initially exercisable or
transferable apart from such shares of Common Stock ("NON-TRANSFERABLE
RIGHTS") and (b) are to be issued rights certificates exercisable and
transferable apart from such shares of Common Stock ("RIGHTS CERTIFICATES")
in certain circumstances to purchase Additional Shares of Common Stock upon
certain acquisitions of stock or assets of or business combinations involving
Frontier by a Person in a transaction or transactions not approved by the
board of directors of Frontier as specified in the Rights Plan.
"SECURITIES ACT" mean the Securities Act of 1933 as in effect on the
date hereof and as the same may be amended from time to time.
"SIGNIFICANT HOLDER" shall mean, at any date, a Holder of 33 1/3% of the
then outstanding Warrants and shares of Warrant Stock.
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<PAGE>
"STOCK UNIT" shall mean one share of Common Stock on the Date of
Issuance, and thereafter such number of shares (including any fractional
shares) of Common Stock and other securities, cash or other property as shall
result from the adjustments specified in Section 4 and Section 5.
"WARRANT STOCK" shall mean (i) the shares of Common Stock purchased or
purchasable by the Holders of the Warrants upon the exercise thereof,
including any other stock into which such Common Stock may thereafter be
changed or converted, and (ii) any additional shares of Common Stock or other
securities issued or distributed by way of a dividend, stock split or other
distribution in respect of the Common Stock referred to in clause (i) above,
or acquired by way of any rights offering or similar offering made in respect
of the Common Stock referred to in clause (i) above.
"WARRANTS" shall mean the warrants issued hereby, dated as of the Date
of Issuance, evidencing rights to purchase up to an aggregate of 56,250 Stock
Units, and all Warrants issued upon transfer, division or combination of, or
in substitution for, any thereof.
SECTION 2. EXERCISE OF WARRANT.
In order to exercise this Warrant, in whole or in part, the Holder
hereof shall deliver to Frontier, at its office maintained for such purpose
pursuant to SECTION 14.01, (a) a written notice of such Holder's election to
exercise this Warrant, which notice shall specify the number of Stock Units
to be purchased, (b) a certified or cashier's check or checks payable to
Frontier in an aggregate amount equal to the aggregate Exercise Price for the
number of Stock Units as to which this Warrant is being exercised, and
(c) this Warrant. Such notice shall be in substantially the form of the "Form
of Exercise" set out at the end of this Warrant. Upon receipt thereof,
Frontier shall, as promptly as practicable and in any event within seven days
thereafter (unless such exercise shall be in connection with an underwritten
public offering of shares of Common Stock subject to this Warrant, in which
event concurrently with such exercise), cause to be executed and delivered to
such Holder a stock certificate or certificates representing the aggregate
number of duly and validly issued, fully paid and nonassessable shares of
Warrant Stock issuable upon such exercise, free and clear of any Liens.
The stock certificate or certificates for Warrant Stock so delivered
shall be in such denominations as may be specified in such notice and shall
be registered in the name of such Holder or such other Person as shall be
designated in such notice, PROVIDED that such other Persons as may be
designated shall confirm in writing for the benefit of Frontier that the
representations and warranties set forth in SECTION 7 are true, complete and
correct with respect to such other Person as may be designated, and each such
other Person acknowledges and agrees in writing to accept the benefits of and
be bound by the terms and conditions set forth in this Warrant. To the extent
permitted by law, such stock certificate or certificates shall be deemed to
have been issued, and such Holder or other Person so designated to receive
the Warrant Stock shall be deemed to have become a holder of record of such
shares, including the right to vote such shares or to consent or to receive
notice as a stockholder, as of the time such notice and payment is received
by Frontier as aforesaid. If this Warrant shall have been exercised only in
part, Frontier shall, at the time of delivery of said stock certificate or
certificates, execute and deliver to such Holder a new Warrant, dated the
original
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<PAGE>
date of issuance, evidencing the rights of such Holder to purchase the
remaining Stock Units called for by this Warrant, which new Warrant shall in
all other respects be identical with this Warrant, or, at the option of
Frontier, appropriate notation may be made on this Warrant and the same
returned to such Holder.
All shares of Common Stock issuable upon the exercise of this Warrant
shall, upon payment therefor in accordance herewith, be duly and validly
issued, fully paid and nonassessable and free and clear of any Liens.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, Frontier shall pay to the Holder
an amount in cash equal to such fraction multiplied by the Current Adjustment
Price per share of Common Stock.
SECTION 3. TRANSFER, DIVISION AND COMBINATION.
Subject to SECTION 9, this Warrant and all rights hereunder are
transferable, in whole or in part, on the books of Frontier to be maintained
for such purpose, upon surrender of this Warrant at the office of Frontier
maintained for such purpose pursuant to SECTION 14.01, together with a
written assignment of this Warrant (in substantially the form of the "Form of
Assignment" annexed hereto) duly executed by the Holder hereof or its agent
or attorney and payment of funds sufficient to pay any stock transfer taxes
payable hereunder by the Holder hereof upon the making of such transfer. Upon
such surrender and payment Frontier shall, subject to SECTION 9 and the
immediately following sentence, execute and deliver a new Warrant or Warrants
(with the same Exercise Price or Exercise Prices as contained in the Warrant
or Warrants so surrendered, respectively) in the name of the assignee or
assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled. If and when this
Warrant is assigned in blank (in case the restrictions on transferability set
forth in SECTION 9 shall have been terminated), Frontier may (but shall not
be obliged to) treat the bearer hereof as the absolute owner of this Warrant
for all purposes and Frontier shall not be affected by any notice to the
contrary. This Warrant, if properly assigned in compliance with this SECTION 3
and SECTION 9, may be exercised by an assignee for the purchase of shares
of Common Stock without having a new Warrant or Warrants issued.
This Warrant may, subject to SECTION 9, be divided or combined with
other Warrants upon presentation at the aforesaid office of Frontier,
together with a written notice specifying the names and denominations in
which new Warrants are to be issued, signed by the Holder hereof or its
authorized agent or attorney. Subject to compliance with the next preceding
paragraph and with SECTION 9, as to any transfer which may be involved in
such division or combination, Frontier shall execute and deliver a new
Warrant or Warrants (with the same Exercise Price or Exercise Prices as
contained in the Warrant or Warrants so transferred, respectively) in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
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Frontier shall maintain at its aforesaid office books for the
registration and transfer of the Warrants.
SECTION 4. ADJUSTMENT OF STOCK UNIT.
The number of shares of Common Stock comprising a Stock Unit shall be
subject to adjustment from time to time as set forth in this SECTION 4.
Frontier shall not take any action with respect to its Common Stock of any
class requiring an adjustment pursuant to any of SECTION 4.01, 4.02, 4.08 or
5 without at the same time taking like action with respect to its Common
Stock of each other class; and Frontier shall not create any class of Common
Stock which carries any rights to dividends or assets differing in any
respect from the rights of the Common Stock on the Date of Issuance.
4.01 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at any
time or from time on or after the Date of Issuance Frontier shall
(i) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then the number of shares of Common Stock comprising a Stock Unit immediately
after the happening of any such event shall be adjusted so as to consist of
the number of shares of Common Stock which a record holder of the number of
shares of Common Stock comprising a Stock Unit immediately prior to the
happening of such event would own or be entitled to receive after the
happening of such event.
4.02 CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case at any time or
from time to time on or after the Date of Issuance Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling them
to receive any dividend or other distribution of,
(i) cash (other than a cash distribution made as a dividend
and payable out of earnings or earned surplus legally available for the
payment of dividends under the laws of the jurisdiction of incorporation
of Frontier, to the extent, but only to the extent, that the aggregate of
all such dividends paid or declared after the date hereof, does not
exceed the consolidated net income of Frontier earned subsequent to the
date hereof determined in accordance with generally accepted accounting
principles consistently applied), or
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<PAGE>
(ii) any evidence of its indebtedness (other than Convertible
Securities), any shares of its stock (other than Additional Shares of
Common Stock) or any other securities or property of any nature
whatsoever (other than cash and other than Convertible Securities or
Additional Shares of Common Stock), or
(iii) any options, warrants or other rights to subscribe for or
purchase any evidences of its indebtedness (other than (A) Convertible
Securities and (B) Non-Transferable Rights issued pursuant to a Rights
Plan), any shares of its stock (other than Additional Shares of Common
Stock) or any other securities or property of any nature whatsoever (other
than cash and other than Convertible Securities or Additional Shares of
Common Stock),
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (i) the numerator of which shall be the Current
Adjustment Price per share of Common Stock at the date of taking such record,
and (ii) the denominator of which shall be such Current Adjustment Price per
share of Common Stock minus the amount of any and all such cash and the Fair
Value of any and all such evidences of indebtedness, shares of stock, other
securities or property, or options, warrants or other subscription or
purchase rights, so distributable in respect of one share of Common Stock. A
reclassification of the Common Stock into shares of Common Stock and shares
of any other class of stock shall be deemed a distribution by Frontier to the
holders of its Common Stock of such shares of such other class of stock within
the meaning of this SECTION 4.02 and, if the outstanding shares of Common Stock
shall be changed into a larger or smaller number of shares of Common Stock as a
part of such reclassification, shall be deemed a subdivision or combination, as
the case may be, of the outstanding shares of Common Stock within the meaning
of SECTION 4.01.
4.03 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case at any
time or from time to time on or after the Date of Issuance Frontier shall
(except as hereinafter provided) issue to any Person any Additional Shares of
Common Stock for a consideration per share less than:
(a) in the case of a public offering of Common Stock under the
Securities Act, the greater of (i) the consideration per share
determined by the managing underwriter (in the event of an underwritten
public offering) and (ii) 90% of the Current Adjustment Price on the
effective date of the registration statement with respect to such public
offering,
(b) in the case of the issuance of Common Stock by Frontier in
connection with the acquisition of assets and/or securities of any
Person, the greater of (i) the consideration per share determined by the
Board of Directors of Frontier as set forth in the binding agreement
pursuant to which such acquisition is being effected and (ii) 90% of the
Current Adjustment Price per share of Common Stock as of the date for
which the pricing of Common Stock in connection with such issuance is
determined in accordance with such binding agreement, or
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(c) in all other circumstances, 95% of the Current Adjustment
Price,
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (a) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
Additional Shares of Common Stock plus the number of such Additional Shares
of Common Stock so issued, and (b) the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus the number of shares
of Common Stock which the aggregate consideration for the total number of
such Additional Shares of Common Stock so issued would purchase at the
Current Adjustment Price. For purposes of this SECTION 4.03, and subject to
the foregoing sentence, the date as of which the Current Adjustment Price
shall be computed shall be the earlier of (i) the date on which Frontier
shall enter into a firm contract for the issuance of such Additional Shares
of Common Stock and (ii) the date of actual issuance of such Additional
Shares of Common Stock. This SECTION 4.03 shall not apply to any issuance of
Additional Shares of Common Stock for which an adjustment is provided under
SECTION 4.01. No adjustment of the number of shares of Common Stock
comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued pursuant
to the exercise of any options, warrants or other subscription or purchase
rights or pursuant to the exercise of any conversion or exchange rights in
any Convertible Securities described in SECTION 4.04 or 4.05 (it being
understood that full adjustment shall be made, without duplication, in
respect of all Additional Shares of Common Stock issuable at the time any
Rights Certificates issued pursuant to a Rights Plan become exercisable by
the holders of Common Stock). No adjustment of the number of shares of Common
Stock comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued for a
consideration greater than that described in clauses (a), (b) and (c), as
applicable, of this SECTION 4.03.
4.04 ISSUANCE OF OPTIONS WARRANTS OR OTHER RIGHTS. If on or after the
Date of Issuance, Frontier shall issue to any Person, any options, warrants or
other rights to subscribe for or purchase any Additional Shares of Common
Stock or any Convertible Securities (other than Non-Transferable Rights
issued pursuant to a Rights Plan) and the consideration per share for which
Additional Shares of Common Stock may at any time thereafter be issuable
pursuant to such options, warrants or other rights or pursuant to the terms
of such Convertible Securities (other than Non-Transferable Rights issued
pursuant to a Rights Plan) shall be less than the Current Adjustment Price,
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted as provided in SECTION 4.03 on the basis that
(a) the maximum number of Additional Shares of Common Stock
issuable pursuant to all such options, warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of (and, accordingly,
the date as of which the Current Adjustment Price shall be computed
shall be) the computation date specified in the last sentence of this
SECTION 4.04, and
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(b) the aggregate consideration for such maximum number Additional
Shares of Common Stock shall be deemed to be the minimum consideration
received and receivable by Frontier for the issuance of such Additional
Shares of Common Stock pursuant to such option, warrants or other rights
or pursuant to the terms of such Convertible Securities (it being
understood that t full adjustment shall be made, without duplication, in
respect of all Additional Shares of Common Stock issuable at the time
any Rights Certificates issued pursuant to a Rights Plan become
exercisable by the holders of Common Stock). For purposes of this
SECTION 4.04, the computation date for clause (a) above shall be the
earliest of (i) the date on which Frontier shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive
any cash options, warrants or other rights, (ii) the date on which
Frontier shall enter into a firm contract for the issuance of such
options, warrants or other rights, and (iii) the date of actual issuance
of such options, warrants or other rights.
4.05 ISSUANCE OF CONVERTIBLE SECURITIES. If on or after the Date of
Issuance Frontier shall issue to any Person any Convertible Securities and
the consideration per share for which Additional Shares of Common Stock may
at any time thereafter be issuable pursuant to the terms of such Convertible
Securities shall be less than the Current Adjustment Price, then the number
of shares of Common Stock thereafter comprising of Stock Unit shall be
adjusted as provided in SECTION 4.03 on the basis that (a) the maximum of
Additional Shares of Common Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been
issued as of (and accordingly, the date as of which the Current Adjustment
Price shall be computed shall be) the computation date specified in the next
following sentence of this SECTION 4.05, and (b) the aggregate consideration
for such maximum number of Additional Shares of Common Stock shall be deemed
to be the minimum consideration received and receivable by Frontier for the
issuance of such Additional Shares of Common Stock pursuant to the terms of
such convertible Securities. For purposes of this SECTION 4.05, the
computation date for clause (a) above shall be the earliest of (i) the date
on which Frontier shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive any such Convertible Securities,
and (ii) the date on which Frontier shall enter into a firm contract for the
issuance of such Convertible Securities, and (iii) the date of actual
issuance of such Convertible Securities. No adjustment of the number of
shares of Common Stock comprising of Stock Units shall be made under this
SECTION 4.05 upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants or other subscription or purchase
rights thereof, if any such adjustment shall previously have been made upon
the issuance of such warrants or other rights pursuant to SECTION 4.04. No
adjustment of the number of Shares of Common Stock comprising of Stock Unit
shall be made under this SECTION 4.05 upon the issuance of any Additional
Shares of Common Stock which are issued for a a consideration greater than
that described in the first sentence of this SECTION 4.05.
4.06 SUPERSEDING ADJUSTMENT OF STOCK UNIT. If, at any time on or
after the Date of Issuance, any adjustment of the number of shares of Common
Stock comprising a Stock Unit shall have been made pursuant to SECTION 4.04
or 4.05 on the basis of the issuance of options, warrants
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or other rights or the issuance of other Convertible Securities, or any new
adjustment of the number of shares of Common Stock comprising a Stock Unit
shall have been made pursuant to this SECTION 4.06.
(i) such options, warrants or rights or the right on conversion or
exchange in such other Convertible Securities shall expire, and a portion of
such options, warrants or rights, or the right of conversion, exercise or
exchange in respect of a portion of such other Convertible Securities, as the
case may be, shall not have been exercised, or
(ii) the consideration per share, for which Additional Shares of
Common Stock are issuable pursuant to such options, warrants or rights or the
terms of such other Convertible Securities, shall be increased solely by
virtue of provisions therein contained for an automatic increase in such
consideration per share upon the arrival of a specified date or the happening
of a specified event,
such previous adjustments shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such options,
warrants or rights or other Convertible Securities on the basis of
(a) treating the number of Additional Shares of Common Stock, if
any, theretofore actually issued or issuable pursuant to the previous
exercise of such options, warrants or rights or such right of
conversion or exchange, as having been issued on the date or dates of
such issuance of Additional Shares of Common Stock as determined for
purposes of such previous adjustment and for the consideration actually
received and receivable therefor, and
(b) treating any such options, warrants or rights or any such
other Convertible Securities which then remain outstanding as having
been granted or issued immediately after the time of such increase of
the consideration per share for such Additional Shares of Common Stock
as are issuable under such options, warrants or rights or other
Convertible Securities, and, if and to the extent called for by the
foregoing provisions of this SECTION 4 on the basis aforesaid, a new
adjustment of the number of shares of Common Stock comprising a Stock
Unit shall be made, which new adjustment shall supersede the previous
adjustment as rescinded and annulled.
4.07 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION 4.
The following provisions shall be applicable to the making of adjustments of
the number of shares of Common Stock comprising a Stock Unit herein before
provided for in this Section 4
(i) TREASURY STOCK. The sale or other disposition of any issued
shares of Common Stock owned or held by or for the account of Frontier
shall be deemed an issuance thereof for purposes of this SECTION 4.
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(ii) COMPUTATION OF CONSIDERATION. To the extent that any
Additional Shares of Common Stock or any Convertible Securities or any
options, warrants or other rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities shall
be issued for a cash consideration, the consideration received by
Frontier therefor shall be deemed to be the amount of cash received by
Frontier therefor, or, if such Additional Shares of Common Stock or
Convertible Securities are offered by Frontier for subscription, the
subscription price, or, if such Additional Shares of Common Stock or
Convertible Securities are sold to underwriters or dealers for public
offering without a subscription offering, the initial public offering
price, in any such case excluding any amounts paid or receivable for
accrued interest or accrued dividends and without deduction of any
compensation, discounts or expenses paid or incurred by Frontier for
and in the underwriting of, or otherwise in connection with, the issue
thereof. To the extent that such issuance shall be for consideration
other cash, then, except as herein otherwise expressly provided, the
amount of such consideration shall be deemed to be the Fair Value of
such consideration at the time of such issuance. The consideration for
any Additional Shares of Common Stock issuable pursuant to any options,
warrants or other rights to subscribe for or purchase the same shall be
the consideration received or receivable by Frontier for issuing such
options, warrants or other rights, plus the additional consideration
payable to Frontier upon the exercise of such options, warrants or other
rights. the consideration for any Additional Shares of Common Stock
issuable pursuant to the terms of any Convertible Securities shall be the
consideration received or receivable by Frontier for issuing any options,
warrants or other rights to subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to Frontier in respect
of the subscription for or purchase of such Convertible Securities, plus
the additional consideration, if any, payable to Frontier upon the exercise
of the right of conversion, exercise or exchange in such Convertible
Securities. In case of the issuance at any time of any Additional
Shares of Common Stock or Convertible Securities in payment or
satisfaction of any dividend upon any class of stock other than Common
Stock, Frontier shall be deemed to have received for such Additional
Shares of Common Stock or Convertible Securities consideration equal to
the amount of such dividend so paid or satisfied.
(iii) WHEN ADJUSTMENTS TO BE MADE. The adjustments required
by the foregoing provisions of this SECTION 4 shall be made whenever
and as often as any specified event requiring an adjustment shall
occur, except that no adjustment of the number of shares of Common
Stock comprising a Stock Unit that would otherwise be required shall be
made (except in the case of a subdivision of combination of shares of
the Common Stock, as provided for in SECTION 4.01) unless and until
such adjustment, either by itself or with other adjustments not
previously made, adds or subtracts at least 1/20th of a share to or
from the number of shares of Common Stock comprising a Stock Unit
immediately prior to the making of such adjustment. Any adjustment
representing a change of less than such minimum amount (except as
aforesaid) shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this SECTION 4
and not previously made, would result in
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a minimum adjustment. For the purpose of any adjustment, any specified
event shall be deemed to have occurred at the close of business on the
date of its occurrence.
(iv) FRACTIONAL INTERESTS. In computing adjustments under this
SECTION 4, fractional interests in Common Stock shall be taken into
account to the nearest one-thousandth of a share.
(v) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which
SECTION 4 shall require that an adjustment in the shares of Common Stock
comprising a Stock Unit be made effective as of a record date, Frontier
may elect to defer until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date, the
shares of Common Stock, if any, issuable upon such exercise over and
above the shares of Common Stock or other capital stock of Frontier, if
any, issuable upon such exercise on the basis of the number of shares of
Common Stock comprising a Stock Unit in effect prior to such adjustment
and (ii) paying to the Holder any amount of cash in lieu of the issuance
of fractional shares pursuant to SECTION 4; PROVIDED, HOWEVER, that
Frontier shall deliver to such Holder a due bill or other appropriate
instrument evidencing such Holder's right to receive such additional
shares or such cash upon the occurrence of such event.
(vi) WHEN ADJUSTMENT NOT REQUIRED. If Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution thereof to
stockholders, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then thereafter no
adjustment shall be required by reason of the taking of such record and
any such adjustment previously made in respect thereof shall be
rescinded and annulled.
4.08 OTHER ACTION AFFECTING COMMON STOCK. In case at any time or from
time to time Frontier shall take any action affecting its Common Stock, other
than an action described in any of the foregoing SECTIONS 4.01 through 4.07
(inclusive), or in SECTION 5, then, unless in the reasonable opinion of the
Board of Directors of Frontier such action will not have a material adverse
effect upon the rights of the Holders of the Warrants or an adverse effect on
the number of shares of Common Stock comprising a Stock Unit shall be
adjusted in such manner and at such time as the Board may reasonably
determine in good faith to be equitable in the circumstances to fairly
protect the purchase rights represented by this Warrant in accordance with
the essential intent and principles in such sections thereof.
SECTION 5. CONSOLIDATION, MERGER, ETC.
In case a consolidation or merger of Frontier shall be effected with
another Person on or after the Date of Issuance, or the sale, lease or other
transfer of all or substantially all of Frontier's assets to another Person
shall be effected on or after the Date of Issuance, then as a condition of
such consolidation, merger, sale, lease or other transfer provision shall be
made whereby the Holder of this
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Warrant shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions specified herein and in lieu of each
Stock Unit immediately theretofore purchasable and receivable upon the
exercise of each of the Warrants, such shares of stock, securities, cash or
other property receivable upon such consolidation, merger, sale, lease or
transfer by the Holder of the number of shares of Common Stock comprising a
Stock Unit immediately prior to such event. In any such case, appropriate
and equitable provision also shall be made with respect to the rights and
interests of the Holder of this Warrant to the end that the provisions hereof
(including SECTION 4) shall thereafter be applicable, as nearly as may be, in
relation of any shares of stock, securities, cash or other property thereafter
deliverable upon the exercise of any Warrants. Frontier shall not effect any
such consolidation, merger, sale, lease or transfer unless prior to or
simultaneously with the consummation thereof the successor Person (if other
than Frontier or a wholly-owned subsidiary of Frontier) resulting from such
consolidation or merger or the Person purchasing, leasing or otherwise
acquiring such assets shall expressly assume, by written instrument mailed to
Gaines Berland and any Significant Holder at its last address appearing on
the books of Frontier, the due and punctual observance and performance of each
and every covenant and condition of this Warrant to be performed and observed
by Frontier and all of the obligations and liabilities hereunder, subject to
such modification as shall be necessary to provide for adjustments of Stock
Units which shall be as nearly equivalent as practicable to the adjustments
provided for in SECTION 4; PROVIDED, HOWEVER,, that Frontier shall not be
required to effect (or mail) such express assumption in respect of any
transaction pursuant to which such obligations are transferred by operation
of law and such Person acknowledges the same in a writing that is retained
and made available for inspection by any holder of Warrants. The above
provisions of this SECTION 5 shall similarly apply to successive
consolidations, mergers, sales, leases or other transfers.
SECTION 6. NOTICE TO WARRANT HOLDERS.
6.01 NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever
the number of shares of Common Stock comprising a Stock Unit shall be
adjusted pursuant to SECTION 4, Frontier shall forthwith obtain a certificate
signed by independent accountants of recognized national standing, setting
forth, in reasonable detail, the event requiring the adjustment and the
method by which such adjustment was calculated (including a statement of the
Fair Value of any evidences of indebtedness, shares of stock, other
securities or property or warrants or other subscription or purchase rights
referred to in SECTION 4.02, 4.07(ii) or SECTION 5) and specifying the
number of shares of Common Stock comprising a Stock Unit and (if such
adjustment was made pursuant to SECTION 4.08 or SECTION 5) describing the
number and kind of any other securities comprising a Stock Unit, and any
change in the purchase price or prices thereof, after giving effect to such
adjustment or change. Frontier shall promptly, and in any case within 20 days
after the making of such adjustment, cause a signed copy of such certificate
to be delivered to each Holder of a Warrant in accordance with SECTION 14.02.
Frontier shall keep at its office or agency, maintained for the purpose
pursuant to SECTION 14.01, copies of all such certificates and cause the same
to be available for inspection at said office during normal business hours by
any Holder of a Warrant or any prospective permitted purchaser of a Warrant
designated by a Holder thereof. The Holders of Warrants entitled to purchase a
majority of the Stock Units covered by all the Warrants shall have the right
to challenge any such
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adjustment of the number of shares of Common Stock comprising a Stock Unit
contained in such certificate for a period of 30 days after such certificate
is delivered to the Holders. In the event the Holders give Frontier written
notice of such challenge within such 30-day period, such Holders and Frontier
shall thereupon promptly attempt in good faith to reach agreement on such
adjustment, and failing such agreement, shall appoint a mutually acceptable
nationally recognized independent accounting firm to determine such
adjustment, whose determination shall be final and binding on Frontier and
the Holders, absent manifest error. The costs incurred by the Holders and
Frontier and the fees and expenses of such independent accounting firm shall
be paid by (a) the Holders if Frontier's adjustment in the certificate was
accurate to within 1/20th of a share to or from the number of shares of
Common Stock comprising a Stock Unit by such independent accounting firm or
if such independent accounting firm's adjustment results in the Holders being
entitled to receive fewer shares of Common Stock per Stock Unit than under
the adjustment determined by Frontier and (b) otherwise by Frontier.
6.02 NOTICE OF CERTAIN CORPORATE ACTION. In case Frontier shall
propose (a) to pay any dividend to the holders of its Common Stock or to make
any other distribution to the holders of its Common Stock, or (b) to offer to
the holders of its Common Stock rights to subscribe for or to purchase any
Additional Shares of Common Stock or shares of stock of any class or any
other securities, rights or options, or (c) to effect any reclassification of
its Common Stock (other than a reclassification involving only the
subdivision, or combination, of outstanding shares of Common Stock), or (d)
to effect any capital reorganization, or (e) to effect any consolidation,
merger or sale, lease, transfer or other disposition of all or substantially
all of its property, assets or business, or (f) to effect the liquidation,
dissolution or winding up of Frontier, then, in each such case, Frontier
shall give to each Holder of a Warrant, in accordance with SECTION 14.02, a
notice of such proposed action, which shall specify the date on which a
record is to be taken for the purposes of such stock dividend, distribution
or rights, or the date on which such reclassification,, reorganization,
consolidation, merger, sale, lease, transfer, disposition, liquidation,
dissolution or winding up is to take place and the date of participation
therein by the holders of Common Stock, if any such date is to be fixed, and
shall also set forth such facts with respect thereto as shall be reasonably
necessary to indicate the effect of such action on the Common Stock and the
number and kind of any other shares of stock which will comprise a Stock
Unit, and the purchase price or prices thereof, after giving effect to any
adjustment which will be required as a result of such action. Such notice
shall be so given in the case of any action covered by clause (a) or (b)
above at least 10 days prior to the record date for determining holders of
the Common Stock for purposes of such action, and in the case of any other
such action, at least 10 days prior to the date of the taking of such
proposed action or the date of participation therein by the holders of Common
Stock, whichever shall be the earlier.
6.02 NOTICE OF EXPIRATION DATE. Frontier shall give to each Holder of
a Warrant notice of the Expiration Date. Such notice may be given by Frontier
not less than 30 days but not more than 60 days prior the the Expiration
Date.
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SECTION 7. REPRESENTATION AND WARRANTIES OF GAINES BERLAND.
Gaines Berland represents and warrants to Frontier as follows:
7.01 PURCHASE FOR OWN ACCOUNT. The Warrants and Warrant Stock, as the
case may be, to be received by Gaines Berland will be acquired for investment
for Gaines Berland's own account and not with a present view to the
distribution of any part thereof, and Gaines Berland has no present intention
of selling, granting any participation in, or otherwise distributing the
same in a manner contrary to the Securities Act or applicable state
securities laws, PROVIDED, that, Gaines Berland at all times retains the
right to control, deal with and sell all of its property, including the
Warrants.
7.02 DISCLOSURE OF INFORMATION: DUE DILIGENCE. Gaines Berland represents
that it has had an opportunity to ask questions of and receive answers from
Frontier regarding Frontier and the terms and conditions of the offering of
the Warrants and Warrant Stock, as the case may be, offered hereby and to
obtain additional information necessary to verify the accuracy of the
information supplied or to which it had access.
7.03 INVESTMENT EXPERIENCE: ACCREDITED INVESTOR STATUS. Gaines Berland
is able to bear the economic risk of its investment and has such knowledge
and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment in the Warrants and the
Warrant Stock. Gaines Berland understands that neither the Warrants nor the
Warrant Stock have been registered under the Securities Act or under the
securities laws of any jurisdiction by reason of reliance upon certain
exemptions, and that the reliance of Frontier on such exemptions is
predicated upon the accuracy of Gaines Berland's representations and
warranties in this SECTION 7.03. Gaines Berland is familiar with Regulation D
promulgated under the Securities Act and is an "accredited investor" as
defined therein.
7.04 SECURITIES ACT COMPLIANCE. Gaines Berland represents that neither
the Warrants nor the Warrant Stock shall be sold or transferred or offered
for sale or transfer without registration under the Securities Act or the
availability of an exemption therefrom, and in accordance with the terms and
conditions and legends set forth in SECTION 9.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF FRONTIER.
Frontier represents and warrants to Gaines Berland as follows:
8.01 EXISTENCE: QUALIFICATION. Frontier is duly organized, validly
existing and in good standing under the laws of the State of Oklahoma.
Frontier has duly qualified and is authorized to do business and is in good
standing as a foreign corporation in every jurisdiction where the failure to
be so qualified would have a material adverse effect on Frontier's ability to
enter into and perform all of its obligations under this Warrant.
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8.02 NO BREACH. The execution, delivery and performance of this Warrant
by Frontier and the consummation of the transactions contemplated hereby will
not (a) violate the articles of incorporation or by-laws of frontier, (b)
violate any loan or credit agreement to which Frontier is a party or is
bound, or result in a breach of or default under any other instrument or
agreements to which Frontier is a party or is bound which is material to the
business or properties of Frontier taken as a whole (c) violate any
judgement, order, injunction, decree or award against or binding upon
Frontier, the violation of which would have a material adverse effect on the
business or properties of Frontier taken as a whole, (d) result in the
creation of any material Lien upon any of the properties or assets of
Frontier, or (e) violate any law, rule or regulation applicable to or binding
upon Frontier, or (f) cause or require any adjustment, or give rise to any
rights in favor of another Person, under any agreement to which frontier is
a party.
8.03 CORPORATE ACTION. Frontier has all necessary corporate power and
authority to execute, deliver and perform its obligation under this Warrant:
the execution, delivery and performance by Frontier of its obligations under
this Warrant have been duly authorized by all necessary corporate action
(including all stockholder action if required) on the part of Frontier, this
Warrant has been duly executed and delivered by Frontier and constitutes a
legal, valid and binding obligation of Frontier, enforceable against Frontier
in accordance with its terms: the Warrant Stock initially covered by the
Warrants will be duly and validly authorized and reserved for issuance and
shall, when paid for, the issued and delivered in accordance with the terms
of the Warrants, be duly and validly authorized and reserved for issuance and
shall, when paid for, be issued and delivered in accordance with the terms of
the Warrants, be duly and validly issued, fully paid and nonassessable and
free and clear of any Liens: and none of the Warrant Stock issued pursuant to
the terms hereof shall be in violation of any preemptive rights of any
shareholder of Frontier.
8.04 APPROVALS. Based in part upon the representation set forth in
SECTION 7, no authorizations, approvals or consents of, and no filings or
registrations with, any governmental authority or any other Person are
necessary for the execution, delivery or performance by Frontier of its
obligations under this Warrant or for the validity or enforceability thereof.
Any such action required to be taken as a condition to the issuance and
delivery of the Warrants has been (or prior to such issuance and delivery
will be) duly taken by all such governmental authorities or other Persons, as
the case may be.
8.05 INVESTMENT COMPANY ACT. Frontier is not an "investment company", or
a company "controlled by" an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
8.06 PUBLIC UTILITY HOLDING COMPANY ACT. Frontier is no a "holding
company", or an "affiliate" of a "holding company" or a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
8.07 CAPITALIZATION. On the date hereof, the total number of shares of
capital stock which Frontier has authority to issue is (i) 9,865,906 shares
of Common Stock, par value $.01 per share,
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of which 40,000,000 shares are issued and outstanding, and (ii) 5,000,000
shares of Preferred Stock, par value $10.00 per share, of which 85,961 shares
are issued and outstanding.
8.08 PRIVATE OFFERING.
(a) Assuming the truth and accuracy of Gaines Berland's representations
and warranties contained in SECTION 7, the issuance and sale of the Warrants
to Gaines Berland hereunder are exempt from the registration and prospectus
delivery requirements of the Securities Act as presently in effect.
(b) Frontier agrees that neither Frontier nor any Person acting on its
behalf has offered or will offer the Warrants or shares of Warrant Stock or
any part thereof or any similar securities for issue or sale to, or has
solicited or will solicit any offer to acquire any of the same from, any
Person so as to bring the issuance and sale of the Warrants or shares of
Warrant Stock within the provisions of the registration and prospectus
delivery requirements of the Securities Act.
8.09 NO LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the best of Frontier's knowledge after due
inquiry, threatened against Frontier before any court or administrative
agency seeking to enjoin the transaction contemplated by this Warrant or
that is reasonably likely to (i) prohibit or limit in any way performance by
Frontier of its obligations under this Warrant or (ii) affect the legality,
validity, enforceability or binding nature of this Warrant.
SECTION 9. RESTRICTION ON TRANSFERABILITY.
9.01 TRANSFERS GENERALLY. Except as otherwise provided in SECTION 9.06,
the Warrants and Warrant Stock shall only be transferable upon the conditions
specified in this SECTION 9, which conditions are intended to insure
compliance with the provisions of the Securities Act and applicable state
securities laws in respect of the transfer of any Warrants and Warrant Stock.
9.02 TRANSFERS OF RESTRICTED SECURITIES PURSUANT TO REGISTRATION
STATEMENTS, RULE 144 AND RULE 144A. The WArrants and Warrant Stock may be
offered or sold by the Holder thereof pursuant to (a) an effective
registration statement under the Securities Act, or (b) to the extent
applicable, Rule 144 or Rule 144A under the Securities Act.
9.03 NOTICE OF CERTAIN TRANSFERS. If any Holder of any Warrants or
Warrant Stock desires to transfer such Warrants or Warrant Stock other than
pursuant to an effective registration statement under the Securities Act or
pursuant to Rule 144 or Rule 144A, then such Holder shall deliver to Frontier
a notice with respect to the proposed transfer, together with a written
representation (together with such factual information in respect thereof as
Frontier may reasonably request) from such Holder in substance reasonably
satisfactory to Frontier to the effect that an exemption from registration
under the Securities Act and applicable state securities laws is available.
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9.04 RESTRICTIVE LEGENDS.
(a) Until otherwise permitted by SECTION 9.05, each certificate for
Warrants issued, each certificate for any Warrants issued to any subsequent
transferee of any such certificate, each certificate for any Warrant Stock
issued upon exercise of any Warrant and each certificate for any Warrant
Stock issued to any subsequent transferee of any such certificate, shall be
stamped or otherwise imprinted with one or more legends in substantially the
following form:
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
HAVE ANY OF THEM BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES OR
BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE NOR THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST OR PARTICIPATION HEREIN OR
THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR IN ANY
OTHER MANNER TRANSFERRED OR DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE RULES AND
REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
(b) In addition, each such certificate shall be stamped or otherwise
imprinted with any legend required under state securities laws.
9.05 TERMINATION OF RESTRICTIONS. All the restrictions imposed by this
SECTION 9 upon the transferability of the Warrants and Warrant Stock shall
cease and terminate as to any particular Warrants or Warrant Stock when such
Warrants or Warrant Stock shall have been effectively registered under the
Securities Act and applicable state securities laws and sold by the Holder
thereof in accordance with such registration or sold under and pursuant to
Rule 144 or is eligible to be sold under and pursuant to paragraph (k) of
Rule 144. Whenever the restrictions imposed by this SECTION 9 shall
terminate as to any Warrants or Warrant Stock as herinabove provided, the
Holder thereof shall be entitled to receive from Frontier, without expense, a
new certificate evidencing such Warrants or Warrant Stock not bearing the
restrictive legend otherwise required to be borne by a certificate evidencing
such Warrants or Warrant Stock.
9.06 CERTAIN DISPOSITIONS OF SECURITIES.
(a) Notwithstanding anything in this Warrant (including SECTION 9 other
than SECTION 9.05) to the contrary, but subject to compliance with the
Securities Act, any applicable state securities laws and the requirement as
to legending of the certificates for Warrants and Warrant Stock specified in
SECTION 9.04, any Holder shall have the right to transfer any or all of its
Warrants and Warrant Stock:
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(i) to any Person who at the time owns (directly or indirectly) at
least a majority of the shares of such Holder;
(ii) to any Person pursuant to a dividend or other distribution
(whether by liquidation or otherwise) of such Holder;
(iii) to any Person at least a majority of whose shares shall at the
time be owned (directly or indirectly) by such Holder or by any Person
who owns (directly or indirectly) at least a majority of the shares of
such Holder; or
(iv) in the case of any Holder which is an insurance company,
pension fund, bank, bank holding company or a subsidiary of an insurance
company, pension fund, bank or bank holding company, to a third party, if,
in the reasonable judgment of such Holder, such transfer is required to
be effected by such Holder because (A) its investment in Warrants or shares
of Warrant Stock may exceed any limitation to which it is subject, or is
otherwise not permitted, under any law, rule or regulation of any
governmental authority, or (B) restrictions are imposed on such Holder
under any law, rule or regulation which, in the reasonable judgment of
such Holder, make it illegal or unduly burdensome to continue to hold such
Warrants or shares of Warrant Stock or a portion thereof.
The party to which Warrants or Warrant Stock are transferred pursuant to the
immediately preceding sentence shall be deemed to be a Holder of such
Warrants or Warrant Stock and bound by the provisions of this Warrant
applicable to Holders so long as he, she or it continues to own any of the
Warrants or Warrant Stock so transferred to such transferee.
(b) If the circumstances described in clause (iv) of SECTION 9.06(a)
arise, Frontier shall assist such Holder in disposing of its Warrants and
Warrant Stock in a prompt and orderly manner, and, at the request of such
Holder, Frontier shall provide (and authorize such Holder to provide) such
financial and other such information concerning Frontier as such holder may
request to any prospective purchaser of the Warrants or Warrant Stock owned
by such Holder.
SECTION 10. HOLDER'S RIGHTS.
10.01 DELIVERY EXPENSES. If any Holder surrenders any certificate for
Warrants or Warrant Stock to Frontier or a transfer agent of Frontier for
exchange for instruments of other denominations or registered in another name
or names, subject to the terms and conditions of SECTION 9, Frontier shall
cause such new instruments to be issued and shall pay the costs associated
with the preparation and issuance of any new instruments and the cost of
delivering to the office of such Holder from Frontier or its transfer agent,
duly insured, the surrendered instrument and any new instruments issued in
substitution or replacement for the surrendered instrument.
10.02 TAXES. Frontier shall pay all taxes (other than Federal, state or
local income taxes) which may be payable in connection with the issuance of
the Warrants and Warrant Stock hereunder,
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or in connection with any modification of this Warrant and shall hold each
Holder harmless without limitation as to time against any and all liabilities
with respect to any Warrant which may be payable in respect of any transfer
involved in the issuance and delivery of Warrants or of shares of Common
Stock in a name other than that in which such Warrant or Common Stock in
registered, and no such issue or delivery shall be made unless and until the
person requesting such issue has paid to Frontier the amount of any such tax,
or has established, to the satisfaction of Frontier, that such tax has been
paid. The obligations of Frontier under this SECTION 10.02 shall survive any
redemption, repurchase or acquisition of Warrants or Warrant Stock by
Frontier, and any cancellation or termination of the Warrants.
10.03 REPLACEMENT OF INSTRUMENTS. Upon receipt by Frontier of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any certificate or instrument evidencing any
Warrants or Warrant Stock, and
(a) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to it, or
(b) in the case of mutilation, upon surrender thereof, Frontier, at its
expense, shall cancel such certificate or instrument and execute, register and
deliver, in lieu thereof, a new certificate or instrument for (or covering
the purchase of) an equal number of Warrants or Warrant Stock.
10.04 CERTAIN RESTRICTIONS. Frontier shall not at any time enter into an
agreement or other instrument limiting in any manner its ability to perform
its obligations under this Warrant or making such performance or the issuance
of shares of Common Stock upon the exercise of any Warrant a default under
any such agreement or instrument.
10.05 CERTAIN COVENANTS. At all times prior to the Expiration Date:
(a) Frontier shall retain a nationally recognized independent
accounting firm as its auditors.
(b) Frontier shall afford Gaines Berland or its Affiliates (or
any Significant Holder), or their respective authorized agents, access,
at reasonable times, upon reasonable prior notice, (i) to inspect the
books and records of Frontier, (ii) to discuss with management of
Frontier the nonconfidential business and affairs of Frontier, and
(iii) to inspect the properties of Frontier.
(c) Each Holder and its authorized agents shall have the right to
attend all meetings of shareholders of Frontier.
(d) Frontier shall provide Gaines Berland with all notices set forth in
SECTIONS 6.01, 6.02 and 6.03 pursuant to the respective terms thereof.
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10.06 INDEMNIFICATION. Frontier shall indemnify and hold harmless
Gaines Berland and the Holders and each of their respective directors,
officers, employees, stockholders, Affiliates and agents, and Gaines Berland
and the Holders shall indemnify and hold harmless Frontier and its directors,
officers, employees, stockholders, Affiliates and agents (each, an
"INDEMNIFIED PERSON") on demand from and against any and all losses, claims,
damages, liabilities (or actions or other proceedings commenced or threatened
in respect thereof) and expenses that arise out of, result from, or in any
way relate to the breach of any representation, warranty or covenant by
Frontier contained in this Warrant or any other agreement, document or
instrument executed and delivered in connection with the transactions
contemplated hereby, and reimburse each indemnified person, upon its demand,
for any reasonable legal or other expenses incurred in connection with
investigating, defending or participating in the defense of any such loss,
claim, damage, liability, action or other proceeding (whether or not such
indemnified person is a party to any action or proceeding out of which any
such expenses arise), other than any of the foregoing claimed by any
indemnified person to the extent incurred by reason of the gross negligence or
willful misconduct of such indemnified person. No indemnified person shall be
responsible or liable to any Person for any consequential damages which may
be alleged as a result of or relating to this Warrant or in connection with
the other transactions contemplated hereby.
10.07 FINANCIAL STATEMENTS. Frontier shall deliver the information
specified below to Gaines Berland and each Significant Holder until the
earlier of (i) the Expiration Date and (ii) the date on which Gaines Berland
or any Significant Holder no longer holds any Warrants or Warrant Stock:
(a) as soon as available and in any event within 60 days after the
end of each of the first three fiscal quarters or each fiscal year of
Frontier, consolidated balance sheets of Frontier as of the end of such
fiscal quarter and statements of operations and cash flow of Frontier for
such fiscal quarter and for the period commencing at the end of the previous
fiscal year and ending with the end of such fiscal quarter, certified by the
chief financial officer of Frontier;
(b) as soon as available and in any event within 120 days after the
end of each fiscal year of Frontier, a copy of the annual audit report for
such fiscal year for Frontier, including therein the balance sheet of
Frontier as of the end of such fiscal year and statements of operations and
cash flow of Frontier for such fiscal year, in each case certified in a
manner reasonably acceptable to Gaines Berland by an independent public
accountant acceptable to Gaines Berland, together with a report from such
accountants to the effect that, in making the examination necessary for the
signing of such annual report by such accountants, they have not become aware
of any default that has occurred and is continuing, or, if they have become
aware of such default, describing such default and the steps, if any, being
taken to cure it;
(c) promptly after (1) the sending of filing thereof, copies of all
reports which Frontier sends to any of its security holders, (2) the sending
or filing thereof, all reports and registration statements which Frontier
files with the Securities and Exchange Commission or any national securities
exchange, (3) the filing thereof, copies of all tariff and rate cases and
other material reports
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filed with any regulatory authority, and (4) receipt thereof, copies of all
notices received from any regulatory authority concerning noncompliance by
Frontier with any applicable regulations; and
(d) such other information respecting the condition or operations,
financial or otherwise, of Frontier as Gaines Berland may from time to time
reasonably request.
SECTION 11. RESERVATION AND AUTHORIZATION OF COMMON STOCK;
REGISTRATION WITH OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY.
Frontier shall at all times reserve and keep available for issue upon the
exercise of Warrants such number of its authorized but unissued shares of
Common Stock as shall be sufficient to permit the exercise in full of all
outstanding Warrants. All shares of Common stock which shall be so issuable,
when issued upon exercise of any Warrant and payment of the applicable
Exercise Price therefor shall be duly and validly issued, fully paid and
nonassessable and free and clear of any Liens (caused directly or indirectly
by Frontier or its Affiliates).
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or which would cause
an adjustment reducing the Current Warrant Price per share of Common Stock
below the then par value, if any, of the shares of Common Stock issuable
upon exercise of the Warrants, Frontier shall take any corporate action which
is necessary in order that Frontier may validly and legally issue fully paid
and nonassessable shares of Common Stock free and clear of any Liens (caused
directly or indirectly by Frontier or its Affiliates) upon the exercise of
all the Warrants immediately after the taking of such action.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit, Frontier shall
obtain all such authorizations or exemptions thereof, or consents thereto, as
may be necessary from any public regulatory body or bodies having
jurisdiction thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise or conversion of Warrants require registration with any governmental
authority under andy Federal or state law (otherwise than any law that
applies to a Holder specifically because of its status as a regulated entity
or in connection with a registration under the Securities Act or applicable
state securities laws) before such shares may be so issued, Frontier shall in
good faith and as expeditiously as reasonably possible and at its expense
endeavor to cause such shares to be duly registered.
SECTION 12. TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS.
(a) In the case of all dividends or other distributions by Frontier to
the holders of its Common Stock with respect to which any provision of
SECTION 4 refers to the taking of a record of such holders, Frontier shall in
each case take such a record as of the close of business on a business day or
as otherwise provided by or permitted under the corporation laws of
Frontier's then jurisdiction of incorporation.
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(b) Frontier shall not at any tine, except upon complete dissolution,
liquidation or winding up, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise, conversion or
transfer of any Warrant, unless otherwise required by any governmental
authority or by any applicable federal, state or local law.
SECTION 13. NO VOTING OR OTHER RIGHTS.
This Warrant shall not entitle the Holder hereof to any voting or other
rights as a stockholder of Frontier either at law or at equity, and the
rights of a holder of this Warrant are limited to those expressly set forth
herein.
SECTION 14. MISCELLANEOUS.
14.01 OFFICE OF FRONTIER. So long as any of the Warrants remains
outstanding, Frontier shall maintain an office in the continental United
States of America where the Warrants may be presented for exercise, transfer,
division or combination as in this Warrant provided. Such office shall be at
Frontier Natural Gas Corporation, 500 Dallas Street, Suite 2920, Houston,
Texas 77002, unless and until Frontier shall designate and maintain some
other office for such purposes and give notice thereof to the Holders of all
outstanding Warrants.
14.02 NOTICES. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and
shall be delivered personally or by facsimile communication to the number set
forth below, or by first class mail, postage prepaid, registered or certified
with return receipt requested, at the addresses set forth below. Notice
deposited in the mail in the manner hereinabove provided shall be effective
upon expiration of five (5) business days from the date on which it is so
deposited. Notice given in any other manner shall be effective only if and
when received by the addressee. For the purposes of notice, the addresses of
the parties shall be as follows:
With respect to Frontier: FRONTIER NATURAL GAS CORPORATION
500 Dallas Street, Suite 2920
Houston, Texas 77002
Attention: President
Telephone Number: (713) 739-7100
Fax Number: (713) 739-7124
With a copy to: Chamberlain, Hrdlicka, White,
Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002-4310
Attention: James J. Spring, III
Telephone Number: (713) 658-1818
Fax Number: (713) 658-2553
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With respect to Gaines Berland: GAINES BERLAND ENERGY FUND, L.P.
712 5th Avenue, 21st Floor
New York, New York 10019
Attention: Peter Blum
Telephone Number: (212) 632-0550
Fax Number: (212) 632-0549
provided that each party shall have the right to change its address for
notice, and the person who is to receive notice hereunder, by the giving of
fifteen (15) days' prior written notice to the other parties hereto in the
manner set forth above.
14.03 AMENDMENTS. The terms of the Warrants may be amended, and the
observance of any term therein may be waived, upon the written consent of the
holders of Warrants for a majority of the total number of Stock Units at the
time purchasable upon the exercise of all then outstanding Warrants. For the
purposes of determining whether the holders of outstanding Warrants entitled
to purchase a requisite number of Stock Units at any time have taken any
action authorized by this Warrant, any Warrants owned by Frontier or any
Affiliate of Frontier shall be deemed not to be outstanding.
14.04 GOVERNING LAW. This Warrant shall in all respects by governed
by, and construed in accordance with, the substantive federal laws of the
United States and the internal laws of the State of Texas (principles of
conflict of laws excluded) and, to the extent the Oklahoma General
Corporation Act so requires, the laws of the State of Oklahoma.
14.05 LIMITATION OF LIABILITY. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Common Stock,
and no mere enumeration herein of the rights or privileges of the Holder
hereof, shall give rise to any liability of such holder for the Exercise
Price or as a stockholder of Frontier, whether such liability is asserted by
Frontier, by any creditor of Frontier or any other Person.
14.06 BINDING EFFECT. The obligations set forth in this Warrant shall
be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns.
14.07 HEADINGS. The headings in this Warrant are inserted for
concurrence only and are not intended to describe, interpret, define or limit
the scope, extent or intent of this Warrant or any provision hereof.
14.08 GENDER AND NUMBER. Whenever required by the context, as used in
this Warrant, the singular number shall include the plural and vice versa and
pronouns of whatever gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
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IN WITNESS WHEREOF, the parties have duly executed this Warrant this
14th day of January, 1998 to be effective as of the Date of Issuance.
Frontier Natural Gas Corporation
By: /s/ David W. Berry
--------------------------------
David W. Berry, President
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<PAGE>
FORM OF EXERCISE
(To be executed by the registered holder hereof)
The undersigned hereby exercises this Warrant to subscribe for and
purchase _____________ Stock Units of Frontier Natural Gas Corporation
covered by the within certificate and herewith makes payment therefor in
full. Kindly issue certificates and/or other instruments covering Stock Units
in accordance with the instructions given below. A new Warrant for the
unexercised balance of the Stock Units covered by the within certificate, if
any, will be registered in the name of the undersigned.
Dated:
------------------------------
-------------------------------------
Instructions for registration of Stock
Units
- - -------------------------------------
Name (please print)
Social Security or Other Identifying
Number:
------------------------------
Address:
- - -------------------------------------
Street
- - -------------------------------------
City, State and Zip Code
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<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder hereof)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
all the rights of the undersigned under the within certificate with respect
to the purchase of up to the number of Stock Units covered thereby as set
forth below and does hereby irrevocably constitute and appoint ______________
____________, attorney-in-fact, to transfer the same on the books of
Frontier, with full power of substitution in the premises:
<TABLE>
<CAPTION>
Number of
Name of Assignee Address Stock Units
- - ---------------- ------- -----------
<S> <C> <C>
</TABLE>
Dated:
------------------------------
--------------------------------------
(Signature of Registered Owner)
--------------------------------------
(Guaranteed Signature)
Notice: The signature to this Form of Assignment must correspond with the
name as written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank or trust company having an office or correspondent in
New York, New York, or by a firm having membership on the New York Stock
Exchange.
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<PAGE>
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES OR BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE
NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST
OR PARTICIPATION HEREIN OR THEREIN, MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR
DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS
AMENDED, AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER AND
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
WARRANT
to Purchase Common Stock of
FRONTIER NATURAL GAS CORPORATION
THIS IS TO CERTIFY THAT ESENJAY PETROLEUM CORPORATION, a Texas
corporation ("Esenjay"), or its assigns, is entitled to purchase in whole or
in part from time to time from FRONTIER NATURAL GAS CORPORATION, an Oklahoma
corporation ("Frontier"), on or after the Date of Issuance (as hereinafter
defined), but not later than 5:00 p.m., Houston time, on the Expiration Date
(as hereinafter defined), 37,500 Stock Units (as hereinafter defined and
subject to adjustment as provided herein) at a purchase price per Stock Unit
equal to the Exercise Price (as hereinafter defined), subject to the terms and
conditions hereinbelow provided.
SECTION 1. CERTAIN DEFINITIONS.
1.01 DEFINED TERMS. For purposes of this Warrant, in addition to the
terms defined elsewhere herein, the following terms shall have the meanings
set forth in this Section 1:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common
Stock issued by Frontier on or after the Date of Issuance, other than (i) the
Warrant Stock, (ii) the shares of Common Stock described as being issued and
outstanding on the Date of Issuance in SECTION 8.07, and (iii) shares of
Common Stock issued or to be issued to employees, directors, advisors or
consultants of Frontier in connection with equity incentive plans.
"AFFILIATE" shall mean, as to any Person, any other Person which
directly or indirectly controls, or is under common control with or is
controlled directly by, such Person and, if such Person is an individual, any
member of the immediate family (including parents, spouse and children) of
such individual or one or more members of such immediate family and any
Person who is controlled by any such member or trust. As used in this
definition, "control" (including the correlative terms "controlled by"
<PAGE>
and "under common control with") shall mean possession, directly or
indirectly, of the power to direct or cause the direction of the management
or policies of a Person (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise), PROVIDED
that, in any event, any Person which owns directly or indirectly 40% or more
of the securities having ordinary voting power for the election of directors
or other governing body of a corporation or 40% or more of the partnership or
other ownership interests of any other Person will be deemed to control such
corporation or other Person. Notwithstanding the foregoing, (i) no individual
shall be deemed to be an Affiliate of a corporation solely by reason of his
or her being an officer or director of such corporation, and (ii) neither
Esenjay nor any of its Affiliates shall be deemed to be an Affiliate of
Frontier.
"ASPECT" shall mean Aspect Resources LLC, a Colorado limited liability
company.
"COMMON STOCK" shall mean Frontier's authorized Common Stock, par value
$.01 per share, as constituted on the date hereof, and any stock into which
such Common stock may thereafter be converted or changed, and also shall
include any other stock of Frontier of any other class that is not preferred
as to dividends or distributions in liquidation over any other class of any
other stock of Frontier.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into, or exercisable or
exchangeable for, Additional Shares of Common Stock, either immediately or
upon the arrival of a specified date or the happening of a specified event.
"CURRENT ADJUSTMENT PRICE," per share of Common Stock, for the purposes
of any provision of this Warrant at the date herein specified, shall be
deemed to be the average of the daily market prices on such date and the five
(5) consecutive trading days immediately prior to such date. The market price
for each such trading day shall be (a) if the Common Stock is traded on a
national securities exchange, its last bid price on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid, all as made available over the
Consolidated Last Sale Reporting System of the CTA Plan or, if the Common
Stock is not then eligible for reporting over such system, its last bid price
on such trading day on such national securities exchange or, if there was no
bid on that day, on the next preceding trading day on which there was a bid
on such national securities exchange or (b) if the principal market for the
Common Stock is the over-the-counter market, (i) its last bid price on such
trading day or, if there was no bid on that day, the last bid price on the
next preceding trading day on which there was a bid, all as made available
over the Consolidated Last Sale Reporting System of the CTA Plan, or (ii) if
the Common Stock is not then eligible for reporting over the Consolidated
Last Sale Reporting System of the CTA Plan and the Common Stock is quoted on
the NASDAQ, the last bid price reported on NASDAQ on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid or (iii) if the Common Stock is not
reported or quoted on NASDAQ, the closing bid quotations as quoted in each
of The Wall Street Journal, the National Quotation Bureau pink sheets, the
Salomon Brothers quotation sheets, quotation sheets of registered
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<PAGE>
marketmakers, as applicable, and, if necessary, dealers' telephone quotations.
If the Current Adjustment Price per share of Common Stock cannot be
ascertained by any of the foregoing methods, the Current Adjustment Price
per share of Common Stock shall be deemed to be the Fair Value per share of
Common Stock.
"CURRENT WARRANT PRICE," per share of Common Stock, for the purpose of
any provision of this Warrant at the date herein specified, shall mean the
amount equal to the quotient resulting from dividing the Exercise Price per
Stock Unit in effect on such date by the number of shares (including any
fractional share) of Common Stock comprising a Stock Unit on such date.
"DATE OF ISSUANCE" shall mean January 15, 1998.
"ESENJAY" shall have the meaning set forth in the preamble of this
Warrant.
"EXERCISE PRICE" per Stock Unit shall mean fifty cents ($.50).
"EXPIRATION DATE" shall mean the later of (i) one year from the Date of
Issuance, or (ii) thirty (30) days after the Holder's receipt of written
notice from Frontier that all amounts advanced under that Credit Agreement,
dated January 12, 1998, by and between Frontier and Aspect have been repaid
and all of the obligations of the Lender (as such term is defined in the
Credit Agreement) under the Credit Agreement have terminated.
"FAIR VALUE" per share of Common Stock (or other property as the case
may be) shall mean the price that could be obtained from an independent third
party for all of the issued and outstanding shares of Common Stock of
Frontier in an arm's length transaction in which the seller would not be
under any compulsion to sell and the purchaser would not be under any
compulsion to purchase. Fair Value shall be determined as follows: Frontier
and the Holders of Warrants entitled to purchase a majority of the Stock
Units covered by all the Warrants shall each designate a respresentative, and
such representatives will meet and use their best efforts to reach an
agreement on the Fair Value. If the representatives designated by Frontier and
such Holders are unable to reach such an agreement, then the Holders of
Warrants entitled to purchase a majority of the Stock Units covered by all
the Warrants will submit a list of at least three Independent Appraisers.
Frontier shall select one of the Independent appraisers set forth on such
list. The Independent Appraiser so selected by Frontier will determine the
Fair Value of a share of Common Stock (or other property, as the case may be)
and its determination thereof will be final and binding on all parties
concerned, absent manifest error. Frontier will provide the Independent
Appraiser so selected by Frontier with all information about Frontier which
such Independent Appraiser reasonably deems necessary for determining the
Fair Value. The fees and expenses of the appraisal process (including those
of the Independent Appraiser) will be paid by Frontier. Frontier may require
that the Independent Appraiser keep confidential any non-public information
received as a result of this paragraph pursuant to reasonable confidentiality
arrangements.
"FRONTIER" shall have the meaning set forth in the preamble of this
Warrant.
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"HOLDER" shall mean any Person who acquires Warrants or Warrant Stock
pursuant to the provisions of this Warrant including any transferees of
Warrants or Warrant Stock.
"INCLUDE" and "INCLUDING" shall be construed as if followed by the
phrase, "without being limited to,".
"INDEPENDENT APPRAISER" shall mean an appraiser which is a nationally
recognized independent expert experienced in valuing businesses similar to
the principal business of Frontier.
"LIEN" means any lien, mortgage, security interest, pledge, charge,
deposit, production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement, or lease,
license or other arrangement substantially equivalent thereto, other than
preferential purchase rights and consents to assignment.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation system.
"NON-TRANSFERABLE RIGHTS" shall have the meaning assigned to such term
in the definition of Rights Plan.
"PERSON" shall mean a corporation, an association, a partnership, a
limited liability company, a bank, an employee benefit plan, a joint venture,
an organization, an individual, a trust or any unit of federal, state or
local government.
"RIGHTS CERTIFICATE" shall have the meaning assigned to such term in the
definition of Rights Plan.
"RIGHTS PLAN" shall mean a shareholder rights plan implemented by
Frontier to deter a hostile acquisition, pursuant to which holders of shares
of Common Stock (a) are issued rights that are not initially exercisable or
transferable apart from such shares of Common Stock ("NON-TRANSFERABLE
RIGHTS") and (b) are to be issued rights certificates exercisable and
transferable apart from such shares of Common Stock ("RIGHTS CERTIFICATES")
in certain circumstances to purchase Additional Shares of Common Stock upon
certain acquisitions of stock or assets of or business combinations involving
Frontier by a Person in a transaction or transactions not approved by the
board of directors of Frontier as specified in the Rights Plan.
"SECURITIES ACT" means the Securities Act of 1933 as in effect on the
date hereof and as the same may be amended from time to time.
"SIGNIFICANT HOLDER" shall mean, at any date, a Holder of 33 1/3% of the
then outstanding Warrants and shares of Warrant Stock.
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"STOCK UNIT" shall mean one share of Common Stock on the Date of
Issuance, and thereafter such number of shares (including any fractional
shares) of Common Stock and other securities, cash or other property as shall
result from the adjustments specified in Section 4 and Section 5.
"WARRANT STOCK" shall mean (i) the shares of Common Stock purchased or
purchasable by the Holders of the Warrants upon the exercise thereof,
including any other stock into which such Common Stock may thereafter be
changed or converted, and (ii) any additional shares of Common Stock or other
securities issued or distributed by way of a dividend, stock split or other
distribution in respect of the Common Stock referred to in clause (i) above,
or acquired by way of any rights offering or similar offering made in respect
of the Common Stock referred to in clause (i) above.
"WARRANTS" shall mean the warrants issued hereby, dated as of the Date
of Issuance, evidencing rights to purchase up to an aggregate of 37,500 Stock
Units, and all Warrants issued upon transfer, division or combination of, or
in substitution for, any thereof.
SECTION 2. EXERCISE OF WARRANT.
In order to exercise this Warrant, in whole or in part, the Holder
hereof shall deliver to Frontier, at its office maintained for such purpose
pursuant to SECTION 14.01, (a) a written notice of such Holder's election to
exercise this Warrant, which notice shall specify the number of Stock Units
to be purchased, (b) a certified or cashier's check or checks payable to
Frontier in an aggregate amount equal to the aggregate Exercise Price for the
number of Stock Units as to which this Warrant is being exercised, and (c)
this Warrant. Such notice shall be in substantially the form of the "Form of
Exercise" set out at the end of this Warrant. Upon receipt thereof, Frontier
shall, as promptly as practicable and in any event within seven days
thereafter (unless such exercise shall be in connection with an underwritten
public offering of shares of Common Stock subject to this Warrant, in which
event concurrently with such exercise), cause to be executed and delivered to
such Holder a stock certificate or certificates representing the aggregate
number of duly and validly issued, fully paid and nonassessable shares of
Warrant Stock issuable upon such exercise, free and clear of any Liens.
The stock certificate or certificates for Warrant Stock so delivered
shall be in such denominations as may be specified in such notice and shall
be registered in the name of such Holder or such other Person as shall be
designated in such notice, PROVIDED that such other Person as may be
designated shall confirm in writing for the benefit of Frontier that the
representations and warranties set forth in SECTION 7 are true, complete and
correct with respect to such other Person as may be designated, and each such
other Person acknowledges and agrees in writing to accept the benefits of and
be bound by the terms and conditions set forth in this Warrant. To the extent
permitted by law, such stock certificate or certificates shall be deemed to
have been issued, and such Holder or other Person so designated to receive the
Warrant Stock shall be deemed to have become a holder of record of such
shares, including the right to vote such shares or to consent or to receive
notice as a stockholder, as of the time such notice and payment is received
by Frontier as aforesaid. If this Warrant shall have been exercised only in
part, Frontier shall, at the time of delivery of said stock certificate or
certificates, execute and deliver to such Holder a new Warrant, dated the
original
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date of issuance, evidencing the rights of such Holder to purchase the
remaining Stock Units called for by this Warrant, which new Warrant shall in
all other respects be identical with this Warrant, or, at the option of
Frontier, appropriate notation may be made on this Warrant and the same
returned to such Holder.
All shares of Common Stock issuable upon the exercise of this Warrant
shall, upon payment therefor in accordance herewith, be duly and validly
issued, fully paid and nonassessable and free and clear of any Liens.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, Frontier shall pay to the Holder
an amount in cash equal to such fraction multiplied by the Current Adjustment
Price per share of Common Stock.
SECTION 3. TRANSFER, DIVISION AND COMBINATION.
Subject to SECTION 9, this Warrant and all rights hereunder are
transferable, in whole or in part, on the books of Frontier to be maintained
for such purpose, upon surrender of this Warrant at the office of Frontier
maintained for such purpose pursuant to SECTION 14.01, together with a
written assignment of this Warrant (in substantially the form of the "Form of
Assignment" annexed hereto) duly executed by the Holder hereof or its agent or
attorney and payment of funds sufficient to pay any stock transfer taxes
payable hereunder by the Holder hereof upon the making of such transfer. Upon
such surrender and payment Frontier shall, subject to SECTION 9 and the
immediately following sentence, execute and deliver a new Warrant or Warrants
(with the same Exercise Price or Exercise Prices as contained in the Warrant
or Warrants so surrendered, respectively) in the name of the assignee or
assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled. If and when this
Warrant is assigned in blank (in case the restrictions on transferability set
forth in SECTION 9 shall have been terminated), Frontier may (but shall not
be obliged to) treat the bearer hereof as the absolute owner of this
Warrant for all purposes and Frontier shall not be affected by any notice to
the contrary. This Warrant, if properly assigned in compliance with this
SECTION 3 and SECTION 9, may be exercised by an assignee for the purchase of
shares of Common Stock without having a new Warrant or Warrants issued.
This Warrant may, subject to SECTION 9, be divided or combined with
other Warrants upon presentation at the aforesaid office of Frontier,
together with a written notice specifying the names and denominations in
which new Warrants are to be issued, signed by the Holder hereof or its
authorized agent or attorney. Subject to compliance with the next preceding
paragraph and with SECTION 9, as to any transfer which may be involved in
such division or combination, Frontier shall execute and deliver a new
Warrant or Warrants (with the same Exercise Price or Exercise Prices as
contained in the Warrant or Warrants so transferred, respectively) in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
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Frontier shall maintain at its aforesaid office books for the
registration and transfer of the Warrants.
SECTION 4. ADJUSTMENT OF STOCK UNIT.
The number of shares of Common Stock comprising a Stock Unit shall be
subject to adjustment from time to time as set forth in this SECTION 4.
Frontier shall not take any action with respect to its Common Stock of any
class requiring an adjustment pursuant to any of SECTION 4.01, 4.02, 4.08 or
5 without at the same time taking like action with respect to its Common
Stock of each other class; and Frontier shall not create any class of Common
Stock which carries any rights to dividends or assets differing in any
respect from the rights of the Common Stock on the Date of Issuance.
4.01 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at any
time or from time on or after the Date of Issuance Frontier shall
(i) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then the number of shares of Common Stock comprising a Stock Unit immediately
after the happening of any such event shall be adjusted so as to consist of
the number of shares of Common Stock which a record holder of the number of
shares of Common Stock comprising a Stock Unit immediately prior to the
happening of such event would own or be entitled to receive after the
happening of such event.
4.02 CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case at any time or
from time to time on or after the Date of Issuance Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling them
to receive any dividend or other distribution of,
(i) cash (other than a cash distribution made as a dividend and
payable out of earnings or earned surplus legally available for the
payment of dividends under the laws of the jurisdiction of incorporation
of Frontier, to the extent, but only to the extent, that the aggregate of
all such dividends paid or declared after the date hereof, does not exceed
the consolidated net income of Frontier earned subsequent to the date
hereof determined in accordance with generally accepted accounting
principles consistently applied), or
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(ii) any evidence of its indebtedness (other than Convertible
Securities), any shares of its stock (other than Additional Shares of
Common Stock) or any other securities or property of any nature whatsoever
(other than cash and other than Convertible Securities or Additional
Shares of Common Stock), or
(iii) any options, warrants or other rights to subscribe for or
purchase any evidences of its indebtedness (other than (A) Convertible
Securities and (B) Non-Transferable Rights issued pursuant to a Rights
Plan), any shares of its stock (other than Additional Shares of Common
Stock) or any other securities or property of any nature whatsoever (other
than cash and other than Convertible Securities or Additional Shares of
Common Stock),
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (i) the numerator of which shall be the Current
Adjustment Price per share of Common Stock at the date of taking such record,
and (ii) the denominator of which shall be such Current Adjustment Price per
share of Common Stock minus the amount of any and all such cash and the Fair
Value of any and all such evidences of indebtedness, shares of stock, other
securities or property, or options, warrants or other subscription or
purchase rights, so distributable in respect of one share of Common Stock. A
reclassification of the Common Stock into shares of Common Stock and shares
of any other class of stock shall be deemed a distribution by Frontier to the
holders of its Common Stock of such shares of such other class of stock
within the meaning of this SECTION 4.02 and, if the outstanding shares of
Common Stock shall be changed into a larger or smaller number of shares of
Common Stock as a part of such reclassification, shall be deemed a
subdivision or combination, as the case may be, of the outstanding shares of
Common Stock within the meaning of SECTION 4.01.
4.03 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case at any
time or from time to time on or after the Date of Issuance Frontier shall
(except as hereinafter provided) issue to any Person any Additional Shares of
Common Stock for a consideration per share less than:
(a) in the case of a public offering of Common Stock under the
Securities Act, the greater of (i) the consideration per share
determined by the managing underwriter (in the event of an underwritten
public offering) and (ii) 90% of the Current Adjustment Price on the
effective date of the registration statement with respect to such public
offering,
(b) in the case of the issuance of Common Stock by Frontier in
connection with the acquisition of assets and/or securities of any
Person, the greater of (i) the consideration per share determined by the
Board of Directors of Frontier as set forth in the binding agreement
pursuant to which such acquisition is being effected and (ii) 90% of the
Current Adjustment Price per share of Common Stock as of the date for
which the pricing of Common Stock in connection with such issuance is
determined in accordance with such binding agreement, or
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(c) in all other circumstances, 95% of the Current Adjustment
Price,
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (a) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
Additional Shares of Common Stock plus the number of such Additional Shares
of Common Stock so issued, and (b) the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus the number of shares
of Common Stock which the aggregate consideration for the total number of
such Additional Shares of Common Stock so issued would purchase at the
Current Adjustment Price. For purposes of this SECTION 4.03, and subject to
the foregoing sentence, the date as of which the Current Adjustment Price
shall be computed shall be the earlier of (i) the date on which Frontier
shall enter into a firm contract for the issuance of such Additional Shares
of Common Stock and (ii) the date of actual issuance of such Additional
Shares of Common Stock. This SECTION 4.03 shall not apply to any issuance of
Additional Shares of Common Stock for which an adjustment is provided under
SECTION 4.01. No adjustment of the number of shares of Common Stock
comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued pursuant
to the exercise of any options, warrants or other subscription or purchase
rights or pursuant to the exercise of any conversion or exchange rights in
any Convertible Securities described in SECTION 4.04 or 4.05 (it being
understood that full adjustment shall be made, without duplication, in
respect of all Additional Shares of Common Stock issuable at the time any
Rights Certificates issued pursuant to a Rights Plan become exercisable by
the holders of Common Stock). No adjustment of the number of shares of Common
Stock comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued for a
consideration greater than that described in clauses (a), (b) and (c), as
applicable, of this SECTION 4.03.
4.04 ISSUANCE OF OPTIONS WARRANTS OR OTHER RIGHTS. If on or after the
Date of Issuance, Frontier shall issue to any Person, any options, warrants
or other rights to subscribe for or purchase any Additional Shares of Common
Stock or any Convertible Securities (other than Non-Transferable Rights
issued pursuant to a Rights Plan) and the consideration per share for which
Additional Shares of Common Stock may at any time thereafter be issuable
pursuant to such options, warrants or other rights or pursuant to the terms
of such Convertible Securities (other than Non-Transferable Rights issued
pursuant to a Rights Plan) shall be less than the Current Adjustment Price,
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted as provided in SECTION 4.03 on the basis that
(a) the maximum number of Additional Shares of Common Stock
issuable pursuant to all such options, warrants or other rights or necessary
to effect the conversion or exchange of all such Convertible Securities shall
be deemed to have been issued as of (and, accordingly, the date as of which
the Current Adjustment Price shall be computed shall be) the computation date
specified in the last sentence of this SECTION 4.04, and
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(b) the aggregate consideration for such maximum number of
Additional Shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by Frontier for the issuance of such
Additional shares of Common Stock pursuant to such options, warrants or other
rights or pursuant to the terms of such Convertible Securities (it being
understood that full adjustment shall be made, without duplication, in
respect of all Additional Shares of Common Stock issuable at the time any
Rights Certificates issued pursuant to a Rights Plan become exercisable by
the holders of Common Stock). For purposes of this SECTION 4.04, the
computation date for clause (a) above shall be the earliest of (i) the date
on which Frontier shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive any such options, warrants or other
rights, (ii) the date on which Frontier shall enter into a firm contract for
the issuance of such options, warrants or other rights, and (iii) the date of
actual issuance of such options, warrants or other rights.
4.05 ISSUANCE OF CONVERTIBLE SECURITIES. If on or after the Date of
Issuance Frontier shall issue to any Person any Convertible Securities and
the consideration per share for which Additional Shares of Common Stock may
at any time thereafter be issuable pursuant to the terms of such Convertible
Securities shall be less than the Current Adjustment Price, then the number
of shares of Common Stock thereafter comprising a Stock Unit shall be
adjusted as provided in SECTION 4.03, on the basis that (a) the maximum
number of Additional Shares of Common Stock necessary to effect the
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued as of (and accordingly,the date as of which the Current
Adjustment Price shall be computed shall be) the computation date specified
in the next following sentence of this SECTION 4.05, and (b) the aggregate
consideration for such maximum number of Additional Shares of Common Stock
shall be deemed to be the minimum consideration received and receivable by
Frontier for the issuance of such Additional Shares of Common Stock pursuant
to the terms of such convertible Securities. For purposes of this SECTION
4.05, the computation date for clause (a) above shall be the earliest of (i)
the date on which Frontier shall take a record of the holders of its Common
Stock for for the purpose of entitling them to receive any such Convertible
Securities, (ii) the date on which Frontier shall enter into a firm contract
for the issuance of such Convertible Securities, and (iii) the date of actual
issuance of such Convertible Securities. No adjustment of the number of
shares of Common Stock comprising a Stock Unit shall be made under this
SECTION 4.05 upon issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants or other subscription or purchase
rights therefor, if any such adjustment shall previously have been made upon
the issuance of such warrants or other rights pursuant to SECTION 4.04. No
adjustment of the number of Shares of Common Stock comprising a Stock Unit
shall be made under this SECTION 4.05 upon the issuance of any Additional
Shares of Common Stock which are issued for a consideration greater than that
described in the first sentence of this SECTION 4.05.
4.06 SUPERSEDING ADJUSTMENT OF STOCK UNIT. If, at any time on or after
the Date of Issuance, any adjustment of the number of shares of Common Stock
comprising a Stock Unit shall have been made pursuant to SECTION 4.04 OR 4.05
on the basis of the issuance of options, warrants
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or other rights or the issuance of other Convertible Securities, or any new
adjustment of the number of shares of Common Stock comprising a Stock Unit
shall have been made pursuant to this SECTION 4.06.
(i) such options, warrants or rights or the right of conversion
or exchange in such other Convertible Securities shall expire, and a
portion of such options, warrants or rights, or the right of conversion,
exercise or exchange in respect of a portion of such other Convertible
Securities, as the case may be, shall not have been exercised, or
(ii) the consideration per share, for which Additional Shares of
Common Stock are issuable pursuant to such options, warrants or rights
or the terms of such other Convertible Securities, shall be increased
solely by virtue of provisions therein contained for an automatic
increase in such consideration per share upon the arrival of a specified
date or the happening of a specified event,
such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such options,
warrants or rights or other Convertible Securities on the basis of
(a) treating the number of Additional Shares of Common Stock, if
any, theretofore actually issued or issuable pursuant to the previous
exercise of such options, warrants or rights or such right of conversion
or exchange, as having been issued on the date or dates of such issuance
of Additional Shares of Common Stock as determined for purposes of such
previous adjustment and for the consideration actually received and
receivable therefor, and
(b) treating any such options, warrants or rights or any such
other Convertible Securities which then remain outstanding as having
been granted or issued immediately after the time of such increase of
the consideration per share for such Additional Shares of Common Stock
as are issuable under such options, warrant or rights or other
Convertible Securities, and , if and to the extent called for by the
foregoing provisions of this SECTION 4 on the basis aforesaid, a new
adjustment of the number of shares of Common Stock comprising a Stock
Unit shall be made, which new adjustment shall supersede the previous
adjustment so rescinded and annulled.
4.07 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION 4.
The following provisions shall be applicable to the making of adjustments
of the number of shares of Common Stock comprising a Stock Unit
hereinbefore provided for in this SECTION 4:
(i) TREASURY STOCK. The sale or other disposition of any issued
shares of Common Stock owned or held by or for the account of Frontier
shall be deemed an issuance thereof for purposes of this SECTION 4.
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(ii) COMPUTATION OF CONSIDERATION. To the extent that any
Additional Shares of Common Stock or any Convertible Securities or any
options, warrants or other rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities shall be
issued for a cash consideration, the consideration received by Frontier
therefor shall be deemed to be the amount of cash received by Frontier
therefor, or, if such Additional Shares of Common Stock or Convertible
Securities are offered by Frontier for subscription, the subscription
price, or, if such Additional Shares of Common Stock or Convertible
Securities are sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price, in
any such case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any compensation,
discounts or expenses paid or incurred by Frontier for and in the
underwriting of, or otherwise in connection with, the issue thereof. To
the extent that such issuance shall be for consideration other than
cash, then, except as herein otherwise expressly provided, the amount of
such consideration shall be deemed to be the Fair Value of such
consideration at the time of such issuance. The consideration for any
Additional Shares of Common Stock issuable pursuant to any options,
warrants or other rights to subscribe for or purchase the same shall be
the consideration received or receivable by Frontier for issuing such
options, warrants or other rights, plus the additional consideration
payable to Frontier upon the exercise of such options, warrants or
other rights. The consideration for any Additional Shares of Common
Stock issuable pursuant to the terms of any Convertible Securities shall
be the consideration received or receivable by Frontier for issuing any
options, warrants or other rights to subscribe for or purchase such
Convertible Securities, plus the consideration paid or payable to
Frontier in respect of the subscription for or purchase of such
Convertible Securities, plus the additional consideration, if any,
payable to Frontier upon the exercise of the right of conversion,
exercise or exchange in such Convertible Securities. In case of the
issuance at any time of any Additional Shares of Common Stock or
Convertible Securities in payment or satisfaction of any dividend upon
any class of stock other than Common Stock, Frontier shall be deemed to
have received for such Additional Shares of Common Stock or Convertible
Securities consideration equal to the amount of such dividend so paid or
satisfied.
(iii) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by the
foregoing provisions of this SECTION 4 shall be made whenever and as
often as any specified event requiring an adjustment shall occur,
except that no adjustment of the number of shares of Common Stock
comprising a Stock Unit that would otherwise be required shall be made
(except in the case of a subdivision or combination of shares of the
Common Stock, as provided for in SECTION 4.01) unless and until such
adjustment, either by itself or with other adjustments not previously
made, adds or subtracts at least 1/20the of a share to or from the
number of shares of Common Stock comprising a Stock Unit immediately
prior to the making of such adjustment. Any adjustment representing a
change of less than such minimum amount (except as aforesaid) shall be
carried forward and made as soon as such adjustment, together with other
adjustments required by this SECTION 4 and not previously made, would
result in
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a minimum adjustment. For the purpose of any adjustment, any specified
event shall be deemed to have occurred at the close of business on the
date of its occurrence.
(iv) FRACTIONAL INTERESTS. In computing adjustments under this
SECTION 4, fractional interests in Common Stock shall be taken into
account to the nearest one-thousandth of a share.
(v) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which SECTION
4 shall require that an adjustment in the shares of Common Stock
comprising a Stock Unit be made effective as of a record date, Frontier
may elect to defer until the occurrence of such event by (i) issuing to
the Holder, if this Warrant is exercised after such record date, the
shares of Common Stock, if any, issuable upon such exercise over and
above the shares of Common Stock or other capital stock of Frontier, if
any, issuable upon such exercise on the basis of the number of shares of
Common Stock comprising a Stock Unit in effect prior to such adjustment
and (ii) paying to the Holder any amount of cash in lieu of the issuance
of fractional shares pursuant to SECTION 4; PROVIDED, HOWEVER, that
Frontier shall deliver to such Holder a due bill or other appropriate
instrument evidencing such Holder's right to receive such additional
shares or such cash upon the occurrence of such event.
(vi) WHEN ADJUSTMENT NOT REQUIRED. If Frontier shall take a record
of the holders of its Common Stock for the purpose of entitling them to
receive a dividend or distribution or subscription or purchase rights
and shall, thereafter and before the distribution thereof to
stockholders, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then thereafter no
adjustment shall be required by reason of the taking of such record and
any such adjustment previously made in respect thereof shall be
rescinded and annulled.
4.08 OTHER ACTION AFFECTING COMMON STOCK. In case at any time or from
time to time Frontier shall take any action affecting its Common Stock, other
than an action described in any of the foregoing SECTIONS 4.01 through 4.07
(inclusive), or in SECTION 5, then, unless in the reasonable opinion of the
Board of Directors of Frontier such action will not have a material adverse
effect upon the rights of the Holders of the Warrants or an adverse effect on
the number of shares of Common Stock comprising a Stock Unit shall be
adjusted in such manner and at such time as the Board may reasonably
determine in good faith to be equitable in the circumstances to fairly
protect the purchase rights represented by this Warrant in accordance with
the essential intent and principles in such sections thereof.
SECTION 5. CONSOLIDATION, MERGER, ETC.
In case a consolidation or merger of Frontier shall be effected with
another Person on or after the Date of Issuance, or the sale, lease or other
transfer of all or substantially all of Frontier's assets to another Person
shall be effected on or after the Date of Issuance, then, as a condition of
such consolidation, merger, sale, lease or other transfer provision shall be
made whereby the Holder of this
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Warrant shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions specified herein and in lieu of each
Stock Unit immediately theretofore purchasable and receivable upon the
exercise of each of the Warrants, such shares of stock, securities, cash or
other property receivable upon such consolidation, merger, sale, lease or
transfer by the Holder of the number of shares of Common Stock comprising a
Stock Unit immediately prior to such event. In any such case, appropriate and
equitable provision also shall be made with respect to the rights and
interests of the Holder of this Warrant to the end that the provisions hereof
(including SECTION 4) shall thereafter be applicable, as nearly as may be, in
relation of any shares of stock, securities, cash or other property
thereafter deliverable upon the exercise of any Warrants. Frontier shall not
effect any such consolidation, merger, sale, lease or transfer unless prior to
or simultaneously with the consummation thereof the successor Person (if
other than Frontier or a wholly-owned subsidiary of Frontier) resulting from
such consolidation or merger or the Person purchasing, leasing or otherwise
acquiring such assets shall expressly assume, by written instrument mailed to
Esenjay and any Significant Holder at its last address appearing on the books
of Frontier, the due and punctual observance and performance of each and
every covenant and condition of this Warrant to be performed and observed by
Frontier and all of the obligations and liabilities hereunder, subject to
such modification as shall be necessary to provide for adjustments of Stock
Units which shall be as nearly equivalent as practicable to the adjustments
provided for in SECTION 4; PROVIDED, HOWEVER, that Frontier shall not be
required to effect (or mail) such express assumption in respect of any
transaction pursuant to which such obligations are transferred by operation
of law and such Person acknowledges the same in a writing that is retained and
made available for inspection by any holder of Warrants. The above provisions
of this SECTION 5 shall similarly apply to successive consolidations, mergers,
sales, leases or other transfers.
SECTION 6. NOTICE TO WARRANT HOLDERS.
6.01 NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever
the number of shares of Common Stock comprising a Stock Unit shall be
adjusted pursuant to SECTION 4, Frontier shall forthwith obtain a certificate
signed by independent accountants of recognized national standing, setting
forth, in reasonable detail, the event requiring the adjustment and the
method by which such adjustment was calculated (including a statement of the
Fair Value of any evidences of indebtedness, shares of stock, other
securities or property or warrants or other subscription or purchase rights
referred to in SECTION 4.02, 4.07(ii) or SECTION 5) and specifying the
number of shares of Common Stock comprising a Stock Unit and (if such
adjustment was made pursuant to SECTION 4.08 or SECTION 5) describing the
number and kind of any other securities comprising a Stock Unit, and any
change in the purchase price or prices thereof, after giving effect to such
adjustment or change. Frontier shall promptly, and in any case within 20 days
after the making of such adjustment, cause a signed copy of such certificate
to be delivered to each Holder of a Warrant in accordance with SECTION 14.02.
Frontier shall keep at its office or agency, maintained for the purpose
pursuant to SECTION 14.01, copies of all such certificates and cause the same
to be available for inspection at said office during normal business hours by
any Holder of a Warrant or any prospective permitted purchaser of a Warrant
designated by a Holder thereof. The Holders of Warrants entitled to purchase
a majority of the Stock Units covered by all the Warrants shall have the
right to challenge any such
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adjustment of the number of shares of Common Stock comprising a Stock Unit
contained in such certificate for a period of 30 days after such certificate
is delivered to the Holders. In the event the Holders give Frontier written
notice of such challenge within such 30-day period, such Holders and Frontier
shall thereupon promptly attempt in good faith to reach agreement on such
adjustment, and failing such agreement, shall appoint a mutually acceptable
nationally recognized independent accounting firm to determine such
adjustment, whose determination shall be final and binding on Frontier and
the Holders, absent manifest error. The costs incurred by the Holders and
Frontier and the fees and expenses of such independent accounting firm shall
be paid by (a) the Holders if Frontier's adjustment in the certificate was
accurate to within 1/20th of a share to or from the number of shares of
Common Stock comprising a Stock Unit by such independent accounting firm or
if such independent accounting firm's adjustment results in the Holders being
entitled to receive fewer shares of Common Stock per Stock Unit than under
the adjustment determined by Frontier and (b) otherwise by Frontier.
6.02 NOTICE OF CERTAIN CORPORATE ACTION. In case Frontier shall
propose (a) to pay any dividend to the holders of its Common Stock or to make
any other distribution to the holders of its Common Stock, or (b) to offer to
the holders of its Common Stock rights to subscribe for or to purchase any
Additional Shares of Common Stock or shares of stock of any class or any
other securities, rights or options, or (c) to effect any reclassification of
its Common Stock (other than a reclassification involving only the
subdivision, or combination, of outstanding shares of Common Stock), or (d)
to effect any capital reorganization, or (e) to effect any consolidation,
merger or sale, lease, transfer or other disposition of all or substantially
all of its property, assets or business, or (f) to effect the liquidation,
dissolution or winding up of Frontier, then, in each such case, Frontier
shall give to each Holder of a Warrant, in accordance with SECTION 14.02, a
notice of such proposed action, which shall specify the date on which a
record is to be taken for the purposes of such stock dividend, distribution
or rights, or the date on which such reclassification, reorganization,
consolidation, merger, sale, lease, transfer, disposition, liquidation,
dissolution or winding up is to take place and the date of participation
therein by the holders of Common Stock, if any such date is to be fixed, and
shall also set forth such facts with respect thereto as shall be reasonably
necessary to indicate the effect of such action on the Common Stock and the
number and kind of any other shares of stock which will comprise a Stock
Unit, and the purchase price or prices thereof, after giving effect to any
adjustment which will be required as a result of such action. Such notice
shall be so given in the case of any action covered by clause (a) or (b)
above at least 10 days prior to the record date for determining holders of
the Common Stock for purposes of such action, and in the case of any other
such action, at least 10 days prior to the date of the taking of such
proposed action or the date or participation therein by the holders of Common
Stock, whichever shall be the earlier.
6.03 NOTICE OF EXPIRATION DATE. Frontier shall give to each Holder of
a Warrant notice of the Expiration Date. Such notice may be given by Frontier
not less than 30 days but not more than 60 days prior to the Expiration Date.
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SECTION 7. REPRESENTATIONS AND WARRANTIES OF ESENJAY.
Esenjay represents and warrants to Frontier as follows:
7.01 PURCHASE FOR OWN ACCOUNT. The Warrants and Warrant Stock, as the
case may be, to be received by Esenjay will be acquired for investment for
Esenjay's own account and not with a present view to the distribution of any
part thereof, and Esenjay has no present intention of selling, granting any
participation in, or otherwise distributing the same in a manner contrary to
the Securities Act or applicable state securities laws, PROVIDED, that,
Esenjay at all times retains the right to control, deal with and sell all of
its property, including the Warrants.
7.02 DISCLOSURE OF INFORMATION; DUE DILIGENCE. Esenjay represents that
it has had an opportunity to ask questions of and receive answers from
Frontier regarding Frontier and the terms and conditions of the offering of
the Warrants and Warrant Stock, as the case may be, offered hereby and to
obtain additional information necessary to verify the accuracy of the
information supplied or to which it had access.
7.03 INVESTMENT EXPERIENCE; ACCREDITED INVESTOR STATUS. Esenjay is
able to bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Warrants and the Warrant Stock.
Esenjay understands that neither the Warrants nor the Warrant Stock have been
registered under the Securities Act or under the securities laws of any
jurisdiction by reason of reliance upon certain exemptions, and that the
reliance of Frontier on such exemptions is predicated upon the accuracy of
Esenjay's representations and warranties in this SECTION 7.03. Esenjay is
familiar with Regulation D promulgated under the Securities Act and is an
"accredited investor" as defined therein.
7.04 SECURITIES ACT COMPLIANCE. Esenjay represents that neither the
Warrants nor the Warrant Stock shall be sold or transferred or offered for
sale or transfer without registration under the Securities Act or the
availability of an exemption therefrom, and in accordance with the terms and
conditions and legends set forth in SECTION 9.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF FRONTIER.
Frontier represents and warrants to Esenjay as follows:
8.1 EXISTENCE; QUALIFICATION. Frontier is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Oklahoma. Frontier has duly qualified and is authorized to do business and
is in good standing as a foreign corporation in every jurisdiction where the
failure to be so qualified would have a material adverse effect on Frontier's
ability to enter into and perform all of its obligations under this Warrant.
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8.02 NO BREACH. The execution, delivery and performance of this
Warrant by Frontier and the consummation of the transactions contemplated
hereby will not (a) violate the articles of incorporation or by-laws of
Frontier, (b) violate any loan or credit agreement to which Frontier is a
party or is bound, or result in a breach of or default under any other
instrument or agreement to which Frontier is a party or is bound which is
material to the business or properties of Frontier taken as a whole, (c)
violate any judgment, order, injunction, decree or award against or binding
upon Frontier, the violation of which would have a material adverse effect on
the business or properties of Frontier taken as a whole, (d) result in the
creation of any material Lien upon any of the properties or assets of
Frontier, or (e) violate any law, rule or regulation applicable to or binding
upon Frontier, or (f) cause or require any adjustment, or give rise to any
rights in favor of another Person, under any agreement to which Frontier is a
party.
8.03 CORPORATE ACTION. Frontier has all necessary corporate power and
authority to execute, deliver and perform its obligations under this
Warrant; the execution, delivery and performance by Frontier of its
obligations under this Warrant have been duly authorized by all necessary
corporate action (including all stockholder action if required) on the part
of Frontier; this Warrant has been duly executed and delivered by Frontier
and constitutes a legal, valid and binding obligation of Frontier,
enforceable against Frontier in accordance with its terms; the Warrant Stock
initially covered by the Warrants will be duly and validly authorized and
reserved for issuance and shall, when paid for, be issued and delivered in
accordance with the terms of the Warrants, be duly and validly issued, fully
paid and nonassessable and free and clear of any Liens; and none of the
Warrant Stock issued pursuant to the terms hereof shall be in violation of
any preemptive rights of any shareholder of Frontier.
8.04 APPROVALS. Based in part upon the representations set forth in
SECTION 7, no authorizations, approvals or consents of, and no filings or
registrations with, any governmental authority or any other Person are
necessary for the execution, deliver or performance by Frontier of its
obligations under this Warrant or for the validity or enforceability thereof.
Any such action required to be taken as a condition to the issuance and
delivery of the Warrants has been (or prior to such issuance and delivery will
be) duly taken by all such governmental authorities or other Persons, as the
case may be.
8.05 INVESTMENT COMPANY ACT. Frontier is not an "investment company",
or a company "controlled by" an "investment company", within the meaning of
the Investment Company Act of 1940, as amended.
8.06 PUBLIC UTILITY HOLDING COMPANY ACT. Frontier is not a "holding
company" or an "affiliate" of a "holding company" or a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
8.07 CAPITALIZATION. On the date hereof, the total number of shares of
capital stock which Frontier has authority to issue is (i) 9,865,906 shares
of Common Stock, par value $.01 per share,
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of which 40,000,000 shares are issued and outstanding, and (ii) 5,000,000
shares of Preferred Stock, par value $10.00 per share, of which 85,961 shares
are issued and outstanding.
8.08 PRIVATE OFFERING.
(a) Assuming the truth and accuracy of Esenjay's representations and
warranties contained in SECTION 7, the issuance and sale of the Warrants to
Esenjay hereunder are exempt from the registration and prospectus delivery
requirements of the Securities Act as presently in effect.
(b) Frontier agrees that neither Frontier nor any Person acting on
its behalf has offered or will offer the Warrants or shares of Warrant Stock
or any part thereof or any similar securities for issue or sale to, or has
solicited or will solicit any offer to acquire any of the same from, any
Person so as to bring the issuance and sale of the Warrants or shares of
Warrant Stock within the provisions of the registration and prospectus
delivery requirements of the Securities Act.
8.09 NO LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the best of Frontier's knowledge after due
inquiry, threatened against Frontier before any court or administrative
agency seeking to enjoin the transactions contemplated by this Warrant or
that is reasonably likely to (i) prohibit or limit in any way performance by
Frontier of its obligations under this Warrant or (ii) affect the legality,
validity, enforceability or binding nature of this Warrant.
SECTION 9. RESTRICTIONS ON TRANSFERABILITY.
9.01 TRANSFERS GENERALLY. Except as otherwise provided in SECTION
9.06, the Warrants and Warrant Stock shall only by transferable upon the
conditions specified in this SECTION 9, which conditions are intended to
insure compliance with the provisions of the Securities Act and applicable
state securities laws in respect of the transfer of any Warrants and Warrant
Stock.
9.02 TRANSFERS OF RESTRICTED SECURITIES PURSUANT TO REGISTRATION
STATEMENTS. RULE 144 AND RULE 144A. The Warrants and Warrant Stock may be
offered or sold by the Holder thereof pursuant to (a) an effective
registration statement under the Securities Act, or (b) to the extent
applicable, Rule 144 or Rule 144A under the Securities Act.
9.03 NOTICE OF CERTAIN TRANSFERS. If any Holder of any Warrants or
Warrant Stock desires to transfer such Warrants or Warrant Stock other than
pursuant to an effective registration statement under the Securities Act or
pursuant to Rule 144 or Rule 144A, then such Holder shall deliver to Frontier
a notice with respect to the proposed transfer, together with a written
representation (together with such factual information in respect thereof as
Frontier may reasonably request) from such Holder in substance reasonably
satisfactory to Frontier to the effect that an exemption from registration
under the Securities Act and applicable state securities laws is available.
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9.04 RESTRICTIVE LEGENDS.
(a) Until otherwise permitted by SECTION 9.05, each certificate for
Warrants issued, each certificate for any Warrants issued to any subsequent
transferee of any such certificate, each certificate for any Warrant Stock
issued upon exercise of any Warrant and each certificate for any Warrant
Stock issued to any subsequent transferee of any such certificate, shall be
stamped or otherwise imprinted with one or more legends in substantially the
following form:
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
HAVE ANY OF THEM BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES OR
BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE NOR THE
SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST OR
PARTICIPATION HEREIN OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR
DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS
AMENDED, AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER AND
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
(b) In addition, each such certificate shall be stamped or
otherwise imprinted with any legend required under state securities
laws.
9.05 TERMINATION OF RESTRICTIONS. All the restrictions imposed
by this SECTION 9 upon the transferability of the Warrants and Warrant
Stock shall cease and terminate as to any particular Warrants or
Warrant Stock when such Warrants or Warrant Stock shall have been
effectively registered under the Securities Act and applicable state
securities laws and sold by the Holder thereof in accordance with such
registration or sold under and pursuant to Rule 144 or is eligible to
be sold under and pursuant to paragraph (k) of Rule 144. Whenever the
restrictions imposed by this SECTION 9 shall terminate as to any
Warrants or Warrant Stock as hereinabove provided, the Holder thereof
shall be entitled to receive from Frontier, without expense, a new
certificate evidencing such Warrants or Warrant Stock not bearing the
restrictive legend otherwise required to be borne by a certificate
evidencing such Warrants or Warrant Stock.
9.06 CERTAIN DISPOSITIONS OF SECURITIES.
(a) Notwithstanding anything in this Warrant (including SECTION
9 other than SECTION 9.05) to the contrary, but subject to compliance
with the Securities Act, any applicable state securities laws and the
requirement as to legending of the certificates for Warrants and
Warrant Stock specified in SECTION 9.04, any Holder shall have the
right to transfer any or all of its Warrants and Warrant Stock:
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(i) to any Person who at the time owns (directly or
indirectly) at least a majority of the shares of such Holder;
(ii) to any Person pursuant to a dividend or other
distribution (whether by liquidation or otherwise) of such Holder;
(iii) to any Person at least a majority of whose shares shall
at the time be owned (directly or indirectly) by such Holder or by
any Person who owns (directly or indirectly) at least a majority of
the shares of such Holder; or
(iv) in the case of any Holder which is an insurance
company, pension fund, bank, bank holding company or a subsidiary of
an insurance company, pension fund, bank or bank holding company, to a
third party, if, in the reasonable judgment of such Holder, such
transfer is required to be effected by such Holder because (A) its
investment in Warrants or shares of Warrant Stock may exceed any
limitation to which it is subject, or is otherwise not permitted,
under any law, rule or regulation of any governmental authority, or
(B) restrictions are imposed on such Holder under any law, rule or
regulation which, in the reasonable judgment of such Holder, make it
illegal or unduly burdensome to continue to hold such Warrants or
shares of Warrant Stock or a portion thereof.
The party to which Warrants or Warrants Stock are transferred pursuant
to the immediately preceding sentence shall be deemed to be a Holder
of such Warrants or Warrants Stock and bound by the provisions of this
Warrant applicable to Holders so long as he, she or it continues to
own any of the Warrants or Warrant Stock so transferred to such
transferee.
(b) If the circumstances described in clause (iv) of SECTION
9.06(a) arise, Frontier shall assist such Holder in disposing of its
Warrants and Warrant Stock in a prompt and orderly manner, and, at the
request of such Holder, Frontier shall provide (and authorize such
Holder to provide) such financial and other such information
concerning Frontier as such holder may request to any prospective
purchaser of the Warrants or Warrant Stock owned by such Holder.
SECTION 10. HOLDER'S RIGHTS.
10.01 DELIVERY EXPENSES. If any Holder surrenders any certificate for
Warrants or Warrant Stock to Frontier or a transfer agent of Frontier for
exchange for instruments of other denominations or registered in another name
or names, subject to the terms and conditions of SECTION 9, Frontier shall
cause such new instruments to be issued and shall pay the costs associated
with the preparation and issuance of any new instruments and the cost of
delivering to the office of such Holder from Frontier or its transfer agent,
duly insured, the surrendered instrument and any new instruments issued in
substitution or replacement for the surrendered instrument.
10.02 TAXES. Frontier shall pay all taxes (other than Federal,
state or local taxes) which may be payable in connection with the
issuance of the Warrants and Warrant Stock hereunder,
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or in connection with any modification of this Warrant and shall hold
each Holder harmless without limitation as to time against any and all
liabilities with respect to all such taxes. Frontier shall not,
however, be required to pay any tax, with respect to any Warrant which
may be payable in respect of any transfer involved in the issuance and
delivery of Warrants or of shares of Common Stock in a name other than
that in which such Warrant or Common Stock is registered, and no such
issue or delivery shall be made unless and until the Person requesting
such issue has paid to Frontier the amount of any such tax, or has
established, to the satisfaction of Frontier, that such tax has been
paid. The obligations of Frontier under this SECTION 10.02 shall
service any redemption, repurchase or acquisition of Warrants or
Warrant Stock by Frontier, and any cancellation or termination of the
Warrants.
10.03 REPLACEMENT OF INSTRUMENTS. Upon receipt by Frontier of
evidence reasonably satisfactory to it of the ownership of and the
loss, theft, destruction or mutilation of any certificate or
instrument evidencing any Warrants or Warrant Stock, and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it, or
(b) in the case of mutilation, upon surrender thereof, Frontier,
at its expense, shall cancel such certificate or instrument and
execute, register and deliver, in lieu thereof, a new certificate or
instrument for (or covering the purchase of) an equal number of
Warrants or Warrant Stock.
10.04 CERTAIN RESTRICTIONS. Frontier shall not at any time
enter into an agreement or other instrument limiting in any manner its
ability to perform its obligations under this Warrant or making such
performance or the issuance of shares of Common Stock upon the
exercise of any Warrant a default under any such agreement or
instrument.
10.05 CERTAIN COVENANTS. At all times prior to the Expiration
Date:
(a) Frontier shall retain a nationally recognized independent
accounting firm as its auditors.
(b) Frontier shall afford Esenjay or its Affiliates (or any
Significant Holder), or their respective authorized agents, access, at
reasonable times, upon reasonable prior notice, (i) to inspect the
books and records of Frontier, (ii) to discuss with management of
Frontier the nonconfidential business and affairs of Frontier, and
(iii) to inspect the properties of Frontier.
(c) Each Holder and its authorized agents shall have the right
to attend all meetings of shareholders of Frontier.
(d) Frontier shall provide Esenjay with all notices set forth in
SECTIONS 6.01, 6.02 and 6.03 pursuant to the respective terms thereof.
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10.06 INDEMNIFICATION. Frontier shall indemnify and hold harmless
Esenjay and the Holders and each of their respective directors, officers,
employees, stockholders, Affiliates and agents, and Esenjay and the Holders
shall indemnify and hold harmless Frontier and its directors, officers,
employees, stockholders, Affiliates and agents (each, an "INDEMNIFIED
PERSON") on demand from and against any and all losses, claims, damages,
liabilities (or actions or other proceedings commenced or threatened in
respect thereof) and expenses that arise out of, result from, or in any way
relate to the breach of any representation, warranty or covenant by Frontier
contained in this Warrant or any other agreement, document or instrument
executed and delivered in connection with the transactions contemplated
hereby, and reimburse each indemnified person, upon its demand, for any
reasonable legal or other expenses incurred in connection with investigating,
defending or participating in the defense of any such loss, claim, damage,
liability, action or other proceeding (whether or not such indemnified person
is a party to any action or proceeding out of which any such expenses arise),
other than any of the foregoing claimed by any indemnified person to the
extent incurred by reason of the gross negligence or willful misconduct of
such indemnified person. No indemnified person shall be responsible or liable
to any Person for any consequential damages which may be alleged as a result
of or relating to this Warrant or in connection with the other transactions
contemplated hereby.
10.07 FINANCIAL STATEMENTS. Frontier shall deliver the information
specified below to Esenjay and each Significant Holder until the earlier of
(i) the Expiration Date and (ii) the date on which Esenjay or any Significant
Holder no longer holds any Warrants or Warrant Stock:
(a) as soon as available and in any event within 60 days after the
end of each of the first three fiscal quarters or each fiscal year of
Frontier, consolidated balance sheets of Frontier as of the end of such
fiscal quarter and statements of operations and cash flow of Frontier for
such fiscal quarter and for the period commencing at the end of the previous
fiscal year and ending with the end of such fiscal quarter, certified by the
chief financial officer of Frontier;
(b) as soon as available and in any event within 120 days after the
end of each fiscal year of Frontier, a copy of the annual audit report for
such fiscal year for Frontier, including therein the balance sheet of
Frontier as of the end of such fiscal year and statements of operations and
cash flow of Frontier for such fiscal year, in each case certified in a
manner reasonably acceptable to Esenjay by an independent public accountant
acceptable to Esenjay, together with a report from such accountants to the
effect that, in making the examination necessary for the signing of such
annual report by such accountants, they have not become aware of any default
that has occurred and is continuing, or, if they have become aware of such
default, describing such default and the steps, if any, being taken to cure
it;
(c) promptly after (1) the sending or filing thereof, copies of all
reports which Frontier sends to any of its security holders, (2) the sending
or filing thereof, all reports and registration statements which Frontier
files with the Securities and Exchange Commission or any national securities
exchange, (3) the filing thereof, copies of all tariff and rate cases and
other material reports filed with any regulatory authority, and (4) receipt
thereof, copies of all notices received from any regulatory authority
concerning noncompliance by Frontier with any applicable regulations; and
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(d) such other information respecting the condition or operations,
financial or otherwise, of Frontier as Esenjay may from time to time
reasonably request.
SECTION 11. RESERVATION AND AUTHORIZATION OF COMMON STOCK: REGISTRATION WITH
OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY.
Frontier shall at all times reserve and keep available for issue upon
the exercise of Warrants such number of its authorized but unissued shares of
Common Stock as shall be sufficient to permit the exercise in full of all
outstanding Warrants. All shares of Common Stock which shall be so issuable,
when issued upon exercise of any Warrant and payment of the applicable
Exercise Price therefor shall be duly and validly issued, fully paid and
nonassessable and free and clear of any Liens (caused directly or indirectly
by Frontier or its Affiliates).
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or which would cause
an adjustment reducing the Current Warrant Price per share of Common Stock
below the then par value, if any, of the shares of Common Stock issuable upon
exercise of the Warrants, Frontier shall take any corporate action which is
necessary in order that Frontier may validly and legally issue fully paid and
nonassessable shares of Common Stock free and clear of any Liens (caused
directly or indirectly by Frontier or its Affiliates) upon the exercise of
all the Warrants immediately after the taking of such action.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit, Frontier shall
obtain all such authorizations or exemptions thereof, or consents thereto, as
may be necessary from any public regulatory body or bodies having
jurisdiction thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise or conversion of Warrants require registration with any governmental
authority under any Federal or state law (otherwise than any law that applies
to a Holder specifically because of its status as a regulated entity or in
connection with a registration under the Securities Act or applicable state
securities laws) before such shares may be so issued, Frontier shall in good
faith and as expeditiously as reasonably possible and at its expense endeavor
to cause such shares to be duly registered.
SECTION 12. TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS.
(a) In the case of all dividends or other distributions by Frontier
to the holders of its Common Stock with respect to which any provision of
SECTION 4 refers to the taking of a record of such holders, Frontier shall in
each such case take such a record as of the close of business on a business
day or as otherwise provided by or permitted under the corporation laws of
Frontier's then jurisdiction of incorporation.
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(b) Frontier shall not at any time, except upon complete dissolution,
liquidation or winding up, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise, conversion or
transfer of any Warrant, unless otherwise required by any governmental
authority or by any applicable federal, state or local law.
SECTION 13. NO VOTING OR OTHER RIGHTS.
This Warrant shall not entitle the Holder hereof to any voting or other
rights as a stockholder of Frontier either at law or at equity, and the
rights of a holder of this Warrant are limited to those expressly set forth
herein.
SECTION 14. MISCELLANEOUS
14.01 OFFICE OF FRONTIER. So long as any of the Warrants remains
outstanding, Frontier shall maintain an office in the continental United
States of America where the Warrants may be presented for exercise, transfer,
division or combination as in this Warrant provided. Such office shall be at
Frontier Natural Gas Corporation, 500 Dallas Street, Suite 2920, Houston,
Texas 77002, unless and until Frontier shall designate and maintain some
other office for such purposes and give notice thereof to the Holders of all
outstanding Warrants.
14.02 NOTICES. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and
shall be delivered personally or by facsimile communication to the number set
forth below, or by first class mail, postage prepaid, registered or certified
with return receipt requested, at the addresses set forth below. Notice
deposited in the mail in the manner hereinabove provided shall be effective
upon expiration of five (5) business days from the date on which it is so
deposited. Notice given in any other manner shall be effective only if and
when received by the addressee. For purposes of notice, the addresses of the
parties shall be as follows:
With respect to Frontier: FRONTIER NATURAL GAS CORPORATION
500 Dallas Street, Suite 2920
Houston, Texas 77002
Attention: President
Telephone Number: (713) 739-7100
Fax Number: (713) 739-7124
With a copy to: Chamberlain, Hrdlicka, White, WIlliams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002-4310
Attention: James J. Spring, III
Telephone Number: (713) 658-1818
Fax Number: (713) 658-2553
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With respect to Esenjay: ESENJAY PETROLEUM CORPORATION
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78471
Attention: Michael E. Johnson
Telephone Number: (512) 883-7464
Fax Number: (512) 883-3244
With a copy to: Pollicoff, Smith, Myers & Remels, L.L.P.
One Greenway Plaza, Suite 300
Houston, Texas 77046
Attention: Jeffrey B. Pollicoff
Telephone Number: (713) 622-6866
Fax Number: (713) 622-5905
provided that each party shall have the right to change its address for
notice, and the person who is to receive notice hereunder, by the giving of
fifteen (15) days' prior written notice to the other parties hereto in the
manner set forth above.
14.03 AMENDMENTS. The terms of the Warrants may be amended, and the
observance of any term therein may be waived, upon the written consent of the
holders of Warrants for a majority of the total number of Stock Units at the
time purchasable upon the exercise of all then outstanding Warrants. For the
purposes of determining whether the holders of outstanding Warrants entitled
to purchase a requisite number of Stock Units at any time have taken any
action authorized by this Warrant, any Warrants owned by Frontier or any
Affiliate of Frontier shall be deemed not to be outstanding.
14.04 GOVERNING LAW. This Warrant shall in all respects be governed by,
and construed in accordance with, the substantive federal laws of the United
States and the internal laws of the State of Texas (principles of conflict of
laws excluded) and, to the extent the Oklahoma General Corporation Act so
requires, the laws of the State of Oklahoma.
14.05 LIMITATION OF LIABILITY. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Common Stock,
and no mere enumeration herein of the rights or privileges of the Holder
hereof, shall give rise to any liability of such holder for the Exercise
Price or as a stockholder of Frontier, whether such liability is asserted by
Frontier, by any creditor of Frontier or any other Person.
14.06 BINDING EFFECT. The obligations set forth in this Warrant shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
14.07 HEADINGS. The headings in this Warrant are inserted for
concurrence only and are not intended to describe, interpret, define or limit
the scope, extent or intent of this Warrant or any provision hereof.
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14.08 GENDER AND NUMBER. Whenever required by the context, as used in
this Warrant, the singular number shall include the plural and vice versa and
pronouns of whatever gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
IN WITNESS WHEREOF, the parties have duly executed this Warrant this 14th
day of January, 1998 to be effective as of the Date of Issuance.
Frontier Natural Gas Corporation
By: /s/ David W. Berry
----------------------------
David W. Berry, President
-26-
<PAGE>
FORM OF EXERCISE
(To be executed by the registered holder hereof)
The undersigned hereby exercises this Warrant to subscribe for and
purchase ___ Stock Units of Frontier Natural Gas Corporation covered by the
within certificate and herewith makes payment therefor in full. Kindly issue
certificates and/or other instruments covering Stock Units in accordance with
the instructions given below. A new Warrant for the unexercised balance of
the Stock Units covered by the within certificate, if any, will be registered
in the name of the undersigned.
Dated:
----------------------
---------------------------------
Instructions for registration of Stock Units
- - -------------------------------------------
Name (please print)
Social Security or Other Identifying
Number:
-----------------------------
Address:
- - ---------------------------------------------
Street
- - ---------------------------------------------
City, State and Zip Code
-27-
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder hereof)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
all the rights of the undersigned under the within certificate with respect
to the purchase of up to the number of Stock Units covered thereby as set
forth below and does hereby irrevocably constitute and appoint ____________,
attorney-in-fact, to transfer the same on the books of Frontier, with full
power of substitution in the premises:
<TABLE>
<CAPTION>
Number of
Name of Assignee Address Stock Units
- - ---------------- ------- -----------
<S> <C> <C>
</TABLE>
Dated:
--------------------------
-------------------------------------
(Signature of Registered Owner)
-------------------------------------
(Guaranteed Signature)
Notice: The signature to this Form of Assignment must correspond with the
name as written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank or trust company having an office or correspondent in
New York, New York, or by a firm having membership on the New York Stock
Exchange.
-28-
<PAGE>
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE.
NEITHER THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR
ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN, MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF,
EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
APPLICABLE RULES AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES OR
BLUE SKY LAWS.
WARRANT
to Purchase Common Stock of
FRONTIER NATURAL GAS CORPORATION
THIS IS TO CERTIFY THAT ASPECT RESOURCES LLC, a Colorado limited
liability company ("Aspect"), or its assigns, is entitled to purchase in
whole or in part from time to time from FRONTIER NATURAL GAS CORPORATION, an
Oklahoma corporation ("Frontier"), on or after the Date of Issuance (as
hereinafter defined), but not later than 5:00 p.m., Houston time, on the
Expiration Date (as hereinafter defined), 56,250 Stock Units (as hereinafter
defined and subject to adjustment as provided herein) at a purchase price per
Stock Unit equal to the Exercise Price (as hereinafter defined), subject to
the terms and conditions hereinbelow provided.
SECTION 1. CERTAIN DEFINITIONS.
1.01 DEFINED TERMS. For purposes of this Warrant, in addition to
the terms defined elsewhere herein, the following terms shall have the
meanings set forth in this Section 1:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock
issued by Frontier on or after the Date of Issuance, other than (i) the
Warrant Stock, (ii) the shares of Common Stock described as being issued and
outstanding on the Date of Issuance in SECTION 8.07, and (iii) shares of
Common Stock issued or to be issued to employees, directors, advisors or
consultants of Frontier in connection with equity incentive plans.
"AFFILIATE" shall mean, as to any Person, any other Person which directly
or indirectly controls, or is under common control with or is controlled by,
such Person and, if such Person is an individual, any member of the immediate
family (including parents, spouse and children) of such individual or one or
more members of such immediate family and any Person who is
<PAGE>
controlled by any such member or trust. As used in this definition,
"control" (including the correlative terms "controlled by" and "under common
control with") shall mean possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person
(whether through ownership of securities or partnership or other ownership
interests, by contract or otherwise), PROVIDED that, in any event, any Person
which owns directly or indirectly 40% or more of the securities having
ordinary voting power for the election of directors or other governing body
of a corporation or 40% or more of the partnership or other ownership
interests of any other Person will be deemed to control such corporation or
other Person. Notwithstanding the foregoing, (i) no individual shall be
deemed to be an Affiliate of a corporation solely by reason of his or her
being an officer or director of such corporation, and (ii) neither Aspect nor
any of its Affiliates shall be deemed to be an Affiliate of Frontier.
"ASPECT" shall have the meaning set forth in the preamble of this Warrant.
"COMMON STOCK" shall mean Frontier's authorized Common Stock, par value
$.01 per share, as constituted on the date hereof, and any stock into which
such Common stock may thereafter be converted or changed, and also shall
include any other stock of Frontier of any other class that is not preferred
as to dividends or distributions in liquidation over any other class of any
other stock of Frontier.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into, or exercisable or
exchangeable for, Additional Shares of Common Stock, either immediately or
upon the arrival of a specified date or the happening of a specified event.
"CURRENT ADJUSTMENT PRICE," per share of Common Stock, for the purposes
of any provision of this Warrant at the date herein specified, shall be
deemed to be the average of the daily market prices on such date and the five
(5) consecutive trading days immediately prior to such date. The market
price for each such trading day shall be (a) if the Common Stock is traded on
a national securities exchange, its last bid price on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid, all as made available over the
Consolidated Last Sale Reporting System of the CTA Plan or, if the Common
Stock is not then eligible for reporting over such system, its last bid price
on such trading day on such national securities exchange or, if there was no
bid on that day, on the next preceding trading day on which there was a bid
on such national securities exchange or (b) if the principal market for the
Common Stock is the over-the-counter market, (i) its last bid price on such
trading day or, if there was no bid on that day, the last bid price on the
next preceding trading day on which there was a bid, all as made available
over the Consolidated Last Sale Reporting System of the CTA Plan, or (ii) if
the Common Stock is not then eligible for reporting over the Consolidated
Last Sale Reporting System of the CTA Plan and the Common Stock is quoted on
the NASDAQ, the last bid price reported on NASDAQ on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid or (iii) if the Common Stock is not
reported or quoted on NASDAQ, the closing bid
<PAGE>
quotations as quoted in each of The Wall Street Journal, the National
Quotation Bureau pink sheets, the Salomon Brothers quotation sheets,
quotation sheets of registered marketmakers, as applicable, and, if
necessary, dealers' telephone quotations. If the Current Adjustment Price
per share of Common Stock cannot be ascertained by any of the foregoing
methods, the Current Adjustment Price per share of Common Stock shall be
deemed to be the Fair Value per share of Common Stock.
"CURRENT WARRANT PRICE," per share of Common Stock, for the purpose of
any provision of this Warrant at the date herein specified, shall mean the
amount equal to the quotient resulting from dividing the Exercise Price per
Stock Unit in effect on such date by the number of shares (including any
fractional share) of Common Stock comprising a Stock Unit on such date.
"DATE OF ISSUANCE" shall mean January 15, 1998.
"EXERCISE PRICE" per Stock Unit shall mean fifty cents ($.50).
"EXPIRATION DATE" shall mean the later of (i) one year from the Date of
Issuance, or (ii) thirty (30) days after the Holder's receipt of written
notice from Frontier that all amounts advanced under that Credit Agreement,
dated January 12, 1998, by and between Frontier and Aspect have been repaid
and all of the obligations of the Lender (as such term is defined in the
Credit Agreement) under the Credit Agreement have terminated.
"FAIR VALUE" per share of Common Stock (or other property as the case may
be) shall mean the price that could be obtained from an independent third
party for all of the issued and outstanding shares of Common Stock of
Frontier in an arm's length transaction in which the seller would not be
under any compulsion to sell and the purchaser would not be under any
compulsion to purchase. Fair Value shall be determined as follows:
Frontier and the Holders of Warrants entitled to purchase a majority of the
Stock Units covered by all the Warrants shall each designate a
representative, and such representatives will meet and use their best efforts
to reach an agreement on the Fair Value. If the representatives designated
by Frontier and such Holders are unable to reach such an agreement, then the
Holders of Warrants entitled to purchase a majority of the Stock Units
covered by all the Warrants will submit a list of at least three Independent
Appraisers. Frontier shall select one of the Independent appraisers set
forth on such list. The Independent Appraiser so selected by Frontier will
determine the Fair Value of a share of Common Stock (or other property, as
the case may be) and its determination thereof will be final and binding on
all parties concerned, absent manifest error. Frontier will provide the
Independent Appraiser so selected by Frontier with all information about
Frontier which such Independent Appraiser reasonably deems necessary for
determining the Fair Value. The fees and expenses of the appraisal process
(including those of the Independent Appraiser) will be paid by Frontier.
Frontier may require that the Independent Appraiser keep confidential any
non-public information received as a result of this paragraph pursuant to
reasonable confidentiality arrangements.
"FRONTIER" shall have the meaning set forth in the preamble of this
Warrant.
<PAGE>
"HOLDER" shall mean any Person who acquires Warrants or Warrant Stock
pursuant to the provisions of this Warrant including any transferees of
Warrants or Warrant Stock.
"INCLUDE" and "INCLUDING" shall be construed as if followed by the
phrase, "without being limited to,".
"INDEPENDENT APPRAISER" shall mean an appraiser which is a nationally
recognized independent expert experienced in valuing businesses similar to
the principal business of Frontier.
"LIEN" means any lien, mortgage, security interest, pledge, charge,
deposit, production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement, or lease,
license or other arrangement substantially equivalent thereto, other than
preferential purchase rights and consents to assignment.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation system.
"NON-TRANSFERABLE RIGHTS" shall have the meaning assigned to such term in
the definition of Rights Plan.
"PERSON" shall mean a corporation, an association, a partnership, a
limited liability company, a bank, an employee benefit plan, a joint venture,
an organization, an individual, a trust or any unit of federal, state or
local government.
"RIGHTS CERTIFICATE" shall have the meaning assigned to such term in the
definition of Rights Plan.
"RIGHTS PLAN" shall mean a shareholder rights plan implemented by
Frontier to deter a hostile acquisition, pursuant to which holders of shares
of Common Stock (a) are issued rights that are not initially exercisable or
transferable apart from such shares of Common Stock ("NON-TRANSFERABLE
RIGHTS") and (b) are to be issued rights certificates exercisable and
transferable apart from such shares of Common Stock ("RIGHTS CERTIFICATES")
in certain circumstances to purchase Additional Shares of Common Stock upon
certain acquisitions of stock or assets of or business combinations involving
Frontier by a Person in a transaction or transactions not approved by the
board of directors of Frontier as specified in the Rights Plan.
"SECURITIES ACT" means the Securities Act of 1933 as in effect on the
date hereof and as the same may be amended from time to time.
"SIGNIFICANT HOLDER" shall mean, at any date, a Holder of 33 1/3% of the
then outstanding Warrants and shares of Warrant Stock.
<PAGE>
"STOCK UNIT" shall mean one share of Common Stock on the Date of
Issuance, and thereafter such number of shares (including any fractional
shares) of Common Stock and other securities, cash or other property as shall
result from the adjustments specified in Section 4 and Section 5.
"WARRANT STOCK" shall mean (i) the shares of Common Stock purchased or
purchasable by the Holders of the Warrants upon the exercise thereof,
including any other stock into which such Common Stock may thereafter be
changed or converted, and (ii) any additional shares of Common Stock or other
securities issued or distributed by way of a dividend, stock split or other
distribution in respect of the Common Stock referred to in clause (i) above,
or acquired by way of any rights offering or similar offering made in respect
of the Common Stock referred to in clause (i) above.
"WARRANTS" shall mean the warrants issued hereby, dated as of the Date of
Issuance, evidencing rights to purchase up to an aggregate of 56,250 Stock
Units, and all Warrants issued upon transfer, division or combination of, or
in substitution for, any thereof.
SECTION 2. EXERCISE OF WARRANT.
In order to exercise this Warrant, in whole or in part, the Holder hereof
shall deliver to Frontier, at its office maintained for such purpose pursuant
to SECTION 14.01, (a) a written notice of such Holder's election to exercise
this Warrant, which notice shall specify the number of Stock Units to be
purchased, (b) a certified or cashier's check or checks payable to Frontier
in an aggregate amount equal to the aggregate Exercise Price for the number
of Stock Units as to which this Warrant is being exercised, and (c) this
Warrant. Such notice shall be in substantially the form of the "Form of
Exercise" set out at the end of this Warrant. Upon receipt thereof, Frontier
shall, as promptly as practicable and in any event within seven days
thereafter (unless such exercise shall be in connection with an underwritten
public offering of shares of Common Stock subject to this Warrant, in which
event concurrently with such exercise), cause to be executed and delivered to
such Holder a stock certificate or certificates representing the aggregate
number of duly and validly issued, fully paid and nonassessable shares of
Warrant Stock issuable upon such exercise, free and clear of any Liens.
The stock certificate or certificates for Warrant Stock so delivered
shall be in such denominations as may be specified in such notice and shall
be registered in the name of such Holder or such other Person as shall be
designated in such notice, PROVIDED that such other Person as may be
designated shall confirm in writing for the benefit of Frontier that the
representations and warranties set forth in SECTION 7 are true, complete and
correct with respect to such other Person as may be designated, and each such
other Person acknowledges and agrees in writing to accept the benefits of and
be bound by the terms and conditions set forth in this Warrant. To the extent
permitted by law, such stock certificate or certificates shall be deemed to
<PAGE>
have been issued, and such Holder or other Person so designated to receive
the Warrant Stock shall be deemed to have become a holder of record of such
shares, including the right to vote such shares or to consent or to receive
notice as a stockholder, as of the time such notice and payment is received
by Frontier as aforesaid. If this Warrant shall have been exercised only in
part, Frontier shall, at the time of delivery of said stock certificate or
certificates, execute and deliver to such Holder a new Warrant, dated the
original date of issuance, evidencing the rights of such Holder to purchase
the remaining Stock Units called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant, or, at the option of
Frontier, appropriate notation may be made on this Warrant and the same
returned to such Holder.
All shares of Common Stock issuable upon the exercise of this Warrant
shall, upon payment therefor in accordance herewith, be duly and validly
issued, fully paid and nonassessable and free and clear of any Liens.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, Frontier shall pay to the Holder
an amount in cash equal to such fraction multiplied by the Current Adjustment
Price per share of Common Stock.
SECTION 3. TRANSFER, DIVISION AND COMBINATION.
Subject to SECTION 9, this Warrant and all rights hereunder are
transferable, in whole or in part, on the books of Frontier to be maintained
for such purpose, upon surrender of this Warrant at the office of Frontier
maintained for such purpose pursuant to SECTION 14.01, together with a
written assignment of this Warrant (in substantially the form of the "Form of
Assignment" annexed hereto) duly executed by the Holder hereof or its agent
or attorney and payment of funds sufficient to pay any stock transfer taxes
payable hereunder by the Holder hereof upon the making of such transfer.
Upon such surrender and payment Frontier shall, subject to SECTION 9 and the
immediately following sentence, execute and deliver a new Warrant or Warrants
(with the same Exercise Price or Exercise Prices as contained in the Warrant
or Warrants so surrendered, respectively) in the name of the assignee or
assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled. If and when this
Warrant is assigned in blank (in case the restrictions on transferability set
forth in SECTION 9 shall have been terminated), Frontier may (but shall not
be obliged to) treat the bearer hereof as the absolute owner of this Warrant
for all purposes and Frontier shall not be affected by any notice to the
contrary. This Warrant, if properly assigned in compliance with this SECTION
3 and SECTION 9, may be exercised by an assignee for the purchase of shares
of Common Stock without having a new Warrant or Warrants issued.
This Warrant may, subject to SECTION 9, be divided or combined with other
Warrants upon presentation at the aforesaid office of Frontier, together with
a written notice specifying the names and denominations in which new Warrants
are to be issued, signed by the Holder hereof or its authorized agent or
attorney. Subject to compliance with the next preceding paragraph and with
SECTION 9, as to any transfer which may be involved in such division or
combination,
<PAGE>
Frontier shall execute and deliver a new Warrant or Warrants (with the same
Exercise Price or Exercise Prices as contained in the Warrant or Warrants so
transferred, respectively) in exchange for the Warrant or Warrants to be
divided or combined in accordance with such notice.
Frontier shall maintain at its aforesaid office books for the
registration and transfer of the Warrants.
SECTION 4. ADJUSTMENT OF STOCK UNIT.
The number of shares of Common Stock comprising a Stock Unit shall be
subject to adjustment from time to time as set forth in this SECTION 4.
Frontier shall not take any action with respect to its Common Stock of any
class requiring an adjustment pursuant to any of SECTION 4.01, 4.02, 4.08 or
5 without at the same time taking like action with respect to its Common
Stock of each other class; and Frontier shall not create any class of Common
Stock which carries any rights to dividends or assets differing in any
respect from the rights of the Common Stock on the Date of Issuance.
4.01 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at any
time or from time on or after the Date of Issuance Frontier shall
(i) take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into
a larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then the number of shares of Common Stock comprising a Stock Unit immediately
after the happening of any such event shall be adjusted so as to consist of
the number of shares of Common Stock which a record holder of the number of
shares of Common Stock comprising a Stock Unit immediately prior to the
happening of such event would own or be entitled to receive after the
happening of such event.
4.02 CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case at any time
or from time to time on or after the Date of Issuance Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling them
to receive any dividend or other distribution of,
(i) cash (other than a cash distribution made as a dividend
and payable out of
<PAGE>
earnings or earned surplus legally available for the payment of dividends
under the laws of the jurisdiction of incorporation of Frontier, to the
extent, but only to the extent, that the aggregate of all such dividends
paid or declared after the date hereof, does not exceed the consolidated
net income of Frontier earned subsequent to the date hereof determined in
accordance with generally accepted accounting principles consistently
applied), or
(ii) any evidence of its indebtedness (other than Convertible
Securities), any shares of its stock (other than Additional Shares of Common
Stock) or any other securities or property of any nature whatsoever (other
than cash and other than Convertible Securities or Additional Shares of
Common Stock), or
(iii) any options, warrants or other rights to subscribe
for or purchase any evidences of its indebtedness (other than (A)
Convertible Securities and (B) Non-Transferable Rights issued pursuant to
a Rights Plan), any shares of its stock (other than Additional Shares of
Common Stock) or any other securities or property of any nature
whatsoever (other than cash and other than Convertible Securities or
Additional Shares of Common Stock),
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (i) the numerator of which shall be the Current
Adjustment Price per share of Common Stock at the date of taking such record,
and (ii) the denominator of which shall be such Current Adjustment Price per
share of Common Stock minus the amount of any and all such cash and the Fair
Value of any and all such evidences of indebtedness, shares of stock, other
securities or property, or options, warrants or other subscription or
purchase rights, so distributable in respect of one share of Common Stock. A
reclassification of the Common Stock into shares of Common Stock and shares
of any other class of stock shall be deemed a distribution by Frontier to the
holders of its Common Stock of such shares of such other class of stock
within the meaning of this SECTION 4.02 and, if the outstanding shares of
Common Stock shall be changed into a larger or smaller number of shares of
Common Stock as a part of such reclassification, shall be deemed a
subdivision or combination, as the case may be, of the outstanding shares of
Common Stock within the meaning of SECTION 4.01.
4.03 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case at any
time or from time to time on or after the Date of Issuance Frontier shall
(except as hereinafter provided) issue to any Person any Additional Shares of
Common Stock for a consideration per share less than:
(a) in the case of a public offering of Common Stock
under the Securities Act, the greater of (i) the consideration per share
determined by the managing underwriter (in the event of an underwritten
public offering) and (ii) 90% of the Current Adjustment Price on the
effective date of the registration statement with respect to such public
offering,
<PAGE>
(b) in the case of the issuance of Common Stock by
Frontier in connection with the acquisition of assets and/or securities
of any Person, the greater of (i) the consideration per share determined
by the Board of Directors of Frontier as set forth in the binding
agreement pursuant to which such acquisition is being effected and (ii)
90% of the Current Adjustment Price per share of Common Stock as of the
date for which the pricing of Common Stock in connection with such
issuance is determined in accordance with such binding agreement, or
(c) in all other circumstances, 95% of the Current
Adjustment Price,
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (a) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
Additional Shares of Common Stock plus the number of such Additional Shares
of Common Stock so issued, and (b) the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus the number of shares
of Common Stock which the aggregate consideration for the total number of
such Additional Shares of Common Stock so issued would purchase at the
Current Adjustment Price. For purposes of this SECTION 4.03, and subject to
the foregoing sentence, the date as of which the Current Adjustment Price
shall be computed shall be the earlier of (i) the date on which Frontier
shall enter into a firm contract for the issuance of such Additional Shares
of Common Stock and (ii) the date of actual issuance of such Additional
Shares of Common Stock. This SECTION 4.03 shall not apply to any issuance of
Additional Shares of Common Stock for which an adjustment is provided under
SECTION 4.01. No adjustment of the number of shares of Common Stock
comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued pursuant
to the exercise of any options, warrants or other subscription or purchase
rights or pursuant to the exercise of any conversion or exchange rights in
any Convertible Securities described in SECTION 4.04 or 4.05 (it being
understood that full adjustment shall be made, without duplication, in
respect of all Additional Shares of Common Stock issuable at the time any
Rights Certificates issued pursuant to a Rights Plan become exercisable by
the holders of Common Stock). No adjustment of the number of shares of
Common Stock comprising a Stock Unit shall be made under this SECTION 4.03
upon the issuance of any Additional Shares of Common Stock which are issued
for a consideration greater than that described in clauses (a), (b) and (c),
as applicable, of this SECTION 4.03.
4.04 ISSUANCE OF OPTIONS WARRANTS OR OTHER RIGHTS. If on or after
the Date of Issuance, Frontier shall issue to any Person, any options,
warrants or other rights to subscribe for or purchase any Additional Shares
of Common Stock or any Convertible Securities (other than Non-Transferable
Rights issued pursuant to a Rights Plan) and the consideration per share for
which Additional Shares of Common Stock may at any time thereafter be
issuable pursuant to such options, warrants or other rights or pursuant to
the terms of such Convertible Securities (other than Non-Transferable Rights
issued pursuant to a Rights Plan) shall be less than the
<PAGE>
Current Adjustment Price, then the number of shares of Common Stock
thereafter comprising a Stock Unit shall be adjusted as provided in SECTION
4.03 on the basis that
(a) the maximum number of Additional Shares of Common
Stock issuable pursuant to all such options, warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of (and, accordingly,
the date as of which the Current Adjustment Price shall be computed shall
be) the computation date specified in the last sentence of this SECTION
4.04, and
(b) the aggregate consideration for such maximum number
of Additional Shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by Frontier for the issuance of
such Additional Shares of Common Stock pursuant to such options, warrants
or other rights or pursuant to the terms of such Convertible Securities
(it being understood that full adjustment shall be made, without
duplication, in respect of all Additional Shares of Common Stock issuable
at the time any Rights Certificates issued pursuant to a Rights Plan
become exercisable by the holders of Common Stock). For purposes of this
SECTION 4.04, the computation date for clause (a) above shall be the
earliest of (i) the date on which Frontier shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive
any such options, warrants or other rights, (ii) the date on which
Frontier shall enter into a firm contract for the issuance of such
options, warrants or other rights, and (iii) the date of actual issuance
of such options, warrants or other rights.
4.05 ISSUANCE OF CONVERTIBLE SECURITIES. If on or after the Date of
Issuance Frontier shall issue to any Person any Convertible Securities and
the consideration per share for which Additional Shares of Common Stock may
at any time thereafter be issuable pursuant to the terms of such Convertible
Securities shall be less than the Current Adjustment Price, then the number
of shares of Common Stock thereafter comprising a Stock Unit shall be
adjusted as provided in SECTION 4.03 on the basis that (a) the maximum number
of Additional Shares of Common Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been
issued as of (and accordingly, the date as of which the Current Adjustment
Price shall be computed shall be) the computation date specified in the next
following sentence of this SECTION 4.05, and (b) the aggregate consideration
for such maximum number of Additional Shares of Common Stock shall be deemed
to be the minimum consideration received and receivable by Frontier for the
issuance of such Additional Shares of Common Stock pursuant to the terms of
such convertible Securities. For purposes of this SECTION 4.05, the
computation date for clause (a) above shall be the earliest of (i) the date
on which Frontier shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive any such Convertible Securities,
(ii) the date on which Frontier shall enter into a firm contract for the
issuance of such Convertible Securities, and (iii) the date of actual
issuance of such Convertible Securities. No adjustment of the number of
shares of Common Stock comprising a Stock Unit shall be made
<PAGE>
under this SECTION 4.05 upon the issuance of any Convertible Securities which
are issued pursuant to the exercise of any warrants or other subscription or
purchase rights therefor, if any such adjustment shall previously have been
made upon the issuance of such warrants or other rights pursuant to SECTION
4.04. No adjustment of the number of Shares of Common Stock comprising a
Stock Unit shall be made under this SECTION 4.05 upon the issuance of any
Additional Shares of Common Stock which are issued for a consideration
greater than that described in the first sentence of this SECTION 4.05.
4.06 SUPERSEDING ADJUSTMENT OF STOCK UNIT. If, at any time on or
after the Date of Issuance, any adjustment of the number of shares of Common
Stock comprising a Stock Unit shall have been made pursuant to SECTION 4.04
or 4.05 on the basis of the issuance of options, warrants or other rights or
the issuance of other Convertible Securities, or any new adjustment of the
number of shares of Common Stock comprising a Stock Unit shall have been made
pursuant to this SECTION 4.06,
(i) such options, warrants or rights or the right of
conversion or exchange in such other Convertible Securities shall expire,
and a portion of such options, warrants or rights, or the right of
conversion, exercise or exchange in respect of a portion of such other
Convertible Securities, as the case may be, shall not have been
exercised, or
(ii) the consideration per share, for which Additional
Shares of Common Stock are issuable pursuant to such options, warrants or
rights or the terms of such other Convertible Securities, shall be
increased solely by virtue of provisions therein contained for an
automatic increase in such consideration per share upon the arrival of a
specified date or the happening of a specified event,
such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such options,
warrants or rights or other Convertible Securities on the basis of
(a) treating the number of Additional Shares of Common
Stock, if any, theretofore actually issued or issuable pursuant to the
previous exercise of such options, warrants or rights or such right of
conversion or exchange, as having been issued on the date or dates of
such issuance of Additional Shares of Common Stock as determined for
purposes of such previous adjustment and for the consideration actually
received and receivable therefor, and
(b) treating any such options, warrants or rights or any
such other Convertible Securities which then remain outstanding as having
been granted or issued immediately after the time of such increase of the
consideration per share for such Additional Shares of Common Stock as are
issuable under such options, warrants or rights or other Convertible
Securities, and, if and to the extent called for by the foregoing
provisions of
<PAGE>
this SECTION 4 on the basis aforesaid, a new adjustment of the number of
shares of Common Stock comprising a Stock Unit shall be made, which new
adjustment shall supersede the previous adjustment so rescinded and
annulled.
4.07 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION
4. The following provisions shall be applicable to the making of adjustments
of the number of shares of Common Stock comprising a Stock Unit hereinbefore
provided for in this SECTION 4:
(i) TREASURY STOCK. The sale or other disposition of any
issued shares of Common Stock owned or held by or for the account of
Frontier shall be deemed an issuance thereof for purposes of this SECTION
4.
(ii) COMPUTATION OF CONSIDERATION. To the extent that any
Additional Shares of Common Stock or any Convertible Securities or any
options, warrants or other rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities shall be
issued for a cash consideration, the consideration received by Frontier
therefor shall be deemed to be the amount of cash received by Frontier
therefor, or, if such Additional Shares of Common Stock or Convertible
Securities are offered by Frontier for subscription, the subscription
price, or, if such Additional Shares of Common Stock or Convertible
Securities are sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price, in
any such case excluding any amounts paid or receivable for accrued
interest or accrued dividends and without deduction of any compensation,
discounts or expenses paid or incurred by Frontier for and in the
underwriting of, or otherwise in connection with, the issue thereof. To
the extent that such issuance shall be for consideration other than cash,
then, except as herein otherwise expressly provided, the amount of such
consideration shall be deemed to be the Fair Value of such consideration
at the time of such issuance. The consideration for any Additional
Shares of Common Stock issuable pursuant to any options, warrants or
other rights to subscribe for or purchase the same shall be the
consideration received or receivable by Frontier for issuing such
options, warrants or other rights, plus the additional consideration
payable to Frontier upon the exercise of such options, warrants or other
rights. The consideration for any Additional Shares of Common Stock
issuable pursuant to the terms of any Convertible Securities shall be the
consideration received or receivable by Frontier for issuing any options,
warrants or other rights to subscribe for or purchase such Convertible
Securities, plus the consideration paid or payable to Frontier in respect
of the subscription for or purchase of such Convertible Securities, plus
the additional consideration, if any, payable to Frontier upon the
exercise of the right of conversion, exercise or exchange in such
Convertible Securities. In case of the issuance at any time of any
Additional Shares of Common Stock or Convertible Securities in payment or
satisfaction of any dividend upon any class of stock other than Common
Stock, Frontier shall be deemed to have received for such Additional
Shares of Common Stock or Convertible Securities consideration equal to
the amount of such dividend so paid or satisfied.
<PAGE>
(iii) WHEN ADJUSTMENTS TO BE MADE. The adjustments
required by the foregoing provisions of this SECTION 4 shall be made
whenever and as often as any specified event requiring an adjustment
shall occur, except that no adjustment of the number of shares of Common
Stock comprising a Stock Unit that would otherwise be required shall be
made (except in the case of a subdivision or combination of shares of the
Common Stock, as provided for in SECTION 4.01) unless and until such
adjustment, either by itself or with other adjustments not previously
made, adds or subtracts at least l/20th of a share to or from the number
of shares of Common Stock comprising a Stock Unit immediately prior to
the making of such adjustment. Any adjustment representing a change of
less than such minimum amount (except as aforesaid) shall be carried
forward and made as soon as such adjustment, together with other
adjustments required by this SECTION 4 and not previously made, would
result in a minimum adjustment. For the purpose of any adjustment, any
specified event shall be deemed to have occurred at the close of business
on the date of its occurrence.
(iv) FRACTIONAL INTERESTS. In computing adjustments under
this SECTION 4, fractional interests in Common Stock shall be taken into
account to the nearest one-thousandth of a share.
(v) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in
which SECTION 4 shall require that an adjustment in the shares of Common
Stock comprising a Stock Unit be made effective as of a record date,
Frontier may elect to defer until the occurrence of such event by (i)
issuing to the Holder, if this Warrant is exercised after such record
date, the shares of Common Stock, if any, issuable upon such exercise
over and above the shares of Common Stock or other capital stock of
Frontier, if any, issuable upon such exercise on the basis of the number
of shares of Common Stock comprising a Stock Unit in effect prior to such
adjustment and (ii) paying to the Holder any amount of cash in lieu of
the issuance of fractional shares pursuant to SECTION 4; PROVIDED,
HOWEVER, that Frontier shall deliver to such Holder a due bill or other
appropriate instrument evidencing such Holder's right to receive such
additional shares or such cash upon the occurrence of such event.
(vi) WHEN ADJUSTMENT NOT REQUIRED. If Frontier shall take
a record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution thereof to
stockholders, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then thereafter no
adjustment shall be required by reason of the taking of such record and
any such adjustment previously made in respect thereof shall be rescinded
and annulled.
4.08 OTHER ACTION AFFECTING COMMON STOCK. In case at any time or
from time to time Frontier shall take any action affecting its Common Stock,
other than an action described in any of the foregoing SECTIONS 4.01 through
4.07 (inclusive), or in SECTION 5, then, unless in the reasonable opinion of
the Board of Directors of Frontier such action will not have a material
adverse effect upon the rights of the Holders of the Warrants or an adverse
effect on the number
<PAGE>
of shares of Common Stock comprising a Stock Unit shall be adjusted in such
manner and at such time as the Board may reasonably determine in good faith
to be equitable in the circumstances to fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles in such sections thereof.
SECTION 5. CONSOLIDATION, MERGER, ETC.
In case a consolidation or merger of Frontier shall be effected with
another Person on or after the Date of Issuance, or the sale, lease or other
transfer of all or substantially all of Frontier's assets to another Person
shall be effected on or after the Date of Issuance, then, as a condition of
such consolidation, merger, sale, lease or other transfer provision shall be
made whereby the Holder of this Warrant shall thereafter have the right to
purchase and receive upon the basis and upon the terms and conditions
specified herein and in lieu of each Stock Unit immediately theretofore
purchasable and receivable upon the exercise of each of the Warrants, such
shares of stock, securities, cash or other property receivable upon such
consolidation, merger, sale, lease or transfer by the Holder of the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
event. In any such case, appropriate and equitable provision also shall be
made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof (including SECTION 4) shall thereafter
be applicable, as nearly as may be, in relation of any shares of stock,
securities, cash or other property thereafter deliverable upon the exercise
of any Warrants. Frontier shall not effect any such consolidation, merger,
sale, lease or transfer unless prior to or simultaneously with the
consummation thereof the successor Person (if other than Frontier or a
wholly-owned subsidiary of Frontier) resulting from such consolidation or
merger or the Person purchasing, leasing or otherwise acquiring such assets
shall expressly assume, by written instrument mailed to Aspect and any
Significant Holder at its last address appearing on the books of Frontier,
the due and punctual observance and performance of each and every covenant
and condition of this Warrant to be performed and observed by Frontier and
all of the obligations and liabilities hereunder, subject to such
modification as shall be necessary to provide for adjustments of Stock Units
which shall be as nearly equivalent as practicable to the adjustments
provided for in SECTION 4; PROVIDED, HOWEVER, that Frontier shall not be
required to effect (or mail) such express assumption in respect of any
transaction pursuant to which such obligations are transferred by operation
of law and such Person acknowledges the same in a writing that is retained
and made available for inspection by any holder of Warrants. The above
provisions of this SECTION 5 shall similarly apply to successive
consolidations, mergers, sales, leases or other transfers.
SECTION 6. NOTICE TO WARRANT HOLDERS.
6.01 NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever
the number of shares of Common Stock comprising a Stock Unit shall be
adjusted pursuant to SECTION 4, Frontier shall forthwith obtain a certificate
signed by independent accountants of recognized national standing, setting
forth, in reasonable detail, the event requiring the adjustment and the
method by which such adjustment was calculated (including a statement of the
Fair Value of any evidences of indebtedness, shares of stock, other
securities or property or warrants or other subscription or purchase rights
referred to in SECTION 4.02, 4.07(ii) or SECTION 5) and specifying the number
of shares of Common Stock comprising a Stock Unit and (if such adjustment was
made pursuant to SECTION 4.08 or SECTION 5) describing the number and kind of
any other securities comprising a Stock Unit, and any change in the purchase
price or prices thereof, after giving effect to such adjustment or change.
Frontier shall promptly, and in any case within 20 days after the making of
such adjustment, cause a signed copy of such certificate to be delivered to
each Holder of a Warrant in accordance with SECTION 14.02. Frontier shall
keep at its office or agency, maintained for the purpose pursuant to SECTION
14.01, copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by any Holder of a
Warrant or any prospective permitted purchaser of a Warrant designated by a
Holder thereof. The Holders of Warrants entitled to purchase a majority of
the Stock Units covered by all the Warrants shall have the right to challenge
any such adjustment of the number of shares of Common Stock comprising a
Stock Unit contained in such certificate for a period of 30 days after such
certificate is delivered to the Holders. In the event the Holders give
Frontier written notice of such challenge within such 30-day period, such
Holders and Frontier shall thereupon promptly attempt in good faith to reach
agreement on such adjustment, and failing such agreement, shall appoint a
mutually acceptable nationally recognized independent accounting firm to
determine such adjustment, whose determination shall be final and binding on
Frontier and the Holders, absent manifest error. The costs incurred by the
Holders and Frontier and the fees and expenses of such independent accounting
firm shall be paid by (a) the Holders if Frontier's adjustment in the
certificate was accurate to within 1/20th of a share to or from the number of
shares of Common Stock comprising a Stock Unit by such independent accounting
firm or if such independent accounting firm's adjustment results in the
Holders being entitled to receive fewer shares of Common Stock per Stock Unit
than under the adjustment determined by Frontier and (b) otherwise by
Frontier.
<PAGE>
6.02 NOTICE OF CERTAIN CORPORATE ACTION. In case Frontier shall
propose (a) to pay any dividend to the holders of its Common Stock or to make
any other distribution to the holders of its Common Stock, or (b) to offer to
the holders of its Common Stock rights to subscribe for or to purchase any
Additional Shares of Common Stock or shares of stock of any class or any
other securities, rights or options, or (c) to effect any reclassification of
its Common Stock (other than a reclassification involving only the
subdivision, or combination, of outstanding shares of Common Stock), or
(d) to effect any capital reorganization, or (e) to effect any consolidation,
merger or sale, lease, transfer or other disposition of all or substantially
all of its property, assets or business, or (f) to effect the liquidation,
dissolution or winding up of Frontier, then, in each such case, Frontier
shall give to each Holder of a Warrant, in accordance with SECTION 14.02, a
notice of such proposed action, which shall specify the date on which a
record is to be taken for the purposes of such stock dividend, distribution
or rights, or the date on which such reclassification, reorganization,
consolidation, merger, sale, lease, transfer, disposition, liquidation,
dissolution or winding up is to take place and the date of participation
therein by the holders of Common Stock, if any such date is to be fixed, and
shall also set forth such facts with
<PAGE>
respect thereto as shall be reasonably necessary to indicate the effect of
such action on the Common Stock and the number and kind of any other shares
of stock which will comprise a Stock Unit, and the purchase price or prices
thereof, after giving effect to any adjustment which will be required as a
result of such action. Such notice shall be so given in the case of any
action covered by clause (a) or (b) above at least 10 days prior to the
record date for determining holders of the Common Stock for purposes of such
action, and in the case of any other such action, at least 10 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of Common Stock, whichever shall be the earlier.
6.03 NOTICE OF EXPIRATION DATE. Frontier shall give to each Holder
of a Warrant notice of the Expiration Date. Such notice may be given by
Frontier not less than 30 days but not more than 60 days prior to the
Expiration Date.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF ASPECT.
Aspect represents and warrants to Frontier as follows:
7.01 PURCHASE FOR OWN ACCOUNT. The Warrants and Warrant Stock, as
the case may be, to be received by Aspect will be acquired for investment for
Aspect's own account and not with a present view to the distribution of any
part thereof, and Aspect has no present intention of selling, granting any
participation in, or otherwise distributing the same in a manner contrary to
the Securities Act or applicable state securities laws, PROVIDED, that,
Aspect at all times retains the right to control, deal with and sell all of
its property, including the Warrants.
7.02 DISCLOSURE OF INFORMATION; DUE DILIGENCE. Aspect represents
that it has had an opportunity to ask questions of and receive answers from
Frontier regarding Frontier and the terms and conditions of the offering of
the Warrants and Warrant Stock, as the case may be, offered hereby and to
obtain additional information necessary to verify the accuracy of the
information supplied or to which it had access.
7.03 INVESTMENT EXPERIENCE; ACCREDITED INVESTOR STATUS. Aspect is
able to bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Warrants and the Warrant Stock.
Aspect understands that neither the Warrants nor the Warrant Stock have been
registered under the Securities Act or under the securities laws of any
jurisdiction by reason of reliance upon certain exemptions, and that the
reliance of Frontier on such exemptions is predicated upon the accuracy of
Aspect's representations and warranties in this SECTION 7.03. Aspect is
familiar with Regulation D promulgated under the Securities Act and is an
"accredited investor" as defined therein.
7.04 SECURITIES ACT COMPLIANCE. Aspect represents that neither the
Warrants nor the
<PAGE>
Warrant Stock shall be sold or transferred or offered for sale or transfer
without registration under the Securities Act or the availability of an
exemption therefrom, and in accordance with the terms and conditions and
legends set forth in SECTION 9.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF FRONTIER.
Frontier represents and warrants to Aspect as follows:
8.01 EXISTENCE; QUALIFICATION. Frontier is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Oklahoma. Frontier has duly qualified and is authorized to do business and
is in good standing as a foreign corporation in every jurisdiction where the
failure to be so qualified would have a material adverse effect on Frontier's
ability to enter into and perform all of its obligations under this Warrant.
8.02 NO BREACH. The execution, delivery and performance of this
Warrant by Frontier and the consummation of the transactions contemplated
hereby will not (a) violate the articles of incorporation or by-laws of
Frontier, (b) violate any loan or credit agreement to which Frontier is a
party or is bound, or result in a breach of or default under any other
instrument or agreement to which Frontier is a party or is bound which is
material to the business or properties of Frontier taken as a whole, (c)
violate any judgment, order, injunction, decree or award against or binding
upon Frontier, the violation of which would have a material adverse effect on
the business or properties of Frontier taken as a whole, (d) result in the
creation of any material Lien upon any of the properties or assets of
Frontier, or (e) violate any law, rule or regulation applicable to or binding
upon Frontier, or (f) cause or require any adjustment, or give rise to any
rights in favor of another Person, under any agreement to which Frontier is a
party.
8.03 CORPORATE ACTION. Frontier has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Warrant; the execution, delivery and performance by Frontier of its
obligations under this Warrant have been duly authorized by all necessary
corporate action (including all stockholder action if required) on the part
of Frontier; this Warrant has been duly executed and delivered by Frontier
and constitutes a legal, valid and binding obligation of Frontier,
enforceable against Frontier in accordance with its terms; the Warrant Stock
initially covered by the Warrants will be duly and validly authorized and
reserved for issuance and shall, when paid for, be issued and delivered in
accordance with the terms of the Warrants, be duly and validly issued, fully
paid and nonassessable and free and clear of any Liens; and none of the
Warrant Stock issued pursuant to the terms hereof shall be in violation of
any preemptive rights of any shareholder of Frontier.
8.04 APPROVALS. Based in part upon the representations set forth in
SECTION 7, no authorizations, approvals or consents of, and no filings or
registrations with, any governmental authority or any other Person are
necessary for the execution, delivery or performance by Frontier of its
obligations under this Warrant or for the validity or enforceability thereof.
Any such action required to be taken as a condition to the issuance and
delivery of the Warrants has been (or prior to such issuance and delivery
will be) duly taken by all such governmental
<PAGE>
authorities or other Persons, as the case may be.
8.05 INVESTMENT COMPANY ACT. Frontier is not an "investment
company", or a company "controlled by" an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
8.06 PUBLIC UTILITY HOLDING COMPANY ACT. Frontier is not a "holding
company", or an "affiliate" of a "holding company" or a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
8.07 CAPITALIZATION. On the date hereof, the total number of shares
of capital stock which Frontier has authority to issue is (i) 9,865,906
shares of Common Stock, par value $.01 per share, of which 40,000,000 shares
are issued and outstanding, and (ii) 5,000,000 shares of Preferred Stock, par
value $10.00 per share, of which 85,961 shares are issued and outstanding.
8.08 PRIVATE OFFERING.
(a) Assuming the truth and accuracy of Aspect's representations and
warranties contained in SECTION 7, the issuance and sale of the Warrants to
Aspect hereunder are exempt from the registration and prospectus delivery
requirements of the Securities Act as presently in effect.
(b) Frontier agrees that neither Frontier nor any Person acting on
its behalf has offered or will offer the Warrants or shares of Warrant Stock
or any part thereof or any similar securities for issue or sale to, or has
solicited or will solicit any offer to acquire any of the same from, any
Person so as to bring the issuance and sale of the Warrants or shares of
Warrant Stock within the provisions of the registration and prospectus
delivery requirements of the Securities Act.
8.09 NO LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the best of Frontier's knowledge after due
inquiry, threatened against Frontier before any court or administrative
agency seeking to enjoin the transactions contemplated by this Warrant or
that is reasonably likely to (i) prohibit or limit in any way performance by
Frontier of its obligations under this Warrant or (ii) affect the legality,
validity, enforceability or binding nature of this Warrant.
SECTION 9. RESTRICTIONS ON TRANSFERABILITY.
9.01 TRANSFERS GENERALLY. Except as otherwise provided in
SECTION 9.06, the Warrants and Warrant Stock shall only be transferable upon
the conditions specified in this SECTION 9, which conditions are intended to
insure compliance with the provisions of the Securities Act and applicable
state securities laws in respect of the transfer of any Warrants and Warrant
Stock.
9.02 TRANSFERS OF RESTRICTED SECURITIES PURSUANT TO REGISTRATION
STATEMENTS, RULE 144
<PAGE>
AND RULE 144A. The Warrants and Warrant Stock may be offered or sold by the
Holder thereof pursuant to (a) an effective registration statement under the
Securities Act, or (b) to the extent applicable, Rule 144 or Rule 144A under
the Securities Act.
9.03 NOTICE OF CERTAIN TRANSFERS. If any Holder of any Warrants or
Warrant Stock desires to transfer such Warrants or Warrant Stock other than
pursuant to an effective registration statement under the Securities Act or
pursuant to Rule 144 or Rule 144A, then such Holder shall deliver to Frontier
a notice with respect to the proposed transfer, together with a written
representation (together with such factual information in respect thereof as
Frontier may reasonably request) from such Holder in substance reasonably
satisfactory to Frontier to the effect that an exemption from registration
under the Securities Act and applicable state securities laws is available.
9.04 RESTRICTIVE LEGENDS.
(a) Until otherwise permitted by SECTION 9.05, each certificate for
Warrants issued, each certificate for any Warrants issued to any subsequent
transferee of any such certificate, each certificate for any Warrant Stock
issued upon exercise of any Warrant and each certificate for any Warrant
Stock issued to any subsequent transferee of any such certificate, shall be
stamped or otherwise imprinted with one or more legends in substantially the
following form:
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
HAVE ANY OF THEM BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES OR
BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE NOR THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST OR PARTICIPATION HEREIN
OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR
IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF, EXCEPT IN COMPLIANCE
WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE RULES
AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES OR BLUE SKY
LAWS.
(b) In addition, each such certificate shall be stamped or
otherwise imprinted with any legend required under state securities laws.
9.05 TERMINATION OF RESTRICTIONS. All the restrictions imposed by
this SECTION 9 upon the transferability of the Warrants and Warrant Stock
shall cease and terminate as to any particular Warrants or Warrant Stock when
such Warrants or Warrant Stock shall have been effectively registered under
the Securities Act and applicable state securities laws and sold by the
<PAGE>
Holder thereof in accordance with such registration or sold under and
pursuant to Rule 144 or is eligible to be sold under and pursuant to
paragraph (k) of Rule 144. Whenever the restrictions imposed by this
SECTION 9 shall terminate as to any Warrants or Warrant Stock as hereinabove
provided, the Holder thereof shall be entitled to receive from Frontier,
without expense, a new certificate evidencing such Warrants or Warrant Stock
not bearing the restrictive legend otherwise required to be borne by a
certificate evidencing such Warrants or Warrant Stock.
9.06 CERTAIN DISPOSITIONS OF SECURITIES.
(a) Notwithstanding anything in this Warrant (including SECTION 9
other than SECTION 9.05) to the contrary, but subject to compliance with the
Securities Act, any applicable state securities laws and the requirement as
to legending of the certificates for Warrants and Warrant Stock specified in
SECTION 9.04, any Holder shall have the right to transfer any or all of its
Warrants and Warrant Stock:
(i) to any Person who at the time owns (directly or
indirectly) at least a majority of the shares of such Holder;
(ii) to any Person pursuant to a dividend or other
distribution (whether by liquidation or otherwise) of such Holder;
(iii) to any Person at least a majority of whose shares shall
at the time be owned (directly or indirectly) by such Holder or by any
Person who owns (directly or indirectly) at least a majority of the shares
of such Holder; or
(iv) in the case of any Holder which is an insurance company,
pension fund, bank, bank holding company or a subsidiary of an insurance
company, pension fund, bank or bank holding company, to a third party, if,
in the reasonable judgment of such Holder, such transfer is required to be
effected by such Holder because (A) its investment in Warrants or shares of
Warrant Stock may exceed any limitation to which it is subject, or is
otherwise not permitted, under any law, rule or regulation of any
governmental authority, or (B) restrictions are imposed on such Holder under
any law, rule or regulation which, in the reasonable judgment of such
Holder, make it illegal or unduly burdensome to continue to hold such
Warrants or shares of Warrant Stock or a portion thereof.
The party to which Warrants or Warrant Stock are transferred pursuant to the
immediately preceding sentence shall be deemed to be a Holder of such
Warrants or Warrant Stock and bound by the provisions of this Warrant
applicable to Holders so long as he, she or it continues to own any of the
Warrants or Warrant Stock so transferred to such transferee.
(b) If the circumstances described in clause (iv) of SECTION
9.06(a) arise, Frontier shall assist such Holder in disposing of its Warrants
and Warrant Stock in a prompt and orderly manner, and, at the request of such
Holder, Frontier shall provide (and authorize such Holder to provide) such
financial and other such information concerning Frontier as such holder may
<PAGE>
request to any prospective purchaser of the Warrants or Warrant Stock owned
by such Holder.
SECTION 10. HOLDER'S RIGHTS.
10.01 DELIVERY EXPENSES. If any Holder surrenders any certificate
for Warrants or Warrant Stock to Frontier or a transfer agent of Frontier for
exchange for instruments of other denominations or registered in another name
or names, subject to the terms and conditions of SECTION 9, Frontier shall
cause such new instruments to be issued and shall pay the costs associated
with the preparation and issuance of any new instruments and the cost of
delivering to the office of such Holder from Frontier or its transfer agent,
duly insured, the surrendered instrument and any new instruments issued in
substitution or replacement for the surrendered instrument.
10.02 TAXES. Frontier shall pay all taxes (other than Federal, state
or local income taxes) which may be payable in connection with the issuance
of the Warrants and Warrant Stock hereunder, or in connection with any
modification of this Warrant and shall hold each Holder harmless without
limitation as to time against any and all liabilities with respect to all
such taxes. Frontier shall not, however, be required to pay any tax, with
respect to any Warrant which may be payable in respect of any transfer
involved in the issuance and delivery of Warrants or of shares of Common
Stock in a name other than that in which such Warrant or Common Stock is
registered, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to Frontier the amount of any such tax,
or has established, to the satisfaction of Frontier, that such tax has been
paid. The obligations of Frontier under this SECTION 10.02 shall survive any
redemption, repurchase or acquisition of Warrants or Warrant Stock by
Frontier, and any cancellation or termination of the Warrants.
10.03 REPLACEMENT OF INSTRUMENTS. Upon receipt by Frontier of
evidence reasonably satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of any certificate or instrument evidencing
any Warrants or Warrant Stock, and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it, or
(b) in the case of mutilation, upon surrender thereof, Frontier, at
its expense, shall cancel such certificate or instrument and execute,
register and deliver, in lieu thereof, a new certificate or instrument for
(or covering the purchase of) an equal number of Warrants or Warrant Stock.
10.04 CERTAIN RESTRICTIONS. Frontier shall not at any time enter
into an agreement or other instrument limiting in any manner its ability to
perform its obligations under this Warrant or making such performance or the
issuance of shares of Common Stock upon the exercise of any Warrant a default
under any such agreement or instrument.
10.05 CERTAIN COVENANTS. At all times prior to the Expiration Date:
<PAGE>
(a) Frontier shall retain a nationally recognized independent
accounting firm as its auditors.
(b) Frontier shall afford Aspect or its Affiliates (or any
Significant Holder), or their respective authorized agents, access, at
reasonable times, upon reasonable prior notice, (i) to inspect the books and
records of Frontier, (ii) to discuss with management of Frontier the
nonconfidential business and affairs of Frontier, and (iii) to inspect the
properties of Frontier.
(c) Each Holder and its authorized agents shall have the right to
attend all meetings of shareholders of Frontier.
(d) Frontier shall provide Aspect with all notices set forth in
SECTIONS 6.01, 6.02 and 6.03 pursuant to the respective terms thereof.
10.06 INDEMNIFICATION. Frontier shall indemnify and hold harmless
Aspect and the Holders and each of their respective directors, officers,
employees, stockholders, Affiliates and agents, and Aspect and the Holders
shall indemnify and hold harmless Frontier and its directors, officers,
employees, stockholders, Affiliates and agents (each, an "INDEMNIFIED
PERSON") on demand from and against any and all losses, claims, damages,
liabilities (or actions or other proceedings commenced or threatened in
respect thereof) and expenses that arise out of, result from, or in any way
relate to the breach of any representation, warranty or covenant by Frontier
contained in this Warrant or any other agreement, document or instrument
executed and delivered in connection with the transactions contemplated
hereby, and reimburse each indemnified person, upon its demand, for any
reasonable legal or other expenses incurred in connection with investigating,
defending or participating in the defense of any such loss, claim, damage,
liability, action or other proceeding (whether or not such indemnified person
is a party to any action or proceeding out of which any such expenses arise),
other than any of the foregoing claimed by any indemnified person to the
extent incurred by reason of the gross negligence or willful misconduct of
such indemnified person. No indemnified person shall be responsible or
liable to any Person for any consequential damages which may be alleged as a
result of or relating to this Warrant or in connection with the other
transactions contemplated hereby.
10.07 FINANCIAL STATEMENTS. Frontier shall deliver the information
specified below to Aspect and each Significant Holder until the earlier of
(i) the Expiration Date and (ii) the date on which Aspect or any Significant
Holder no longer holds any Warrants or Warrant Stock:
(a) as soon as available and in any event within 60 days after the
end of each of the first three fiscal quarters or each fiscal year of
Frontier, consolidated balance sheets of Frontier as of the end of such
fiscal quarter and statements of operations and cash flow of Frontier for
such
<PAGE>
fiscal quarter and for the period commencing at the end of the previous
fiscal year and ending with the end of such fiscal quarter, certified by the
chief financial officer of Frontier;
(b) as soon as available and in any event within 120 days after the
end of each fiscal year of Frontier, a copy of the annual audit report for
such fiscal year for Frontier, including therein the balance sheet of
Frontier as of the end of such fiscal year and statements of operations and
cash flow of Frontier for such fiscal year, in each case certified in a
manner reasonably acceptable to Aspect by an independent public accountant
acceptable to Aspect, together with a report from such accountants to the
effect that, in making the examination necessary for the signing of such
annual report by such accountants, they have not become aware of any default
that has occurred and is continuing, or, if they have become aware of such
default, describing such default and the steps, if any, being taken to cure
it;
(c) promptly after (1) the sending or filing thereof, copies of all
reports which Frontier sends to any of its security holders, (2) the sending
or filing thereof, all reports and registration statements which Frontier
files with the Securities and Exchange Commission or any national securities
exchange, (3) the filing thereof, copies of all tariff and rate cases and
other material reports filed with any regulatory authority, and (4) receipt
thereof, copies of all notices received from any regulatory authority
concerning noncompliance by Frontier with any applicable regulations; and
(d) such other information respecting the condition or operations,
financial or otherwise, of Frontier as Aspect may from time to time
reasonably request.
SECTION 11. RESERVATION AND AUTHORIZATION OF COMMON STOCK: REGISTRATION WITH
OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY.
Frontier shall at all times reserve and keep available for issue upon the
exercise of Warrants such number of its authorized but unissued shares of
Common Stock as shall be sufficient to permit the exercise in full of all
outstanding Warrants. All shares of Common Stock which shall be so issuable,
when issued upon exercise of any Warrant and payment of the applicable
Exercise Price therefor shall be duly and validly issued, fully paid and
nonassessable and free and clear of any Liens (caused directly or indirectly
by Frontier or its Affiliates).
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or which would cause
an adjustment reducing the Current Warrant Price per share of Common Stock
below the then par value, if any, of the shares of Common Stock issuable upon
exercise of the Warrants, Frontier shall take any corporate action which is
necessary in order that Frontier may validly and legally issue fully paid and
nonassessable shares of Common Stock free and clear of any Liens (caused
directly or indirectly by Frontier or its Affiliates) upon the exercise of
all the Warrants immediately after the taking of such action.
Before taking any action which would result in an adjustment in the
number of shares of
<PAGE>
Common Stock comprising a Stock Unit, Frontier shall obtain all such
authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having jurisdiction
thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise or conversion of Warrants require registration with any governmental
authority under any Federal or state law (otherwise than any law that applies
to a Holder specifically because of its status as a regulated entity or in
connection with a registration under the Securities Act or applicable state
securities laws) before such shares may be so issued, Frontier shall in good
faith and as expeditiously as reasonably possible and at its expense endeavor
to cause such shares to be duly registered.
SECTION 12. TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS.
(a) In the case of all dividends or other distributions by Frontier
to the holders of its Common Stock with respect to which any provision of
SECTION 4 refers to the taking of a record of such holders, Frontier shall in
each such case take such a record as of the close of business on a business
day or as otherwise provided by or permitted under the corporation laws of
Frontier's then jurisdiction of incorporation.
(b) Frontier shall not at any time, except upon complete
dissolution, liquidation or winding up, close its stock transfer books or
Warrant transfer books so as to result in preventing or delaying the
exercise, conversion or transfer of any Warrant, unless otherwise required by
any governmental authority or by any applicable federal, state or local law.
SECTION 13. NO VOTING OR OTHER RIGHTS.
This Warrant shall not entitle the Holder hereof to any voting or other
rights as a stockholder of Frontier either at law or at equity, and the
rights of a holder of this Warrant are limited to those expressly set forth
herein.
SECTION 14. MISCELLANEOUS.
14.01 OFFICE OF FRONTIER. So long as any of the Warrants remains
outstanding, Frontier shall maintain an office in the continental United
States of America where the Warrants may be presented for exercise, transfer,
division or combination as in this Warrant provided. Such office shall be at
Frontier Natural Gas Corporation, 500 Dallas Street, Suite 2920, Houston,
Texas 77002, unless and until Frontier shall designate and maintain some
other office for such purposes and give notice thereof to the Holders of all
outstanding Warrants.
14.02 NOTICES. All notices and other communications required or
permitted to be given
<PAGE>
pursuant to this Agreement shall be in writing and shall be delivered
personally or by facsimile communication to the number set forth below, or by
first class mail, postage prepaid, registered or certified with return
receipt requested, at the addresses set forth below. Notice deposited in the
mail in the manner hereinabove provided shall be effective upon expiration of
five (5) business days from the date on which it is so deposited. Notice
given in any other manner shall be effective only if and when received by the
addressee. For purposes of notice, the addresses of the parties shall be as
follows:
With respect to Frontier: FRONTIER NATURAL GAS CORPORATION
500 Dallas Street, Suite 2920
Houston, Texas 77002
Attention: President
Telephone Number: (713) 739-7100
Fax Number: (713) 739-7124
With a copy to: Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002-4310
Attention: James J. Spring, III
Telephone Number: (713) 658-1818
Fax Number: (713) 658-2553
With respect to Aspect: ASPECT RESOURCES, LLC
511 16th Street, Suite 300
Denver, Colorado 80202
Attention: Alex M. Cranberg
Telephone Number: (303) 573-7011
Fax Number: (303) 573-7340
With a copy to: Davis, Graham & Stubbs LLP
370 17th Street, Suite 4700
Denver, Colorado 80202
Attention: Charles D. Bybee
Telephone Number: (303) 892-9400
Fax Number: (303) 893-1379
provided that each party shall have the right to change its address for
notice, and the person who is to receive notice hereunder, by the giving of
fifteen (15) days' prior written notice to the other parties hereto in the
manner set forth above.
14.03 AMENDMENTS. The terms of the Warrants may be amended, and the
observance of any term therein may be waived, upon the written consent of the
holders of Warrants for a majority of the total number of Stock Units at the
time purchasable upon the exercise of all then outstanding Warrants. For the
purposes of determining whether the holders of outstanding
<PAGE>
Warrants entitled to purchase a requisite number of Stock Units at any time
have taken any action authorized by this Warrant, any Warrants owned by
Frontier or any Affiliate of Frontier shall be deemed not to be outstanding.
14.04 GOVERNING LAW. This Warrant shall in all respects be governed
by, and construed in accordance with, the substantive federal laws of the
United States and the internal laws of the State of Texas (principles of
conflict of laws excluded) and, to the extent the Oklahoma General
Corporation Act so requires, the laws of the State of Oklahoma.
14.05 LIMITATION OF LIABILITY. No provision hereof, in the absence
of affirmative action by the Holder hereof to purchase shares of Common
Stock, and no mere enumeration herein of the rights or privileges of the
Holder hereof, shall give rise to any liability of such holder for the
Exercise Price or as a stockholder of Frontier, whether such liability is
asserted by Frontier, by any creditor of Frontier or any other Person.
14.06 BINDING EFFECT. The obligations set forth in this Warrant
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
14.07 HEADINGS. The headings in this Warrant are inserted for
concurrence only and are not intended to describe, interpret, define or limit
the scope, extent or intent of this Warrant or any provision hereof.
14.08 GENDER AND NUMBER. Whenever required by the context, as used
in this Warrant, the singular number shall include the plural and vice versa
and pronouns of whatever gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
IN WITNESS WHEREOF, the parties have duly executed this Warrant this
14th day of January, 1998 to be effective as of the Date of Issuance.
Frontier Natural Gas Corporation
By: /s/ David W. Berry
David W. Berry, President
<PAGE>
FORM OF EXERCISE
(To be executed by the registered holder hereof)
The undersigned hereby exercises this Warrant to subscribe for and
purchase __________ Stock Units of Frontier Natural Gas Corporation covered
by the within certificate and herewith makes payment therefor in full.
Kindly issue certificates and/or other instruments covering Stock Units in
accordance with the instructions given below. A new Warrant for the
unexercised balance of the Stock Units covered by the within certificate, if
any, will be registered in the name of the undersigned.
Dated:
Instructions for registration of Stock Units
Name (please print)
Social Security or Other Identifying
Number:
Address:
Street
City, State and Zip Code
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder hereof)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
all the rights of the undersigned under the within certificate with respect
to the purchase of up to the number of Stock Units covered thereby as set
forth below and does hereby irrevocably constitute and appoint
__________________________, attorney-in-fact, to transfer the same on the
books of Frontier, with full power of substitution in the premises:
<TABLE>
<CAPTION>
Number of
Name of Assignee Address Stock Units
- - ---------------- ------- -----------
<S> <C> <C>
</TABLE>
Dated:
(Signature of Registered Owner)
(Guaranteed Signature)
Notice: The signature to this Form of Assignment must correspond with the
name as written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank or trust company having an office or correspondent in
New York, New York, or by a firm having membership on the New York Stock
Exchange.
<PAGE>
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES OR BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE
NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST
OR PARTICIPATION HEREIN OR THEREIN, MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR
DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS
AMENDED, AND THE APPLICABLE RULES AND REGULATIONS
THEREUNDER AND APPLICABLE STATE SECURITIES OR
BLUE SKY LAWS.
WARRANT
to Purchase Common Stock of
FRONTIER NATURAL GAS CORPORATION
THIS IS TO CERTIFY THAT GAINES BERLAND ENERGY FUND, L.P., a Delaware
limited partnership ("Gaines Berland"), or its assigns, is entitled to purchase
in whole or in part from time to time from FRONTIER NATURAL GAS CORPORATION, an
Oklahoma corporation ("Frontier"), on or after the Date of Issuance (as
hereinafter defined), but not later than 5:00 p.m., Houston time, on the
Expiration Date (as hereinafter defined), 56,250 Stock Units (as hereinafter
defined and subject to adjustment as provided herein) at a purchase price per
Stock Unit equal to the Exercise Price (as hereinafter defined), subject to the
terms and conditions hereinbelow provided.
SECTION 1. CERTAIN DEFINITIONS.
1.01 DEFINED TERMS. For purposes of this Warrant, in addition to
the terms defined elsewhere herein, the following terms shall have the
meanings set forth in this Section 1:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common
Stock issued by Frontier on or after the Date of Issuance, other than (i) the
Warrant Stock, (ii) the shares of Common Stock described as being issued and
outstanding on the Date of Issuance in SECTION 8.07, and (iii) shares of
Common Stock issued or to be issued to employees, directors, advisors or
consultants of Frontier in connection with equity incentive plans.
"AFFILIATE" shall mean, as to any Person, any other Person which
directly or indirectly controls, or is under common control with or is
controlled by, such Person and, if such Person is an individual, any member
of the immediate family (including parents, spouse and children) of
<PAGE>
such individual or one or more members of such immediate family and any
Person who is controlled by any such member or trust. As used in this
definition, "control" (including the correlative terms "controlled by" and
"under common control with") shall mean possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies
of a Person (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise), PROVIDED that, in any event,
any Person which owns directly or indirectly 40% or more of the securities
having ordinary voting power for the election of directors or other governing
body of a corporation or 40% or more of the partnership or other ownership
interests of any other Person will be deemed to control such corporation or
other Person. Notwithstanding the foregoing, (i) no individual shall be
deemed to be an Affiliate of a corporation solely by reason of his or her
being an officer or director of such corporation, and (ii) neither Gaines
Berland nor any of its Affiliates shall be deemed to be an Affiliate of
Frontier.
"ASPECT" shall mean Aspect Resources LLC, a Colorado limited liability
company.
"COMMON STOCK" shall mean Frontier's authorized Common Stock, par value
$.01 per share, as constituted on the date hereof, and any stock into which
such Common stock may thereafter be converted or changed, and also shall
include any other stock of Frontier of any other class that is not preferred
as to dividends or distributions in liquidation over any other class of any
other stock of Frontier.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into, or exercisable or
exchangeable for, Additional Shares of Common Stock, either immediately or
upon the arrival of a specified date or the happening of a specified event.
"CURRENT ADJUSTMENT PRICE," per share of Common Stock, for the purposes
of any provision of this Warrant at the date herein specified, shall be
deemed to be the average of the daily market prices on such date and the five
(5) consecutive trading days immediately prior to such date. The market price
for each such trading day shall be (a) if the Common Stock is traded on a
national securities exchange, its last bid price on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid, all as made available over the
Consolidated Last Sale Reporting System of the CTA Plan or, if the Common
Stock is not then eligible for reporting over such system, its last bid price
on such trading day on such national securities exchange or, if there was no
bid on that day, on the next preceding trading day on which there was a bid
on such national securities exchange or (b) if the principal market for the
Common Stock is the over-the-counter market, (i) its last bid price on such
trading day or, if there was no bid on that day, the last bid price on the
next preceding trading day on which there was a bid, all as made available
over the Consolidated Last Sale Reporting System of the CTA Plan, or (ii) if
the Common Stock is not then eligible for reporting over the Consolidated
Last Sale Reporting System of the CTA Plan and the Common Stock is quoted on
the NASDAQ, the last bid price reported on NASDAQ on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a
<PAGE>
bid or (iii) if the Common Stock is not reported or quoted on NASDAQ, the
closing bid quotations as quoted in each of The Wall Street Journal, the
National Quotation Bureau pink sheets, the Salomon Brothers quotation sheets,
quotation sheets of registered marketmakers, as applicable, and, if
necessary, dealers' telephone quotations. If the Current Adjustment Price per
share of Common Stock cannot be ascertained by any of the foregoing methods,
the Current Adjustment Price per share of Common Stock shall be deemed to be
the Fair Value per share of Common Stock.
"CURRENT WARRANT PRICE," per share of Common Stock, for the purpose of
any provision of this Warrant at the date herein specified, shall mean the
amount equal to the quotient resulting from dividing the Exercise Price per
Stock Unit in effect on such date by the number of shares (including any
fractional share) of Common Stock comprising a Stock Unit on such date.
"DATE OF ISSUANCE" shall mean January 15, 1998.
"EXERCISE PRICE" per Stock Unit shall mean fifty cents ($.50).
"EXPIRATION DATE" shall mean the later of (i) one year from the Date of
Issuance, or (ii) thirty (30) days after the Holder's receipt of written
notice from Frontier that all amounts advanced under that Credit Agreement,
dated January 12, 1998, by and between Frontier and Aspect have been repaid
and all of the obligations of the Lender (as such term is defined in the
Credit Agreement) under the Credit Agreement have terminated.
"FAIR VALUE" per share of Common Stock (or other property as the case
may be) shall mean the price that could be obtained from an independent third
party for all of the issued and outstanding shares of Common Stock of
Frontier in an arm's length transaction in which the seller would not be
under any compulsion to sell and the purchaser would not be under any
compulsion to purchase. Fair Value shall be determined as follows: Frontier
and the Holders of Warrants entitled to purchase a majority of the Stock
Units covered by all the Warrants shall each designate a representative, and
such representatives will meet and use their best efforts to reach an
agreement on the Fair Value. If the representatives designated by Frontier
and such Holders are unable to reach such an agreement, then the Holders of
Warrants entitled to purchase a majority of the Stock Units covered by all
the Warrants will submit a list of at least three Independent Appraisers.
Frontier shall select one of the Independent appraisers set forth on such
list. The Independent Appraiser so selected by Frontier will determine the
Fair Value of a share of Common Stock (or other property, as the case may be)
and its determination thereof will be final and binding on all parties
concerned, absent manifest error. Frontier will provide the Independent
Appraiser so selected by Frontier with all information about Frontier which
such Independent Appraiser reasonably deems necessary for determining the
Fair Value. The fees and expenses of the appraisal process (including those
of the Independent Appraiser) will be paid by Frontier. Frontier may require
that the Independent Appraiser keep confidential any non-public information
received as a result of this paragraph pursuant to reasonable confidentiality
arrangements.
<PAGE>
"FRONTIER" shall have the meaning set forth in the preamble of this
Warrant.
"GAINES BERLAND" shall have the meaning set forth in the preamble of
this Warrant.
"HOLDER" shall mean any Person who acquires Warrants or Warrant Stock
pursuant to the provisions of this Warrant including any transferees of
Warrants or Warrant Stock.
"INCLUDE" and "INCLUDING" shall be construed as if followed by the
phrase, "without being limited to,".
"INDEPENDENT APPRAISER" shall mean an appraiser which is a nationally
recognized independent expert experienced in valuing businesses similar to
the principal business of Frontier.
"LIEN" means any lien, mortgage, security interest, pledge, charge,
deposit, production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement, or lease,
license or other arrangement substantially equivalent thereto, other than
preferential purchase rights and consents to assignment.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation system.
"NON-TRANSFERABLE RIGHTS" shall have the meaning assigned to such term
in the definition of Rights Plan.
"PERSON" shall mean a corporation, an association, a partnership, a
limited liability company, a bank, an employee benefit plan, a joint venture,
an organization, an individual, a trust or any unit of federal, state or
local government.
"RIGHTS CERTIFICATE" shall have the meaning assigned to such term in the
definition of Rights Plan.
"RIGHTS PLAN" shall mean a shareholder rights plan implemented by
Frontier to deter a hostile acquisition, pursuant to which holders of shares
of Common Stock (a) are issued rights that are not initially exercisable or
transferable apart from such shares of Common Stock ("NON-TRANSFERABLE
RIGHTS") and (b) are to be issued rights certificates exercisable and
transferable apart from such shares of Common Stock ("RIGHTS CERTIFICATES")
in certain circumstances to purchase Additional Shares of Common Stock upon
certain acquisitions of stock or assets of or business combinations involving
Frontier by a Person in a transaction or transactions not approved by the
board of directors of Frontier as specified in the Rights Plan.
"SECURITIES ACT" means the Securities Act of 1933 as in effect on the
date hereof and as the same may be amended from time to time.
<PAGE>
"SIGNIFICANT HOLDER" shall mean, at any date, a Holder of 33 1/3% of the
then outstanding Warrants and shares of Warrant Stock.
"STOCK UNIT" shall mean one share of Common Stock on the Date of
Issuance, and thereafter such number of shares (including any fractional
shares) of Common Stock and other securities, cash or other property as shall
result from the adjustments specified in Section 4 and Section 5.
"WARRANT STOCK" shall mean (i) the shares of Common Stock purchased or
purchasable by the Holders of the Warrants upon the exercise thereof,
including any other stock into which such Common Stock may thereafter be
changed or converted, and (ii) any additional shares of Common Stock or other
securities issued or distributed by way of a dividend, stock split or other
distribution in respect of the Common Stock referred to in clause (i) above,
or acquired by way of any rights offering or similar offering made in respect
of the Common Stock referred to in clause (i) above.
"WARRANTS" shall mean the warrants issued hereby, dated as of the Date
of Issuance, evidencing rights to purchase up to an aggregate of 56,250 Stock
Units, and all Warrants issued upon transfer, division or combination of, or
in substitution for, any thereof.
SECTION 2. EXERCISE OF WARRANT.
In order to exercise this Warrant, in whole or in part, the Holder
hereof shall deliver to Frontier, at its office maintained for such purpose
pursuant to SECTION 14.01, (a) a written notice of such Holder's election to
exercise this Warrant, which notice shall specify the number of Stock Units
to be purchased, (b) a certified or cashier's check or checks payable to
Frontier in an aggregate amount equal to the aggregate Exercise Price for the
number of Stock Units as to which this Warrant is being exercised, and (c)
this Warrant. Such notice shall be in substantially the form of the "Form of
Exercise" set out at the end of this Warrant. Upon receipt thereof, Frontier
shall, as promptly as practicable and in any event within seven days
thereafter (unless such exercise shall be in connection with an underwritten
public offering of shares of Common Stock subject to this Warrant, in which
event concurrently with such exercise), cause to be executed and delivered to
such Holder a stock certificate or certificates representing the aggregate
number of duly and validly issued, fully paid and nonassessable shares of
Warrant Stock issuable upon such exercise, free and clear of any Liens.
The stock certificate or certificates for Warrant Stock so delivered
shall be in such denominations as may be specified in such notice and shall
be registered in the name of such Holder or such other Person as shall be
designated in such notice, PROVIDED that such other Person as may be
designated shall confirm in writing for the benefit of Frontier that the
representations and warranties set forth in SECTION 7 are true, complete and
correct with respect
<PAGE>
to such other Person as may be designated, and each such other Person
acknowledges and agrees in writing to accept the benefits of and be bound by
the terms and conditions set forth in this Warrant. To the extent permitted
by law, such stock certificate or certificates shall be deemed to have been
issued, and such Holder or other Person so designated to receive the Warrant
Stock shall be deemed to have become a holder of record of such shares,
including the right to vote such shares or to consent or to receive notice as
a stockholder, as of the time such notice and payment is received by Frontier
as aforesaid. If this Warrant shall have been exercised only in part,
Frontier shall, at the time of delivery of said stock certificate or
certificates, execute and deliver to such Holder a new Warrant, dated the
original date of issuance, evidencing the rights of such Holder to purchase
the remaining Stock Units called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant, or, at the option of
Frontier, appropriate notation may be made on this Warrant and the same
returned to such Holder.
All shares of Common Stock issuable upon the exercise of this Warrant
shall, upon payment therefor in accordance herewith, be duly and validly
issued, fully paid and nonassessable and free and clear of any Liens.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, Frontier shall pay to the Holder
an amount in cash equal to such fraction multiplied by the Current Adjustment
Price per share of Common Stock.
SECTION 3. TRANSFER, DIVISION AND COMBINATION.
Subject to SECTION 9, this Warrant and all rights hereunder are
transferable, in whole or in part, on the books of Frontier to be maintained
for such purpose, upon surrender of this Warrant at the office of Frontier
maintained for such purpose pursuant to SECTION 14.01, together with a
written assignment of this Warrant (in substantially the form of the "Form of
Assignment" annexed hereto) duly executed by the Holder hereof or its agent
or attorney and payment of funds sufficient to pay any stock transfer taxes
payable hereunder by the Holder hereof upon the making of such transfer. Upon
such surrender and payment Frontier shall, subject to SECTION 9 and the
immediately following sentence, execute and deliver a new Warrant or Warrants
(with the same Exercise Price or Exercise Prices as contained in the Warrant
or Warrants so surrendered, respectively) in the name of the assignee or
assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled. If and when this
Warrant is assigned in blank (in case the restrictions on transferability set
forth in SECTION 9 shall have been terminated), Frontier may (but shall not
be obliged to) treat the bearer hereof as the absolute owner of this Warrant
for all purposes and Frontier shall not be affected by any notice to the
contrary. This Warrant, if properly assigned in compliance with this SECTION
3 and SECTION 9, may be exercised by an assignee for the purchase of shares
of Common Stock without having a new Warrant or Warrants issued.
This Warrant may, subject to SECTION 9, be divided or combined with
other Warrants upon presentation at the aforesaid office of Frontier,
together with a written notice specifying the
<PAGE>
names and denominations in which new Warrants are to be issued, signed by the
Holder hereof or its authorized agent or attorney. Subject to compliance with
the next preceding paragraph and with SECTION 9, as to any transfer which may
be involved in such division or combination, Frontier shall execute and
deliver a new Warrant or Warrants (with the same Exercise Price or Exercise
Prices as contained in the Warrant or Warrants so transferred, respectively)
in exchange for the Warrant or Warrants to be divided or combined in
accordance with such notice.
Frontier shall maintain at its aforesaid office books for the
registration and transfer of the Warrants.
SECTION 4. ADJUSTMENT OF STOCK UNIT.
The number of shares of Common Stock comprising a Stock Unit shall be
subject to adjustment from time to time as set forth in this SECTION 4.
Frontier shall not take any action with respect to its Common Stock of any
class requiring an adjustment pursuant to any of SECTION 4.01, 4.02, 4.08 or
5 without at the same time taking like action with respect to its Common
Stock of each other class; and Frontier shall not create any class of Common
Stock which carries any rights to dividends or assets differing in any
respect from the rights of the Common Stock on the Date of Issuance.
4.01 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at any
time or from time on or after the Date of Issuance Frontier shall
(i) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then the number of shares of Common Stock comprising a Stock Unit immediately
after the happening of any such event shall be adjusted so as to consist of the
number of shares of Common Stock which a record holder of the number of shares
of Common Stock comprising a Stock Unit immediately prior to the happening of
such event would own or be entitled to receive after the happening of such
event.
4.02 CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case at any time or
from time to time on or after the Date of Issuance Frontier shall take a
record of the holders of its Common
<PAGE>
Stock for the purpose of entitling them to receive any dividend or other
distribution of,
(i) cash (other than a cash distribution made as a dividend
and payable out of earnings or earned surplus legally available for the
payment of dividends under the laws of the jurisdiction of
incorporation of Frontier, to the extent, but only to the extent, that
the aggregate of all such dividends paid or declared after the date
hereof, does not exceed the consolidated net income of Frontier earned
subsequent to the date hereof determined in accordance with generally
accepted accounting principles consistently applied), or
(ii) any evidence of its indebtedness (other than Convertible
Securities), any shares of its stock (other than Additional Shares of
Common Stock) or any other securities or property of any nature
whatsoever (other than cash and other than Convertible Securities or
Additional Shares of Common Stock), or
(iii) any options, warrants or other rights to subscribe for
or purchase any evidences of its indebtedness (other than (A)
Convertible Securities and (B) Non-Transferable Rights issued pursuant
to a Rights Plan), any shares of its stock (other than Additional
Shares of Common Stock) or any other securities or property of any
nature whatsoever (other than cash and other than Convertible
Securities or Additional Shares of Common Stock),
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (i) the numerator of which shall be the Current
Adjustment Price per share of Common Stock at the date of taking such record,
and (ii) the denominator of which shall be such Current Adjustment Price per
share of Common Stock minus the amount of any and all such cash and the Fair
Value of any and all such evidences of indebtedness, shares of stock, other
securities or property, or options, warrants or other subscription or
purchase rights, so distributable in respect of one share of Common Stock. A
reclassification of the Common Stock into shares of Common Stock and shares
of any other class of stock shall be deemed a distribution by Frontier to the
holders of its Common Stock of such shares of such other class of stock
within the meaning of this SECTION 4.02 and, if the outstanding shares of
Common Stock shall be changed into a larger or smaller number of shares of
Common Stock as a part of such reclassification, shall be deemed a
subdivision or combination, as the case may be, of the outstanding shares of
Common Stock within the meaning of SECTION 4.01.
4.03 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case at any time
or from time to time on or after the Date of Issuance Frontier shall (except
as hereinafter provided) issue to any Person any Additional Shares of Common
Stock for a consideration per share less than:
(a) in the case of a public offering of Common Stock under the
Securities Act, the greater of (i) the consideration per share
determined by the managing underwriter (in the event of an underwritten
public offering) and (ii) 90% of the Current
<PAGE>
Adjustment Price on the effective date of the registration statement
with respect to such public offering,
(b) in the case of the issuance of Common Stock by Frontier in
connection with the acquisition of assets and/or securities of any
Person, the greater of (i) the consideration per share determined by
the Board of Directors of Frontier as set forth in the binding
agreement pursuant to which such acquisition is being effected and (ii)
90% of the Current Adjustment Price per share of Common Stock as of the
date for which the pricing of Common Stock in connection with such
issuance is determined in accordance with such binding agreement, or
(c) in all other circumstances, 95% of the Current Adjustment
Price,
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (a) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
Additional Shares of Common Stock plus the number of such Additional Shares
of Common Stock so issued, and (b) the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus the number of shares
of Common Stock which the aggregate consideration for the total number of
such Additional Shares of Common Stock so issued would purchase at the
Current Adjustment Price. For purposes of this SECTION 4.03, and subject to
the foregoing sentence, the date as of which the Current Adjustment Price
shall be computed shall be the earlier of (i) the date on which Frontier
shall enter into a firm contract for the issuance of such Additional Shares
of Common Stock and (ii) the date of actual issuance of such Additional
Shares of Common Stock. This SECTION 4.03 shall not apply to any issuance of
Additional Shares of Common Stock for which an adjustment is provided under
SECTION 4.01. No adjustment of the number of shares of Common Stock
comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued pursuant
to the exercise of any options, warrants or other subscription or purchase
rights or pursuant to the exercise of any conversion or exchange rights in
any Convertible Securities described in SECTION 4.04 or 4.05 (it being
understood that full adjustment shall be made, without duplication, in
respect of all Additional Shares of Common Stock issuable at the time any
Rights Certificates issued pursuant to a Rights Plan become exercisable by
the holders of Common Stock). No adjustment of the number of shares of Common
Stock comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued for a
consideration greater than that described in clauses (a), (b) and (c), as
applicable, of this SECTION 4.03.
4.04 ISSUANCE OF OPTIONS WARRANTS OR OTHER RIGHTS. If on or after the
Date of Issuance, Frontier shall issue to any Person, any options, warrants
or other rights to subscribe for or purchase any Additional Shares of Common
Stock or any Convertible Securities (other than Non-Transferable Rights
issued pursuant to a Rights Plan) and the consideration per share for
<PAGE>
which Additional Shares of Common Stock may at any time thereafter be
issuable pursuant to such options, warrants or other rights or pursuant to
the terms of such Convertible Securities (other than Non-Transferable Rights
issued pursuant to a Rights Plan) shall be less than the Current Adjustment
Price, then the number of shares of Common Stock thereafter comprising a
Stock Unit shall be adjusted as provided in SECTION 4.03 on the basis that
(a) the maximum number of Additional Shares of Common Stock
issuable pursuant to all such options, warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of (and, accordingly,
the date as of which the Current Adjustment Price shall be computed
shall be) the computation date specified in the last sentence of this
SECTION 4.04, and
(b) the aggregate consideration for such maximum number of
Additional Shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by Frontier for the issuance of
such Additional Shares of Common Stock pursuant to such options,
warrants or other rights or pursuant to the terms of such Convertible
Securities (it being understood that full adjustment shall be made,
without duplication, in respect of all Additional Shares of Common
Stock issuable at the time any Rights Certificates issued pursuant to a
Rights Plan become exercisable by the holders of Common Stock). For
purposes of this SECTION 4.04, the computation date for clause (a)
above shall be the earliest of (i) the date on which Frontier shall
take a record of the holders of its Common Stock for the purpose of
entitling them to receive any such options, warrants or other rights,
(ii) the date on which Frontier shall enter into a firm contract for
the issuance of such options, warrants or other rights, and (iii) the
date of actual issuance of such options, warrants or other rights.
4.05 ISSUANCE OF CONVERTIBLE SECURITIES. If on or after the Date of
Issuance Frontier shall issue to any Person any Convertible Securities and the
consideration per share for which Additional Shares of Common Stock may at any
time thereafter be issuable pursuant to the terms of such Convertible Securities
shall be less than the Current Adjustment Price, then the number of shares of
Common Stock thereafter comprising a Stock Unit shall be adjusted as provided in
SECTION 4.03 on the basis that (a) the maximum number of Additional Shares of
Common Stock necessary to effect the conversion or exchange of all such
Convertible Securities shall be deemed to have been issued as of (and
accordingly, the date as of which the Current Adjustment Price shall be computed
shall be) the computation date specified in the next following sentence of this
SECTION 4.05, and (b) the aggregate consideration for such maximum number of
Additional Shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by Frontier for the issuance of such
Additional Shares of Common Stock pursuant to the terms of such convertible
Securities. For purposes of this SECTION 4.05, the computation date for clause
(a) above shall be the earliest of (i) the date on which Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive any such
<PAGE>
Convertible Securities, (ii) the date on which Frontier shall enter into a
firm contract for the issuance of such Convertible Securities, and (iii) the
date of actual issuance of such Convertible Securities. No adjustment of the
number of shares of Common Stock comprising a Stock Unit shall be made under
this SECTION 4.05 upon the issuance of any Convertible Securities which are
issued pursuant to the exercise of any warrants or other subscription or
purchase rights therefor, if any such adjustment shall previously have been
made upon the issuance of such warrants or other rights pursuant to SECTION
4.04. No adjustment of the number of Shares of Common Stock comprising a
Stock Unit shall be made under this SECTION 4.05 upon the issuance of any
Additional Shares of Common Stock which are issued for a consideration
greater than that described in the first sentence of this SECTION 4.05.
4.06 SUPERSEDING ADJUSTMENT OF STOCK UNIT. If, at any time on or after
the Date of Issuance, any adjustment of the number of shares of Common Stock
comprising a Stock Unit shall have been made pursuant to SECTION 4.04 or 4.05
on the basis of the issuance of options, warrants or other rights or the
issuance of other Convertible Securities, or any new adjustment of the number
of shares of Common Stock comprising a Stock Unit shall have been made
pursuant to this SECTION 4.06,
(i) such options, warrants or rights or the right of
conversion or exchange in such other Convertible Securities shall
expire, and a portion of such options, warrants or rights, or the right
of conversion, exercise or exchange in respect of a portion of such
other Convertible Securities, as the case may be, shall not have been
exercised, or
(ii) the consideration per share, for which Additional Shares
of Common Stock are issuable pursuant to such options, warrants or
rights or the terms of such other Convertible Securities, shall be
increased solely by virtue of provisions therein contained for an
automatic increase in such consideration per share upon the arrival of
a specified date or the happening of a specified event,
such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such options, warrants
or rights or other Convertible Securities on the basis of
(a) treating the number of Additional Shares of Common Stock,
if any, theretofore actually issued or issuable pursuant to the
previous exercise of such options, warrants or rights or such right of
conversion or exchange, as having been issued on the date or dates of
such issuance of Additional Shares of Common Stock as determined for
purposes of such previous adjustment and for the consideration actually
received and receivable therefor, and
(b) treating any such options, warrants or rights or any such
other Convertible Securities which then remain outstanding as having
been granted or issued immediately
<PAGE>
after the time of such increase of the consideration per share for such
Additional Shares of Common Stock as are issuable under such options,
warrants or rights or other Convertible Securities, and, if and to the
extent called for by the foregoing provisions of this SECTION 4 on the
basis aforesaid, a new adjustment of the number of shares of Common
Stock comprising a Stock Unit shall be made, which new adjustment shall
supersede the previous adjustment so rescinded and annulled.
4.07 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION 4.
The following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock comprising a Stock Unit hereinbefore provided
for in this SECTION 4:
(i) TREASURY STOCK. The sale or other disposition of any
issued shares of Common Stock owned or held by or for the account of
Frontier shall be deemed an issuance thereof for purposes of this
SECTION 4.
(ii) COMPUTATION OF CONSIDERATION. To the extent that any
Additional Shares of Common Stock or any Convertible Securities or any
options, warrants or other rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities shall
be issued for a cash consideration, the consideration received by
Frontier therefor shall be deemed to be the amount of cash received by
Frontier therefor, or, if such Additional Shares of Common Stock or
Convertible Securities are offered by Frontier for subscription, the
subscription price, or, if such Additional Shares of Common Stock or
Convertible Securities are sold to underwriters or dealers for public
offering without a subscription offering, the initial public offering
price, in any such case excluding any amounts paid or receivable for
accrued interest or accrued dividends and without deduction of any
compensation, discounts or expenses paid or incurred by Frontier for
and in the underwriting of, or otherwise in connection with, the issue
thereof. To the extent that such issuance shall be for consideration
other than cash, then, except as herein otherwise expressly provided,
the amount of such consideration shall be deemed to be the Fair Value
of such consideration at the time of such issuance. The consideration
for any Additional Shares of Common Stock issuable pursuant to any
options, warrants or other rights to subscribe for or purchase the same
shall be the consideration received or receivable by Frontier for
issuing such options, warrants or other rights, plus the additional
consideration payable to Frontier upon the exercise of such options,
warrants or other rights. The consideration for any Additional Shares
of Common Stock issuable pursuant to the terms of any Convertible
Securities shall be the consideration received or receivable by
Frontier for issuing any options, warrants or other rights to subscribe
for or purchase such Convertible Securities, plus the consideration
paid or payable to Frontier in respect of the subscription for or
purchase of such Convertible Securities, plus the additional
consideration, if any, payable to Frontier upon the exercise of the
right of conversion, exercise or exchange in such Convertible
Securities. In case of the issuance at any time of any Additional
Shares of Common Stock or Convertible Securities in payment or
satisfaction of any dividend upon any class of stock other than Common
Stock, Frontier shall be deemed to have received for such
<PAGE>
Additional Shares of Common Stock or Convertible Securities
consideration equal to the amount of such dividend so paid or satisfied.
(iii) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by
the foregoing provisions of this SECTION 4 shall be made whenever and
as often as any specified event requiring an adjustment shall occur,
except that no adjustment of the number of shares of Common Stock
comprising a Stock Unit that would otherwise be required shall be made
(except in the case of a subdivision or combination of shares of the
Common Stock, as provided for in SECTION 4.01) unless and until such
adjustment, either by itself or with other adjustments not previously
made, adds or subtracts at least l/20th of a share to or from the
number of shares of Common Stock comprising a Stock Unit immediately
prior to the making of such adjustment. Any adjustment representing a
change of less than such minimum amount (except as aforesaid) shall be
carried forward and made as soon as such adjustment, together with
other adjustments required by this SECTION 4 and not previously made,
would result in a minimum adjustment. For the purpose of any adjustment,
any specified event shall be deemed to have occurred at the close of
business on the date of its occurrence.
(iv) FRACTIONAL INTERESTS. In computing adjustments under this
SECTION 4, fractional interests in Common Stock shall be taken into
account to the nearest one-thousandth of a share.
(v) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which
SECTION 4 shall require that an adjustment in the shares of Common
Stock comprising a Stock Unit be made effective as of a record date,
Frontier may elect to defer until the occurrence of such event by (i)
issuing to the Holder, if this Warrant is exercised after such record
date, the shares of Common Stock, if any, issuable upon such exercise
over and above the shares of Common Stock or other capital stock of
Frontier, if any, issuable upon such exercise on the basis of the
number of shares of Common Stock comprising a Stock Unit in effect
prior to such adjustment and (ii) paying to the Holder any amount of
cash in lieu of the issuance of fractional shares pursuant to SECTION
4; PROVIDED, HOWEVER, that Frontier shall deliver to such Holder a due
bill or other appropriate instrument evidencing such Holder's right to
receive such additional shares or such cash upon the occurrence of such
event.
(vi) WHEN ADJUSTMENT NOT REQUIRED. If Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution thereof to
stockholders, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then thereafter no
adjustment shall be required by reason of the taking of such record and
any such adjustment previously
<PAGE>
made in respect thereof shall be rescinded and annulled.
4.08 OTHER ACTION AFFECTING COMMON STOCK. In case at any time or from
time to time Frontier shall take any action affecting its Common Stock, other
than an action described in any of the foregoing SECTIONS 4.01 through 4.07
(inclusive), or in SECTION 5, then, unless in the reasonable opinion of the
Board of Directors of Frontier such action will not have a material adverse
effect upon the rights of the Holders of the Warrants or an adverse effect on
the number of shares of Common Stock comprising a Stock Unit shall be adjusted
in such manner and at such time as the Board may reasonably determine in good
faith to be equitable in the circumstances to fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles in such sections thereof.
SECTION 5. CONSOLIDATION, MERGER, ETC.
In case a consolidation or merger of Frontier shall be effected with
another Person on or after the Date of Issuance, or the sale, lease or other
transfer of all or substantially all of Frontier's assets to another Person
shall be effected on or after the Date of Issuance, then, as a condition of
such consolidation, merger, sale, lease or other transfer provision shall be
made whereby the Holder of this Warrant shall thereafter have the right to
purchase and receive upon the basis and upon the terms and conditions
specified herein and in lieu of each Stock Unit immediately theretofore
purchasable and receivable upon the exercise of each of the Warrants, such
shares of stock, securities, cash or other property receivable upon such
consolidation, merger, sale, lease or transfer by the Holder of the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
event. In any such case, appropriate and equitable provision also shall be
made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof (including SECTION 4) shall thereafter
be applicable, as nearly as may be, in relation of any shares of stock,
securities, cash or other property thereafter deliverable upon the exercise
of any Warrants. Frontier shall not effect any such consolidation, merger,
sale, lease or transfer unless prior to or simultaneously with the
consummation thereof the successor Person (if other than Frontier or a
wholly-owned subsidiary of Frontier) resulting from such consolidation or
merger or the Person purchasing, leasing or otherwise acquiring such assets
shall expressly assume, by written instrument mailed to Gaines Berland and
any Significant Holder at its last address appearing on the books of
Frontier, the due and punctual observance and performance of each and every
covenant and condition of this Warrant to be performed and observed by
Frontier and all of the obligations and liabilities hereunder, subject to
such modification as shall be necessary to provide for adjustments of Stock
Units which shall be as nearly equivalent as practicable to the adjustments
provided for in SECTION 4; PROVIDED, HOWEVER, that Frontier shall not be
required to effect (or mail) such express assumption in respect of any
transaction pursuant to which such obligations are transferred by operation
of law and such Person acknowledges the same in a writing that is retained
and made available for inspection by any holder of Warrants. The above
provisions of this SECTION 5 shall similarly apply to successive
consolidations, mergers, sales, leases or other transfers.
SECTION 6. NOTICE TO WARRANT HOLDERS.
<PAGE>
6.01 NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever the
number of shares of Common Stock comprising a Stock Unit shall be adjusted
pursuant to SECTION 4, Frontier shall forthwith obtain a certificate signed
by independent accountants of recognized national standing, setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated (including a statement of the Fair Value of
any evidences of indebtedness, shares of stock, other securities or property
or warrants or other subscription or purchase rights referred to in SECTION
4.02, 4.07(II) or SECTION 5) and specifying the number of shares of Common
Stock comprising a Stock Unit and (if such adjustment was made pursuant to
SECTION 4.08 or SECTION 5) describing the number and kind of any other
securities comprising a Stock Unit, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. Frontier
shall promptly, and in any case within 20 days after the making of such
adjustment, cause a signed copy of such certificate to be delivered to each
Holder of a Warrant in accordance with SECTION 14.02. Frontier shall keep at
its office or agency, maintained for the purpose pursuant to SECTION 14.01,
copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by any Holder of a
Warrant or any prospective permitted purchaser of a Warrant designated by a
Holder thereof. The Holders of Warrants entitled to purchase a majority of
the Stock Units covered by all the Warrants shall have the right to challenge
any such adjustment of the number of shares of Common Stock comprising a
Stock Unit contained in such certificate for a period of 30 days after such
certificate is delivered to the Holders. In the event the Holders give
Frontier written notice of such challenge within such 30-day period, such
Holders and Frontier shall thereupon promptly attempt in good faith to reach
agreement on such adjustment, and failing such agreement, shall appoint a
mutually acceptable nationally recognized independent accounting firm to
determine such adjustment, whose determination shall be final and binding on
Frontier and the Holders, absent manifest error. The costs incurred by the
Holders and Frontier and the fees and expenses of such independent accounting
firm shall be paid by (a) the Holders if Frontier's adjustment in the
certificate was accurate to within 1/20th of a share to or from the number of
shares of Common Stock comprising a Stock Unit by such independent accounting
firm or if such independent accounting firm's adjustment results in the
Holders being entitled to receive fewer shares of Common Stock per Stock Unit
than under the adjustment determined by Frontier and (b) otherwise by
Frontier.
6.02 NOTICE OF CERTAIN CORPORATE ACTION. In case Frontier shall propose
(a) to pay any dividend to the holders of its Common Stock or to make any other
distribution to the holders of its Common Stock, or (b) to offer to the holders
of its Common Stock rights to subscribe for or to purchase any Additional Shares
of Common Stock or shares of stock of any class or any other securities, rights
or options, or (c) to effect any reclassification of its Common Stock (other
than a reclassification involving only the subdivision, or combination, of
outstanding shares of Common Stock), or (d) to effect any capital
reorganization, or (e) to effect any consolidation, merger or sale, lease,
transfer or other disposition of all or substantially all of its property,
assets or business, or (f) to effect the liquidation, dissolution or winding up
of Frontier, then, in each such case, Frontier shall give to each Holder of a
Warrant, in accordance with SECTION 14.02, a notice of such proposed action,
which shall specify the date on which a record is to be taken for
<PAGE>
the purposes of such stock dividend, distribution or rights, or the date on
which such reclassification, reorganization, consolidation, merger, sale,
lease, transfer, disposition, liquidation, dissolution or winding up is to
take place and the date of participation therein by the holders of Common
Stock, if any such date is to be fixed, and shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect
of such action on the Common Stock and the number and kind of any other
shares of stock which will comprise a Stock Unit, and the purchase price or
prices thereof, after giving effect to any adjustment which will be required
as a result of such action. Such notice shall be so given in the case of any
action covered by clause (a) or (b) above at least 10 days prior to the
record date for determining holders of the Common Stock for purposes of such
action, and in the case of any other such action, at least 10 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of Common Stock, whichever shall be the earlier.
6.03 NOTICE OF EXPIRATION DATE. Frontier shall give to each Holder of a
Warrant notice of the Expiration Date. Such notice may be given by Frontier not
less than 30 days but not more than 60 days prior to the Expiration Date.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF GAINES BERLAND.
Gaines Berland represents and warrants to Frontier as follows:
7.01 PURCHASE FOR OWN ACCOUNT. The Warrants and Warrant Stock, as the
case may be, to be received by Gaines Berland will be acquired for investment
for Gaines Berland's own account and not with a present view to the distribution
of any part thereof, and Gaines Berland has no present intention of selling,
granting any participation in, or otherwise distributing the same in a manner
contrary to the Securities Act or applicable state securities laws, PROVIDED,
that, Gaines Berland at all times retains the right to control, deal with and
sell all of its property, including the Warrants.
7.02 DISCLOSURE OF INFORMATION; DUE DILIGENCE. Gaines Berland
represents that it has had an opportunity to ask questions of and receive
answers from Frontier regarding Frontier and the terms and conditions of the
offering of the Warrants and Warrant Stock, as the case may be, offered hereby
and to obtain additional information necessary to verify the accuracy of the
information supplied or to which it had access.
7.03 INVESTMENT EXPERIENCE; ACCREDITED INVESTOR STATUS. Gaines Berland
is able to bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Warrants and the Warrant Stock. Gaines
Berland understands that neither the Warrants nor the Warrant Stock have been
registered under the Securities Act or under the securities laws of any
jurisdiction by reason of reliance upon certain exemptions, and that the
reliance of Frontier on
<PAGE>
such exemptions is predicated upon the accuracy of Gaines Berland's
representations and warranties in this SECTION 7.03. Gaines Berland is
familiar with Regulation D promulgated under the Securities Act and is an
"accredited investor" as defined therein.
7.04 SECURITIES ACT COMPLIANCE. Gaines Berland represents that neither
the Warrants nor the Warrant Stock shall be sold or transferred or offered
for sale or transfer without registration under the Securities Act or the
availability of an exemption therefrom, and in accordance with the terms and
conditions and legends set forth in SECTION 9.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF FRONTIER.
Frontier represents and warrants to Gaines Berland as follows:
8.01 EXISTENCE; QUALIFICATION. Frontier is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Oklahoma. Frontier has duly qualified and is authorized to do business and is in
good standing as a foreign corporation in every jurisdiction where the failure
to be so qualified would have a material adverse effect on Frontier's ability to
enter into and perform all of its obligations under this Warrant.
8.02 NO BREACH. The execution, delivery and performance of this Warrant
by Frontier and the consummation of the transactions contemplated hereby will
not (a) violate the articles of incorporation or by-laws of Frontier, (b)
violate any loan or credit agreement to which Frontier is a party or is bound,
or result in a breach of or default under any other instrument or agreement to
which Frontier is a party or is bound which is material to the business or
properties of Frontier taken as a whole, (c) violate any judgment, order,
injunction, decree or award against or binding upon Frontier, the violation of
which would have a material adverse effect on the business or properties of
Frontier taken as a whole, (d) result in the creation of any material Lien upon
any of the properties or assets of Frontier, or (e) violate any law, rule or
regulation applicable to or binding upon Frontier, or (f) cause or require any
adjustment, or give rise to any rights in favor of another Person, under any
agreement to which Frontier is a party.
8.03 CORPORATE ACTION. Frontier has all necessary corporate power and
authority to execute, deliver and perform its obligations under this Warrant;
the execution, delivery and performance by Frontier of its obligations under
this Warrant have been duly authorized by all necessary corporate action
(including all stockholder action if required) on the part of Frontier; this
Warrant has been duly executed and delivered by Frontier and constitutes a
legal, valid and binding obligation of Frontier, enforceable against Frontier in
accordance with its terms; the Warrant Stock initially covered by the Warrants
will be duly and validly authorized and reserved for issuance and shall, when
paid for, be issued and delivered in accordance with the terms of the Warrants,
be duly and validly issued, fully paid and nonassessable and free and clear of
any Liens; and none of the Warrant Stock issued pursuant to the terms hereof
shall be in violation of any preemptive rights of any shareholder of Frontier.
8.04 APPROVALS. Based in part upon the representations set forth in
SECTION 7, no
<PAGE>
authorizations, approvals or consents of, and no filings or registrations
with, any governmental authority or any other Person are necessary for the
execution, delivery or performance by Frontier of its obligations under this
Warrant or for the validity or enforceability thereof. Any such action
required to be taken as a condition to the issuance and delivery of the
Warrants has been (or prior to such issuance and delivery will be) duly taken
by all such governmental authorities or other Persons, as the case may be.
8.05 INVESTMENT COMPANY ACT. Frontier is not an "investment company",
or a company "controlled by" an "investment company", within the meaning of the
Investment Company Act of 1940, as amended.
8.06 PUBLIC UTILITY HOLDING COMPANY ACT. Frontier is not a "holding
company", or an "affiliate" of a "holding company" or a "subsidiary company" of
a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
8.07 CAPITALIZATION. On the date hereof, the total number of shares of
capital stock which Frontier has authority to issue is (i) 9,865,906 shares
of Common Stock, par value $.01 per share, of which 40,000,000 shares are
issued and outstanding, and (ii) 5,000,000 shares of Preferred Stock, par
value $10.00 per share, of which 85,961 shares are issued and outstanding.
8.08 PRIVATE OFFERING.
(a) Assuming the truth and accuracy of Gaines Berland's representations
and warranties contained in SECTION 7, the issuance and sale of the Warrants to
Gaines Berland hereunder are exempt from the registration and prospectus
delivery requirements of the Securities Act as presently in effect.
(b) Frontier agrees that neither Frontier nor any Person acting on its
behalf has offered or will offer the Warrants or shares of Warrant Stock or any
part thereof or any similar securities for issue or sale to, or has solicited or
will solicit any offer to acquire any of the same from, any Person so as to
bring the issuance and sale of the Warrants or shares of Warrant Stock within
the provisions of the registration and prospectus delivery requirements of the
Securities Act.
8.09 NO LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the best of Frontier's knowledge after due
inquiry, threatened against Frontier before any court or administrative
agency seeking to enjoin the transactions contemplated by this Warrant or
that is reasonably likely to (i) prohibit or limit in any way performance by
Frontier of its obligations under this Warrant or (ii) affect the legality,
validity, enforceability or binding nature of this Warrant.
SECTION 9. RESTRICTIONS ON TRANSFERABILITY.
9.01 TRANSFERS GENERALLY. Except as otherwise provided in SECTION 9.06,
the Warrants
<PAGE>
and Warrant Stock shall only be transferable upon the conditions specified in
this SECTION 9, which conditions are intended to insure compliance with the
provisions of the Securities Act and applicable state securities laws in
respect of the transfer of any Warrants and Warrant Stock.
9.02 TRANSFERS OF RESTRICTED SECURITIES PURSUANT TO REGISTRATION
STATEMENTS, RULE 144 AND RULE 144A. The Warrants and Warrant Stock may be
offered or sold by the Holder thereof pursuant to (a) an effective registration
statement under the Securities Act, or (b) to the extent applicable, Rule 144 or
Rule 144A under the Securities Act.
9.03 NOTICE OF CERTAIN TRANSFERS. If any Holder of any Warrants or
Warrant Stock desires to transfer such Warrants or Warrant Stock other than
pursuant to an effective registration statement under the Securities Act or
pursuant to Rule 144 or Rule 144A, then such Holder shall deliver to Frontier a
notice with respect to the proposed transfer, together with a written
representation (together with such factual information in respect thereof as
Frontier may reasonably request) from such Holder in substance reasonably
satisfactory to Frontier to the effect that an exemption from registration under
the Securities Act and applicable state securities laws is available.
9.04 RESTRICTIVE LEGENDS.
(a) Until otherwise permitted by SECTION 9.05, each certificate for
Warrants issued, each certificate for any Warrants issued to any subsequent
transferee of any such certificate, each certificate for any Warrant Stock
issued upon exercise of any Warrant and each certificate for any Warrant Stock
issued to any subsequent transferee of any such certificate, shall be stamped or
otherwise imprinted with one or more legends in substantially the following
form:
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
HAVE ANY OF THEM BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES OR
BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE NOR THE SECURITIES
ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST OR PARTICIPATION HEREIN
OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR
IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF, EXCEPT IN COMPLIANCE
WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE RULES
AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES OR BLUE SKY
LAWS.
(b) In addition, each such certificate shall be stamped or otherwise
imprinted with any legend required under state securities laws.
<PAGE>
9.05 TERMINATION OF RESTRICTIONS. All the restrictions imposed by this
SECTION 9 upon the transferability of the Warrants and Warrant Stock shall cease
and terminate as to any particular Warrants or Warrant Stock when such Warrants
or Warrant Stock shall have been effectively registered under the Securities Act
and applicable state securities laws and sold by the Holder thereof in
accordance with such registration or sold under and pursuant to Rule 144 or is
eligible to be sold under and pursuant to paragraph (k) of Rule 144. Whenever
the restrictions imposed by this SECTION 9 shall terminate as to any Warrants or
Warrant Stock as hereinabove provided, the Holder thereof shall be entitled to
receive from Frontier, without expense, a new certificate evidencing such
Warrants or Warrant Stock not bearing the restrictive legend otherwise required
to be borne by a certificate evidencing such Warrants or Warrant Stock.
9.06 CERTAIN DISPOSITIONS OF SECURITIES.
(a) Notwithstanding anything in this Warrant (including SECTION 9 other
than SECTION 9.05) to the contrary, but subject to compliance with the
Securities Act, any applicable state securities laws and the requirement as to
legending of the certificates for Warrants and Warrant Stock specified in
SECTION 9.04, any Holder shall have the right to transfer any or all of its
Warrants and Warrant Stock:
(i) to any Person who at the time owns (directly or indirectly)
at least a majority of the shares of such Holder;
(ii) to any Person pursuant to a dividend or other
distribution (whether by liquidation or otherwise) of such Holder;
(iii) to any Person at least a majority of whose shares shall
at the time be owned (directly or indirectly) by such Holder or by any
Person who owns (directly or indirectly) at least a majority of the
shares of such Holder; or
(iv) in the case of any Holder which is an insurance company,
pension fund, bank, bank holding company or a subsidiary of an
insurance company, pension fund, bank or bank holding company, to a
third party, if, in the reasonable judgment of such Holder, such
transfer is required to be effected by such Holder because (A) its
investment in Warrants or shares of Warrant Stock may exceed any
limitation to which it is subject, or is otherwise not permitted, under
any law, rule or regulation of any governmental authority, or (B)
restrictions are imposed on such Holder under any law, rule or
regulation which, in the reasonable judgment of such Holder, make it
illegal or unduly burdensome to continue to hold such Warrants or
shares of Warrant Stock or a portion thereof.
The party to which Warrants or Warrant Stock are transferred pursuant to the
immediately preceding sentence shall be deemed to be a Holder of such Warrants
or Warrant Stock and bound by the provisions of this Warrant applicable to
Holders so long as he, she or it continues
<PAGE>
to own any of the Warrants or Warrant Stock so transferred to such transferee.
(b) If the circumstances described in clause (iv) of SECTION 9.06(A)
arise, Frontier shall assist such Holder in disposing of its Warrants and
Warrant Stock in a prompt and orderly manner, and, at the request of such
Holder, Frontier shall provide (and authorize such Holder to provide) such
financial and other such information concerning Frontier as such holder may
request to any prospective purchaser of the Warrants or Warrant Stock owned by
such Holder.
SECTION 10. HOLDER'S RIGHTS.
10.01 DELIVERY EXPENSES. If any Holder surrenders any certificate for
Warrants or Warrant Stock to Frontier or a transfer agent of Frontier for
exchange for instruments of other denominations or registered in another name or
names, subject to the terms and conditions of SECTION 9, Frontier shall cause
such new instruments to be issued and shall pay the costs associated with the
preparation and issuance of any new instruments and the cost of delivering to
the office of such Holder from Frontier or its transfer agent, duly insured, the
surrendered instrument and any new instruments issued in substitution or
replacement for the surrendered instrument.
10.02 TAXES. Frontier shall pay all taxes (other than Federal, state or
local income taxes) which may be payable in connection with the issuance of
the Warrants and Warrant Stock hereunder, or in connection with any
modification of this Warrant and shall hold each Holder harmless without
limitation as to time against any and all liabilities with respect to all
such taxes. Frontier shall not, however, be required to pay any tax, with
respect to any Warrant which may be payable in respect of any transfer
involved in the issuance and delivery of Warrants or of shares of Common
Stock in a name other than that in which such Warrant or Common Stock is
registered, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to Frontier the amount of any such tax,
or has established, to the satisfaction of Frontier, that such tax has been
paid. The obligations of Frontier under this SECTION 10.02 shall survive any
redemption, repurchase or acquisition of Warrants or Warrant Stock by
Frontier, and any cancellation or termination of the Warrants.
10.03 REPLACEMENT OF INSTRUMENTS. Upon receipt by Frontier of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any certificate or instrument evidencing any
Warrants or Warrant Stock, and
(a) in the case of loss, theft or destruction, of indemnity reasonably
satisfactory to it, or
(b) in the case of mutilation, upon surrender thereof, Frontier, at its
expense, shall cancel such certificate or instrument and execute, register and
deliver, in lieu thereof, a new certificate or instrument for (or covering the
purchase of) an equal number of Warrants or Warrant Stock.
<PAGE>
10.04 CERTAIN RESTRICTIONS. Frontier shall not at any time enter into
an agreement or other instrument limiting in any manner its ability to perform
its obligations under this Warrant or making such performance or the issuance of
shares of Common Stock upon the exercise of any Warrant a default under any such
agreement or instrument.
10.05 CERTAIN COVENANTS. At all times prior to the Expiration Date:
(a) Frontier shall retain a nationally recognized independent
accounting firm as its auditors.
(b) Frontier shall afford Gaines Berland or its Affiliates (or any
Significant Holder), or their respective authorized agents, access, at
reasonable times, upon reasonable prior notice, (i) to inspect the books and
records of Frontier, (ii) to discuss with management of Frontier the
nonconfidential business and affairs of Frontier, and (iii) to inspect the
properties of Frontier.
(c) Each Holder and its authorized agents shall have the right to
attend all meetings of shareholders of Frontier.
(d) Frontier shall provide Gaines Berland with all notices set forth in
SECTIONS 6.01, 6.02 and 6.03 pursuant to the respective terms thereof.
10.06 INDEMNIFICATION. Frontier shall indemnify and hold harmless
Gaines Berland and the Holders and each of their respective directors, officers,
employees, stockholders, Affiliates and agents, and Gaines Berland and the
Holders shall indemnify and hold harmless Frontier and its directors, officers,
employees, stockholders, Affiliates and agents (each, an "INDEMNIFIED PERSON")
on demand from and against any and all losses, claims, damages, liabilities (or
actions or other proceedings commenced or threatened in respect thereof) and
expenses that arise out of, result from, or in any way relate to the breach of
any representation, warranty or covenant by Frontier contained in this Warrant
or any other agreement, document or instrument executed and delivered in
connection with the transactions contemplated hereby, and reimburse each
indemnified person, upon its demand, for any reasonable legal or other expenses
incurred in connection with investigating, defending or participating in the
defense of any such loss, claim, damage, liability, action or other proceeding
(whether or not such indemnified person is a party to any action or proceeding
out of which any such expenses arise), other than any of the foregoing claimed
by any indemnified person to the extent incurred by reason of the gross
negligence or willful misconduct of such indemnified person. No indemnified
person shall be responsible or liable to any Person for any consequential
damages which may be alleged as a result of or relating to this Warrant or in
connection with the other transactions contemplated hereby.
10.07 FINANCIAL STATEMENTS. Frontier shall deliver the information
specified below to
<PAGE>
Gaines Berland and each Significant Holder until the earlier of (i) the
Expiration Date and (ii) the date on which Gaines Berland or any Significant
Holder no longer holds any Warrants or Warrant Stock:
(a) as soon as available and in any event within 60 days after the end
of each of the first three fiscal quarters or each fiscal year of Frontier,
consolidated balance sheets of Frontier as of the end of such fiscal quarter and
statements of operations and cash flow of Frontier for such fiscal quarter and
for the period commencing at the end of the previous fiscal year and ending with
the end of such fiscal quarter, certified by the chief financial officer of
Frontier;
(b) as soon as available and in any event within 120 days after the end
of each fiscal year of Frontier, a copy of the annual audit report for such
fiscal year for Frontier, including therein the balance sheet of Frontier as of
the end of such fiscal year and statements of operations and cash flow of
Frontier for such fiscal year, in each case certified in a manner reasonably
acceptable to Gaines Berland by an independent public accountant acceptable to
Gaines Berland, together with a report from such accountants to the effect that,
in making the examination necessary for the signing of such annual report by
such accountants, they have not become aware of any default that has occurred
and is continuing, or, if they have become aware of such default, describing
such default and the steps, if any, being taken to cure it;
(c) promptly after (1) the sending or filing thereof, copies of all
reports which Frontier sends to any of its security holders, (2) the sending
or filing thereof, all reports and registration statements which Frontier
files with the Securities and Exchange Commission or any national securities
exchange, (3) the filing thereof, copies of all tariff and rate cases and
other material reports filed with any regulatory authority, and (4) receipt
thereof, copies of all notices received from any regulatory authority
concerning noncompliance by Frontier with any applicable regulations; and
(d) such other information respecting the condition or operations,
financial or otherwise, of Frontier as Gaines Berland may from time to time
reasonably request.
SECTION 11. RESERVATION AND AUTHORIZATION OF COMMON STOCK: REGISTRATION WITH
OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY.
Frontier shall at all times reserve and keep available for issue upon
the exercise of Warrants such number of its authorized but unissued shares of
Common Stock as shall be sufficient to permit the exercise in full of all
outstanding Warrants. All shares of Common Stock which shall be so issuable,
when issued upon exercise of any Warrant and payment of the applicable Exercise
Price therefor shall be duly and validly issued, fully paid and nonassessable
and free and clear of any Liens (caused directly or indirectly by Frontier or
its Affiliates).
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or which would cause an
adjustment reducing the Current Warrant Price per share of Common Stock below
the then par value, if any, of the shares
<PAGE>
of Common Stock issuable upon exercise of the Warrants, Frontier shall take
any corporate action which is necessary in order that Frontier may validly
and legally issue fully paid and nonassessable shares of Common Stock free
and clear of any Liens (caused directly or indirectly by Frontier or its
Affiliates) upon the exercise of all the Warrants immediately after the
taking of such action.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit, Frontier shall obtain
all such authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise or conversion of Warrants require registration with any governmental
authority under any Federal or state law (otherwise than any law that applies to
a Holder specifically because of its status as a regulated entity or in
connection with a registration under the Securities Act or applicable state
securities laws) before such shares may be so issued, Frontier shall in good
faith and as expeditiously as reasonably possible and at its expense endeavor to
cause such shares to be duly registered.
SECTION 12. TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS.
(a) In the case of all dividends or other distributions by Frontier to
the holders of its Common Stock with respect to which any provision of SECTION 4
refers to the taking of a record of such holders, Frontier shall in each such
case take such a record as of the close of business on a business day or as
otherwise provided by or permitted under the corporation laws of Frontier's then
jurisdiction of incorporation.
(b) Frontier shall not at any time, except upon complete dissolution,
liquidation or winding up, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise, conversion or
transfer of any Warrant, unless otherwise required by any governmental authority
or by any applicable federal, state or local law.
SECTION 13. NO VOTING OR OTHER RIGHTS.
This Warrant shall not entitle the Holder hereof to any voting or other
rights as a stockholder of Frontier either at law or at equity, and the rights
of a holder of this Warrant are limited to those expressly set forth herein.
SECTION 14. MISCELLANEOUS.
14.01 OFFICE OF FRONTIER. So long as any of the Warrants remains
outstanding, Frontier shall maintain an office in the continental United States
of America where the Warrants may be presented for exercise, transfer, division
or combination as in this Warrant provided. Such office shall be at Frontier
Natural Gas Corporation, 500 Dallas Street, Suite 2920, Houston, Texas
<PAGE>
77002, unless and until Frontier shall designate and maintain some other
office for such purposes and give notice thereof to the Holders of all
outstanding Warrants.
14.02 NOTICES. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be delivered personally or by facsimile communication to the number set forth
below, or by first class mail, postage prepaid, registered or certified with
return receipt requested, at the addresses set forth below. Notice deposited in
the mail in the manner hereinabove provided shall be effective upon expiration
of five (5) business days from the date on which it is so deposited. Notice
given in any other manner shall be effective only if and when received by the
addressee. For purposes of notice, the addresses of the parties shall be as
follows:
With respect to Frontier: FRONTIER NATURAL GAS CORPORATION
500 Dallas Street, Suite 2920
Houston, Texas 77002
Attention: President
Telephone Number: (713) 739-7100
Fax Number: (713) 739-7124
With a copy to: Chamberlain, Hrdlicka, White,
Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002-4310
Attention: James J. Spring, III
Telephone Number: (713) 658-1818
Fax Number: (713) 658-2553
With respect to Gaines Berland: GAINES BERLAND ENERGY FUND, L.P.
712 5th Avenue, 21st Floor
New York, New York 10019
Attention: Peter Blum
Telephone Number: (212) 632-0550
Fax Number: (212) 632-0549
provided that each party shall have the right to change its address for notice,
and the person who is to receive notice hereunder, by the giving of fifteen (15)
days' prior written notice to the other parties hereto in the manner set forth
above.
14.03 AMENDMENTS. The terms of the Warrants may be amended, and the
observance of any term therein may be waived, upon the written consent of the
holders of Warrants for a majority of the total number of Stock Units at the
time purchasable upon the exercise of all then outstanding Warrants. For the
purposes of determining whether the holders of outstanding Warrants entitled to
purchase a requisite number of Stock Units at any time have taken any
<PAGE>
action authorized by this Warrant, any Warrants owned by Frontier or any
Affiliate of Frontier shall be deemed not to be outstanding.
14.04 GOVERNING LAW. This Warrant shall in all respects be governed by,
and construed in accordance with, the substantive federal laws of the United
States and the internal laws of the State of Texas (principles of conflict of
laws excluded) and, to the extent the Oklahoma General Corporation Act so
requires, the laws of the State of Oklahoma.
14.05 LIMITATION OF LIABILITY. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Common Stock, and
no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such holder for the Exercise Price or as a
stockholder of Frontier, whether such liability is asserted by Frontier, by any
creditor of Frontier or any other Person.
14.06 BINDING EFFECT. The obligations set forth in this Warrant shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
14.07 HEADINGS. The headings in this Warrant are inserted for
concurrence only and are not intended to describe, interpret, define or limit
the scope, extent or intent of this Warrant or any provision hereof.
14.08 GENDER AND NUMBER. Whenever required by the context, as used in
this Warrant, the singular number shall include the plural and vice versa and
pronouns of whatever gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
IN WITNESS WHEREOF, the parties have duly executed this Warrant this
23rd day of January, 1998 to be effective as of the Date of Issuance.
Frontier Natural Gas Corporation
By: /s/ David W. Berry
------------------------------
David W. Berry, President
<PAGE>
FORM OF EXERCISE
(To be executed by the registered holder hereof)
The undersigned hereby exercises this Warrant to subscribe for and
purchase __________ Stock Units of Frontier Natural Gas Corporation covered by
the within certificate and herewith makes payment therefor in full. Kindly issue
certificates and/or other instruments covering Stock Units in accordance with
the instructions given below. A new Warrant for the unexercised balance of the
Stock Units covered by the within certificate, if any, will be registered in the
name of the undersigned.
Dated:
Instructions for registration of Stock Units
Name (please print)
Social Security or Other Identifying
Number:
Address:
Street
City, State and Zip Code
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder hereof)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
all the rights of the undersigned under the within certificate with respect to
the purchase of up to the number of Stock Units covered thereby as set forth
below and does hereby irrevocably constitute and appoint
__________________________, attorney-in-fact, to transfer the same on the books
of Frontier, with full power of substitution in the premises:
<TABLE>
<CAPTION>
Number of
Name of Assignee Address Stock Units
- - ---------------- ------- -----------
<S> <C> <C>
</TABLE>
Dated:
(Signature of Registered Owner)
(Guaranteed Signature)
Notice: The signature to this Form of Assignment must correspond with the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank or trust company having an office or correspondent in New York, New York,
or by a firm having membership on the New York Stock Exchange.
<PAGE>
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE.
NEITHER THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR
ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN, MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF,
EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
APPLICABLE RULES AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES OR
BLUE SKY LAWS.
WARRANT
to Purchase Common Stock of
FRONTIER NATURAL GAS CORPORATION
THIS IS TO CERTIFY THAT ESENJAY PETROLEUM CORPORATION, a Texas
corporation ("Esenjay"), or its assigns, is entitled to purchase in whole or
in part from time to time from FRONTIER NATURAL GAS CORPORATION, an Oklahoma
corporation ("Frontier"), on or after the Date of Issuance (as hereinafter
defined), but not later than 5:00 p.m., Houston time, on the Expiration Date
(as hereinafter defined), 37,500 Stock Units (as hereinafter defined and
subject to adjustment as provided herein) at a purchase price per Stock Unit
equal to the Exercise Price (as hereinafter defined), subject to the terms
and conditions hereinbelow provided.
SECTION 1. CERTAIN DEFINITIONS
1.01 DEFINED TERMS. For purposes of this Warrant, in addition to the
terms defined elsewhere herein, the following terms shall have the meanings set
forth in this Section 1:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common Stock
issued by Frontier on or after the Date of Issuance, other than (i) the Warrant
Stock, (ii) the shares of Common Stock described as being issued and outstanding
on the Date of Issuance in SECTION 8.07, and (iii) shares of Common Stock issued
or to be issued to employees, directors, advisors or consultants of Frontier in
connection with equity incentive plans.
"AFFILIATE" shall mean, as to any Person, any other Person which directly
or indirectly controls, or is under common control with or is controlled by,
such Person and, if such Person is an individual, any member of the immediate
family (including parents, spouse and children) of
<PAGE>
such individual or one or more members of such immediate family and any
Person who is controlled by any such member or trust. As used in this
definition, "control" (including the correlative terms "controlled by" and
"under common control with") shall mean possession, directly or indirectly,
of the power to direct or cause the direction of the management or policies
of a Person (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise), PROVIDED that, in any event,
any Person which owns directly or indirectly 40% or more of the securities
having ordinary voting power for the election of directors or other governing
body of a corporation or 40% or more of the partnership or other ownership
interests of any other Person will be deemed to control such corporation or
other Person. Notwithstanding the foregoing, (i) no individual shall be
deemed to be an Affiliate of a corporation solely by reason of his or her
being an officer or director of such corporation, and (ii) neither Esenjay
nor any of its Affiliates shall be deemed to be an Affiliate of Frontier.
"ASPECT" shall mean Aspect Resources LLC, a Colorado limited liability
company.
"COMMON STOCK" shall mean Frontier's authorized Common Stock, par value
$.01 per share, as constituted on the date hereof, and any stock into which
such Common stock may thereafter be converted or changed, and also shall
include any other stock of Frontier of any other class that is not preferred
as to dividends or distributions in liquidation over any other class of any
other stock of Frontier.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into, or exercisable or
exchangeable for, Additional Shares of Common Stock, either immediately or
upon the arrival of a specified date or the happening of a specified event.
"CURRENT ADJUSTMENT PRICE," per share of Common Stock, for the purposes
of any provision of this Warrant at the date herein specified, shall be
deemed to be the average of the daily market prices on such date and the five
(5) consecutive trading days immediately prior to such date. The market
price for each such trading day shall be (a) if the Common Stock is traded on
a national securities exchange, its last bid price on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid, all as made available over the
Consolidated Last Sale Reporting System of the CTA Plan or, if the Common
Stock is not then eligible for reporting over such system, its last bid price
on such trading day on such national securities exchange or, if there was no
bid on that day, on the next preceding trading day on which there was a bid
on such national securities exchange or (b) if the principal market for the
Common Stock is the over-the-counter market, (i) its last bid price on such
trading day or, if there was no bid on that day, the last bid price on the
next preceding trading day on which there was a bid, all as made available
over the Consolidated Last Sale Reporting System of the CTA Plan, or (ii) if
the Common Stock is not then eligible for reporting over the Consolidated
Last Sale Reporting System of the CTA Plan and the Common Stock is quoted on
the NASDAQ, the last bid price reported on NASDAQ on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a
<PAGE>
bid or (iii) if the Common Stock is not reported or quoted on NASDAQ, the
closing bid quotations as quoted in each of The Wall Street Journal, the
National Quotation Bureau pink sheets, the Salomon Brothers quotation sheets,
quotation sheets of registered marketmakers, as applicable, and, if
necessary, dealers' telephone quotations. If the Current Adjustment Price
per share of Common Stock cannot be ascertained by any of the foregoing
methods, the Current Adjustment Price per share of Common Stock shall be
deemed to be the Fair Value per share of Common Stock.
"CURRENT WARRANT PRICE," per share of Common Stock, for the purpose of
any provision of this Warrant at the date herein specified, shall mean the
amount equal to the quotient resulting from dividing the Exercise Price per
Stock Unit in effect on such date by the number of shares (including any
fractional share) of Common Stock comprising a Stock Unit on such date.
"DATE OF ISSUANCE" shall mean February 23, 1998.
"ESENJAY" shall have the meaning set forth in the preamble of this
Warrant.
"EXERCISE PRICE" per Stock Unit shall mean fifty cents ($.50).
"EXPIRATION DATE" shall mean the later of (i) one year from the Date of
Issuance, or (ii) thirty (30) days after the Holder's receipt of written
notice from Frontier that all amounts advanced under that Credit Agreement,
dated January 12, 1998, by and between Frontier and Duke Energy Financial
Services, Inc. have been repaid and all of the obligations of the Lender (as
such term is defined in the Credit Agreement) under the Credit Agreement have
terminated.
"FAIR VALUE" per share of Common Stock (or other property as the case
may be) shall mean the price that could be obtained from an independent third
party for all of the issued and outstanding shares of Common Stock of
Frontier in an arm's length transaction in which the seller would not be
under any compulsion to sell and the purchaser would not be under any
compulsion to purchase. Fair Value shall be determined as follows:
Frontier and the Holders of Warrants entitled to purchase a majority of the
Stock Units covered by all the Warrants shall each designate a
representative, and such representatives will meet and use their best efforts
to reach an agreement on the Fair Value. If the representatives designated
by Frontier and such Holders are unable to reach such an agreement, then the
Holders of Warrants entitled to purchase a majority of the Stock Units
covered by all the Warrants will submit a list of at least three Independent
Appraisers. Frontier shall select one of the Independent appraisers set
forth on such list. The Independent Appraiser so selected by Frontier will
determine the Fair Value of a share of Common Stock (or other property, as
the case may be) and its determination thereof will be final and binding on
all parties concerned, absent manifest error. Frontier will provide the
Independent Appraiser so selected by Frontier with all information about
Frontier which such Independent Appraiser reasonably deems necessary for
determining the Fair Value. The fees and expenses of the appraisal process
(including those of the Independent Appraiser) will be paid by Frontier.
Frontier may require that the Independent Appraiser keep confidential any
non-public information received as a result of this paragraph pursuant to
reasonable
<PAGE>
confidentiality arrangements.
"FRONTIER" shall have the meaning set forth in the preamble of this
Warrant.
"HOLDER" shall mean any Person who acquires Warrants or Warrant Stock
pursuant to the provisions of this Warrant including any transferees of
Warrants or Warrant Stock.
"INCLUDE" and "INCLUDING" shall be construed as if followed by the
phrase, "without being limited to,".
"INDEPENDENT APPRAISER" shall mean an appraiser which is a nationally
recognized independent expert experienced in valuing businesses similar to
the principal business of Frontier.
"LIEN" means any lien, mortgage, security interest, pledge, charge,
deposit, production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement, or lease,
license or other arrangement substantially equivalent thereto, other than
preferential purchase rights and consents to assignment.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation system.
"NON-TRANSFERABLE RIGHTS" shall have the meaning assigned to such term
in the definition of Rights Plan.
"PERSON" shall mean a corporation, an association, a partnership, a
limited liability company, a bank, an employee benefit plan, a joint venture,
an organization, an individual, a trust or any unit of federal, state or
local government.
"RIGHTS CERTIFICATE" shall have the meaning assigned to such term in the
definition of Rights Plan.
"RIGHTS PLAN" shall mean a shareholder rights plan implemented by
Frontier to deter a hostile acquisition, pursuant to which holders of shares
of Common Stock (a) are issued rights that are not initially exercisable or
transferable apart from such shares of Common Stock ("NON-TRANSFERABLE
RIGHTS") and (b) are to be issued rights certificates exercisable and
transferable apart from such shares of Common Stock ("RIGHTS CERTIFICATES")
in certain circumstances to purchase Additional Shares of Common Stock upon
certain acquisitions of stock or assets of or business combinations involving
Frontier by a Person in a transaction or transactions not approved by the
board of directors of Frontier as specified in the Rights Plan.
"SECURITIES ACT" means the Securities Act of 1933 as in effect on the
date hereof and as
<PAGE>
the same may be amended from time to time.
"SIGNIFICANT HOLDER" shall mean, at any date, a Holder of 331/3% of the
then outstanding Warrants and shares of Warrant Stock.
"STOCK UNIT" shall mean one share of Common Stock on the Date of
Issuance, and thereafter such number of shares (including any fractional
shares) of Common Stock and other securities, cash or other property as shall
result from the adjustments specified in Section 4 and Section 5.
"WARRANT STOCK" shall mean (i) the shares of Common Stock purchased or
purchasable by the Holders of the Warrants upon the exercise thereof,
including any other stock into which such Common Stock may thereafter be
changed or converted, and (ii) any additional shares of Common Stock or other
securities issued or distributed by way of a dividend, stock split or other
distribution in respect of the Common Stock referred to in clause (i) above,
or acquired by way of any rights offering or similar offering made in respect
of the Common Stock referred to in clause (i) above.
"WARRANTS" shall mean the warrants issued hereby, dated as of the Date
of Issuance, evidencing rights to purchase up to an aggregate of 37,500 Stock
Units, and all Warrants issued upon transfer, division or combination of, or
in substitution for, any thereof.
SECTION 2. EXERCISE OF WARRANT
In order to exercise this Warrant, in whole or in part, the Holder
hereof shall deliver to Frontier, at its office maintained for such purpose
pursuant to SECTION 14.01, (a) a written notice of such Holder's election to
exercise this Warrant, which notice shall specify the number of Stock Units
to be purchased, (b) a certified or cashier's check or checks payable to
Frontier in an aggregate amount equal to the aggregate Exercise Price for the
number of Stock Units as to which this Warrant is being exercised, and (c)
this Warrant. Such notice shall be in substantially the form of the "Form of
Exercise" set out at the end of this Warrant. Upon receipt thereof, Frontier
shall, as promptly as practicable and in any event within seven days
thereafter (unless such exercise shall be in connection with an underwritten
public offering of shares of Common Stock subject to this Warrant, in which
event concurrently with such exercise), cause to be executed and delivered to
such Holder a stock certificate or certificates representing the aggregate
number of duly and validly issued, fully paid and nonassessable shares of
Warrant Stock issuable upon such exercise, free and clear of any Liens.
The stock certificate or certificates for Warrant Stock so delivered
shall be in such denominations as may be specified in such notice and shall
be registered in the name of such Holder or such other Person as shall be
designated in such notice, PROVIDED that such other Person as may be
designated shall confirm in writing for the benefit of Frontier that the
representations and warranties set forth in SECTION 7 are true, complete and
correct with respect to such other Person as may be designated, and each such
other Person acknowledges and agrees
<PAGE>
in writing to accept the benefits of and be bound by the terms and conditions
set forth in this Warrant. To the extent permitted by law, such stock
certificate or certificates shall be deemed to have been issued, and such
Holder or other Person so designated to receive the Warrant Stock shall be
deemed to have become a holder of record of such shares, including the right
to vote such shares or to consent or to receive notice as a stockholder, as
of the time such notice and payment is received by Frontier as aforesaid. If
this Warrant shall have been exercised only in part, Frontier shall, at the
time of delivery of said stock certificate or certificates, execute and
deliver to such Holder a new Warrant, dated the original date of issuance,
evidencing the rights of such Holder to purchase the remaining Stock Units
called for by this Warrant, which new Warrant shall in all other respects be
identical with this Warrant, or, at the option of Frontier, appropriate
notation may be made on this Warrant and the same returned to such Holder.
All shares of Common Stock issuable upon the exercise of this Warrant
shall, upon payment therefor in accordance herewith, be duly and validly
issued, fully paid and nonassessable and free and clear of any Liens.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, Frontier shall pay to the Holder
an amount in cash equal to such fraction multiplied by the Current Adjustment
Price per share of Common Stock.
SECTION 3. TRANSFER, DIVISION AND COMBINATION
Subject to SECTION 9, this Warrant and all rights hereunder are
transferable, in whole or in part, on the books of Frontier to be maintained
for such purpose, upon surrender of this Warrant at the office of Frontier
maintained for such purpose pursuant to SECTION 14.01, together with a
written assignment of this Warrant (in substantially the form of the "Form of
Assignment" annexed hereto) duly executed by the Holder hereof or its agent
or attorney and payment of funds sufficient to pay any stock transfer taxes
payable hereunder by the Holder hereof upon the making of such transfer.
Upon such surrender and payment Frontier shall, subject to SECTION 9 and the
immediately following sentence, execute and deliver a new Warrant or Warrants
(with the same Exercise Price or Exercise Prices as contained in the Warrant
or Warrants so surrendered, respectively) in the name of the assignee or
assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled. If and when this
Warrant is assigned in blank (in case the restrictions on transferability set
forth in SECTION 9 shall have been terminated), Frontier may (but shall not
be obliged to) treat the bearer hereof as the absolute owner of this Warrant
for all purposes and Frontier shall not be affected by any notice to the
contrary. This Warrant, if properly assigned in compliance with this SECTION
3 and SECTION 9, may be exercised by an assignee for the purchase of shares
of Common Stock without having a new Warrant or Warrants issued.
This Warrant may, subject to SECTION 9, be divided or combined with
other Warrants upon presentation at the aforesaid office of Frontier,
together with a written notice specifying the names and denominations in
which new Warrants are to be issued, signed by the Holder hereof
<PAGE>
or its authorized agent or attorney. Subject to compliance with the next
preceding paragraph and with SECTION 9, as to any transfer which may be
involved in such division or combination, Frontier shall execute and deliver
a new Warrant or Warrants (with the same Exercise Price or Exercise Prices as
contained in the Warrant or Warrants so transferred, respectively) in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
Frontier shall maintain at its aforesaid office books for the
registration and transfer of the Warrants.
SECTION 4. ADJUSTMENT OF STOCK UNIT
The number of shares of Common Stock comprising a Stock Unit shall be
subject to adjustment from time to time as set forth in this SECTION 4.
Frontier shall not take any action with respect to its Common Stock of any
class requiring an adjustment pursuant to any of SECTION 4.01, 4.02, 4.08 or
5 without at the same time taking like action with respect to its Common
Stock of each other class; and Frontier shall not create any class of Common
Stock which carries any rights to dividends or assets differing in any
respect from the rights of the Common Stock on the Date of Issuance.
4.01 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at
any time or from time on or after the Date of Issuance Frontier shall
(i) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then the number of shares of Common Stock comprising a Stock Unit immediately
after the happening of any such event shall be adjusted so as to consist of
the number of shares of Common Stock which a record holder of the number of
shares of Common Stock comprising a Stock Unit immediately prior to the
happening of such event would own or be entitled to receive after the
happening of such event.
4.02 CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case at any time
or from time to time on or after the Date of Issuance Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling them to
receive any dividend or other distribution of,
<PAGE>
(i) cash (other than a cash distribution made as a dividend
and payable out of earnings or earned surplus legally available for the
payment of dividends under the laws of the jurisdiction of incorporation of
Frontier, to the extent, but only to the extent, that the aggregate of all
such dividends paid or declared after the date hereof, does not exceed the
consolidated net income of Frontier earned subsequent to the date hereof
determined in accordance with generally accepted accounting principles
consistently applied), or
(ii) any evidence of its indebtedness (other than Convertible
Securities), any shares of its stock (other than Additional Shares of
Common Stock) or any other securities or property of any nature whatsoever
(other than cash and other than Convertible Securities or Additional Shares
of Common Stock), or
(iii) any options, warrants or other rights to subscribe for or
purchase any evidences of its indebtedness (other than (A) Convertible
Securities and (B) Non-Transferable Rights issued pursuant to a Rights
Plan), any shares of its stock (other than Additional Shares of Common
Stock) or any other securities or property of any nature whatsoever (other
than cash and other than Convertible Securities or Additional Shares of
Common Stock),
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (i) the numerator of which shall be the Current
Adjustment Price per share of Common Stock at the date of taking such record,
and (ii) the denominator of which shall be such Current Adjustment Price per
share of Common Stock minus the amount of any and all such cash and the Fair
Value of any and all such evidences of indebtedness, shares of stock, other
securities or property, or options, warrants or other subscription or
purchase rights, so distributable in respect of one share of Common Stock. A
reclassification of the Common Stock into shares of Common Stock and shares
of any other class of stock shall be deemed a distribution by Frontier to the
holders of its Common Stock of such shares of such other class of stock
within the meaning of this SECTION 4.02 and, if the outstanding shares of
Common Stock shall be changed into a larger or smaller number of shares of
Common Stock as a part of such reclassification, shall be deemed a
subdivision or combination, as the case may be, of the outstanding shares of
Common Stock within the meaning of SECTION 4.01.
4.03 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case at any
time or from time to time on or after the Date of Issuance Frontier shall
(except as hereinafter provided) issue to any Person any Additional Shares of
Common Stock for a consideration per share less than:
(a) in the case of a public offering of Common Stock
under the Securities Act, the greater of (i) the consideration per share
determined by the managing underwriter (in the event of an underwritten
public offering) and (ii) 90% of the Current Adjustment Price on the
effective date of the registration statement with respect to such
<PAGE>
public offering,
(b) in the case of the issuance of Common Stock by
Frontier in connection with the acquisition of assets and/or securities
of any Person, the greater of (i) the consideration per share determined
by the Board of Directors of Frontier as set forth in the binding
agreement pursuant to which such acquisition is being effected and (ii)
90% of the Current Adjustment Price per share of Common Stock as of the
date for which the pricing of Common Stock in connection with such
issuance is determined in accordance with such binding agreement, or
(c) in all other circumstances, 95% of the Current
Adjustment Price,
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of shares
of Common Stock comprising a Stock Unit immediately prior to such adjustment by
a fraction (a) the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such Additional Shares of
Common Stock plus the number of such Additional Shares of Common Stock so
issued, and (b) the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such Additional Shares of
Common Stock plus the number of shares of Common Stock which the aggregate
consideration for the total number of such Additional Shares of Common Stock so
issued would purchase at the Current Adjustment Price. For purposes of this
SECTION 4.03, and subject to the foregoing sentence, the date as of which the
Current Adjustment Price shall be computed shall be the earlier of (i) the date
on which Frontier shall enter into a firm contract for the issuance of such
Additional Shares of Common Stock and (ii) the date of actual issuance of such
Additional Shares of Common Stock. This SECTION 4.03 shall not apply to any
issuance of Additional Shares of Common Stock for which an adjustment is
provided under SECTION 4.01. No adjustment of the number of shares of Common
Stock comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued pursuant to
the exercise of any options, warrants or other subscription or purchase rights
or pursuant to the exercise of any conversion or exchange rights in any
Convertible Securities described in SECTION 4.04 or 4.05 (it being understood
that full adjustment shall be made, without duplication, in respect of all
Additional Shares of Common Stock issuable at the time any Rights Certificates
issued pursuant to a Rights Plan become exercisable by the holders of Common
Stock). No adjustment of the number of shares of Common Stock comprising a
Stock Unit shall be made under this SECTION 4.03 upon the issuance of any
Additional Shares of Common Stock which are issued for a consideration greater
than that described in clauses (a), (b) and (c), as applicable, of this
SECTION 4.03.
4.04 ISSUANCE OF OPTIONS WARRANTS OR OTHER RIGHTS. If on or after the
Date of Issuance, Frontier shall issue to any Person, any options, warrants or
other rights to subscribe for or purchase any Additional Shares of Common Stock
or any Convertible Securities (other than Non-Transferable Rights issued
pursuant to a Rights Plan) and the consideration per share for which Additional
Shares of Common Stock may at any time thereafter be issuable pursuant to
<PAGE>
such options, warrants or other rights or pursuant to the terms of such
Convertible Securities (other than Non-Transferable Rights issued pursuant to
a Rights Plan) shall be less than the Current Adjustment Price, then the
number of shares of Common Stock thereafter comprising a Stock Unit shall be
adjusted as provided in SECTION 4.03 on the basis that
(a) the maximum number of Additional Shares of Common
Stock issuable pursuant to all such options, warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of (and, accordingly,
the date as of which the Current Adjustment Price shall be computed
shall be) the computation date specified in the last sentence of this
SECTION 4.04, and
(b) the aggregate consideration for such maximum number
of Additional Shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by Frontier for the issuance of
such Additional Shares of Common Stock pursuant to such options,
warrants or other rights or pursuant to the terms of such Convertible
Securities (it being understood that full adjustment shall be made,
without duplication, in respect of all Additional Shares of Common Stock
issuable at the time any Rights Certificates issued pursuant to a Rights
Plan become exercisable by the holders of Common Stock). For purposes
of this SECTION 4.04, the computation date for clause (a) above shall be
the earliest of (i) the date on which Frontier shall take a record of
the holders of its Common Stock for the purpose of entitling them to
receive any such options, warrants or other rights, (ii) the date on
which Frontier shall enter into a firm contract for the issuance of such
options, warrants or other rights, and (iii) the date of actual issuance
of such options, warrants or other rights.
4.05 ISSUANCE OF CONVERTIBLE SECURITIES. If on or after the Date
of Issuance Frontier shall issue to any Person any Convertible Securities and
the consideration per share for which Additional Shares of Common Stock may
at any time thereafter be issuable pursuant to the terms of such Convertible
Securities shall be less than the Current Adjustment Price, then the number
of shares of Common Stock thereafter comprising a Stock Unit shall be
adjusted as provided in SECTION 4.03 on the basis that (a) the maximum number
of Additional Shares of Common Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been
issued as of (and accordingly, the date as of which the Current Adjustment
Price shall be computed shall be) the computation date specified in the next
following sentence of this SECTION 4.05, and (b) the aggregate consideration
for such maximum number of Additional Shares of Common Stock shall be deemed
to be the minimum consideration received and receivable by Frontier for the
issuance of such Additional Shares of Common Stock pursuant to the terms of
such convertible Securities. For purposes of this SECTION 4.05, the
computation date for clause (a) above shall be the earliest of (i) the date
on which Frontier shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive any such Convertible Securities,
(ii) the date on which Frontier shall enter into a firm contract for the
<PAGE>
issuance of such Convertible Securities, and (iii) the date of actual
issuance of such Convertible Securities. No adjustment of the number of
shares of Common Stock comprising a Stock Unit shall be made under this
SECTION 4.05 upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants or other subscription or purchase
rights therefor, if any such adjustment shall previously have been made upon
the issuance of such warrants or other rights pursuant to SECTION 4.04. No
adjustment of the number of Shares of Common Stock comprising a Stock Unit
shall be made under this SECTION 4.05 upon the issuance of any Additional
Shares of Common Stock which are issued for a consideration greater than that
described in the first sentence of this SECTION 4.05.
4.06 SUPERSEDING ADJUSTMENT OF STOCK UNIT. If, at any time on or
after the Date of Issuance, any adjustment of the number of shares of Common
Stock comprising a Stock Unit shall have been made pursuant to SECTION 4.04
or 4.05 on the basis of the issuance of options, warrants or other rights or
the issuance of other Convertible Securities, or any new adjustment of the
number of shares of Common Stock comprising a Stock Unit shall have been made
pursuant to this SECTION 4.06,
(i) such options, warrants or rights or the right of
conversion or exchange in such other Convertible Securities shall expire,
and a portion of such options, warrants or rights, or the right of
conversion, exercise or exchange in respect of a portion of such other
Convertible Securities, as the case may be, shall not have been exercised,
or
(ii) the consideration per share, for which Additional Shares
of Common Stock are issuable pursuant to such options, warrants or rights
or the terms of such other Convertible Securities, shall be increased
solely by virtue of provisions therein contained for an automatic increase
in such consideration per share upon the arrival of a specified date or the
happening of a specified event,
such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such options,
warrants or rights or other Convertible Securities on the basis of
(a) treating the number of Additional Shares of Common
Stock, if any, theretofore actually issued or issuable pursuant to the
previous exercise of such options, warrants or rights or such right of
conversion or exchange, as having been issued on the date or dates of
such issuance of Additional Shares of Common Stock as determined for
purposes of such previous adjustment and for the consideration actually
received and receivable therefor, and
(b) treating any such options, warrants or rights or any
such other Convertible Securities which then remain outstanding as
having been granted or issued immediately after the time of such
increase of the consideration per share for such Additional Shares
<PAGE>
of Common Stock as are issuable under such options, warrants or rights
or other Convertible Securities, and, if and to the extent called for by
the foregoing provisions of this SECTION 4 on the basis aforesaid, a new
adjustment of the number of shares of Common Stock comprising a Stock
Unit shall be made, which new adjustment shall supersede the previous
adjustment so rescinded and annulled.
4.07 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION 4.
The following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock comprising a Stock Unit hereinbefore provided
for in this SECTION 4:
(i) TREASURY STOCK. The sale or other disposition of any
issued shares of Common Stock owned or held by or for the account of
Frontier shall be deemed an issuance thereof for purposes of this
SECTION 4.
(ii) COMPUTATION OF CONSIDERATION. To the extent that any
Additional Shares of Common Stock or any Convertible Securities or any
options, warrants or other rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities shall be
issued for a cash consideration, the consideration received by Frontier
therefor shall be deemed to be the amount of cash received by Frontier
therefor, or, if such Additional Shares of Common Stock or Convertible
Securities are offered by Frontier for subscription, the subscription
price, or, if such Additional Shares of Common Stock or Convertible
Securities are sold to underwriters or dealers for public offering without
a subscription offering, the initial public offering price, in any such
case excluding any amounts paid or receivable for accrued interest or
accrued dividends and without deduction of any compensation, discounts or
expenses paid or incurred by Frontier for and in the underwriting of, or
otherwise in connection with, the issue thereof. To the extent that such
issuance shall be for consideration other than cash, then, except as herein
otherwise expressly provided, the amount of such consideration shall be
deemed to be the Fair Value of such consideration at the time of such
issuance. The consideration for any Additional Shares of Common Stock
issuable pursuant to any options, warrants or other rights to subscribe for
or purchase the same shall be the consideration received or receivable by
Frontier for issuing such options, warrants or other rights, plus the
additional consideration payable to Frontier upon the exercise of such
options, warrants or other rights. The consideration for any Additional
Shares of Common Stock issuable pursuant to the terms of any Convertible
Securities shall be the consideration received or receivable by Frontier
for issuing any options, warrants or other rights to subscribe for or
purchase such Convertible Securities, plus the consideration paid or
payable to Frontier in respect of the subscription for or purchase of such
Convertible Securities, plus the additional consideration, if any, payable
to Frontier upon the exercise of the right of conversion, exercise or
exchange in such Convertible Securities. In case of the issuance at any
time of any Additional Shares of Common Stock or Convertible Securities in
payment or satisfaction of any dividend upon any class of stock other than
Common Stock, Frontier shall be deemed to have received for such Additional
Shares of Common Stock or Convertible Securities consideration equal to the
<PAGE>
amount of such dividend so paid or satisfied.
(iii) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by
the foregoing provisions of this SECTION 4 shall be made whenever and as
often as any specified event requiring an adjustment shall occur, except
that no adjustment of the number of shares of Common Stock comprising a
Stock Unit that would otherwise be required shall be made (except in the
case of a subdivision or combination of shares of the Common Stock, as
provided for in SECTION 4.01) unless and until such adjustment, either by
itself or with other adjustments not previously made, adds or subtracts at
least l/20th of a share to or from the number of shares of Common Stock
comprising a Stock Unit immediately prior to the making of such adjustment.
Any adjustment representing a change of less than such minimum amount
(except as aforesaid) shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this SECTION 4 and
not previously made, would result in a minimum adjustment. For the purpose
of any adjustment, any specified event shall be deemed to have occurred at
the close of business on the date of its occurrence.
(iv) FRACTIONAL INTERESTS. In computing adjustments under
this SECTION 4, fractional interests in Common Stock shall be taken into
account to the nearest one-thousandth of a share.
(v) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which
SECTION 4 shall require that an adjustment in the shares of Common Stock
comprising a Stock Unit be made effective as of a record date, Frontier may
elect to defer until the occurrence of such event by (i) issuing to the
Holder, if this Warrant is exercised after such record date, the shares of
Common Stock, if any, issuable upon such exercise over and above the shares
of Common Stock or other capital stock of Frontier, if any, issuable upon
such exercise on the basis of the number of shares of Common Stock
comprising a Stock Unit in effect prior to such adjustment and (ii) paying
to the Holder any amount of cash in lieu of the issuance of fractional
shares pursuant to SECTION 4; PROVIDED, HOWEVER, that Frontier shall
deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares or such
cash upon the occurrence of such event.
(vi) WHEN ADJUSTMENT NOT REQUIRED. If Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling them
to receive a dividend or distribution or subscription or purchase rights
and shall, thereafter and before the distribution thereof to stockholders,
legally abandon its plan to pay or deliver such dividend, distribution,
subscription or purchase rights, then thereafter no adjustment shall be
required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
<PAGE>
4.08 OTHER ACTION AFFECTING COMMON STOCK. In case at any time or from
time to time Frontier shall take any action affecting its Common Stock, other
than an action described in any of the foregoing SECTIONS 4.01 through 4.07
(inclusive), or in SECTION 5, then, unless in the reasonable opinion of the
Board of Directors of Frontier such action will not have a material adverse
effect upon the rights of the Holders of the Warrants or an adverse effect on
the number of shares of Common Stock comprising a Stock Unit shall be adjusted
in such manner and at such time as the Board may reasonably determine in good
faith to be equitable in the circumstances to fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles in such sections thereof.
SECTION 5. CONSOLIDATION, MERGER, ETC
In case a consolidation or merger of Frontier shall be effected with
another Person on or after the Date of Issuance, or the sale, lease or other
transfer of all or substantially all of Frontier's assets to another Person
shall be effected on or after the Date of Issuance, then, as a condition of such
consolidation, merger, sale, lease or other transfer provision shall be made
whereby the Holder of this Warrant shall thereafter have the right to purchase
and receive upon the basis and upon the terms and conditions specified herein
and in lieu of each Stock Unit immediately theretofore purchasable and
receivable upon the exercise of each of the Warrants, such shares of stock,
securities, cash or other property receivable upon such consolidation, merger,
sale, lease or transfer by the Holder of the number of shares of Common Stock
comprising a Stock Unit immediately prior to such event. In any such case,
appropriate and equitable provision also shall be made with respect to the
rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including SECTION 4) shall thereafter be applicable, as
nearly as may be, in relation of any shares of stock, securities, cash or other
property thereafter deliverable upon the exercise of any Warrants. Frontier
shall not effect any such consolidation, merger, sale, lease or transfer unless
prior to or simultaneously with the consummation thereof the successor Person
(if other than Frontier or a wholly-owned subsidiary of Frontier) resulting from
such consolidation or merger or the Person purchasing, leasing or otherwise
acquiring such assets shall expressly assume, by written instrument mailed to
Esenjay and any Significant Holder at its last address appearing on the books of
Frontier, the due and punctual observance and performance of each and every
covenant and condition of this Warrant to be performed and observed by Frontier
and all of the obligations and liabilities hereunder, subject to such
modification as shall be necessary to provide for adjustments of Stock Units
which shall be as nearly equivalent as practicable to the adjustments provided
for in SECTION 4; PROVIDED, HOWEVER, that Frontier shall not be required to
effect (or mail) such express assumption in respect of any transaction pursuant
to which such obligations are transferred by operation of law and such Person
acknowledges the same in a writing that is retained and made available for
inspection by any holder of Warrants. The above provisions of this SECTION 5
shall similarly apply to successive consolidations, mergers, sales, leases or
other transfers.
SECTION 6. NOTICE TO WARRANT HOLDERS
<PAGE>
6.01 NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever
the number of shares of Common Stock comprising a Stock Unit shall be adjusted
pursuant to SECTION 4, Frontier shall forthwith obtain a certificate signed by
independent accountants of recognized national standing, setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated (including a statement of the Fair Value of any
evidences of indebtedness, shares of stock, other securities or property or
warrants or other subscription or purchase rights referred to in SECTION 4.02,
4.07(ii) or SECTION 5) and specifying the number of shares of Common Stock
comprising a Stock Unit and (if such adjustment was made pursuant to
SECTION 4.08 or SECTION 5) describing the number and kind of any other
securities comprising a Stock Unit, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. Frontier
shall promptly, and in any case within 20 days after the making of such
adjustment, cause a signed copy of such certificate to be delivered to each
Holder of a Warrant in accordance with SECTION 14.02. Frontier shall keep at
its office or agency, maintained for the purpose pursuant to SECTION 14.01,
copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by any Holder of a
Warrant or any prospective permitted purchaser of a Warrant designated by a
Holder thereof. The Holders of Warrants entitled to purchase a majority of the
Stock Units covered by all the Warrants shall have the right to challenge any
such adjustment of the number of shares of Common Stock comprising a Stock Unit
contained in such certificate for a period of 30 days after such certificate is
delivered to the Holders. In the event the Holders give Frontier written notice
of such challenge within such 30-day period, such Holders and Frontier shall
thereupon promptly attempt in good faith to reach agreement on such adjustment,
and failing such agreement, shall appoint a mutually acceptable nationally
recognized independent accounting firm to determine such adjustment, whose
determination shall be final and binding on Frontier and the Holders, absent
manifest error. The costs incurred by the Holders and Frontier and the fees and
expenses of such independent accounting firm shall be paid by (a) the Holders if
Frontier's adjustment in the certificate was accurate to within 1/20th of a
share to or from the number of shares of Common Stock comprising a Stock Unit by
such independent accounting firm or if such independent accounting firm's
adjustment results in the Holders being entitled to receive fewer shares of
Common Stock per Stock Unit than under the adjustment determined by Frontier and
(b) otherwise by Frontier.
6.02 NOTICE OF CERTAIN CORPORATE ACTION. In case Frontier shall
propose (a) to pay any dividend to the holders of its Common Stock or to make
any other distribution to the holders of its Common Stock, or (b) to offer to
the holders of its Common Stock rights to subscribe for or to purchase any
Additional Shares of Common Stock or shares of stock of any class or any other
securities, rights or options, or (c) to effect any reclassification of its
Common Stock (other than a reclassification involving only the subdivision, or
combination, of outstanding shares of Common Stock), or (d) to effect any
capital reorganization, or (e) to effect any consolidation, merger or sale,
lease, transfer or other disposition of all or substantially all of its
property, assets or business, or (f) to effect the liquidation, dissolution or
winding up of Frontier, then, in each such case, Frontier shall give to each
Holder of a Warrant, in accordance with SECTION 14.02, a notice of such proposed
action, which shall specify the date on which a record is to be taken for the
purposes of such stock dividend, distribution or rights, or the date on which
such
<PAGE>
reclassification, reorganization, consolidation, merger, sale, lease,
transfer, disposition, liquidation, dissolution or winding up is to take
place and the date of participation therein by the holders of Common Stock,
if any such date is to be fixed, and shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate the effect of
such action on the Common Stock and the number and kind of any other shares
of stock which will comprise a Stock Unit, and the purchase price or prices
thereof, after giving effect to any adjustment which will be required as a
result of such action. Such notice shall be so given in the case of any
action covered by clause (a) or (b) above at least 10 days prior to the
record date for determining holders of the Common Stock for purposes of such
action, and in the case of any other such action, at least 10 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of Common Stock, whichever shall be the earlier.
6.03 NOTICE OF EXPIRATION DATE. Frontier shall give to each Holder
of a Warrant notice of the Expiration Date. Such notice may be given by
Frontier not less than 30 days but not more than 60 days prior to the
Expiration Date.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF ESENJAY
Esenjay represents and warrants to Frontier as follows:
7.01 PURCHASE FOR OWN ACCOUNT. The Warrants and Warrant Stock, as
the case may be, to be received by Esenjay will be acquired for investment
for Esenjay's own account and not with a present view to the distribution of
any part thereof, and Esenjay has no present intention of selling, granting
any participation in, or otherwise distributing the same in a manner contrary
to the Securities Act or applicable state securities laws, PROVIDED, that,
Esenjay at all times retains the right to control, deal with and sell all of
its property, including the Warrants.
7.02 DISCLOSURE OF INFORMATION; DUE DILIGENCE. Esenjay represents
that it has had an opportunity to ask questions of and receive answers from
Frontier regarding Frontier and the terms and conditions of the offering of
the Warrants and Warrant Stock, as the case may be, offered hereby and to
obtain additional information necessary to verify the accuracy of the
information supplied or to which it had access.
7.03 INVESTMENT EXPERIENCE; ACCREDITED INVESTOR STATUS. Esenjay is
able to bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Warrants and the Warrant Stock.
Esenjay understands that neither the Warrants nor the Warrant Stock have been
registered under the Securities Act or under the securities laws of any
jurisdiction by reason of reliance upon certain exemptions, and that the
reliance of Frontier on such exemptions is predicated upon the accuracy of
Esenjay's representations and warranties in this SECTION 7.03. Esenjay is
familiar with Regulation D promulgated under the Securities Act and is an
"accredited
<PAGE>
investor" as defined therein.
7.04 SECURITIES ACT COMPLIANCE. Esenjay represents that neither
the Warrants nor the Warrant Stock shall be sold or transferred or offered
for sale or transfer without registration under the Securities Act or the
availability of an exemption therefrom, and in accordance with the terms and
conditions and legends set forth in SECTION 9.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF FRONTIER
Frontier represents and warrants to Esenjay as follows:
8.01 EXISTENCE; QUALIFICATION. Frontier is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Oklahoma. Frontier has duly qualified and is authorized to do business and is
in good standing as a foreign corporation in every jurisdiction where the
failure to be so qualified would have a material adverse effect on Frontier's
ability to enter into and perform all of its obligations under this Warrant.
8.02 NO BREACH. The execution, delivery and performance of this
Warrant by Frontier and the consummation of the transactions contemplated
hereby will not (a) violate the articles of incorporation or by-laws of
Frontier, (b) violate any loan or credit agreement to which Frontier is a
party or is bound, or result in a breach of or default under any other
instrument or agreement to which Frontier is a party or is bound which is
material to the business or properties of Frontier taken as a whole, (c)
violate any judgment, order, injunction, decree or award against or binding
upon Frontier, the violation of which would have a material adverse effect on
the business or properties of Frontier taken as a whole, (d) result in the
creation of any material Lien upon any of the properties or assets of
Frontier, or (e) violate any law, rule or regulation applicable to or binding
upon Frontier, or (f) cause or require any adjustment, or give rise to any
rights in favor of another Person, under any agreement to which Frontier is a
party.
8.03 CORPORATE ACTION. Frontier has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Warrant; the execution, delivery and performance by Frontier of its
obligations under this Warrant have been duly authorized by all necessary
corporate action (including all stockholder action if required) on the part
of Frontier; this Warrant has been duly executed and delivered by Frontier
and constitutes a legal, valid and binding obligation of Frontier,
enforceable against Frontier in accordance with its terms; the Warrant Stock
initially covered by the Warrants will be duly and validly authorized and
reserved for issuance and shall, when paid for, be issued and delivered in
accordance with the terms of the Warrants, be duly and validly issued, fully
paid and nonassessable and free and clear of any Liens; and none of the
Warrant Stock issued pursuant to the terms hereof shall be in violation of
any preemptive rights of any shareholder of Frontier.
8.04 APPROVALS. Based in part upon the representations set forth
in SECTION 7, no authorizations, approvals or consents of, and no filings or
registrations with, any governmental authority or any other Person are
necessary for the execution, delivery or performance by
<PAGE>
Frontier of its obligations under this Warrant or for the validity or
enforceability thereof. Any such action required to be taken as a condition
to the issuance and delivery of the Warrants has been (or prior to such
issuance and delivery will be) duly taken by all such governmental
authorities or other Persons, as the case may be.
8.05 INVESTMENT COMPANY ACT. Frontier is not an "investment
company", or a company "controlled by" an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
8.06 PUBLIC UTILITY HOLDING COMPANY ACT. Frontier is not a
"holding company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
8.07 CAPITALIZATION. On the date hereof, the total number of
shares of capital stock which Frontier has authority to issue is (i)
9,865,906 shares of Common Stock, par value $.01 per share, of which
40,000,000 shares are issued and outstanding, and (ii) 5,000,000 shares of
Preferred Stock, par value $10.00 per share, of which 85,961 shares are
issued and outstanding.
8.08 PRIVATE OFFERING.
(a) Assuming the truth and accuracy of Esenjay's representations
and warranties contained in SECTION 7, the issuance and sale of the Warrants
to Esenjay hereunder are exempt from the registration and prospectus delivery
requirements of the Securities Act as presently in effect.
(b) Frontier agrees that neither Frontier nor any Person acting on
its behalf has offered or will offer the Warrants or shares of Warrant Stock
or any part thereof or any similar securities for issue or sale to, or has
solicited or will solicit any offer to acquire any of the same from, any
Person so as to bring the issuance and sale of the Warrants or shares of
Warrant Stock within the provisions of the registration and prospectus
delivery requirements of the Securities Act.
8.09 NO LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the best of Frontier's knowledge after due
inquiry, threatened against Frontier before any court or administrative
agency seeking to enjoin the transactions contemplated by this Warrant or
that is reasonably likely to (i) prohibit or limit in any way performance by
Frontier of its obligations under this Warrant or (ii) affect the legality,
validity, enforceability or binding nature of this Warrant.
SECTION 9. RESTRICTIONS ON TRANSFERABILITY
9.01 TRANSFERS GENERALLY. Except as otherwise provided in
SECTION 9.06, the Warrants and Warrant Stock shall only be transferable upon the
conditions specified in this SECTION 9, which conditions are intended to insure
compliance with the provisions of the Securities Act and
<PAGE>
applicable state securities laws in respect of the transfer of any Warrants
and Warrant Stock.
9.02 TRANSFERS OF RESTRICTED SECURITIES PURSUANT TO REGISTRATION
STATEMENTS, RULE 144 AND RULE 144A. The Warrants and Warrant Stock may be
offered or sold by the Holder thereof pursuant to (a) an effective registration
statement under the Securities Act, or (b) to the extent applicable, Rule 144 or
Rule 144A under the Securities Act.
9.03 NOTICE OF CERTAIN TRANSFERS. If any Holder of any Warrants or
Warrant Stock desires to transfer such Warrants or Warrant Stock other than
pursuant to an effective registration statement under the Securities Act or
pursuant to Rule 144 or Rule 144A, then such Holder shall deliver to Frontier a
notice with respect to the proposed transfer, together with a written
representation (together with such factual information in respect thereof as
Frontier may reasonably request) from such Holder in substance reasonably
satisfactory to Frontier to the effect that an exemption from registration under
the Securities Act and applicable state securities laws is available.
9.04 RESTRICTIVE LEGENDS.
(a) Until otherwise permitted by SECTION 9.05, each certificate for
Warrants issued, each certificate for any Warrants issued to any subsequent
transferee of any such certificate, each certificate for any Warrant Stock
issued upon exercise of any Warrant and each certificate for any Warrant Stock
issued to any subsequent transferee of any such certificate, shall be stamped or
otherwise imprinted with one or more legends in substantially the following
form:
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAVE ANY
OF THEM BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY LAWS
OF ANY STATE. NEITHER THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF, NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE
SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER
TRANSFERRED OR DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF
1933, AS AMENDED, AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER AND
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
(b) In addition, each such certificate shall be stamped or otherwise
imprinted with any legend required under state securities laws.
9.05 TERMINATION OF RESTRICTIONS. All the restrictions imposed by
this SECTION 9 upon
<PAGE>
the transferability of the Warrants and Warrant Stock shall cease and
terminate as to any particular Warrants or Warrant Stock when such Warrants
or Warrant Stock shall have been effectively registered under the Securities
Act and applicable state securities laws and sold by the Holder thereof in
accordance with such registration or sold under and pursuant to Rule 144 or
is eligible to be sold under and pursuant to paragraph (k) of Rule 144.
Whenever the restrictions imposed by this SECTION 9 shall terminate as to any
Warrants or Warrant Stock as hereinabove provided, the Holder thereof shall
be entitled to receive from Frontier, without expense, a new certificate
evidencing such Warrants or Warrant Stock not bearing the restrictive legend
otherwise required to be borne by a certificate evidencing such Warrants or
Warrant Stock.
9.06 CERTAIN DISPOSITIONS OF SECURITIES.
(a) Notwithstanding anything in this Warrant (including SECTION 9
other than SECTION 9.05) to the contrary, but subject to compliance with the
Securities Act, any applicable state securities laws and the requirement as to
legending of the certificates for Warrants and Warrant Stock specified in
SECTION 9.04, any Holder shall have the right to transfer any or all of its
Warrants and Warrant Stock:
(i) to any Person who at the time owns (directly or
indirectly) at least a majority of the shares of such Holder;
(ii) to any Person pursuant to a dividend or other
distribution (whether by liquidation or otherwise) of such Holder;
(iii) to any Person at least a majority of whose shares shall
at the time be owned (directly or indirectly) by such Holder or by any
Person who owns (directly or indirectly) at least a majority of the shares
of such Holder; or
(iv) in the case of any Holder which is an insurance company,
pension fund, bank, bank holding company or a subsidiary of an insurance
company, pension fund, bank or bank holding company, to a third party, if,
in the reasonable judgment of such Holder, such transfer is required to be
effected by such Holder because (A) its investment in Warrants or shares of
Warrant Stock may exceed any limitation to which it is subject, or is
otherwise not permitted, under any law, rule or regulation of any
governmental authority, or (B) restrictions are imposed on such Holder
under any law, rule or regulation which, in the reasonable judgment of such
Holder, make it illegal or unduly burdensome to continue to hold such
Warrants or shares of Warrant Stock or a portion thereof.
The party to which Warrants or Warrant Stock are transferred pursuant to the
immediately preceding sentence shall be deemed to be a Holder of such Warrants
or Warrant Stock and bound by the provisions of this Warrant applicable to
Holders so long as he, she or it continues to own any of the Warrants or Warrant
Stock so transferred to such transferee.
<PAGE>
(b) If the circumstances described in clause (iv) of SECTION 9.06(a)
arise, Frontier shall assist such Holder in disposing of its Warrants and
Warrant Stock in a prompt and orderly manner, and, at the request of such
Holder, Frontier shall provide (and authorize such Holder to provide) such
financial and other such information concerning Frontier as such holder may
request to any prospective purchaser of the Warrants or Warrant Stock owned by
such Holder.
SECTION 10. HOLDER'S RIGHTS
10.01 DELIVERY EXPENSES. If any Holder surrenders any certificate
for Warrants or Warrant Stock to Frontier or a transfer agent of Frontier for
exchange for instruments of other denominations or registered in another name
or names, subject to the terms and conditions of SECTION 9, Frontier shall
cause such new instruments to be issued and shall pay the costs associated
with the preparation and issuance of any new instruments and the cost of
delivering to the office of such Holder from Frontier or its transfer agent,
duly insured, the surrendered instrument and any new instruments issued in
substitution or replacement for the surrendered instrument.
10.02 TAXES. Frontier shall pay all taxes (other than Federal,
state or local income taxes) which may be payable in connection with the
issuance of the Warrants and Warrant Stock hereunder, or in connection with
any modification of this Warrant and shall hold each Holder harmless without
limitation as to time against any and all liabilities with respect to all
such taxes. Frontier shall not, however, be required to pay any tax, with
respect to any Warrant which may be payable in respect of any transfer
involved in the issuance and delivery of Warrants or of shares of Common
Stock in a name other than that in which such Warrant or Common Stock is
registered, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to Frontier the amount of any such tax,
or has established, to the satisfaction of Frontier, that such tax has been
paid. The obligations of Frontier under this SECTION 10.02 shall survive any
redemption, repurchase or acquisition of Warrants or Warrant Stock by
Frontier, and any cancellation or termination of the Warrants.
10.03 REPLACEMENT OF INSTRUMENTS. Upon receipt by Frontier of
evidence reasonably satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of any certificate or instrument evidencing
any Warrants or Warrant Stock, and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it, or
(b) in the case of mutilation, upon surrender thereof, Frontier,
at its expense, shall cancel such certificate or instrument and execute,
register and deliver, in lieu thereof, a new certificate or instrument for
(or covering the purchase of) an equal number of Warrants or Warrant Stock.
10.04 CERTAIN RESTRICTIONS. Frontier shall not at any time enter into
an agreement or other instrument limiting in any manner its ability to perform
its obligations under this Warrant
<PAGE>
or making such performance or the issuance of shares of Common Stock upon the
exercise of any Warrant a default under any such agreement or instrument.
10.05 CERTAIN COVENANTS. At all times prior to the Expiration Date:
(a) Frontier shall retain a nationally recognized independent
accounting firm as its auditors.
(b) Frontier shall afford Esenjay or its Affiliates (or any
Significant Holder), or their respective authorized agents, access, at
reasonable times, upon reasonable prior notice, (i) to inspect the books and
records of Frontier, (ii) to discuss with management of Frontier the
nonconfidential business and affairs of Frontier, and (iii) to inspect the
properties of Frontier.
(c) Each Holder and its authorized agents shall have the right to
attend all meetings of shareholders of Frontier.
(d) Frontier shall provide Esenjay with all notices set forth in
SECTIONS 6.01, 6.02 and 6.03 pursuant to the respective terms thereof.
10.06 INDEMNIFICATION. Frontier shall indemnify and hold harmless
Esenjay and the Holders and each of their respective directors, officers,
employees, stockholders, Affiliates and agents, and Esenjay and the Holders
shall indemnify and hold harmless Frontier and its directors, officers,
employees, stockholders, Affiliates and agents (each, an "INDEMNIFIED
PERSON") on demand from and against any and all losses, claims, damages,
liabilities (or actions or other proceedings commenced or threatened in
respect thereof) and expenses that arise out of, result from, or in any way
relate to the breach of any representation, warranty or covenant by Frontier
contained in this Warrant or any other agreement, document or instrument
executed and delivered in connection with the transactions contemplated
hereby, and reimburse each indemnified person, upon its demand, for any
reasonable legal or other expenses incurred in connection with investigating,
defending or participating in the defense of any such loss, claim, damage,
liability, action or other proceeding (whether or not such indemnified person
is a party to any action or proceeding out of which any such expenses arise),
other than any of the foregoing claimed by any indemnified person to the
extent incurred by reason of the gross negligence or willful misconduct of
such indemnified person. No indemnified person shall be responsible or
liable to any Person for any consequential damages which may be alleged as a
result of or relating to this Warrant or in connection with the other
transactions contemplated hereby.
10.07 FINANCIAL STATEMENTS. Frontier shall deliver the information
specified below to Esenjay and each Significant Holder until the earlier of
(i) the Expiration Date and (ii) the date on which Esenjay or any Significant
Holder no longer holds any Warrants or Warrant Stock:
<PAGE>
(a) as soon as available and in any event within 60 days after the
end of each of the first three fiscal quarters or each fiscal year of Frontier,
consolidated balance sheets of Frontier as of the end of such fiscal quarter and
statements of operations and cash flow of Frontier for such fiscal quarter and
for the period commencing at the end of the previous fiscal year and ending with
the end of such fiscal quarter, certified by the chief financial officer of
Frontier;
(b) as soon as available and in any event within 120 days after the
end of each fiscal year of Frontier, a copy of the annual audit report for such
fiscal year for Frontier, including therein the balance sheet of Frontier as of
the end of such fiscal year and statements of operations and cash flow of
Frontier for such fiscal year, in each case certified in a manner reasonably
acceptable to Esenjay by an independent public accountant acceptable to Esenjay,
together with a report from such accountants to the effect that, in making the
examination necessary for the signing of such annual report by such accountants,
they have not become aware of any default that has occurred and is continuing,
or, if they have become aware of such default, describing such default and the
steps, if any, being taken to cure it;
(c) promptly after (1) the sending or filing thereof, copies of all
reports which Frontier sends to any of its security holders, (2) the sending or
filing thereof, all reports and registration statements which Frontier files
with the Securities and Exchange Commission or any national securities exchange,
(3) the filing thereof, copies of all tariff and rate cases and other material
reports filed with any regulatory authority, and (4) receipt thereof, copies of
all notices received from any regulatory authority concerning noncompliance by
Frontier with any applicable regulations; and
(d) such other information respecting the condition or operations,
financial or otherwise, of Frontier as Esenjay may from time to time reasonably
request.
SECTION 11. RESERVATION AND AUTHORIZATION OF COMMON STOCK: REGISTRATION WITH
OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY
Frontier shall at all times reserve and keep available for issue upon the
exercise of Warrants such number of its authorized but unissued shares of Common
Stock as shall be sufficient to permit the exercise in full of all outstanding
Warrants. All shares of Common Stock which shall be so issuable, when issued
upon exercise of any Warrant and payment of the applicable Exercise Price
therefor shall be duly and validly issued, fully paid and nonassessable and free
and clear of any Liens (caused directly or indirectly by Frontier or its
Affiliates).
Before taking any action which would result in an adjustment in the number
of shares of Common Stock comprising a Stock Unit or which would cause an
adjustment reducing the Current Warrant Price per share of Common Stock below
the then par value, if any, of the shares of Common Stock issuable upon exercise
of the Warrants, Frontier shall take any corporate action which is necessary in
order that Frontier may validly and legally issue fully paid and nonassessable
shares of Common Stock free and clear of any Liens (caused directly or
indirectly
<PAGE>
by Frontier or its Affiliates) upon the exercise of all the Warrants
immediately after the taking of such action.
Before taking any action which would result in an adjustment in the number
of shares of Common Stock comprising a Stock Unit, Frontier shall obtain all
such authorizations or exemptions thereof, or consents thereto, as may be
necessary from any public regulatory body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise or conversion of Warrants require registration with any governmental
authority under any Federal or state law (otherwise than any law that applies to
a Holder specifically because of its status as a regulated entity or in
connection with a registration under the Securities Act or applicable state
securities laws) before such shares may be so issued, Frontier shall in good
faith and as expeditiously as reasonably possible and at its expense endeavor to
cause such shares to be duly registered.
SECTION 12. TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS
(a) In the case of all dividends or other distributions by Frontier
to the holders of its Common Stock with respect to which any provision of
SECTION 4 refers to the taking of a record of such holders, Frontier shall in
each such case take such a record as of the close of business on a business day
or as otherwise provided by or permitted under the corporation laws of
Frontier's then jurisdiction of incorporation.
(b) Frontier shall not at any time, except upon complete dissolution,
liquidation or winding up, close its stock transfer books or Warrant transfer
books so as to result in preventing or delaying the exercise, conversion or
transfer of any Warrant, unless otherwise required by any governmental authority
or by any applicable federal, state or local law.
SECTION 13. NO VOTING OR OTHER RIGHTS
This Warrant shall not entitle the Holder hereof to any voting or other
rights as a stockholder of Frontier either at law or at equity, and the rights
of a holder of this Warrant are limited to those expressly set forth herein.
SECTION 14. MISCELLANEOUS
14.01 OFFICE OF FRONTIER. So long as any of the Warrants remains
outstanding, Frontier shall maintain an office in the continental United States
of America where the Warrants may be presented for exercise, transfer, division
or combination as in this Warrant provided. Such office shall be at Frontier
Natural Gas Corporation, 500 Dallas Street, Suite 2920, Houston, Texas
<PAGE>
77002, unless and until Frontier shall designate and maintain some other
office for such purposes and give notice thereof to the Holders of all
outstanding Warrants.
14.02 NOTICES. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be delivered personally or by facsimile communication to the number set forth
below, or by first class mail, postage prepaid, registered or certified with
return receipt requested, at the addresses set forth below. Notice deposited in
the mail in the manner hereinabove provided shall be effective upon expiration
of five (5) business days from the date on which it is so deposited. Notice
given in any other manner shall be effective only if and when received by the
addressee. For purposes of notice, the addresses of the parties shall be as
follows:
With respect to Frontier: FRONTIER NATURAL GAS CORPORATION
500 Dallas Street, Suite 2920
Houston, Texas 77002
Attention: President
Telephone Number: (713) 739-7100
Fax Number: (713) 739-7124
With a copy to: Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002-4310
Attention: James J. Spring, III
Telephone Number: (713) 658-1818
Fax Number: (713) 658-2553
With respect to Esenjay: ESENJAY PETROLEUM CORPORATION
500 N. Water Street, Suite 1100
Corpus Christi, Texas 78471
Attention: Michael E. Johnson
Telephone Number: (512) 883-7464
Fax Number: (512) 883-3244
With a copy to: Pollicoff, Smith, Myers & Remels, L.L.P.
One Greenway Plaza, Suite 300
Houston, Texas 77046
Attention: Jeffrey B. Pollicoff
Telephone Number: (713) 622-6866
Fax Number: (713) 622-5905
provided that each party shall have the right to change its address for notice,
and the person who is to receive notice hereunder, by the giving of fifteen (15)
days' prior written notice to the other parties hereto in the manner set forth
above.
<PAGE>
14.03 AMENDMENTS. The terms of the Warrants may be amended, and the
observance of any term therein may be waived, upon the written consent of the
holders of Warrants for a majority of the total number of Stock Units at the
time purchasable upon the exercise of all then outstanding Warrants. For the
purposes of determining whether the holders of outstanding Warrants entitled to
purchase a requisite number of Stock Units at any time have taken any action
authorized by this Warrant, any Warrants owned by Frontier or any Affiliate of
Frontier shall be deemed not to be outstanding.
14.04 GOVERNING LAW. This Warrant shall in all respects be governed
by, and construed in accordance with, the substantive federal laws of the United
States and the internal laws of the State of Texas (principles of conflict of
laws excluded) and, to the extent the Oklahoma General Corporation Act so
requires, the laws of the State of Oklahoma.
14.05 LIMITATION OF LIABILITY. No provision hereof, in the absence of
affirmative action by the Holder hereof to purchase shares of Common Stock, and
no mere enumeration herein of the rights or privileges of the Holder hereof,
shall give rise to any liability of such holder for the Exercise Price or as a
stockholder of Frontier, whether such liability is asserted by Frontier, by any
creditor of Frontier or any other Person.
14.06 BINDING EFFECT. The obligations set forth in this Warrant shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
14.07 HEADINGS. The headings in this Warrant are inserted for
concurrence only and are not intended to describe, interpret, define or limit
the scope, extent or intent of this Warrant or any provision hereof.
14.08 GENDER AND NUMBER. Whenever required by the context, as used in
this Warrant, the singular number shall include the plural and vice versa and
pronouns of whatever gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
IN WITNESS WHEREOF, the parties have duly executed this Warrant this 23rd
day of January, 1998 to be effective as of the Date of Issuance.
Frontier Natural Gas Corporation
By: /s/ David W. Berry
------------------------------
David W. Berry, President
<PAGE>
FORM OF EXERCISE
(To be executed by the registered holder hereof)
The undersigned hereby exercises this Warrant to subscribe for and purchase
__________ Stock Units of Frontier Natural Gas Corporation covered by the within
certificate and herewith makes payment therefor in full. Kindly issue
certificates and/or other instruments covering Stock Units in accordance with
the instructions given below. A new Warrant for the unexercised balance of the
Stock Units covered by the within certificate, if any, will be registered in the
name of the undersigned.
Dated:
Instructions for registration of Stock Units
Name (please print)
Social Security or Other Identifying
Number:
Address:
Street
City, State and Zip Code
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder hereof)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers all
the rights of the undersigned under the within certificate with respect to the
purchase of up to the number of Stock Units covered thereby as set forth below
and does hereby irrevocably constitute and appoint __________________________,
attorney-in-fact, to transfer the same on the books of Frontier, with full power
of substitution in the premises:
<TABLE>
<CAPTION>
Number of
Name of Assignee Address Stock Units
- - ---------------- ------- -----------
<S> <C> <C>
</TABLE>
Dated:
(Signature of Registered Owner)
(Guaranteed Signature)
Notice: The signature to this Form of Assignment must correspond with the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever, and must be guaranteed by a
bank or trust company having an office or correspondent in New York, New York,
or by a firm having membership on the New York Stock Exchange.
<PAGE>
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY STATE.
NEITHER THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR
ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN, MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF,
EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
APPLICABLE RULES AND REGULATIONS THEREUNDER AND APPLICABLE STATE SECURITIES OR
BLUE SKY LAWS.
WARRANT
to Purchase Common Stock of
FRONTIER NATURAL GAS CORPORATION
THIS IS TO CERTIFY THAT ASPECT RESOURCES LLC, a Colorado limited
liability company ("Aspect"), or its assigns, is entitled to purchase in
whole or in part from time to time from FRONTIER NATURAL GAS CORPORATION, an
Oklahoma corporation ("Frontier"), on or after the Date of Issuance (as
hereinafter defined), but not later than 5:00 p.m., Houston time, on the
Expiration Date (as hereinafter defined), 56,250 Stock Units (as hereinafter
defined and subject to adjustment as provided herein) at a purchase price per
Stock Unit equal to the Exercise Price (as hereinafter defined), subject to
the terms and conditions hereinbelow provided.
SECTION 1. CERTAIN DEFINITIONS
1.01 DEFINED TERMS. For purposes of this Warrant, in addition to
the terms defined elsewhere herein, the following terms shall have the
meanings set forth in this Section 1:
"ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares of Common
Stock issued by Frontier on or after the Date of Issuance, other than (i) the
Warrant Stock, (ii) the shares of Common Stock described as being issued and
outstanding on the Date of Issuance in SECTION 8.07, and (iii) shares of
Common Stock issued or to be issued to employees, directors, advisors or
consultants of Frontier in connection with equity incentive plans.
"AFFILIATE" shall mean, as to any Person, any other Person which
directly or indirectly controls, or is under common control with or is
controlled by, such Person and, if such Person is an individual, any member
of the immediate family (including parents, spouse and children) of such
individual or one or more members of such immediate family and any Person who
is
<PAGE>
controlled by any such member or trust. As used in this definition,
"control" (including the correlative terms "controlled by" and "under common
control with") shall mean possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person
(whether through ownership of securities or partnership or other ownership
interests, by contract or otherwise), PROVIDED that, in any event, any Person
which owns directly or indirectly 40% or more of the securities having
ordinary voting power for the election of directors or other governing body
of a corporation or 40% or more of the partnership or other ownership
interests of any other Person will be deemed to control such corporation or
other Person. Notwithstanding the foregoing, (i) no individual shall be
deemed to be an Affiliate of a corporation solely by reason of his or her
being an officer or director of such corporation, and (ii) neither Aspect nor
any of its Affiliates shall be deemed to be an Affiliate of Frontier.
"ASPECT" shall have the meaning set forth in the preamble of this
Warrant.
"COMMON STOCK" shall mean Frontier's authorized Common Stock, par value
$.01 per share, as constituted on the date hereof, and any stock into which
such Common stock may thereafter be converted or changed, and also shall
include any other stock of Frontier of any other class that is not preferred
as to dividends or distributions in liquidation over any other class of any
other stock of Frontier.
"CONVERTIBLE SECURITIES" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into, or exercisable or
exchangeable for, Additional Shares of Common Stock, either immediately or
upon the arrival of a specified date or the happening of a specified event.
"CURRENT ADJUSTMENT PRICE," per share of Common Stock, for the purposes
of any provision of this Warrant at the date herein specified, shall be
deemed to be the average of the daily market prices on such date and the five
(5) consecutive trading days immediately prior to such date. The market
price for each such trading day shall be (a) if the Common Stock is traded on
a national securities exchange, its last bid price on such trading day or, if
there was no bid on that day, the last bid price on the next preceding
trading day on which there was a bid, all as made available over the
Consolidated Last Sale Reporting System of the CTA Plan or, if the Common
Stock is not then eligible for reporting over such system, its last bid price
on such trading day on such national securities exchange or, if there was no
bid on that day, on the next preceding trading day on which there was a bid
on such national securities exchange or (b) if the principal market for the
Common Stock is the over-the-counter market, (i) its last bid price on such
trading day or, if there was no bid on that day, the last bid price on the
next preceding trading day on which there was a bid, all as made available
over the Consolidated Last Sale Reporting System of the CTA Plan, or (ii) if
the Common Stock is not then eligible for reporting over the Consolidated
Last Sale Reporting System of the CTA Plan and the Common Stock is
<PAGE>
quoted on the NASDAQ, the last bid price reported on NASDAQ on such trading
day or, if there was no bid on that day, the last bid price on the next
preceding trading day on which there was a bid or (iii) if the Common Stock
is not reported or quoted on NASDAQ, the closing bid quotations as quoted in
each of The Wall Street Journal, the National Quotation Bureau pink sheets,
the Salomon Brothers quotation sheets, quotation sheets of registered
marketmakers, as applicable, and, if necessary, dealers' telephone
quotations. If the Current Adjustment Price per share of Common Stock cannot
be ascertained by any of the foregoing methods, the Current Adjustment Price
per share of Common Stock shall be deemed to be the Fair Value per share of
Common Stock.
"CURRENT WARRANT PRICE," per share of Common Stock, for the purpose of
any provision of this Warrant at the date herein specified, shall mean the
amount equal to the quotient resulting from dividing the Exercise Price per
Stock Unit in effect on such date by the number of shares (including any
fractional share) of Common Stock comprising a Stock Unit on such date.
"DATE OF ISSUANCE" shall mean February 23, 1998.
"EXERCISE PRICE" per Stock Unit shall mean fifty cents ($.50).
"EXPIRATION DATE" shall mean the later of (i) five year from the Date of
Issuance, or (ii) thirty (30) days after the Holder's receipt of written
notice from Frontier that all amounts advanced under that Credit Agreement,
dated February 23, 1998, by and between Frontier and Duke Energy Financial
Services, Inc. have been repaid and all of the obligations of the Lender (as
such term is defined in the Credit Agreement) under the Credit Agreement have
terminated.
"FAIR VALUE" per share of Common Stock (or other property as the case
may be) shall mean the price that could be obtained from an independent third
party for all of the issued and outstanding shares of Common Stock of
Frontier in an arm's length transaction in which the seller would not be
under any compulsion to sell and the purchaser would not be under any
compulsion to purchase. Fair Value shall be determined as follows:
Frontier and the Holders of Warrants entitled to purchase a majority of the
Stock Units covered by all the Warrants shall each designate a
representative, and such representatives will meet and use their best efforts
to reach an agreement on the Fair Value. If the representatives designated
by Frontier and such Holders are unable to reach such an agreement, then the
Holders of Warrants entitled to purchase a majority of the Stock Units
covered by all the Warrants will submit a list of at least three Independent
Appraisers. Frontier shall select one of the Independent appraisers set
forth on such list. The Independent Appraiser so selected by Frontier will
determine the Fair Value of a share of Common Stock (or other property, as
the case may be) and its determination thereof will be final and binding on
all parties concerned, absent manifest error. Frontier will provide the
Independent Appraiser so selected by Frontier with all information about
Frontier which such Independent Appraiser reasonably deems necessary for
determining the Fair Value. The fees and expenses of the appraisal process
(including those of the Independent Appraiser) will be paid by Frontier.
Frontier may require that the Independent Appraiser keep confidential any
non-public information received as a result of this paragraph pursuant to
reasonable confidentiality
<PAGE>
arrangements.
"FRONTIER" shall have the meaning set forth in the preamble of this
Warrant.
"HOLDER" shall mean any Person who acquires Warrants or Warrant Stock
pursuant to the provisions of this Warrant including any transferees of
Warrants or Warrant Stock.
"INCLUDE" and "INCLUDING" shall be construed as if followed by the
phrase, "without being limited to,".
"INDEPENDENT APPRAISER" shall mean an appraiser which is a nationally
recognized independent expert experienced in valuing businesses similar to
the principal business of Frontier.
"LIEN" means any lien, mortgage, security interest, pledge, charge,
deposit, production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement, or lease,
license or other arrangement substantially equivalent thereto, other than
preferential purchase rights and consents to assignment.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation system.
"NON-TRANSFERABLE RIGHTS" shall have the meaning assigned to such term
in the definition of Rights Plan.
"PERSON" shall mean a corporation, an association, a partnership, a
limited liability company, a bank, an employee benefit plan, a joint venture,
an organization, an individual, a trust or any unit of federal, state or
local government.
"RIGHTS CERTIFICATE" shall have the meaning assigned to such term in the
definition of Rights Plan.
"RIGHTS PLAN" shall mean a shareholder rights plan implemented by
Frontier to deter a hostile acquisition, pursuant to which holders of shares
of Common Stock (a) are issued rights that are not initially exercisable or
transferable apart from such shares of Common Stock ("NON-TRANSFERABLE
RIGHTS") and (b) are to be issued rights certificates exercisable and
transferable apart from such shares of Common Stock ("RIGHTS CERTIFICATES")
in certain circumstances to purchase Additional Shares of Common Stock upon
certain acquisitions of stock or assets of or business combinations involving
Frontier by a Person in a transaction or transactions not approved by the
board of directors of Frontier as specified in the Rights Plan.
<PAGE>
"SECURITIES ACT" means the Securities Act of 1933 as in effect on the
date hereof and as the same may be amended from time to time.
"SIGNIFICANT HOLDER" shall mean, at any date, a Holder of 33 1/3% of the
then outstanding Warrants and shares of Warrant Stock.
"STOCK UNIT" shall mean one share of Common Stock on the Date of
Issuance, and thereafter such number of shares (including any fractional
shares) of Common Stock and other securities, cash or other property as shall
result from the adjustments specified in Section 4 and Section 5.
"WARRANT STOCK" shall mean (i) the shares of Common Stock purchased or
purchasable by the Holders of the Warrants upon the exercise thereof,
including any other stock into which such Common Stock may thereafter be
changed or converted, and (ii) any additional shares of Common Stock or other
securities issued or distributed by way of a dividend, stock split or other
distribution in respect of the Common Stock referred to in clause (i) above,
or acquired by way of any rights offering or similar offering made in respect
of the Common Stock referred to in clause (i) above.
"WARRANTS" shall mean the warrants issued hereby, dated as of the Date
of Issuance, evidencing rights to purchase up to an aggregate of 56,250 Stock
Units, and all Warrants issued upon transfer, division or combination of, or
in substitution for, any thereof.
SECTION 2. EXERCISE OF WARRANT
In order to exercise this Warrant, in whole or in part, the Holder
hereof shall deliver to Frontier, at its office maintained for such purpose
pursuant to SECTION 14.01, (a) a written notice of such Holder's election to
exercise this Warrant, which notice shall specify the number of Stock Units
to be purchased, (b) a certified or cashier's check or checks payable to
Frontier in an aggregate amount equal to the aggregate Exercise Price for the
number of Stock Units as to which this Warrant is being exercised, and (c)
this Warrant. Such notice shall be in substantially the form of the "Form of
Exercise" set out at the end of this Warrant. Upon receipt thereof, Frontier
shall, as promptly as practicable and in any event within seven days
thereafter (unless such exercise shall be in connection with an underwritten
public offering of shares of Common Stock subject to this Warrant, in which
event concurrently with such exercise), cause to be executed and delivered to
such Holder a stock certificate or certificates representing the aggregate
number of duly and validly issued, fully paid and nonassessable shares of
Warrant Stock issuable upon such exercise, free and clear of any Liens.
The stock certificate or certificates for Warrant Stock so delivered
shall be in such denominations as may be specified in such notice and shall
be registered in the name of such Holder or such other Person as shall be
designated in such notice, PROVIDED that such other Person as may be
designated shall confirm in writing for the benefit of Frontier that the
representations and warranties set forth in SECTION 7 are true, complete and
correct with respect
<PAGE>
to such other Person as may be designated, and each such other Person
acknowledges and agrees in writing to accept the benefits of and be bound by
the terms and conditions set forth in this Warrant. To the extent permitted
by law, such stock certificate or certificates shall be deemed to have been
issued, and such Holder or other Person so designated to receive the Warrant
Stock shall be deemed to have become a holder of record of such shares,
including the right to vote such shares or to consent or to receive notice as
a stockholder, as of the time such notice and payment is received by Frontier
as aforesaid. If this Warrant shall have been exercised only in part,
Frontier shall, at the time of delivery of said stock certificate or
certificates, execute and deliver to such Holder a new Warrant, dated the
original date of issuance, evidencing the rights of such Holder to purchase
the remaining Stock Units called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant, or, at the option of
Frontier, appropriate notation may be made on this Warrant and the same
returned to such Holder.
All shares of Common Stock issuable upon the exercise of this Warrant
shall, upon payment therefor in accordance herewith, be duly and validly
issued, fully paid and nonassessable and free and clear of any Liens.
No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. With respect to any fraction of a
share called for upon any exercise hereof, Frontier shall pay to the Holder
an amount in cash equal to such fraction multiplied by the Current Adjustment
Price per share of Common Stock.
SECTION 3. TRANSFER, DIVISION AND COMBINATION
Subject to SECTION 9, this Warrant and all rights hereunder are
transferable, in whole or in part, on the books of Frontier to be maintained
for such purpose, upon surrender of this Warrant at the office of Frontier
maintained for such purpose pursuant to SECTION 14.01, together with a
written assignment of this Warrant (in substantially the form of the "Form of
Assignment" annexed hereto) duly executed by the Holder hereof or its agent
or attorney and payment of funds sufficient to pay any stock transfer taxes
payable hereunder by the Holder hereof upon the making of such transfer.
Upon such surrender and payment Frontier shall, subject to SECTION 9 and the
immediately following sentence, execute and deliver a new Warrant or Warrants
(with the same Exercise Price or Exercise Prices as contained in the Warrant
or Warrants so surrendered, respectively) in the name of the assignee or
assignees and in the denominations specified in such instrument of
assignment, and this Warrant shall promptly be canceled. If and when this
Warrant is assigned in blank (in case the restrictions on transferability set
forth in SECTION 9 shall have been terminated), Frontier may (but shall not
be obliged to) treat the bearer hereof as the absolute owner of this Warrant
for all purposes and Frontier shall not be affected by any notice to the
contrary. This Warrant, if properly assigned in compliance with this SECTION
3 and SECTION 9, may be exercised by an assignee for the purchase of shares
of Common Stock without having a new Warrant or Warrants issued.
This Warrant may, subject to SECTION 9, be divided or combined with
other Warrants upon presentation at the aforesaid office of Frontier,
together with a written notice specifying the
<PAGE>
names and denominations in which new Warrants are to be issued, signed by the
Holder hereof or its authorized agent or attorney. Subject to compliance with
the next preceding paragraph and with SECTION 9, as to any transfer which may
be involved in such division or combination, Frontier shall execute and
deliver a new Warrant or Warrants (with the same Exercise Price or Exercise
Prices as contained in the Warrant or Warrants so transferred, respectively)
in exchange for the Warrant or Warrants to be divided or combined in
accordance with such notice.
Frontier shall maintain at its aforesaid office books for the
registration and transfer of the Warrants.
SECTION 4. ADJUSTMENT OF STOCK UNIT
The number of shares of Common Stock comprising a Stock Unit shall be
subject to adjustment from time to time as set forth in this SECTION 4.
Frontier shall not take any action with respect to its Common Stock of any
class requiring an adjustment pursuant to any of SECTION 4.01, 4.02, 4.08 or
5 without at the same time taking like action with respect to its Common
Stock of each other class; and Frontier shall not create any class of Common
Stock which carries any rights to dividends or assets differing in any
respect from the rights of the Common Stock on the Date of Issuance.
4.01 STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case at
any time or from time on or after the Date of Issuance Frontier shall
(i) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock, or
(ii) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then the number of shares of Common Stock comprising a Stock Unit immediately
after the happening of any such event shall be adjusted so as to consist of
the number of shares of Common Stock which a record holder of the number of
shares of Common Stock comprising a Stock Unit immediately prior to the
happening of such event would own or be entitled to receive after the
happening of such event.
4.02 CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case at any time
or from time to time on or after the Date of Issuance Frontier shall take a
record of the holders of its Common
<PAGE>
Stock for the purpose of entitling them to receive any dividend or other
distribution of,
(i) cash (other than a cash distribution made as a dividend
and payable out of earnings or earned surplus legally available for the
payment of dividends under the laws of the jurisdiction of incorporation of
Frontier, to the extent, but only to the extent, that the aggregate of all
such dividends paid or declared after the date hereof, does not exceed the
consolidated net income of Frontier earned subsequent to the date hereof
determined in accordance with generally accepted accounting principles
consistently applied), or
(ii) any evidence of its indebtedness (other than Convertible
Securities), any shares of its stock (other than Additional Shares of
Common Stock) or any other securities or property of any nature whatsoever
(other than cash and other than Convertible Securities or Additional Shares
of Common Stock), or
(iii) any options, warrants or other rights to subscribe for or
purchase any evidences of its indebtedness (other than (A) Convertible
Securities and (B) Non-Transferable Rights issued pursuant to a Rights
Plan), any shares of its stock (other than Additional Shares of Common
Stock) or any other securities or property of any nature whatsoever (other
than cash and other than Convertible Securities or Additional Shares of
Common Stock),
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (i) the numerator of which shall be the Current
Adjustment Price per share of Common Stock at the date of taking such record,
and (ii) the denominator of which shall be such Current Adjustment Price per
share of Common Stock minus the amount of any and all such cash and the Fair
Value of any and all such evidences of indebtedness, shares of stock, other
securities or property, or options, warrants or other subscription or
purchase rights, so distributable in respect of one share of Common Stock. A
reclassification of the Common Stock into shares of Common Stock and shares
of any other class of stock shall be deemed a distribution by Frontier to the
holders of its Common Stock of such shares of such other class of stock
within the meaning of this SECTION 4.02 and, if the outstanding shares of
Common Stock shall be changed into a larger or smaller number of shares of
Common Stock as a part of such reclassification, shall be deemed a
subdivision or combination, as the case may be, of the outstanding shares of
Common Stock within the meaning of SECTION 4.01.
4.03 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case at any
time or from time to time on or after the Date of Issuance Frontier shall
(except as hereinafter provided) issue to any Person any Additional Shares of
Common Stock for a consideration per share less than:
(a) in the case of a public offering of Common Stock
under the Securities Act, the greater of (i) the consideration per share
determined by the managing underwriter (in the event of an underwritten
public offering) and (ii) 90% of the Current Adjustment Price on the
effective date of the registration statement with respect to such public
offering,
(b) in the case of the issuance of Common Stock by
Frontier in connection with the acquisition of assets and/or securities
of any Person, the greater of (i) the consideration per share determined
by the Board of Directors of Frontier as set forth in the binding
agreement pursuant to which such acquisition is being effected and (ii)
90% of the Current Adjustment Price per share of Common Stock as of the
date for which the pricing of Common Stock in connection with such
issuance is determined in accordance with such binding agreement, or
(c) in all other circumstances, 95% of the Current
Adjustment Price,
then the number of shares of Common Stock thereafter comprising a Stock Unit
shall be adjusted to that number determined by multiplying the number of
shares of Common Stock comprising a Stock Unit immediately prior to such
adjustment by a fraction (a) the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
Additional Shares of Common Stock plus the number of such Additional Shares
of Common Stock so issued, and (b) the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Shares of Common Stock plus the number of shares
of Common Stock which the aggregate consideration for the total number of
such Additional Shares of Common Stock so issued would purchase at the
Current Adjustment Price. For purposes of this SECTION 4.03, and subject to
the foregoing sentence, the date as of which the Current Adjustment Price
shall be computed shall be the earlier of (i) the date on which Frontier
shall enter into a firm contract for the issuance of such Additional Shares
of Common Stock and (ii) the date of actual issuance of such Additional
Shares of Common Stock. This SECTION 4.03 shall not apply to any issuance of
Additional Shares of Common Stock for which an adjustment is provided under
SECTION 4.01. No adjustment of the number of shares of Common Stock
comprising a Stock Unit shall be made under this SECTION 4.03 upon the
issuance of any Additional Shares of Common Stock which are issued pursuant
to the exercise of any options, warrants or other subscription or purchase
rights or pursuant to the exercise of any conversion or exchange rights in
any Convertible Securities described in SECTION 4.04 or 4.05 (it being
understood that full adjustment shall be made, without duplication, in
respect of all Additional Shares of Common Stock issuable at the time any
Rights Certificates issued pursuant to a Rights Plan become exercisable by
the holders of Common Stock). No adjustment of the number of shares of
Common Stock comprising a Stock Unit shall be made under this SECTION 4.03
upon the issuance of any Additional Shares of Common Stock which are issued
for a consideration greater than that described in clauses (a), (b) and (c),
as applicable, of this SECTION 4.03.
4.04 ISSUANCE OF OPTIONS WARRANTS OR OTHER RIGHTS. If on or after
the Date of Issuance, Frontier shall issue to any Person, any options,
warrants or other rights to subscribe for or purchase any Additional Shares
of Common Stock or any Convertible Securities (other than Non-Transferable
Rights issued pursuant to a Rights Plan) and the consideration per share
<PAGE>
for which Additional Shares of Common Stock may at any time thereafter be
issuable pursuant to such options, warrants or other rights or pursuant to
the terms of such Convertible Securities (other than Non-Transferable Rights
issued pursuant to a Rights Plan) shall be less than the Current Adjustment
Price, then the number of shares of Common Stock thereafter comprising a
Stock Unit shall be adjusted as provided in SECTION 4.03 on the basis that
(a) the maximum number of Additional Shares of Common
Stock issuable pursuant to all such options, warrants or other rights or
necessary to effect the conversion or exchange of all such Convertible
Securities shall be deemed to have been issued as of (and, accordingly,
the date as of which the Current Adjustment Price shall be computed
shall be) the computation date specified in the last sentence of this
SECTION 4.04, and
(b) the aggregate consideration for such maximum number
of Additional Shares of Common Stock shall be deemed to be the minimum
consideration received and receivable by Frontier for the issuance of
such Additional Shares of Common Stock pursuant to such options,
warrants or other rights or pursuant to the terms of such Convertible
Securities (it being understood that full adjustment shall be made,
without duplication, in respect of all Additional Shares of Common Stock
issuable at the time any Rights Certificates issued pursuant to a Rights
Plan become exercisable by the holders of Common Stock). For purposes
of this SECTION 4.04, the computation date for clause (a) above shall be
the earliest of (i) the date on which Frontier shall take a record of
the holders of its Common Stock for the purpose of entitling them to
receive any such options, warrants or other rights, (ii) the date on
which Frontier shall enter into a firm contract for the issuance of such
options, warrants or other rights, and (iii) the date of actual issuance
of such options, warrants or other rights.
4.05 ISSUANCE OF CONVERTIBLE SECURITIES. If on or after the Date
of Issuance Frontier shall issue to any Person any Convertible Securities and
the consideration per share for which Additional Shares of Common Stock may
at any time thereafter be issuable pursuant to the terms of such Convertible
Securities shall be less than the Current Adjustment Price, then the number
of shares of Common Stock thereafter comprising a Stock Unit shall be
adjusted as provided in SECTION 4.03 on the basis that (a) the maximum number
of Additional Shares of Common Stock necessary to effect the conversion or
exchange of all such Convertible Securities shall be deemed to have been
issued as of (and accordingly, the date as of which the Current Adjustment
Price shall be computed shall be) the computation date specified in the next
following sentence of this SECTION 4.05, and (b) the aggregate consideration
for such maximum number of Additional Shares of Common Stock shall be deemed
to be the minimum consideration received and receivable by Frontier for the
issuance of such Additional Shares of Common Stock pursuant to the terms of
such convertible Securities. For purposes of this SECTION 4.05, the
computation date for clause (a) above shall be the earliest of (i) the date
on which Frontier shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive any such Convertible
<PAGE>
Securities, (ii) the date on which Frontier shall enter into a firm contract
for the issuance of such Convertible Securities, and (iii) the date of actual
issuance of such Convertible Securities. No adjustment of the number of
shares of Common Stock comprising a Stock Unit shall be made under this
SECTION 4.05 upon the issuance of any Convertible Securities which are issued
pursuant to the exercise of any warrants or other subscription or purchase
rights therefor, if any such adjustment shall previously have been made upon
the issuance of such warrants or other rights pursuant to SECTION 4.04. No
adjustment of the number of Shares of Common Stock comprising a Stock Unit
shall be made under this SECTION 4.05 upon the issuance of any Additional
Shares of Common Stock which are issued for a consideration greater than that
described in the first sentence of this SECTION 4.05.
4.06 SUPERSEDING ADJUSTMENT OF STOCK UNIT. If, at any time on or
after the Date of Issuance, any adjustment of the number of shares of Common
Stock comprising a Stock Unit shall have been made pursuant to SECTION 4.04
or 4.05 on the basis of the issuance of options, warrants or other rights or
the issuance of other Convertible Securities, or any new adjustment of the
number of shares of Common Stock comprising a Stock Unit shall have been made
pursuant to this SECTION 4.06,
(i) such options, warrants or rights or the right of
conversion or exchange in such other Convertible Securities shall expire,
and a portion of such options, warrants or rights, or the right of
conversion, exercise or exchange in respect of a portion of such other
Convertible Securities, as the case may be, shall not have been exercised,
or
(ii) the consideration per share, for which Additional Shares
of Common Stock are issuable pursuant to such options, warrants or rights
or the terms of such other Convertible Securities, shall be increased
solely by virtue of provisions therein contained for an automatic increase
in such consideration per share upon the arrival of a specified date or the
happening of a specified event,
such previous adjustment shall be rescinded and annulled and the Additional
Shares of Common Stock which were deemed to have been issued by virtue of the
computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such options,
warrants or rights or other Convertible Securities on the basis of
(a) treating the number of Additional Shares of Common
Stock, if any, theretofore actually issued or issuable pursuant to the
previous exercise of such options, warrants or rights or such right of
conversion or exchange, as having been issued on the date or dates of
such issuance of Additional Shares of Common Stock as determined for
purposes of such previous adjustment and for the consideration actually
received and receivable therefor, and
(b) treating any such options, warrants or rights or any
such other Convertible Securities which then remain outstanding as
having been granted or issued immediately
<PAGE>
after the time of such increase of the consideration per share for such
Additional Shares of Common Stock as are issuable under such options,
warrants or rights or other Convertible Securities, and, if and to the
extent called for by the foregoing provisions of this SECTION 4 on the
basis aforesaid, a new adjustment of the number of shares of Common
Stock comprising a Stock Unit shall be made, which new adjustment shall
supersede the previous adjustment so rescinded and annulled.
4.07 OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION 4.
The following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock comprising a Stock Unit hereinbefore provided
for in this SECTION 4:
(i) TREASURY STOCK. The sale or other disposition of any
issued shares of Common Stock owned or held by or for the account of
Frontier shall be deemed an issuance thereof for purposes of this
SECTION 4.
(ii) COMPUTATION OF CONSIDERATION. To the extent that any
Additional Shares of Common Stock or any Convertible Securities or any
options, warrants or other rights to subscribe for or purchase any
Additional Shares of Common Stock or any Convertible Securities shall be
issued for a cash consideration, the consideration received by Frontier
therefor shall be deemed to be the amount of cash received by Frontier
therefor, or, if such Additional Shares of Common Stock or Convertible
Securities are offered by Frontier for subscription, the subscription
price, or, if such Additional Shares of Common Stock or Convertible
Securities are sold to underwriters or dealers for public offering without
a subscription offering, the initial public offering price, in any such
case excluding any amounts paid or receivable for accrued interest or
accrued dividends and without deduction of any compensation, discounts or
expenses paid or incurred by Frontier for and in the underwriting of, or
otherwise in connection with, the issue thereof. To the extent that such
issuance shall be for consideration other than cash, then, except as herein
otherwise expressly provided, the amount of such consideration shall be
deemed to be the Fair Value of such consideration at the time of such
issuance. The consideration for any Additional Shares of Common Stock
issuable pursuant to any options, warrants or other rights to subscribe for
or purchase the same shall be the consideration received or receivable by
Frontier for issuing such options, warrants or other rights, plus the
additional consideration payable to Frontier upon the exercise of such
options, warrants or other rights. The consideration for any Additional
Shares of Common Stock issuable pursuant to the terms of any Convertible
Securities shall be the consideration received or receivable by Frontier
for issuing any options, warrants or other rights to subscribe for or
purchase such Convertible Securities, plus the consideration paid or
payable to Frontier in respect of the subscription for or purchase of such
Convertible Securities, plus the additional consideration, if any, payable
to Frontier upon the exercise of the right of conversion, exercise or
exchange in such Convertible Securities. In case of the issuance at any
time of any Additional Shares of Common Stock or Convertible Securities in
payment or satisfaction of any dividend upon any class of stock other than
Common Stock, Frontier shall be deemed to have received for such Additional
Shares of Common
<PAGE>
Stock or Convertible Securities consideration equal to the amount of
such dividend so paid or satisfied.
(iii) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by
the foregoing provisions of this SECTION 4 shall be made whenever and as
often as any specified event requiring an adjustment shall occur, except
that no adjustment of the number of shares of Common Stock comprising a
Stock Unit that would otherwise be required shall be made (except in the
case of a subdivision or combination of shares of the Common Stock, as
provided for in SECTION 4.01) unless and until such adjustment, either by
itself or with other adjustments not previously made, adds or subtracts at
least l/20th of a share to or from the number of shares of Common Stock
comprising a Stock Unit immediately prior to the making of such adjustment.
Any adjustment representing a change of less than such minimum amount
(except as aforesaid) shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this SECTION 4 and
not previously made, would result in a minimum adjustment. For the purpose
of any adjustment, any specified event shall be deemed to have occurred at
the close of business on the date of its occurrence.
(iv) FRACTIONAL INTERESTS. In computing adjustments under
this SECTION 4, fractional interests in Common Stock shall be taken into
account to the nearest one-thousandth of a share.
(v) DEFERRAL OF ISSUANCE OR PAYMENT. In any case in which
SECTION 4 shall require that an adjustment in the shares of Common Stock
comprising a Stock Unit be made effective as of a record date, Frontier may
elect to defer until the occurrence of such event by (i) issuing to the
Holder, if this Warrant is exercised after such record date, the shares of
Common Stock, if any, issuable upon such exercise over and above the shares
of Common Stock or other capital stock of Frontier, if any, issuable upon
such exercise on the basis of the number of shares of Common Stock
comprising a Stock Unit in effect prior to such adjustment and (ii) paying
to the Holder any amount of cash in lieu of the issuance of fractional
shares pursuant to SECTION 4; PROVIDED, HOWEVER, that Frontier shall
deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares or such
cash upon the occurrence of such event.
(vi) WHEN ADJUSTMENT NOT REQUIRED. If Frontier shall take a
record of the holders of its Common Stock for the purpose of entitling them
to receive a dividend or distribution or subscription or purchase rights
and shall, thereafter and before the distribution thereof to stockholders,
legally abandon its plan to pay or deliver such dividend, distribution,
subscription or purchase rights, then thereafter no adjustment shall be
required by reason of the taking of such record and any such adjustment
previously made in respect thereof shall be rescinded and annulled.
<PAGE>
4.08 OTHER ACTION AFFECTING COMMON STOCK. In case at any time or
from time to time Frontier shall take any action affecting its Common Stock,
other than an action described in any of the foregoing SECTIONS 4.01 through
4.07 (inclusive), or in SECTION 5, then, unless in the reasonable opinion of the
Board of Directors of Frontier such action will not have a material adverse
effect upon the rights of the Holders of the Warrants or an adverse effect on
the number of shares of Common Stock comprising a Stock Unit shall be adjusted
in such manner and at such time as the Board may reasonably determine in good
faith to be equitable in the circumstances to fairly protect the purchase rights
represented by this Warrant in accordance with the essential intent and
principles in such sections thereof.
SECTION 5. CONSOLIDATION, MERGER, ETC
In case a consolidation or merger of Frontier shall be effected with
another Person on or after the Date of Issuance, or the sale, lease or other
transfer of all or substantially all of Frontier's assets to another Person
shall be effected on or after the Date of Issuance, then, as a condition of such
consolidation, merger, sale, lease or other transfer provision shall be made
whereby the Holder of this Warrant shall thereafter have the right to purchase
and receive upon the basis and upon the terms and conditions specified herein
and in lieu of each Stock Unit immediately theretofore purchasable and
receivable upon the exercise of each of the Warrants, such shares of stock,
securities, cash or other property receivable upon such consolidation, merger,
sale, lease or transfer by the Holder of the number of shares of Common Stock
comprising a Stock Unit immediately prior to such event. In any such case,
appropriate and equitable provision also shall be made with respect to the
rights and interests of the Holder of this Warrant to the end that the
provisions hereof (including SECTION 4) shall thereafter be applicable, as
nearly as may be, in relation of any shares of stock, securities, cash or other
property thereafter deliverable upon the exercise of any Warrants. Frontier
shall not effect any such consolidation, merger, sale, lease or transfer unless
prior to or simultaneously with the consummation thereof the successor Person
(if other than Frontier or a wholly-owned subsidiary of Frontier) resulting from
such consolidation or merger or the Person purchasing, leasing or otherwise
acquiring such assets shall expressly assume, by written instrument mailed to
Aspect and any Significant Holder at its last address appearing on the books of
Frontier, the due and punctual observance and performance of each and every
covenant and condition of this Warrant to be performed and observed by Frontier
and all of the obligations and liabilities hereunder, subject to such
modification as shall be necessary to provide for adjustments of Stock Units
which shall be as nearly equivalent as practicable to the adjustments provided
for in SECTION 4; PROVIDED, HOWEVER, that Frontier shall not be required to
effect (or mail) such express assumption in respect of any transaction pursuant
to which such obligations are transferred by operation of law and such Person
acknowledges the same in a writing that is retained and made available for
inspection by any holder of Warrants. The above provisions of this SECTION 5
shall similarly apply to successive consolidations, mergers, sales, leases or
other transfers.
SECTION 6. NOTICE TO WARRANT HOLDERS
<PAGE>
6.01 NOTICE OF ADJUSTMENT OF STOCK UNIT OR EXERCISE PRICE. Whenever
the number of shares of Common Stock comprising a Stock Unit shall be adjusted
pursuant to SECTION 4, Frontier shall forthwith obtain a certificate signed by
independent accountants of recognized national standing, setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated (including a statement of the Fair Value of any
evidences of indebtedness, shares of stock, other securities or property or
warrants or other subscription or purchase rights referred to in SECTION 4.02,
4.07(ii) or SECTION 5) and specifying the number of shares of Common Stock
comprising a Stock Unit and (if such adjustment was made pursuant to
SECTION 4.08 or SECTION 5) describing the number and kind of any other
securities comprising a Stock Unit, and any change in the purchase price or
prices thereof, after giving effect to such adjustment or change. Frontier
shall promptly, and in any case within 20 days after the making of such
adjustment, cause a signed copy of such certificate to be delivered to each
Holder of a Warrant in accordance with SECTION 14.02. Frontier shall keep at
its office or agency, maintained for the purpose pursuant to SECTION 14.01,
copies of all such certificates and cause the same to be available for
inspection at said office during normal business hours by any Holder of a
Warrant or any prospective permitted purchaser of a Warrant designated by a
Holder thereof. The Holders of Warrants entitled to purchase a majority of the
Stock Units covered by all the Warrants shall have the right to challenge any
such adjustment of the number of shares of Common Stock comprising a Stock Unit
contained in such certificate for a period of 30 days after such certificate is
delivered to the Holders. In the event the Holders give Frontier written notice
of such challenge within such 30-day period, such Holders and Frontier shall
thereupon promptly attempt in good faith to reach agreement on such adjustment,
and failing such agreement, shall appoint a mutually acceptable nationally
recognized independent accounting firm to determine such adjustment, whose
determination shall be final and binding on Frontier and the Holders, absent
manifest error. The costs incurred by the Holders and Frontier and the fees and
expenses of such independent accounting firm shall be paid by (a) the Holders if
Frontier's adjustment in the certificate was accurate to within 1/20th of a
share to or from the number of shares of Common Stock comprising a Stock Unit by
such independent accounting firm or if such independent accounting firm's
adjustment results in the Holders being entitled to receive fewer shares of
Common Stock per Stock Unit than under the adjustment determined by Frontier and
(b) otherwise by Frontier.
6.02 NOTICE OF CERTAIN CORPORATE ACTION. In case Frontier shall
propose (a) to pay any dividend to the holders of its Common Stock or to make
any other distribution to the holders of its Common Stock, or (b) to offer to
the holders of its Common Stock rights to subscribe for or to purchase any
Additional Shares of Common Stock or shares of stock of any class or any other
securities, rights or options, or (c) to effect any reclassification of its
Common Stock (other than a reclassification involving only the subdivision, or
combination, of outstanding shares of Common Stock), or (d) to effect any
capital reorganization, or (e) to effect any consolidation, merger or sale,
lease, transfer or other disposition of all or substantially all of its
property, assets or business, or (f) to effect the liquidation, dissolution or
winding up of Frontier, then, in each such case, Frontier shall give to each
Holder of a Warrant, in accordance with SECTION 14.02, a notice of such proposed
action, which shall specify the date on which a record is to be taken for the
purposes of such stock dividend, distribution or rights, or the date on which
such
<PAGE>
reclassification, reorganization, consolidation, merger, sale, lease,
transfer, disposition, liquidation, dissolution or winding up is to take
place and the date of participation therein by the holders of Common Stock,
if any such date is to be fixed, and shall also set forth such facts with
respect thereto as shall be reasonably necessary to indicate the effect of
such action on the Common Stock and the number and kind of any other shares
of stock which will comprise a Stock Unit, and the purchase price or prices
thereof, after giving effect to any adjustment which will be required as a
result of such action. Such notice shall be so given in the case of any
action covered by clause (a) or (b) above at least 10 days prior to the
record date for determining holders of the Common Stock for purposes of such
action, and in the case of any other such action, at least 10 days prior to
the date of the taking of such proposed action or the date of participation
therein by the holders of Common Stock, whichever shall be the earlier.
6.03 NOTICE OF EXPIRATION DATE. Frontier shall give to each Holder
of a Warrant notice of the Expiration Date. Such notice may be given by
Frontier not less than 30 days but not more than 60 days prior to the
Expiration Date.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF ASPECT
Aspect represents and warrants to Frontier as follows:
7.01 PURCHASE FOR OWN ACCOUNT. The Warrants and Warrant Stock, as
the case may be, to be received by Aspect will be acquired for investment for
Aspect's own account and not with a present view to the distribution of any
part thereof, and Aspect has no present intention of selling, granting any
participation in, or otherwise distributing the same in a manner contrary to
the Securities Act or applicable state securities laws, PROVIDED, that,
Aspect at all times retains the right to control, deal with and sell all of
its property, including the Warrants.
7.02 DISCLOSURE OF INFORMATION; DUE DILIGENCE. Aspect represents
that it has had an opportunity to ask questions of and receive answers from
Frontier regarding Frontier and the terms and conditions of the offering of
the Warrants and Warrant Stock, as the case may be, offered hereby and to
obtain additional information necessary to verify the accuracy of the
information supplied or to which it had access.
7.03 INVESTMENT EXPERIENCE; ACCREDITED INVESTOR STATUS. Aspect is
able to bear the economic risk of its investment and has such knowledge and
experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Warrants and the Warrant Stock.
Aspect understands that neither the Warrants nor the Warrant Stock have been
registered under the Securities Act or under the securities laws of any
jurisdiction by reason of reliance upon certain exemptions, and that the
reliance of Frontier on such exemptions is predicated upon the accuracy of
Aspect's representations and warranties in this SECTION 7.03. Aspect is
familiar with Regulation D promulgated under the Securities Act and is an
"accredited
<PAGE>
investor" as defined therein.
7.04 SECURITIES ACT COMPLIANCE. Aspect represents that neither the
Warrants nor the Warrant Stock shall be sold or transferred or offered for
sale or transfer without registration under the Securities Act or the
availability of an exemption therefrom, and in accordance with the terms and
conditions and legends set forth in SECTION 9.
SECTION 8. REPRESENTATIONS AND WARRANTIES OF FRONTIER
Frontier represents and warrants to Aspect as follows:
8.01 EXISTENCE; QUALIFICATION. Frontier is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Oklahoma. Frontier has duly qualified and is authorized to do business
and is in good standing as a foreign corporation in every jurisdiction where
the failure to be so qualified would have a material adverse effect on
Frontier's ability to enter into and perform all of its obligations under
this Warrant.
8.02 NO BREACH. The execution, delivery and performance of this
Warrant by Frontier and the consummation of the transactions contemplated
hereby will not (a) violate the articles of incorporation or by-laws of
Frontier, (b) violate any loan or credit agreement to which Frontier is a
party or is bound, or result in a breach of or default under any other
instrument or agreement to which Frontier is a party or is bound which is
material to the business or properties of Frontier taken as a whole, (c)
violate any judgment, order, injunction, decree or award against or binding
upon Frontier, the violation of which would have a material adverse effect on
the business or properties of Frontier taken as a whole, (d) result in the
creation of any material Lien upon any of the properties or assets of
Frontier, or (e) violate any law, rule or regulation applicable to or binding
upon Frontier, or (f) cause or require any adjustment, or give rise to any
rights in favor of another Person, under any agreement to which Frontier is a
party.
8.03 CORPORATE ACTION. Frontier has all necessary corporate power
and authority to execute, deliver and perform its obligations under this
Warrant; the execution, delivery and performance by Frontier of its
obligations under this Warrant have been duly authorized by all necessary
corporate action (including all stockholder action if required) on the part
of Frontier; this Warrant has been duly executed and delivered by Frontier
and constitutes a legal, valid and binding obligation of Frontier,
enforceable against Frontier in accordance with its terms; the Warrant Stock
initially covered by the Warrants will be duly and validly authorized and
reserved for issuance and shall, when paid for, be issued and delivered in
accordance with the terms of the Warrants, be duly and validly issued, fully
paid and nonassessable and free and clear of any Liens; and none of the
Warrant Stock issued pursuant to the terms hereof shall be in violation of
any preemptive rights of any shareholder of Frontier.
8.04 APPROVALS. Based in part upon the representations set forth
in SECTION 7, no authorizations, approvals or consents of, and no filings or
registrations with, any governmental authority or any other Person are
necessary for the execution, delivery or performance by
<PAGE>
Frontier of its obligations under this Warrant or for the validity or
enforceability thereof. Any such action required to be taken as a condition
to the issuance and delivery of the Warrants has been (or prior to such
issuance and delivery will be) duly taken by all such governmental
authorities or other Persons, as the case may be.
8.05 INVESTMENT COMPANY ACT. Frontier is not an "investment
company", or a company "controlled by" an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
8.06 PUBLIC UTILITY HOLDING COMPANY ACT. Frontier is not a
"holding company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
8.07 CAPITALIZATION. On the date hereof, the total number of
shares of capital stock which Frontier has authority to issue is (i)
9,865,906 shares of Common Stock, par value $.01 per share, of which
40,000,000 shares are issued and outstanding, and (ii) 5,000,000 shares of
Preferred Stock, par value $10.00 per share, of which 85,961 shares are
issued and outstanding.
8.08 PRIVATE OFFERING.
(a) Assuming the truth and accuracy of Aspect's representations
and warranties contained in SECTION 7, the issuance and sale of the Warrants
to Aspect hereunder are exempt from the registration and prospectus delivery
requirements of the Securities Act as presently in effect.
(b) Frontier agrees that neither Frontier nor any Person acting on
its behalf has offered or will offer the Warrants or shares of Warrant Stock
or any part thereof or any similar securities for issue or sale to, or has
solicited or will solicit any offer to acquire any of the same from, any
Person so as to bring the issuance and sale of the Warrants or shares of
Warrant Stock within the provisions of the registration and prospectus
delivery requirements of the Securities Act.
8.09 NO LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the best of Frontier's knowledge after due
inquiry, threatened against Frontier before any court or administrative
agency seeking to enjoin the transactions contemplated by this Warrant or
that is reasonably likely to (i) prohibit or limit in any way performance by
Frontier of its obligations under this Warrant or (ii) affect the legality,
validity, enforceability or binding nature of this Warrant.
SECTION 9. RESTRICTIONS ON TRANSFERABILITY
9.01 TRANSFERS GENERALLY. Except as otherwise provided in SECTION
9.06, the Warrants and Warrant Stock shall only be transferable upon the
conditions specified in this SECTION 9, which conditions are intended to
insure compliance with the provisions of the Securities Act and
<PAGE>
applicable state securities laws in respect of the transfer of any Warrants
and Warrant Stock.
9.02 TRANSFERS OF RESTRICTED SECURITIES PURSUANT TO REGISTRATION
STATEMENTS, RULE 144 AND RULE 144A. The Warrants and Warrant Stock may be
offered or sold by the Holder thereof pursuant to (a) an effective
registration statement under the Securities Act, or (b) to the extent
applicable, Rule 144 or Rule 144A under the Securities Act.
9.03 NOTICE OF CERTAIN TRANSFERS. If any Holder of any Warrants or
Warrant Stock desires to transfer such Warrants or Warrant Stock other than
pursuant to an effective registration statement under the Securities Act or
pursuant to Rule 144 or Rule 144A, then such Holder shall deliver to Frontier
a notice with respect to the proposed transfer, together with a written
representation (together with such factual information in respect thereof as
Frontier may reasonably request) from such Holder in substance reasonably
satisfactory to Frontier to the effect that an exemption from registration
under the Securities Act and applicable state securities laws is available.
9.04 RESTRICTIVE LEGENDS.
(a) Until otherwise permitted by SECTION 9.05, each certificate
for Warrants issued, each certificate for any Warrants issued to any
subsequent transferee of any such certificate, each certificate for any
Warrant Stock issued upon exercise of any Warrant and each certificate for
any Warrant Stock issued to any subsequent transferee of any such
certificate, shall be stamped or otherwise imprinted with one or more legends
in substantially the following form:
THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR
HAVE ANY OF THEM BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES OR
BLUE SKY LAWS OF ANY STATE. NEITHER THIS CERTIFICATE NOR THE
SECURITIES ISSUABLE UPON EXERCISE HEREOF, NOR ANY INTEREST OR
PARTICIPATION HEREIN OR THEREIN MAY BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR
DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS
AMENDED, AND THE APPLICABLE RULES AND REGULATIONS THEREUNDER AND
APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.
(b) In addition, each such certificate shall be stamped or
otherwise imprinted with any legend required under state securities laws.
9.05 TERMINATION OF RESTRICTIONS. All the restrictions imposed by
this SECTION 9 upon
<PAGE>
the transferability of the Warrants and Warrant Stock shall cease and
terminate as to any particular Warrants or Warrant Stock when such Warrants
or Warrant Stock shall have been effectively registered under the Securities
Act and applicable state securities laws and sold by the Holder thereof in
accordance with such registration or sold under and pursuant to Rule 144 or
is eligible to be sold under and pursuant to paragraph (k) of Rule 144.
Whenever the restrictions imposed by this SECTION 9 shall terminate as to any
Warrants or Warrant Stock as hereinabove provided, the Holder thereof shall
be entitled to receive from Frontier, without expense, a new certificate
evidencing such Warrants or Warrant Stock not bearing the restrictive legend
otherwise required to be borne by a certificate evidencing such Warrants or
Warrant Stock.
9.06 CERTAIN DISPOSITIONS OF SECURITIES.
(a) Notwithstanding anything in this Warrant (including SECTION 9
other than SECTION 9.05) to the contrary, but subject to compliance with the
Securities Act, any applicable state securities laws and the requirement as
to legending of the certificates for Warrants and Warrant Stock specified in
SECTION 9.04, any Holder shall have the right to transfer any or all of its
Warrants and Warrant Stock:
(i) to any Person who at the time owns (directly or
indirectly) at least a majority of the shares of such Holder;
(ii) to any Person pursuant to a dividend or other
distribution (whether by liquidation or otherwise) of such Holder;
(iii) to any Person at least a majority of whose shares shall
at the time be owned (directly or indirectly) by such Holder or by any
Person who owns (directly or indirectly) at least a majority of the shares
of such Holder; or
(iv) in the case of any Holder which is an insurance company,
pension fund, bank, bank holding company or a subsidiary of an insurance
company, pension fund, bank or bank holding company, to a third party, if,
in the reasonable judgment of such Holder, such transfer is required to be
effected by such Holder because (A) its investment in Warrants or shares of
Warrant Stock may exceed any limitation to which it is subject, or is
otherwise not permitted, under any law, rule or regulation of any
governmental authority, or (B) restrictions are imposed on such Holder
under any law, rule or regulation which, in the reasonable judgment of such
Holder, make it illegal or unduly burdensome to continue to hold such
Warrants or shares of Warrant Stock or a portion thereof.
The party to which Warrants or Warrant Stock are transferred pursuant to the
immediately preceding sentence shall be deemed to be a Holder of such
Warrants or Warrant Stock and bound by the provisions of this Warrant
applicable to Holders so long as he, she or it continues to own any of the
Warrants or Warrant Stock so transferred to such transferee.
(b) If the circumstances described in clause (iv) of SECTION
9.06(a) arise, Frontier shall
<PAGE>
assist such Holder in disposing of its Warrants and Warrant Stock in a prompt
and orderly manner, and, at the request of such Holder, Frontier shall
provide (and authorize such Holder to provide) such financial and other such
information concerning Frontier as such holder may request to any prospective
purchaser of the Warrants or Warrant Stock owned by such Holder.
SECTION 10. HOLDER'S RIGHTS
10.01 DELIVERY EXPENSES. If any Holder surrenders any certificate
for Warrants or Warrant Stock to Frontier or a transfer agent of Frontier for
exchange for instruments of other denominations or registered in another name
or names, subject to the terms and conditions of SECTION 9, Frontier shall
cause such new instruments to be issued and shall pay the costs associated
with the preparation and issuance of any new instruments and the cost of
delivering to the office of such Holder from Frontier or its transfer agent,
duly insured, the surrendered instrument and any new instruments issued in
substitution or replacement for the surrendered instrument.
10.02 TAXES. Frontier shall pay all taxes (other than Federal,
state or local income taxes) which may be payable in connection with the
issuance of the Warrants and Warrant Stock hereunder, or in connection with
any modification of this Warrant and shall hold each Holder harmless without
limitation as to time against any and all liabilities with respect to all
such taxes. Frontier shall not, however, be required to pay any tax, with
respect to any Warrant which may be payable in respect of any transfer
involved in the issuance and delivery of Warrants or of shares of Common
Stock in a name other than that in which such Warrant or Common Stock is
registered, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to Frontier the amount of any such tax,
or has established, to the satisfaction of Frontier, that such tax has been
paid. The obligations of Frontier under this SECTION 10.02 shall survive any
redemption, repurchase or acquisition of Warrants or Warrant Stock by
Frontier, and any cancellation or termination of the Warrants.
10.03 REPLACEMENT OF INSTRUMENTS. Upon receipt by Frontier of
evidence reasonably satisfactory to it of the ownership of and the loss,
theft, destruction or mutilation of any certificate or instrument evidencing
any Warrants or Warrant Stock, and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it, or
(b) in the case of mutilation, upon surrender thereof, Frontier,
at its expense, shall cancel such certificate or instrument and execute,
register and deliver, in lieu thereof, a new certificate or instrument for
(or covering the purchase of) an equal number of Warrants or Warrant Stock.
10.04 CERTAIN RESTRICTIONS. Frontier shall not at any time enter
into an agreement or other instrument limiting in any manner its ability to
perform its obligations under this Warrant or making such performance or the
issuance of shares of Common Stock upon the exercise of
<PAGE>
any Warrant a default under any such agreement or instrument.
10.05 CERTAIN COVENANTS. At all times prior to the Expiration Date:
(a) Frontier shall retain a nationally recognized independent
accounting firm as its auditors.
(b) Frontier shall afford Aspect or its Affiliates (or any
Significant Holder), or their respective authorized agents, access, at
reasonable times, upon reasonable prior notice, (i) to inspect the books and
records of Frontier, (ii) to discuss with management of Frontier the
nonconfidential business and affairs of Frontier, and (iii) to inspect the
properties of Frontier.
(c) Each Holder and its authorized agents shall have the right to
attend all meetings of shareholders of Frontier.
(d) Frontier shall provide Aspect with all notices set forth in
SECTIONS 6.01, 6.02 and 6.03 pursuant to the respective terms thereof.
10.06 INDEMNIFICATION. Frontier shall indemnify and hold harmless
Aspect and the Holders and each of their respective directors, officers,
employees, stockholders, Affiliates and agents, and Aspect and the Holders
shall indemnify and hold harmless Frontier and its directors, officers,
employees, stockholders, Affiliates and agents (each, an "INDEMNIFIED
PERSON") on demand from and against any and all losses, claims, damages,
liabilities (or actions or other proceedings commenced or threatened in
respect thereof) and expenses that arise out of, result from, or in any way
relate to the breach of any representation, warranty or covenant by Frontier
contained in this Warrant or any other agreement, document or instrument
executed and delivered in connection with the transactions contemplated
hereby, and reimburse each indemnified person, upon its demand, for any
reasonable legal or other expenses incurred in connection with investigating,
defending or participating in the defense of any such loss, claim, damage,
liability, action or other proceeding (whether or not such indemnified person
is a party to any action or proceeding out of which any such expenses arise),
other than any of the foregoing claimed by any indemnified person to the
extent incurred by reason of the gross negligence or willful misconduct of
such indemnified person. No indemnified person shall be responsible or
liable to any Person for any consequential damages which may be alleged as a
result of or relating to this Warrant or in connection with the other
transactions contemplated hereby.
10.07 FINANCIAL STATEMENTS. Frontier shall deliver the information
specified below to Aspect and each Significant Holder until the earlier of
(i) the Expiration Date and (ii) the date on which Aspect or any Significant
Holder no longer holds any Warrants or Warrant Stock:
<PAGE>
(a) as soon as available and in any event within 60 days after the
end of each of the first three fiscal quarters or each fiscal year of
Frontier, consolidated balance sheets of Frontier as of the end of such
fiscal quarter and statements of operations and cash flow of Frontier for
such fiscal quarter and for the period commencing at the end of the previous
fiscal year and ending with the end of such fiscal quarter, certified by the
chief financial officer of Frontier;
(b) as soon as available and in any event within 120 days after
the end of each fiscal year of Frontier, a copy of the annual audit report
for such fiscal year for Frontier, including therein the balance sheet of
Frontier as of the end of such fiscal year and statements of operations and
cash flow of Frontier for such fiscal year, in each case certified in a
manner reasonably acceptable to Aspect by an independent public accountant
acceptable to Aspect, together with a report from such accountants to the
effect that, in making the examination necessary for the signing of such
annual report by such accountants, they have not become aware of any default
that has occurred and is continuing, or, if they have become aware of such
default, describing such default and the steps, if any, being taken to cure
it;
(c) promptly after (1) the sending or filing thereof, copies of
all reports which Frontier sends to any of its security holders, (2) the
sending or filing thereof, all reports and registration statements which
Frontier files with the Securities and Exchange Commission or any national
securities exchange, (3) the filing thereof, copies of all tariff and rate
cases and other material reports filed with any regulatory authority, and (4)
receipt thereof, copies of all notices received from any regulatory authority
concerning noncompliance by Frontier with any applicable regulations; and
(d) such other information respecting the condition or operations,
financial or otherwise, of Frontier as Aspect may from time to time
reasonably request.
SECTION 11. RESERVATION AND AUTHORIZATION OF COMMON STOCK: REGISTRATION WITH
OR APPROVAL OF ANY GOVERNMENTAL AUTHORITY
Frontier shall at all times reserve and keep available for issue upon
the exercise of Warrants such number of its authorized but unissued shares of
Common Stock as shall be sufficient to permit the exercise in full of all
outstanding Warrants. All shares of Common Stock which shall be so issuable,
when issued upon exercise of any Warrant and payment of the applicable
Exercise Price therefor shall be duly and validly issued, fully paid and
nonassessable and free and clear of any Liens (caused directly or indirectly
by Frontier or its Affiliates).
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit or which would cause
an adjustment reducing the Current Warrant Price per share of Common Stock
below the then par value, if any, of the shares of Common Stock issuable upon
exercise of the Warrants, Frontier shall take any corporate action which is
necessary in order that Frontier may validly and legally issue fully paid and
nonassessable shares of Common Stock free and clear of any Liens (caused
directly or indirectly by Frontier or its Affiliates) upon the exercise of
all the Warrants immediately after the taking of
<PAGE>
such action.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock comprising a Stock Unit, Frontier shall
obtain all such authorizations or exemptions thereof, or consents thereto, as
may be necessary from any public regulatory body or bodies having
jurisdiction thereof.
If any shares of Common Stock required to be reserved for issue upon
exercise or conversion of Warrants require registration with any governmental
authority under any Federal or state law (otherwise than any law that applies
to a Holder specifically because of its status as a regulated entity or in
connection with a registration under the Securities Act or applicable state
securities laws) before such shares may be so issued, Frontier shall in good
faith and as expeditiously as reasonably possible and at its expense endeavor
to cause such shares to be duly registered.
SECTION 12. TAKING OF RECORD: STOCK AND WARRANT TRANSFER BOOKS
(a) In the case of all dividends or other distributions by
Frontier to the holders of its Common Stock with respect to which any
provision of SECTION 4 refers to the taking of a record of such holders,
Frontier shall in each such case take such a record as of the close of
business on a business day or as otherwise provided by or permitted under the
corporation laws of Frontier's then jurisdiction of incorporation.
(b) Frontier shall not at any time, except upon complete
dissolution, liquidation or winding up, close its stock transfer books or
Warrant transfer books so as to result in preventing or delaying the
exercise, conversion or transfer of any Warrant, unless otherwise required by
any governmental authority or by any applicable federal, state or local law.
SECTION 13. NO VOTING OR OTHER RIGHTS
This Warrant shall not entitle the Holder hereof to any voting or other
rights as a stockholder of Frontier either at law or at equity, and the
rights of a holder of this Warrant are limited to those expressly set forth
herein.
SECTION 14. MISCELLANEOUS
14.01 OFFICE OF FRONTIER. So long as any of the Warrants remains
outstanding, Frontier shall maintain an office in the continental United
States of America where the Warrants may be presented for exercise, transfer,
division or combination as in this Warrant provided. Such office shall be at
Frontier Natural Gas Corporation, 500 Dallas Street, Suite 2920, Houston,
Texas 77002, unless and until Frontier shall designate and maintain some
other office for such purposes
<PAGE>
and give notice thereof to the Holders of all outstanding Warrants.
14.02 NOTICES. All notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and
shall be delivered personally or by facsimile communication to the number set
forth below, or by first class mail, postage prepaid, registered or certified
with return receipt requested, at the addresses set forth below. Notice
deposited in the mail in the manner hereinabove provided shall be effective
upon expiration of five (5) business days from the date on which it is so
deposited. Notice given in any other manner shall be effective only if and
when received by the addressee. For purposes of notice, the addresses of the
parties shall be as follows:
With respect to Frontier: FRONTIER NATURAL GAS CORPORATION
500 Dallas Street, Suite 2920
Houston, Texas 77002
Attention: President
Telephone Number: (713) 739-7100
Fax Number: (713) 739-7124
With a copy to: Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002-4310
Attention: James J. Spring, III
Telephone Number: (713) 658-1818
Fax Number: (713) 658-2553
With respect to Aspect: ASPECT RESOURCES, LLC
511 16th Street, Suite 300
Denver, Colorado 80202
Attention: Alex M. Cranberg
Telephone Number: (303) 573-7011
Fax Number: (303) 573-7340
With a copy to: Davis, Graham & Stubbs LLP
370 17th Street, Suite 4700
Denver, Colorado 80202
Attention: Charles D. Bybee
Telephone Number: (303) 892-9400
Fax Number: (303) 893-1379
provided that each party shall have the right to change its address for
notice, and the person who is to receive notice hereunder, by the giving of
fifteen (15) days' prior written notice to the other parties hereto in the
manner set forth above.
14.03 AMENDMENTS. The terms of the Warrants may be amended, and the
observance of
<PAGE>
any term therein may be waived, upon the written consent of the holders of
Warrants for a majority of the total number of Stock Units at the time
purchasable upon the exercise of all then outstanding Warrants. For the
purposes of determining whether the holders of outstanding Warrants entitled
to purchase a requisite number of Stock Units at any time have taken any
action authorized by this Warrant, any Warrants owned by Frontier or any
Affiliate of Frontier shall be deemed not to be outstanding.
14.04 GOVERNING LAW. This Warrant shall in all respects be governed
by, and construed in accordance with, the substantive federal laws of the
United States and the internal laws of the State of Texas (principles of
conflict of laws excluded) and, to the extent the Oklahoma General
Corporation Act so requires, the laws of the State of Oklahoma.
14.05 LIMITATION OF LIABILITY. No provision hereof, in the absence
of affirmative action by the Holder hereof to purchase shares of Common
Stock, and no mere enumeration herein of the rights or privileges of the
Holder hereof, shall give rise to any liability of such holder for the
Exercise Price or as a stockholder of Frontier, whether such liability is
asserted by Frontier, by any creditor of Frontier or any other Person.
14.06 BINDING EFFECT. The obligations set forth in this Warrant
shall be binding upon and shall inure to the benefit of the parties hereto
and their respective successors and permitted assigns.
14.07 HEADINGS. The headings in this Warrant are inserted for
concurrence only and are not intended to describe, interpret, define or limit
the scope, extent or intent of this Warrant or any provision hereof.
14.08 GENDER AND NUMBER. Whenever required by the context, as used
in this Warrant, the singular number shall include the plural and vice versa
and pronouns of whatever gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
IN WITNESS WHEREOF, the parties have duly executed this Warrant this
23rd day of January, 1998 to be effective as of the Date of Issuance.
Frontier Natural Gas Corporation
By: /s/ David W. Berry
David W. Berry, President
<PAGE>
FORM OF EXERCISE
(To be executed by the registered holder hereof)
The undersigned hereby exercises this Warrant to subscribe for and
purchase __________ Stock Units of Frontier Natural Gas Corporation covered
by the within certificate and herewith makes payment therefor in full.
Kindly issue certificates and/or other instruments covering Stock Units in
accordance with the instructions given below. A new Warrant for the
unexercised balance of the Stock Units covered by the within certificate, if
any, will be registered in the name of the undersigned.
Dated:
Instructions for registration of Stock Units
Name (please print)
Social Security or Other Identifying
Number:
Address:
Street
City, State and Zip Code
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder hereof)
FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers
all the rights of the undersigned under the within certificate with respect
to the purchase of up to the number of Stock Units covered thereby as set
forth below and does hereby irrevocably constitute and appoint
__________________________, attorney-in-fact, to transfer the same on the
books of Frontier, with full power of substitution in the premises:
<TABLE>
<CAPTION>
Number of
Name of Assignee Address Stock Units
- - ---------------- ------- -----------
<S> <C> <C>
</TABLE>
Dated:
(Signature of Registered Owner)
(Guaranteed Signature)
Notice: The signature to this Form of Assignment must correspond with the
name as written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever, and must be
guaranteed by a bank or trust company having an office or correspondent in
New York, New York, or by a firm having membership on the New York Stock
Exchange.
<PAGE>
FIRST AMENDMENT TO
ACQUISITION AGREEMENT AND PLAN OF EXCHANGE
This First Amendment to Acquisition Agreement and Plan of Exchange (this
"Amendment") is made and entered into as of April 20, 1998, by and among
Frontier Natural Gas Corporation, an Oklahoma corporation ("Frontier"),
Esenjay Petroleum Corporation, a Texas corporation ("Esenjay"), and Aspect
Resources LLC, a Colorado limited liability company ("Aspect"), for the
purpose of amending that Acquisition Agreement and Plan of Exchange, dated as
of January 19, 1998 (the "Agreement"), by and among Frontier, Esenjay and
Aspect. Capitalized terms used, but not defined, herein shall have the
meaning ascribed to them in the Agreement.
1. The defined term "Proxy Statement/Prospectus" in Section 1.01 of the
Agreement is hereby deleted in its entirety and a new defined term is hereby
added in its place as follows:
"Proxy Statement" shall mean the proxy statement of Frontier, which
shall be prepared for the purpose of obtaining the approval of
Frontier's stockholders of this Agreement and the Exchange, in addition
to other matters.
2. The definition of "Registration Statement" in Section 1.01 of the
Agreement is hereby amended and restated in its entirety as follows:
"Registration Statement" shall mean a registration statement on Form
SB-2 to be filed by Frontier with the SEC for the purpose, among other
things, of registering the Frontier Common Stock which will be issued to
Aspect, Esenjay and other parties, if any, upon consummation of the
Exchange.
3. Section 8.11 of the Agreement is hereby amended and restated in its
entirety as follows:
Section 8.11 Registration Statement and Proxy Statement/Prospectus;
Frontier Stockholders' Meeting.
(a) As promptly as practical, after the execution of this
Agreement, Frontier shall prepare and file with the SEC the Proxy
Statement to be sent to its stockholders in connection with the
meeting of Frontier's stockholders (the "Frontier Stockholders'
Meeting") to consider the Exchange and Frontier shall prepare and
file with the SEC the Registration Statement. Frontier shall use all
commercially reasonable efforts to cause the Registration Statement
to become effective as soon after such filing as is practical and,
in any event, no later than fourteen days following the Closing
Date. The Proxy Statement shall include the recommendation of the
Board of Directors of Frontier in favor of this Agreement and the
Exchange. Frontier
<PAGE>
shall make all other necessary filings with respect to the Exchange
and the issuance of Frontier Common Stock required under the
Securities Act and the Exchange Act.
(b) Aspect and Esenjay will cooperate in the preparation of
the Registration Statement and the Proxy Statement and will as
promptly as practicable after the date hereof furnish all such data
and information relating to it as Frontier may reasonably request
for the purpose of including such data and information in the
Registration Statement and Proxy Statement. Frontier shall notify
Aspect and Esenjay of the receipt of any comments of the SEC with
respect to the Registration Statement or the Proxy Statement and of
any requests by the SEC for any amendment or supplement thereto or
for additional information and shall provide to the other promptly
copies of all correspondence to and from the SEC with respect to the
Registration Statement or the Proxy Statement. Frontier shall give
Aspect and Esenjay and their counsel the opportunity to review the
Registration Statement and the Proxy Statement and all responses to
requests for additional information by and replies to comments of
the SEC before their being filed with, or sent to, the SEC. Frontier
agrees to use its commercially reasonable efforts, after
consultation with Aspect and Esenjay, to respond promptly to all
such comments of and requests by the SEC and to cause (i) the Proxy
Statement to be approved by the SEC at the earliest practicable
time, (ii) the Registration Statement to be declared effective by
the SEC as of the Closing Date or as soon thereafter as practicable
and in any event no later than fourteen days following the Closing
Date and to be kept effective for so long as any parties receiving
Frontier Common Stock in connection with the Exchange retain any
such shares or until such time as the Frontier Common Stock held by
such parties can be sold free of restrictions under Rule 144 (other
than volume limitations), whichever is earlier, and (iii) the Proxy
Statement to be mailed to the holders of Frontier Common Stock and
the Frontier Preferred Stock entitled to vote at the Frontier
Stockholders' Meeting at the earliest practicable time. No amendment
or supplement to the Registration Statement or the Proxy Statement
shall be made by Frontier without first providing Aspect and Esenjay
with reasonable opportunity to review such amendment or supplement.
Frontier shall, within the confines of its fiduciary and regulatory
obligations, use its reasonable best efforts to incorporate or
otherwise address the comments of Aspect and/or Esenjay after their
review of such documents.
(c) Frontier shall, as soon as practicable following
effectiveness of the Proxy Statement, take all action necessary
under the OGCA and its Certificate of Incorporation and Bylaws to
convene the Frontier Stockholders' Meeting of its stockholders for
the purpose of approving the Exchange, among other things. Included
in the issues required to be approved by the Shareholders of
Frontier shall be (i) closing of the acquisition of the Aspect
Assets, (ii) closing of the acquisition of the Esenjay Assets, (iii)
authorizing a reverse split of the Frontier Common Stock, (iv)
authorizing the change of Frontier's state of incorporation from
Oklahoma to
2
<PAGE>
Delaware, (v) election of the slate of nominees for the Board of
Directors as set forth in Section 8.09 of this Agreement, and (vi)
any other provision hereof its counsel advises Frontier requires
specific approval in order to fully implement the provisions of this
Agreement. Frontier shall use commercially reasonable efforts to
cause the Frontier Stockholders' Meeting to be held as soon as
practicable after the date hereof.
(d) Frontier shall take such action as may be necessary to
insure that (i) the information included in the Registration
Statement shall not at the time the Registration Statement is
declared effective by the SEC contain any untrue statement of a
material fact or omit to state any material fact required to be
stated in the Registration Statement or necessary in order to make
the statements therein not misleading, and the prospectus contained
in such Registration Statement, at the time the Registration
Statement becomes effective and at any time such prospectus is
delivered to a purchaser of the Frontier Common Stock covered by
such prospectus, will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading, and (ii) the information included in the
Proxy Statement shall not, on the date the Proxy Statement is first
mailed to stockholders of Frontier, at the time of the Frontier
Stockholders' Meeting, and at the Closing Date, contain any
statement which, at such time and in light of the circumstances
under which it shall be made, is false or misleading with respect to
any material fact, or omit to state any material fact necessary in
order to make the statements made in the Proxy Statement not false
or misleading, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to
the solicitation of proxies for the Frontier Stockholders' Meeting
which has become false or misleading.
(e) Aspect and Esenjay shall take such action as may be
necessary to insure that any information or data provided by them to
Frontier in connection with the Proxy Statement or Registration
Statement does not contain any untrue statement of a material fact
or omit to state any material fact required to be stated in the
Proxy Statement or Registration Statement or necessary to make the
statements in the Proxy Statement or Registration Statement, in
light of the circumstances under which they were made, not
misleading.
4. Section 8.13 of the Agreement is hereby amended and restated in its
entirety as follows:
Section 8.13 Name Change. Within three (3) days of Closing,
Frontier shall take all steps necessary or appropriate to change its
name from "Frontier Natural Gas Corporation" to "Esenjay Exploration,
Inc." or a similar name as is legally available and as may be agreed to
among the parties hereto prior to Closing and Esenjay shall consent to
the use of such name and execute any documents reasonably requested by
Frontier to evidence
3
<PAGE>
such consent. In the event that Esenjay retains the name "Esenjay
Petroleum Corporation," Esenjay agrees not to assign the rights to such
name to any person or entity other than Frontier.
5. Except as amended herein, the Agreement remains the same and, to
such extent, is hereby ratified and confirmed.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first above written by the parties or the authorized representative of the
parties.
FRONTIER:
Frontier Natural Gas Corporation
By: /s/ David W. Berry
--------------------------------
David W. Berry, President
ESENJAY:
Esenjay Petroleum Corporation
By: /s/ Michael E. Johnson
--------------------------------
Michael E. Johnson, President
By: /s/ Charles J. Smith
--------------------------------
Charles J. Smith, Chairman
ASPECT:
Aspect Resources LLC
By: Aspect Management Corporation,
its Manager
By: /s/ Alex M. Cranberg
--------------------------------
Alex M. Cranberg, President
4
<PAGE>
SECOND AMENDMENT TO
ACQUISITION AGREEMENT AND PLAN OF EXCHANGE
This Second Amendment to Acquisition Agreement and Plan of Exchange
(this "Amendment") is made and entered into as of May 13, 1998, by and among
Frontier Natural Gas Corporation, an Oklahoma corporation ("Frontier"),
Esenjay Petroleum Corporation, a Texas corporation ("Esenjay"), and Aspect
Resources LLC, a Colorado limited liability company ("Aspect"), for the
purpose of amending that Acquisition Agreement and Plan of Exchange, dated as
of January 18, 1998 (as amended, the "Agreement"), by and among Frontier,
Esenjay and Aspect. Capitalized terms used, but not defined, herein shall
have the meaning ascribed to them in the Agreement.
1. Section 15.02 of the Agreement is hereby amended and restated in
its entirety as follows:
Section 15.02 Indemnification by Esenjay. Esenjay shall indemnify,
defend and hold Aspect and Frontier harmless from and against any all
Damages from, resulting by reason of or arising in connection with any
of the following (in each case so long as notice of a claim for
indemnification is made in good faith within the applicable survival
period):
(a) any break of or inaccuracy in any representation or
warranty made by Esenjay in this Agreement or any Related Document
or any document delivered at Closing;
(b) any breach of or failure by Esenjay to perform any
covenant or obligation of Esenjay in this Agreement or any Related
Document or any document delivered at Closing;
(c) any liability, loss, damage, or obligation incurred or
suffered by Frontier in connection with or as a result of that
lawsuit styled JUAN CABALLERO VS. ESENJAY PETROLEUM CORPORATION AND
FRONTIER NATURAL GAS CORPORATION, Cause No. 98-1884-A in the 28th
District Court of Nueces County, Texas (the "Lawsuit"); provided
however, that this Section 15.02(c) shall (i) only apply in the
event of a final non-appealable monetary judgment or other final
settlement of the Lawsuit or in the event of any loss or damage to
the Esenjay Assets arising out of or resulting from the Lawsuit;
(ii) not include (A) any legal fees or costs of defense, or (B) any
costs associated with the implementation of a safety plan or loss
control program by Frontier, and (iii) not entitle Frontier to
recover any amounts in excess of any monetary damages pursuant to
any final non-appealable judgment or
<PAGE>
settlement, except in the case of any loss or damage to the Esenjay
Assets; and provided further that Frontier shall not enter into any
settlement of the Lawsuit without the prior written consent of
Esenjay and, to the extent Frontier does so, this Section 15.02(c)
shall terminate as to any such settlement and Frontier shall not be
entitled to indemnification hereunder with respect to such
settlement;
(d) any liability, loss, damage, obligation, cost or expense
of Esenjay, other than liabilities for Post Effective Date Costs
assumed by Frontier pursuant to Section 2.03 hereof.
2. Section 15.04 of the Agreement is hereby amended by adding the
following to the end of such section:
"; provided, further, that with respect to any claim for
Damages under Section 15.02(c) of this Agreement, Esenjay's
indemnification obligations hereunder shall not be limited to 24
months, but instead shall extend to any claims brought during the
pendency of the Lawsuit and for a period of 60 days thereafter.
3. Except as amended herein, the Agreement remains the same and, to such
extent, is hereby ratified and confirmed.
[SIGNATURES ON FOLLOWING PAGE]
2
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first above written by the parties or the authorized representative of the
parties.
FRONTIER:
Frontier Natural Gas Corporation
By: /s/ David W. Berry
--------------------------------------
David W. Berry, President
ESENJAY:
Esenjay Petroleum Corporation
By: /s/ Michael E. Johnson
--------------------------------------
Michael E. Johnson, President
By: /s/ Charles J. Smith
--------------------------------------
Charles J. Smith, Chairman
ASPECT:
Aspect Resources LLC
By: Aspect Management Corporation,
its Manager
By: /s/ Alex M. Cranberg
--------------------------------------
Alex M. Cranberg, President
3
<PAGE>
EXCHANGE AGREEMENT
This Exchange Agreement (this "Agreement") is made and entered into as
of May 13, 1998, by and between Frontier Natural Gas Corporation, an Oklahoma
corporation ("Frontier"), and R. Michael Looney, James E. Rogers and Steven
L. Creger, residents of the State of Texas (collectively, the "Aspect
Employees").
1. INTRODUCTION. The parties acknowledge that Frontier has entered into
that Acquisition Agreement and Plan of Exchange, dated as of January 19, 1998
(the "Acquisition Agreement"), with Aspect Resources LLC, a Colorado limited
liability company ("Aspect"), and Esenjay Petroleum Corporation, a Texas
corporation ("Esenjay"). Under the Acquisition Agreement, Aspect is
contributing certain oil and gas interests and properties to Frontier. The
Aspect Employees have been granted certain overriding royalty interests and
working interests ("ORRI/WIs") in certain of the Aspect Assets (as such term
is defined in the Acquisition Agreement) and desire hereby to contribute such
ORRI/WIs to Frontier in exchange for common stock of Frontier. By their
execution hereof, the Aspect Employees acknowledge that they have been
provided with a copy of the executed Acquisition Agreement and that they had
an opportunity to review such agreement.
2. CONTRIBUTION. As of the date hereof, the Aspect Employees agree
that, in connection with a closing under the Acquisition Agreement and only
in connection with such a closing, they shall transfer, assign and convey
their ORRI/WIs in the Aspect Assets to Frontier in exchange for shares of the
common stock, par value $.01 per share, of Frontier (the "Frontier Common
Stock"), as set forth on Exhibit "A" attached hereto, which shares take into
account a 1 for 6 reverse stock split of the Frontier Common stock prior to a
closing under the Acquisition Agreement. Such transfer, assignment and
conveyance shall be treated as a contribution of the ORRI/WIs to the capital
of Frontier and, along with the contributions contemplated by the Acquisition
Agreement, is intended to qualify as a transfer under Section 351 of the
Internal Revenue Code of 1986, as amended. In connection with such transfers,
the Aspect Employees covenant and agree that they will execute and deliver
all other appropriate agreements, documents or instruments, and take any
other action necessary, to make this Agreement fully and legally effective,
binding and enforceable as between them and Frontier and as against third
parties.
3. REPRESENTATIONS AND WARRANTIES.
(a) FRONTIER. Frontier represents and warrants to the Aspect
Employees that: (i) the Frontier Common Stock, upon issuance to the Aspect
Employees, will be duly and validly issued and fully paid and non-assessable,
free and clear of any preemptive rights; (ii) Frontier has full and corporate
power and authority to enter into this Agreement and to perform it obligations
hereunder and to consummate the transactions contemplated hereby; (iii) this
Agreement constitutes a legal, valid and binding obligation of Frontier,
enforceable against Frontier in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws in effect that affect the
enforcement of creditors' rights generally and
<PAGE>
by equitable limitations on the availability of specific remedies; and (iv)
prior to the stock issuances contemplated by this Agreement and the
Acquisition Agreement, the authorized capital stock of Frontier consists of
40,000,000 shares of common stock, par value $.01 per share, of which
9,890,906 shares are issued and outstanding, and 5,000,000 share of preferred
stock, par value $.01 per share, of which 85,061 share are issued and
outstanding.
(b) ASPECT EMPLOYEES. Each of the Aspect Employees represents and
warrants to Frontier with respect to himself, as follows:
(i) Each of the Aspect Employees has full power and authority to
enter into this Agreement and to perform his obligations hereunder and to
consummate the transactions contemplated hereby. This Agreement
constitutes a legal, valid and binding obligation of each of the Aspect
Employees, enforceable against the Aspect Employees in accordance with its
terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws in
effect that affect the enforcement of creditors' rights generally and by
equitable limitations on the availability of specific remedies.
(ii) To the knowledge of each of the Aspect Employees, the
following representations are true, correct and complete as of the date
hereof and will continue to be true contemplated hereby:
(1) the Frontier Common Stock to be issued to the Aspect
Employees hereunder will not be issued in satisfaction of an
indebtedness of Frontier or interest on indebtedness of
Frontier;
(2) Frontier will not assume any liabilities of the Aspect
Employees in connection with the transactions contemplated
hereby;
(3) there is no indebtedness between the Aspect Employees and
Frontier and there will be no indebtedness created by
Frontier in favor of the Aspect Employees as a result of the
transactions contemplated hereby;
(4) the Aspect Employees will receive Frontier Common Stock at
the closing hereunder approximately equal to the net fair
market value of the ORRI/WIs being transferred by the Aspect
Employees to Frontier;
(5) the Aspect Employees will pay their owner expenses, if any,
incurred in connection with the transactions contemplated
hereby;
(6) the Aspect Employees are not under the jurisdiction of a
court in a title 11 or similar case (within the meaning of
Section 368(a)(3)(A) of
2
<PAGE>
the Code) and the Frontier Common Stock to be received in
the transactions contemplated hereby will not be used to
satisfy any indebtedness of such party;
(7) All of the Frontier Common Stock that the Aspect Employees
will receive as part of the transactions contemplated
hereby will be received in exchange for the property
transferred by the Aspect Employees to Frontier pursuant to
this Agreement, and none of such common stock will
constitute separate consideration for, or be allocable to,
any employment, consulting or other services provided to (or
that will be provided to) Frontier by the Aspect Employees
(or any other person) either in connection with the
transactions contemplated hereby or otherwise;
(8) the Aspect Employees will not retain any rights or
interests in the property transferred to Frontier as part
of the transactions contemplated hereby; and
(9) the Aspect Employees have no plan or intention to sell,
exchange, or otherwise dispose of any of the Frontier Common
Stock to be received by the Aspect Employees pursuant hereto.
4. COVENANTS. The Aspect Employees shall reasonably cooperate in
the preparation and delivery to Frontier and its counsel of tax certificates or
similar documents that may be necessary or appropriate in connection with the
preparation of tax opinions or other items regarding the tax matters
associated with this Agreement and the transactions contemplated by the
Acquisition Agreement. Each of the Aspect Employees covenants and agrees that
he shall use his reasonable best efforts to take all actions, and shall not
fail to take any actions, which are necessary or appropriate to cause the
transfers contemplated hereby and by the Acquisition Agreement to constitute
tax-free exchanges under Section 351 of the Internal Revenue of Code of 1986,
as amended.
5. GOVERNING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Texas (without
regard to its conflicts of law doctrines).
6. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto, and supersedes all prior agreements or
understandings (whether written or oral), with respect to the subject matter
hereof. There are no restrictions, promises, representations, warranties,
covenants or undertakings, other than those expressly set forth or referred
to herein.
7. AMENDMENT. This Agreement may be amended, modified or supplemented
only by the written agreement of the parties hereto.
3
<PAGE>
8. BINDING EFFECT. This Agreement and the rights and obligations
hereunder shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors and
assigns.
9. COUNTERPARTS. This Agreement may be executed in multiple 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 this Agreement as of the
day and year first above written.
FRONTIER:
Frontier Natural Gas Corporation
By: /s/ David W. Berry
---------------------------------
Name: David W. Berry
Title: President
ASPECT EMPLOYEES:
/s/ R. Michael Looney
------------------------------------
R. Michael Looney
/s/ James E. Rogers
------------------------------------
James E. Rogers
/s/ Steven L. Creger
------------------------------------
Steven L. Creger
4
<PAGE>
Exhibit "A"
<TABLE>
<CAPTION>
Shares of
Aspect Employee Frontier Common Stock
--------------- ---------------------
<S> <C>
R. Michael Looney 23,334
James E. Rodgers 23,334
Steven L. Creger 16,667
</TABLE>
<PAGE>
EXCHANGE AGREEMENT
This Exchange Agreement (this "Agreement") is made and entered into as of
May 14, 1998, by and between Frontier Natural Gas Corporation, an Oklahoma
corporation ("Frontier), and Joint Energy Development Investments II Limited
Partnership, a Delaware limited partnership ("JEDI").
1. INTRODUCTION. JEDI (through its predecessor-in-interest) and Aspect
Resources LLC, a Colorado limited liability company ("Aspect"), entered into
a Loan Agreement, dated as of September 17, 1997 (the "Loan Agreement"),
pursuant to which JEDI agreed to advance amounts to Aspect based upon the
terms and conditions set forth in the Loan Agreement. Under the Loan
Agreement, Aspect owes JEDI in excess of $3.8 million and, in accordance with
that Acquisition Agreement and Plan of Exchange, dated as of January 19, 1998
(the "Acquisition Agreement"), with Aspect and Esenjay Petroleum Corporation,
a Texas corporation ("Esenjay"), Aspect has contributed certain of its assets
to Frontier (the "Contributed Assets") and Frontier has agreed to assume $3.8
million of Aspect's debt to JEDI (the "Subject Debt"). JEDI and Frontier are
entering into this Agreement to evidence their understanding regarding JEDI's
conversion of the Subject Debt into shares of Frontier's common stock. By
its execution hereof, JEDI acknowledges that it has been provided a copy of
the executed Acquisition Agreement and that is has had an opportunity to
review such agreement.
2. CONVERSION. As of the date hereof, JEDI agrees to convert the
Subject Debt into, and Frontier agrees to issue to JEDI, 675,000 shares
(after taking into account a 1 for 6 reverse stock split, the "Conversion
Shares") of Frontier's common stock, par value $.01 per share, which equates
to approximately 5.7% of Frontier's issued and outstanding common stock.
Upon the issuance of the Conversion Shares, JEDI agrees that Frontier shall
have no further obligation or liability for payment of the Subject Debt;
provided, however, that Frontier hereby expressly assumes Aspect's
obligations under Section 4.22 of the Loan Agreement with respect to the
Contributed Assets and agrees to perform such obligations in the same manner
and to the same extent as Aspect would have been required to perform but for
the transactions contemplated by the Acquisition Agreement, which assumption
and agreement shall survive Frontier's issuance of the Conversion Shares to
JEDI. The parties agree that the fair market value of the Conversion Shares
is equal to the amount of the Subject Debt. Such conversion shall be treated
as a contribution of the Subject Debt to the capital of Frontier by JEDI and,
along with the contributions contemplated by the Acquisition Agreement, is
intended to qualify as a transfer under Section 351 of the Internal Revenue
Code of 1986, as amended.
3. REGISTRATION OF CONVERSION SHARES. The resale of the Conversion
Shares will be registered, pursuant to a resale registration statement on
Form SB-2 (that will be filed with the Securities and Exchange Commission
within ten days of the date of issuance of the Conversion Shares and declared
effective as soon thereafter as possible, but in no event later than 60 days
after mutual execution of this Agreement). For so long as such registration
statement is effective under the Securities Act of 1933, the Conversion
Shares will be freely tradeable without volume limitations or otherwise.
Frontier hereby covenants with JEDI that it will use its best efforts to take
all actions
<PAGE>
necessary to maintain the effectiveness of the Form SB-2 for a minimum of two
years from the effective date of such Form SB-2.
4. REPRESENTATIONS AND WARRANTIES.
(a) FRONTIER. Frontier represents and warrants to JEDI that (i) the
Conversion Shares, upon issuance to JEDI, will be (A) duly and validly issued
and fully paid and non-assessable, free and clear of any preemptive rights,
(B) upon the effectiveness of the Form SB-2 resale registration statement,
registered under the Securities Act of 1933, as amended, and freely tradeable
without volume trading limitations or otherwise, and (C) based upon JEDI's
representations set forth in Section 4(b) hereof (the accuracy of which are
hereby assumed), issued to JEDI in a transaction that is exempt from
registration under federal and state securities laws; (ii) Frontier has full
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder and to consummate the transactions contemplated hereby;
and (iii) this Agreement constitutes a legal, valid and binding obligation of
Frontier, enforceable against Frontier in accordance with its terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws in effect that affect the
enforcement of creditors' generally and by equitable limitations on the
availability of specific remedies. In addition, the representations and
warranties of Frontier, Esenjay and Aspect contained in Articles IV, VI and
VII, respectively, of the Acquisition Agreement are incorporated herein and
hereby made by Frontier to JEDI. Frontier hereby (i) represents and warrants
to JEDI that such representations and warranties are true and correct as of
the date hereof, (ii) agrees that whenever such representations and
warranties refer to assets and properties, such assets and properties include
the Aspect Assets and the Esenjay Assets (as such terms are defined in the
Acquisition Agreement), (iii) agrees that whenever such representations are
warranties refer to Related Documents (as such term is defined in the
Acquisition Agreement), such documents include this Agreement, and (iv)
agrees to indemnify and hold harmless JEDI for (x) any breach of or
inaccuracy in such representations and warranties and the other
representations and warranties of Frontier herein and (y) any breach of
covenants contained in this Agreement, all in accordance with the provisions
of Article XV of the Acquisition Agreement with JEDI being deemed a party
indemnified thereunder.
(b) JEDI. JEDI represents and warrants to Frontier that: (i) JEDI
has full partnership power and authority to enter into this Agreement and to
perform it obligations hereunder and to consummate the transactions
contemplated hereby; (ii) this Agreement constitutes a legal, valid and
binding obligation of JEDI, enforceable against JEDI in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws in effect that affect
the enforcement of creditors' rights generally and by equitable limitations
on the availability of specific remedies; (iii) JEDI has such knowledge and
experience in business and financial matters as will enable it to evaluate
the merits and risks of the prospective investment and to make an informed
investment decision; (iv) JEDI is aware that no state or federal agency has
reviewed or endorsed the Conversion Shares and that the Conversion Shares
involve a degree of economic risk; (v) JEDI is purchasing the Conversion
Shares for its own account for investment and not with a view to
distribution, assignment, resale or other transfer; (vi) no person (other
than JEDI and the direct or indirect beneficial owners of JEDI) will have, at
the
2
<PAGE>
time of purchase, a direct or indirect beneficial interest in the Conversion
Shares; (vii) JEDI is authorized and otherwise duly qualified to purchase and
hold the Conversion Shares acquired pursuant to this Agreement; and
(viii) JEDI was not formed for the specific purpose of acquiring the
Conversion Shares. JEDI further understands that, as of the date hereof,
Frontier has not registered the Conversion Shares under the Securities Act of
1933, as amended, or the applicable securities laws of any state in reliance
on exemptions from registration, which exemptions depend upon JEDI's
investment intent at the time it acquires the Conversion Shares.
5. GOVERNING LAW. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Texas (without
regard to its conflicts of law doctrines).
6. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto, and supersedes all prior agreements or
understandings (whether written or oral), with respect to the subject matter
hereof. There are no restrictions, promises, representations, warranties,
covenants or undertakings, other than those expressly set forth or referred
to herein.
7. ARBITRATION. Any controversy, dispute or claim arising out of or
related to this Agreement (a "Dispute") shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, by an arbitrator mutually agreed to by the parties. In the event
the parties are unable to agree to the selection of an arbitrator within
10 days after the written notification by either party to this Agreement of
the commencement of a Dispute, each party shall appoint one arbitrator who
shall be an impartial person. Those two persons shall select a third person
to serve as the arbitrator. Any arbitration shall be held in Houston, Texas
within 60 days of the appointment of the arbitrator. The decision by the
arbitrator shall be final and binding on each party. The arbitrator shall
execute and deliver to each party its decision in writing. Judgment upon the
award, if any, rendered by the arbitrator may be entered in any court having
jurisdiction over the parties. No award by the arbitrator shall assess
consequential, exemplary or punitive damages, but may assess the arbitration
costs and expenses, including without limitation, attorneys fees of the
parties, in a manner deemed equitable by the arbitrator, taking into account
the arbitration decision. The parties to any Dispute shall maintain the
confidentiality of any Dispute and any related arbitration proceeding for a
period of 18 months, unless such disclosure is required by law.
8. AMENDMENT. This Agreement may be amended, modified or supplemented
only by the written agreement of the parties hereto.
9. BINDING EFFECT. This Agreement and the rights and obligations
hereunder shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors and
assigns.
10. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
JEDI:
Joint Energy Development Investments II
Limited Partnership
By: Enron Capital Management II
Limited Partnership, its general partner
By: Enron Capital II Corp.,
its general partner
By: /s/ Clifford Hickey
-----------------------------------------
Name: Clifford P. Hickey
---------------------------------------
Title: Vice President
--------------------------------------
FRONTIER:
Frontier Natural Gas Corporation
By: /s/ David B. Christofferson
-----------------------------------------
Name: David B. Christofferson
---------------------------------------
Title: Exec. Vice President
--------------------------------------
4
<PAGE>
FRONTIER NATURAL GAS CORPORATION
SECTION 351 PLAN OF EXCHANGE
This Section 351 Plan of Exchange (this "PLAN") has been duly
adopted by the board of directors of Frontier Natural Gas Corporation,
an Oklahoma corporation (the "COMPANY"), and the undersigned parties
hereto for the purpose of describing the general terms and conditions
of a series of related transactions.
W I T N E S S E T H:
WHEREAS, the Company intends to enter into one or more agreements
to acquire certain assets and oil and gas interests from various
parties in exchange for the Company's common stock, par value $.01 per
share; and
WHEREAS, following such acquisitions, the Company intends to
complete an underwritten public offering of its common stock (the
"PUBLIC OFFERING"); and
WHEREAS, the Company intends that the asset acquisitions and the
Public Offering will be completed in a manner consistent with the
requirements of Section 351 of the Internal Revenue Code of 1986, as
amended (the "CODE"); and
WHEREAS, the Company intends that the Public Offering will
constitute a qualified underwriting transaction within the meaning of
Section 1.351-1(a)(3) of the Treasury Regulations; and
WHEREAS, the Company expects (without making any representation
with respect thereto) that the persons who receive stock of the
Company as part of the consideration for the asset acquisitions, and
the persons who invest in the Company through the Public Offering,
will collectively satisfy the control requirements of Section 368(c)
of the Code;
NOW, THEREFORE, the general terms and conditions of this Plan are
as follows:
1. DESCRIPTION OF ACQUISITIONS. The Company expects that the
transferors in the asset acquisitions will include the persons
identified on Exhibit A attached hereto (the "TRANSFERORS"), but does
not intend for the Transferors to constitute an exclusive list of the
parties that may participate in the asset acquisitions contemplated by
this Plan.
2. EXCHANGE AGREEMENTS. Each of the acquisition transactions
will be effectuated pursuant to an agreement that includes, among
other things, a recital to the effect that the transaction is intended
to satisfy the requirements of Section 351 of the Code.
<PAGE>
3. UNDERWRITING AGREEMENTS. Each agreement that the Company
enters into with an underwriter in connection with the Public Offering
will be structured so that the Public Offering constitutes, to the
extent possible, a qualified underwriting transaction within the
meaning of Section 1.351-1(a)(3) of the Treasury Regulations.
4. AMENDMENT OF PLAN. This Plan may be amended from time to
time by the Board of Directors of the Company.
The execution of this Plan shall not obligate any party to any
acquisition to consummate such acquisition other than upon the terms
and conditions of the definitive agreement to be executed by the
parties to such acquisition. By the execution of this Plan, each of
the parties hereto evidences his, her or its agreement with, and
acknowledgment of, the terms and provisions of this Plan.
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
----------------------------------
David W. Berry, President
ESENJAY PETROLEUM CORPORATION
By: /s/ Michael E. Johnson
----------------------------------
Michael E. Johnson, President
ASPECT RESOURCES LLC
By: Aspect Management Corporation,
its Manager
By: /s/ Alex Cranberg
----------------------------------
Alex Cranberg, President
-2-
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement"), dated as of May
14, 1998, is made and entered into by and among Esenjay Petroleum
Corporation, a Texas corporation ("Esenjay"), Aspect Resources LLC, a
Colorado limited liability ("Aspect"), and Frontier Natural Gas Corporation,
an Oklahoma corporation (the "Company"). Esenjay and Aspect are herein
collectively referred to as "Shareholders" or individually as a "Shareholder."
RECITALS
A. Esenjay, Aspect and the Company entered into that certain
Acquisition Agreement and Plan of Exchange, dated as of January 19, 1998 (the
"Acquisition Agreement").
B. As of January 12, 1998, Aspect and the Company entered into a Credit
Agreement and in connection therewith the Company issued to Esenjay and
Aspect warrants (the "Bridge Facility Warrants") to purchase an aggregate of
93,750 shares (56,250 in the case of Aspect and 37,500 in the case of
Esenjay) of the common stock, par value $0.01 per share of the Company (the
"Common Stock").
C. As of February 23, 1998, the Company entered into a Credit Agreement
with Duke Energy Financial Services, Inc. and in connection therewith the
Company issued to Esenjay and Aspect warrants (the "Duke Facility Warrants;"
and together with the Bridge Facility Warrants, the "Warrants") to purchase
an aggregate of 93,750 shares (56,250 in the case of Aspect and 37,500 in the
case of Esenjay) of the Common Stock.
D. On May 14, 1998, the shareholders of the Company approved, and the
Company effectuated, a 1 for 6 reverse stock split (the "Reverse Stock
Split"), thereby reducing the number of shares of Common Stock that are the
subject of the Warrants to 31,250 shares.
D. Following the Reverse Stock Split and upon consummation of
transactions contemplated by the Acquisition Agreement, Esenjay will own
5,165,261 shares of the Common Stock and Aspect will own 4,203,106 shares of
the Common Stock.
NOW, THEREFORE, the parties hereto, in consideration of the mutual
representations, warranties, covenants, agreements, terms and conditions
contained herein and in the Acquisition Agreement, and intending to be
legally bound hereby, covenant and agree as follows:
1. DEMAND REGISTRATION.
(a) REQUEST FOR REGISTRATION. At any time after June 30, 1998, the
Shareholders, in the aggregate, may request up to three registrations under
the Securities Act of 1933, as amended (the "Securities Act"), of all or part
of its Registrable Shares (as hereinafter defined). Any registration
requested pursuant to this Section 1(a) is referred to herein as a "Demand
Registration." The Demand Registration will be on Form S-2 or S-3, or any
similar short-form registration, if available, or, if such forms are
unavailable, on Form S-1 or any other appropriate form.
<PAGE>
Any request for Demand Registration must include at least ten percent (10%)
of the Registrable Shares.
(b) PRIORITY ON DEMAND REGISTRATION. In the event a Demand
Registration is underwritten, if the managing underwriter advises the Company
in writing that in its opinion the number of Registrable Shares and other
securities requested to be included exceeds the number which can be sold in
such offering, the Company will include in such registration: (i) first, the
number of Registrable Shares requested to be included which in the opinion of
such underwriters can be sold; (ii) second, any securities for the account of
the Company; and (iii) any other securities requested to be included under
Section 1(c)(iii).
(c) RESTRICTIONS ON DEMAND REGISTRATION.
(i) Each of the Shareholders agrees that the Company shall not
be required to effect any registration during any period of time when the
Company is in possession of material non-public information, which the
Company's Board of Directors deems not to be advisable to disclose in a
registration statement, which material information may relate to any matter
or matters, including without limitation, to a financing project, pending
acquisition, merger or other material corporate transaction to which the
Company is or expects to be a party, and the Company agrees to advise the
Shareholders promptly when such delay is no longer applicable; provided,
however, that the Company may not exercise such right more than once in any
twelve-month period.
(ii) The Company will not be required to proceed with any
Demand Registration for a period of 180 days from the completion of sales of
more than five percent (5%) of the Registrable Shares in any prior Demand or
Piggyback Registration.
(iii) The Company shall have the right to notify such of its
stockholders as it shall desire of any Demand Registration and to invite them
to participate in such registration, subject to Section 1(b) hereof.
Further, the Company shall also be entitled to participate in any Demand
Registration, subject to Section 1(b) hereof, but in the event the Company
participates, such registration shall not count as a Demand Registration
unless the Company's participation is cut back materially.
(iv) A registration will not count as a Demand Registration (A)
until it has become effective, or (B) if the Company takes any action or
fails to take any action in violation of this Agreement and as a result
thereof a registration statement is not effective for the period of time
required hereby or if less, the time required to sell the Registrable Shares
included in such registration statement, provided that any registration that
is withdrawn or terminated at the written request of the Shareholders will
count as a Demand Registration.
(d) SELECTION OF UNDERWRITERS. The investment banker(s) and
manager(s), if any, who shall administer any underwritten offering made
pursuant to the Demand Registration
-2-
<PAGE>
shall be selected by the Shareholder(s) requesting the registration and shall
be reasonably satisfactory to the Company.
(e) DURATION OF EFFECTIVENESS. The Company agrees to use its best
efforts to keep any Demand Registration that is a "shelf" registration
pursuant to Rule 415 under the Securities Act continuously effective for one
year after the effective date of such registration statement (the "Effective
Date").
(f) DEMAND REGISTRATION EXPENSES. The Company, on the one hand,
and the Shareholder(s) requesting the first Demand Registration, on the other
hand, shall share equally in all Registration Expenses (as hereinafter
defined) in connection with the first two Demand Registrations, whether or
not they become effective; provided, however, that the Company shall pay all
of the Registration Expenses associated with the first Demand Registration if
the Shareholders jointly agree to waive their rights to and agree to forego
the second Demand Registration. The Shareholder(s) requesting the third
Demand Registration will pay all Registration Expenses in connection
therewith. The Company will make generally available to the public and the
Shareholders, as soon as reasonably practicable after they become available,
earnings statements governing a period of 12 months commencing not later than
the first day of the fiscal quarter next succeeding the Effective Date of
each Demand Registration which earnings statements shall satisfy the
provisions of Section 11(a) of the Securities Act.
2. PIGGYBACK REGISTRATIONS.
(a) RIGHT TO PIGGYBACK. Whenever the Company proposes to register
any of its securities under the Securities Act (except in the case of any
primary offering by Frontier occurring on or before September 30, 1998) and
the registration form to be used may be used for the registration of
Registrable Shares (a "Piggyback Registration"), the Company will give prompt
written notice to all holders of Registrable Shares of its intention to
effect such a registration no less than fifteen (15) days prior to the filing
of such registration statement and will include in such registration all
Registrable Shares with respect to which the Company has received written
requests for inclusion therein within 15 days after the receipt of the
Company's notice.
(b) PIGGYBACK EXPENSES. The Company will pay the Registration
Expenses of the holders of Registrable Shares in all Piggyback Registrations.
(c) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration
is an underwritten primary registration on behalf of the Company, and the
managing underwriter advises the Company in writing that in its 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, in order of priority, the following (i) first, the
securities the Company purposes to sell, (ii) second, the Registrable Shares
held by the Shareholders or their assigns and requested to be included in such
registration, which shall be included in the offering on a pro rata basis
with respect
-3-
<PAGE>
to the holders thereof requesting registration, and (iii) third, 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, in order of
priority, the following (i) first, the securities requested to be included
therein by the holders of Common Stock exercising registration rights with a
priority senior to the Shareholders, (ii) second, the Registrable Shares held
by the Shareholders or their assigns and requested to be included in such
registration, which shall be included in the offering on a pro rata basis
with respect to the holders thereof requesting registration, which amount
will be calculated based upon the total number of Registrable Shares owned by
such holders, and (iii) third, other securities requested to be included in
such registration.
3. REGISTRATION PROCEDURES. Whenever the holders of Registrable Shares
have requested that any Registrable Shares be registered pursuant to this
Agreement, the Company will use its best efforts to effect the registration
and the sale of such Registrable Shares 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 Section a registration statement with
respect to such Registrable Shares 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, at least 10 days prior to filing, to the
counsel selected by the holders of a majority of the Registrable Shares
covered by such registration statement copies of all such documents proposed
to be filed, which documents will be subject to the review and approval of
such counsel, which shall not be unreasonably withheld);
(b) prepare and file with the Section such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for a period of not less than one year 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;
(c) furnish to each seller of Registrable Shares such 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
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<PAGE>
seller may reasonably request in order to facilitate the disposition of the
Registrable Shares owned by such seller;
(d) use its best efforts to register or qualify such Registrable
Shares under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate
the disposition of the Registrable Shares owned by such seller in such
jurisdictions; provided, that the Company will not be required to (i) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 3(d), (ii) subject itself to income
taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction);
(e) notify each seller of such Registrable Shares, 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 Shares,
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;
(f) cause all such Registrable Shares to be listed or quoted on each
securities exchange or automated quotation system on which similar securities
issued by the Company are then listed or quoted;
(g) appoint a transfer agent and registrar for all such Registrable
Shares not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders
of a majority of the Registrable Shares being sold or the underwriters, if
any, reasonably request in order to expedite or facilitate the disposition of
such Registrable Shares;
(i) if the offering is underwritten, at the request of any seller
of Registrable Shares the Company will use its best efforts to furnish on the
date that Registrable Shares are delivered to the underwriters for sale
pursuant to such registration an opinion of counsel representing the Company
for the purposes of such registration, dated such date addressed to the
underwriters and to such seller, stating that such registration statement has
become effective under the Securities Act and that (i) to the best knowledge
of such counsel, no stop order suspending the effectiveness thereof has been
issued and no proceedings for that purpose have been instituted or are pending
or contemplated under the Securities Act, (ii) the registration statement,
the related prospectus and each amendment or supplement thereof comply as to
form in all material respects with the requirements of the Securities Act
(except that such counsel need not express any opinion as to financial
statements
-5-
<PAGE>
contained therein) and (iii) to such other effect as reasonably may be
requested by counsel for the underwriters or by such seller or its counsel.
(j) make available for inspection by any seller of Registrable
Shares, 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, 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) use its best efforts to cause the Registrable Shares covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
sellers thereof to consummate the disposition of such Registrable Shares.
4. RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the Securities and Exchange Commission (the
"Section") that may permit the sale of the Registrable Shares to the public
without registration, the Company agrees to use its best efforts to:
(a) make and keep public information regarding the Company
available, as those terms are understood and-defined in Rule 144 under the
Securities Act, at all times;
(b) file with the Section in a timely manner all reports and other
documents required of the Company under the Securities Act and the Securities
Exchange Act of 1934, as amended;
(c) furnish to any holder of Registrable Shares forthwith upon written
request a written statement by the Company as to its compliance with the
reporting requirements of Rule 144 and of the Securities Act and the Exchange
Act, a copy of the most recent annual or quarterly report of the Company, and
such other reports and documents so filed as such holder may reasonably
request in availing itself of any rule or regulation of the Section allowing
such a holder to sell any such securities without registration.
5. REGISTRATION EXPENSES. All Registration Expenses will be borne as
provided in this Agreement, except that the Company will, in any event, 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 or including
the securities to be registered on each securities exchange or automated
quotation system on which similar securities issued by the Company are then
listed or quoted.
6. INDEMNIFICATION.
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<PAGE>
(a) The Company agrees to indemnify, to the extent permitted by
law, each holder of Registrable Shares, its officers and directors and each
person 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 or necessary to make the
statements therein not misleading, 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 are caused solely by such holder's
failure to deliver a copy of the registration statement or prospectus or any
amendments or supplements thereto in conformity with applicable federal and
state securities laws after the Company has furnished such holder with a
sufficient number of copies of the same.
(b) In connection with any registration statement in which a holder
of Registrable Shares is participating, each such holder will furnish to the
Company in writing such information 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 and each person who controls the Company (within the meaning of the
Securities Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement of material fact
contained in the 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 or necessary to
make the statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information 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 Shares and
the liability of each such holder of Registrable Shares will be in proportion
to and limited to the net amount received by such holder from the sale of
Registrable Shares pursuant to such registration statement.
(c) Any person 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 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 not be
obligated to pay the fees and expenses of more than one counsel for all
parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party and its legal
counsel a conflict of interest may exist between such indemnified party and
any other of such indemnified parties with respect to such claim.
(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
-7-
<PAGE>
any officer, director or controlling person of such indemnified party and
will survive the transfer of securities.
(e) If the indemnification provided for in this Section 6 is held
by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred
to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability, claim, damage,
or expense in such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission.
(f) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering
are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
7. DEFINITIONS.
(a) "REGISTRATION EXPENSES" means, subject to Section 5 hereof, 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 federal and state securities or blue sky
laws, securities laws of any foreign jurisdictions, printing expenses,
messenger and delivery expenses, and fees and disbursements of counsel for
the Company and all independent certified public accountants, underwriters
(excluding discounts and commissions) and other persons retained by the
Company.
(b) "REGISTRABLE SHARES" means (i) the 9,368,367 shares of Common
Stock that will be issued to the Shareholders in connection with the
transactions contemplated by the Acquisition Agreement, (ii) the 31,250
shares of Common Stock that will be issued to the Shareholders upon exercise
of the Warrants, and (iii) any securities issued or issuable with respect to
the Common Stock referred to in clauses (i) or (ii) by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. Any
securities which have become eligible for transfer pursuant to Rule 144 under
the Securities Act (or any similar rule then in force), will cease to be
Registrable Shares when they have actually been sold in compliance with Rule
144 (or any similar rule then in effect). For purposes of this Agreement, a
person will be deemed to be a holder of Registrable Shares whenever such
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<PAGE>
person has the right to acquire such Registrable Shares (by conversion,
exchange, exercise or otherwise), whether or not such acquisition has
actually been effected.
8. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company will not hereafter
enter into any agreement with respect to its securities which grants senior
rights to register its securities or which is inconsistent with the rights
granted to the holders of Registrable Shares in this Agreement.
(b) ADJUSTMENTS AFFECTING REGISTRABLE SHARES. The Company will not
take any action, or permit any change to occur, with respect to its
securities which would adversely affect the ability of the holders of
Registrable Shares to include the Registrable Shares in a registration
undertaken pursuant to this Agreement or which would adversely affect the
marketability of such Registrable Shares in any such registration.
(c) REMEDIES. Any person 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.
(d) AMENDMENTS 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
holders of 66 2/3% of the then-outstanding Registrable Shares.
(e) SUCCESSORS 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; provided however, that the only the Piggyback
Registration rights of a holder of Registrable Shares hereunder may be
transferred or assigned and then only to: (i) a transferee or assignee of at
least one-fifth of the Shareholder's Registrable Shares (as presently
constituted and subject to adjustment for stock splits, stock dividends,
reverse splits and the like); (ii) to a partner or stockholder of such
holder; (iii) another holder of Registrable Shares; (iv) any entity to which
such holder acts as a trustee, investment manager, investment advisor or other
fiduciary; (vi) an affiliate of such holder; in each case to whom Registrable
Shares are transferred, subject to such transferee's delivery to the Company
of a written instrument agreeing to be bound hereby.
(f) NOTICES. The Section entitled "Notices, Etc." in the
Acquisition Agreement is hereby incorporated in this Agreement by reference
and made a part hereof.
(g) TERM. Other than the obligations under Section 6 hereof, this
Agreement shall terminate upon the sale of all Registrable Shares held by the
Shareholders or their respective successors or assigns.
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<PAGE>
(h) GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware, including
the conflicts of law provisions thereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the
date first above written.
ESENJAY PETROLEUM CORPORATION
By: /s/ Michael E. Johnson
-------------------------------------
Michael E. Johnson, President
ASPECT RESOURCES LLC
By: Aspect Management Corporation,
its Manager
By: /s/ Alex M. Cranberg
-------------------------------------
Alex M. Cranberg, President
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
-------------------------------------
David W. Berry, President
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<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement (this "Agreement") is made and
entered as of May 14, 1998, by and between Frontier Natural Gas Corporation,
an Oklahoma corporation ("Frontier"), and Aspect Resources LLC, a Colorado
limited liability company ("Aspect").
W I T N E S S E T H:
WHEREAS, Frontier, Aspect and Esenjay Petroleum Corporation ("Esenjay")
entered into that certain Acquisition Agreement and Plan of Exchange, dated
as of January 19, 1998 (the "Acquisition Agreement"), providing for, among
other things, the transfer to Frontier of certain of the assets and
properties of Aspect, in consideration of the payment by Frontier to Aspect
of the shares of common stock of Frontier set forth in the Acquisition
Agreement, and the assumption by Frontier of certain of the liabilities and
obligations of Aspect; and
WHEREAS, all of the instruments, documents and agreements required to be
executed and delivered in order to consummate the transactions provided in
the Acquisition Agreement are being executed by and delivered to the
respective parties to the Acquisition Agreement concurrently herewith;
NOW, THEREFORE, in consideration of the premises and the transfer by
Aspect concurrently herewith of the Aspect Assets (as defined in the
Acquisition Agreement), in accordance with and pursuant to the Acquisition
Agreement, the parties hereby agrees as follows:
1. All capitalized terms used but not defined herein shall have the
meaning ascribed to them in the Acquisition Agreement. The parties agree that
the Group A Aspect Assets and the Group B Aspect Assets, as such terms are
used in the Acquisition Agreement and herein, shall mean those Aspect Assets
identified on Schedule 1 hereto under the respective headings "Group A Aspect
Assets" and "Group B Aspect Assets".
2. Frontier hereby assumes and agrees to pay or perform in accordance
with their terms, the following obligations and liabilities of Aspect
(collectively, the "Assumed Liabilities"), as follows:
(a) Aspect's obligation, as of and after the date hereof, to pay when
due unpaid principal in the amount of $3,800,000, and interest accruing
thereon after the date hereof, representing a portion of the amount owing
under that certain Loan Agreement, dated September 17, 1997 (the "Loan
Agreement"), by and between Aspect and Joint Energy Development
Investments Limited Partnership ("JEDI-1"), whereby JEDI-1 agreed to lend
up to $16 million to Aspect on the terms and conditions set forth in the
Loan Agreement;
<PAGE>
(b) the obligations and liabilities of Aspect arising after the date
hereof under the agreements, contracts and commitments relating to the
Aspect Assets (the "Assumed Contracts"); provided, however, that Frontier
does not assume any liability arising out of the performance or
nonperformance of, or a violation, breach or default (including any event
which with notice or lapse of time or both will give rise to a
default) by, Aspect prior to the date hereof;
(c) all Post Effective Date Costs relating to the Group A Aspect
Assets incurred after the Effective Date and remaining unpaid as of the
date hereof; and
(d) all Operating Costs in excess of $5,989,000 (regardless of when
incurred) attributable to the Group B Aspect Assets.
3. Aspect hereby assigns to Frontier all of its right, title and
interest in, to and under the Assumed Contracts, except to the extent the
Assumed Contracts relate to assets ("Retained Assets") in which Aspect will
continue to have an interest after the transfers contemplated hereby and by
the Acquisition Agreement, in which case Aspect retains rights, coterminous
with those assigned to Frontier hereunder, with respect to the Retained
Assets.
4. Aspect expressly understands and agrees that except for the Assumed
Liabilities, Frontier has not agreed to pay, shall not be required to assume,
and shall have no liability or obligation, direct or indirect, absolute or
contingent, arising out of or related the liabilities of Aspect existing on
or arising after the date hereof. It is expressly understood and agreed that
all liabilities, obligations and commitments not assumed hereunder by
Frontier shall remain, as between Frontier, on the one hand, and Aspect, on
the other hand, the sole obligation of Aspect and its respective successors
and assigns.
5. The parties acknowledge that, after the date hereof, Aspect may (but
shall have no obligation to) pay certain of the Assumed Liabilities in the
ordinary course of its business. In the event Aspect pays any of the Assumed
Liabilities, Frontier agrees to promptly reimburse Aspect for any such
payment.
6. Nothing herein shall be deemed to deprive Frontier of any defenses,
setoffs or counterclaims (collectively, "Defenses") which Aspect may have had
or which Frontier shall have with respect to any of the obligations,
liabilities or commitments assumed hereby. Aspect hereby transfers, conveys
and assigns to Frontier all Defenses and agrees to reasonably cooperate with
Frontier to maintain, secure, perfect and enforce the Defenses.
7. Frontier further covenants and agrees with Aspect that Frontier will
do, execute and deliver, or cause to be done, executed and delivered, all
such further instruments, documents, agreements and assurances as may be
reasonably requested by Aspect, which may be necessary in
2
<PAGE>
order to evidence and provide for the specific assumption by Frontier of any
one or more of the Assumed Liabilities.
8. Subject to the indemnification of Frontier by Aspect contained in
Section 15.03 of the Acquisition Agreement, Frontier hereby indemnifies and
agrees to defend and hold Aspect harmless from and against any and all loss,
damage, liability, cost and expense, including reasonable attorneys' fees,
suffered or incurred by Aspect after the date hereof and arising out of any
claims, liabilities, obligations, damages and expenses with respect to the
Assumed Liabilities.
9. Aspect and Frontier, by their execution hereof, each hereby
acknowledges and agrees that, except as expressly provided herein, neither
the representations and warranties nor the rights and remedies of either
party under the Acquisition Agreement shall be deemed to be enlarged,
modified or altered in any way by this Agreement. Nothing in this Agreement
is intended to waive any rights of Frontier and/or Aspect under Section
3.02(d) of the Acquisition Agreement. This Agreement is solely for the
benefit of Frontier and Aspect and nothing contained herein shall be
construed to grant any third party any rights against Frontier or Aspect.
10. This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas (without regard to its conflicts of law
doctrine).
IN WITNESS WHEREOF, Frontier has caused this Agreement to be duly
executed by its authorized officers as of the date first above written.
FRONTIER:
Frontier Natural Gas Corporation
By: /s/ David W. Berry
------------------------------
David W. Berry, President
ASPECT:
Aspect Resources LLC
By: Aspect Management Corporation,
its Manager
By: /s/ Alex Cranberg
-------------------------------
Alex Cranberg, President
3
<PAGE>
Schedule 1
to
Assignment and Assumption Agreement
Group A Aspect Assets:
- - ----------------------
Lipsmacker (aka Lipsmacker field, Hinton field,
Oktuppa field, Cedar Creek field and Crandall Field)
Raymondville South
Midfield
Hordes Creek
Houston Endowment (aka Vicksburg II, Phase 2)
Wolfpoint
El Maton
Blessing
Hall Ranch
Mikeska
Piledriver
Tidehaven
Group B Aspect Assets:
- - ----------------------
Caney Creek
Gillock
Lovell Lake
Bauer Ranch
Lox B
West Port Acres
Stowell/Big Hill
W. Beaumont
SW Pheasant
Sheriff
East Texas
<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement (this "Agreement") is made and
entered as of May 14, 1998, by and between Frontier Natural Gas Corporation,
an Oklahoma corporation ("Frontier"), and Esenjay Petroleum Corporation, a
Texas corporation ("Esenjay").
W I T N E S S E T H:
WHEREAS, Frontier, Esenjay and Aspect Resources LLC ("Aspect") entered
into that certain Acquisition Agreement and Plan of Exchange, dated as of
January 19, 1998 (the "Acquisition Agreement"), providing for, among other
things, the transfer to Frontier of certain of the assets and properties of
Esenjay, in consideration of the payment by Frontier to Esenjay of the shares
of common stock of Frontier set forth in the Acquisition Agreement, and the
assumption by Frontier of certain of the liabilities and obligations of
Esenjay; and
WHEREAS, all of the instruments, documents and agreements required to be
executed and delivered in order to consummate the transactions provided in
the Acquisition Agreement are being executed by and delivered to the
respective parties to the Acquisition Agreement concurrently herewith;
NOW, THEREFORE, in consideration of the premises and the transfer by
Esenjay concurrently herewith of the Esenjay Assets (as defined in the
Acquisition Agreement), in accordance with and pursuant to the Acquisition
Agreement, the parties hereby agrees as follows:
1. All capitalized terms used but not defined herein shall have the
meaning ascribed to them in the Acquisition Agreement.
2. Frontier hereby assumes and agrees to pay or perform in accordance
with their terms, the following obligations and liabilities of Esenjay
(collectively the "Assumed Liabilities"), as follows:
(a) those liabilities of Esenjay in an amount not to exceed
$1,000,000 set forth on Schedule 1 attached hereto;
(b) the obligations and liabilities of Esenjay arising after the
date hereof under the Assumed Agreements; provided, however, that
Frontier does not assume any liability arising out of the performance or
nonperformance of, or a violation, breach or default (including any
event which with notice or lapse of time or both will give rise to a
default) by, Esenjay prior to the date hereof;
<PAGE>
(c) the properly accrued vacation and sick leave obligations of
Esenjay for those employees of Esenjay who accept employment with
Frontier, in an amount not to exceed $102,044 in the aggregate;
(d) the obligations and liabilities of Esenjay arising after the
date hereof under the agreements, contracts and commitments relating to
the Esenjay Assets (the "Assumed Contracts"); provided, however, that
Frontier does not assume any liability arising out of the performance or
nonperformance of, or a violation, breach or default (including any
event which with notice or lapse of time or both will give rise to a
default) by, Esenjay prior to the date hereof; and
(e) all Post Effective Date Costs relating to the Esenjay Assets
incurred after the Effective Date and remaining unpaid as of the date
hereof.
3. Esenjay hereby assigns to Frontier all of its right, title and
interest in, to and under the Assumed Contracts and the Assumed Agreements,
except to the extent the Assumed Contracts relate to assets ("Retained
Assets") in which Esenjay will continue to have an interest after the
transfers contemplated hereby and by the Acquisition Agreement, in which case
Esenjay retains rights, coterminous with those assigned to Frontier
hereunder, with respect to the Retained Assets.
4. Esenjay expressly understands and agrees that except for the Assumed
Liabilities, Frontier has not agreed to pay, shall not be required to assume,
and shall have no liability or obligation, direct or indirect, absolute or
contingent, arising out of or related the liabilities of Esenjay existing on
or arising after the date hereof. It is expressly understood and agreed that
all liabilities, obligations and commitments not assumed hereunder by
Frontier shall remain, as between Frontier, on the one hand, and Esenjay, on
the other hand, the sole obligation of Esenjay and its respective successors
and assigns.
5. Nothing herein shall be deemed to deprive Frontier of any defenses,
setoffs or counterclaims (collectively, "Defenses") which Esenjay may have had
or which Frontier shall have with respect to any of the obligations,
liabilities or commitments assumed hereby. Esenjay hereby transfers, conveys
and assigns to Frontier all Defenses and agrees to reasonably cooperate with
Frontier to maintain, secure, perfect and enforce the Defenses.
6. Frontier further covenants and agrees with Esenjay that Frontier
will do, execute and deliver, or cause to be done, executed and delivered,
all such further instruments, documents, agreements and assurances as may be
reasonably requested by Esenjay, which may be necessary in order to evidence
and provide for the specific assumption by Frontier of any one or more of the
Assumed Liabilities.
2
<PAGE>
7. Subject to the indemnification of Frontier by Esenjay contained in
Section 15.02 of the Acquisition Agreement, Frontier hereby indemnifies and
agrees to defend and hold Esenjay harmless from and against any and all loss,
damage, liability, cost and expense, including reasonable attorneys' fees,
suffered or incurred by Esenjay after the date hereof and arising out of any
claims, liabilities, obligations, damages and expenses with respect to the
Assumed Liabilities.
8. Esenjay and Frontier, by their execution hereof, each hereby
acknowledges and agrees that, except as expressly provided herein, neither
the representations and warranties nor the rights and remedies of either
party under the Acquisition Agreement shall be deemed to be enlarged,
modified or altered in any way by this Agreement. This Agreement is solely
for the benefit of Frontier and Esenjay and nothing contained herein shall be
construed to grant any third party any rights against Frontier or Esenjay.
9. This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas (without regard to its conflicts of law
doctrine).
IN WITNESS WHEREOF, Frontier has caused this Agreement to be duly
executed by its authorized officers as of the date first above written.
FRONTIER:
Frontier Natural Gas Corporation
By: /s/ David W. Berry
---------------------------------
David W. Berry, President
ESENJAY:
Esenjay Petroleum Corporation
By: /s/ Michael E. Johnson
---------------------------------
Michael E. Johnson, President
3
<PAGE>
GEOTECHNICAL SERVICES CONSULTING AGREEMENT
This Geotechnical Services Consulting Agreement (this "Agreement"),
effective May 14, 1998 (the "Effective Date"), is made and entered into by
and between Frontier Natural Gas Corporation, an Oklahoma corporation (the
"Company"), and Aspect Management Corporation, a Colorado corporation
("Aspect"). The Company and Aspect are sometimes hereafter referred to
collectively as the "Parties."
R E C I T A L S
A. The Company owns certain leasehold, mineral and contractual interests
in oil and gas leases and wells and associated equipment and facilities, all
as more particularly described in that certain Acquisition Agreement and Plan
of Exchange, dated as of January 19, 1998 (the "Acquisition Agreement"), by
and among the Company, Esenjay Petroleum Corporation and Aspect Resources
LLC. The real and personal property interests conveyed by Aspect Resources LLC
to the Company pursuant to the Acquisition Agreement are sometimes hereafter
referred to collectively as the "Assets."
B. Aspect Resources LLC owns certain real and personal property interests
in the same oil and gas properties that comprise the Assets and Aspect
manages those properties for and on behalf of Aspect Resources LLC;
accordingly, Aspect has the resources and expertise necessary to provide the
geotechnical consulting services to the Company with respect to the Assets as
a co-owner with and consultant and/or agent to the Company, all as set forth
in this Agreement (collectively, the "Services" as defined in Article 2
below).
C. The Company desires to retain Aspect to provide the Services and
Aspect desires to provide such Services, all pursuant to the terms of this
Agreement.
AGREEMENT
In consideration for the Parties entering into the Acquisition Agreement,
and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
All capitalized terms used herein which are not defined herein shall have
the meaning given in the Acquisition Agreement.
<PAGE>
ARTICLE 2
SERVICES
2.1 Aspect agrees to provide the following geotechnical services to the
Company related to the Assets, such services to include performance of the
following functions (collectively, the "Services"):
(a) Manage and maintain the geophysical and/or seismic data base
related to the Assets unless the data related to certain areas or lease block
are excluded by the Company or Aspect in writing.
(b) Employ or contract for the services of independent geophysical
and/or geophysical consultants or other persons reasonably required to assist
Aspect in the performance of its duties.
(c) Design the parameters for (i) the acquisition of new seismic
or geophysical data related to the Assets, including acquisition of new
seismic data from third parties, (ii) the processing and/or reprocessing of
seismic data and (iii) the analysis and interpretation of such processed
and/or reprocessed data.
(d) Review, reprocess, analyze and if requested, interpret seismic
data related to the Assets.
(e) Establish and maintain all files (electronic or otherwise) as
are required or convenient to administer the geotechnical functions
associated with the Assets.
(f) Manage, negotiate, execute and deliver all contracts and
agreements and amendments to existing contracts and agreements affecting the
Assets and related to the geotechnical and geophysical aspect of the Assets
which Aspect believes are necessary or desirable in connection with the
development of the Assets using geophysical data or to perform any of the
Services hereunder; provided, however, that Aspect shall obtain the approval
of the Company to enter into any such contract or agreement which has a cost
exceeding $50,000, net to the interest of the Company. Unless Aspect obtains
the prior approval of the Company, Aspect shall not intentionally undertake
or approve any of the Services described in this Section if any such Services
will exceed by more than 20% the cost levels or estimates upon which the
Company's approval was based.
2.2 Any person is entitled to rely on this Agreement as granting to
Aspect the power and authority to perform the Services on behalf of the
Company. If deemed necessary by Aspect, the Company shall execute one or more
powers of attorney as are necessary to carry out the purpose of this
Agreement and to evidence that Aspect has the power and authority to perform
the Services on behalf of the Company. The Company shall, for all purposes of
this
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<PAGE>
Agreement, be deemed to have elected to participate in any actions properly
taken by Aspect in accordance with any such power of attorney.
ARTICLE 3
PERFORMANCE OF SERVICES
Aspect agrees to use reasonable efforts to perform all of the Services in
a reasonable, prudent and timely manner consistent with good oil field and
business practices. The Services rendered by Aspect shall be as an
independent contractor, and the Company shall have no supervision or control
over the manner or method used by Aspect in performing the Services. The
Company's sole and only interest shall be in the results obtained.
ARTICLE 4
COSTS AND EXPENSES
To the extent that Aspect pays or advances costs and/or expenses
associated with the Assets on behalf of the Company and to the extent Aspect
hires independent contractors, such cost and expenses and the costs and
expenses of independent contractors shall be billed by Aspect to the Company.
In addition, the Company shall pay Aspect for services rendered under this
Agreement an amount equivalent to Aspect's employee costs, overhead costs and
general and administrative costs associated with or allocable to the services
rendered hereunder. The Company agrees to pay Aspect for all amounts invoiced
hereunder within 30 days of receipt of an invoice from Aspect. Aspect agrees
to deliver monthly invoices to the Company. Each such invoice shall include
the calculation of the costs and expenses which are the subject thereof,
together with supporting documentation.
ARTICLE 5
INDEMNIFICATION
5.1 Aspect shall defend, indemnify and hold harmless the Company, and
its members (include the officers, employees, agents, administrators and
representatives of such members), partners, parents, affiliates, officers,
directors, employees, agents, administrators and representatives from all
loss, costs or expense which may arise directly or indirectly from or in
connection with a breach by Aspect of its duties or obligations under this
Agreement.
5.2 The Company shall defend, indemnify and hold harmless Aspect and its
members (including the officers, employees, agents, administrators and
representatives of such members), partners, parents, affiliates, officers,
directors, employees, agents, administrators and representatives from all
loss, cost or expense which may arise directly or indirectly from or in
connection with (i) a breach by the Company of its duties or obligations
under this Agreement,
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<PAGE>
(ii) a breach by the Company of its duties or obligations under any
confidentiality provisions contained in any agreement or contract relating to
the ownership or licensing of seismic data, and (iii) a breach by the Company
of its duties or obligations under any other provision of any contract,
agreement or license relating to seismic data.
5.3 The Company acknowledges and agrees that it shall rely on Aspect's
interpretation of the seismic or geophysical data given pursuant to the terms
of this Agreement at its own risk. In using such data and interepretations to
make decisions, the Company shall rely solely on its independent analysis,
evaluation and investigation of and judgment with respect to the business,
economic, legal effects of its decision including its own estimate of the
petroleum, natural gas and other reserves of the land to which the seismic
data relates.
ARTICLE 6
TERM/TERMINATION
6.1 This Agreement shall be effective for the period from the Effective
Date until May 14, 2002, unless terminated in writing by either party by
giving the non-terminating party 90 days written notice of such termination.
6.2 If Aspect is in breach of its obligations set forth in Article 3, and
the Company is materially damaged as a result of such breach, the Company
shall so inform Aspect in writing of such breach (an "Event of Default").
Thereafter, Aspect shall have 30 days in which to cure the Event of Default
or such longer period of time as is reasonably necessary under the
circumstances so long as Aspect undertakes to commence the cure of such Event
of Default within such 30-day period and such cure is diligently prosecuted
thereafter. If Aspect does not cure the Event of Default within the 30-day
time period, the Company, at its sole option and discretion, may terminate
this Agreement, and retain any legal and equitable rights and remedies it may
have against Aspect on account of such breach; provided, however, that
Aspect's liability hereunder shall be no greater than the liability it would
have as an operator to a non-operator under AAPL 610 1989 Model Form
Operating Agreement, it being recognized that under such Operating Agreement
the operator is not responsible for its own negligence and has no liability
or responsibility other than for gross negligence or willful misconduct.
ARTICLE 7
MISCELLANEOUS
7.1 This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the
Parties and delivered to the other.
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<PAGE>
7.2 This Agreement shall be governed by and construed in accordance with
the law of the State of Colorado without reference to the conflict of laws
provisions thereof.
7.3 All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally, sent by documented
overnight delivery service or, to the extent receipt is confirmed, by United
States mail, telecopy or other electronic transmission service to the
appropriate address as set forth below.
IF TO ASPECT:
Aspect Management Corporation
511 16th Avenue, Suite 300
Denver, Colorado 80202
Attention: Alex B. Campbell
Facsimile: (303) 573-7340
IF TO THE COMPANY:
Frontier Natural Gas Corporation
500 Dallas Street, Suite 2920
Houston, Texas 77002
Attention: Linda Schibi
Facsimile: (713) 739-7124
or at such other address and to the attention of such other person as such
Party may designate by written notice to the other Party.
7.4 Notwithstanding anything herein provided to the contrary, the Company
shall be deemed to have given its approval to Aspect for any matter requiring
the Company's approval if the Company fails to deny its approval to Aspect
within 10 days of receipt from Aspect of a request for approval under this
Agreement, or within such shorter time period if the situation requires
Aspect to act before the 10-day period has expired and Aspect notifies
Company of such shorter time period.
7.5 Subject to Article 6 hereof, this Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors and
assigns.
7.6 This Agreement may not be modified or amended except by an instrument
or instruments in writing signed by the Parties. Any Party hereto may, only by
an instrument in writing, waive compliance by another Party with any term
provision of this Agreement on the part of such other Party to be performed
or complied with. The waiver by any Party of a breach of any term or
provision of this Agreement shall not be construed as a waiver of any
subsequent breach.
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<PAGE>
7.7 This Agreement is not intended to create, and shall not be construed
to create, a relationship of partnership or an association for profit
between Aspect and the Company.
7.8 The Parties agree not to record this Agreement but agree to place a
power of attorney of record if necessary.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
ASPECT MANAGEMENT CORPORATION
By: /s/ Alex Cranberg
------------------------------
Alex Cranberg, President
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
------------------------------
David W. Berry, President
SIGNATURE PAGE TO GEOTECHNICAL SERVICES CONSULTING AGREEMENT
-6-
<PAGE>
LAND SERVICES CONSULTING AGREEMENT
This Land Services Consulting Agreement (this "Agreement"), effective
May 14, 1998 (the "Effective Date"), is made and entered into by and between
Frontier Natural Gas Corporation, an Oklahoma corporation (the "Company"), and
Aspect Management Corporation, a Colorado corporation ("Aspect"). The Company
and Aspect are sometimes hereafter referred to collectively as the "Parties."
RECITALS
A. The Company owns certain leasehold, mineral and contractual interests
in oil and gas leases and wells and associated equipment and facilities, all as
more particularly described in that certain Acquisition Agreement and Plan of
Exchange, dated as of January 19, 1998 (the "Acquisition Agreement"), by and
among the Company, Esenjay Petroleum Corporation and Aspect Resources LLC. The
real and personal property interests conveyed by Aspect Resources LLC to the
Company pursuant to the Acquisition Agreement are sometimes hereafter referred
to collectively as the "Assets."
B. Aspect Resources LLC owns certain real and personal property interests
in the same oil and gas properties that comprise the Assets and Aspect manages
those properties for and on behalf of Aspect Resources LLC; accordingly, Aspect
has the resources and expertise necessary to provide the land consulting
services to the Company with respect to the Assets as set forth in this
Agreement (collectively, the "Services" as defined in Article 2 below).
C. The Company desires to retain Aspect to provide the Services and
Aspect desires to provide such Services, all pursuant to the terms of this
Agreement.
AGREEMENT
In consideration for the Parties entering into the Acquisition Agreement,
and other good and valuable consideration the receipt and sufficiency of which
are hereby acknowledged, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
All capitalized terms used herein which are not defined herein shall have
the meaning given in the Acquisition Agreement.
<PAGE>
ARTICLE 2
SERVICES
2.1 Aspect agrees to provide the following land-related services to the
Company related to the Assets, such services to include performance of the
following functions (collectively, the "Services"):
(a) Manage and maintain land services related to the Assets unless
certain areas or lease block are excluded by the Company or Aspect in writing
(the "Lease Blocks").
(b) Assemble acreage blocks under options to lease, oil and gas
leases, or other agreements in the geographic locations defined by the Company
or Aspect and under general terms and conditions established by the Company or
Aspect.
(c) Employ or contract for the services of independent landmen,
brokers, lease analysts, division order analysts or other persons reasonably
required to assist Aspect in the performance of its duties.
(d) Pay and perform all land related obligations related to the
Assets on behalf of the Company.
(e) Execute and file and record, when appropriate or required, all
assignments and other instruments, permits, applications, requests or regulatory
documents or instruments relating to the Assets.
(f) Establish and maintain all lease files and other land-related
files, books and records, as are required or convenient to administer the land
functions associated with the Assets.
(g) Perform all required land related reporting for the Assets and to
which the Company is subject; including furnishing Company quarterly reports on
or before 60 days after the end of a calendar quarter, detailing the land
activities on the Assets; such report to be in form and substance as agreed to
by the parties.
(h) Receive and collect all revenues and income attributable to the
Lease Blocks, including, without limitation, all gross proceeds and other
income, unless otherwise agreed to by the Parties.
(i) Manage, negotiate, execute and deliver all contracts and
agreements and amendments to existing contracts and agreements affecting the
Assets which Aspect believes are necessary or desirable in connection with the
ownership, development, operation, production and maintenance of the Assets or
to perform any of the Services hereunder;
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<PAGE>
provided, however, that Aspect shall obtain the approval of the Company to
enter into any such contract or agreement which has a cost exceeding $50,000,
net to the interest of the Company. Unless Aspect obtains the prior approval
of the Company, Aspect shall not intentionally undertake or approve any of
the Services described in this Section if any such Services will exceed by
more than 20% the cost levels or estimates upon which the Company's approval
was based.
(j) Serve as the Company's representative as to all hearings,
proceedings, filings, permits, bonds, licenses or such other similar matters as
they relate to the Assets and which relate to any governmental, quasi-
governmental or regulatory body or agency (other than the Internal Revenue
Service), and to execute all applications, permits, orders, consents, waivers
and agreements, as such relate to the Assets with respect to such body or
agency. Should a conflict arise between the interests of Aspect and the Company
regarding the foregoing matters, Aspect shall advise the Company of (i) any such
conflict, and (ii) Company's right to represent itself with respect to such
matters.
2.2 Any person is entitled to rely on this Agreement as granting to Aspect
the power and authority to perform the Services on behalf of the Company. In
order to allow Aspect to carry out its duties and to exercise its powers
hereunder, the Company has executed a Power of Attorney (the "Power of
Attorney") in the form set forth on Schedule 1. The Company shall execute such
counterparts of the Power of Attorney as are necessary to carry out the purpose
of this Agreement and to evidence that Aspect has the power and authority to
perform the Services on behalf of the Company. The Company and Aspect
acknowledge that, for purposes of administrative convenience, certain
limitations on the authority of Aspect which are set forth in this Agreement are
not set forth in the Power of Attorney, and that this circumstance shall not
result in any expansion in the authority of Aspect. The Company shall, for all
purposes of this Agreement, be deemed to have elected to participate in any
actions properly taken by Aspect in accordance with the Power of Attorney.
ARTICLE 3
PERFORMANCE OF SERVICES
Aspect agrees to use reasonable efforts to perform all of the Services in a
reasonable, prudent and timely manner consistent with good oil field and
business practices. The Services rendered by Aspect shall be as an independent
contractor, and the Company shall have no supervision or control over the manner
or method used by Aspect in performing the Services. The Company's sole and
only interest shall be in the results obtained.
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<PAGE>
ARTICLE 4
COSTS AND EXPENSES
To the extent that Aspect pays or advances costs and/or expenses associated
with the Assets on behalf of the Company and to the extent Aspect hires
independent contractors, such cost and expenses and the costs and expenses of
independent contractors shall be billed by Aspect to the Company. In addition,
the Company shall pay Aspect for services rendered under this Agreement an
amount equivalent to Aspect's employee costs, overhead costs and general and
administrative costs associated with or allocable to the services rendered
hereunder. The Company agrees to pay Aspect for all amounts invoiced hereunder
within 30 days of receipt of an invoice from Aspect. Aspect agrees to deliver
monthly invoices to the Company. Each such invoice shall include the
calculation of the costs and expenses which are the subject thereof, together
with supporting documentation.
ARTICLE 5
INDEMNIFICATION
5.1 Aspect shall defend, indemnify and hold harmless the Company, and its
members (including the officers, employees, agents, administrators and
representatives of such members), partners, parents, affiliates, officers,
directors, employees, agents, administrators and representatives from all loss,
cost or expense which may arise directly or indirectly from or in connection
with a breach by Aspect of its duties or obligations under this Agreement.
5.2 The Company shall defend, indemnify and hold harmless Aspect and its
members (including the officers, employees, agents, administrators and
representatives of such members), partners, parents, affiliates, officers,
directors, employees, agents, administrators and representatives from all loss,
cost or expense which may arise directly or indirectly from or in connection
with a breach by the Company of its duties or obligations under this Agreement.
ARTICLE 6
TERM/TERMINATION
6.1 This Agreement shall be effective for the period from the Effective
Date until May 14, 2002, unless terminated in writing by either party by giving
the non-terminating party 90 days written notice of such termination.
6.2 If Aspect is in breach of its obligations set forth in Article 3,
and the Company is materially damaged as a result of such breach, the Company
shall so inform Aspect in writing of such breach (an "Event of Default").
Thereafter, Aspect shall have 30 days in which to cure the Event of Default or
such longer period of time as is reasonably necessary under
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<PAGE>
the circumstances so long as Aspect undertakes to commence the cure of such
Event of Default within such 30-day period and such cure is diligently
prosecuted thereafter. If Aspect does not cure the Event of Default within
the 30-day time period, the Company, at its sole option and discretion, may
terminate this Agreement, and retain any legal and equitable rights and
remedies it may have against Aspect on account of such breach; provided,
however, that Aspect's liability hereunder shall be no greater than the
liability it would have as an operator to a non-operator under AAPL 610 1989
Model Form Operating Agreement, it being recognized that under such Operating
Agreement the operator is not responsible for its own negligence and has no
liability or responsibility other than for gross negligence or willful
misconduct.
ARTICLE 7
MISCELLANEOUS
7.1 This Agreement may be executed in one or more counterparts, all of
which shall be considered one and the same agreement, and shall become effective
when one or more counterparts have been signed by each of the Parties and
delivered to the other.
7.2 This Agreement shall be governed by and construed in accordance with
the law of the State of Colorado without reference to the conflict of laws
provisions thereof.
7.3 All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally, sent by documented overnight
delivery service or, to the extent receipt is confirmed, by United States mail,
telecopy or other electronic transmission service to the appropriate address as
set forth below.
IF TO ASPECT:
Aspect Management Corporation
511 16th Avenue, Suite 300
Denver, Colorado 80202
Attention: Alex Campbell
Facsimile: (303) 573-7340
IF TO THE COMPANY:
Frontier Natural Gas Corporation
500 Dallas Street, Suite 2920
Houston, Texas 77002
Attention: Linda Schibi
Facsimile: (713) 739-7124
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<PAGE>
or at such other address and to the attention of such other person as such Party
may designate by written notice to the other Party.
7.4 Notwithstanding anything herein provided to the contrary, the Company
shall be deemed to have given its approval to Aspect for any matter requiring
the Company's approval if the Company fails to deny its approval to Aspect
within 10 days of receipt from Aspect of a request for approval under this
Agreement, or within such shorter time period if the situation requires Aspect
to act before the 10-day period has expired and Aspect notifies Company of such
shorter time period.
7.5 Subject to Article 6 hereof, this Agreement shall be binding upon
and inure to the benefit of the Parties and their respective successors and
assigns. Further, this Agreement, and the rights and obligations hereunder,
shall be a covenant running with the lands attributable to the Assets.
7.6 This Agreement may not be modified or amended except by an instrument
or instruments in writing signed by the Parties. Any Party hereto may, only by
an instrument in writing, waive compliance by another Party with any term or
provision of this Agreement on the part of such other Party to be performed or
complied with. The waiver by any Party of a breach of any term or provision of
this Agreement shall not be construed as a waiver of any subsequent breach.
7.7 This Agreement is not intended to create, and shall not be construed
to create, a relationship of partnership or an association for profit between
Aspect and the Company.
7.8 The Parties agree not to record this Agreement but agree to place the
Power of Attorney of record if necessary.
-6-
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first above written.
ASPECT MANAGEMENT CORPORATION
By: /s/ Alex Cranberg
--------------------------------
Alex Cranberg, President
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
--------------------------------
David W. Berry, President
SIGNATURE PAGE TO LAND SERVICES CONSULTING AGREEMENT
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<PAGE>
SCHEDULE 1
POWER OF ATTORNEY
This POWER OF ATTORNEY (this "Power of Attorney") is dated
and effective as of May 14, 1998 (the "Effective Date"), and is executed by and
between Frontier Natural Gas Corporation, an Oklahoma corporation, whose address
is 500 Dallas Street, Suite 2920, Houston, Texas 77002 (the "Company"), and
Aspect Management Corporation, a Colorado corporation, whose address is 511
Sixteenth Street, Suite 300, Denver, Colorado 80202 ("Aspect").
RECITALS
A. The Parties hereby give notice that they entered into a
Land Services Consulting Agreement dated effective May 14, 1998 (the
"Agreement"), whereby the Company contracted with Aspect for Aspect to perform
certain land related services relative to the Assets conveyed to the Company by
Aspect Resources LLC (collectively, the "Assets") pursuant to that certain
Acquisition Agreement and Plan of Exchange, dated as of January 19, 1998
(the "Acquisition Agreement"), by and among the Company, Esenjay Petroleum
Corporation and Aspect Resources LLC.
B. Aspect has agreed to manage the land related portion of
the Assets for and on behalf of the Company, by performing certain management
services, as limited and described in more detail in the Agreement (the
"Services").
AGREEMENT
1. Effective as of the Effective Date, the Company does
hereby revoke all prior powers of attorney granted in connection with the
following matters and does hereby appoint and constitute Aspect as its duly
authorized Attorney-in-Fact with power and authority for the Company and in its
name, place and stead to execute, acknowledge and deliver such instruments as
Aspect deems necessary or convenient in connection with the following matters
relating to real or personal property constituting the Assets:
(a) Operate, manage, and maintain the Assets.
(b) Employ or contract for the services of any person
required by Aspect, in its reasonable discretion, to assist Aspect in the
performance of any of its duties and responsibilities under the Agreement,
including, without limitation, any land related legal, accounting, and other
services and advice as Aspect deems advisable, in its reasonable discretion,
from any person.
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<PAGE>
(c) Pay and perform all obligations of the Company
which relate to the Assets, including, without limitation, the payment of
working interest expenses attributable to the Assets.
(d) Execute and file and record, when appropriate or
required, all assignments and other land related instruments, permits,
applications, requests or regulatory documents or instruments relating to the
Assets.
(e) Establish and maintain all bank accounts, books
and records, capital accounts, and other accounts as are required or convenient
to operate the Assets.
(f) Perform all accounting and reporting related to
the Assets.
(g) Receive and collect all revenues and income
attributable to the Assets.
(h) Manage, negotiate, execute and deliver all
contracts and agreements and amendments to existing contracts and agreements
affecting the Assets which Aspect believes are necessary or desirable in
connection with the ownership, development, operation, production and
maintenance of the Assets or to perform any of the Services under the Agreement.
(i) Act on behalf of and bind the Company with respect
to all hearings, proceedings, filings, permits, bonds, licenses or such other
similar matters as they relate to the Assets or a portion thereof and which
relate to any governmental, quasi-governmental or regulatory body or agency
(other than the Internal Revenue Service), and to execute all applications,
permits, orders, consents, waivers and agreements, as such relate to the Assets
or a portion thereof, with respect such body or agency.
(j) Exercise on behalf of the Company the right to not
participate or to non-consent any proposal.
(k) Pool, force pool, unpool, unitize, force unitize
or deunitize the Company's interests in the Assets.
(l) All other acts and things as are necessary to
carry out Aspect's responsibilities under the Agreement.
2. The powers herein conferred shall extend to all acts
and transactions described in (a) - (l) above affecting the Assets and extend to
all forms of interests in the Assets. This Power of Attorney is irrevocable by
the Company and is coupled with an interest in the lands covered by the Assets
for the period from the Effective Date until the Agreement is
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<PAGE>
terminated. This Power of Attorney shall automatically terminate on May 14,
2002, unless earlier terminated by placing notice of such termination of
record.
3. Aspect shall use reasonable efforts to perform the
Services in a reasonable and prudent manner consistent with good oil field and
business practices.
4. Aspect may present this Power of Attorney to any third
party as evidence of its authority to perform the duties and obligations of
Aspect under the Agreement.
Any person is entitled to rely on this Power of Attorney as
notice that Aspect has been given the power and authority to manage the Assets
and to perform the Services on behalf of the Company.
FRONTIER NATURAL GAS CORPORATION
By: /s/ David W. Berry
--------------------------------
David W. Berry, President
ASPECT MANAGEMENT CORPORATION
By: /s/ Alex Cranberg
--------------------------------
Alex Cranberg, President
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<PAGE>
STATE OF TEXAS )
) ss.
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me this 14th day
of May, 1998, by David W. Berry as President of Frontier Natural Gas
Corporation, an Oklahoma corporation, on behalf of such corporation.
Witness my hand and official seal.
/s/ Angela Sterling
-----------------------------------
Notary Public
My commission expires: 8-22-2001
(SEAL)
STATE OF TEXAS )
) ss.
COUNTY OF HARRIS )
The foregoing instrument was acknowledged before me this 14th day
of May, 1998, by Alex Cranberg as President of Aspect Management Corporation,
a Colorado corporation, on behalf of such corporation.
Witness my hand and official seal.
/s/ Angela Sterling
------------------------------------
Notary Public
My commission expires: Aug. 22, 2001
(SEAL)
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<PAGE>
BILL OF SALE AND ASSIGNMENT
This Bill of Sale and Assignment (this "Agreement") is made and entered
into as of May 14, 1998, by James E. Rogers, R. Michael Looney and Steven L.
Creger (collectively, "Assignors") for the benefit of Frontier Natural Gas
Corporation, an Oklahoma corporation ("Assignee"). As contemplated by that
Exchange Agreement, dated as of May 13, 1998, by and among Assignors and
Assignee and as a contribution to the capital of Assignee, Assignors hereby
grant, bargain, convey, assign, transfer, set over and deliver unto Assignee
all of their respective right, title and interest in all overriding royalty
interests an/or working interests ("ORRI/WIs") in, to and under those oil and
gas properties being conveyed by Aspect Resources LLC ("Aspect") to Assignee
under that certain Acquisition Agreement and Plan of Exchange, dated as of
January 19, 1998, by and among Assignee, Esenjay Petroleum Corporation
("Esenjay") and Aspect, free and clear of any and all liens, claims or
encumbrances.
Assignors hereby agree TO HAVE AND TO HOLD the ORRI/WIs unto Assignee,
its successors and assigns, forever; and Assignors do hereby bind themselves
and their heirs, legal representatives and assigns to WARRANT AND FOREVER
DEFEND all and singular the ORRI/WIs unto Assignee, its successors and
assigns, against every person whomsoever lawfully claiming or to claim the
same or any part thereof. Assignors hereby agree to execute any and all
additional instruments, documents and certificates and to take any and all
further actions requested by Assignee to effect the transfer of and to vest
title in, or for aiding and assisting in collecting and reducing to
possession, any and all of the ORRI/WIs in Assignee.
This Agreement shall (i) be binding upon Assignors and their heirs,
legal representatives and assigns, (ii) inure to the benefit of and be
enforceable by Assignee, its successors and assigns, and (iii) be construed
and enforced in accordance with the laws of the State of Texas.
IN WITNESS WHEREOF, this Agreement is executed by and between the
parties hereto as of May 14, 1998.
ASSIGNORS:
/s/ James E. Rogers
---------------------------------
James E. Rogers
Signed documents being
held in escrow by Charles
Bybee pending delivery of /s/ R. Michael Looney
stock certificates for Messrs. ---------------------------------
Rogers, Looney and Creger R. Michael Looney
to Mr. Bybee
/s/ Steven L. Creger
---------------------------------
Steven L. Creger
<PAGE>
May 14, 1998
David W. Berry
Frontier Natural Gas Corporation
500 Dallas Street, Suite 2920
Houston, Texas 77002
Re: Right of First Offer; Conflicts
Dear David:
Reference is made to that certain Acquisition Agreement and Plan of
Exchange, dated as of January 19, 1998 (the "Acquisition Agreement"), by and
among Frontier Natural Gas Corporation ("Frontier"), Esenjay Petroleum
Corporation ("Esenjay") and Aspect Resources LLC ("Aspect"). Capitalized
terms used but not defined herein shall have the meanings specified in the
Acquisition Agreement. This letter agreement is being delivered pursuant to
Sections 10.01(r) and 10.03(n) of the Acquisition Agreement.
Aspect agrees that after the date hereof it will negotiate in good faith
to reach a mutual understanding and agreement with Frontier regarding an area
of mutual interest arrangement or right of first offer arrangement relating
to certain lands and areas surrounding the Prospect Areas (the "Halo Region").
Frontier acknowledges that Aspect owns and is likely to acquire and
develop lands and Oil and Gas Interests located within the Halo Region and in
other areas in which Frontier may have an interest. Frontier acknowledges and
agrees that (i) Aspect and its officers, members, managers, agents,
employees, and affiliates may acquire or develop, independently or with
others, any lands or Oil and Gas Interests, including lands or Oil and Gas
Interests that may be the same or similar to lands or Oil and Gas Interests
owned by Frontier and that might be in direct or indirect competition with
Frontier's business or interests, and (ii) except for the rights provided
hereinabove, Frontier shall have no rights in or to such lands or Oil and Gas
Interests. Frontier further agrees that Aspect shall not be obligated to
present any investment opportunity (oil and gas related or otherwise) or
prospective economic advantage to Frontier, even if the opportunity is of the
character that, if presented to Frontier, could be taken by Frontier and that
Aspect shall have the right to hold any investment opportunity or prospective
economic advantage for its own account or to recommend such opportunity to
persons other than Frontier. Frontier hereby waives any and all rights and
claims which it may otherwise have against Aspect
<PAGE>
David W. Berry
May 14, 1998
Page 2
and its officers, members, managers, agents, employees, and affiliates as a
result of any of such activities.
If this letter evidences your understanding with respect to the
foregoing matters, please evidence such understanding in the space provided
below and return a fully executed copy of this letter to me for our files.
Sincerely,
Aspect Resources LLC
By: Aspect Management Corporation,
its Manager
By: /s/ Alex Cranberg
------------------------------------
Alex Cranberg, President
ACKNOWLEDGED AND AGREED TO
THIS 14 DAY OF MAY, 1998
Frontier Natural Gas Corporation
By: /s/ David W. Berry
-----------------------------------
David W. Berry, President
<PAGE>
MASTER ASSIGNMENT - ESENJAY
PARTIAL ASSIGNMENT, BILL OF SALE AND CONVEYANCE
THIS PARTIAL ASSIGNMENT, BILL OF SALE AND CONVEYANCE ("Assignment"),
dated effective November 1, 1997 at 7:00 a.m., Central Time (the "Effective
Time"), is from Esenjay Petroleum Corporation, a Texas Corporation, 500 N.
Water Street, Suite 1100 South, Corpus Christi, Texas 78471 ("Esenjay" or
"Assignor") to Frontier Natural Gas Corporation, an Oklahoma corporation, 500
Dallas Street, Suite 2920, Houston, Texas 77002 ("Frontier" or "Assignee").
FOR $100.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Assignor, Assignor hereby
sells, transfers, grants, conveys and assigns to Assignee, those certain
working and not revenue interests set forth on Exhibit A, in and to the
following (all of which are collectively called the "Interests"), subject to
the reservations set forth below:
1. The oil, gas, mineral and related properties and assets of any kind
and nature, direct or indirect, including working, royalty and overriding
royalty interests, production payments, operating rights, net profits
interests, fee minerals, fee royalties, other non-working and non-operating
interests, other mineral leasehold interests and other leasehold estates
created by the leases, licenses, permits and other agreements described in
Exhibit A (collectively, the "Leases"), INSOFAR BUT ONLY INSOFAR as they
cover and relate to the lands covered by the Leases in which Assignor has an
Interest (the "Lands") and the undivided interests set forth on Exhibit A;
2. The interests in and rights with respect to crude oil, natural gas,
casinghead gas, and other liquid or gaseous hydrocarbons produced from the
Lands (the "Hydrocarbons") and other minerals or revenues therefrom and
contracts in connection therewith and claims and rights thereto (including
operating agreements, unitization and pooling agreements and orders, division
orders, transfer orders, mineral deeds, royalty deeds, oil and gas sales,
exchange and processing contracts and agreements, and, in each case,
interests thereunder), surface interests, fee interests, reversionary
interests,reservations and concessions;
3. All the real and personal property and rights associated with,
appurtenant to or necessary for operation of the Leases, the oil and gas
wells located on the Land (the "Wells") and the Leases, including to the
extent transferable, surface, product purchase and sales agreements, surface
leases, gas gathering contracts, processing agreements, compression
agreements, equipment leases, unit agreements, pooling agreements, areas of
mutual interest, farmout agreements, farmin agreements,saltwater disposal
agreements, water injection agreements, road use agreements, operating
agreements, surface use agreements, easements, rights-of-way, licenses,
authorizations, permits, orders, pooling agreements, spacing agreements,
consolidation agreements, gas balancing agreements and all other agreements
relating thereto;
<PAGE>
4. All of the personal property, fixtures and improvements, including
without limitation, the interests appurtenant to the Wells, Leases or Lands
(excluding vehicles and that seismic and other geological and geological
technical data which was retained by Assignor as of the Effective Time), or
used or obtained in connection with the operation of the Wells, or the Leases
or with the production, treatment, sale or disposal of Hydrocarbons or water
produced therefrom or attributable thereto, including without limitation,
pumps, well equipment (surface and subsurface), saltwater disposal wells,
pumps, water plants, dehydration facilities, storage facilities, treating
facilities, flow lines, valves, meters, separators, tanks, tank batteries and
other fixtures but expressly excluding transportation lines, tools, vehicles,
or other rolling stock, communication equipment, leased equipment, computer
equipment and software; and
5. To the extent transferable, copies of the files and records of
Assignor relating to the interests described in paragraphs 1 through 4 above.
TO HAVE AND TO HOLD the Interests unto Assignee and its successors and
assigns forever.
This Assignment is made and accepted expressly subject to the following
terms and conditions:
A. THIS ASSIGNMENT IS MADE WITHOUT REPRESENTATION OR WARRANTY OF ANY
KIND, provided that Assignor warrants and agrees that, except as described on
Exhibit A, the Interests are free and clear of all liens or encumbrances
arising by, through and under Assignor, but not otherwise.
B. This Assignment is expressly made and accepted subject to those
terms and conditions of the Acquisition Agreement and Plan of Exchange
("Agreement") dated effective January 19, 1998 between Frontier, Esenjay, and
Aspect Resources LLC. The parties intend that the terms of this Assignment
and the terms of the Agreement NOT merge. If there is any conflict or
inconsistency between the provisions of this Assignment and the terms of the
Agreement, the terms of the Agreement shall control in all respects. Further,
this Assignment and Interests conveyed herein are subject to the agreements
and instruments described and set forth in Exhibit A to the extent that they
may be valid, in force and effect and enforceable in accordance with their
terms and Assignee agrees to assume the liabilities and obligation related to
the Interests attributable to the period of time after the Effective Time.
C. Assignor also hereby grants and transfers to Assignee its
successors and assigns, to the extent so transferable, the benefit of and the
right to enforce the covenants and warranties, if any, which Assignor is
entitled to enforce with respect to the Interests against Assignor's
predecessors in title to the Interests.
<PAGE>
D. The parties agree that to the extent required to be operative, the
disclaimers of certain warranties contained in this paragraph are
"conspicuous" disclaimers for the purposes of any applicable law, rule or
order. Except for the special limited warranty set forth above and except as
specifically set forth in the Agreement, the Interests are assigned to
Assignee without recourse, covenant or warranty of any kind, express, implied
or statutory. WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY
PRECEDING SENTENCE, ASSIGNOR EXPRESSLY DISCLAIMS AND NEGATES AS TO PERSONAL
PROPERTY AND FIXTURES (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY,
(b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (c)
ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF
MATERIALS AND (d) ANY IMPLIED OR EXPRESS WARRANTY OF TITLE, OTHER THAN THE
LIMITED WARRANTY TO ASSIGNEE SET FORTH ABOVE. ASSIGNOR ALSO EXPRESSLY
DISCLAIMS AND NEGATES ANY IMPLIED OR EXPRESS WARRANTY AS TO THE COMPLETENESS
AND ACCURACY OF ANY OF THE INFORMATION FURNISHED WITH RESPECT TO THE
EXISTENCE OR EXTENT OF RESERVES OR THE VALUE OF THE INTERESTS BASED THEREON
OR THE CONDITION OR STATE OF REPAIR OF ANY OF THE INTERESTS (IT BEING
UNDERSTOOD THAT ALL RESERVE ESTIMATES ON WHICH ASSIGNEE HAS RELIED OR IS
RELYING HAVE BEEN DERIVED BY INDEPENDENT EVALUATION BY ASSIGNEE) AND AS TO
THE PRICES THAT ASSIGNOR OR ASSIGNEE ARE OR WILL BE ENTITLED TO RECEIVE FROM
PRODUCTION OF OIL, GAS OR OTHER SUBSTANCES FROM THE INTERESTS.
E. The references herein to liens or encumbrances are for the purpose
of defining the nature and extent of Assignor's special limited warranty and
shall not be deemed to ratify or create any rights in third parties. The
Working Interest and Net Revenue Interest numbers on Exhibit A fairly
reflect, Assignor's right, title and interest in and to the Wells and shall
be used only to define the scope of the special limited warranty set forth
herein and shall not be deemed to ratify or create any rights in third
parties, it being Assignor's intent to assign the specified interests in the
Leases, Lands and Wells to Assignee.
F. Unless provided otherwise, all recording references in the Exhibits
hereto are to the official real property records of the counties in which the
Interests are located.
G. Separate assignments of the Interests may be executed on officially
approved forms by Assignor to Assignee, in sufficient counterparts to satisfy
applicable statutory and regulatory requirements. Those assignments shall
be deemed to contain the special limited warranty and all of the exceptions,
reservations, right to enforce covenants and warranties (if any) against
Assignor's predecessors, in title, rights, titles, power and privileges set
forth herein as fully as though they were set forth in each such assignments.
The interests conveyed by such separate assignments are the same, and not in
addition to, the Interests conveyed herein.
<PAGE>
H. This Assignment may be executed in any number of counterparts, and
each counterpart hereof shall be deemed to be an original instrument, but all
such counterparts shall constitute but one assignment. To facilitate
recording, a counterpart to be recorded in a given county may contain only
those portions of the Exhibits hereto that describes property located in that
county.
I. This Assignment shall bind and inure to the benefit of Assignor and
Assignee and their respective successors and assigns.
EXECUTED on the dates set forth in the acknowledgments below, to be
effective for all purposes as of the Effective Time.
ASSIGNOR:
ESENJAY PETROLEUM CORPORATION,
ATTEST: a Texas corporation
By: By:
-------------------- -----------------------------
Name: Charles J. Smith Name: Linda D. Schibi
-------------------- -----------------------------
Title: Chairman Title: Agent and Attorney-in-Fact
-------------------- -----------------------------
ASSIGNEE:
FRONTIER NATURAL GAS CORPORATION,
ATTEST: an Oklahoma corporation
By: By:
-------------------- -------------------------------
Name: David W. Berry Name: David B. Christofferson
-------------------- -------------------------------
Title: President Title: Exec. Vice President
-------------------- -------------------------------
<PAGE>
STATE OF Texas Section
Section ss.
COUNTY OF Nueces Section
The foregoing instrument was acknowledged before me this 13th day of
May, 1998 by Linda D. Schibi, Agent and AIF of Esenjay Petroleum
Corporation, A Texas corporation.
[SEAL]
Witness my hand and official seal.
My commission expires: __________________
-----------------------
Notary Public
STATE OF Texas Section
Section ss.
COUNTY OF Harris Section
The foregoing instrument was acknowledged before me this 14th day of
May, 1998 by David B. Christofferson, as E. Vice President of Frontier
Natural Gas Corporation, an Oklahoma corporation.
Witness my hand and official seal.
My commission expires:
--------------------
Notary Public
[SEAL]
<PAGE>
PARTIAL ASSIGNMENT, BILL OF SALE AND CONVEYANCE
-----------------------------------------------
THIS PARTIAL ASSIGNMENT, BILL OF SALE AND CONVEYANCE ("Assignment")
dated effective November 1, 1997 at 7:00 a.m. Central Time (the "Effective
Time") is from Aspect Resources LLC, a Colorado limited liability company,
511 Sixteenth Street, Suite 300, Denver, Colorado 80202 ("Aspect" or
"Assignor") to Esenjay Exploration, Inc., a Delaware corporation, 500 North
Water, Suite #1100 South, Corpus Christi, Texas 78471 ("Esenjay" or
"Assignee").
FOR $100.00 and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by Assignor, Assignor hereby
sells, transfers, grants, conveys and assigns to Assignee, an undivided
_________________ percent (_____%) interest in Assignor's right, title
and interest set forth on Exhibit "A," in and to the following (all of which
are collectively called the "Interests"), subject to the reservations set
forth below:
1. The oil, gas, mineral and related properties and assets of any kind
and nature, direct or indirect, including working, royalty and overriding
royalty interests, production payments, operating rights, net profits
interests, fee minerals, fee royalties, other non-working and non-operating
interests; other mineral leasehold interests and other leasehold estates
created by the leases, licenses, permits and other agreements described in
Exhibit "A" (collectively the "Leases"), INSOFAR BUT ONLY INSOFAR as they
cover and relate to the land covered by the Leases in which Assignor has an
Interest (the "Land") and the undivided interests set forth on Exhibit "A";
2. The interests in and rights with respect to crude oil, natural gas,
casinghead gas, and other liquid or gaseous hydrocarbons produced from the
Lands (the "Hydrocarbons") and other minerals or revenues therefrom and
contracts in connection therewith and claims and rights thereto (including
operating agreements, unitization and pooling agreements and orders, division
orders, transfer orders, mineral deeds, royalty deeds, oil and gas sales,
exchange and processing contracts and agreements and, in each case, interests
thereunder), surface interests, fee interests, reversionary interests,
reservations and concessions;
3. All the real and personal property and rights associated with,
appurtenant to or necessary for operation of the Leases, the oil and gas
wells located on the Land (the "Wells") and the Leases, including to the
extent transferable, surface, product purchase and sales agreements, surface
leases, gas gathering contracts, processing agreements, compression
agreements, equipment leases, unit agreements, pooling agreements, areas of
mutual interest, farmout agreements, farmin agreements, surface use
agreements, easements, rights-of-way, licenses, authorizations, permits,
orders, pooling agreements, spacing agreements, consolidation agreements, gas
balancing agreements and all other agreements relating thereto;
1
<PAGE>
4. All of the personal property, fixtures and improvements, including
without limitation, the interests appurtenant to the Wells, Leases or Lands
(excluding vehicles and that seismic and other geological and geophysical
technical data which was retained by Assignor as of the Effective Time), or
used or obtained in connection with the operation of the Wells or the Leases,
or with the production, treatment, sale or disposal of Hydrocarbons or water
produced therefrom or attributable thereto, including without limitation
pumps, well equipment (surface and subsurface), saltwater disposal wells,
pumps, water plants, dehydration facilities, storage facilities, treating
facilities, flow lines, valves, meters, separators, tanks, tank batteries and
other fixtures, but expressly excluding transportation lines, tools, vehicles,
or other rolling stock, communication equipment, leased equipment, computer
equipment and software; and
5. To the extent transferable, copies of the files and records of
Assignor relating to the interests described in paragraphs 1 through 4 above.
TO HAVE AND TO HOLD the Interests unto Assignee and its successors and
assigns forever.
This Assignment is made and accepted expressly subject to the
following terms and conditions:
A. THIS ASSIGNMENT IS MADE WITHOUT REPRESENTATION OR WARRANTY OF ANY
KIND, provided that Assignor warrants and agrees that the Interests are free
and clear of all liens or encumbrances arising by, through and under
Assignor, but not otherwise.
B. This Assignment is expressly made and accepted subject to those
terms and conditions of the Acquisition Agreement and Plan of Exchange
("Agreement") dated effective January 19, 1998 between Aspect Resources LLC,
Frontier Natural Gas Corporation, and Esenjay Petroleum Corporation. The
parties intend that the terms of this Assignment and the terms of the
Agreement NOT merge. Certain of the Interests to be assigned pursuant to the
Agreement and this Assignment (i) were vested in Assignor of record after the
Effective Time but on or before the date of this Assignment, or (ii) at the
Effective Time were contractual rights to receive assignments of the
Interests from third parties; Assignor intends to assign the specific
undivided percentages set forth above pursuant to the terms of this
Assignment, notwithstanding that such Interests were not held by Assignor of
record at the Effective Time or were contractual rights to receive
assignments from third parties. If there is any conflict or inconsistency
between the provisions of this Assignment and the terms of the Agreement, the
terms of the Agreement shall control in all respects.
C. THE LAND SPECIFICALLY DESCRIBED IN EXHIBIT "A" HERETO AND ALL OTHER
LAND IS SPECIFICALLY LIMITED IN DEPTH TO THOSE DEPTHS LYING FROM THE BASE OF
THE "UNITIZED FORMATION" AS DESCRIBED IN THAT CERTAIN UNIT AGREEMENT FOR THE
SOUTH GILLOCK UNIT, GALVESTON COUNTY, TEXAS, DATED AUGUST 5, 1964, TO ALL
DEPTHS BELOW, DESCRIBED IN OR COVERED BY THE LEASES WHETHER OR NOT SUCH LAND
IS SPECIFICALLY DESCRIBED IN EXHIBIT "A" HERETO.
D. Assignor also hereby grants and transfers to Assignee, its
successors and assigns, to the extent so transferable, the benefit of and the
right to enforce the covenants and warranties, if any, which Assignor is
entitled to enforce with respect to the Interests against Assignor's
predecessors in title to the Interests.
E. The parties agree that to the extent required to be operative, the
disclaimers of certain warranties contained in this paragraph are
"conspicous" disclaimers for the purposes of any applicable law, rule or
order. Except for the special limited warranty set for the above, and except
as specifically set
2
<PAGE>
forth in the Agreement, the Interests are assigned to Assignee without
recourse, covenant or warranty of any kind, express, implied or statutory.
WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE,
ASSIGNOR EXPRESSLY DISCLAIMS AND NEGATES AS TO PERSONAL PROPERTY AND FIXTURES
(a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR
EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (c) ANY IMPLIED OR
EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS AND (d) ANY
IMPLIED OR EXPRESS WARRANTY OF TITLE, OTHER THAN THE LIMITED WARRANTY TO
ASSIGNEE SET FORTH ABOVE. ASSIGNOR ALSO EXPRESSLY DISCLAIMS AND NEGATES ANY
IMPLIED OR EXPRESS WARRANTY AS TO THE COMPLETENESS AND ACCURACY OF ANY OF THE
INFORMATION FURNISHED WITH THE RESPECT TO THE EXISTENCE OR EXTENT OR THE VALUE
OF THE INTERESTS BASED THEREON OR THE CONDITION OR STATE OF REPAIR OF ANY OF
THE INTERESTS (IT BEING UNDERSTOOD THAT ALL RESERVE ESTIMATES ON WHICH ASSIGNEE
HAS RELIED OR IS RELYING HAVE BEEN DERIVED BY INDEPENDENT EVALUATION BY
ASSIGNEE) AND AS TO THE PRICES THAT ASSIGNOR OR ASSIGNEE ARE OR WILL BE
ENTITLED TO RECEIVE FROM PRODUCTION OF OIL, GAS OR OTHER SUBSTANCES FROM THE
INTERESTS.
F. The references herein to liens or encumbrances are for the purpose
of defining the nature and extent of Assignor's special limited warranty and
shall not be deemed to ratify or create any rights in third parties. The
Working Interest and Net Revenue Interest numbers on Exhibit "A" fairly
reflect Assignor's right, title and interest in and to the Wells and shall be
used only to define the scope of the special limited warranty set forth
herein and shall not be deemed to ratify or create any rights in third
parties or limit the scope of Assignor's assignment, it being Assignor's
intent to assign the specified undivided percentage of Assignor's interests
in the Leases, Lands and Wells to Assignee without limitation as to depth or
formation, except as specified in Paragraph C., above.
G. Unless provided otherwise, all recording references in the Exhibit
"A" hereto are to the official real property records of the counties in which
the Interests are located.
H. Separate assignments of the Interests may be executed on officially
approved forms by Assignor to Assignee, in sufficient counterparts to satisfy
applicable statutory and regulatory requirements. Those assignments shall be
deemed to contain the special limited warranty and all of the exceptions,
reservations, right to enforce covenants and warranties (if any) against
Assignor's predecessors, in title, rights, titles, power and privileges set
forth herein as fully as though they were set forth in each such assignment.
The interests conveyed by such separate assignments are the same, and not in
addition to, the Interests conveyed herein.
I. This Assignment may be executed in any number of counterparts, and
each counterpart hereof shall be deemed to be an original instrument, but all
such counterparts shall constitute but one assignment. To facilitate
recording, a counterpart to be recorded in a given county may contain only
those portions of the Exhibit "A" hereto that describe property located in
that county.
J. This Assignment shall bind and inure to the benefit of Assignor and
Assignee and their respective successors and assigns.
3
<PAGE>
EXECUTED on the dates set forth in the acknowledgments below, to be
effective for all purposes as of the Effective Time.
ASSIGNOR:
ASPECT RESOURCES LLC, A COLORADO LIMITED
LIABILITY COMPANY
BY: ASPECT MANAGEMENT CORPORATION, ITS
MANAGER
BY:
--------------------------------------
ALEX B. CAMPBELL, VICE PRESIDENT
ASSIGNEE:
ATTEST: ESENJAY EXPLORATION, INC.
A DELAWARE CORPORATION
BY: BY:
----------------------------- ------------------------------
NAME: DAVID B. CHRISTOFFERSON NAME: MICHAEL E. JOHNSON
-------------------------- ----------------------------
TITLE: EXEC. VICE PRESIDENT TITLE: PRESIDENT
------------------------- ---------------------------
4
<PAGE>
January 12, 1998
Frontier Natural Gas Corporation
500 Dallas Street, Suite 2920
Houston, TX 77002
Attention: David B. Christofferson
RE: Credit Agreement dated as of January 3, 1996, as amended
Ladies and Gentlemen:
Please refer to the Credit Agreement dated as of January 3, 1996, as
amended by Amendment No. 1 to Credit Agreement dated as of November 1, 1996
and Amendment No. 2 to Credit Agreement dated as of July 1, 1997 (as amended
from time to time, the "Credit Agreement"), between Frontier Natural Gas
Corporation ("Borrower") and Bank of America Illinois,
predecessor-in-interest to Bank of America National Trust and Savings
Association (the "Lender"). All capitalized terms used herein and not
otherwise defined shall have the respective meanings assigned to them in the
Credit Agreement.
You have requested that the Lender, for a certain period of time, waive
compliance by Borrower with certain provisions of the Credit Agreement.
1. INDEBTEDNESS UNDER ASPECT LOAN AGREEMENT. The Lender hereby waives
Borrower's compliance with SECTION 7.2.2 of the Credit Agreement, insofar as
such section prohibits Borrower from incurring certain indebtedness, to the
extent necessary to permit Borrower to incur the indebtedness described in
that certain Credit Agreement dated as of January 12, 1998 (the "ASPECT LOAN
AGREEMENT"), between Borrower and Aspect Resources LLC, a Colorado limited
liability company ("ASPECT"), in a maximum principal amount of $1,800,000.00.
A true, correct and complete copy of the Aspect Loan Agreement and all of its
exhibits and schedules is attached to this letter as ANNEX I, and there exist
no amendments or other agreements varying the terms of the Aspect Loan
Agreement.
<PAGE>
Frontier Natural Gas Corporation
January 12, 1998
Page 2
2. LIENS UNDER ASPECT LOAN AGREEMENT. The Lender hereby waives
Borrower's compliance with SECTION 7.2.3 of the Credit Agreement, insofar as
such section prohibits Liens on the property, revenues or assets, whether now
owned or hereafter acquired, or Borrower or its Subsidiaries, to the extent
necessary to permit Borrower or its Subsidiaries to grant Liens in favor of
Aspect pursuant to the Aspect Loan Agreement, insofar and only insofar as
such Liens burden the property, revenues and assets described in ANNEX I
hereto and insofar and only insofar as such Liens do not burden any property,
revenues or assets currently subject to Liens in favor of the Lender.
3. NEGATIVE COVENANTS UNDER ASPECT LOAN AGREEMENT. The Lender hereby
waives Borrower's compliance with SECTION 7.2.11 of the Credit Agreement,
insofar as such section prohibits Borrower from entering into agreements
prohibiting the creation or assumption of any Liens on the property, revenues
or assets, whether now owned or hereafter acquired, or Borrower or its
Subsidiaries, or the ability of Borrower to amend or otherwise modify the
Credit Agreement or any other Loan Document, to the extent that the Aspect
Loan Agreement contains such a prohibition.
4. ACQUISITION AGREEMENT. The Lender hereby waives Borrower's
compliance with SECTION 7.2.8 of the Credit Agreement, insofar as such
section prohibits Borrower from consolidating with, or acquiring all or
substantially all of the assets of any Person, to the extent necessary to
permit Borrower to acquire the "Aspect Assets" and the "Esenjay Assets," as
defined and described in that certain Acquisition Agreement and Plan of
Exchange dated as of January 19, 1998 (the "ACQUISITION AGREEMENT"), between
Borrower, Aspect and Esenjay Petroleum Corporation, a Texas corporation
("ESENJAY"); PROVIDED, HOWEVER, that nothing in this waiver shall permit
Borrower to assume and become liable for some or all of the indebtedness of
Aspect to Joint Energy Development Investments II, a Delaware limited
partnership as contemplated by SECTION 3.02(a) of the Acquisition Agreement.
The Lender hereby waives Borrower's compliance with SECTION 7.2.6 of the
Credit Agreement, insofar as such section prohibits Borrower from making
distributions to redeem any class of equity, to the extent necessary to
permit Borrower to redeem 85,961 shares of $0.01 par value preferred stock of
Borrower (having a $10.00 per share redemption value) in connection with the
consummation of the transactions described in the Acquisition Agreement. The
Lender hereby waives SECTION 8.1.8 of the Credit Agreement, insofar as such
section provides that a Change in Control is an Event of Default, to the
extent that David W. Berry and David B. Christofferson shall no longer own
their respective existing percentages of the voting capital stock of
<PAGE>
Frontier Natural Gas Corporation
January 12, 1998
Page 3
Borrower; PROVIDED, HOWEVER, that this waiver shall not waive any Event of
Default that would occur if either of such Persons failed to be actively
involved in the management of the business of Borrower. A true, correct and
complete copy of the Acquisition Agreement and all of its exhibits and
schedules is attached to this letter as ANNEX II, and there exist no
amendments or other agreements varying the terms of the Acquisition Agreement.
5. INDEBTEDNESS UNDER DUKE LOAN AGREEMENT. The Lender hereby waives
Borrower's compliance with SECTION 7.2.2 of the Credit Agreement, insofar as
such section prohibits Borrower from incurring certain indebtedness, to the
extent necessary to permit Borrower to incur the indebtedness described in
that certain Credit Agreement dated as of February __, 1998 (the "DUKE LOAN
AGREEMENT"), between Borrower and Duke Energy Financial Services, Inc., a
Delaware corporation ("DUKE"), in a maximum principal amount of
$7,800,000.00 and for the uses, purposes and on the terms set forth in the
Duke Loan Agreement. A true, correct and complete copy of the Duke Loan
Agreement and all of its exhibits and schedules is attached to this letter as
ANNEX III, and there exist no amendments or other agreements varying the
terms of the Duke Loan Agreement.
6. LIENS UNDER DUKE LOAN AGREEMENT. The Lender hereby waives
Borrower's compliance with SECTION 7.2.3 of the Credit Agreement, insofar as
such section prohibits Liens on the property, revenues or assets, whether now
owned or hereafter acquired, or Borrower or its Subsidiaries, to the extent
necessary to permit Borrower or its Subsidiaries to grant Liens in favor of
Duke pursuant to the Duke Loan Agreement, insofar and only insofar as such
Liens burden the property, revenues and assets described in ANNEX III hereto
and insofar and only insofar as such Liens do not burden any property,
revenues or assets currently subject to Liens in favor of the Lender.
7. NEGATIVE COVENANTS UNDER DUKE LOAN AGREEMENT. The Lender hereby
waives Borrower's compliance with SECTION 7.2.11 of the Credit Agreement,
insofar as such section prohibits Borrower from entering into agreements
prohibiting the creation or assumption of any Liens on the property, revenues
or assets, whether now owned or hereafter acquired, or Borrower or its
Subsidiaries, or the ability of Borrower to amend or otherwise modify the
Credit Agreement or any other Loan Document, to the extent that the Duke Loan
Agreement contains such a prohibition.
8. FINANCIAL COVENANTS UNDER CREDIT AGREEMENT. The Lender hereby
waives Borrower's compliance with SECTION 7.2.4 of the Credit Agreement, for
the period commencing on January 1, 1998 and ending on the earlier to occur
of June 30, 1998 or the Closing under the Acquisition Agreement.
<PAGE>
Frontier Natural Gas Corporation
January 12, 1998
Page 4
9. TIMING; PAYMENT IN FULL; AMENDMENT OF STATED MATURITY DATE. The
foregoing waivers set forth in PARAGRAPHS 1, 2, and 3 above are effective from
the date hereof through and including the earlier to occur of June 30, 1998
or the Closing under the Acquisition Agreement. The foregoing waivers set
forth in PARAGRAPHS 4, 5, 6 AND 7 above are effective from the date hereof.
The foregoing waivers set forth in PARAGRAPH 8 above are effective from
January 1, 1998, through and including the earlier to occur of June 30, 1998
or the Closing under the Acquisition Agreement. In the event that all
indebtedness under the Aspect Loan Agreement has not been repaid and
discharged in full and all Liens granted under the Aspect Loan Agreement have
not been released or terminated in full by June 30, 1998, then, without
further notice or demand of any kind, the entire indebtedness of Borrower to
the Lender under the Credit Agreement shall become and be immediately due and
payable as of June 30, 1998. In addition, the existing definition of "Stated
Maturity Date" in the Credit Agreement is hereby deleted and the following is
inserted in its place: "Stated Maturity Date means December 31, 1998."
10. NO OBLIGATION TO LEND. In consideration of the foregoing waivers,
Borrower agrees that, so long as the Aspect Loan Agreement or the Duke Loan
Agreement remains in effect and there are outstanding loans to Borrower from
Aspect or Duke or commitments by Aspect or Duke in favor of Borrower under
the Aspect Loan Agreement or the Duke Loan Agreement, Borrower shall not be
entitled to request a Loan or Loans, and the Lender shall not be obligated to
lend, any additional amount under the Credit Agreement.
11. NO OTHER DEFAULTS. To induce the Lender to grant the foregoing
waivers, Borrower hereby represents and warrants that (i) as of the date
hereof and after giving effect to the waivers set forth herein, there exists
no Default or Event of Default and (ii) no action, suit or proceeding is
pending or threatened against the Borrower or any other Obligor which (a) if
adversely determined, would have a Material Adverse Effect, or (b) pertains
to the Credit Agreement or any other Loan Document or the ability of Borrower
or any other Obligor to perform their respective obligations to the Lender
under the Credit Agreement or under any other Loan Document. Borrower
reaffirms, as of the date hereof, the representations and warranties
contained in ARTICLE VI of the Credit Agreement (except to the extent such
representations and warranties relate solely to an earlier date).
<PAGE>
Frontier Natural Gas Corporation
January 12, 1998
Page 5
The waivers set forth above are subject to the conditions and
limitations set forth herein and shall be applicable only for the purposes,
and the periods, set forth herein, and not for any other purposes or with
respect to any subsequent period. The waivers contained herein shall not
apply to any Default or Event of Default (other than those specifically
waived in this letter), regardless of whether such other Default or Event of
Default is prior or subsequent to any of the matters referred to herein or is
of the same or a different type as any of the matters referred to herein.
If the foregoing correctly sets forth your understanding, kindly sign
and return the enclosed signed copy of this letter.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
successor-by-merger to Bank of
America Illinois
By: /s/ Richard A. Bernardy
---------------------------
RICHARD A. BERNARDY
Title: Vice President
Confirmed and agreed to:
FRONTIER NATURAL GAS CORPORATION
By: /s/ David B. Christofferson
---------------------------
DAVID B. CHRISTOFFERSON
Title: Executive Vice President
The undersigned Guarantors hereby consent to the foregoing waiver:
FRONTIER, INC.
By: /s/ David B. Christofferson
---------------------------
DAVID B. CHRISTOFFERSON
Title: Executive Vice President
<PAGE>
Frontier Natural Gas Corporation
January 12, 1998
Page 6
FRONTIER ACQUISITION CORPORATION
By: /s/ David B. Christofferson
---------------------------
DAVID B. CHRISTOFFERSON
Title: Executive Vice President
FRONTIER EXPLORATION AND PRODUCTION CORPORATION
By: /s/ David B. Christofferson
---------------------------
DAVID B. CHRISTOFFERSON
Title: Executive Vice President
<PAGE>
EXHIBIT 23(b)
INDEPENDENT AUDITORS' CONSENT
Esenjay Exploration, Inc.:
We consent to the inclusion in this Registration Statement of Esenjay
Exploration, Inc. (formerly Frontier Natural Gas Corporation) on Form SB-2 of
our report dated March 27, 1998 (May 14, 1998 with respect to the second
paragraph of Note 2 and the third and fourth paragraphs of Note 10) (which
expresses an unqualified opinion and includes an explanatory paragraph relating
to the Company's ability to continue as a going concern) for the year ended
December 31, 1997 and to the reference to us under the heading "Experts" in the
Prospectus, which is part of such Registration Statement.
/s/ DELOITTE & TOUCHE LLP
- - -------------------------------------------
DELOITTE & TOUCHE LLP
Houston, Texas
May 20, 1998
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of Frontier
Natural Gas Corporation, an Oklahoma corporation (the "Company"), hereby
constitutes and appoints David B. Christofferson, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and on his
behalf and in his name, place and stead, to execute and file any and all
instruments which said attorney-in-fact and agent may deem necessary or
advisable or which may be required to enable the Company to comply with the
Securities Exchange Act of 1934, as amended (the "Act"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, as well as any rules, regulations and requirements of any other
regulatory authority, in connection with the disclosure and filing by the
Company of its SB-2 Registration Statement, or any other appropriate form, with
all exhibits and any and all documents required to be filed as a part of or in
connection therewith, with the Securities and Exchange Commission or any other
regulatory authority, until this Limited Power of Attorney is superseded or
revoked, including specifically, but without limiting the generality of the
foregoing, full power and authority to sign the name of the undersigned Director
of the Company in his capacity as Director thereof to the SB-2 Registration
Statement and to any instruments or documents filed as part of or in
connections with the SB-2 Registration Statement, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done to
effectuate the same, as fully as he himself might or could do if personally
present; and the undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or his substitute, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents on this 14th
day of May, 1998.
/s/ Michael E. Johnson
------------------------------
Michael E. Johnson
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of Frontier
Natural Gas Corporation, an Oklahoma corporation (the "Company"), hereby
constitutes and appoints David B. Christofferson, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and on his
behalf and in his name, place and stead, to execute and file any and all
instruments which said attorney-in-fact and agent may deem necessary or
advisable or which may be required to enable the Company to comply with the
Securities Exchange Act of 1934, as amended (the "Act"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, as well as any rules, regulations and requirements of any other
regulatory authority, in connection with the disclosure and filing by the
Company of its SB-2 Registration Statement, or any other appropriate form, with
all exhibits and any and all documents required to be filed as a part of or in
connection therewith, with the Securities and Exchange Commission or any other
regulatory authority, until this Limited Power of Attorney is superseded or
revoked, including specifically, but without limiting the generality of the
foregoing, full power and authority to sign the name of the undersigned Director
of the Company in his capacity as Director thereof to the SB-2 Registration
Statement and to any instruments or documents filed as part of or in
connections with the SB-2 Registration Statement, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done to
effectuate the same, as fully as he himself might or could do if personally
present; and the undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or his substitute, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents on this 14th
day of May, 1998.
/s/ Alex M. Cranberg
------------------------------
Alex M. Cranberg
<PAGE>
Exhibit 24.(c)
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of Frontier
Natural Gas Corporation, an Oklahoma corporation (the "Company"), hereby
constitutes and appoints David B. Christofferson, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and on his
behalf and in his name, place and stead, to execute and file any and all
instruments which said attorney-in-fact and agent may deem necessary or
advisable or which may be required to enable the Company to comply with the
Securities Exchange Act of 1934, as amended (the "Act"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, as well as any rules, regulations and requirements of any other
regulatory authority, in connection with the disclosure and filing by the
Company of its SB-2 Registration Statement, or any other appropriate form, with
all exhibits and any and all documents required to be filed as a part of or in
connection therewith, with the Securities and Exchange Commission or any other
regulatory authority, until this Limited Power of Attorney is superseded or
revoked, including specifically, but without limiting the generality of the
foregoing, full power and authority to sign the name of the undersigned Director
of the Company in his capacity as Director thereof to the SB-2 Registration
Statement and to any instruments or documents filed as part of or in
connections with the SB-2 Registration Statement, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done to
effectuate the same, as fully as he himself might or could do if personally
present; and the undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or his substitute, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents on this 14th
day of May, 1998.
/s/ Alex B. Campbell
------------------------------
Alex B. Campbell
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of Frontier
Natural Gas Corporation, an Oklahoma corporation (the "Company"), hereby
constitutes and appoints David B. Christofferson, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and on his
behalf and in his name, place and stead, to execute and file any and all
instruments which said attorney-in-fact and agent may deem necessary or
advisable or which may be required to enable the Company to comply with the
Securities Exchange Act of 1934, as amended (the "Act"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, as well as any rules, regulations and requirements of any other
regulatory authority, in connection with the disclosure and filing by the
Company of its SB-2 Registration Statement, or any other appropriate form, with
all exhibits and any and all documents required to be filed as a part of or in
connection therewith, with the Securities and Exchange Commission or any other
regulatory authority, until this Limited Power of Attorney is superseded or
revoked, including specifically, but without limiting the generality of the
foregoing, full power and authority to sign the name of the undersigned Director
of the Company in his capacity as Director thereof to the SB-2 Registration
Statement and to any instruments or documents filed as part of or in
connections with the SB-2 Registration Statement, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done to
effectuate the same, as fully as he himself might or could do if personally
present; and the undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or his substitute, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents on this 14th
day of May, 1998.
/s/ Charles J. Smith
------------------------------
Charles J. Smith
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of Frontier
Natural Gas Corporation, an Oklahoma corporation (the "Company"), hereby
constitutes and appoints David B. Christofferson, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and on his
behalf and in his name, place and stead, to execute and file any and all
instruments which said attorney-in-fact and agent may deem necessary or
advisable or which may be required to enable the Company to comply with the
Securities Exchange Act of 1934, as amended (the "Act"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, as well as any rules, regulations and requirements of any other
regulatory authority, in connection with the disclosure and filing by the
Company of its SB-2 Registration Statement, or any other appropriate form, with
all exhibits and any and all documents required to be filed as a part of or in
connection therewith, with the Securities and Exchange Commission or any other
regulatory authority, until this Limited Power of Attorney is superseded or
revoked, including specifically, but without limiting the generality of the
foregoing, full power and authority to sign the name of the undersigned Director
of the Company in his capacity as Director thereof to the SB-2 Registration
Statement and to any instruments or documents filed as part of or in
connections with the SB-2 Registration Statement, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done to
effectuate the same, as fully as he himself might or could do if personally
present; and the undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or his substitute, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents on this 14th
day of May, 1998.
/s/ Hobart A. Smith
------------------------------
Hobart A. Smith
<PAGE>
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director of Frontier
Natural Gas Corporation, an Oklahoma corporation (the "Company"), hereby
constitutes and appoints David B. Christofferson, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and on his
behalf and in his name, place and stead, to execute and file any and all
instruments which said attorney-in-fact and agent may deem necessary or
advisable or which may be required to enable the Company to comply with the
Securities Exchange Act of 1934, as amended (the "Act"), and any rules,
regulations or requirements of the Securities and Exchange Commission in respect
thereof, as well as any rules, regulations and requirements of any other
regulatory authority, in connection with the disclosure and filing by the
Company of its SB-2 Registration Statement, or any other appropriate form, with
all exhibits and any and all documents required to be filed as a part of or in
connection therewith, with the Securities and Exchange Commission or any other
regulatory authority, until this Limited Power of Attorney is superseded or
revoked, including specifically, but without limiting the generality of the
foregoing, full power and authority to sign the name of the undersigned Director
of the Company in his capacity as Director thereof to the SB-2 Registration
Statement and to any instruments or documents filed as part of or in
connections with the SB-2 Registration Statement, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done to
effectuate the same, as fully as he himself might or could do if personally
present; and the undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or his substitute, shall do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents on this 14th
day of May, 1998.
/s/ Jack P. Randall
------------------------------
Jack P. Randall
