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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-22782
FRONTIER NATURAL GAS CORPORATION
(Exact name of small business issuer in its charter)
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OKLAHOMA 73-1421000
(State of incorporation) (I.R.S. Employer Identification Number)
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500 DALLAS, SUITE 2920
HOUSTON, TEXAS 77002
(Address of registrant's principal executive offices, including zip code)
Registrant's telephone number, including area code: (713) 739-7100
Securities registered under Section 12(b) of the Exchange Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK
PREFERRED STOCK
SERIES A COMMON STOCK PURCHASE WARRANTS
SERIES B COMMON STOCK PURCHASE WARRANTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
State issuer's revenues for its most recent fiscal year: $908,609
The aggregate market value of the voting stock held by non-affiliates of the
registrant (treating all executive officers and directors of the registrant, for
this purpose, as if they may be affiliates of the registrant) was approximately
$6,487,857 on March 27, 1998 (based on the last sales price of $0.75 per share
as reported on the NASDAQ Stock Market).
9,935,906 shares as the registrant's common stock were outstanding as of
March 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement for its 1998 Annual Meeting of Stockholders is
incorporated by reference into Part III.
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FRONTIER NATURAL GAS CORPORATION
FOR YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
FORM 10-KSB
PART I
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ITEM PAGE
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1. Description of Business........................................................................... 1
2. Description of Property........................................................................... 14
3. Legal Proceedings................................................................................. 16
4. Submission of Matters to a Vote of Security Holders............................................... 16
PART II
5. Market for Common Equity and Related Stockholder Matters.......................................... 17
6. Management's Discussion and Analysis or Plan of Operation......................................... 17
7. Financial Statements.............................................................................. 24
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 44
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
Exchange Act.................................................................................... 45
10. Executive Compensation............................................................................ 45
11. Security Ownership of Certain Beneficial Owners and Management.................................... 45
12. Certain Relationships and Related Transactions.................................................... 45
PART IV
13. Exhibits and Reports on Form 8-K.................................................................. 45
Signatures........................................................................................ 48
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PART I
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference are discussed in the introductory paragraph to
Management's Discussion and Analysis beginning on page 11 of this Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
THE COMPANY
The Company is an independent energy company engaged in the exploration for
and development of natural gas and oil reserves. It has also has engaged in the
acquisition, production, development and marketing of natural gas and oil. Its
early growth was through acquisitions of natural gas reserves principally in the
mid-continent area of Arkansas, Kansas, Oklahoma and Texas. In recent years, the
Company's business activities have evolved to focus more on exploration and
related developmental drilling projects in southern Louisiana and along the Gulf
Coast of Alabama, Mississippi and Texas. Currently its most significant interest
is its Starboard Project, which is composed of a group of distinct, high
potential exploration prospects, as well as undeveloped locations in the Gulf
Coast region of Louisiana. The Company's current business objective is to
increase its reserves by drilling natural gas and oil wells on prospects
identified and developed through the use of well correlations, CAEX technologies
and 3-D seismic surveys. Its strategy is to increase shareholder value by
becoming the most active explorer in those specific geographically focused areas
that comprise its exploration projects. The Company also may acquire producing
properties as market conditions and the Company's resources allow. The
appropriate use of 3-D seismic is the Company's key tool for achieving these
objectives.
In 1997 the Company was confronted with several issues that resulted in the
substantial depletion of its cash resources. Most significantly, the Company
lost substantial revenues over 1996 due to the premature loss of production in
its Mobile Bay area wells due to water encroachment. The Company also
experienced significant delays in drilling on its Starboard Project. It
responded by participation in a series of primarily third party originated
projects, many of which were not confirmed by 3-D seismic data, and which
drilling resulted in very poor results and minimal cash flow. The Board then
directed the Company to seek a strategic business combination. After a
significant search the Company entered into the below described agreement with
Esenjay Petroleum Corporation ("Esenjay") and Aspect Resources LLC ("Aspect"),
which if consummated, will result in substantial changes in the nature and scope
of the Company. Management and the Board believe said changes will position the
Company to effectively pursue its business strategy. In the event the agreements
are not consummated, the Company would have to seek other partners or sell down
the majority of its project inventory to survive.
On January 19, 1998, the Company entered into the Acquisition Agreement with
Esenjay and Aspect (the "Acquisition Agreement"). Pursuant to the terms and
conditions of the Acquisition Agreement, and subject to approval by the
Company's shareholders the Company will purchase from Esenjay (the "Esenjay
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 30,991,563 shares of Common Stock to Esenjay in
exchange for the Esenjay Assets, and will issue up to 29,648,636 shares of
Common Stock to Aspect or its assigns in exchange for the Aspect Assets. The
Company has filed a preliminary Schedule 14A proxy statement in this regard and
intends to have a shareholders meeting in late April or early May of 1998 to
seek the approval of its shareholders of the Acquisitions and related matters.
The Company will substantially increase the scope and diversity of its
portfolio (generally 25% to 40%) of projects upon consummation of the
Acquisitions. The acquired assets include substantial working
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interests in 28 exploration projects, almost all of which are natural gas
oriented, located primarily along the Texas Gulf Coast. Most of the projects
have been, are being, or will be enhanced with 3-D seismic data and CAEX
technologies. The Acquisitions include leases or options in over 280,000 gross
acres. The 3-D seismic data acquired will, when complete, cover approximately
1,500 square miles. Drilling operations have commenced on four of the
exploration projects to be acquired by the Company with substantial drilling
anticipated through the remainder of this year.
The discussion of the Company's business and properties set forth below is a
discussion of the Company's historical business and operations before
consummation of the Acquisitions.
The Company moved its headquarters to Houston, Texas, in September 1996, to
allow the Company to more effectively exploit opportunities along the Gulf
Coast. The Company's exploration activities for 1997 continued to center around
furthering its Gulf Coast projects, and in particular, the transition zones of
South Louisiana, which it initiated in 1995. The Company's main emphasis was in
furthering the Starboard Project and, in the second half of 1997, reviewing and
analyzing potential acquisitions and consolidations.
The Starboard Project, located in Terrebonne Parish, Louisiana, has been the
primary focus of the Company's exploration work for over two years, and
continues to be the most significant project in the Company's history. Partners
include Fina Oil and Chemical Company, two affiliates of public utilities, and a
development drilling financing commitment from Bank of America Illinois. The
Company owns working interests in its leases over this project ranging from 12%
to 48%, depending upon the target formation depths. 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 by the partners, two of which are exploratory and one of
which is developmental. Drilling is expected to commence late in the second
quarter of 1998. The Company is highly dependent upon this project, which
dependence will, if the Acquisitions are consummated, be significantly reduced.
In 1997 the Company implemented a drilling program it considered to be
aggressive. In the first nine months of 1997, the Company participated in five
dry holes and one unsuccessful sidetrack operation on South Louisiana prospects.
It also participated in a dry hole in Mobile Bay, Alabama, on a high risk, high
potential Oligocene feature. The Company did however participate in two
successful completions in Garvin County, Oklahoma, resulting from 3-D seismic
data. No drilling was conducted in the fourth quarter. These results, coupled
with limited capital resources, caused the Company to primarily focus on its
Starboard Project and to look at potential consolidation opportunities. In this
regard, it looked at potential asset acquisitions using stock and other
potential opportunities, including business consolidations in order to increase
efficiencies and exploration capital.
As a result of its search for an appropriate business combination
transaction, the Company entered into the Acquisition Agreement with Esenjay and
Aspect. Upon consummation of the transactions contemplated by the Acquisition
Agreement, Esenjay and Aspect or its assignees would own an aggregate of
approximately 85.92% of the issued and outstanding Common Stock. If the Company
does not close the transaction set forth in the Acquisition Agreement, or find
alternative sources of capital, or sell substantial interests in its prospect
inventory, it will not have adequate liquidity to fund ongoing operations.
The Company plans to continue to expand its exploration activities in the
Gulf Coast area through several current activities, including (i) the
Acquisitions; (ii) generation of prospects with its existing partners; (iii)
identification of "bright spot" seismic anomalies; (iv) acquisition of acreage
on additional high potential Gulf Coast exploration projects identified by the
Company; and (v) evaluation of technology enhanced exploration prospect
opportunities in Gulf Coast areas.
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THE ACQUISITIONS
On January 19, 1998 the Company entered into an acquisition agreement with
Esenjay and Aspect, which calls for the Company to issue 30,991,563 shares of
its common stock for Esenjay and 29,648,636 shares of its common stock for
Aspect in exchange for substantial interests in an array of primarily natural
gas, technology enhanced exploration projects. The acquisitions include
interests in 28 projects, leases or options in over 280,000 gross acres, and
interests in 3-D seismic shoots and data, which will cover over 1,500 square
miles when completed. Closing of the Acquisition Agreement, a copy of which is
attached as an exhibit for this Form 10-KSB, is subject to, among other things,
approval by the Company's shareholders. The Company has filed a preliminary
schedule 14A proxy statement to call such a meeting. In conjunction with the
Acquisitions, if approved, the Board will add a new President and C.E.O. and
incur a change in the majority of its Board. The Company will also redeem its
issued and outstanding convertible preferred stock. Further information is
provided in the Acquisition Agreement attached as an exhibit to this Form 10-KSB
and any and all discussion herein is qualified in its entirety by reference to
said Acquisition Agreement.
Set forth below is a description of the assets intended to be acquired
pursuant to the Acquisition Agreement. All of the interests are in non-producing
properties. All acreage figures are estimates only due to the ongoing daily
process of acquiring, evaluating, and releasing acreage. Estimates of drilling
and completion costs are gross amounts and are not net to the Companies'
interests in the related projects. Actual costs may vary materially from the
estimates. There can be no assurance that the Company will find commercial
hydrocarbon production from its exploration activities on said properties.
GERONIMO PROJECT. The Company will acquire from Esenjay an aggregate 20%
interest in this project, which consists of approximately 6,700 gross acres of
leases and options in San Patricio County, Texas. A 72 square mile 3-D seismic
survey has been conducted and has identified several prospective drillsites,
three of which have already been drilled. The first two proceeded the
Acquisition Agreement and were drilled by Esenjay. Both resulted in successful
completions. The third well was drilled since the effective date of the
Acquisition Agreement and will be for the account of the Company, if the
Acquisitions are consummated. The well is currently being completed. Historical
total production from Frio Sands within the 3-D seismic survey area has been 500
BCF of gas and 13 million barrels of oil. One deeper Vicksburg well is currently
scheduled to be drilled by the Company in 1998. The estimated cost of drilling
and completing a shallow well in this project area is approximately 1.2 million
dollars with deeper wells costing as much as $4 million.
DUVAL, MCMULLEN PROJECT. The Company will acquire from Esenjay an aggregate
90% interest in this project, which consists of approximately 2,000 gross and
net acres of options in Duval and McMullen Counties, Texas. Within this acreage
is a field that has produced one half trillion cubic feet of gas. A one year old
proprietary 3-D seismic survey has recently become available. Immediate plans
are to acquire and interpret the 3-D seismic data prior to any drilling.
Drilling and completed well costs are estimated to range from $800,000 for
shallow wells (the bulk of the area production has come from these shallower
field pays) and $1.2 million for deeper wells.
LA ROSA PROJECT. The Company will acquire from Esenjay an 8% interest in
this project, which consists of approximately 7,700 gross acres of options and
leases. The La Rosa Field (which is within the project area) has produced in
excess of 15 million bbls of oil and 170 BCF of gas since 1938. Approximately 25
to 30 square miles of 3-D seismic data has been shot and interpreted. The
prospective sections are Frio and Vicksburg. The first well drilled in 1997, by
Esenjay, prior to entering the Acquisition Agreement, was completed as a Frio
Sands gas producer. One well has been drilled since the effective date of the
Acquisition Agreement, which will be for the account of the Company if the
Acquisitions are consummated. The well was a dry hole. The estimated costs of
drilling and completing a Frio Sands well in this project area are approximately
$550,000.
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MATAGORDA I PROJECT. The Company will acquire from Esenjay an aggregate 74%
interest in this project, which consists of approximately 9,500 gross acres of
options in Matagorda County, Texas. Production was first discovered in this area
in 1932. Four shallow wells have produced 854,000 bbls of oil within this
acreage. Available 2-D seismic data suggests numerous undrilled fault segments.
In addition, only one deep well has been drilled. A 3-D seismic survey is
scheduled mid-year 1998 as part of an adjacent project (which survey will cover
the project area). The estimated costs of a drilled and completed shallow well
in this project area are approximately $550,000, and the costs of drilling and
completing a deeper well are approximately $1.3 million.
MATAGORDA II PROJECT. The Company will acquire from Esenjay an aggregate
66% interest in this project, which consists of approximately 7,500 gross acres
of options in Matagorda County, Texas. The project area has produced 41 BCF of
gas and 3,000,000 bbls of oil. Two exploitation/development prospects have been
generated within the prospect area. In additions a 1,000 acre wildcat prospect
has been identified for the entire package of TEX MISS sands, located within the
project area between two producing fields. This area is scheduled for a 3-D
survey mid-year 1998 in conjunction with the Matagorda I Project. The estimated
costs of drilling and completing a shallow well are approximately $550,000 and a
deep well $1.3 million.
THOMPSON CREEK PROJECT. The Company will acquire from Esenjay an aggregate
56% interest in this project, which consists of approximately 2,219 gross acres
in Wayne County, Mississippi. This project appears to be a large, faulted,
salt-based anticline with multiple oil pays. The prospective section ranges from
7,000 feet to 17,000 feet. There currently exists a drillable (without 3-D
seismic) Cotton Valley test which also has secondary objectives. This prospect
was generated by using subsurface and 2-D seismic. However, the Company intends
to employ 3-D seismic prior to any drilling. The structure has both anticline
and fault traps plus drape plays exist on the flank of the salt structure. Known
trend producers include the Tuscaloosa, Paluxy, Wash/Fred, Hosston, Rodessa,
Cotton Valley, Smackover and Norphlet. Typical initial flow rates are 500 bbls
of oil (allowable); wells can, however, easily test at rates greater than 1,000
bbls of oil in the Cotton Valley. Approximately 12 square miles of full fold 3-D
seismic data will be necessary to image the acreage position. A speculative 3-D
seismic survey is being conducted by a seismic vendor over this area and the
processed data should be delivered in the summer of 1998. The estimated costs of
drilling and completing a 15,500' Cotton Valley well in this project area are
approximately $1.35 million.
WILLACY COUNTY PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 78.875% interest in this project, which consists of approximately
10,288 gross acres of leases and options in Willacy County, Texas. Fields in the
immediate area have produced approximately 78 BCF of gas and 2.5 million bbls of
oil. 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 picked as a result of
subsurface well correlation and production analysis and will be re-evaluated
after interpretation of the 3-D seismic data. The estimated costs of drilling
and completing a well in this project area are approximately $550,000. A 50
square mile 3-D survey is scheduled for mid-year 1998.
TIDEHAVEN PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 40.5% interest in this project, which consists of leases and options
covering approximately 7,300 gross acres in Matagorda County, Texas. Fields in
the immediate area have produced approximately 65 BCF of gas and 5 million bbls
of oil. The Tidehaven Field, which is inside the project area, has multiple Frio
Sands pays, down to 12,000 feet. Numerous known pays and multiple fault blocks
make this structure a good 3-D seismic candidate. Interpretation of the 28
square mile 3-D seismic data set is now 90% complete. As of this date, drilling
has commenced on a well in which the Company will, in the event the Acquisitions
are consummated, own a working interest effective prior to the date drilling
commenced. The estimated costs of drilling and completing wells in this project
range from $550,000 to approximately $1.3 million, depending upon depth.
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EL MATON PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 46.5% interest in this project, which consists of leases and options
covering approximately 10,468 gross acres in Matagorda County, Texas. Fields in
the immediate area have produced 60 BCF of gas and associated condensate. A 29
square mile 3-D seismic survey was started in late May 1997 as an extension of
the Tidehaven shoot. The geologic setting and target zones are the same as
Tidehaven and the information obtained at Tidehaven should benefit the El Maton
project. The 3-D seismic data is in the interpretation phase and several leads
have been identified. The estimated costs of drilling and completing a well in
this project area are approximately the same as Tidehaven.
MIDFIELD PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 37.5% interest in this project, which consists of leases and options
covering approximately 4,300 gross acres in Matagorda County, Texas. Fields in
the immediate area have produced 90 BCF of gas and 10 million bbls of oil. The
project is an extension of the Tidehaven and El Maton 3-D seismic shoots. A 21
square mile 3-D seismic survey was started in late May 1997. The geologic
setting and target zones are the same as Tidehaven and the information obtained
from Tidehaven should benefit this project. Data interpretation is disappointing
for the zones, which have historically been productive in the area; however, the
data revealed two potential shallow locations. These locations need additional
work before drilling can be scheduled. The estimated costs of drilling and
completing a well in this project area are approximately $550,000.
WOLF POINT PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 45.5% interest in this project, which consists of approximately 1,520
gross acres of state leases in Calhoun County, Texas. Fields in the immediate
area have produced approximately 35 BCF of gas and 6 million bbls of oil. The
project area is covered by 3-D seismic data and Esenjay has drilled five
successful wells on adjacent leases. The prospects will require directional
drilling. This project has previously multiple Frio pay potential from 7,000 to
9,000 feet, all normal pressured. Known field pays from this area are from the
7,200' Frio, 7,500' Frio, 7,700' Frio, Broughton, Oats, Upper Middle and lower
Melbourne sands. Additional geophysical processing is in progress to attempt to
identify direct hydrocarbon indicators. Several potential drill sites have been
delineated. The total estimated costs of a drilled and completed well in this
project area are approximately $900,000.
HALL RANCH PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 41.5% interest in this project, which consists of leases and options
covering approximately 7,550 gross acres under 57 square miles of 3-D seismic
data in Karnes County, Texas. Fields in the immediate area have produced
approximately 250 BCF of gas and over 20 million bbls of oil. The Hall Ranch
area is an under-explored ridge on trend with several producing fields. Multiple
potential pays encompassing four expanded fault blocks have been delineated.
Including potential Wilcox pays from 8,000 to at least 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. Several potential drill sites are
delineated. As of this date drilling has commenced on a deep well in which the
Company will, in the event the Acquisitions are consummated, own a working
interest effective prior to the date drilling commenced. Estimated drilling and
completed well costs in the project area range from approximately $270,000 to
$600,000, and wells completed in the deep zones (to 12,500 feet) cost
approximately $1.8 million.
HORDES CREEK PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 41.5% interest in this project, which contains leases and options of
approximately 8,300 gross acres located in Goliad County, Texas. Hordes Creek
has potential in the Miocene, Frio, Yegua, and the Upper, Middle, and Lower
Wilcox. The targeted feature has produced 100 BCF of gas to date (from fields in
the project area). Preliminary migrated 3-D data covering 25 square miles is
being interpreted and currently four potential drilling locations have been
identified. The estimated costs of drilling and completing a 9,500' well in the
project area are approximately $800,000.
MIKESKA PROJECT. The Company will acquire from Aspect and Esenjay a 38%
interest in this project, which appears to contain two large growth faults under
a leasehold of 8,200 gross acres located in Live Oak
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County, Texas. Fields in the immediate area have produced approximately 200 BCF
of gas and 2 million bbls of oil. This exploration play is characterized by
excellent reservoir rock in the Wilcox. 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 conducted and the data is being interpreted. Currently,
several drill sites have been delineated, and as of this date drilling has
commenced on a well in which the Company will, in the event the Acquisitions are
consummated, own a working interest effective prior to the date drilling
commenced. The estimated costs of drilling and completing a deep well in this
project area are approximately $1.4 million.
PILEDRIVER PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 62.5% interest in this project, which consists of 640 gross acres
located in Chambers County, Texas. Fields in the immediate area have produced
approximately 269 BCF of gas and 17 million bbls of oil. The objectives are two
Frio sands. One of these target sands had a significant gas test at the top of
the sand in a well that is down dip to Esenjay's acreage. A recent speculative
3-D seismic survey has been conducted by Western Geophysical. It is the
Company's current intention to acquire and interpret 3-D seismic over the
prospect before making any drilling decisions. The estimated costs of drilling
and completing a well are approximately $1.85 million.
HOUSTON ENDOWMENT PROJECT. The Company will acquire from Aspect and Esenjay
an aggregate 27% interest in this project, which consists of approximately
12,782 gross acres in San Patricio County, Texas. This acreage has been off the
market from 1948 until recently, and as such the Company believes the Endowment
acreage represents a unique opportunity due to the low level of drilling
activity in recent years. The leasehold has significant potential in many zones,
as approximately 20 reservoirs are productive along the trend. A 50 square mile
3-D seismic survey has been conducted and the data set is in the interpretation
phase. One deep dry hole has been drilled within the project area by Esenjay. It
is anticipated that a well will be drilled by the Company this year to test the
shallower sands. A seismic "bright spot" that conforms to structure exists at
the proposed drilling location. An additional shallow well is scheduled for the
2nd quarter of 1998. The estimated costs of drilling and completing a shallow
well in this project area are approximately $700,000 and approximately $1.3
million for a deep well.
BLESSING PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 24% interest in this project, which consists of 10,000 gross acres of
leases and options over 22 square miles of 3-D seismic coverage in Matagorda
County, Texas. Fields in the immediate area have produced approximately 301 BCF
of gas and 15 million bbls of oil. A 3-D seismic survey was conducted in
conjunction with the Tidehaven project. Deep results have been disappointing to
date; however, there are several upper Frio prospect leads. A shallow well, to
test the upper Frio Sands, has been drilled, in which the Company will, in the
event the Acquisitions are consummated, own a working interest effective prior
to the date drilling commenced. There are several potential pay sands in the
well. Pipe is currently being set in order to complete the well. Prior to
drilling, an additional interest was acquired in the well which brought the
Company's total prospective ownership to 37.5% The estimated costs of drilling
and completing a shallow well in this project area are approximately $550,000,
and the costs of completing a deep well are approximately $1.3 million.
LIPSMACKER PROJECT. The Company will acquire from Aspect and Esenjay an
aggregate 22% interest in this project, which consists of approximately 15,000
gross acres in Choctaw, Alabama and Clarke Counties, Mississippi. Esenjay
completed a 64 square mile 3-D seismic survey in the fall of 1996, and while
several drilling locations were delineated, the results were generally
disappointing. The estimated costs of drilling and completing a well in this
project area are approximately $1.15 million and there are two remaining
drillable locations. It is unlikely the Company will invest its own capital in
drilling these wells unless new, favorable data becomes available.
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BIG GAS PROJECT. The Company will acquire from Aspect a 22.5% interest in
this 3-D seismic project, which consists of options and leases located on 24,700
gross acres in Galveston County, Texas. The primary geological areas identified
for drilling are the Frio and Vicksburg sands. An onshore seismic survey is
expected in mid-1998. The estimated costs of drilling and completing a shallow
well are approximately $900,000 and a deep well $1.5 million.
CANEY CREEK PROJECT. The Company will acquire from Aspect a 12.5% interest
in this project, which consists of options and leases covering 21,000 gross
acres in Matagorda and Wharton Counties, Texas. The project targets the Yegua
and Frio reservoirs. A 3-D seismic survey has been conducted and the
interpretation of the data should be finished by the end of 1998. The estimated
costs of drilling and completing a shallow well are approximately $700,000 and
$1.7 million for a deep well.
LOX B PROJECT. The Company will acquire from Aspect a 25% interest in this
project, which consists of 11,700 gross acres of leases and options in Jefferson
County, Texas. The primary Vicksburg objectives of this project, as well as
Hackberry targets, have been evaluated with 71 square miles of 3-D seismic data.
The interpretation has recognized 22 potential prospects. Most of these
potential targets have attributes analogous with known production. The estimated
costs of drilling and completing a well in this project are approximately
$750,000. The first prospect is likely to be tested during mid-1998.
WEST PORT ACRES PROJECT. The Company will acquire from Aspect a 12.5%
interest in this project, on which 800 gross acres in Jefferson County, Texas
has been leased and a 21 square mile 3-D seismic survey has been conducted.
Additional potential for Hackberry production exists west of Port Acres Field,
which has produced over 300 BCF of gas with over 10 million bbls of associated
condensate. The estimated costs of drilling and completing a shallow well are
approximately $600,000 to $700,000 and a deep well $1.3 million
SHERIFF FIELD AREA PROJECT. The Company will acquire from Aspect a 75%
interest in this project, which consists of 54,100 gross acres of options in
Calhoun County, Texas, in a lightly explored part of the Lower Frio and
Vicksburg sections southwest of Lavaca Bay. Complex shale domes and coastal axis
oriented ridges provide the setting for complex and poorly understood geology in
this portion of the trend. After interpretation of a pilot 3-D seismic survey, a
larger shoot is anticipated to begin in the second quarter of 1998 in which the
Company intends to participate. The estimated costs of drilling and completing a
shallow well are approximately $600,000 and a deep well $1.2 million.
SOUTH WEST PHEASANT PROJECT. The Company will acquire from Aspect a 75%
interest in this project, which consists of 10,000 gross acres of options in
Matagorda County, Texas. The primary target objectives are in the middle and
lower Frio section. A portion of the project area is covered by a Mobil 3-D
seismic survey that is currently being reprocessed. Final interpretations and
well recommendations are expected by April of 1998. The estimated costs of
drilling and completing a shallow well are approximately $550,000 and a deep
well $1.3 million.
EAST JEFFCO PROJECT. The Company will acquire from Aspect a 50% interest in
this project, which consists of 24,000 gross acres of leases and options in
Jefferson County, Texas. The Company plans to participate in a 3-D seismic
survey that is scheduled for the second quarter of 1998, with Hackberry sands as
the primary target. The estimated costs of drilling and completing a shallow
well are approximately $600,000 to $700,000 and a deep well $1.3 million.
STOWELL/BIG HILL PROJECT. The Company will acquire from Aspect a 50%
interest in this project, which consists of 11,700 gross acres of leases and
options in Jefferson County, Texas. Big Hill Field (which is within the project
area) was discovered in 1941 and contains approximately seventy field segments
recognized by the Texas Railroad Commission. Hackberry sands alone have produced
over 56 BCF of gas and 54 million bbls of liquids. The data from a 3-D seismic
survey is being interpreted. Multiple prospects
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have been identified in the seismic data. The estimated costs of drilling and
completing a shallow well are approximately $600,000 to $700,000 and a deep well
$1.3 million
WEST JEFFCO PROJECT. The Company will acquire from Aspect a 45% interest in
this project, which contains 13,500 gross acres of options in Jefferson County,
Texas. Numerous prospect leads have been identified within the area by log
shows, detailed structural mapping and 2-D seismic data. The Lower Frio Sands
have been prolific producers in this immediate area. A deep (Vicksburg)
exploration target has been conceived. The Company plans to participate in a 3-D
seismic survey that are anticipated to be started in the second quarter of 1998.
The estimated costs of drilling and completing a shallow well are approximately
$600,000 to $700,000 and a deep well $1.3 million.
WEST BEAUMONT PROJECT. The Company will acquire from Aspect a 6.25%
interest in this project, which consists of 11,264 gross acres of leases and
options in Jefferson County, Texas. The project is in the newly established
Hackberry trend, which has experienced over 20 new field discoveries in the past
year, with average reserve sizes of 500,000 bbls of oil equivalent per well. The
trend has been well defined by a three mile corridor downdip of the Hackberry
embayment failure edge. This project is west of the Tri-C 3-D seismic survey,
data from which has been utilized on five new discoveries to date. A 22.5 square
mile 3-D seismic survey has just been completed and will be received by the
Company after it is processed. The estimated costs of drilling and completing a
shallow well are approximately $600,000 to $700,000 and a deep well $1.3 million
EAST TEXAS PINNACLE REEF TREND PROJECT. The Company will acquire from
Aspect a 100% interest in its rights to 3-D seismic data pertaining to the East
Texas Cotton Valley Reef Trend. There is no current acreage position or defined
drilling opportunity currently included in this project.
Most of the above projects may have various independent third parties as
working interest owners based upon who owns leases, who elects to participate in
drilling, industry trades and other factors. Of the interests acquired from
Esenjay, Esenjay will deliver over 90% of its interests to the Company and
retain the balance. As to its retained interests, it will be responsible for its
own pro rata costs. Of the interests acquired from Aspect. Aspect delivered 100%
of its interests in several projects and Aspect retained interests of 50% in
most of the remaining projects. It will be responsible for its own pro rata
costs attributable to said retained interests.
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
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technology may provide it with certain advantages in the exploration process
over those companies that do not use this technology. These include better
delineation of the subsurface, which can reduce exploration risks and help
optimize well locations in productive reservoirs. The Company believes this can
be readily validated based upon general industry experience as well as the
experience of Aspect and Esenjay. 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 make any conclusion regarding
the Company's ability to interpret and use the information developed from the
technology.
EXPLORATION AND DEVELOPMENT
The Company considers the area along and in 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 is particularly well suited to
interpret. In 1994, the Company began devoting more of its resources to the Gulf
Coast region. The Company initially entered this area by evaluating the onshore
shallow Frio/Miocene Trend. The Company's emphasis recently has shifted to
larger exploration targets in this area due to the greater potential return on
investment resulting from the size of the geological features that remain to be
explored and produced. This includes shallow offshore prospects and deeper and
potentially much larger prospects centering in the transitional lands and waters
of South Louisiana and the transitional and onshore areas along the Texas Gulf
Coast. Additional 2-D and 3-D seismic surveys may need to be conducted to
evaluate these areas more fully, and when determined appropriate, the Company
intends to acquire acreage and drill wells as indicated by the evaluations.
Most of the prospects the Company is pursuing, including the Acquisitions,
are either on the edge of a large existing producing field or between such
fields. The prospects generally involve drilling in fault blocks that to date
have not been adequately tested. Thus, 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
lower risk. The availability of the Company's resources and the availability of
joint venture partners will determine the extent to which the Company will
pursue its activities in the Gulf Coast region.
The Starboard Project is comprised of a group of distinct high potential
exploration prospects, as well as proved undeveloped locations. The proved
undeveloped portion of the Starboard Project has been evaluated by independent
petroleum engineers as containing substantial proved undeveloped reserves. See
Notes to Financial Statements. A 3-D seismic survey funded by Fina Oil and
Chemical Company and its partners has been shot and processed. Interpretation
began in March 1997 and the initial 3-D seismic data evaluated drill sites have
been selected.
The interests to be acquired pursuant to the Acquisition Agreement, which
are primarily natural gas oriented, are of such diversity and scope that the
Company's projects will be substantially diversified if the Acquisitions are
closed. The projects acquired will make the Company substantially less dependent
upon the success or failure of its Starboard Prospect.
ACQUISITIONS AND DIVESTMENTS
The Company has periodically acquired producing natural gas and oil
properties. In connection with each such 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
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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.
Initially, the Company concentrated its acquisition activity in Arkansas,
Kansas, Oklahoma, and Texas, believing that these areas had potential for
exploitation through additional development, enhanced recovery and improved
operating techniques. The Company typically sought properties that were
underdeveloped, overly burdened with expenses or owned by financially troubled
companies. During 1994, prices for natural gas and oil reserves were unusually
high. As a result of and in reaction to market conditions, the Company divested
selected proved producing natural gas and oil properties to take advantage of
the relatively higher prices being paid for such properties, and refocused most
of its 1994 and 1995 activities on its exploration program. However, the Company
will continue to evaluate properties for acquisition if they meet the Company's
acquisition criteria, and as resources permit.
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.
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 a 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. The hedges in place expire in January
of 1999, and as of December 31, 1997 the Company had an accrued liability of
$128,936 to recognize the projected loss from the above hedges. The Company has
not recently conducted an active hedging program other then as required by the
bank credit agreement. In this regard, the Company had realized 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 hedge positions.
All of the Company's oil production is 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 long-term
fixed price contract with an industrial end-user, Waldorf Corporation, which
contract initially covered seven years and 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 Waldorf agreement as of January 31, 1996. The 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
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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.
OPERATING HAZARDS AND INSURANCE
The gas and oil business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations, and environmental hazards such as oil spills, gas leaks, ruptures or
discharges of toxic gases, the occurrence of any of which could result in
substantial losses to the Company due to injury or loss of life, severe damage
to or destruction of property, natural resources and equipment, pollution or
other environmental damage, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
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.
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 regulations 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
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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 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 pricing of natural gas. Commencing in April 1992, the
FERC issued Order Nos. 636, 636-A and 636-B (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 basis that is equal for all gas supplies. 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 have been to substantially
reduce or eliminate the interstate pipelines' traditional role as wholesalers of
natural gas in favor of providing only storage and transportation services. The
FERC has issued final orders in virtually all pipeline restructuring
proceedings, and has now commenced a series of one year reviews to determine
whether refinements are required regarding he implementation by individual
pipelines Order No. 636. In July 1996, the United States Court of Appeals for
the District of Columbia Circuit largely upheld Order No. 636.
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.
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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
for resale in the secondary market, and the use of negotiated and market-based
rates and terms and conditions for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, the FERC's
stated intention is to further enhance 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.
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. 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. Effective as of January 1, 1995,
the FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which would generally index such rates
to inflation, subject to certain conditions and limitations. These regulations
could increase the cost of transporting crude oil, liquids and condensate by
pipeline. These regulations are subject to pending petitions for judicial
review. The Company is not able to predict with certainty what effect, if any,
these regulations will have on it, but other factors being equal, the
regulations may tend to increase transportation costs or reduce wellhead prices
for such commodities.
ENVIRONMENTAL MATTERS. The Company's oil and natural gas exploration,
development and production operations are subject to stringent federal, state
and local laws governing the discharge of materials into the environment or
otherwise relating to environmental protection. Numerous governmental agencies,
such as the Environmental Protection Agency ("EPA"), issue regulations to
implement and enforce such laws, which often require difficult and costly
compliance measures that carry substantial civil and criminal penalties 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
drilling activities on certain lands lying within wilderness, wetlands,
ecologically sensitive and other protected areas, require some form of remedial
action to prevent pollution from former operations, such
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as plugging abandoned wells, and impose substantial liabilities for pollution
resulting from the Company's operations. In addition, these laws, rules 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,
disposal or cleanup requirements could adversely affect 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 not
experienced any material adverse effect from compliance with these environmental
requirements, there is no assurance that this will continue in the future.
The primary environmental statutory and regulatory programs that affect the
Company's operations include the following:
The Comprehensive Environmental Response, Compensation and Liability Act, as
amended ("CERCLA"), also known as "Superfund," 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 Federal Water Pollution Control Act of 1972 ("FWPCA") as amended, also
known as the Clean Water Act ("CWA"), imposes restrictions and strict controls
regarding the discharge of pollutants including produced waters and other oil
and gas wastes, into waters of the United States (as defined in the CWA). 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 ("OPA") amends certain provisions of the CWA,
and other statutes as they pertain to the prevention of and response to spills
or discharges of hazardous substances or oil into navigable waters. 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 EPA is also authorized to seek preliminary and permanent injunctive
relief and, in certain cases, criminal penalties and fines. State laws governing
the control of water pollution also provide varying civil and criminal penalties
and liabilities in the case of releases of petroleum or its derivatives into
surface waters or into the ground. In the event that a discharge occurs at a
well site at which the Company is
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conducting production operations, the Company may be exposed to claims that it
is liable under OPA, the CWA or similar state laws.
The Resource Conservation and Recovery Act ("RCRA"), as amended, 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.
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.
FACILITIES
In July 1996 the Company executed a five year lease agreement commencing
September 1, 1996 to occupy approximately 7,600 square feet of office space in
downtown Houston, at an annual rate of $117,068. The Company currently leases
more office space than it needs and intends to sublet a portion of its office
space in 1998. Frontier completed the move of its corporate headquarters to
Houston, Texas in September, 1996.
EMPLOYEES
The Company employs seven full-time and two part-time employees in its
Houston, Texas office. Their functions include management, production, geology,
geophysics, land, legal, gas marketing, accounting, financial planning and
administration. Certain operations of the Company's field activities are
accomplished through independent contractors and are supervised by the Company.
The Company believes its relations with its employees and contractors are good.
No employees of the Company are represented by a union.
ITEM 2. DESCRIPTION OF PROPERTY
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. The
Company currently owns interests in 6 wells it operates, of which 4 are
producing. The Company also owns non-operated interests in approximately 27
15
<PAGE>
wells in Oklahoma, Texas, Louisiana and Kansas, of which 18 are producing. 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 provide the basis for the Company's
current revenues.
DRILLING ACTIVITY
The Company drilled only one well in each of 1991, 1992 and 1993, and such
wells were 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 Garvin
County, Oklahoma wells of which two were productive. In 1997, the Company
participated in five dry holes and one unsuccessful sidetrack operation on South
Louisiana prospects. It also participated in a dry hole in Mobile Bay, Alabama,
on a high risk, high potential Oligocene feature. The Company also participated
in two successful completions in Garvin County, Oklahoma, on prospects resulting
from 3-D seismic data.
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 0.04 8 0.20
Texas........................................................... 1 0.07 5 2.22
Louisiana....................................................... 2 0.79 0 0.00
Kansas.......................................................... 1 0.10 0 0.00
--- --- --- ---
Total......................................................... 9 1.00 13 2.42
--- --- --- ---
--- --- --- ---
</TABLE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, average prices received (net of transportation) and average production
costs associated with the Company's sale of gas and oil for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
------------- ------------
<S> <C> <C>
Net Production:
Oil (Bbl)...................................................... 7,286 9,276
Gas (Mcf)...................................................... 121,304 1,406,016
Gas equivalent (Mcfe).......................................... 165,020 1,461,672
Average sales price:
Oil ($ per Bbl)............................................... $ 20.28 $ 20.99
Gas ($ per Mcf)............................................... $ 2.06 $ 2.18
Average production expenses and taxes ($ per Mcfe).............. $ 2.13(1) $ .78
</TABLE>
- ------------------------
(1) This computation includes $164,792 in costs associated with the fulfillment
of contractual transportation obligations on the Company's Mobile Bay
Properties. If this amount were not included, the average production
expenses and taxes per Mcfe would have been $1.13.
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<PAGE>
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. It does not include any of the
interests the Company would acquire if the Acquisitions are consummated.
<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>
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, to liens for current taxes
not yet due and to other encumbrances. As is customary in the industry in the
case of undeveloped properties, little investigation of record title is made at
the time of acquisition (other than a preliminary review of local records).
Investigations, including a title opinion of legal counsel, are generally made
before commencement of drilling operations. The Company has granted a mortgage
on its interest in the Starboard Prospect to secure repayment of the
non-recourse funding to 420 Energy Investments, Inc., and a mortgage on all of
its undeveloped properties, including Starboard, to Duke Energy Financial
Services, Inc. It has also granted to Bank of America, Illinois, a mortgage on
virtually all remaining producing gas and oil properties to secure repayment
under its credit facility with the bank.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant from time to time in lawsuits incidental to its
business. The Company believes that none of such current proceedings,
individually or in the aggregate, will have a materially adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 20, 1997 a special meeting of the shareholders of the Company was
held. At that meeting the shareholders approved an amendment, the Board of
Directors had authorized, to the Certificate of Incorporation to increase the
number of authorized shares of Common Stock from 20,000,000 to 40,000,000
shares. Under the amendment, Article V of the Certificate was approved to read
as follows: "The total number of shares of all classes of stock which the
corporation shall have the authority to issue is 45,000,000 shares, divided into
classes designated as (i) 40,000,000 shares of Common Stock, par value $0.01 per
share (the "Common Stock"), and 5,000,000 shares of Preferred Stock, par value
of $0.01 per share (the "Preferred Stock"). Said amendment was subsequently
filed of record on February 11, 1998.
17
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On November 12, 1993, Frontier Natural Gas Corporation's stock was admitted
to trading on the NASDAQ Small Cap Market under the symbols "FNGC" for its
common stock, "FNGCP" for its convertible preferred stock and "FNGCW for its
Series A Warrants. On August 9, 1996 the Company's Series B Warrants were
admitted to trading on the same market. The Company estimates there are
approximately 84 common shareholders of record and 2,337 beneficial owners of
the common stock.
For the periods indicated below, the following table sets forth the range of
high and low sales prices for Frontier Natural Gas Corporation's common stock,
convertible preferred stock, Series A Warrants, and Series B Warrants as
reported by NASDAQ. There was no public market for the securities prior to
November 12, 1993. NASDAQ quotations represent prices between dealers without
adjustment for retail markups, markdowns or commissions and may not necessarily
represent actual transactions. There have been no dividends declared or paid to
the owners of the common stock nor does the Company currently intend to declare
any such dividends. The Company's convertible preferred stock has priority as to
dividends over the common stock and no common stock cash dividend can be
declared or paid unless all accrued convertible preferred stock dividends have
been paid. As of December 31, 1997, the Company has undeclared and unpaid
dividends in the amount of $180,518 on its convertible preferred stock. Although
the Company is not required to declare and pay such dividends, the Company is
precluded from paying dividends to its common shareholders until such dividends
are paid current. Due to newly enacted listing requirements of the NASDAQ Small
Cap Market effective February 23, 1998, the Company is currently not in
compliance with the continued listing requirements in two regards. One is the
requirement for two independent directors. The Company has only one at this time
due to the death in February of 1998 of Mr. Neal Elliott. The Company's Board of
Directors has the power to, and intends to, elect an additional independent
director to cure this item on a timely basis. In addition, the new continued
listing requirement calls for a minimum bid price for the Company's common stock
to equal or exceed $1.00 on an ongoing basis. The Company intends to propose to
it's shareholders a reverse stock split intended to timely remedy this
deficiency.
<TABLE>
<CAPTION>
CONVERTIBLE SERIES A WARRANTS SERIES B WARRANTS
COMMON PREFERRED
---------------------- ------------------ --------------------- ----------------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- -------------------- --------- --------- ------- ------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997... $ 2 $ 11/16 $ 8 1/2 $ 7 1/8 $ 3/8 $ 1/64 $ 7/16 $ 3/32
September 30,
1997.............. 2 5/8 9 7 1/4 3/16 1/16 3/4 1/8
June 30, 1997....... 2 3/8 1 11/16 10 9 5/16 3/16 15/16 1/2
March 31, 1997...... 3 9/16 2 1/16 10 5/8 9 1/2 5/32 1 11/16 11/16
December 31, 1996... 2 15/16 2 10 1/4 8 11/32 1/16 1 3/8 5/8
September 30,
1996.............. 2 3/4 1 5/8 8 5/8 7 3/8 11/16 3/16 1 1/18 5/16
June 30, 1996....... 2 11/16 1 7/8 7 3/8 7 1/4 1/2 7/32 1 1/8 5/16
March 31, 1996...... 2 11/16 1 27/64 7 1/4 7 1/4 15/32 1/8 1 3/8 9/16
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis reviews Frontier Natural Gas
Corporation's operations for the years ended December 31, 1997 and 1996 and
should be read in conjunction with its consolidated financial statements and
notes related thereto. Certain statements contained herein set forth
management's intentions, plans, beliefs, expectations or predictions of the
future and are forward-looking statements. It is important to note that
Frontier's actual results could differ materially from those projected in such
forward-looking statements. The risks and uncertainties include but are not
limited to potential unfavorable or uncertain results of 3-D seismic surveys not
yet completed, drilling cost and operational uncertainties, risks associated
with quantities of total reserves and rates of production from existing gas and
oil reserves and pricing assumptions of said reserves, potential delays in the
timing of
18
<PAGE>
planned operations, competition and other risks associated with permitting
seismic surveys and with leasing oil and gas properties, potential cost
overruns, regulatory uncertainties, and the availability of capital to fund
planned expenditures as well as general industry and market conditions.
OVERVIEW
In mid-1996, the Company refocused its activities from acquiring gas
reserves principally in the mid-continent region of the United States to
concentrate on exploration and related development drilling projects in Southern
Louisiana and along the Gulf Coast region of Alabama, Mississippi and Texas. The
Company's most significant interest in the Gulf Coast region is the Starboard
Project, which is comprised of a group of distinct exploration prospects, as
well as undeveloped locations.
During 1996 and the first six months of 1997, the Company's drilling
activities, which were based significantly on 2-D seismic data, were
unsuccessful. This unsuccessful drilling activity, along with an unexpected drop
in production from the Company's Mobile Bay area wells, reduced the Company's
cash and capital resources at the time the drilling phase of the Starboard
Project was approaching. To address the Company's capital needs for the
Starboard Project and other activities, the Board of Directors, at its meeting
on August 12, 1997, directed management to look for potential assets to acquire
in exchange for the Company's Common Stock, to identify and review potential
business consolidation opportunities, identify potential partners to help fund
the Company's proposed drilling activities on the Starboard Project and in other
locations, and to consider any other avenues to strengthen the Company's capital
resources and diversify its exploration opportunities. The Board also directed
management to reduce overhead wherever prudently possible and the Company
retained an investment advisor to aid in achieving these objectives.
To better the position the Company to enter into a potential transaction,
the Company called a special shareholders meeting to increase its authorized
Common Stock from 20,000,000 to 40,000,000 shares. The Company's shareholders
approved the increase on October 20, 1997. The Board also determined to not
further extend any existing employment contracts with senior management, and to
settle any deferred compensation liabilities with those individuals, to create
more flexibility in all appropriate alternatives for strategic consolidations.
The Company, in conjunction with its investment advisor, began reviewing
sources of capital and consolidation candidates, and where appropriate, entered
preliminary discussions to identify those candidates that the Company considered
most attractive and that had a similar interest in pursuing negotiations.
The Company explored a series of such transactions and ultimately management
brought four proposals to its Board of Directors. The Board, after receipt of
the advice of management and its investment adviser, and receipt of due
diligence reports and other materials, unanimously agreed that the transaction
with Aspect and Esenjay was the best option for the Company's shareholders. The
Acquisition Agreement was executed January 19, 1998, and is subject to, among
other items, approval by the Company's shareholders. The Company's ongoing
business plan is substantially dependent upon approval of the Acquisitions by
its shareholders and the closing of said Acquisitions. If closed, the Company
will convey a substantial majority of its common stock to acquire the array of
significant technology enhanced natural gas oriented exploration projects, many
of which are ready to drill. It will also substantially broaden and strengthen
its management which it believes will facilitate expanded access to capital
markets due to the value and diversity of its exploration project portfolio.
Conversely, if the Acquisitions are not closed, the Company would be required to
rapidly find another consolidation, or other capital sources, or sell
substantial interests in its existing exploration projects or it would be unable
to fund ongoing operations.
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
19
<PAGE>
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.
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 were 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 to the
decline in gas and oil revenues was the sale of the Company's NE Cedardale field
located in Major County, Oklahoma in September 1996. The Company recorded gas
and oil revenues associated with the aforementioned 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 the
year 1996 to $452,020 reported for the year 1997. The increase is notably 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 gas 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 for its bank loan
facility. 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 the 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 of the Company 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.
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 Prospect in Terrebonne Parish, Louisiana. There were no such
transactions for the same period in 1996.
20
<PAGE>
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 located in
Texas, Arkansas and Oklahoma.
TRANSPORTATION AND GATHERING COSTS decreased from $368,716 in 1996 to
$143,265 in 1997. The decrease in transportation and gathering costs was almost
entirely attributable to the ceased production of the Mobile Bay wells.
DEPLETION, DEPRECIATION, AND AMORTIZATION EXPENSE ("DD&A") decreased by
85.9% from $2,237,648 in 1996 to $315,880 in 1997. The decrease in DD&A was
primarily attributable to the sale of certain of the Company's properties
including the NE Cedardale field located in Major County, Oklahoma on September
27, 1996.
INTEREST EXPENSE decreased to $60,942 in 1997 from $783,872 in 1996. The
decrease in interest expense was primarily attributable to the substantial loan
principal repayment made to Bank of America in September of 1996. During 1997,
the Company capitalized a large portion of its interest in its ongoing Starboard
Prospect, 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.
GENERAL ADMINISTRATIVE EXPENSES ("G&A") 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 located in Alabama.
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 $0.72 per share
in 1996 to a net loss of $0.51 per share in 1997. 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 weighed average
equivalent shares outstanding. As a result of the common stock offering that was
finalized on August 14, 1996, approximately 9,877,000 weighted average common
equivalent shares at December 31, 1997 as compared to approximately 7,142,000
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 consummate the Acquisitions and develop
the Esenjay Assets and Aspect Assets, as well as the Starboard Project and other
prospects. Because the Company had 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, the Company's share of revenues from Mobile Bay have
been substantially reduced during 1997. Revenues from the operation of the
mid-continent and Mobile Bay
21
<PAGE>
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 have been 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.
The Company's potential results in 1998 will be substantially effected by
the closing of the Acquisitions, which closing is subject to approval by the
Company's common shareholders, as well as other provisions of the Acquisition
Agreement.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had a cash balance of $690,576 and a
working capital a deficit of $476,251 as compared to a cash balance of
$4,956,656 and working capital of $4,159,034 at December 31, 1996. The decrease
in cash and working capital was primarily attributable to the operating loss
incurred during 1997 and, in particular, exploration costs associated with dry
holes that were drilled during 1997.
In addition to the changes in cash, the decrease in working capital was
primarily attributable to several factors. Current liability increases of
$186,174 in accounts payable (primarily due to a greater volume of exploration
activities), and $153,647 in accruals and other liabilities (primarily
attributable to the current portion of the unrealized loss on swap agreements)
were largely offset by a $292,032 reduction in the revenue distribution account
(primarily due to the sale of operated properties). They were the primary
changes in the category. Current assets were primarily effected by the
previously described reduction in cash and a reduction of $144,634 in accounts
receivable primarily attributable to the sale of operated properties.
Cash flows used in operations totaled $1,894,402, excluding $2,258,702 of
exploration costs, which are classified under cash flows used in investing
activities. Cash flows used in investing activities totaled $2,180,392. Included
in the cash flows used in investing activities are $3,023,253 of capital
expenditures on gas and oil properties, including the exploration costs referred
to above that are included in the operating loss for the period but are excluded
from operating cash flows. The Company received $1,002,540 of proceeds from the
sale of various oil and gas properties during 1997, which partially offset the
capital expenditures during 1997.
Cash flows from financing activities reflects a use of cash of $191,286
during 1997. Cash flows from financing activities consisted of proceeds from
debt issuance of $182,382 offset by repayments of long-term debt of $296,303 and
preferred stock dividends paid of $77,365.
The Company's major obligations at December 31, 1997, were substantially the
same as at December 31, 1996, and consisted principally of (i) servicing loans
from Bank of America ($293,888 at December 31, 1997) and other loans, (ii) a
non-recourse loan relating to the development of the Company's Starboard
Prospect ($864,000 at December 31, 1997), (iii) payment of preferred stock
dividends ($77,365 of dividends were paid during 1997), (iv) funding of the
Company's exploration activities, and (v) funding of the day-to-day operating
costs. Unrealized losses on commodity transactions were $128,936 for the period
ended December 31, 1997. There were no such losses for the same period in 1996.
The lack of success in 1997 drilling caused the Company to reduce its
exploration plans and seek a potential business consolidation. It was these
efforts which led to its negotiations with Aspect and Esenjay and to the
execution of the definitive agreement dated January 19, 1998, which governs the
terms of the Acquisition which is in the process of being submitted to the
Companies shareholders for approval. The Company is not currently seeking
additional projects and is focused upon working to consummate the Acquisitions.
In conjunction with the Acquisition Agreement, Aspect committed to lend the
Company up to $1,800,000 to fund operational and exploration requirements prior
to closing of the Acquisitions. This
22
<PAGE>
credit facility was implemented January 12, 1998 and was superseded by a larger
facility from Duke Energy Financial Services, Inc., dated February 23, 1998 (the
"Duke Facility"). Upon closing of the Duke Facility, Aspect was repaid $500,000
in principle (plus interest) then due. The Duke Facility provides that the
Company can borrow up to $4,800,000 prior to closing of the Acquisitions and, if
the Acquisitions are closed, up to an aggregate of $7,800,000. Of the initial
$4,800,000, $1,800,000 can be utilized by the Company to fund general corporate
needs and costs of exploration, and $3,000,000 is to be utilized to loan to
Esenjay (on a secured basis) to pay exploration costs associated with Esenjay's
working interests to be conveyed to the Company upon closing of the
Acquisitions, which costs may be incurred after the effective date of the
Acquisitions, but prior to the date of closing. In the event the Acquisitions
are closed, an additional $3,000,000 is available to fund costs of redeeming the
Companies currently outstanding preferred stock (a condition of closing the
Acquisitions) and exploration costs.
Major provisions of the Duke Facility include interest at the rate of a
national prime rate plus 4% per annum, cash payments equal to an overriding
royalty of 0.6% of the Company's interest in wells drilled by the Company while
the Duke Facility is outstanding, and the right of the lender to gather,
process, and 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 Duke Facility is secured by mortgages on most of the
Company's undeveloped exploration projects. If the Acquisitions are closed, the
assets acquired will be subject to such mortgages. The Duke Facility is
repayable in twelve monthly payments (the first eleven in amounts equal to
1/30th of the principal balance on July 31, 1998 plus interest and the final
payment for the remaining principal balance plus interest) commencing August 31,
1998, or sooner, in the event the borrower sells interests in the collateral or
closes any underwritten public offering of securities.
The Company has utilized, and expects to continue to utilize, its cash
balances and credit facilities to fund negative cash flows from operations. The
Company expects that it will have depleted its current cash reserves and fully
used its credit facilities by the third quarter of 1998. As such it is
imperative that the Company close the Acquisitions or find other sources of
capital or merger partners, or it will be unable to fund its projects and
operations other then by the sale of substantial working interests in Company
projects, including Starboard. The Company believes that such alternatives are
viable and achievable although no assurances can presently be made. However, a
sale of the Starboard Project interests, without closing the Acquisition, would
leave the Company without cash flow and minimal exploration project inventory.
The Company is presently in non-compliance with the terms of its loan from Bank
of America, but has secured a waiver of various covenants under the loan through
June 30, 1998. The Company anticipates that it will require additional waivers
of covenants under the Bank of America loan until such time as the Company
begins to receive revenues, if ever, from its current exploration projects. The
Company has no assurance said waiver will be granted.
In the event the Acquisitions are closed, the Company will have what it
considers an exceptional inventory of technology enhanced, gas oriented
exploration projects, many of which are ready to drill. Until such time as the
Company develops substantial revenues from producing properties, it will require
external sources of exploration capital. It believes it will have a drillable
project inventory such that it could effectively deploy over $25,000,000 of
exploratory costs in 1998 on the net interests acquired by it pursuant to the
Acquisitions. Sources include the Duke Facility, industry participants via the
sale of promoted interests, other credit facilities including its banks, which
the Company believes would be available in the event it can discover meaningful
natural gas and/or oil reserves net to its account, and additional equity
capital. In that the Company will operate most of the projects acquired, it
could also defer a portion of the capital costs to 1999 in the event adequate
resources were not available, however, management believes that such resources
will be available to it in 1998 under reasonable terms.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Frontier Natural Gas Corporation
We have audited the accompanying consolidated balance sheets of Frontier Natural
Gas Corporation and subsidiaries (the "Company") as of December 31, 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 Frontier Natural Gas
Corporation and subsidiaries 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
24
<PAGE>
FRONTIER NATURAL GAS CORPORATION
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...................................................... 362,578 208,931
------------- ------------
Total current liabilities........................................................ 1,743,190 1,598,856
Long-term debt....................................................................... 22,680 325,394
Non-recourse debt.................................................................... 864,000 681,618
Accrued interest on non-recourse debt................................................ 131,400 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; 9,935,906 and
5,058,406 outstanding at December 31, 1997 and December 31, 1996,
respectively................................................................... 99,359 98,659
Unamortized value of warrants issued............................................... (27,163) (54,325)
Common stock subscribed............................................................ -- 45,000
Common stock subscription receivable............................................... -- (45,000)
Additional paid-in capital......................................................... 14,668,626 14,599,326
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>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
FRONTIER NATURAL GAS CORPORATION
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
------------- -------------
Income (loss) before provision for income taxes..................................... (4,953,803) (5,025,019)
Benefit (provision) for income taxes................................................ -- --
------------- -------------
Net income (loss)................................................................... (4,953,803) (5,025,019)
Cumulative preferred stock dividend................................................. 103,153 103,153
------------- -------------
Net income (loss) applicable to common stockholders................................. $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
$ (0.51) $ (0.72)
Weighted average number of common shares outstanding................................ 9,877,865 7,142,056
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
FRONTIER NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A COMMON UNAMORTIZED
PREFERRED STOCK SHARES VALUE OF ADDITIONAL
------------------------ -------------------- WARRANTS PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT ISSUED CAPITAL DEFICIT
----------- ----------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... 85,961 $ 860 5,058,406 $ 50,584 -- $ 7,866,879 $ (2,854,887)
Issuance of common stock........ -- -- 4,807,500 48,075 -- 6,616,947 --
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 9,865,906 98,659 (54,325) 14,599,326 (7,905,694)
----------- ----- --------- --------- ------------ ----------- ------------
Issuance of common stock........ -- -- 70,000 700 -- 69,300 --
Cumulative preferred stock
dividend...................... -- -- -- -- -- -- (77,365)
Amortization of warrants........ -- -- -- -- 27,162 -- --
Net loss........................ -- -- -- -- -- -- (4,953,803)
----------- ----- --------- --------- ------------ ----------- ------------
Balance, December 31, 1997...... 85,961 $ 860 9,935,906 $ 99,359 $ (27,163) $14,668,626 $(12,936,862)
----------- ----- --------- --------- ------------ ----------- ------------
----------- ----- --------- --------- ------------ ----------- ------------
</TABLE>
The accommpanying notes are an integral part of these financial statements.
27
<PAGE>
FRONTIER NATURAL GAS CORPORATION
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.
28
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION--The Company's primary business activities include gas
and oil exploration, production and sales, primarily in the Southwestern and
Gulf Coast areas of the United States. The accompanying consolidated financial
statements include the accounts of the Company, and its subsidiaries.
The preparation of financial statements in conformity with generally
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.
29
<PAGE>
FRONTIER NATURAL GAS CORPORATION
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
30
<PAGE>
FRONTIER NATURAL GAS CORPORATION
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....................................... 9,877,865 7,142,056
Basic (Loss) Per Share........................................................... $ (0.51) $ (0.72)
------------- -------------
------------- -------------
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. If the Company is unsuccessful in its attempt
to finalize the proposed Acquisitions and secure permanent financing, the
Company believes it will be unable to continue to meet its current obligations
during 1998 and beyond without selling substantial interests in its exploration
projects. The Company is actively pursuing completion of the proposed
Acquisitions and permanent financing.
3. STOCKHOLDERS' EQUITY:
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 (1) share of common stock (valued at $4.00) and one (1) warrant ("Series A
Warrant") (valued at $0.10). During 1995, the Company offered to exchange one
(1) share of cumulative convertible
31
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
preferred stock plus all unpaid and accrued preferred dividends for four (4)
shares 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 2,415,756 shares of Common Stock and 1,207,878 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 two shares 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 150,000 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 three shares of
Common Stock and three (3) Series B Redeemable Common Stock Purchase Warrants
("Series B Warrants"). The price for each Unit was $5.0625. 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 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
32
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
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 $5.00. The initial conversion
price is $10.00; therefore, the cumulative convertible preferred stock is
initially convertible into common stock and Series A Warrants at the conversion
rate of two (2) shares of common stock and two (2) Series A Warrants 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 (1) share of common stock at a price equal to $6.00,
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 $.25 each on 30
days notice. As of December 31, 1997 and 1996, there were 1,578,078 Series A
Warrants outstanding.
Each Series B Warrant issued in the August 1996 public securities offering
entitles the holder to purchase one (1) share of common stock for $2.025
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 $0.01 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.
33
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
The Company has also issued a common stock warrant to purchase 25,000 shares
of common stock at $4.00 per share in connection with a loan agreement. This
warrant expires five (5) years from the effective date of the Company's 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 75,000 shares of common stock and a stock purchase
warrant to purchase up to 300,000 shares of common stock at an exercise price of
$3.00 per share 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 $6.00 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 250,000 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 250,000 shares of the
Company's common stock at $2.00 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 70,000 shares of common stock during 1997. At December 31, 1997,
the Company had prepaid consultant cost 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 150,000 shares of Common Stock at an
exercise price of $.50 per share.
EMPLOYEE OPTION PLAN--1997--The plan authorizes the issuance of up to
695,350 options to purchase one (1) share of common stock. Options to purchase
601,000 shares of common stock at prices ranging from $0.63 to $1.88 are
currently outstanding of which 31,000 expire in June of 1998.
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
34
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
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 350,000 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 122,000 options currently outstanding, of
which 116,000 expire by June of 1998.
MANAGEMENT INCENTIVE STOCK PLAN
The Plan initially authorized the issuance of up to 240,000 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 48,000 units currently
outstanding, 42,000 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.... -- 180,000 -- 120,000 8,000 350,000 695,350
Shares under option at end Of
period...................... -- 180,000 48,000 112,000 122,000 342,000 601,000
Option price per share........ -- $ 1.679 $2.00-3.50 $2.00-3.50 $1.47-2.125 $1.47-2.125 $0.63-1.88
Shares exerciseable at end Of
period...................... -- 156,000 48,000 102,000 40,666 -- 544,000
Sales exercised during the
Period...................... -- -- -- -- -- -- --
Sales canceled................ 180,000 -- 64,000 120,000 220,000 --
Weighted Option Price......... -- $ 1.679 $ 3.02 $ 3.09 $ 1.67 $ 1.569 $ 0.70
</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 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
35
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
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 and common equivalent share--as reported....................... $ (0.51) $ (0.72)
------------- -------------
------------- -------------
Net loss per common and common equivalent share--pro forma......................... $ (0.57) $ (0.74)
------------- -------------
------------- -------------
</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 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
36
<PAGE>
FRONTIER NATURAL GAS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
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 MARKET PRICE OF EXERCISE PRICE
OPTIONS/SARS STOCK AT TIME OF AT TIME OF NEW
REPRICED OR REPRICING OR REPRICING OR EXERCISE
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE
- ----------------------------------- --------- ------------- ------------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
David W. Berry..................... 12/3/97 120,000(1) $ .97 $ 1.62 $ .63
President and 12/3/97 24,000(2) $ .97 $ 3.10 $ .63
Chief Executive Officer
David B. Christofferson............ 12/3/97 180,000(3) $ .97 $ 1.68 $ .63
Executive Vice 12/3/97 24,000(2) $ .97 $ 3.10 $ .63
President, General 12/3/97 100,000(1) $ .97 $ 1.47 $ .63
Counsel and Secretary
<CAPTION>
LENGTH OF ORIGINAL
OPTION TERM
REMAINING AT DATE
OF REPRICING OR
NAME AMENDMENT (MONTHS)
- ----------------------------------- -------------------
<S> <C>
David W. Berry..................... 102
President and 69
Chief Executive Officer
David B. Christofferson............ 62
Executive Vice 69
President, General 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 180,000 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.
37
<PAGE>
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>
38
<PAGE>
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.
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
39
<PAGE>
6. LONG-TERM DEBT: (CONTINUED)
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.
40
<PAGE>
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 statements.
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
Esenjay Petroleum Corporation ("Esenjay") and Aspect Resources LLC ("Aspect")
(the "Acquisition Agreement"). Pursuant to the terms and conditions of the
Acquisition Agreement and subject to approval by the Company's shareholders the
Company will purchase from Esenjay (the "Esenjay 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
30,991,563 shares of Common Stock to Esenjay in exchange for the Esenjay Assets,
and will issue up to 29,648,636 shares of Common Stock to Aspect or its assigns
in exchange for the Aspect Assets. The Company has filed a preliminary Schedule
14A proxy statement in this regard and intends to have a shareholders meeting in
late April or early May of 1998 to seek the approval of its shareholders of the
Acquisitions and related matters. 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.
41
<PAGE>
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 Esenjay to pay
exploratory costs incurred on the Esenjay 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. If the
Acquisitions are closed, the assets acquired 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.
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.
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>
42
<PAGE>
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
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. 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
43
<PAGE>
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
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, $15.62 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.
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 net cash flows before income taxes.......................................... 8,283,153 32,963,421
Discount of future net cash flows at 10%........................................... 4,257,496 11,267,101
-------------- -------------
Discounted future net cash flows before income taxes............................... 4,025,657 21,696,320
Future income taxes, net of discount at 10%........................................ 266,763 4,937,776
-------------- -------------
Standardized measure of discounted future net cash flows........................... $ 3,758,894 $ 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........................................................ 4,671,013 (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............... $ 3,758,894 $ 16,758,544
-------------- --------------
-------------- --------------
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
44
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is hereby partially incorporated by
reference to the Company's proxy statement which will be filed with the
Commission within one hundred twenty (120) days of the close of the fiscal year
pursuant to regulation 14A. There is no additional required information.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to
the Company's proxy statement, which will be filed with the Commission within
one hundred twenty (120) days of the close of the fiscal year pursuant to
regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference to
the Company's proxy statement, which will be filed with the Commission within
one hundred twenty (120) days of the close of the fiscal year pursuant to
regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference to
the Company's proxy statement, which will be filed with the Commission within
one hundred twenty (120) days of the close of the fiscal year pursuant to
regulation 14A.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
[REVIEW FOLLOWING FOR POTENTIAL DELETIONS AND ADDITIONS]
<TABLE>
<CAPTION>
EXHIBIT NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
2* Acquisition Agreement and Plan of Exchange Regarding the Acquisition of Certain Assets of Esenjay
Petroleum Corporation and Aspect Resources LLC by Frontier Natural Gas Corporation, dated January 19,
1998.
3(a) Amended & Restated Certificate of Incorporation of the Company is incorporated by reference to the
Company's Registration Statement 333-06261, Amendment No. 1, dated July 31, 1996.
3(b)* Amended Certificate of Incorporation of the Company dated February 11, 1998.
3(c) By-Laws of the Company as currently in effect is incorporated by reference to the Company's Registration
Statement 33-69640-FW, wherein the same appeared as Exhibit 3.2.
4 See Articles V, and VI, of the Company's Certificate of Incorporation and Article V of the Company's
By-Laws as provided at Exhibits 3(a) and 3(b) above, and see also the Company's Certificate of
Designations of Convertible Preferred Stock as currently in effect which is incorporated by reference to
the Company's Registration Statement number 33-69640-FW dated September 29, 1993 wherein the same
appeared as Exhibit 3.3.
10(a) Employment Agreement by and between the Company and David W. Berry as currently in effect is
incorporated by reference to the Company's Registration Statement 33-69640-FW dated September 29, 1993
wherein the same appeared as Exhibit 10.1.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10(b)* Contract Settlement Agreement between Frontier Natural Gas Corporation and David W. Berry dated
effective January 1, 1998.
10(c) Employment Agreement by and between the Company and David B. Christofferson as currently in effect is
incorporated by reference to the Company's Registration Statement 33-69640-FW dated September 29, 1993
wherein the same appeared as Exhibit 10.2.
10(d)* Contract Settlement Agreement between Frontier Natural Gas Corporation and David B. Christofferson dated
effective January 1, 1998.
10(e) 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
appeared as Exhibit 10.5.
10(f) 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(g) 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(h) $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 current report on Form 8-K dated January 9, 1996.
10(i) $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.
10(j) Lease Agreement dated July 16, 1996, by and between the Company and Allen Center Company is incorporated
by reference to the Company's registration statement 333-06261 dated July 31, 1996 wherein the same
appeared as Exhibit 10.23.
10(k) 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(l) 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(m) 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(n) 3-D Seismic Participation Agreement dated May 30, 1996 by and between Frontier Natural Gas Corporation
and Fina Oil and Chemical Company.
10(o)* Frontier Natural Gas Corporation Employee Option Plan--1997 as currently in effect.
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.
11 See Note 1 to the audited consolidated financial statements.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NAME OF EXHIBIT
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
21* Subsidiaries of Registrant.
27* Financial Data Schedule.
(b) Reports on Form 8-K.
None
</TABLE>
- ------------------------
* Filed herewith
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13, or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
FRONTIER NATURAL GAS CORPORATION
By: /s/ DAVID W. BERRY
-----------------------------------------
David W. Berry,
CHAIRMAN OF THE BOARD OF DIRECTORS;
PRESIDENT
</TABLE>
Pursuant to the requirements of Section 13, or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ DAVID W. BERRY Chief Executive Officer,
- ------------------------------ (Principal Executive , 1998
David W. Berry Officer) and Director
Executive Vice President,
General Counsel, Chief
/s/ DAVID B. CHRISTOFFERSON Financial Officer,
- ------------------------------ (Principal Accounting , 1998
David B. Christofferson and Financial Officer)
and Director
/s/ JEFFREY R. ORGILL
- ------------------------------ Vice Chairman of the Board , 1998
Jeffrey R. Orgill of Directors
/s/ ALLEN H. SWEENEY
- ------------------------------ Director , 1998
Allen H. Sweeney
48
<PAGE>
ACQUISITION AGREEMENT
AND
PLAN OF EXCHANGE
REGARDING
THE ACQUISITION OF CERTAIN ASSETS OF
ESENJAY PETROLEUM CORPORATION
AND
ASPECT RESOURCES LLC
BY
FRONTIER NATURAL GAS CORPORATION
JANUARY 19, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.01 Defined Terms. . . . . . . . . . . . . . . . . . . . . . . 1
1.02 References and Titles. . . . . . . . . . . . . . . . . . .11
1.03 Knowledge. . . . . . . . . . . . . . . . . . . . . . . . .12
1.04 Adequacy of Disclosure . . . . . . . . . . . . . . . . . .12
1.05 Supplemental Property Schedules. . . . . . . . . . . . . .12
ARTICLE II
ACQUISITION OF ESENJAY ASSETS . . . . . . . . . . . . . . . . . . . . .13
2.01 Contribution of Esenjay Assets . . . . . . . . . . . . . .13
2.02 Assumed Liabilities. . . . . . . . . . . . . . . . . . . .13
2.03 Esenjay Employees. . . . . . . . . . . . . . . . . . . . .15
2.04 Non-Assignable Rights. . . . . . . . . . . . . . . . . . .15
ARTICLE III
ACQUISITION OF ASPECT ASSETS. . . . . . . . . . . . . . . . . . . . . .15
3.01 Contribution of Aspect Assets. . . . . . . . . . . . . . .15
3.02 Assumed Liabilities; Permitted Asset Sales; Adjustments. .16
3.03 Non-Assignable Rights. . . . . . . . . . . . . . . . . . .18
ARTICLE IV
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO FRONTIER . . . . . . . .18
4.01 Organization, Standing and Qualification . . . . . . . . .18
4.02 Execution, Delivery and Performance of
Agreement; Authority . . . . . . . . . . . . . . . . . .18
4.03 Conflicts. . . . . . . . . . . . . . . . . . . . . . . . .19
4.04 SEC Documents; Financial Statements; Liabilities . . . . .19
4.05 Capitalization . . . . . . . . . . . . . . . . . . . . . .21
4.06 Accounts Receivable, Payable . . . . . . . . . . . . . . .21
4.07 Absence of Events. . . . . . . . . . . . . . . . . . . . .22
4.08 Contracts. . . . . . . . . . . . . . . . . . . . . . . . .23
4.09 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .24
4.10 Litigation . . . . . . . . . . . . . . . . . . . . . . . .26
4.11 Compliance with Laws, Material Agreements and Permits. . .26
4.12 Tax Representations. . . . . . . . . . . . . . . . . . . .26
4.13 Environmental Matters. . . . . . . . . . . . . . . . . . .27
4.14 Books and Records. . . . . . . . . . . . . . . . . . . . .28
4.15 Gas Imbalances . . . . . . . . . . . . . . . . . . . . . .29
4.16 Title to Assets other than Oil and Gas Interests . . . . .29
4.17 Title to Oil and Gas Interests . . . . . . . . . . . . . .29
4.18 Oil and Gas Operations . . . . . . . . . . . . . . . . . .30
4.19 No Guarantees. . . . . . . . . . . . . . . . . . . . . . .30
4.20 Employee Matters . . . . . . . . . . . . . . . . . . . . .30
4.21 Employee Benefit Plans . . . . . . . . . . . . . . . . . .30
4.22 Broker/Finders . . . . . . . . . . . . . . . . . . . . . .33
4.23 Royalties. . . . . . . . . . . . . . . . . . . . . . . . .33
4.24 Plugging and Abandonment Liabilities . . . . . . . . . . .34
i
<PAGE>
Page
----
4.25 Prepayments. . . . . . . . . . . . . . . . . . . . . . . .34
4.26 Hedging Activities . . . . . . . . . . . . . . . . . . . .34
4.27 Transactions With Related Parties. . . . . . . . . . . . .34
4.28 Disclosure . . . . . . . . . . . . . . . . . . . . . . . .34
ARTICLE V
FINANCIAL ADVISOR . . . . . . . . . . . . . . . . . . . . . . . . . . .35
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ESENJAY . . . . . . . . . . . . . . .35
6.01 Organization, Standing and Qualification . . . . . . . . .35
6.02 Execution, Delivery and Performance of
Agreement; Authority . . . . . . . . . . . . . . . . . .35
6.03 Conflicts. . . . . . . . . . . . . . . . . . . . . . . . .35
6.04 Capitalization . . . . . . . . . . . . . . . . . . . . . .36
6.05 Financial Statements. . . . . . . . . . . . . . . . . . ..36
6.06 Absence of Undisclosed Liabilities . . . . . . . . . . . .36
6.07 Absence of Events. . . . . . . . . . . . . . . . . . . . .37
6.08 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .38
6.09 Litigation . . . . . . . . . . . . . . . . . . . . . . . .39
6.10 Compliance with Laws, Material Agreements and Permits. . .39
6.11 Environmental Matters. . . . . . . . . . . . . . . . . . .39
6.12 Title to Assets other than Oil and Gas Interests . . . . .41
6.13 Title to Oil and Gas Interests . . . . . . . . . . . . . .41
6.14 Broker/Finders . . . . . . . . . . . . . . . . . . . . . .41
6.15 Royalties. . . . . . . . . . . . . . . . . . . . . . . . .42
6.16 Gas Imbalances . . . . . . . . . . . . . . . . . . . . . .42
6.17 Hedging Activities . . . . . . . . . . . . . . . . . . . .42
6.18 Certain Business Relationships or Transactions
with Affiliates. . . . . . . . . . . . . . . . . . . . .42
6.19 No Guarantees. . . . . . . . . . . . . . . . . . . . . . .42
6.20 Employee Matters . . . . . . . . . . . . . . . . . . . . .43
6.21 Employee Benefit Plans . . . . . . . . . . . . . . . . . .43
6.22 Plugging and Abandonment Liabilities . . . . . . . . . . .45
6.23 Prepayments. . . . . . . . . . . . . . . . . . . . . . . .46
6.24 Calls on Production. . . . . . . . . . . . . . . . . . . .46
6.25 Oil and Gas Operations . . . . . . . . . . . . . . . . . .46
6.26 Tax Representations. . . . . . . . . . . . . . . . . . . .46
6.27 Disclosure . . . . . . . . . . . . . . . . . . . . . . . .47
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF ASPECT. . . . . . . . . . . . . . . .47
7.01 Organization, Standing and Qualification . . . . . . . . .48
7.02 Execution, Delivery and Performance of
Agreement; Authority . . . . . . . . . . . . . . . . . .48
7.03 Conflicts. . . . . . . . . . . . . . . . . . . . . . . . .48
7.04 Aspect Assets. . . . . . . . . . . . . . . . . . . . . . .48
7.05 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . .48
7.06 Litigation . . . . . . . . . . . . . . . . . . . . . . . .49
7.07 Compliance with Laws, Material Agreements and Permits. . .49
7.08 Environmental Matters. . . . . . . . . . . . . . . . . . .50
7.09 Title to Assets other than Oil and Gas Interests . . . . .51
7.10 Title to Oil and Gas Interests . . . . . . . . . . . . . .51
ii
<PAGE>
Page
----
7.11 Broker/Finders . . . . . . . . . . . . . . . . . . . . . .52
7.12 Tax Representations. . . . . . . . . . . . . . . . . . . .52
7.13 Disclosure . . . . . . . . . . . . . . . . . . . . . . . .53
ARTICLE VIII
COVENANTS AND OTHER AGREEMENTS. . . . . . . . . . . . . . . . . . . . .53
8.01 Access to Records and Properties . . . . . . . . . . . . .53
8.02 Operation of the Business. . . . . . . . . . . . . . . . .54
8.03 Consents . . . . . . . . . . . . . . . . . . . . . . . . .55
8.04 Announcements. . . . . . . . . . . . . . . . . . . . . . .55
8.05 No Solicitations . . . . . . . . . . . . . . . . . . . . .56
8.06 Notification of Certain Matters. . . . . . . . . . . . . .57
8.07 Financing Covenants. . . . . . . . . . . . . . . . . . . .57
8.08 Public Equity Transaction. . . . . . . . . . . . . . . . .58
8.09 Reconstituted Frontier Board of Directors. . . . . . . . .58
8.10 Management of Frontier . . . . . . . . . . . . . . . . . .58
8.11 Registration Statement and Proxy Statement/Prospectus;
Frontier Stockholders' Meeting . . . . . . . . . . . . .59
8.12 Tax Cooperation. . . . . . . . . . . . . . . . . . . . . .61
8.13 Name Change. . . . . . . . . . . . . . . . . . . . . . . .61
8.14 Frontier Ownership Dilution. . . . . . . . . . . . . . . .61
8.15 Liabilities and Obligations of Esenjay and Aspect. . . . .62
8.16 Esenjay Wind-down. . . . . . . . . . . . . . . . . . . . .62
ARTICLE IX
CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
9.01 Conditions to Obligations of Esenjay and Aspect. . . . . .62
9.02 Conditions to Obligations of Frontier. . . . . . . . . . .63
9.03 Conditions to Obligations of All Parties . . . . . . . . .64
ARTICLE X
DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
10.01 Deliveries by Frontier . . . . . . . . . . . . . . . . . .65
10.02 Deliveries by Esenjay. . . . . . . . . . . . . . . . . . .67
10.03 Deliveries by Aspect . . . . . . . . . . . . . . . . . . .68
ARTICLE XI
VALUATION ADJUSTMENTS FOR TITLE DEFECTS . . . . . . . . . . . . . . . .70
11.01 Buyer and Seller . . . . . . . . . . . . . . . . . . . . .70
11.02 Allocated Value of Oil and Gas Interests . . . . . . . . .70
11.03 Notice of Title Defects. . . . . . . . . . . . . . . . . .70
11.04 Adjustments. . . . . . . . . . . . . . . . . . . . . . . .70
11.05 Casualty Loss. . . . . . . . . . . . . . . . . . . . . . .70
11.06 Dispute Resolution . . . . . . . . . . . . . . . . . . . .71
11.07 Preferential Rights and Consents . . . . . . . . . . . . .71
ARTICLE XII
VALUATION ADJUSTMENT FOR ENVIRONMENTAL DEFECTS. . . . . . . . . . . . .73
12.01 Environmental Liabilities and Obligations. . . . . . . . .73
12.02 Environmental Defect Notice. . . . . . . . . . . . . . . .73
12.03 Remedies . . . . . . . . . . . . . . . . . . . . . . . . .73
iii
<PAGE>
Page
----
12.04 Contested Environmental Defects. . . . . . . . . . . . . .74
12.05 Exclusive Remedies . . . . . . . . . . . . . . . . . . . .74
ARTICLE XIII
TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
13.01 Termination of Agreement . . . . . . . . . . . . . . . . .74
13.02 Obligations Upon Termination . . . . . . . . . . . . . . .75
13.03 Breakup Fee. . . . . . . . . . . . . . . . . . . . . . . .76
ARTICLE XIV
CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
14.01 Time and Place . . . . . . . . . . . . . . . . . . . . . .76
14.02 Further Assurances . . . . . . . . . . . . . . . . . . . .76
14.03 Concurrent Conditions. . . . . . . . . . . . . . . . . . .76
ARTICLE XV
INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
15.01 Indemnification by Frontier. . . . . . . . . . . . . . . .77
15.02 Indemnification by Esenjay . . . . . . . . . . . . . . . .77
15.03 Indemnification by Aspect. . . . . . . . . . . . . . . . .77
15.04 Indemnification Limitations. . . . . . . . . . . . . . . .78
15.05 Notice and Resolution of Claim . . . . . . . . . . . . . .78
15.06 Defense of Third Party Claim . . . . . . . . . . . . . . .78
15.07 Payment. . . . . . . . . . . . . . . . . . . . . . . . . .79
ARTICLE XVI
GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .79
16.01 Effect of Due Diligence. . . . . . . . . . . . . . . . . .79
16.02 Further Assurances . . . . . . . . . . . . . . . . . . . .79
16.03 Survival of Representations, Warranties and Covenants. . .79
16.04 Entire Agreement; Amendment and Waiver . . . . . . . . . .79
16.05 Severability . . . . . . . . . . . . . . . . . . . . . . .80
16.06 Applicable Law . . . . . . . . . . . . . . . . . . . . . .80
16.07 Assignment . . . . . . . . . . . . . . . . . . . . . . . .80
16.08 Notices. . . . . . . . . . . . . . . . . . . . . . . . . .80
16.09 Incorporation of Exhibits and Schedules by Reference . . .82
16.10 Binding Effect . . . . . . . . . . . . . . . . . . . . . .82
16.11 Headings . . . . . . . . . . . . . . . . . . . . . . . . .82
16.12 Gender and Number. . . . . . . . . . . . . . . . . . . . .82
16.13 Multiple Counterparts. . . . . . . . . . . . . . . . . . .82
16.14 Expenses . . . . . . . . . . . . . . . . . . . . . . . . .82
iv
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ATTACHMENTS
EXHIBITS:
Exhibit "A" - Bridge Financing Agreement
Exhibit "B" - Registration Rights Agreement
Exhibit "C" - Assignment, Bill of Sale and Conveyance Agreement (Aspect
Assets)
Exhibit "D" - Assignment, Bill of Sale and Conveyance Agreement (Esenjay
Assets)
Exhibit "E" - [Intentionally Omitted]
Exhibit "F" - Opinion of Porter & Hedges, L.L.P.
Exhibit "G" - [Intentionally Omitted]
Exhibit "H" - Letter regarding limited guaranty by Esenjay Shareholders
Exhibit "I" - Opinion of Pollicoff, Smith, Myres & Remels, L.L.P.
Exhibit "J" - Letter regarding limited guaranty by Aspect Members
Exhibit "K" - Opinion of Davis, Graham & Stubbs LLP
Exhibit "L" - Prospect Areas
SCHEDULES:
Disclosure Schedule - Aspect
Disclosure Schedule - Esenjay
Disclosure Schedule - Frontier
Schedule 2.01 Esenjay Assets
Schedule 2.02 Assumed Agreements
Schedule 2.04 Esenjay Seismic Agreements
Schedule 3.01 Aspect Assets
Schedule 4.05(a) Frontier Option and Warrant Agreements
Schedule 4.05(b) Frontier Subsidiaries
Schedule 4.06 Frontier Accounts Receivable and Accounts Payable
Schedule 4.07 Frontier Absence of Events
Schedule 4.15 Frontier Gas Imbalances
Schedule 4.17 Frontier Oil and Gas Interests
Schedule 4.18 Frontier Reserve Reports
Schedule 5.01 Agreement with Gaines Berland, Inc.
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ACQUISITION AGREEMENT AND PLAN OF EXCHANGE
This Acquisition Agreement and Plan of Exchange ("Agreement") is
executed and delivered as of January 19, 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"), with respect to the following:
R E C I T A L S:
A. Frontier, Esenjay and Aspect have determined to engage in a
strategic business combination (the "Exchange") pursuant to which certain
assets of Esenjay and certain assets of Aspect shall be transferred to
Frontier in exchange for capital stock of Frontier, in a transaction intended
to qualify under Section 351 of the Code (as hereinafter defined); and
B. The parties desire to evidence the terms, provisions,
representations, warranties and conditions upon which such Exchange will be
consummated by this binding Agreement.
NOW, THEREFORE, in consideration of the foregoing and the benefits to be
derived from the mutual observance of the terms and conditions set forth
below, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 Defined Terms. For purposes of this Agreement, in addition to
the terms defined elsewhere herein, the following terms shall have the
meanings set forth in this Article I or in the Section referred to below:
"Accounting Firm" has the meaning set forth in Section 11.06.
"Acquisition Proposal" has the meaning set forth in Section 8.05.
"Agreed Group B Amount" has the meaning set forth in Section 3.02(d).
"Agreement" means this Acquisition Agreement and Plan of Exchange
and the Exhibits and Schedules attached hereto and by this reference made
a part hereof for all purposes.
"Allocated Value" has the meaning set forth in Section 11.02.
"Aspect" has the meaning set forth in the preface above.
<PAGE>
"Aspect Assets" shall mean the Oil and Gas Interests and other
assets of Aspect identified on Schedule 3.01 and the Exhibits thereto; it
being understood that (a) such Oil and Gas Interests and other assets
represent less than 100% of Aspect's interest in the properties identified
due to partial interests being retained by Aspect, and (b) Aspect retains
and reserves unto itself all Working Interests and Net Revenue Interests
in the Oil and Gas Interests located in the Prospect Areas and other
assets not specifically identified on Schedule 3.01, including any Net
Revenue Interest available from the Working Interest conveyed to Frontier
after applicable (i) royalties, (ii) overriding royalties, (iii) other
burdens out of production, and (iv) the Net Revenue Interest contributed
to Frontier; provided, however, that all Oil and Gas Interests located
in the Prospect Areas acquired hereafter and/or not listed on Schedule
3.01 shall be owned in the same pro rata percentages as the properties
currently listed in Schedule 3.01.
"Aspect Employees" means certain of the employees of Aspect in its
Houston office who have received an overriding royalty interest in certain
of the Oil and Gas Interests included in the Aspect Assets.
"Aspect Members" means Alex Cranberg, an individual and a resident of
Colorado, Antrim Resources, Inc., a Nevada corporation, and CWS Limited-
Liability Company, a Delaware limited liability company.
"Aspect Participation Agreement" means that certain Participation
Agreement, dated April 24, 1997, by and between Aspect and Esenjay,
covering the Identfied Esenjay Assets.
"Aspect Permits" has the meaning set forth in Section 7.07.
"Assumed Agreements" has the meaning set forth in Section 2.02(d).
"Benefit Arrangement" means any employment, severance or similar
contract, or any other contract, plan, policy or arrangement (whether or
not written) providing for compensation, bonus, profit-sharing, stock
option or other stock related rights or other forms of incentive or
deferred compensation, vacation benefits, insurance coverage (including
any self-insured arrangement), health or medical benefits, disability
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance
benefits), other than the Employee Plans, that (a) is maintained,
administered or contributed to by Esenjay or any member of the Frontier
Group, as the case may be, and (b) covers any employee or former employee
of any such person.
"Bridge Financing Agreement" shall be that agreement as set forth as
Exhibit "A" attached hereto which is incorporated herein by reference.
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"Casualty Loss" has the meaning set forth in Section 11.05.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or any successor statutes and any
regulations promulgated thereunder.
"CERCLIS" means the Comprehensive Environmental Response, Compensation
and Liability Information System List.
"Closing" means the taking of the actions contemplated by Article XIV
of this Agreement in order to consummate the Exchange.
"Closing Date" means the date on which the Closing occurs as set
forth in Section 14.01 hereof.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of
1985.
"Code" means the Internal Revenue Code of 1986 as in effect on the
date hereof and as may be amended from time to time.
"Damages" has the meaning set forth in Section 15.01.
"Defect Limit" has the meaning set forth in Section 11.04.
"Defensible Title" means such right, title and interest that is
evidenced by an instrument or instruments whether or not filed of record
in accordance with the conveyance and recording laws of the applicable
jurisdiction to the extent necessary to prevail against competing claims
of bona fide purchasers for value without notice such that: (a) the
titled party shall be entitled to receive from its ownership interest in
each of the titled party's Oil and Gas Interests not less than the
interest shown as the Net Revenue Interest for such Oil and Gas Interest
listed in such titled party's Property Schedule attached hereto in all
Hydrocarbons produced, saved and marketed from each of such Oil and Gas
Interests without reduction, suspension or termination throughout the life
of each of such Oil and Gas Interests, except pursuant to the agreements
set forth on such titled party's Property Schedule; (b) the titled party is
obligated to bear a percentage of the costs and expenses relating to
operations on and the maintenance or development of each of the titled
party's Oil and Gas Interests listed in the Property Schedule of such
party not greater than the interest shown as the Working Interest for each
of such Oil and Gas Interests in the titled party's Property Schedule
without increase throughout the life of each of such Oil and Gas
Interests, except pursuant to the agreements set forth on such titled
party's Property Schedule; and (c) the interest of the titled party in
each of the titled party's Oil and Gas Interests is free and clear of all
Liens, claims, infringements, burdens or other defects of any kind
whatsoever, except for Permitted
3
<PAGE>
Encumbrances, which do not materially interfere with the occupation, use
and enjoyment of such properties in the normal course of business as
presently conducted, or materially impair the use or value thereof for
such business. Defensible Title concerning an Option Contract shall apply
to the ownership of the Option Contract and not the minerals described
therein.
"Disclosure Schedule" means a Disclosure Schedule attached hereto and
any documents listed on such Disclosure Schedule and expressly incorporated
therein by reference.
"Disputed Matters" has the meaning set forth in Section 11.06.
"DOL" means the Department of Labor.
"Effective Date" shall be November 1, 1997.
"Employee Plan" means a plan or arrangement as defined in Section
3(3) of ERISA, that (a) is subject to any provision of ERISA, (b) is
maintained, administered or contributed to by Esenjay or any member of the
Frontier Group, as the case may be, and (c) covers any employee or former
employee of any such person.
"Environmental Defect" means a condition in, on, or under the Oil and
Gas Interests (including air, land, soil, surface, subsurface strata,
surface water, groundwater or sediments) that causes an Oil and Gas
Interest to be in violation of, or subject to remediation under, any
Environmental Law.
"Environmental Defect Notice" has the meaning set forth in Section
12.02.
"Environmental Defect Value" has the meaning set forth in Section
12.04.
"Environmental Law" means any federal, state, local or foreign
statute, code, ordinance, rule, regulation, policy, guideline, permit,
consent, approval, license, judgment, order, writ, decree, common law,
injunction or other authorization in effect on the date hereof or at a
previous time applicable to the operations of, as the context requires,
relating to (a) emissions, discharges, releases or threatened releases
of Hazardous Materials into the natural environment, including into
ambient air, soil, sediments, land surface or subsurface, buildings
facilities, surface water, groundwater, publicly-owned treatment works,
septic systems or land; (b) the generation, treatment, storage, disposal,
use, handling, manufacturing, transportation or shipment of Hazardous
Materials; (c) occupational health and safety; or (d) otherwise relating
to the pollution of the environment, solid waste handling treatment or
disposal, or operation or reclamation of oil and gas operations or mines.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
4
<PAGE>
"Esenjay" has the meaning set forth in the preface above.
"Esenjay Assets" shall mean the Oil and Gas Interests and other
assets of Esenjay identified on Schedule 2.01 and the Exhibits thereto;
it being understood that (a) such Oil and Gas Interests and other assets
represent less than 100% of Esenjay's interest in the properties
identified due to partial interests being retained by Esenjay, and (b)
Esenjay retains and reserves unto itself all Working Interests and Net
Revenue Interests in the Oil and Gas Interests located in the Prospect
Areas and other assets not specifically identified on Schedule 2.01,
including any Net Revenue Interest available from the Working Interest
conveyed to Frontier after applicable (i) royalties, (ii) overriding
royalties, (iii) other burdens out of production, and (iv) the Net Revenue
Interest contributed to Frontier; provided, however, that all Oil and
Gas Interests located in the Prospect Areas acquired hereafter and/or not
listed on Schedule 2.01 shall be owned in the same pro rata percentages as
the properties currently listed in Schedule 2.01.
"Esenjay Permits" has the meaning set forth in Section 6.10.
"Esenjay Shareholders" means Michael E. Johnson, an individual and a
Texas resident, and Charles J. Smith, an individual and a Texas resident,
each of whom owns 50% of the issued and outstanding equity securities of
Esenjay and who collectively own all of the outstanding equity securities
of Esenjay.
"Exchange" has the meaning set forth in the recitals above.
"Exchange Act" means the Securities Exchange Act of 1934 as in effect
on the date hereof and as the same may be amended from time to time.
"Frontier" has the meaning set forth in the preface above and shall
include, unless otherwise expressly stated, Frontier Natural Gas
Corporation and its wholly-owned (directly or indirectly) subsidiaries:
(a) Frontier Acquisition Corporation, an Oklahoma corporation, (b)
Frontier, Inc., an Oklahoma corporation, (c) Frontier Exploration &
Production Corporation, an Oklahoma corporation, and (d) Petroleum
Acquisition Corporation, a Delaware corporation.
"Frontier Common Stock" means the shares of common stock, par value
$0.01 per share, of Frontier Natural Gas Corporation.
"Frontier Financial Statements" has the meaning set forth in Section
4.04.
"Frontier Group" has the meaning set forth in Section 4.09.
"Frontier Interim Financial Statements" has the meaning set forth in
Section 4.04.
5
<PAGE>
"Frontier Material Agreement(s)" means any written or oral agreement,
contract, commitment or understanding to which Frontier is a party, by
which Frontier is directly or indirectly bound, or to which any asset of
any of Frontier may be subject, involving total value or consideration in
excess of $100,000.
"Frontier Option Plan" has the meaning set forth in Section 8.14.
"Frontier Permits" has the meaning set forth in Section 4.11.
"Frontier Preferred Stock" has the meaning set forth in Section 4.05.
"Frontier Stockholders' Meeting" has the meaning set forth in
Section 8.11.
"GAAP" means generally accepted accounting principles as recognized
by the U.S. Financial Accounting Standards Board.
"GBI" means Gaines Berland, Inc.
"Governmental Action" means any authorization, application, approval,
consent, exemption, filing, license, notice, registration, permit or other
requirement of, to or with any Governmental Authority.
"Governmental Authority" means any national, state, county or
municipal government, domestic or foreign, and any agency, board, bureau,
commission, court, department or other instrumentality of any such
government, or any arbitrator in any case that has jurisdiction over any
of the parties hereto or their assets, tangible or intangible.
"Group A Aspect Assets" shall mean those Aspect Assets identified on
Exhibit C to Schedule 3.01 under the heading "Group A Assets."
"Group B Aspect Assets" shall mean those Aspect Assets identified on
Exhibit C to Schedule 3.01 under the heading "Group B Assets."
"Hazardous Material" means (a) any "hazardous substance," as defined
by CERCLA; (b) any "hazardous waste" or "solid waste," in either case as
defined by the Resource Conservation and Recovery Act, as amended; (c) any
solid, hazardous, dangerous or toxic chemical, material, waste or
substance, within the meaning of and regulated by any Environmental Law;
(d) any radioactive material, including any naturally occurring radioactive
material, and any source, special or byproduct material as defined in 42
U.S.C. 2011 et seq. and any amendments thereof; (e) any asbestos-containing
materials in any form or condition; (f) any polychlorinated biphenyl in
any form or condition; or (g) any Hydrocarbons, or any fraction or
byproducts thereof.
6
<PAGE>
"Hydrocarbons" means crude oil, natural gas, casinghead gas, and
other liquid or gaseous hydrocarbons.
"Identified Esenjay Assets" means those properties identified in
Schedule 2.01 as: Tidehaven, El Maton, Midfield, Wolf Point, Hall Ranch,
Hordes Creek, Mikeska, Pile Driver, Houston Endowment, Lipsmacker and
Blessing.
"Initial Bridge Facility" has the meaning set forth in Section 8.07.
"IRS" means the Internal Revenue Service.
"JEDI" has the meaning set forth in Section 3.02(a).
"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.
"Material Adverse Effect" means with respect to a party, an event,
change or occurrence which, individually or together with any other event,
change or occurrence has a material adverse impact on (a) the financial
position, business, prospects or results of operations of such party and
its Subsidiaries, taken as a whole, or (b) the ability of such party to
perform its obligations under this Agreement or to consummate the Exchange
or the other transactions contemplated hereby; provided that "material
adverse impact" shall be deemed not to include the impact of (i) changes
resulting from force majeure events beyond the control of a party, (ii)
actions or omissions of a party or any of its Subsidiaries taken with the
prior informed written consent of the other parties, (iii) the drilling of
any successful or unsuccessful well on the Oil and Gas Interests of any of
the parties hereto, (iv) changes in the prices of oil or natural gas, or
(v) in the case of Frontier, its operating results from September 30, 1997
through the Closing Date provided that such operating results are
consistent with the financial results reflected in the SEC Reports. An
event, change or occurrence shall be deemed to have a "material adverse
impact," individually or together with any other event, change or
occurrence if it results in a liability, claim, obligation, encumbrance or
Lien against a party or its assets or results in a change of financial
position, business, prospects or results of operations of $50,000 in the
case of Frontier and $100,000 in the case of either Aspect or Esenjay.
"Multiemployer Plan" means a plan or arrangement as defined in
Section 4001(a)(3) and 3(37) of ERISA.
"NASDAQ" means the National Association of Securities Dealers
Automated Quotation system.
7
<PAGE>
"Net Casualty Loss" has the meaning set forth in Section 11.05.
"Net Revenue Interest" means the interest in all Hydrocarbons
produced from a well, lease or any unit of which a lease is a part which
is attributable to: (a) the Working Interests therein after payment of
applicable lessor royalties, overriding royalties, production payments and
other payments out of or measured by the production of Hydrocarbons from
the well or property covered by the leases or any unit of which a lease is
a part, (b) any overriding royalty interest therein, or (c) any royalty
interest therein.
"New Debt" has the meaning set forth in Section 8.07.
"Notice of Title Defects" has the meaning set forth in Section 11.03.
"OGCA" means the Oklahoma General Corporation Act.
"Oil and Gas Interest(s)" means, as to a party hereto, (a) all
interests in and rights with respect to 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 interests and non-operating interests; (b) interests in and
rights with respect to Hydrocarbons and other minerals or revenues
therefrom and contracts in connection therewith and claims and rights
thereto (including oil and gas leases, 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; (c) easements, rights of way, licenses, permits, leases, and
other interests associated with, appurtenant to, or necessary for the
operation of any of the foregoing; (d) interests in equipment and machinery
(including well equipment and machinery), oil and gas production,
gathering, transmission, compression, treating, processing and storage
facilities (including tanks, tank batteries, pipelines and gathering
systems), pumps, water plants, electric plants, gasoline and gas processing
plants, refineries and other tangible personal property and fixtures
associated with, appurtenant to, or necessary for the operation of any of
the foregoing; and (e) subject to the provisions of Sections 2.04 and
3.03, all rights to geological or geophysical data or information
(including rights under seismic, geophysical exploration, data license or
similar agreements) related to the oil, gas, mineral or other properties
which the party owns or to which the party has any rights, including any
processing, reprocessing and third party interpretation of such data.
"Operating Costs" means all third party, out-of-pocket costs incurred
for or in connection with (a) in the case of the Group B Aspect Assets, the
acquisition of Oil and Gas Interests, (b) the acquisition of oil and gas
leases within the Prospect Areas after the date hereof, but only with the
written consent of the parties hereto, and (c) in the case of all
8
<PAGE>
properties, the maintenance, development and/or operation of Oil and Gas
Interests, including geological and geophysical costs, land and associated
costs, legal, and tangible and intangible drilling costs.
"Option Contract" means an executed document by which the owner of
such document has the legal right to lease minerals in the future on
pre-agreed terms.
"Permitted Encumbrances" means (a) Liens securing indebtedness that
is described in the Disclosure Schedule of such party; (b) Liens for Taxes
which are not yet delinquent or which are being contested in good faith
and for which adequate reserves have been established as may be required
by GAAP; (c) Liens under operating agreements, unitization agreements,
pooling orders and mechanic's and materialman's liens incurred in the
ordinary course of business relating to the party's Oil and Gas Interests,
which obligations are not yet due and pursuant to which the party is not
in default; provided, the effect thereof on such Oil and Gas Interest of
such party has been properly reflected on the Property Schedule in the Net
Revenue Interest and Working Interest attributable to such Oil and Gas
Interest; (d) all rights to consent by, required notices to, filings with,
or other actions of Governmental Authorities to the extent customarily
obtained subsequent to closing; (e) other Liens described in the
Disclosure Schedule of such party; (f) preferential rights to purchase
described in the Property Schedule of such party; (g) consent to transfer
requirements of any person other than a party hereto or any Governmental
Authority which consents to transfer will be obtained on or before the
Closing Date; and (h) Liens in the ordinary course of business consisting
of minor defects and minor irregularities in title and other minor
restrictions (whether created by or arising out of operating agreements,
farm-out agreements, leases and assignments, contracts for purchases of
Hydrocarbons or similar agreements, or otherwise in the ordinary course of
business) that are of a nature customarily accepted by prudent purchasers
of oil and gas properties and that do not materially impair the ability of
the obligor to use any such property in its operations and provided that
the effect thereof on the Oil and Gas Interest of such party has been
properly reflected on the Property Schedule for such party. For purposes
of clause (h) of the preceding sentence, a title defect or irregularity or
other restriction shall be considered minor if such items in the aggregate
do not impair the value of the affected property by more than $10,000.
"Post Effective Date Costs" shall mean net Operating Costs (i.e.,
net of any resulting revenues) incurred by or for the account of (a)
Esenjay on the Oil and Gas Interests included in the Esenjay Assets and
attributable to the period of time after the Effective Date and prior
to the Closing Date and (b) Aspect on the Oil and Gas Interests
included in the Group A Aspect Assets and attributable to the period of
time after the Effective Date and prior to the Closing Date. The term
"Post Effective Date Costs" shall not include any costs related to the
Houston Endowment No. 1 well (which well has been plugged and
abandoned) and the Scott Hall No. 1 well (which well has been
temporarily abandoned).
9
<PAGE>
"Property Schedule" means (a) in the case of Frontier, Schedule
4.17, (b) in the case of Esenjay, Schedule 2.01 and (c) in the case of
Aspect, Schedule 3.01.
"Prospect Areas" means those properties or prospects identified in
the Property Schedules of Aspect and/or Esenjay and the areas of mutual
interest described in the maps attached hereto as Exhibit "L".
"Proxy Statement/Prospectus" shall mean (a) the proxy statement of
Frontier to be included in the Registration Statement for the purpose
of obtaining the approval of Frontier's stockholders of this Agreement
and the Exchange, and (b) the prospectus of Frontier to be included in
the Registration Statement registering the shares of Frontier Common
Stock to be issued to Aspect and Esenjay upon consummation of the
Exchange.
"Public Equity Transaction" has the meaning set forth in Section
8.08.
"Registration Statement" shall mean the registration statement on
Form S-4 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 and Esenjay upon consummation of the Exchange.
"Rejection Notice" has the meaning set forth in Section 12.04.
"Related Documents" means the other instruments and agreements to
be delivered by the parties at the Closing.
"Responsible Officers" means the chief executive officer,
president and any vice president of such corporation and, with respect
to any limited liability company, such officers of the manager of such
company.
"SEC" means the Securities and Exchange Commission.
"SEC Documents" has the meaning set forth in Section 4.04.
"SEC Reports" has the meaning set forth in Section 4.04.
"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.
"Subsidiary" of a corporation or other entity means a corporation,
partnership or other business entity, the voting securities of which
are owned or otherwise controlled directly or indirectly by such
corporation or other person in an amount sufficient to elect at least a
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<PAGE>
majority of the board of directors or other managers of such
corporation, partnership or other entity.
"Superior Proposal" has the meaning set forth in Section 8.05.
"Tax" means any federal, state, or local gross receipts, license,
payroll, employment, excise, severance, income, franchise, property,
transfer, valued added, ad valorem, sales and use or other tax of any
kind, including any interest, penalty, or addition thereto, whether
disputed or not.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including
any schedule or attachment thereto.
"Title Defect" means any encumbrance, encroachment, irregularity,
defect in or objection to real property title to the Oil and Gas
Interests, excluding Permitted Encumbrances, that alone or in
combination with other defects renders title to a particular Oil and
Gas Interest less than Defensible Title.
"Title Defect Value" has the meaning set forth in Section 11.03.
"Undisclosed Liabilities" has the meaning set forth in Section
4.04.
"Working Interest" means an interest in a well, lease or unit
which entitles the owner thereof, at its own expense, to explore for,
produce and sell oil, gas and other minerals from the lands covered
thereby subject to the payment of all costs associated with the
interest owned and the payment of the landowner's royalty and any
overriding royalty, production payment or other similar burden to which
the well, lease or unit has been made subject.
1.02 References and Titles. All references in this Agreement to
Exhibits, Schedules, Articles, Sections, subsections and other subdivisions
refer to the corresponding Exhibits, Schedules, Articles, Sections,
subsections and other subdivisions of or to this Agreement unless expressly
provided otherwise. Titles appearing at the beginning of any Articles,
Sections, subsections or other subdivisions of this Agreement are for
convenience only, do not constitute any part of this Agreement, and shall be
disregarded in construing the language hereof. The words "this agreement,"
"herein," "hereby," "hereunder" and "hereof," and words of similar import,
refer to this Agreement as a whole and not to any particular subdivision
unless expressly so limited. The words "this article," "this section" and
"this subsection," and words of similar import, refer only to the Article,
Section or Subsection hereof in which such words occur. The word "or" is not
exclusive, and the word "including" (in its various forms) means "including
without limitation." Pronouns in masculine, feminine or neuter genders shall
be construed to state and include any other gender, and words, terms and
titles (including terms defined herein) in the singular form shall be
construed to include the plural and vice versa, unless the context otherwise
requires.
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1.03 Knowledge. As used in the representations and warranties
contained in this Agreement, the phrase "to the knowledge" or "to the best
knowledge" of the representing party shall mean that the Responsible Officers of
such representing party, individually or collectively, either (a) know that the
matter being represented and warranted is true and accurate or (b) have no
reason, after reasonable inquiry of persons who are likely to have information
about the matter to which the representation or warranty relates, to believe
that the matter being represented and warranted is not true and accurate.
1.04 Adequacy of Disclosure; Construction. In preparing the Disclosure
Schedules to this Agreement, the parties will use their reasonable best efforts
to identify the section or subsection, as the case may be, of this Agreement to
which an exception relates. Nothing in the Disclosure Schedules hereto shall be
deemed adequate to disclose an exception to a representation or warranty made
herein unless the Disclosure Schedule identifies the exception in adequate
detail for a reasonably prudent person to be able to identify that portion of
the representation or warranty to which the exception relates; the mere listing
(or inclusion of a copy) of a document or other item shall not be deemed
adequate to disclose, an exception to a representation or warranty made herein
(unless the representation or warranty has to do with the existence of the
document or other items itself). The parties intend that each representation,
warranty, and covenant contained herein shall have independent significance. If
any party has breached any representation, warranty, or covenant contained
herein in any respect, the fact that there exists another representation,
warranty, or covenant relating to the same subject matter (regardless of the
relative levels of specificity) which the party has not breached shall not
detract from or mitigate the fact that the party is in breach of the first
representation, warranty, or covenant.
1.05 Supplemental Property Schedules. In the case of those Oil and Gas
Interests included within the Esenjay Assets or the Aspect Assets, the parties
acknowledge and agree that the all of the agreements, rights and interests
related to the Oil and Gas Interests included within the Esenjay Assets or the
Aspect Assets, proportionately reduced for the percentage interests identified
in the Property Schedules, are being conveyed hereunder (subject to the
provisions of Sections 2.04 and 3.03) and that, if necessary to accurately
reflect the interests being conveyed, the Property Schedules of Aspect and/or
Esenjay will be amended accordingly. If any party amends its Property Schedule
prior to the Closing Date and the effect of such amendment is to decrease the
Oil and Gas Interests being conveyed to Frontier hereunder, such amendment shall
be treated as a Title Defect, which shall be cured in accordance with the
provisions of Section 11.04(a)(ii) (without regard to the notice requirements of
Section 11.03 or the Defect Limit specified in Section 11.04).
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ARTICLE II
ACQUISITION OF ESENJAY ASSETS
2.01 Contribution of Esenjay Assets.
(a) Subject to the terms and conditions of this Agreement,
Esenjay shall assign, transfer, convey, contribute to the capital of, and
deliver to, Frontier, and Frontier shall acquire and receive from Esenjay,
at the Closing, all right, title and interest of Esenjay in and to the
Esenjay Assets. The Esenjay Assets shall be free and clear of all
liabilities, obligations, or Liens whatsoever, except for (a) Permitted
Encumbrances, and (b) liabilities assumed by Frontier pursuant to Section
2.02 hereof. In exchange for the Esenjay Assets, Frontier shall issue and
deliver to Esenjay 30,991,563 shares of Frontier Common Stock.
(b) The parties acknowledge and agree that the Identified
Esenjay Assets shall be contributed by Esenjay and acquired by Frontier on
terms and conditions identical to those set forth in the Aspect
Participation Agreement; provided however, that (i) the effective date
shall be as set out in this Agreement, (ii) Frontier shall not be obligated
for Esenjay's Carried Interest (as such term is defined in the Aspect
Participation Agreement), (iii) there shall be no security interest
retained by Esenjay in the Esenjay Assets, (iv) the Expense Date (as such
term is defined in the Aspect Participation Agreement) shall be the
Effective Date, and (v) there shall be no cash consideration paid to
Esenjay.
(c) In all oil, gas and mineral leases taken in a Prospect Area
after the date hereof, other than those included as an Identified Esenjay
Asset, Esenjay shall be entitled to an overriding royalty interest as set
out in Schedule 2.01.
2.02 Assumed Liabilities.
(a) Debt Assumption. The Esenjay Assets shall be subject to
liabilities, other than liabilities for Post Effective Date Costs, in the
amount of $1,000,000 and Frontier agrees to assume and discharge such debt.
(b) Aspect Debt. In addition to any other amounts assumed
hereby, the parties acknowledge and agree that Esenjay has an outstanding
liability to Aspect in the principal amount of $564,337.50 and that the
Esenjay Assets shall be contributed subject to such liability.(1)
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(1) The offset to this liability is Aspect's agreement to pay certain
intangible drilling and development costs, which costs will benefit certain
of the Oil and Gas Interests included in the
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(c) Certain Costs. All Post Effective Date Costs relating to
the Esenjay Assets and paid by Esenjay on or before the Closing Date shall
be invoiced by Esenjay to Frontier within sixty (60) days of the Closing
Date and, subject to Esenjay's adequate verification of such costs at
Frontier's request, shall be paid by Frontier to Esenjay not later than
(i) one hundred eighty (180) days from the Closing Date, or (ii) ten days
from Frontier's receipt of funds from the Public Equity Transaction,
whichever is earlier. All Post Effective Date Costs relating to the
Esenjay Assets that are not paid by Esenjay on or before the Closing Date
shall be assumed by Frontier and Frontier agrees to timely discharge
Esenjay's obligations with respect to such costs. After the date hereof,
Esenjay shall provide Aspect and Frontier with monthly reports as to the
Post Effective Date Costs accrued and/or paid with respect to the Esenjay
Assets.
(d) Assumed Agreements. As of the Closing Date, Frontier shall
assume and agrees to discharge the obligations of Esenjay under the office
lease, equipment leases and other agreements set forth on Schedule 2.02
(the "Assumed Agreements")(2); provided, however, that Frontier is not
hereby assuming (i) any obligations arising under the Assumed Agreements
on or before the Closing Date, or (ii) any liability arising out of 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
Closing Date under any Assumed Agreement. There shall be prorated between
Esenjay and Frontier as of the Closing Date all accrued rent, royalties
and other payments due under the Assumed Agreements.
(e) Accrued Vacation and Sick Leave. As of the Closing Date,
Frontier shall assume the accrued vacation and sick leave obligations of
Esenjay for those employees of Esenjay who accept employment with Frontier;
provided, however that Frontier's maximum liability under this Section
2.02(e) shall not exceed $102,043.62, in the aggregate.
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Esenjay Assets. Esenjay will contribute its rights under its agreement with
Aspect to Frontier, limited to the amount of the liability assumed and paid
under this Section 2.02(b) (I.E., Esenjay will retain the excess), but with a
minimum amount equal to the debt being guaranteed (I.E., if the amount
Frontier receives from Aspect under Esenjay's agreement with Aspect is less
than the debt assumed by Frontier, Esenjay will pay Frontier the difference).
The agreement will be identified on an Exhibit to Schedule 2.01 and will be
treated as an Esenjay Asset for purposes of this Agreement.
(1) The Assumed Leases and Esenjay's rights in the underlying equipment
or office space should be included on an Exhibit to Schedule 2.01 and will be
considered an Esenjay Asset for purposes of this Agreement.
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(f) Other. All liabilities and obligations arising under or
related to the Esenjay Assets and attributable to the period of time after
the Closing Date.
(g) Esenjay Employees. In conjunction with the acquisition by
Frontier of the Esenjay Assets it is agreed by the parties hereto that Frontier
shall, concurrent with Closing, offer employment to each of the current Esenjay
employees. The Esenjay employees who accept employment with Frontier shall be
compensated on terms determined by the Board of Directors of Frontier; it being
intended, without creating any rights in favor of such employees, that such
compensation terms will be comparable to those of similarly situated employees
for similarly situated companies and that, for purposes of any benefit plans
maintained by Frontier and to the extent permitted by such plans, the Esenjay
employees employed by Frontier shall be credited with their years of service to
Esenjay.
2.04 Non-Assignable Rights. Notwithstanding that the definition of
Esenjay Assets includes Esenjay's rights to the geological and geophysical data
and information attributable to the Oil and Gas Interests identified on
Esenjay's Property Schedule (including those seismic agreements identified on
Schedule 2.04), the parties hereto acknowledge and understand that some or all
of Esenjay's rights to such data or information may not be assignable by
Esenjay. To the extent that any rights to geological or geophysical data to be
assigned to Frontier by Esenjay hereunder are not assignable without the consent
of another party or the payment of any amounts to such party, this Agreement
shall not constitute an assignment or an attempted assignment of such data.
Esenjay agrees to use its commercially reasonable best efforts to obtain the
consent of each party whose consent is required for the transfer of the data in
consideration for such assignment; provided, however, that Esenjay shall not be
required to pay any amounts to the assigning party; and provided, further that
it shall not be a breach of this Agreement if such consent is not obtained. If
such consent is not obtained at or prior to the Closing Date, Esenjay agrees (a)
to cooperate with Frontier in seeking such consent after the Closing Date,
provided that Esenjay shall not be required to pay any amounts to the assigning
party in consideration for such assignment and (b) to the extent legally
possible and without breaching Esenjay's obligations under any agreement
relating to such data, enter into any reasonable arrangement designed to provide
Fronter with the benefits of such data.
ARTICLE III
ACQUISITION OF ASPECT ASSETS
3.01 Contribution of Aspect Assets. Subject to the terms and
conditions of this Agreement, Aspect shall assign, transfer, convey, contribute
to the capital of, and deliver to, Frontier, and Frontier shall acquire and
receive from Aspect, at the Closing, all right, title and interest of Aspect in
and to the Aspect Assets. The Aspect Assets shall be free and clear of all
liabilities, obligations, liens and encumbrances whatsoever, except for
(a) Permitted Encumbrances, and (b) liabilities assumed by Frontier pursuant to
Section 3.02 hereof. In exchange for the Aspect Assets, Frontier shall issue
and
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deliver to Aspect 29,648,636 shares of Frontier Common Stock, subject to
adjustment pursuant to Sections 3.02(a) and 3.02(f) hereof, if applicable.
3.02 Assumed Liabilities; Permitted Asset Sales; Adjustments.
(a) Assumed Debt. The parties acknowledge and agree that, as of
the date hereof, the Aspect Assets are pledged to Joint Energy Development
Investments Limited Partnership ("JEDI") as collateral for a loan by JEDI
to Aspect. At the option of Aspect and subject to the mutual agreement of
the parties hereto, the Aspect Assets may be contributed to Frontier
subject to a liability to JEDI in the amount of $3.8 million and, in such
event, Frontier shall assume such debt to JEDI and agrees to discharge the
liability associated therewith. In the event that the Aspect Assets are
contributed to Frontier subject to the debt to JEDI, the number of shares
of Frontier Common Stock to be delivered to Aspect pursuant to Section 3.01
hereof shall be reduced by 4,050,000 shares.
(b) Sale of Aspect Assets. With the prior written consent of
the parties hereto, Aspect shall be permitted to sell certain of the Aspect
Assets prior to the Closing Date. At the Closing, Aspect shall contribute
and pay over to Frontier (i) the net proceeds from any such sale of the
Aspect Assets, LESS (ii) in an amount not to exceed the amount pursuant to
clause (i), the Post Effective Date Costs relating to the Group A Aspect
Assets which are incurred and paid after the Effective Date, and LESS (iii)
in an amount not to exceed the amount pursuant to clause (i) reduced by the
amount applied pursuant to clause (c), the Operating Costs attributable to
the Group B Aspect Assets that have been paid by Aspect as of the Closing
Date and that exceed the Agreed Group B Amount.
(c) Group A Costs. All Post Effective Date Costs relating to
the Group A Aspect Assets and incurred and paid after the Effective Date
(reduced by any amounts applied pursuant to Section 3.02(b)(ii)) shall be
invoiced by Aspect to Frontier within sixty (60) days of the Closing Date
and, subject to Aspect's adequate verification of such costs at the request
of Frontier, shall be paid by Frontier to Aspect not later than (i) one
hundred eighty (180) days from the Closing Date, or (ii) ten days from
Frontier's receipt of funds from the Public Equity Transaction, whichever
is earlier. All Post Effective Date Costs incurred after the Effective
Date relating to the Aspect Assets that are not paid by Aspect on or before
the Closing Date shall be assumed by Frontier and Frontier agrees to timely
discharge Aspect's obligations with respect to such costs. After the date
hereof, Aspect shall provide Esenjay and Frontier with monthly reports as
to the Post Effective Date Costs accrued and/or paid with respect to the
Group A Asset Assets.
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(d) Group B Costs. The parties acknowledge and agree that, in
determining the value of the Group B Aspect Assets, such value assumes that
Aspect has or will pay Operating Costs with respect to such Group B Aspect
Assets of $5,989,000 (the "Agreed Group B Amount"). If, as of the Closing
Date, Aspect has not paid Operating Costs with respect to the Group B
Aspect Assets equal in amount to the Agreed Group B Amount, Aspect shall,
notwithstanding the conveyance of the Group B Aspect Assets to Frontier,
continue to be liable for the Operating Costs with respect to the Group B
Aspect Assets until the aggregate expenditures by Aspect are equal to the
Agreed Group B Amount. If Aspect has any continuing liability hereunder,
Frontier shall submit invoices to Aspect for the Operating Costs
attributable to the Group B Aspect Assets and such invoices shall be paid
by Aspect (i) within ten days of receipt of the invoice or (ii) on or
before the relevant vendor's due date for the payment of such Operating
Cost, whichever is later. At such time as Aspect has paid Operating Costs
attributable to the Group B Aspect Assets equal to the Agreed Group B
Amount (whether before or after the Closing Date), Frontier shall be liable
for all Operating Costs with respect to the Group B Aspect Assets in excess
of the Agreed Group B Amount, regardless of when such Operating Costs were
or are incurred, and Frontier agrees to assume and timely pay such
Operating Costs. If, as of the Closing Date, Aspect has paid Operating
Costs attributable to the Group B Aspect Assets in excess of the Agreed
Group B Amount, such excess (reduced by any amounts applied pursuant to
Section 3.02(b)(iii)) shall be invoiced by Aspect to Frontier within sixty
(60) days of the Closing Date and, subject to Aspect's adequate
verification of such costs at the request of Frontier, shall be paid by
Frontier to Aspect not later than (y) one hundred eighty (180) days from
the Closing Date, or (z) ten days from Frontier's receipt of funds from the
Public Equity Transaction, whichever is earlier. After the date hereof,
Aspect shall provide Esenjay and Frontier with monthly reports as to the
amount of Operating Costs attributable to the Group B Aspect Assets that
exceed the Agreed Group B Amount.
(e) Other. All liabilities and obligations arising under or
related to the Aspect Assets and attributable to the period of time after
the Closing Date.
(f) Adjustments. The Aspect Employees own an overriding royalty
interest in certain of the Oil and Gas Interests included in the Aspect
Assets. On or before the Closing Date, (i) Aspect will (A) purchase such
overriding royalty interests from the Aspect Employees such that the Aspect
Assets are not encumbered by such overriding royalty interests at the time
of the conveyances contemplated hereby, or (B) elect to treat the value of
the overriding royalty interests held by the Aspect Employees as a Title
Defect, which shall be cured on or before the Closing Date in accordance
with the provisions of Section 11.04(a)(ii) (without regard to the notice
requirements of Section 11.03 of the Defect Limit specified in Section
11.04), or (ii) on the Closing Date, the Aspect Employees will contribute
their overriding royalty
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interests to Frontier in exchange for Frontier Common Stock, which
contributions will be on terms and conditions mutually acceptable to
Frontier, Aspect and the Aspect Employees and any shares issued to the
Aspect Employees will reduce the number of shares issuable to Aspect
under Section 3.01.
3.03 Non-Assignable Rights. Notwithstanding that the definition of
Aspect Assets includes Aspect's rights to the geological and geophysical data
and information attributable to the Oil and Gas Interests identified on Aspect's
Property Schedule, the parties hereto acknowledge and understand that some or
all of Aspect's rights to such data or information may not be assignable by
Aspect. To the extent that any rights to geological or geophysical data to be
assigned to Frontier by Aspect hereunder are not assignable without the consent
of another party or the payment of any amounts to such party, this Agreement
shall not constitute an assignment or an attempted assignment of such data.
Aspect agrees to use its commercially reasonable best efforts to obtain the
consent of each party whose consent is required for the transfer of the data;
provided, however, that Aspect shall not be required to pay any amounts to the
assigning party in consideration for such assignment; and provided, further that
it shall not be a breach of this Agreement if such consent is not obtained. If
such consent is not obtained at or prior to the Closing Date, Aspect agrees (a)
to cooperate with Frontier in seeking such consent after the Closing Date,
provided that Aspect shall not be required to pay any amounts to the assigning
party in consideration for such assignment and (b) to the extent legally
possible and without breaching Aspect's obligations under any agreement relating
to such data, to enter into any reasonable arrangement designed to provide
Fronter with the benefits of such data.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
WITH RESPECT TO FRONTIER
As a material part of the consideration for this Agreement, Frontier
represents and warrants to each of Aspect and Esenjay as of the date of this
Agreement and as of the Closing Date as follows:
4.01 Organization, Standing and Qualification. Frontier is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Oklahoma. Frontier has all requisite corporate power and
authority to carry on its business as now being conducted and to own, lease or
operate its properties as and in the places where such business is now conducted
and such properties are now owned, leased or operated. Frontier is qualified
and in good standing to do business in all states in which the Esenjay Assets
and the Aspect Assets are located and in which the nature of its business
requires it to be qualified.
4.02 Execution, Delivery and Performance of Agreement; Authority.
Frontier has full corporate power and authority to enter into this Agreement and
the Related Documents to which it is a party, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. The execution, delivery and performance by Frontier of this
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Agreement and the Related Documents to which it is a party have been duly and
validly approved by all necessary corporate action and no other actions or
proceeding on the part of Frontier are necessary to authorize this Agreement and
the Related Documents to which it is a party and the transactions contemplated
hereby and thereby; provided, however, that, solely for purposes of the making
of this representation as of the date of this Agreement (and not as of the
Closing Date), the requisite approval of this Agreement and the transactions
contemplated hereby by Frontier's shareholders has not been obtained by
Frontier. Except for (a) the filing of the Proxy Statement/Prospectus included
in the Registration Statement with the SEC and the declaration of effectiveness
thereof by the SEC and the filing of other SEC required documents and compliance
with the Securities Act and the Exchange Act and state securities or blue sky
laws, (b) the filing of an amendment to Frontier's listing application with the
NASDAQ, and (c) the consent of Bank of America Illinois (which consent will be
obtained prior to the Closing Date), no consent, waiver, approval or
authorization of, or filing, registration or qualification with, or notice to,
any Governmental Authority or any other entity or person is required to be made,
obtained, or given by Frontier in connection with the execution, delivery and
performance of this Agreement and the Related Documents to which it is a party.
This Agreement constitutes, and the Related Documents to which it is a party
when executed will constitute, legal, valid and binding obligations of Frontier,
enforceable against Frontier in accordance with their respective 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.
4.03 Conflicts. The execution, delivery and performance by Frontier
of this Agreement and the Related Documents to which it is a party do not and
will not, with or without the giving of notice or the passage of time, or both,
violate or result in a breach of, conflict with, default, right to accelerate or
loss of rights under, or result in the creation of any Lien pursuant to, any
provision of Frontier's organizational documents or bylaws, or, except as set
forth on Disclosure Schedule-Frontier, any mortgage, deed of trust, lease,
license, agreement, or understanding, to which Frontier is a party or any of
Frontier's assets is subject, or any order, judgment or decree to which Frontier
is a party or by which Frontier or its assets may be bound or affected, or to
Frontier's knowledge, any law ordinance, rule or regulation to which Frontier or
its assets is subject.
4.04 SEC Documents; Financial Statements; Liabilities.
(a) Frontier has made available to Esenjay and Aspect true and
complete copies of its Annual Report on Form 10-KSB for the year ended
December 31, 1996 and its Quarterly Reports on Form 10-QSB for each of the
quarterly periods ended March 31, 1997, June 30, 1997 and September 30,
1997 (collectively, the "SEC Reports"), each in the form (including
exhibits and any amendments thereto) required to be filed with the SEC.
Since January 1, 1995, Frontier has timely filed (or has cured any failures
to timely file to the satisfaction of the SEC staff) all reports,
schedules, forms, statements and other documents (excluding any prospectus
or
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registration statement filed by Frontier) required to be filed with the
SEC (the "SEC Documents"). As of their respective dates, each of the SEC
Documents (i) complied in all material respects with all applicable
requirements of the Exchange Act, and the rules and regulations promulgated
thereunder, respectively, and (ii) did not contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make
the statements made, in light of the circumstances under which they were
made, not misleading. As of their respective dates, each prospectus and
each registration statement filed by Frontier with the SEC (y) complied in
all material respects with all applicable requirements of the Securities
Act, and the rules and regulations promulgated thereunder, respectively,
and (z) did not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(b) The Frontier audited financial statements included in the
SEC Documents (the "Frontier Financial Statements") have been audited by
Deloitte & Touche LLP, independent accountants, or the independent
accounting firm specified therein, in accordance with generally accepted
auditing standards, have been prepared in accordance with GAAP applied on a
basis consistent with prior periods except as required by changes in GAAP,
and present fairly the financial position of Frontier at such dates and the
results of operations and cash flows for the periods then ended. The
Frontier interim financial statements included in the SEC Reports (the
"Frontier Interim Financial Statements") fairly present the financial
position of Frontier as at the dates thereof and the results of its
operations and changes in financial position for the periods then ended,
except that (i) the notes to the financial statements included therein are
in summary form and therefore not complete and (ii) such financial
statements are subject to normal year-end non-cash adjustments. Except as
set forth in the Disclosure Schedule-Frontier, neither Frontier nor any of
its assets is subject to any liability, commitment, debt or obligation (of
any kind whatsoever whether absolute or contingent, accrued, fixed, known,
unknown, matured or unmatured) ("Undisclosed Liabilities"), except (A) as
and to the extent reflected on the most recent Frontier Financial
Statements and Frontier Interim Financial Statements, or (B) as reflected
in the SEC Reports, or (C) as may have been incurred or may have arisen
since the date of the most recent Frontier Interim Financial Statements in
the ordinary course of business and that are not reasonably likely to have
a Material Adverse Effect on Frontier.
(c) The most recent Frontier Financial Statements include
appropriate reserves for all Taxes and other liabilities incurred as of
such date but not yet payable.
(d) Except as set forth in the Disclosure Schedule-Frontier,
since the date of the most recent Frontier Financial Statements, no event
or condition (financial or
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otherwise) has occurred that has had or is likely to have a Material
Adverse Effect on Frontier.
(e) Except as set forth in the Disclosure Schedule-Frontier, the
statements of income included in the most recent Frontier Interim Financial
Statements do not contain any income or revenue realized from operations
that Frontier would be prohibited or restricted from conducting after the
Closing Date pursuant to any covenant or provision in any contract to which
Frontier is a party.
4.05 Capitalization.
(a) Frontier. The authorized capital stock of Frontier Natural
Gas Corporation consists of 40,000,000 shares of Frontier Common Stock, of
which 9,890,906 shares are issued and outstanding as of the date hereof,
and 5,000,000 shares of preferred stock, $.01 par value per share
("Frontier Preferred Stock"), of which 85,961 shares of preferred stock are
issued and outstanding as of the date hereof. Other than the option and/or
warrant agreements identified on Schedule 4.05(a) attached hereto (which
Schedule includes the number of options or warrants outstanding under such
agreements and the strike price for each such option or warrant), there are
no outstanding subscriptions, options, warrants, calls, contracts, demands,
commitments, convertible securities or other agreements or arrangements of
any character or nature whatsoever under which Frontier may become
obligated to issue, assign, transfer or repurchase any shares of the
capital stock or other equity interest in Frontier. Except as set forth on
Schedule 4.05(a), the Exchange will not cause or require any adjustments
under the option and/or warrant agreements identified on Schedule 4.05(a).
All of the outstanding shares of Frontier Common Stock and Frontier
Preferred Stock have been validly issued and are fully paid and
nonassessable and were issued in full compliance with all applicable
securities laws. The shares of Frontier Common Stock issuable to Esenjay
and Aspect hereunder, when issued in accordance with the provisions of this
Agreement, will be duly and validly authorized and issued and will be fully
paid and nonassessable free and clear of any preemptive right of any
security holder of Frontier.
(b) Other Entities. Except for the Subsidiaries of Frontier
identified on Schedule 4.05(b) (all of which Subsidiaries are wholly-owned,
directly or indirectly, by Frontier Natural Gas Corporation), Frontier has
no interest, direct or indirect, and has no commitment to purchase any
interest, direct or indirect, in any other corporation or in any
partnership or other business entity.
4.06 Accounts Receivable, Payable. All of the accounts receivable and
accounts payable reflected on the most recent Frontier Financial Statements or
arising thereafter as reflected on the books of Frontier have arisen only from
bona fide transactions in the ordinary course of business,
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represent valid obligations owing to or from, as the case may be, Frontier
and have been accrued and recorded in accordance with GAAP. Schedule 4.06
sets forth as of October 31, 1997, the accounts receivable and accounts
payable balances of Frontier, together with an aging schedule of such
balances as of such date.
4.07 Absence of Events. Since September 30, 1997, Frontier has not,
except as set forth on Schedule 4.07 or pursuant to this Agreement, done any of
the following:
(a) mortgaged, pledged or subjected its properties or assets to
any Lien other than a Permitted Encumbrance;
(b) purchased, sold, leased, transferred or otherwise disposed
of (i) any Oil and Gas Interests that, individually or in the aggregate,
had a fair market value of $50,000 or more; or (ii) any other assets except
in the ordinary course of business and consistent with prior practice;
(c) other than in the ordinary course of business and consistent
with prior practice, made any change in the rate of compensation,
commission, bonus or other direct or indirect remuneration payable, or paid
or agreed or orally promised to pay, conditionally or otherwise, any bonus,
extra compensation, reimbursement, pension or severance or vacation pay, to
any shareholder, partner, director, officer, employee or agent;
(d) issued or sold any shares of capital stock or other
securities, or issued, granted or sold any options, rights or warrants with
respect thereto;
(e) paid or declared any dividends or distributions, purchased,
redeemed, acquired or retired any indebtedness, equity interest or other
securities from its equity owners or other security holders (other than
note payments made in accordance with the underlying loan or credit
agreements and consistent with past practices), made any loans or advances
or guaranteed any loans or advances to any person, or otherwise incurred or
suffered to exist any liabilities or obligations of any nature (other than
current liabilities incurred in the ordinary course of business and
consistent with past practices);
(f) canceled, waived or released any rights or claims against,
or indebtedness owed by, third parties;
(g) amended its certificate or articles of incorporation,
by-laws, or similar documents;
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(h) entered into any transaction, contract or commitment other
than in the ordinary course of business and consistent with prior practice;
(i) made any capital expenditure or commitment therefor, except
in the ordinary course of business;
(j) adopted any employee benefit plan or made any change in any
existing employee benefit plans or made any bonus or profit sharing
distribution or granted any stock options;
(k) increased indebtedness for borrowed money, or made any loan
to any person, other than in the ordinary course of business;
(l) made any change affecting any banking, safe deposit or power
of attorney arrangements;
(m) made any change in any accounting principle or practice or
method or application thereof;
(n) suffered the termination, suspension or revocation of any
license or permit necessary for the operation of its business;
(o) entered into any transaction other than on an arm's length
basis;
(p) received any notice of default or termination of any
contract, lease or other agreement or suffered any damage, destruction,
loss (whether or not covered by insurance) or any other changes, event or
condition which in any case or in the aggregate, has had or may have a
Material Adverse Effect on Frontier;
(q) instituted, settled or agreed to settle any litigation,
action or proceeding before any court or governmental body;
(r) entered into any swap, hedging or similar arrangements,
forward sale of production or production sales contract; or
(s) entered into any agreement, whether or not in writing, or
made any commitment to take any of the types of actions described in
paragraphs (a) through (r) above.
4.08 Contracts. The Disclosure Schedule-Frontier lists each of the
following instruments, documents or agreements to which Frontier is a party and
that is currently in effect or under which Frontier has any obligations:
(a) collective bargaining agreement; (b) employment or other agreement
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or contract with or commitment to any salaried employee, except for unwritten
agreements or agreements or arrangements terminable at will or upon
statutorily required notice; (c) agreement, contract or commitment containing
any covenant (other than covenants entered into in the ordinary course of
business relating to the confidential or proprietary information of another
person) limiting Frontier's freedom to engage in any line of business or to
compete with any person; (d) obligation of guaranty or indemnification
arising from any agreement, contract or commitment, except as provided in its
certificate of incorporation; (e) joint venture, partnership, franchise or
similar contract involving a sharing of profits or expenses, other than
agreements relating to Frontier's Oil and Gas Interests (which have been made
available to Aspect and Esenjay); (f) non disclosure agreement, non
competition agreement, non solicitation agreement, any agreement with an
officer, director or employee of Frontier, tax indemnity, tax sharing or tax
allocation agreement or severance, bonus or commission agreement; (g)
agreement or contract under which Frontier is the licensee of computer
software or other intellectual property with a per unit cost greater than
$10,000; (h) contract between Frontier and any of its affiliates, other than
those referred to in the SEC Reports; (i) indenture, mortgage, loan, credit,
sale leaseback or similar contract under which Frontier has borrowed in
excess of $25,000 or issued any note, bond or other evidence of indebtedness
for borrowed money or guaranteed indebtedness for money borrowed by others in
excess of $25,000; (j) hedge, swap, exchange, futures or similar agreements
or contracts in an amount in excess of $25,000; (k) any Registration Rights
Agreements or other agreements under which Frontier has any obligations to
register shares of Frontier Common Stock; or (l) other agreement, contract or
commitment that has had or may have a Material Adverse Effect on Frontier.
Frontier is not a party to any oral agreements of any nature, other than
those terminable at will without penalty or default and the termination of
which would not have a Material Adverse Effect on Frontier. There is no
existing breach by Frontier of, nor is there any pending or, to the knowledge
of Frontier, threatened claim that Frontier has breached any of the terms or
conditions of any of its material agreements, contracts or commitments and,
to the knowledge of Frontier, no other parties to such agreements, contracts
or commitments have breached any of their terms or conditions.
4.09 Taxes. Except as set forth in the Disclosure Schedule-Frontier,
each of the following is true with respect to Frontier Natural Gas Corporation
and each subsidiary of Frontier Natural Gas Corporation with which Frontier
Natural Gas Corporation files consolidated or combined federal or state income
tax returns, in each case as listed on Schedule 4.05(b) attached hereto
(collectively the "Frontier Group"):
(a) all Tax Returns required to be filed by each member of the
Frontier Group have been filed when due, including legal periods permitted
by extensions, in accordance with all applicable laws; all material Taxes
shown on such Tax Returns have been timely paid when due; the Tax Returns
have been properly completed in compliance in all material respects with
all applicable laws and regulations and completely and accurately reflect
the facts regarding the income, expenses, properties, businesses and
operations required to be shown thereon;
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(b) each member of the Frontier Group has paid all material
Taxes required to be paid by it (whether or not shown on a Tax Return) or
for which it is liable, whether to taxing authorities or to other persons
under tax allocation agreements, and the charges, accruals, and reserves
for Taxes due, or accrued but not yet due, relating to its income,
properties, transactions or operations for any periods prior to the Closing
Date as reflected on its books (including the latest Frontier Financial
Statement) are adequate in the aggregate to cover such Taxes;
(c) there are no agreements or consents currently in effect for
the extension or waiver of the time (i) to file any Tax Return or (ii) for
assessment or collection of any Taxes relating to the income, properties or
operations of any member of the Frontier Group for any period ending on or
before the Closing Date and no member the Frontier Group has been requested
to enter into any such agreement or consent;
(d) there are no Tax liens (other than for current Taxes not yet
delinquent) upon the assets of any member of the Frontier Group;
(e) all material Taxes that the Frontier Group is required by
law to withhold or collect have been duly withheld or collected, and have
been timely paid over to the appropriate governmental authorities to the
extent due and payable;
(f) no member of the Frontier Group is a party to any agreement,
contract, arrangement or plan that would result, separately or in the
aggregate, in the payment of any "excess parachute payments" within the
meaning of Code Section 280G;
(g) no member of the Frontier Group has agreed, nor is it
required, to make any adjustment under Code Section 481(a) (or any
comparable provision of state or local law) by reason of a change in
accounting method or otherwise;
(h) no member of the Frontier Group has filed a consent pursuant
to the collapsible corporation provisions of Code Section 341(f) (or any
corresponding provision of state, local or foreign income law) or agreed to
have Code Section 341(f)(2) (or any corresponding provision of state, local
or foreign income law) apply to any disposition of any asset owned by it;
(i) neither Frontier nor any member of the Frontier Group has
been a member of an affiliated group (used herein as defined in Code
Section 1504) other than an affiliated group of which Frontier Natural Gas
Corporation is the parent corporation; and
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(j) except as set forth on the Disclosure Schedule-Frontier,
neither Frontier nor any member of the Frontier Group is (or has ever been)
a party to any tax sharing agreement nor has any such member assumed the
tax liability of any other person under contract.
4.10 Litigation. There is no legal, administrative, arbitration
other proceeding (other than routine oil and gas field regulatory orders),
governmental investigation, order, decree or judgment in progress, in effect,
pending or, to the best knowledge of Frontier, threatened against Frontier
except as set forth on the Disclosure Schedule-Frontier.
4.11 Compliance with Laws, Material Agreements and Permits. Frontier
is not in violation of, or in default under, and no event has occurred that
(with notice or the lapse of time or both) would constitute a violation of or
default under, (a) its articles of incorporation or by-laws, (b) any applicable
law, rule, regulation, order, writ, decree or judgment of any Governmental
Authority, or (c) any agreement to which Frontier is a party or to which any of
its assets is subject or bound, except (in the case of clause (b) or (c) above)
for any violation or default that would not, individually or in the aggregate,
have a Material Adverse Effect on Frontier. Frontier has obtained and holds all
permits, licenses, variances, exemptions, orders, franchises, approvals and
authorizations of all Governmental Authorities necessary for the lawful conduct
of its business or the lawful ownership, use and operation of its assets
("Frontier Permits"), except for Frontier Permits which the failure to obtain or
hold would not, individually or in the aggregate, have a Material Adverse Effect
on Frontier. Frontier is in compliance with the terms of its Frontier Permits,
except where the failure to comply would not, individually or in the aggregate,
have a Material Adverse Effect on Frontier. No investigation or review by any
Governmental Authority with respect to Frontier is pending or, to the knowledge
of Frontier, threatened, other than those the outcome of which would not,
individually or in the aggregate, have a Material Adverse Effect on Frontier.
4.12 Tax Representations. To the knowledge of Frontier, each of the
following representations are true, correct and complete and will continue to be
true, correct and complete as of the Closing Date:
(a) no Frontier Common Stock issued pursuant to this Agreement
will be issued in satisfaction of an indebtedness of Frontier or of
interest on indebtedness of Frontier;
(b) other than as set forth in this Agreement and the Exhibits
and Schedules hereto, the transfers of the Aspect Assets and the Esenjay
Assets to Frontier are not the result of the solicitation of a promoter,
broker, or investment house;
(c) other than as expressly set forth in this Agreement, there
is no indebtedness between Frontier and Esenjay or Frontier and Aspect, and
there will be
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no indebtedness of Frontier created in favor of either Esenjay or Aspect
as a result of or in connection with the Exchange.
(d) taking into account the issuance of the Frontier Common
Stock pursuant to this Agreement and any Frontier Common Stock issued to
the Aspect Employees (as such term in defined in the Section 351 Plan of
Exchange attached hereto as Exhibit "E") and disregarding for these
purposes the Frontier Preferred Stock issued and outstanding as of the date
hereof, at or in connection with the Closing, Aspect, Esenjay and the
Aspect Employees, collectively, will own stock in Frontier possessing at
least 80% of the total combined voting power of all classes of stock
entitled to vote and at least 80% of the total number of shares of all
other classes of stock of Frontier.
(e) Aspect and Esenjay will receive, at the Closing, Frontier
Common Stock approximately equal to the net fair market value of the assets
transferred to Frontier by Aspect and Esenjay, respectively;
(f) other than as set forth in this Agreement, each of the
parties to the Exchange will pay its or his own expenses, if any, incurred
in connection with the Exchange.
4.13 Environmental Matters. Consistent with its status as operator or
non-operator, as the case may be,
(a) Frontier has conducted its business and operated its assets,
and is conducting its business and operating its assets, in material
compliance with all Environmental Laws;
(b) Frontier has not been notified by any Governmental Authority
or other third party that any of the operations or assets of Frontier is
the subject of any investigation or inquiry by any Governmental Authority
or other third party evaluating whether any remedial action is needed to
respond to a release or threatened release of any Hazardous Material or to
the improper treatment, storage or disposal (including treatment, storage
or disposal at offsite locations) of any Hazardous Material;
(c) Neither Frontier nor any other person has filed any notice
under any federal, state or local law indicating that (i) Frontier is
responsible for the improper release into the environment, or the improper
treatment, storage or disposal, of any Hazardous Material, or (ii) any
Hazardous Material is improperly treated, stored or disposed of upon any
property of Frontier;
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(d) Frontier has no contingent liability in connection with
(i) the release or threatened release into the environment at, beneath or
on any property now or previously owned or leased by Frontier, (ii) the
treatment, storage or disposal of any Hazardous Material, or (iii) any
other claims (including common law claims) with respect to damage to
health, safety or the environment;
(e) Frontier has not received any claim, complaint, notice,
inquiry or request for information involving any matter which remains
unresolved as of the date hereof with respect to any alleged violation of
any Environmental Law or regarding potential liability under any
Environmental Law or relating to any other claims (including common law
claims) with respect to damage to health, safety or the environment
relating to operations or conditions of any facilities or property
(including off-site treatment, storage or disposal of any Hazardous
Material from such facilities or property) currently or formerly owned,
leased or operated by Frontier;
(f) No property now or previously owned, leased or operated by
Frontier is listed on the National Priorities List pursuant to CERCLA or on
the CERCLIS or on any other federal or state list as sites requiring
investigation or cleanup;
(g) Frontier is not directly transporting, has not directly
transported, is not directly arranging for the transportation of, and has
not directly arranged for the transportation of, any Hazardous Material to
any location which is listed on the National Priorities List pursuant to
CERCLA, on the CERCLIS, or on any similar federal or state list or which is
the subject of federal, state or local enforcement actions or other
investigations that may lead to material claims against such company for
response costs, damage to natural resources or personal injury, including
claims under CERCLA;
(h) There are no sites, locations or operations at which
Frontier is currently undertaking, or has completed, any remedial or
response action relating to any release or threatened release of Hazardous
Materials, as required by Environmental Laws or in response to a common law
claim or a potential common law claim under Environmental Law; and
(i) All underground and aboveground storage tanks and solid
waste disposal facilities owned or operated by Frontier are used and
operated in material compliance with Environmental Laws.
4.14 Books and Records. All books, records and files of Frontier
(including those pertaining to Frontier's Oil and Gas Interests, wells and other
assets, those pertaining to the production, gathering, transportation and sale
of Hydrocarbons, and corporate, accounting, financial and employee records)
(a) have been prepared, assembled and maintained in accordance with usual
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and customary policies and procedures and (b) reflect in all material
respects the ownership, use, enjoyment and operation by Frontier of its
assets. True and correct copies of all such books, records and files have
been made available to Aspect and Esenjay.
4.15 Gas Imbalances. Other than as set forth at Schedule 4.15 hereto,
Frontier has not received any payments under gas contracts for which any party
has a right to take make up gas from Frontier, and has not Frontier received any
payments for production which are subject to refund or recoupment out of future
production. There is no Oil and Gas Interest with respect to which Frontier and
its predecessors in title to the Oil and Gas Interest have collectively taken
more (referred to herein as "over-produced") or less (referred to herein as
"under-produced") production from such well than the ownership of Frontier and
such predecessors would entitle Frontier and such predecessors (absent any gas
balancing agreement or arrangement) to receive. There exist no gas balancing
arrangements or agreements whereby over-production from wells other than Oil and
Gas Interests can be balanced with production from the Oil and Gas Interests.
None of the Oil and Gas Interests is subject to having allowable production
after the date hereof reduced below the full and regular allowable (including
the maximum permissible tolerance) because of any over-production (whether or
not the same was permissible at the time) prior to the date hereof. A breach of
this representation and warranty shall be treated as a Title Defect (as
hereinafter defined) and an adjustment shall be made in accordance with the
provisions of clause (b) of Section 11.04.
4.16 Title to Assets other than Oil and Gas Interests. Except for Oil
and Gas Interests of Frontier (which are covered by Section 4.17 hereof),
Frontier has good and marketable title to, or valid leasehold interests in, all
of the properties and assets used in its business, including, but not limited
to, the computer hardware and software and the exclusive right to use in its
trade areas its name and any other trademark or servicemark currently utilized
by such entity. Except for any Permitted Encumbrance, none of such properties
and assets are subject to any Lien, easement, liability or adverse claim of any
nature whatsoever, direct or indirect, whether accrued, absolute, contingent or
otherwise. All of such properties and assets owned or leased are in good
operating condition and repair (normal wear and tear excepted).
4.17 Title to Oil and Gas Interests. Schedule 4.17 contains a
complete and accurate list of Frontier's Oil and Gas Interests and sets forth
(i) the Working Interests of Frontier therein, and (ii) sufficient detail to
determine the Net Revenue Interests of Frontier therein. Except as set forth in
the Disclosure Schedule-Frontier:
(a) Frontier (individually or collectively) has Defensible Title
to Frontier's Oil and Gas Interests;
(b) the leases and related agreements forming any part of
Frontier's Oil and Gas Interests are in full force and effect and are valid
and legally binding agreements among the parties thereto, their successors
and assigns, enforceable in accordance with their terms in all material
respects except for applicable bankruptcy and
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insolvency laws. All rentals, royalties and other payments due and
payable under any such leases and other contracts and agreements forming
a part of Frontier's Oil and Gas Interests have been properly and timely
paid and all other obligations under such leases and related agreements
attendant to the ownership of Frontier's Oil and Gas Interests have been
met; and
(c) there are no back-in, reversionary or similar interests (the
vesting of which is subject to future production) held by third parties
which would reduce the interests of Frontier in Frontier's Oil and Gas
Interests from that shown on the Property Schedule.
4.18 Oil and Gas Operations. To the best knowledge of Frontier, all
wells included in the Oil and Gas Interests of Frontier have been drilled and
completed (if applicable), operated and produced in accordance with generally
accepted oil and gas field practices and in compliance in all material respects
with applicable leases and applicable laws, rules and regulations, except where
any failure or violation could not reasonably be expected to have a Material
Adverse Effect on Frontier. Proceeds from the sale of Hydrocarbons produced
from Frontier's Oil and Gas Interests are being received by Frontier in a timely
manner and are not being held in suspense for any reason (except for amounts,
individually or in the aggregate, not in excess of $25,000 and held in suspense
in the ordinary course of business). None of Frontier's Oil and Gas Interests
are subject to production curtailments, and, to the knowledge of Frontier, no
such production curtailment is pending or threatened. Schedule 4.18 sets forth
a true and correct copy of Frontier's latest independent third party report
regarding its proved developed reserves and all internal reports prepared by
Frontier since the date of such third party report.
4.19 No Guarantees. Frontier has not directly or indirectly
guaranteed the obligations or liabilities of any other person, firm or
corporation.
4.20 Employee Matters. Frontier has provided to each of Aspect and
Esenjay a true and correct list detailing the name, current annual compensation
rate (including bonus and commissions), current base salary rate, accrued bonus,
accrued sick leave, accrued severance pay and accrued vacation benefits of each
salaried employee of Frontier. There are no charges of, formal, informal or
internal complaints of, or proceeding involving, discrimination or harassment
(including discrimination or harassment based upon sex, age, marital status,
race, religion, color, creed, national origin, sexual preference, handicap or
veteran status) pending or, to the knowledge of Frontier, threatened; nor is
there any investigation pending or, to the knowledge of Frontier, threatened,
including investigations before the Equal Employment Opportunity Commission or
any federal, state or local agency or court with respect to any current or
former employee of Frontier.
4.21 Employee Benefit Plans. With respect to any member of the
Frontier Group:
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(a) The Disclosure Schedule-Frontier lists each Employee Plan
that each member of the Frontier Group maintains, administers, contributes
to, or has any contingent liability with respect thereto. Frontier has
provided to Aspect and Esenjay a true and complete copy of each such
Employee Plan, current summary plan description, (and, if applicable,
related trust documents) and all amendments thereto, together with (i) the
three most recent annual reports, if any, prepared in connection with each
such Employee Plan (Form 5500 including, if applicable, Schedule B
thereto); (ii) the most recent actuarial report, if any, and trust reports
prepared in connection with each Employee Plan; (iii) all material
communications received from or sent to the IRS or the DOL within the last
two years (including a written description of any material oral
communications relating to the IRS Voluntary Compliance Resolution or
Closing Agreement Programs); (iv) the most recent IRS determination letter
with respect to each Employee Plan and the most recent application for a
determination letter, both as applicable; (v) all insurance contracts or
other funding arrangements, currently in force; and (vi) an actuarial study
of any post-employment life or medical benefits provided, if any.
(b) The Disclosure Schedule-Frontier identifies each Benefit
Arrangement that each member of the Frontier Group maintains, administers,
contributes to, or has any contingent liability with respect thereto. Each
Benefit Arrangement has been maintained and administered in substantial
compliance with its terms and with the requirements (including reporting
requirements, if any) prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Benefit Arrangement.
(c) Benefits under any Employee Plan or Benefit Arrangement are
as represented in said documents and have not been increased or modified
(whether written or not written) subsequent to the dates of such documents.
To the knowledge of Frontier, no member of the Frontier Group has
communicated to any employee or former employee any intention or commitment
to modify any Employee Plan or Benefit Arrangement or to establish or
implement any other employee or retiree benefit or compensation
arrangement.
(d) No Employee Plan is (i) a Multiemployer Plan, (ii) an
Employee Plan, other than any Multiemployer Plan, subject to Title IV of
ERISA, (iii) maintained in connection with any trust described in
Section 501(c)(9) of the Code or (iv) a plan to which Section 412 of the
Code applies. No current or former member of the Frontier Group has ever
maintained or become obligated to contribute to any employee benefit plan
(i) that is subject to Title IV of ERISA, (ii) to which Section 412 of the
Code applies, or (iii) that is a Multiemployer Plan or (iv) that is
maintained in connection with any trust described in Section 501(c)(9) of
the Code. No member of the Frontier Group has within the last five years
engaged in, or is a successor corporation to an
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entity that has engaged in, a transaction described in Section 4069 of
ERISA. No member of the Frontier Group is subject to withdrawal liability
(whether asserted or unasserted) under Section 4201, et seq. of ERISA.
(e) Each Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during
the period from its adoption to date, and no event has occurred since such
adoption that would adversely affect such qualification and each trust
created in connection with each such Employee Plan forming a part thereof
is exempt from tax pursuant to Section 501(a) of the Code. A favorable
determination letter has been issued by the IRS as to the qualification of
each such Employee Plan for which a determination is available under the
Code and to the effect that each such trust is exempt from taxation under
Section 501(a) of the Code. Each Employee Plan has been maintained and
administered in substantial compliance with its terms and with the
requirements (including reporting requirements, if any) prescribed by any
and all applicable statutes, orders, rules and regulations, including ERISA
and the Code.
(f) Full payment has been made of all amounts which any member
of the Frontier Group is or has been required to have paid as contributions
to or benefits due under any Employee Plan or Benefit Arrangement under
applicable law or under the terms of any such plan or any arrangement.
(g) No member of the Frontier Group, or any of their respective
directors, officers or employees has engaged in any transaction with
respect to an Employee Plan that could subject Frontier to a tax, penalty
or liability for a prohibited transaction, as defined in Section 406 of
ERISA or Section 4975 of the Code. None of the assets of any Employee Plan
are invested in employer securities or employer real property.
(h) To the knowledge of Frontier, there are no facts or
circumstances that might give rise to any liability under Title I of ERISA.
(i) No member of the Frontier Group has any current or projected
liability in respect of post-retirement or post-employment welfare benefits
for retired, current or former employees, except as required to avoid
excise tax under Section 4980B of the Code, relating to COBRA.
(j) There is no litigation, administrative or arbitration
proceeding or other dispute pending or, to the knowledge of Frontier,
threatened that involves any Employee Plan or Benefit Arrangement.
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(k) No employee or former employee of any member of the Frontier
Group will become entitled to any bonus, retirement, severance, job
security or similar benefit or enhanced benefit (including acceleration of
an award, vesting or exercise of an incentive award) or any fee or payment
of any kind solely as a result of any of the transactions contemplated
hereby, except as disclosed on the Disclosure Schedule-Frontier and no
such disclosed payment constitutes a parachute payment described in
Section 280G of the Code, except as disclosed in the Disclosure Schedule-
Frontier.
(l) To the knowledge of Frontier, all group health plans (as
defined in Code Section 5000(b)(1) and as defined in ERISA Section 607(i))
of any member of the Frontier Group have at all times fully complied with
all applicable notification and continuation coverage requirements of
Section 4980B(f) of the Code and Section 601 of ERISA, and the regulations
promulgated thereunder. Further, no Employee Plan provides health,
medical, death or survivor benefits to any stockholders or directors who
are not employees, former employees or beneficiaries thereof, except to the
extent otherwise required by the continuation requirements of
Section 4980B(f) of the Code and Section 601 of ERISA, and to the knowledge
of Frontier there are no claims by terminated employees with respect
thereto.
(m) Except as set forth in the Disclosure Schedule-Frontier, no
employee or former employee, officer or director of any member of the
Frontier Group is or will become entitled to receive any award under any
discretionary or other bonus plans.
(n) All obligations under any Employee Plans and/or Benefit
Arrangements have been in the aggregate, accrued on the Frontier Financial
Statements to the extent required (including items relating to vesting via
passage of time or as a result of the transaction contemplated by this
Agreement).
4.22 Broker/Finders. Except as set forth on the Disclosure Schedule-
Frontier, no broker, finder, investment banker or other person is or will be, in
connection with the Exchange, entitled to any brokerage or investment bankers
fees, commissions or finders fees based on any arrangement made by or on behalf
of Frontier for which any party hereto will have any liability or obligation.
4.23 Royalties. To the knowledge of Frontier, all royalties,
overriding royalties, compensatory royalties and other payments due from or in
respect of production with respect to Frontier's Oil and Gas Interests, have
been or will be, prior to the Closing Date, properly and correctly paid or
provided for in all material respects, except for those for which Frontier has a
valid right to suspend. Frontier has not received any written notice of default
from any party alleging that Frontier is in default under the terms of any lease
or other agreement relating to its Oil and Gas Interests, or that any such lease
or other agreement is invalid.
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4.24 Plugging and Abandonment Liabilities. To the best knowledge of
Frontier, Frontier has no obligation under any contract, statute or regulation
to plug and/or dismantle any shut-in or non-producing well.
4.25 Prepayments. No prepayment for Hydrocarbon sales has been
received by Frontier for Hydrocarbons which have not been delivered as of the
date hereof.
4.26 Hedging Activities. Except as set forth in the Disclosure
Schedule-Frontier, Frontier does not participate in any hedging activities.
4.27 Transactions With Related Parties.
(a) The SEC Documents describe all transactions required to be
described therein of the types detailed in Items 402 and 404 of
Regulation S-B of the SEC, and the Disclosure Schedule-Frontier lists all
transactions between January 1, 1993 and the date of this Agreement or with
respect to activities that pre-date January 1, 1993, which currently
require payments in excess of $10,000 by Frontier or for the benefit of
Frontier, on the one hand, and any director or officer of Frontier of any
affiliate of such officer or director, on the other hand, including,
(i) any debtor or creditor relationship, (ii) any transfer or lease of real
or personal property, (iii) wages, salaries, commissions, bonuses and
agreements relating to employment and (iv) purchases or sales of products
or services.
(b) The Disclosure Schedule-Frontier lists (i) all claims of any
nature that any officer or director of Frontier or any affiliate of such
officer or director has against Frontier as of the date of this Agreement
that are not reflected in the most recent Frontier Financial Statements and
(ii) all claims of any nature that Frontier has against any officer or
director of Frontier or any affiliate of such officer or director as of the
date of this Agreement that are not reflected in the most recent Frontier
Financial Statements.
4.28 Disclosure. The representations, warranties and statements made
by Frontier in this Agreement, and in the certificates and other documents
delivered pursuant hereto, do not contain any untrue statement of a material
fact, and, when taken together, do no omit to state any material fact necessary
to make such representations, warranties and statements, in light of the
circumstances under which they are made, not misleading. Since the date of the
most recent SEC Report, there have not been any events, changes or developments
relating to Frontier that are reasonably likely to have a Material Adverse
Effect on Frontier.
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ARTICLE V
FINANCIAL ADVISOR
5.01 Frontier has been and shall be advised in regard to the Exchange
by GBI. A copy of its engagement of GBI is set forth at Schedule 5.01 hereto,
and Aspect and Esenjay acknowledge same as a valid obligation and contract of
Frontier, and further agree to cooperate fully with GBI in GBI's preparation of
a fairness opinion in regards to this Agreement. It is specifically
acknowledged and agreed to by Frontier, Aspect and Esenjay that the delivery of
said fairness opinion, in form and substance satisfactory to counsel of
Frontier, expressing that the terms and provisions of this Agreement are fair to
the shareholders of Frontier is a condition precedent to Closing of the
Exchange.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF ESENJAY
As a material part of the consideration for this Agreement, Esenjay
represents and warrants to each of Aspect and Frontier as of the date of this
Agreement and as of the Closing Date as follows:
6.01 Organization, Standing and Qualification. Esenjay is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas. Esenjay has all requisite corporate power and authority
to carry on its business as now being conducted and to own, lease or operate its
properties as and in the places where such business is now conducted and such
properties are now owned, leased or operated. Esenjay is qualified and in good
standing to do business in all states in which the nature of its business
requires it to be qualified.
6.02 Execution, Delivery and Performance of Agreement; Authority.
Esenjay has full corporate power and authority to enter into this Agreement and
the Related Documents to which it is a party, to perform its obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. The execution, delivery and performance by Esenjay of this
Agreement and the Related Documents to which it is a party have been duly and
validly approved by all necessary corporate action and no other actions or
proceeding on the part of Esenjay are necessary to authorize this Agreement and
the Related Documents to which it is a party and the transactions contemplated
hereby and thereby. This Agreement constitutes, and the Related Documents to
which it is a party when executed will constitute, legal, valid and binding
obligations of Esenjay, enforceable against Esenjay in accordance with their
respective 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.
6.03 Conflicts. The execution, delivery and performance of this
Agreement and the Related Documents to which it is a party by Esenjay do not and
will not, with or without the giving of notice
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or the passage of time, or both, violate or result in a breach of, conflict
with, default, right to accelerate or loss of rights under, or result in the
creation of any Lien pursuant to, any provision of Esenjay's organizational
documents or bylaws, or any mortgage, deed of trust, lease, license,
agreement, or understanding, to which Esenjay is a party or any of Esenjay's
assets is subject, or any order, judgment or decree to which Esenjay is a
party or by which Esenjay or its assets may be bound or affected, or to
Esenjay's knowledge, any law ordinance, rule or regulation to which Esenjay or
its assets is subject.
6.04 Capitalization.
(a) Esenjay. The authorized capital stock of Esenjay consists
of 100,000 shares of common stock, of which 100,000 shares are issued and
outstanding as of the date hereof. All of the issued and outstanding
shares of common stock of Esenjay are owned by the Esenjay Shareholders.
There are no outstanding subscriptions, options, warrants, calls,
contracts, demands, commitments, convertible securities or other agreements
or arrangements of any character or nature whatsoever under which Esenjay
may become obligated to issue, assign, transfer or repurchase any shares of
the capital stock or other equity interest in Esenjay. All of the
outstanding shares of Esenjay common stock have been validly issued and are
fully paid and nonassessable.
(b) Other Entities. Except as set forth on Disclosure Schedule-
Esenjay, Esenjay has no interest, direct or indirect, and has no commitment
to purchase any interest, direct or indirect, in any other corporation or
in any partnership or other business entity.
6.05 Financial Statements. Esenjay has furnished or made available to
Frontier and Aspect its financial statements for the twelve month period ending
December 31, 1996, including an unaudited, internally prepared balance sheet as
of the end of such twelve month period and unaudited, internally prepared
statements of income and shareholders' equity for such twelve month period
(collectively, the "Esenjay Financial Statements"). The Esenjay Financial
Statements which are incorporated into this Agreement for all purposes are
complete and correct in all material respects, and present fairly the financial
condition of Esenjay as at the dates thereof and the results of their operations
for the periods covered thereby.
6.06 Absence of Undisclosed Liabilities. Esenjay has no liabilities
(whether known or unknown, whether asserted or unasserted, whether absolute or
contingent, whether accrued or unaccrued, whether liquidated or unliquidated,
and whether due or to become due, including liabilities for Taxes), except for
(a) liabilities set forth on the face of the Esenjay Financial Statements,
(b) liabilities which have arisen after the date of the Esenjay Financial
Statements in the ordinary course of business and consistent with past
experience and practice, and (c) liabilities under this Agreement.
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6.07 Absence of Events. Except as set forth on the Disclosure
Schedule-Esenjay, since December 31, 1996, no event has occurred that could have
a Material Adverse Effect on Esenjay and Esenjay has not done any of the
following:
(a) mortgaged, pledged or subjected to lien, charge, security
interest or any other encumbrance or restriction any Esenjay Assets, other
than Permitted Encumbrances;
(b) sold, transferred or otherwise disposed of any Esenjay
Assets;
(c) other than in the ordinary course of business and consistent
with prior practice, made any change in the rate of compensation,
commission, bonus or other direct or indirect remuneration payable, or paid
or agreed or orally promised to pay, conditionally or otherwise, any bonus,
extra compensation, reimbursement, pension or severance or vacation pay, to
any shareholder, partner, director, officer, employee or agent;
(d) issued or sold any shares of capital stock or partnership
interest or other securities, or issued, granted or sold any options,
rights or warrants with respect thereto;
(e) paid or declared any dividends or distributions, purchased,
redeemed, acquired or retired any indebtedness, equity interest or other
securities from its equity owners or other security holders, made any loans
or advances or guaranteed any loans or advances to any person, or otherwise
incurred or suffered to exist any liabilities (other than current
liabilities incurred in the ordinary course of business and consistent with
past practices);
(f) amended its certificate or articles of incorporation,
by-laws, or similar documents;
(g) entered into any transaction, contract or commitment other
than in the ordinary course of business and consistent with prior practice;
(h) adopted any employee benefit plan or made any change in any
existing employee benefit plans or made any bonus or profit sharing
distribution or granted any stock options;
(i) received any notice of default or termination or suffered
any damage, destruction, loss (whether or not covered by insurance) or any
other change, event or
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condition which in any case or in the aggregate, has had or may have a
Material Adverse Effect on Esenjay;
(j) entered into any agreement or made any commitment to take
any of the types of actions described in paragraphs (a) through (i) or that
could have a Material Adverse Effect on Esenjay.
6.08 Taxes. Except as set forth in the Disclosure Schedule-Esenjay,
each of the following is true with respect to Esenjay:
(a) To the best of Esenjay's knowledge, Esenjay has paid all
material Taxes required to be paid by it (whether or not shown on a Tax
Return) or for which it is liable, whether to taxing authorities or to
other persons under tax allocation agreements;
(b) there are no agreements or consents currently in effect for
the extension or waiver of the time (i) to file any Tax Return or (ii) for
assessment or collection of any Taxes relating to the income, properties or
operations of Esenjay for any period ending on or before the Closing Date
and Esenjay has not been requested to enter into any such agreement or
consent;
(c) there are no Tax liens (other than for current Taxes not yet
delinquent) upon the assets of Esenjay;
(d) all material Taxes that Esenjay is required by law to
withhold or collect have been duly withheld or collected, and have been
timely paid over to the appropriate governmental authorities to the extent
due and payable;
(e) Esenjay is not a party to any agreement, contract,
arrangement or plan that would result, separately or in the aggregate, in
the payment of any "excess parachute payments" within the meaning of Code
Section 280G;
(f) Esenjay has not agreed, nor is it required, to make any
adjustment under Code Section 481(a) (or any comparable provision of state
or local law) by reason of a change in accounting method or otherwise;
(g) Esenjay has not filed a consent pursuant to the collapsible
corporation provisions of Code Section 341(f) (or any corresponding
provision of state, local or foreign income law) or agreed to have Code
Section 341(f)(2) (or any corresponding provision of state, local or
foreign income law) apply to any disposition of any asset owned by it;
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(h) Esenjay has never been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code and is not
subject to any Tax liability of any other person, including any liability
arising from the application of U.S. Treasury Regulation Section 1.1502-6
or any analogous provisions of state, local or foreign law; and
(i) Esenjay is not (and never has been) a party to any tax
sharing agreement and has not assumed the tax liability of any other person
under contract.
6.09 Litigation. There is no legal, administrative, arbitration
other proceeding (other than routine oil and gas field regulatory orders),
governmental investigation, order, decree or judgment in progress, in effect,
pending or, to the best knowledge of Esenjay, threatened against Esenjay except
as set forth on the Disclosure Schedule-Esenjay.
6.10 Compliance with Laws, Material Agreements and Permits. With
respect to the Esenjay Assets, Esenjay is not in violation of, or in default
under, and no event has occurred that (with notice or the lapse of time or both)
would constitute a violation of or default under, (a) its articles of
incorporation or by-laws, (b) any applicable law, rule, regulation, order, writ,
decree or judgment of any Governmental Authority, or (c) any agreement to which
Esenjay is a party or to which any of its assets is subject or bound. Esenjay
has obtained and holds all permits, licenses, variances, exemptions, orders,
franchises, approvals and authorizations of all Governmental Authorities
necessary for the lawful conduct of its business or the lawful ownership, use
and operation of its assets ("Esenjay Permits"), except for Esenjay Permits
which the failure to obtain or hold would not, individually or in the aggregate,
have a Material Adverse Effect on Esenjay. Esenjay is in compliance with the
terms of its Esenjay Permits, except where the failure to comply would not,
individually or in the aggregate, have a Material Adverse Effect on Esenjay. No
investigation or review by any Governmental Authority with respect to Esenjay is
pending or, to the knowledge of Esenjay, threatened, other than those the
outcome of which would not, individually or in the aggregate, have a Material
Adverse Effect on Esenjay. To the knowledge of Esenjay, no party to any
material agreement affecting the Esenjay Assets or by which the Esenjay Assets
are bound is in breach of any of the material terms, provisions or conditions of
such agreement.
6.11 Environmental Matters. With respect to the Esenjay Assets,
consistent with its status as operator or non-operator, as the case may be:
(a) Esenjay has conducted its business and operated its assets,
and is conducting its business and operating its assets, in material
compliance with all Environmental Laws;
(b) Esenjay has not been notified by any Governmental Authority
or other third party that any of the operations or assets of Esenjay is the
subject of any investigation or inquiry by any Governmental Authority or
other third party evaluating
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whether any remedial action is needed to respond to a release or threatened
release of any Hazardous Material or to the improper treatment, storage or
disposal (including treatment, storage or disposal at offsite locations) of
any Hazardous Material;
(c) Neither Esenjay nor any other person has filed any notice
under any federal, state or local law indicating that (i) Esenjay is
responsible for the improper release into the environment, or the improper
treatment, storage or disposal, of any Hazardous Material, or (ii) any
Hazardous Material is improperly treated, stored or disposed of upon any
property of Esenjay;
(d) Esenjay has no contingent liability in connection with
(i) the release or threatened release into the environment at, beneath or
on any property now or previously owned or leased by Esenjay, (ii) the
treatment, storage or disposal of any Hazardous Material, or (iii) any
other claims (including common law claims) with respect to damage to
health, safety or the environment;
(e) Esenjay has not received any claim, complaint, notice,
inquiry or request for information involving any matter which remains
unresolved as of the date hereof with respect to any alleged violation of
any Environmental Law or regarding potential liability under any
Environmental Law or relating to any other claims (including common law
claims) with respect to damage to health, safety or the environment
relating to operations or conditions of any facilities or property
(including off-site treatment, storage or disposal of any Hazardous
Material from such facilities or property) currently or formerly owned,
leased or operated by Esenjay;
(f) No property now or previously owned, leased or operated by
Esenjay is listed on the National Priorities List pursuant to CERCLA or on
the CERCLIS or on any other federal or state list as sites requiring
investigation or cleanup;
(g) Esenjay is not directly transporting, has not directly
transported, is not directly arranging for the transportation of, and has
not directly arranged for the transportation of, any Hazardous Material to
any location which is listed on the National Priorities List pursuant to
CERCLA, on the CERCLIS, or on any similar federal or state list or which is
the subject of federal, state or local enforcement actions or other
investigations that may lead to material claims against such company for
response costs, damage to natural resources or personal injury, including
claims under CERCLA;
(h) There are no sites, locations or operations at which Esenjay
is currently undertaking, or has completed, any remedial or response action
relating to any release or threatened release of Hazardous Materials, as
required by
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Environmental Laws or in response to a common law claim or a potential
common law claim under Environmental Law; and
(i) All underground and aboveground storage tanks and solid
waste disposal facilities owned or operated by Esenjay are used and
operated in material compliance with Environmental Laws.
6.12 Title to Assets other than Oil and Gas Interests. Except for Oil
and Gas Interests (which are covered by Section 6.13 hereof), Esenjay has good
and marketable title to, or valid leasehold interests in, all of the properties
and assets that are included in the Esenjay Assets. Except for any Permitted
Encumbrance, none of such properties and assets are subject to any Lien,
easement, liability or adverse claim of any nature whatsoever, direct or
indirect, whether accrued, absolute, contingent or otherwise. All of such
properties and assets owned or leased are in good operating condition and repair
(normal wear and tear excepted).
6.13 Title to Oil and Gas Interests. Schedule 2.01 contains a
complete and accurate list of Esenjay's Oil and Gas Interests that are being
conveyed pursuant to the Exchange and sets forth (i) the Working Interests of
Esenjay therein to the extent being conveyed hereby, and (ii) sufficient detail
to determine the Net Revenue Interests of Esenjay therein to the extent being
conveyed hereby. Except as set forth in the Disclosure Schedule-Esenjay and
solely with respect to the Oil and Gas Interests that are included in the
Esenjay Assets:
(a) Esenjay (individually or collectively) has Defensible Title
to Esenjay's Oil and Gas Interests;
(b) the leases and related agreements forming any part of
Esenjay's Oil and Gas Interests are in full force and effect and are valid
and legally binding agreements among the parties thereto, their successors
and assigns, enforceable in accordance with their terms in all material
respects except for applicable bankruptcy and insolvency laws. All
rentals, royalties and other payments due and payable under any such leases
and other contracts and agreements forming a part of Esenjay's Oil and Gas
Interests have been properly and timely paid and all other obligations
under such leases and related agreements attendant to the ownership of
Esenjay's Oil and Gas Interests have been met; and
(c) there are no back-in, reversionary or similar interests (the
vesting of which is subject to future production) held by third parties
which would reduce the interests of Esenjay in Esenjay's Oil and Gas
Interests from that shown on the Property Schedule.
6.14 Broker/Finders. No broker, finder, investment banker other than
as set forth in Disclosure Schedule-Esenjay, or other person is or will be, in
connection with the Exchange, entitled
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to any brokerage or investment bankers fees, commissions or finders fees based
on any arrangement made by or on behalf of Esenjay and for which any party
hereto will have any liability or obligation.
6.15 Royalties. To the knowledge of Esenjay, all royalties,
overriding royalties, compensatory royalties and other payments due from or in
respect of production with respect to Oil and Gas Interests included in the
Esenjay Assets, have been or will be, prior to the Closing Date, properly and
correctly paid or provided for in all material respects, except for those for
which Esenjay has a valid right to suspend. Esenjay has not received any
written notice of default from any party alleging that Esenjay is in default
under the terms of any lease or other agreement relating to the Oil and Gas
Interests included in the Esenjay Assets, or that any such lease or other
agreement is invalid.
6.16 Gas Imbalances. Except as identified on the Disclosure Schedule-
Esenjay, Esenjay has not received any deficiency payments under gas contracts
for which any party has a right to take deficiency gas from Esenjay, nor has
Esenjay received any payments for production which are subject to refund or
recoupment out of future production. There is no Oil and Gas Interest with
respect to which Esenjay and its predecessors in title to the Esenjay Oil and
Gas Interests have collectively taken more (referred to herein as "over-
produced") or less (referred to herein as "under-produced") production from such
well than the ownership would entitle Esenjay and such predecessors to receive
(absent any gas balancing agreement or arrangement). There exist no gas
balancing arrangements or agreements whereby over-production from wells other
than Esenjay Oil and Gas Interests can be balanced with production from the Oil
and Gas Interests. None of the Esenjay Oil and Gas Interests is subject to
having allowable production after the date hereof reduced below the full and
regular allowable (including the maximum permissible tolerance) because of any
over-production (whether or not the same was permissible at the time) prior to
the date hereof. With respect to the Esenjay Assets, a breach of this
representation and warranty shall be treated as a Title Defect and an adjustment
shall be made in accordance with the provisions of clause (b) of Section 11.04.
6.17 Hedging Activities. Except as set forth in the Disclosure
Schedule-Esenjay, Esenjay does not participate in any hedging activities.
6.18 Certain Business Relationships or Transactions with Affiliates.
The Disclosure Schedule-Esenjay sets forth a complete and accurate list of any
agreement, contract, arrangement or understanding to which Esenjay is a party
for the direct or indirect benefit of any of the Esenjay Shareholders (or, as
the case may be, their family members, directors, officers or employees, or
other affiliates). None of the Esenjay Shareholders (or, as the case may be,
their family members, directors, officers or employees, or other affiliates)
owns any material asset, tangible or intangible, which is used in the business
of Esenjay.
6.19 No Guarantees. Esenjay has not directly or indirectly guaranteed
the obligations of or liabilities of any other person, firm or corporation.
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6.20 Employee Matters. Esenjay has provided to each of Aspect and
Frontier a true and correct list detailing the following information for each
Esenjay employee: the name, current annual compensation and base salary rate
(including bonuses and commissions and any increases in compensation or base
salary since December 31, 1996), accrued bonus, accrued sick leave, accrued
severance pay and accrued vacation benefits. The liability of Esenjay for
accrued sick leave and accrued vacation benefits of the Esenjay employees
does not exceed $102,043.62, in the aggregate. There are no charges of,
formal, informal or internal complaints of, or proceeding involving,
discrimination or harassment (including discrimination or harassment based
upon sex, age, marital status, race, religion, color, creed, national origin,
sexual preference, handicap or veteran status) pending or, to the knowledge
of Esenjay, threatened; nor is there any investigation pending or, to the
knowledge of Esenjay, threatened, including investigations before the Equal
Employment Opportunity Commission or any federal, state or local agency or
court with respect to any current or former employee of Esenjay.
6.21 Employee Benefit Plans. With respect to Esenjay:
(a) The Disclosure Schedule-Esenjay lists each Employee Plan
that Esenjay maintains, administers, contributes to, or has any contingent
liability with respect thereto. Esenjay has provided to Aspect and
Frontier a true and complete copy of each such written Employee Plan and
each material oral Employee Plan, current summary plan description, (and,
if applicable, related trust documents) and all amendments thereto,
together with (i) the three most recent annual reports, if any, prepared in
connection with each such Employee Plan (Form 5500 including, if
applicable, Schedule B thereto); (ii) the most recent actuarial report, if
any, and trust reports prepared in connection with each Employee Plan;
(iii) all material communications received from or sent to the IRS or the
DOL within the last two years (including a written description of any
material oral communications relating to the IRS Voluntary Compliance
Resolution or Closing Agreement Programs); (iv) the most recent IRS
determination letter with respect to each Employee Plan and the most recent
application for a determination letter, both as applicable; (v) all
insurance contracts or other funding arrangements, currently in force; and
(vi) an actuarial study of any post-employment life or medical benefits
provided, if any.
(b) The Disclosure Schedule-Esenjay identifies each Benefit
Arrangement that Esenjay maintains, administers, contributes to, or has any
contingent liability with respect thereto. Each Benefit Arrangement has
been maintained and administered in substantial compliance with its terms
and with the requirements (including reporting requirements, if any)
prescribed by any and all statutes, orders, rules and regulations which are
applicable to such Benefit Arrangement.
(c) Benefits under any Employee Plan or Benefit Arrangement are
as represented in said documents and have not been increased or modified
(whether
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written or not written) subsequent to the dates of such documents. To
the knowledge of Esenjay, except as set forth on the Disclosure
Schedule-Esenjay, Esenjay has not communicated to any employee or former
employee any intention or commitment to modify any Employee Plan or Benefit
Arrangement or to establish or implement any other employee or retiree
benefit or compensation arrangement.
(d) No Employee Plan is (i) a Multiemployer Plan, (ii) an
Employee Plan, other than any Multiemployer Plan, subject to Title IV of
ERISA, (iii) maintained in connection with any trust described in
Section 501(c)(9) of the Code or (iv) a plan to which Section 412 of the
Code applies. Esenjay has never maintained or become obligated to
contribute to any employee benefit plan (i) that is subject to Title IV of
ERISA, (ii) to which Section 412 of the Code applies, or (iii) that is a
Multiemployer Plan or (iv) that is maintained in connection with any trust
described in Section 501(c)(9) of the Code. Esenjay has not within the
last five years engaged in, or is a successor corporation to an entity that
has engaged in, a transaction described in Section 4069 of ERISA. Esenjay
is not subject to withdrawal liability (whether asserted or unasserted)
under Section 4201, et seq. of ERISA.
(e) Each Employee Plan which is intended to be qualified under
Section 40l(a) of the Code is so qualified and has been so qualified during
the period from its adoption to date, and no event has occurred since such
adoption that would adversely affect such qualification and each trust
created in connection with each such Employee Plan forming a part thereof
is exempt from tax pursuant to Section 501(a) of the Code. A favorable
determination letter has been issued by the IRS as to the qualification of
each such Employee Plan for which a determination is available under the
Code and to the effect that each such trust is exempt from taxation under
Section 501(a) of the Code. Each Employee Plan has been maintained and
administered in substantial compliance with its terms and with the
requirements (including reporting requirements, if any) prescribed by any
and all applicable statutes, orders, rules and regulations, including ERISA
and the Code.
(f) Full payment has been made of all amounts which Esenjay is
or has been required to have paid as contributions to or benefits due under
any Employee Plan or Benefit Arrangement under applicable law or under the
terms of any such plan or any arrangement.
(g) Neither Esenjay nor any of its respective directors,
officers or employees has engaged in any transaction with respect to an
Employee Plan that could subject Esenjay to a tax, penalty or liability for
a prohibited transaction, as defined in Section 406 of ERISA or
Section 4975 of the Code. None of the assets of any Employee Plan are
invested in employer securities or employer real property.
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(h) To the knowledge of Esenjay, there are no facts or
circumstances that might give rise to any liability under Title I of ERISA.
(i) Esenjay has no current or projected liability in respect of
post-retirement or post-employment welfare benefits for retired, current or
former employees, except as required to avoid excise tax under
Section 4980B of the Code, relating to COBRA.
(j) There is no litigation, administrative or arbitration
proceeding or other dispute pending or, to the knowledge of Esenjay,
threatened that involves any Employee Plan or Benefit Arrangement.
(k) No employee or former employee of Esenjay will become
entitled to any bonus, retirement, severance, job security or similar
benefit or enhanced benefit (including acceleration of an award, vesting or
exercise of an incentive award) or any fee or payment of any kind solely as
a result of any of the transactions contemplated hereby, except as
disclosed on the Disclosure Schedule-Esenjay and no such disclosed payment
constitutes a parachute payment described in Section 280G of the Code,
except as disclosed in the Disclosure Schedule-Esenjay.
(l) To the knowledge of Esenjay, all group health plans (as
defined in Code Section 5000(b)(1) and as defined in ERISA Section 607(i))
of Esenjay have at all times fully complied with all applicable
notification and continuation coverage requirements of Section 4980B(f) of
the Code and Section 601 of ERISA, and the regulations promulgated
thereunder. Further, no Employee Plan provides health, medical, death or
survivor benefits to any stockholders or directors who are not employees,
former employees or beneficiaries thereof, except to the extent otherwise
required by the continuation requirements of Section 4980B(f) of the Code
and Section 601 of ERISA, and to the knowledge of Esenjay there are no
claims by terminated employees with respect thereto.
(m) Except as set forth in the Disclosure Schedule-Esenjay, no
employee or former employee, officer or director of Esenjay is or will
become entitled to receive any award under any discretionary or other bonus
plans.
(n) All obligations under any Employee Plans and/or Benefit
Arrangements have been in the aggregate, accrued on the Esenjay Financial
Statements to the extent required (including items relating to vesting via
passage of time or as a result of the transaction contemplated by this
Agreement).
6.22 Plugging and Abandonment Liabilities. To the best knowledge
of Esenjay, except as reflected in the Esenjay Financial Statements or in the
Disclosure Schedule-Esenjay, Esenjay has no
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obligation, in relation to the Esenjay Assets, under applicable contract,
statute or regulation to plug and dismantle any well.
6.23 Prepayments. No prepayment for Hydrocarbon sales has been
received by Esenjay for Hydrocarbons which have not been delivered as of the
date hereof.
6.24 Calls on Production. To the best knowledge of Esenjay, except
as set forth in the Disclosure Schedule-Esenjay, no party has a call or a
preferential right to purchase production from Esenjay's Oil and Gas
Interests.
6.25 Oil and Gas Operations. To the best knowledge of Esenjay, all
wells included in the Esenjay Assets have been drilled and completed (if
applicable), operated and produced in accordance with generally accepted oil
and gas field practices and in compliance in all material respects with
applicable leases and applicable laws, rules and regulations, except where
any failure or violation could not reasonably be expected to have a Material
Adverse Effect on the Esenjay Assets. Proceeds from the sale of Hydrocarbons
produced from Oil and Gas Interests included in the Esenjay Assets are being
received by Esenjay in a timely manner and are not being held in suspense for
any reason (except for amounts, individually or in the aggregate, not in
excess of $25,000 and held in suspense in the ordinary course of business).
None of the Oil and Gas Interests included in the Esenjay Assets are subject
to production curtailments, and, to the knowledge of the Esenjay, no such
production curtailment is pending or threatened.
6.26 Tax Representations. To the knowledge of Esenjay, each of the
following representations are true, correct and complete and will continue to
be true, correct and complete as of the Closing Date:
(a) the Frontier Common Stock to be issued to Esenjay at the
Closing will not be issued in satisfaction of an indebtedness of Frontier
or interest on indebtedness of Frontier;
(b) other than as set forth in this Agreement and the Exhibits
and Schedules hereto, the transfers of the Esenjay Assets to Frontier are
not the result of the solicitation of a promoter, broker, or investment
house;
(c) Frontier will not, other than specifically set forth in this
Agreement, assume any liabilities of Esenjay in connection with the
Exchange;
(d) other than as expressly set forth in this Agreement and
other than any liabilities arising under the New Debt agreement, there is
no indebtedness between Esenjay and Frontier and there will be no
indebtedness created by Frontier in favor of Esenjay or the Esenjay
Shareholders as a result of the Exchange;
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(e) Esenjay will receive Frontier Common Stock at the Closing
approximately equal to the net fair market value of the Esenjay Assets
transferred by Esenjay to Frontier;
(f) other than as set forth in this Agreement, Esenjay will pay
its own expenses, if any, incurred in connection with the Exchange;
(g) Esenjay is not under the jurisdiction of a court in a title
11 or similar case (within the meaning of Section 368(a)(3)(A) of the Code)
and the Frontier Common Stock to be received in the Exchange will not be
used to satisfy any indebtedness of such party;
(h) All of the Frontier Common Stock that Esenjay will receive
as part of the Exchange will be received in exchange for the property
transferred by Esenjay 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 Esenjay or the Esenjay Shareholders
(or any other person) either in connection with the Exchange or otherwise;
(i) Except as set forth on Schedule 2.01, Esenjay will not
retain any rights or interests in the property transferred to Frontier as
part of the Exchange; and
(j) Esenjay has no plan or intention to sell, exchange, or
otherwise dispose of any of the Frontier Common Stock to be received by
Esenjay pursuant hereto.
6.27 Disclosure. The representations, warranties and statements
made by Esenjay in this Agreement, and in the certificates and other
documents delivered pursuant hereto, do not contain any untrue statement of a
material fact, and, when taken together, do no omit to state any material
fact necessary to make such representations, warranties and statements, in
light of the circumstances under which they are made, not misleading. Since
the date of the most recent Esenjay Financial Statement, there have not been
any events, changes or developments relating to Esenjay that are reasonably
likely to have a Material Adverse Effect on Esenjay.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF ASPECT
As a material part of the consideration for this Agreement, Aspect
represents and warrants to Esenjay and Frontier as of the date of this
Agreement and as of the Closing Date as follows:
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7.01 Organization, Standing and Qualification. Aspect is a limited
liability corporation duly organized, validly existing and in good standing
under the laws of the State of Colorado. Aspect has all requisite limited
liability company power and authority to carry on its business as now being
conducted and to own, lease or operate its properties, if any, as and in the
places where such business is now conducted and such properties, if any, are
now owned, leased or operated. Aspect is qualified and in good standing to
do business in all states in which the nature of its business requires it to
be qualified.
7.02 Execution, Delivery and Performance of Agreement; Authority.
Aspect has full limited liability company power and authority to enter into
this Agreement and the Related Documents to which it is a party, to perform
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance by
Aspect of this Agreement and the Related Documents to which it is a party
have been duly and validly approved by all necessary limited liability
company action and no other actions or proceeding on the part of Aspect are
necessary to authorize this Agreement and the Related Documents to which it
is a party and the transactions contemplated hereby and thereby. This
Agreement constitutes, and the Related Documents to which it is a party when
executed will constitute, legal, valid and binding obligations of Aspect,
enforceable against Aspect in accordance with their respective 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.
7.03 Conflicts. The execution, delivery and performance of this
Agreement and the Related Documents to which it is a party by Aspect do not
and will not, with or without the giving of notice or the passage of time, or
both, violate or result in a breach of, conflict with, default, right to
accelerate or loss of rights under, or result in the creation of any Lien
pursuant to, any provision of Aspect's articles of organization or operating
agreement, or any mortgage, deed of trust, lease, license, agreement, or
understanding, to which Aspect is a party or any of Aspect's assets is
subject, or any order, judgment or decree to which Aspect is a party or by
which Aspect or its assets may be bound or affected, or to Aspect's
knowledge, any law ordinance, rule or regulation to which Aspect or its
assets is subject.
7.04 Aspect Assets. The Aspect Assets represent no more than fifty
percent (50%) of the Aspect's net asset value.
7.05 Taxes. Except as set forth in the Disclosure Schedule-Aspect,
each of the following is true with respect to Aspect:
(a) all Tax Returns required to be filed by Aspect have been
filed when due, including legal periods permitted by extensions, in
accordance with all applicable laws; all material Taxes shown on such Tax
Returns have been timely paid when due; the Tax Returns have been properly
completed in compliance in all material respects
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with all applicable laws and regulations and completely and accurately
reflect the facts regarding the income, expenses, properties, businesses
and operations required to be shown thereon;
(b) Aspect has paid all material Taxes required to be paid by it
(whether or not shown on a Tax Return) or for which it is liable, whether
to taxing authorities or to other persons under tax allocation agreements;
(c) there are no agreements or consents currently in effect for
the extension or waiver of the time (i) to file any Tax Return or (ii) for
assessment or collection of any Taxes relating to the income, properties or
operations of Aspect for any period ending on or before the Closing Date
and Aspect has not been requested to enter into any such agreement or
consent;
(d) there are no Tax liens (other than for current Taxes not yet
delinquent) upon the assets of Aspect; and
(e) all material Taxes that the Aspect is required by law to
withhold or collect have been duly withheld or collected, and have been
timely paid over to the appropriate governmental authorities to the extent
due and payable.
7.06 Litigation. There is no legal, administrative, arbitration
other proceeding (other than routine oil and gas field regulatory orders),
governmental investigation, order, decree or judgment in progress, in effect,
pending or, to the best knowledge of Aspect, threatened against Aspect and
relating to the Aspect Assets.
7.07 Compliance with Laws, Material Agreements and Permits. With
respect to the Aspect Assets, Aspect is not in violation of, or in default
under, and no event has occurred that (with notice or the lapse of time or
both) would constitute a violation of or default under, (i) its articles of
incorporation, or by-laws, (ii) any applicable law, rule, regulation, order,
writ, decree or judgment of any Governmental Authority, or (iii) any
agreement to which Aspect is a party or to which any of its assets is subject
or bound. Aspect has obtained and holds all permits, licenses, variances,
exemptions, orders, franchises, approvals and authorizations of all
Governmental Authorities necessary for the lawful conduct of its business or
the lawful ownership, use and operation of its assets ("Aspect Permits"),
except for Aspect Permits which the failure to obtain or hold would not,
individually or in the aggregate, have a Material Adverse Effect on Aspect.
Aspect is in compliance with the terms of its Aspect Permits, except where
the failure to comply would not, individually or in the aggregate, have a
Material Adverse Effect on Aspect. No investigation or review by any
Governmental Authority with respect to Aspect is pending or, to the knowledge
of Aspect, threatened, other than those the outcome of which would not,
individually or in the aggregate, have a Material Adverse Effect on Aspect.
To the knowledge of Aspect, no party to any material
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agreement affecting the Aspect Assets or by which the Aspect Assets are bound
is in breach of any of the material terms, provisions or conditions of such
agreement.
7.08 Environmental Matters. With respect to the Aspect Assets,
consistent with its status as operator or non-operator, as the case may be:
(a) Aspect has conducted its business and operated its assets,
and is conducting its business and operating its assets, in material
compliance with all Environmental Laws;
(b) Aspect has not been notified by any Governmental Authority
or other third party that any of the operations or assets of Aspect is the
subject of any investigation or inquiry by any Governmental Authority or
other third party evaluating whether any remedial action is needed to
respond to a release or threatened release of any Hazardous Material or to
the improper treatment, storage or disposal (including treatment, storage
or disposal at offsite locations) of any Hazardous Material;
(c) Neither Aspect nor any other person has filed any notice
under any federal, state or local law indicating that (i) Aspect is
responsible for the improper release into the environment, or the improper
treatment, storage or disposal, of any Hazardous Material, or (ii) any
Hazardous Material is improperly treated, stored or disposed of upon any
property of Aspect;
(d) Aspect has no contingent liability in connection with
(i) the release or threatened release into the environment at, beneath or
on any property now or previously owned or leased by Aspect, (ii) the
treatment, storage or disposal of any Hazardous Material, or (iii) any
other claims (including common law claims) with respect to damage to
health, safety or the environment;
(e) Aspect has not received any claim, complaint, notice,
inquiry or request for information involving any matter which remains
unresolved as of the date hereof with respect to any alleged violation of
any Environmental Law or regarding potential liability under any
Environmental Law or relating to any other claims (including common law
claims) with respect to damage to health, safety or the environment
relating to operations or conditions of any facilities or property
(including off-site treatment, storage or disposal of any Hazardous
Material from such facilities or property) currently or formerly owned,
leased or operated by Aspect;
(f) No property now or previously owned, leased or operated by
Aspect is listed on the National Priorities List pursuant to CERCLA or on
the CERCLIS or on any other federal or state list as sites requiring
investigation or cleanup;
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(g) Aspect is not directly transporting, has not directly
transported, is not directly arranging for the transportation of, and has
not directly arranged for the transportation of, any Hazardous Material to
any location which is listed on the National Priorities List pursuant to
CERCLA, on the CERCLIS, or on any similar federal or state list or which is
the subject of federal, state or local enforcement actions or other
investigations that may lead to material claims against such company for
response costs, damage to natural resources or personal injury, including
claims under CERCLA;
(h) There are no sites, locations or operations at which Aspect
is currently undertaking, or has completed, any remedial or response action
relating to any release or threatened release of Hazardous Materials, as
required by Environmental Laws or in response to a common law claim or a
potential common law claim under Environmental Law; and
(i) All underground and aboveground storage tanks and solid
waste disposal facilities owned or operated by Aspect are used and operated
in material compliance with Environmental Laws.
7.09 Title to Assets other than Oil and Gas Interests. Except for
Oil and Gas Interests (which are covered by Section 7.09 hereof), Aspect has
good and marketable title to, or valid leasehold interests in, all of the
properties and assets that are included in the Aspect Assets. Except for any
Permitted Encumbrance, none of such properties and assets are subject to any
Lien, easement, liability or adverse claim of any nature whatsoever, direct
or indirect, whether accrued, absolute, contingent or otherwise. All of such
properties and assets owned or leased are in good operating condition and
repair (normal wear and tear excepted).
7.10 Title to Oil and Gas Interests. Schedule 3.01 contains a
complete and accurate list of Aspect's Oil and Gas Interests that are being
conveyed pursuant to the Exchange and sets forth (i) the Working Interests of
Aspect therein to the extent being conveyed hereby, and (ii) sufficient
detail to determine the Net Revenue Interests of Aspect therein to the extent
being conveyed hereby. Except as set forth in the Disclosure
Schedule-Aspect and solely with respect to the Oil and Gas Interest that are
included in the Aspect Assets:
(a) Aspect (individually or collectively) has Defensible Title
to Aspect's Oil and Gas Interests;
(b) the leases and related agreements forming any part of
Aspect's Oil and Gas Interests are in full force and effect and are valid
and legally binding agreements among the parties thereto, their successors
and assigns, enforceable in accordance with their terms in all material
respects except for applicable bankruptcy and
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insolvency laws. All rentals, royalties and other payments due and
payable under any such leases and other contracts and agreements forming a
part of Aspect's Oil and Gas Interests have been properly and timely paid
and all other obligations under such leases and related agreements
attendant to the ownership of Aspect's Oil and Gas Interests have been
met; and
(c) there are no back-in, reversionary or similar interests (the
vesting of which is subject to future production) held by third parties
which would reduce the interests of Aspect in Aspect's Oil and Gas
Interests from that shown on the Property Schedule.
7.11 Broker/Finders. No broker, finder, investment banker other
than as set forth in Disclosure Schedule-Aspect, or other person is or will
be, in connection with the Exchange, entitled to any brokerage or investment
bankers fees, commissions or finders fees based on any arrangement made by or
on behalf of Aspect and for which any party hereto will have any liability or
obligation.
7.12 Tax Representations. To the knowledge of Aspect, each of the
following representations are true, correct and complete and will continue to
be true, correct and complete as of the Closing Date:
(a) the Frontier Common Stock to be issued to Aspect at the
Closing will not be issued in satisfaction of an indebtedness of Frontier
or interest on indebtedness of Frontier;
(b) other than as set forth in this Agreement and the Exhibits
and Schedules hereto, the transfers of the Aspect Assets to Frontier are
not the result of the solicitation of a promoter, broker, or investment
house;
(c) Frontier will not, other than specifically set forth in this
Agreement, assume any liabilities of Aspect in connection with the
Exchange;
(d) other than as expressly set forth in this Agreement and the
Exhibits hereto, there is no indebtedness between Aspect and Frontier and
there will be no indebtedness created by Frontier in favor of Aspect or the
Aspect Members as a result of the Exchange;
(e) Aspect will receive Frontier Common Stock at the Closing
approximately equal to the fair market value of the Aspect Assets
transferred by Aspect to Frontier;
(f) other than as set forth in this Agreement, Aspect will pay
its own expenses, if any, incurred in connection with the Exchange;
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(g) Aspect is not under the jurisdiction of a court in a title
11 or similar case (within the meaning of Section 368(a)(3)(A) of the Code)
and the Frontier Common Stock to be received in the Exchange will not be
used to satisfy any indebtedness of such party;
(h) All of the Frontier Common Stock that Aspect will receive as
part of the Exchange will be received in exchange for the property
transferred by Aspect 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 Aspect or the Aspect Members (or any
other person) either in connection with the Exchange or otherwise;
(i) Except as set forth on Schedule 3.01, Aspect will not retain
any rights or interests in the property transferred to Frontier as part of
the Exchange; and
(j) Aspect has no plan or intention to sell, exchange, or
otherwise dispose of any of the Frontier Common Stock to be received by
Aspect pursuant hereto.
7.13 Disclosure. The representations, warranties and statements
made by Aspect in this Agreement, and in the certificates and other documents
delivered pursuant hereto, do not contain any untrue statement of a material
fact, and, when taken together, do no omit to state any material fact
necessary to make such representations, warranties and statements, in light
of the circumstances under which they are made, not misleading.
ARTICLE VIII
COVENANTS AND OTHER AGREEMENTS
8.01 Access to Records and Properties. Except to the extent
limited by agreement with third parties, between the date of this Agreement
and the Closing Date, Frontier, Esenjay and Aspect shall give each other full
access to all their respective premises, properties and books and records and
will cause their respective employees, agents and representatives to furnish
financial and operating data and other information with respect to each other
party as the other from time to time reasonably requests; provided, however,
that any such investigation shall be conducted in such a manner as not to
interfere unreasonably with the operation of the providing parties business.
Any such furnishing of such information to the parties or any investigation
by the parties, shall not affect each party's right to rely on any
representations and warranties made in this Agreement. Except as required by
law, all information furnished pursuant hereto shall not be disclosed and
shall be kept confidential from all third parties unless the party who
furnished such information consents in writing to the disclosure of all or
part of such information. In the event of any termination of this Agreement,
each party will return all documents, work papers and other materials
(including all copies thereof) obtained pursuant
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hereto and in connection with the Exchange, and for a period of one year after
such termination (i) will use all reasonable efforts to keep confidential any
information obtained pursuant to this Agreement, except to the extent required
by law or unless such information is readily ascertainable from public or
published information or trade sources, and (ii) will not use any of the
information obtained in connection with the Exchange, except in connection
therewith.
8.02 Operation of the Business.
(a) Frontier. From the date hereof to the Closing Date, except
to the extent that Esenjay and Aspect shall otherwise consent, Frontier
shall operate its respective businesses substantially as presently operated
and only in the ordinary course, and, consistent with such operation, shall
use its best efforts to preserve intact its respective present business
organizations and relationships with persons having dealings with them. In
addition, Frontier shall promptly notify Esenjay and Aspect of (i) the
receipt by Frontier of any notice or claim, written or oral, of default or
breach by Frontier, or of any modification, termination or cancellation, or
threat of termination or cancellation, of any Frontier Material Agreement;
(ii) any loss of, damage to, or disposition of any of Frontier's Oil and
Gas Interests that is reasonably likely to have a Material Adverse Effect
on Frontier; and (iii) after receipt of notice thereof by Frontier,
Frontier shall give notice to Esenjay and Aspect of any claim or
litigation, threatened or instituted, against Frontier, or of any other
event or circumstance that has or may have a Material Adverse Effect on
Frontier. Without the written consent of Esenjay and Aspect, Frontier
(individually or in the aggregate) shall be prohibited from (w) entering
into any single contract, commitment, indebtedness or liability in excess
of $50,000; (x) making any change in the outstanding equity interests of
Frontier Natural Gas Corporation or any of its Subsidiaries, granting any
options, rights, calls or any other similar commitment or agreement with
respect to the equity interest of such entities, from declaring any
dividend or other distribution in respect of the equity interest of such
entities or from repurchasing any outstanding equity interest;
(y) increasing the compensation payable or to become payable by any such
entities to any of its officers, directors, employees or other agents,
other than in the ordinary course of business; and (z) committing or
omitting any act which act or omission would cause a breach of any covenant
contained in this Agreement or would cause any representation or warranty
contained in this Agreement to become untrue, as if each such
representation and warranty were continuously made from and after the date
hereof.
(b) Esenjay. From the date hereof to the Closing Date, except
to the extent Frontier and Aspect shall otherwise consent, Esenjay shall
operate the business of Esenjay substantially as presently operated and
only in the ordinary course and, consistent with such operation, shall use
its best efforts to preserve intact its business organization and
relationships. In addition, Esenjay shall promptly notify Frontier and
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Aspect of (i) the receipt by Esenjay of any notice or claim, written or
oral, of default or breach by Esenjay, or of any modification, termination
or cancellation, or threat of termination or cancellation, of any material
agreement of Esenjay; (ii) any loss of, damage to, or disposition of any of
the Esenjay Assets; and (iii) after receipt of notice thereof by Esenjay,
give notice to Frontier and Aspect of any claim or litigation, threatened
or instituted, against Esenjay, or of any other event or circumstance that
has or may have a Material Adverse Effect on Esenjay. Without consent of
Frontier and Aspect, Esenjay shall be prohibited (individually or in the
aggregate) from (x) entering into any single contract, commitment,
indebtedness or liability in excess of $100,000 which contract commitment,
indebtedness or liability affects the ownership rights to the Esenjay
Assets; (y) increasing the compensation payable or to become payable by any
such entities to any of its officers, directors, employees or other agents,
other than in the ordinary course of business and other than increases in
compensation reflected on the employee list delivered to Frontier and
Aspect pursuant to Section 6.20 hereof; and (z) committing or omitting any
act which act or omission would cause a breach of any covenant contained in
this Agreement or would cause any representation or warranty contained in
this Agreement to become untrue, as if each such representation and
warranty were continuously made from and after the date hereof.
(c) Aspect. From the date hereof to the Closing Date, except to
the extent Frontier and Esenjay shall otherwise consent, Aspect shall
operate the business of Aspect as it relates to the Aspect Assets
substantially as presently operated and only in the ordinary course. In
addition, Aspect shall promptly notify Frontier and Esenjay of (i) the
receipt by Aspect of any notice or claim, written or oral, of default or
breach by Aspect, or of any modification, termination or cancellation, or
threat of termination or cancellation, of any material agreement relative
to the Aspect Assets; (ii) any loss of, damage to, or disposition of any of
the Aspect Assets; and (iii) after receipt of notice thereof by Aspect,
give notice to Frontier and Esenjay of any claim or litigation, threatened
or instituted, against Aspect and relating to the Aspect Assets.
(d) All Parties. Each of the parties shall obtain the consent
of the other parties prior to drilling any new wells on the Oil and Gas
Interests of Frontier or the Oil and Gas Interests included in the Esenjay
Assets and the Aspect Assets.
8.03 Consents. The parties shall each use their best efforts to
obtain the consent or approval of each person or Governmental Authority whose
consent or approval shall be required in order to permit consummation of the
Exchange.
8.04 Announcements. All pre-Closing and post-Closing press releases,
and other public announcements with respect to this Agreement and the Exchange
shall be approved by Frontier prior to the issuance thereof; provided, however,
any pre-Closing press release of Frontier with respect to
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this Agreement also shall be presented prior to the issuance thereof to
Aspect and Esenjay for their comments. Frontier shall, within the confines
of its fiduciary and regulatory obligations, use its reasonable best efforts
to incorporate the comments of Aspect and Esenjay but will not be required to
do so.
8.05 No Solicitations.
(a) Frontier shall not directly or indirectly, through any
officer, director, employee, representative or agent, solicit or encourage
the initiation or submission of any inquiries, proposals or offers
regarding any acquisition, merger, take-over bid, sale of all or
substantially all of the assets of, or sales of shares of capital stock of
Frontier, whether or not in writing and whether or not delivered to the
stockholders of Frontier generally (including by way of a tender offer), or
similar transactions involving Frontier (any of the foregoing inquiries or
proposals being referred to herein as an "Acquisition Proposal"). Nothing
contained in this Section 8.05 or any other provision of this Agreement
shall prevent the Board of Directors of Frontier from considering or
negotiating an unsolicited bona fide Acquisition Proposal. If the Board of
Directors of Frontier, after duly considering advice, written or otherwise,
of outside counsel and financial advisors to Frontier, determines in good
faith that it would be consistent with its fiduciary responsibilities to
approve or recommend (and in connection therewith withdraw or modify its
approval or recommendation of this Agreement, and the transactions
contemplated hereby or thereby) a Superior Proposal (as defined below),
then, notwithstanding any such approval or recommendation (x) Frontier
shall not enter into any agreement with respect to the Superior Proposal
and (y) any other obligation of Frontier under this Agreement shall not be
affected, unless this Agreement is terminated pursuant to Section 13.01(f)
hereof prior to or simultaneously with the grant of such approval or the
making of such recommendation. As used herein the term "Superior Proposal"
means a bona fide proposal made by a third party to acquire Frontier
pursuant to a tender or exchange offer, a merger, a sale of all or
substantially all of its assets or otherwise that the Board of Directors
determines in its good faith judgment to be more favorable to Frontier's
stockholders than the transactions contemplated by this Agreement (after
considering the advice, written or otherwise, of Frontier's professional
advisors).
(b) Frontier shall promptly notify Aspect and Esenjay after
receipt of any formal, informal, written or oral Acquisition Proposal or
any request for nonpublic information relating to Frontier in connection
with an Acquisition Proposal or for access to the properties, books or
records of Frontier that informs the Board of Directors of Frontier that
the proposer is considering making, or has made, an Acquisition Proposal.
Such notice to Aspect and Esenjay shall be made orally and in writing and
shall indicate in reasonable detail the identity of the offeror and the
terms and conditions of such proposal, inquiry or contact.
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(c) If the Board of Directors of Frontier receives a request for
material nonpublic information by a person who makes or who states in
writing that it intends, subject to satisfactory review of such nonpublic
information, to make, a bona fide Acquisition Proposal, Frontier may,
subject to the execution of a confidentiality agreement substantially
similar to that then in effect between Frontier, Aspect and Esenjay,
provide such person with access to information regarding Frontier.
(d) Nothing contained in this Section 8.05 shall prevent
Frontier from complying with Rule 14e-2(a) or Rule 14d-9 promulgated under
the Exchange Act, if applicable, with regard to an Acquisition Proposal
made in the form of a tender offer by a third party.
8.06 Notification of Certain Matters. Each of the parties hereto
shall give prompt notice to the others of (a) any representation or warranty
contained herein and made by such party or parties being untrue or inaccurate
when made, (b) the occurrence of any event or development that would cause (or
could reasonably be expected to cause) any representation or warranty of such
party or parties contained herein to be untrue or inaccurate on the Closing
Date, or (c) any failure of a party or of the parties to comply with or satisfy
any covenant, condition, or agreement to be complied with or satisfied by it or
them hereunder.
8.07 Financing Covenants.
(a) Bridge Financing Agreement. As a part of the prior
agreements between the parties, Aspect has committed to loan to Frontier
amounts of up to $1,800,000 which commitment shall survive the execution of
this Agreement and the Closing under this Agreement. The terms and
provisions of this commitment are included in the Bridge Financing
Agreement attached as Exhibit "A" hereto and which shall be referred to
herein as the "Initial Bridge Facility". Aspect shall not be committed or
obligated in any manner to advance more than $1,800,000 under the Initial
Bridge Facility or to otherwise amend or extend the Initial Bridge Facility
if Frontier fails to secure the New Debt (as hereinafter defined) or to
complete the Public Equity Transaction (as hereinafter defined) or for any
other reason whatsoever.
(b) New Debt Financing. In addition to the Initial Bridge
Facility, Aspect, Esenjay and Frontier are negotiating with commercial
banks and other independent third parties for a secured, revolving credit
facility in amounts projected to finance certain exploration and 3-D
seismic costs, leasehold acquisition and development of oil and gas
properties, and for general corporate purposes (the "New Debt"). It is
contemplated that such New Debt may be in addition to the Initial Bridge
Facility and will be used in part to provide working capital for Esenjay
prior to the Closing Date. Aspect, Esenjay and Frontier agree to work in
conjunction with one another in order
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to secure an appropriate commitment or commitments for such New Debt;
provided, however, that no party shall be required to advance any
amounts to any other party in connection with such efforts to secure an
appropriate commitment or commitments. No agreement with respect to the
New Debt shall be entered into without the mutual agreement of the parties
hereto. The New Debt may be structured to include the Initial Bridge
Facility, in which case any advances under the Bridge Financing Agreement
shall be repaid, and the commitments of Aspect under the Bridge Financing
Agreement terminated, if and only if the New Debt has terms at least as
favorable to Frontier as those under the Bridge Financing Agreement and is
sufficient in amount to cover the working capital expenses of Frontier and
Esenjay through the Closing Date. It is, however, agreed to by each party
hereto that a commitment for the New Debt is not a condition precedent to
funding of the Bridge Financing Agreement or to Closing.
8.08 Public Equity Transaction. The parties acknowledge that
Frontier, following the Closing, intends, to evaluate the public offer and sale
of equity securities of Frontier in a firm-commitment underwritten transaction
registered under the Securities Act and, subject to such evaluation, intends to
accomplish such transaction prior to June of 1998 ("Public Equity Transaction").
8.09 Reconstituted Frontier Board of Directors. The following slate
of individuals shall be nominated to the Board of Directors of Frontier and
shall be vote on pursuant to the Proxy Statement/Prospectus:
(a) For a term expiring at Frontier's annual shareholder meeting
in 2000, Alex M. Cranberg, Michael E. Johnson and an independent director.
(b) For a term expiring at Frontier's annual shareholder meeting
in 1999, Alex B. Campbell, Charles J. Smith and David W. Berry.
(c) For a term expiring at Frontier's annual shareholder meeting
in 1998, Esenjay designee and an independent director.
8.10 Management of Frontier. Immediately after the Closing, the
executive officers of Frontier will be as follows: David W. Berry shall be
Chairman of the Board of Directors, Michael E. Johnson shall be President,
Charles J. Smith shall be Chairman of the Executive Committee of the Board of
Directors, Alex M. Cranberg shall be Vice Chairman of the Board of Directors and
Chairman of the Audit Committee thereof (to be established), and David B.
Christofferson shall be General Counsel and an executive officer with a title to
be determined by Frontier's Board of Directors. Nothing in this Section 8.10 is
intended (a) to prevent the Board of Directors from changing the executive
officers of Frontier from time to time at its discretion or (b) to provide any
guarantees or assurances of continued employment of any of the foregoing
individuals by Frontier.
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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/Prospectus 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 in which the Proxy Statement/Prospectus will be
included as a prospectus. Frontier shall use all commercially reasonable
efforts to cause the Registration Statement to become effective as soon
after such filing as is practical. The Proxy Statement/Prospectus shall
include the recommendation of the Board of Directors of Frontier in favor
of this Agreement and the Exchange. Frontier 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/Prospectus 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/Prospectus. 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/Prospectus 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/Prospectus. Frontier shall give Aspect
and Esenjay and their counsel the opportunity to review the Registration
Statement and the Proxy Statement/Prospectus 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 Registration Statement to be declared effective by the SEC at
the earliest practicable time and to be kept effective for as long as is
necessary to consummate the Exchange, and (ii) the Proxy Statement/
Prospectus 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/Prospectus 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
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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 Registration 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) an amendment to Frontier's
Certificate of Incorporation authorizing the issuance of additional shares
of Frontier Common Stock sufficient in amount to provide Frontier with
authorized, but unissued and unreserved, shares of Frontier Common Stock,
adequate to satisfy its obligations under this Agreement and any
contemplated stock issuances under the Public Equity Transaction,
(iv) authorizing the change of Frontier's state of incorporation from
Oklahoma to 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 in the Registration Statement, in
light of the circumstances under which they were made, not misleading, and
(ii) the information included in the Proxy Statement/Prospectus shall not,
on the date the Proxy Statement/Prospectus 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/Prospectus 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/Prospectus does not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated in the Proxy
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Statement/Prospectus or necessary to make the statements in the Proxy
Statement/Prospectus, in light of the circumstances under which they
were made, not misleading.
8.12 Tax Cooperation. Subject to the terms and conditions of this
Agreement, the parties hereto shall cooperate in the preparation, execution and
filing of all returns, questionnaires, applications or other documents regarding
any gains, sales, use, transfer, value added, stock transfer and stamp taxes,
any transfer, recording, registration and other fees, and any similar taxes or
fees which become payable in connection with the Exchange. Each of the parties
shall not take or fail to take any action if such action or omission would cause
any of the parties or their shareholders or members to recognize gain or loss
for federal income tax purposes as a result of the exchange of Frontier Common
Stock for the Esenjay Assets or the Aspect Assets. Aspect and Esenjay shall,
and shall cause their members or shareholders to, 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 Exchange.
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 Resources Corporation" 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 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.
8.14 Frontier Ownership Dilution.
(a) Frontier Option Plan. At or prior to Closing, Frontier
shall adopt a long-term incentive plan for its officers, directors,
employees and consultants that is mutually acceptable to Esenjay, Aspect
and Frontier ("Frontier Option Plan"). The Frontier Option Plan shall
provide for grants of stock and stock-oriented awards, including stock
options and similar arrangements with respect to Frontier Common Stock. In
addition, the parties agree initially that an amount equal to approximately
fifteen percent (15%) of the shares of the outstanding Frontier Common
Stock after giving effect to Closing, and any existing Frontier option
plans, shall be authorized for awards under the Frontier Option Plan. The
parties agree to seek the approval of Frontier's shareholders for such
incentive plan at Frontier's next annual shareholders meeting following the
Closing.
(b) Public Equity Transaction. The Public Equity Transaction
may dilute the interests of all holders of Frontier Common Stock.
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8.15 Liabilities and Obligations of Esenjay and Aspect.
(a) Esenjay. With respect to the Esenjay Assets, Esenjay agrees
to retain and to release and hold the other parties harmless from all
claims, costs, expenses, liabilities and obligations attributable to the
period of time prior to the Effective Date.
(b) Aspect. With respect to the Aspect Assets, Aspect agrees to
retain and to release and hold the other parties harmless from all claims,
costs, expenses, liabilities and obligations attributable to the period of
time prior to the Effective Date or, in the case of Post Effective Date
Costs, from the period of time prior to January 1, 1998.
8.16 Esenjay Wind-down. Subsequent to the closing of the Exchange,
Esenjay shall continue to operate, but shall do so only in a wind-down mode.
Esenjay shall not compete with Frontier in connection with the business of
Frontier, provided, however, Esenjay shall be legally entitled to take all steps
reasonably necessary to maximize the value of the oil and gas properties
retained by Esenjay subsequent to the closing of the Exchange, including, but
not limited to, drilling wells, recompleting existing wells, farming out its
interest and selling oil and natural gas. After the Closing, Esenjay may
utilize the services of Frontier's employees to facilitate its winding down,
provided that such utilization does not interfere with the ability of such
employees to satisfy or complete their duties or responsibilities to Frontier
and provided further that Esenjay shall reimburse Frontier for such services to
the extent such services exceed $5,000 per month (based upon criteria determined
by Frontier's Board of Directors in its reasonable discretion).
ARTICLE IX
CONDITIONS
9.01 Conditions to Obligations of Esenjay and Aspect. All obligations
of Esenjay and Aspect at the Closing are subject to the fulfillment of each of
the following conditions precedent at or prior to the Closing, any of which may
be waived in whole or in part by mutual agreement:
(a) Representations and Warranties. All representations and
warranties of Esenjay and Frontier, in the case of Aspect, and Aspect and
Frontier, in the case of Esenjay, contained herein or in any document
delivered pursuant hereto which are qualified by materiality thresholds
shall be true and correct in all respects when made and as of the Closing,
and the representations and warranties which are not qualified by
materiality thresholds shall be true and correct in all material respects,
except for the representations and warranties set forth in Section 4.05
which shall be true and correct in all respects. For purposes of this
Section 9.01(a) only, a representation shall be false or inaccurate if the
factual matter that is the subject of the representation
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is false or inaccurate notwithstanding any lack of knowledge of or notice
to the warrantor.
(b) Covenants, Agreements and Obligations. All covenants,
agreements and obligations required by the terms of this Agreement to be
performed by Frontier, Esenjay or Aspect at or before the Closing shall
have been properly performed and complied with in all respects.
(c) No Material Adverse Effect. Since the date of this
Agreement, there shall not have occurred any Material Adverse Effect with
respect to (i) Frontier in the case of Aspect and Esenjay, (ii) the Esenjay
Assets in the case of Aspect only, or (iii) the Aspect Assets in the case
of Esenjay only.
(d) Delivery of Documents. All documents, certificates or other
instruments required to be delivered to Aspect, Esenjay and Frontier at or
prior to the Closing shall have been so delivered.
(e) Bank of America Consent. Bank of America Illinois shall
have consented to the Exchange and waived any existing defaults under
Frontier's credit agreement with Bank of America Illinois.
(f) Preferred Stock Redemption. All of the issued and
outstanding Frontier Preferred Stock as of the date hereof shall have been
called for redemption by Frontier and Frontier shall have deposited in an
escrow account funds sufficient to pay the holders of the Frontier
Preferred Stock all amounts such holders are entitled to receive in
connection with the redemption of the Frontier Preferred Stock.
(g) Esenjay Financial Statements. Esenjay shall deliver to
Frontier and Aspect (i) on or before January 31, 1998, financial statements
for its fiscal year ending March 31, 1997 and (ii) on or before
February 10, 1998, financial statements for the nine month period ending
December 31, 1997. The financial statements delivered hereunder shall be
unaudited and internally prepared, but shall be prepared in accordance with
GAAP (including any footnotes required thereby) and shall consist of a
balance sheet, a statement of income, a statement of cash flows and a
statement of shareholders' equity. This condition shall not be a condition
of Esenjay to Closing.
9.02 Conditions to Obligations of Frontier. All obligations of
Frontier hereunder are subject, at the option of Frontier, to the fulfillment of
each of the following conditions precedent at or prior to the Closing, any of
which may be waived in whole or in part by Frontier:
(a) Representations and Warranties. All representations and
warranties of Aspect and Esenjay contained herein or in any document
delivered pursuant hereto
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which are qualified by materiality thresholds shall be true and correct in
all respects when made and as of the Closing, and the representations and
warranties which are not qualified by materiality thresholds shall be true
and correct in all material respects. For purposes of this Section 9.02(a)
only, a representation shall be false or inaccurate if the factual matter
that is the subject of the representation is false or inaccurate
notwithstanding any lack of knowledge of or notice to the warrantor.
(b) Covenants, Agreements and Obligations. All covenants,
agreements and obligations required by the terms of this Agreement to be
performed by Aspect or Esenjay at or before the Closing shall have been
properly performed and complied with in all respects.
(c) No Material Adverse Effect. Since the date of this
Agreement, there shall not have occurred any Material Adverse Effect with
respect to the Aspect Assets or to Esenjay or to the Esenjay Assets.
(d) Delivery of Documents. All documents, certificates or other
instruments required to be delivered to Frontier at or prior to the Closing
shall have been so delivered.
(e) Compliance. Aspect shall be in full compliance with its
obligations pursuant to the Bridge Financing Agreement.
(f) Esenjay Financial Statements. Esenjay shall deliver to
Frontier (i) on or before January 31, 1998, financial statements for its
fiscal year ending March 31, 1997 and (ii) on or before February 10, 1998,
financial statements for the nine month period ending December 31, 1997.
The financial statements delivered hereunder shall be unaudited and
internally prepared, but shall be prepared in accordance with GAAP
(including any footnotes required thereby) and shall consist of a balance
sheet, a statement of income, a statement of cash flows and a statement of
shareholders' equity.
9.03 Conditions to Obligations of All Parties. The respective
obligations of each party are subject to the fulfillment of each of the
following conditions precedent at or prior to the Closing:
(a) Shareholder Approval. The shareholders of Frontier shall
have duly and validly approved Frontier's execution of this Agreement and
the consummation of the Exchange.
(b) Other Consents and Approvals. All consents, approvals,
permits and authorizations required to be obtained prior to the Closing
from any Governmental Authority or other person in connection with the
consummation of the Exchange, and
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any preferential right to purchase an interest in any Oil and Gas Interest
included in the Aspect Assets or Esenjay Assets as a result of the
Exchange, shall have been obtained, made or waived, except where such
failure to obtain such consents, approvals, permits, authorizations or
waiver would not be reasonably likely to result in a Material Adverse
Effect on Frontier (assuming the Exchange is consummated).
(c) Pending Actions. None of the parties shall be subject to
any writ, order, decree or injunction of a court of competent jurisdiction
which prohibits or restricts the consummation of the Exchange or any
pending or threatened action seeking such relief or seeking damages as a
result thereof.
(d) Officers of Frontier. Consistent with Section 8.10, the
principal officers of Frontier shall be designated in writing at the
Closing to take office effective immediately after the Closing.
(e) Fairness Opinion. The fairness opinion of GBI described in
Article V hereof, in form and substance satisfactory to counsel for
Frontier, shall have been delivered to Frontier and copies thereof shall be
delivered to Aspect and Esenjay.
(f) Operating Agreement. Frontier, Aspect and Esenjay shall
approve a form of operating agreement, mutually acceptable to each of them,
that addresses the operation of the Oil and Gas Interests jointly owned by
Frontier and Aspect and/or Esenjay. Following the Closing, the parties
agree to execute such form of operating agreement in the case of any
operations on such Oil and Gas Interests which are not already subject to
an operating agreement.
ARTICLE X
DELIVERIES
10.01 Deliveries by Frontier. Subject to the written waiver of Aspect
and Esenjay, Frontier shall execute, as appropriate, and deliver at the Closing
all of the following documents and instruments:
(a) stock certificates of Frontier Natural Gas Corporation, in
each case duly endorsed, properly authenticated and in proper form,
necessary to issue to Aspect and Esenjay the shares of Frontier Common
Stock issuable pursuant to this Agreement and the Related Documents;
(b) a certificate dated the Closing Date signed by an
appropriate executive officer of Frontier certifying that, as of the
Closing Date, the representations and
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warranties of Frontier are accurate, true and correct with the same force
and effect as though made on the Closing Date;
(c) certificates dated the Closing Date signed by an appropriate
executive officer of Frontier certifying, among other things, Frontier's
By-laws and the resolutions of Frontier's Board of Directors and
shareholders approving this Agreement and the Related Documents to which it
is a party and the transactions contemplated hereby and thereby (together
with an incumbency and signature certificate regarding the officer(s)
signing on its behalf);
(d) a copy of Frontier's articles of incorporation which have
been filed with the Secretary of State of its State of incorporation,
certified as of a recent date by the Secretary of State of its State of
incorporation;
(e) the Registration Rights Agreement substantially in the form
of Exhibit "B";
(f) a certificate of good standing with respect to Frontier,
issued not earlier than 10 days prior to the Closing Date by the Secretary
of State of its State of incorporation;
(g) an Assignment, Bill of Sale and Conveyance Agreement with
respect to the Aspect Assets substantially in the form of Exhibit "C";
(h) an Assignment, Bill of Sale and Conveyance Agreement with
respect to the Esenjay Assets substantially in the form of Exhibit "D";
(i) the Technical Services Agreements with Esenjay and Aspect,
in form mutually acceptable to the parties thereto;
(j) the Land Consulting Services Agreements with Esenjay and
Aspect, in form mutually acceptable to the parties thereto;
(k) a Section 351 Plan of Exchange, in form and substance
mutually acceptable to the parties hereto;
(l) the written opinion of Porter & Hedges, L.L.P., counsel to
Frontier, substantially in the form of Exhibit "F";
(m) an opinion of Chamberlain, Hrdlicka, White, Williams &
Martin, tax counsel to Frontier (or other counsel to Frontier which is
reasonably acceptable to Aspect and Esenjay), acceptable in form and
substance to counsel for Aspect and
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Esenjay stating that the Exchange satisfies the requirements of Section
351 of the Code and will be tax-free to Aspect and Esenjay;
(n) the written resignation of each member of the Board of
Directors of Frontier, other than David W. Berry;
(o) the fairness opinion of GBI described in Article V hereof;
(p) evidence satisfactory to Aspect and Esenjay that Frontier's
state of incorporation has been changed from Oklahoma to Delaware;
(q) such verified tax lien, Uniform Commercial Code and judgment
searches relating to Frontier as may be reasonably required by Aspect or
Esenjay; and
(r) without limitation by specific enumeration of the foregoing,
all other documents and instruments reasonably required or requested by
Aspect or Esenjay to consummate the Exchange.
10.02 Deliveries by Esenjay. Subject to the written waiver by Frontier
and Aspect, Esenjay shall execute, as appropriate, and deliver at the Closing
all of the following documents and instruments:
(a) a certificate dated the Closing Date signed by an
appropriate executive officer of Esenjay certifying that, as of the Closing
Date, the representations and warranties of Esenjay are accurate, true and
correct with the same force and effect as though made on the Closing Date;
(b) certificates dated the Closing Date signed by an appropriate
executive officer of Esenjay certifying, among other things, Esenjay's
By-laws and the resolutions of Esenjay's Board of Directors and
shareholders approving this Agreement and the Related Documents to which it
is a party and the transactions contemplated hereby and thereby (together
with an incumbency and signature certificate regarding the officer(s)
signing on its behalf);
(c) a copy of Esenjay's articles of incorporation which have
been filed with the Secretary of State of its State of incorporation,
certified as of a recent date by the Secretary of State of its State of
incorporation;
(d) the Registration Rights Agreement substantially in the form
of Exhibit "B";
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(e) a certificate of good standing with respect to Esenjay,
issued not earlier than 10 days prior to the Closing Date by the Secretary
of State of its State of incorporation;
(f) an Assignment, Bill of Sale and Conveyance Agreement with
respect to the Esenjay Assets substantially in the form of Exhibit "D";
(g) [Intentionally omitted];
(h) the Technical Services Agreement between Esenjay and
Frontier, in form mutually acceptable to the parties thereto;
(i) the Land Consulting Services Agreement between Esenjay and
Frontier, in form mutually acceptable to the parties thereto;
(j) a Section 351 Plan of Exchange, in form and substance
mutually acceptable to the parties hereto;
(k) a letter regarding the limited guaranty of the Esenjay
Shareholders substantially in the form of Exhibit "H";
(l) the written opinion of Pollicoff, Smith, Myres & Remels,
L.L.P., counsel to Esenjay, substantially in the form of Exhibit "I";
(m) such verified tax lien, Uniform Commercial Code and judgment
searches relating to Esenjay as may be reasonably required by Aspect or
Frontier; and
(n) without limitation by specific enumeration of the foregoing,
all other documents and instruments reasonably required or requested by
Aspect or Frontier to consummate the Exchange.
10.03 Deliveries by Aspect. Subject to the written waiver by Frontier
and Esenjay, Aspect shall execute, as appropriate, and deliver at the Closing
all of the following documents and instruments:
(a) a certificate dated the Closing Date signed by a manager of
Aspect certifying that, as of the Closing Date, the representations and
warranties of Aspect are accurate, true and correct with the same force and
effect as though made on the Closing Date;
(b) certificates dated the Closing Date signed by a manager of
Aspect certifying, among other things, Aspect's Operating Agreement and the
resolutions of
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Aspect's managers and members approving this Agreement and the Related
Documents to which it is a party and the transactions contemplated hereby
and thereby (together with an incumbency and signature certificate
regarding the officer(s) signing on its behalf);
(c) a copy of Aspect's articles of organization which have been
filed with the Secretary of State of its State of organization, certified
as of a recent date by the Secretary of State of its State of organization;
(d) the Registration Rights Agreement substantially in the form
of Exhibit "B";
(e) a certificate of good standing with respect to Aspect,
issued not earlier than 10 days prior to the Closing Date by the Secretary
of State of its State of organization;
(f) an Assignment, Bill of Sale and Conveyance Agreement with
respect to the Aspect Assets substantially in the form of Exhibit "C";
(g) [Intentionally omitted];
(h) the Technical Services Agreement between Aspect and
Frontier, in form mutually acceptable to the parties thereto;
(i) the Land Consulting Services Agreement between Aspect and
Frontier, in form mutually acceptable to the parties thereto;
(j) a Section 351 Plan of Exchange, in form and substance
mutually acceptable to the parties hereto;
(k) a letter regarding the limited guaranty of the Aspect
Members substantially in the form of Exhibit "J";
(l) the written opinion of Davis, Graham & Stubbs LLP, counsel
to Aspect, substantially in the form of Exhibit "K";
(m) such verified tax lien, Uniform Commercial Code and judgment
searches relating to Aspect as may be reasonably required by Frontier or
Esenjay; and
(n) without limitation by specific enumeration of the foregoing,
all other documents and instruments reasonably required or requested by
Frontier or Esenjay to consummate the Exchange.
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ARTICLE XI
VALUATION ADJUSTMENTS FOR TITLE DEFECTS
11.01 Buyer and Seller. For purposes of this Article XI and
Article XII, the terms "Buyer" and "Seller" shall have the following meanings:
(a) with respect to the Oil and Gas Interest owned by Frontier, Frontier shall
be the Seller and Esenjay and/or Aspect shall be the Buyer; (b) with respect to
the Esenjay Assets, Esenjay shall be the Seller and Aspect and/or Frontier shall
be the Buyer; and (c) with respect to the Aspect Assets, Aspect shall be the
Seller and Frontier and/or Esenjay shall be the Buyer. Any references in this
Article XI or in Article XII to Oil and Gas Interests of a party shall mean
(i) in the case of Frontier, the Oil and Gas Interests set forth on
Schedule 4.17, (ii) in the case of Esenjay, the Oil and Gas Interests set forth
on Schedule 2.01, and (iii) in the case of Aspect, the Oil and Gas Interests set
forth on Schedule 3.01.
11.02 Allocated Value of Oil and Gas Interests. For the purposes of
any adjustment to the valuation of a particular party's Oil and Gas Interest,
the value of each party's Oil and Gas Interests shall be mutually agreed by the
parties.
11.03 Notice of Title Defects. Buyer shall deliver to Seller a written
notice of Title Defects ("Notice of Title Defects") as soon as possible but no
later than January 19, 1998 at 5:00 p.m. Central Time. As a condition precedent
to the effectiveness of such notice, the Notice of Title Defects shall describe
with reasonable particularity the Title Defect, the basis for the Title Defect,
and Buyer's good faith estimate of the reduction in the particular Oil and Gas
Interest's Allocated Value caused by the Title Defect ("Title Defect Value") and
associated calculations.
11.04 Adjustments. If the Title Defect Value of a particular party's
aggregate Title Defects does not exceed $125,000 in the case of Frontier and
$250,000 in the case of Aspect or Esenjay (the "Defect Limit"), there shall be
no adjustment to the aggregate Allocated Value for such party's Oil and Gas
Interests. If the sum of all Title Defect Values attributable to a particular
party's Oil and Gas Interests equals or exceeds the Defect Limit, then (a) if
the Seller is Esenjay or Aspect either (i) the basis for the Title Defect shall
be removed by Seller, at its sole cost and expense prior to Closing, or Seller
may agree (by a written instrument delivered to Frontier and in form
satisfactory to Frontier) to cure such Title Defect no later than ninety
(90) days after Closing, or (ii) Seller shall replace the Oil and Gas Interest
subject to the Title Defect with other Oil and Gas Interests (in an amount equal
to the full amount of the Title Defect Value), acceptable to Buyer; or (b) if
the Seller is Frontier, the parties shall adjust the Esenjay Assets and the
Aspect Assets, in a manner satisfactory to Esenjay and Aspect, to decrease the
assets being conveyed by Esenjay and Aspect to Frontier by the aggregate Title
Defect Value.
11.05 Casualty Loss. Prior to Closing, if a portion of the Oil and Gas
Interests is destroyed by fire or other casualty, is taken or threatened to be
taken in condemnation or under the right of
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eminent domain ("Casualty Loss"), Buyer shall purchase the Oil and Gas
Interests at Closing for the Allocated Value of the Oil and Gas Interests
reduced by the estimated cost to repair such Oil and Gas Interests (with
equipment of similar utility) up to the Allocated Value thereof (the
reduction being the "Net Casualty Loss").
11.06 Dispute Resolution. The parties agree to resolve disputes
concerning the following matters pursuant to this Section 11.06: (a) the Title
Defect Value, (b) the existence of a Title Defect, (c) the amount of Net
Casualty Loss, (d) the adequacy of Title Defect curative materials submitted
pursuant to Section 11.04, (e) the existence of an Environmental Defect or
(f) the Environmental Defect Value (collectively, the "Disputed Matters"). The
parties agree to attempt to initially resolve all disputes through good-faith
negotiations. If the parties cannot resolve such disputes on or before one day
prior to Closing, the Disputed Matters shall be finally determined by the
Houston office of the accounting firm of Coopers & Lybrand (the "Accounting
Firm"), taking into account the factors set forth in this Article XI and
employing such independent attorneys, petroleum engineers and environmental
consultants as such firm deems necessary or as reasonably requested by the
parties. Buyer and Seller shall present their respective positions in writing
to the Accounting Firm, together with such evidence as each party deems
appropriate. If any party fails to provide the Accounting Firm with its written
position within ten (10) business days of the Accounting Firm's written request
for such position, the party failing to timely provide such written position
shall be treated as acquiescing in the other party's proposed resolution of the
dispute. The Accounting Firm shall be instructed to resolve the dispute through
a final decision within thirty (30) days after submission of the parties'
respective positions to the Accounting Firm. The costs incurred in employing
the Accounting Firm shall be borne equally by Buyer and Seller, unless either
Buyer or Seller fails to timely provide the Accounting Firm with its written
position regarding the dispute (to the extent requested by the Accounting Firm
in accordance with the provisions hereof), in which case the party failing to
provide a written position shall pay all of the costs incurred in employing the
Accounting Firm. After the Accounting Firm makes a determination as to all
disputes, the Accounting Firm shall instruct Seller to (i) if the Seller is
Esenjay or Aspect, transfer, assign, convey and deliver replacement or
additional Oil and Gas Interests to Frontier, which replacement or additional
Oil and Gas Interests shall have a value equal to the Title Defect Value or the
Environmental Defect Value, the case may be and as determined by the Accounting
Firm, and must be satisfactory to Frontier, or (ii) if the Seller is Frontier,
adjust the Esenjay Assets and the Aspect Assets, in a manner satisfactory to
Esenjay and Aspect, to decrease the assets being conveyed by Esenjay and Aspect
to Frontier by the aggregate Title Defect Value or the Environmental Defect
Value, as the case may be and as determined by the Accounting Firm.
11.07 Preferential Rights and Consents. For the purposes of this
Section, Seller shall mean Esenjay or Aspect and Buyer shall mean Frontier.
(a) Pre-Closing. Seller shall use its reasonable best efforts
to obtain all required consents and to give notices required in connection
with preferential purchase rights prior to Closing. If a party discovers
other affected properties during
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the course of its due diligence activities, that party shall notify
Seller immediately and Seller shall use its reasonable best efforts to
obtain such consents and to give the notices required in connection with
the preferential rights prior to Closing.
(b) Consents. Except for consents and approvals which are
customarily obtained post-Closing and those consents which would not
invalidate the conveyance of the Oil and Gas Interests included in the
Esenjay Assets or the Aspect Assets, if a necessary consent to assign any
lease has not been obtained as of the Closing, then (i) the portion of the
Oil and Gas Interests for which such consent has not been obtained shall
not be excluded from the Oil and Gas Interests at the Closing, (ii) Seller
shall use its reasonable best efforts to obtain such consent as promptly as
possible following Closing, and (iii) if such consent has not been obtained
within six months of the Closing Date (A) the portion of the Oil and Gas
Interests for which the necessary consent has not been obtained shall be
reconveyed by Frontier to Seller effective as of the Effective Date and
shall be excluded from the Oil and Gas Interests conveyed by Seller to
Frontier and (B) Seller shall transfer, assign and convey to Frontier other
Oil and Gas Interests equivalent in value to the Allocated Value for such
reconveyed portion less the net proceeds of production that have been
received by Frontier as of the time of the reconveyance. The parties shall
reasonably cooperate with each other in obtaining any required consent
including providing assurances of reasonable financial conditions, but a
party shall not be required to expend funds or make any other type of
financial commitments a condition of obtaining such consent.
(c) Preferential Rights.
(i) Pre-Closing. If any preferential right to purchase
any portion of the Oil and Gas Interests included in the Esenjay Assets
and/or the Aspect Assets is exercised prior to the Closing Date, the Oil
and Gas Interest for which such preferential right is exercised shall be
excluded from the Oil and Gas Interest of the affected Seller and the
affected Seller shall assign and convey to Frontier other Oil and Gas
Interests, acceptable to Frontier, equivalent in value to the Allocated
Value of such affected Oil and Gas Interests. All Oil and Gas Interests
that are subject to preferential rights to purchase that have not been
exercised as of the Closing shall be conveyed to Frontier at the Closing.
(ii) Post-Closing. If any such preferential right is
exercised after Closing, Frontier agrees to convey such affected Oil and
Gas Interests to the party exercising such right on the same terms and
conditions under which Seller conveyed such Oil and Gas Interests to
Frontier and retain all amounts paid by the party exercising such
preferential right to purchase. In the event of such exercise, Frontier
shall prepare, execute and deliver a form of conveyance of such interests
to such
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such exercising party, such conveyance to be in form and substance as
provided in this Agreement.
(d) Exclusive Remedy. The remedies set forth in this
Section 11.07 are the exclusive remedies for exercised preferential
purchase rights and required consents to assign the Oil and Gas Interests
that are not obtained.
ARTICLE XII
VALUATION ADJUSTMENT FOR ENVIRONMENTAL DEFECTS
12.01 Environmental Liabilities and Obligations.
(a) Esenjay Assets. As of the Effective Date and with respect
to the Esenjay Assets, Esenjay agrees to retain and release the other
parties from all claims, costs, expenses, liabilities and obligations
attributable to the period of time prior to the Effective Date.
(b) Aspect Assets. As of the Effective Date and with respect to
the Aspect Assets, Aspect agrees to retain and release the other parties
from all claims, costs, expenses, liabilities and obligations attributable
to the period of time prior to the Effective Date.
12.02 Environmental Defect Notice. Buyer may conduct an environmental
review of Seller's Oil and Gas Interests and give Seller a written notice of
Environmental Defects ("Environmental Defect Notice"). As a condition precedent
to the effectiveness of such notice, an Environmental Defect Notice must be
received on or before January 19, 1998 at 5:00 p.m. Central Time and shall state
with reasonable particularity the name of the affected Oil and Gas Interest, the
condition in, on or under the Oil and Gas Interest that causes the Environmental
Defect, substantiation for the Environmental Defect, and the estimated cost to
remediate the Oil and Gas Interest. If Buyer fails to timely deliver a valid
Environmental Defect Notice with respect to an Oil and Gas Interest, Buyer shall
be deemed to have accepted the environmental condition in, on and under that Oil
and Gas Interest and shall be deemed to have waived its right to claim an
Environmental Defect with respect to that Oil and Gas Interest, except in the
event of the breach of a representation or warranty of Seller hereunder.
12.03 Remedies. Each particular party's Oil and Gas Interests shall be
treated independently for the purposes of this Section. If Buyer delivers a
valid Environmental Defect Notice to Seller and if the aggregate Environmental
Defects claimed exceeds the Defect Limit, Seller shall have the following
options: (a) remediate the Environmental Defect; or (b) contest the existence
of an Environmental Defect or Buyer's good-faith estimate of the costs
associated with remediation of the Environmental Defect; or (c) replace the Oil
and Gas Interest subject to the Environmental Defect
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with other equivalent property that would qualify as an Oil and Gas Interest
with a similar Allocated Value. If the estimated cost of Remediation of an
Oil and Gas Interest exceeds twenty-five percent (25%) of the Allocated Value
of such Oil and Gas Interest, Buyer or Seller may elect to remove the
affected Oil and Gas Interest from its Oil and Gas Interests hereunder by
notifying Seller or Buyer in writing on or prior to Closing, in which case
(i) if the Seller is Esenjay or Aspect, the Seller shall replace the Oil and
Gas Interest subject to the Environmental Defect with other Oil and Gas
Interests (in an amount equal to the full amount of the affected Oil and Gas
Interest), acceptable to Buyer; or (ii) if the Seller is Frontier, the
parties shall adjust the Esenjay Assets and the Aspect Assets, in a manner
satisfactory to Esenjay and Aspect, to decrease the assets being conveyed by
Esenjay and Aspect to Frontier by the Allocated Value of the affected Oil and
Gas Interest.
12.04 Contested Environmental Defects. If Seller contests the
existence of an Environmental Defect or Buyer's good-faith estimate of costs
of remediation of an Environmental Defect ("Environmental Defect Value"), the
contesting party shall notify the other party in writing on or before two
business days prior to Closing ("Rejection Notice"). The Rejection Notice
shall state with reasonable specificity the basis of the rejection of the
Environmental Defect or the good-faith estimate of the Environmental Defect
Value. Within five business days of receipt of the Rejection Notice,
representatives of the parties, knowledgeable in environmental matters, shall
meet and, within ten business days after receipt of such Rejection Notice,
either (i) mutually agree to reject the particular Environmental Defect or
(ii) agree on the validity of such Environmental Defect and the Environmental
Defect Value, in which case the party receiving the notice shall proceed to
remediate the Environmental Defect as provided herein, or reduce the value of
the particular Oil and Gas Interest, as the case may be. If the parties
cannot agree on either options (i) or (ii) in the preceding sentence, the
Environmental Defect or the Environmental Defect Value subject to the
Rejection Notice shall be resolved in accordance with the arbitration
procedures set forth in Section 11.06. If a party fails to timely deliver a
Rejection Notice, that party shall be deemed to have accepted the validity of
the Environmental Defect and the other party's good-faith estimate of the
Environmental Defect Value, and shall be deemed to have waived its own option
to contest the Environmental Defect pursuant to this section.
12.05 Exclusive Remedies. The rights and remedies granted each
party in this Article are the exclusive rights and remedies against the other
party related to any Environmental Defect for which a party has received a
valid Environmental Defect Notice.
ARTICLE XIII
TERMINATION
13.01 Termination of Agreement. Notwithstanding anything herein to
the contrary, this Agreement and the Exchange may be terminated and abandoned
at any time prior to the Closing in the following manner:
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(a) By the mutual written consent of each of Frontier, Esenjay,
and Aspect;
(b) By either Esenjay or Aspect, through written notice to
Frontier, if there has been a material breach by Frontier of any
representation or warranty of Frontier set forth in this Agreement, or if,
on the Closing Date, any condition in favor of Esenjay and/or Aspect set
forth in Sections 9.01 or 9.03 has not been satisfied by Frontier or waived
by Esenjay and Aspect;
(c) By either Frontier or Aspect, through written notice to the
other parties if there has been a material breach by Esenjay of any
representation or warranty of Esenjay set forth in this Agreement, or if,
on the Closing Date, any condition in favor of Frontier and/or Aspect set
forth in Sections 9.02 or 9.03 has not been satisfied by Esenjay or waived
by Frontier and Aspect; or
(d) By either Frontier or Esenjay, through written notice to the
other parties, if there has been a material breach by Aspect of any
representation or warranty of Aspect set forth in this Agreement or if, on
the Closing Date, any condition in favor of Frontier and/or Esenjay set
forth in Sections 9.02 or 9.03 has not been satisfied by Aspect or waived
by Frontier and Esenjay; or
(e) In the event that Closing has not occurred by June 30, 1998,
any party hereto may, by written notice, terminate the Agreement.
(f) By Frontier in the event it receives a Superior Proposal.
Upon receipt of written notice of termination, pursuant to
paragraphs (b), (c) or (d) above, the breaching or nonperforming party
shall have a period of five (5) business days to cure the breach or remedy,
cure, perform or fulfill the condition which has not been satisfied or
waived. In the event that any such breach or non-performance is not cured
within said five day period, termination shall be effective as of the
expiration of such five day period.
13.02 Obligations Upon Termination. In the event of termination of
this Agreement pursuant to the terms and provisions hereof, each party shall
return all books, records, maps, files, papers and other property in such
party's possession to the party entitled thereto, whereupon this Agreement
shall become void, except as provided herein and no party shall have any
character of liability to the other parties hereunder, including any
liability for damages; provided that in the event of termination because of
breach of or default under a representation, warranty, covenant or agreement
contained herein, the party not in breach or default shall have and retain
all rights afforded to it under this Agreement and in law or at equity by
reason of such breach or default, including actions for actual or
consequential damages.
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13.03 Breakup Fee. If this Agreement is terminated (a) by any party
hereto due to the failure of Frontier's shareholders to approve this
Agreement and the consummation of the Exchange (regardless of the reason for
such failure to approve) or (b) by Frontier pursuant to Section 13.01(f),
then Aspect and Esenjay shall be entitled to receive from Frontier, and
Frontier shall be obligated to pay to each of Aspect and Esenjay, within one
business day following receipt of an invoice therefor, a fee equal to the sum
of all out-of-pocket expenses and fees (including fees and expenses of
counsel, accountants, experts, and consultants) actually incurred or accrued
by Aspect or Esenjay in connection with this Agreement and the Exchange. In
addition, Aspect and Esenjay shall each be entitled to an assignment of 10%
of Frontier's interest in the Lapeyrouse Prospect, Terrebonne Parish,
Louisiana as described on Schedule 4.17, which assignment Frontier shall
promptly deliver.
ARTICLE XIV
CLOSING
14.01 Time and Place. Subject to the provisions of this Agreement,
the Closing of the Exchange shall take place at the offices of Frontier in
Houston, Texas, within three days of the date of approval by Frontier
shareholders of this Agreement, at 10:00 a.m. local time, or as soon as
practicable thereafter, provided each of the conditions set forth in Article
IX has been satisfied or waived by the party or parties entitled to the
benefit of such conditions on or before Closing.
14.02 Further Assurances. At any time and from time to time after
the Closing, at Frontier's request and without additional consideration, any
party hereto will execute and deliver such other instruments of sale,
transfer, conveyance, assignment and confirmation and take such action as
Frontier may deem reasonably necessary or desirable in order to more
effectively transfer, convey and assign to Frontier, and to confirm
Frontier's title to, all of the Aspect Assets and Esenjay Assets and to
assist Frontier in exercising all rights with respect thereto. Frontier
shall take any action reasonably requested by Aspect or Esenjay to confirm
the transfer and issuance of either such party of the shares of Frontier
Common Stock required to be issued to Aspect or Esenjay pursuant to the terms
of this Agreement.
14.03 Concurrent Conditions. The performance or tender of
performance of all matters applicable to a party at the Closing under this
Agreement shall be deemed concurrent conditions and no party shall be
required to perform, or tender performance of, the obligations of such party
hereunder unless, coincident therewith, each other party for whom performance
is required under this Agreement performs or tenders performance of its
obligations hereunder.
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ARTICLE XV
INDEMNIFICATION
15.01 Indemnification by Frontier. Frontier shall indemnify, defend
and hold Aspect and Esenjay harmless from and against any and all losses,
liabilities, damages, obligations, costs and expenses (including legal and
other similar expenses) (collectively, "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 breach of or inaccuracy in any representation or
warranty made by Frontier in this Agreement or any Related Document or any
document delivered at Closing; or
(b) any breach of or failure by Frontier to perform any covenant
or obligation of Frontier in this Agreement or any Related Document or any
document delivered at Closing.
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 breach 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; or
(c) 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.
15.03 Indemnification by Aspect. Aspect shall indemnify, defend and
hold Esenjay 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 breach of or inaccuracy in any representation or
warranty made by Aspect in this Agreement or any Related Document or any
document delivered at Closing;
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(b) any breach of or failure by Aspect to perform any covenant
or obligation of Aspect in this Agreement or any Related Document or any
document delivered at Closing; or
(c) any liability, loss, damage, obligation, cost or expense of
Aspect, other than liabilities attributable to Post Effective Date Costs
incurred after December 31, 1997 and assumed by Frontier pursuant to
Section 3.02 hereof.
15.04 Indemnification Limitations. The indemnification provided
under this Article XV shall survive the consummation of the transactions
contemplated by this Agreement, but shall be limited to liabilities of which
the party seeking indemnification shall have notified in writing the
indemnifying party within twenty-four (24) months of the Closing Date;
provided, however that with respect to any claim for Damages sustained by
reason of (a) a breach of any representation or warranty relating to those
matters governed by Section 6.08 or (b) any liability for the Taxes of
Esenjay, Esenjay's idemnification obligations hereunder shall not be limited
to 24 months, but instead shall be limited to claims for which written notice
is given to Esenjay by the appropriate taxing authority within the period of
the applicable federal or state statutes of limitations related to such
matters.
15.05 Notice and Resolution of Claim. An indemnified party
hereunder shall promptly give notice to the indemnifying party after
obtaining knowledge of any claim against the indemnified party as to which
recovery may be sought against the indemnifying party because of the
indemnity set forth above, and, if such indemnity shall arise from the claim
of a third party, shall permit the indemnifying party to assume the defense
of any such claim or any litigation resulting from such claim. The failure
of the indemnified party to give notice shall not relieve the indemnifying
party of its obligations hereunder except to the extent (if any) that the
indemnifying party shall have been prejudiced thereby. If the indemnifying
party assumes the defense of such claim or litigation resulting therefrom,
the obligations of the indemnify ing party hereunder as to such claim shall
include taking all reasonable steps necessary in the defense or settlement of
such claim or litigation resulting therefrom and defending and holding the
indemnified party harmless from and against any and all losses, damages and
liabilities caused by or arising out of any settlement approved by the
indemnifying party or any judgment in connection with such claim or
litigation resulting therefrom. The indemnifying party shall not, in the
defense of such claim or any litigation resulting therefrom, consent to the
entry of any judgment (except with the written consent of the indemnified
party), or enter into any settlement (except with the written consent of the
indemnified party), which does not include, as to the indemnified party and
as an unconditional term thereof, a release by the third party from any and
all liability in respect of such claim or litigation. The indemnified party
will cooperate reasonably in the defense of the action or claim.
15.06 Defense of Third Party Claim. If the indemnifying party does
not assume the defense of any claim by a third party or litigation resulting
therefrom, the indemnified party may, but shall have no obligation to, defend
against such claim or litigation in any matter that it may deem
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appropriate and, unless the indemnifying party shall deposit with the
indemnified party a sum equivalent to the total amount demanded in such claim
or litigation plus the indemnified party's estimate of the cost of defending
the same, the indemnified party may settle such claim or litigation on such
terms as it may deem appropriate and the indemnifying party shall promptly
reimburse the indemnified party for the amount of such settlement and for all
losses or expenses, legal or otherwise, incurred by the indemnified party in
connection with the defense against or settlement of such claim or
litigation.
15.07 Payment. The indemnifying party shall promptly reimburse the
indemnified party for the amount of any judgment rendered with respect to any
claim by a third party in such litigation and for all reasonable expenses
incurred directly by the indemnified party in connection with the defense
against such claim or litigation, and for any other loss suffered or incurred
with respect to the falsity or the breach of any representation, warranty,
covenant or agreement (whether or not arising out of the claim of a third
party).
ARTICLE XVI
GENERAL PROVISIONS
16.01 Effect of Due Diligence. No investigation by any of the
parties hereto into the business, operations and conditions of the other
parties shall diminish in any way the effect of any representation or
warranty made by either party in this Agreement or shall relieve such party
of any of its obligations under this Agreement.
16.02 Further Assurances. Each party agrees to cooperate fully and
to obtain the written agreement of each officer, director or employee
designated by the other parties to so cooperate with the other parties and to
execute such further instruments, documents and agreements and to give such
further written assurances as may be reasonably requested by any other party
to better evidence and reflect the Exchange and to carry into effect the
intention and purposes of this Agreement.
16.03 Survival of Representations, Warranties and Covenants. The
representations, warranties, covenants and agreements made by each of the
parties hereto shall survive the Closing of the transactions contemplated
hereby.
16.04 Entire Agreement; Amendment and Waiver. This Agreement,
together with all Exhibits and Schedules attached hereto and all agreements
and instruments to be executed and delivered by the parties pursuant hereto,
contains the entire agreement between the parties relating to the subject
matter hereof and supersedes any other prior agreement or arrangement and
understanding between the parties regarding the subject matter hereof. No
representation, warranty, covenant, obligation, promise, inducement or
statement of intention has been made by any of the parties which is not
expressed in this Agreement. This Agreement may be amended or changed only by
written instrument duly executed by all the parties hereto, and any amendment
or change which
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is not so documented shall not be effective as to the parties. Except as
expressly provided herein to the contrary, provisions of this Agreement may
be waived only by the party(ies) hereto entitled to the benefit thereof by
evidencing such waiver in writing, executed by such party(ies). Except to
the extent waiver or satisfaction is deemed to exist by the express terms of
this Agreement, the failure of any party hereto to enforce at any time any of
the provisions of this Agreement shall in no way be construed to be a waiver
of any such provision, nor in any to affect the validity of this Agreement or
any party thereof or the right of any party thereafter to enforce each and
every provision. No waiver of any breach of this Agreement shall be held to
be a waiver of any other or subsequent breach.
16.05 Severability. This Agreement is intended to be performed in
accordance with and only to the extent permitted by all applicable legal
requirements. If any provision of this Agreement or the application thereof
to any person or circumstance shall for any reason and to any extent, be
invalid or unenforceable, then the performance of such offending provision
shall be excused by the parties hereto, but the remainder of this Agreement
and the application of such provision to other persons or circumstances shall
not be affected thereby, but rather shall be enforced to the greatest extent
permitted by law.
16.06 Applicable Law. This Agreement 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 OGCA so requires, the
laws of the State of Oklahoma.
16.07 Assignment. This Agreement may not be assigned by any party
without the prior written consent of each other party hereto. No such
permitted assignment shall alter any of the obligations of an assigning party
under this Agreement or release an assigning party from obligations of such
party under this Agreement. Upon any such assignment, the assignee shall
succeed to all rights assigned to it by, and shall become bound by all of the
obligations of, the assigning party. Nothing in this Agreement is intended
to confer upon any person not a party hereto any rights, benefits or remedies
under or by reason of this Agreement.
16.08 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:
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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: Porter & Hedges, L.L.P.
700 Louisiana, Suite 3500
Houston, Texas 77002-2730
Attention: Samuel N. Allen
Telephone Number: (713) 226-0600
Fax Number: (713) 226-0296
With respect to Esenjay: ESENJAY PETROLEUM CORPORATION
500 N. Water St., Suite 1100 South
Corpus Christi, Texas 78471
Attention: Michael E. Johnson
Telephone Number: (512) 883-7464
Fax Number: (512) 883-3244
With a copy to: Pollicoff, Smith, Myres & Remels, L.L.P.
One Greenway Plaza, Suite 300
Houston, Texas 77046-0102
Attention: Jeffrey B. Pollicoff
Telephone Number: (713) 622-6866
Fax Number: (713) 622-5905
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
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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.
16.09 Incorporation of Exhibits and Schedules by Reference. All
Exhibits and Schedules expressly referenced herein are hereby incorporated
herein for any and all purposes as a part of this Agreement, to the same
extent as if stated herein.
16.10 Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
16.11 Headings. The headings in this Agreement are inserted for
convenience and identification only and are not intended to describe,
interpret, define, or limit the scope, extent, or intent of this Agreement or
any provision hereof.
16.12 Gender and Number. Whenever required by the context, as used in
this Agreement, 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.
16.13 Multiple Counterparts. This Agreement will be executed in one
or more counterparts, each of which shall be an original, but all of which
shall constitute but one instrument.
16.14 Expenses. Except as provided in Section 13.03, prior to
Closing each party shall be responsible for its own fees and expenses,
including fees and expenses of legal counsel and/or accountants, incurred in
connection with the negotiation of this Agreement and the consummation of the
Exchange; provided, however, that if Closing occurs then Esenjay and Aspect
may submit invoices for reasonable third party out-of-pocket costs to
Frontier, which costs shall be due and payable by Frontier not later than 180
days from receipt of said invoices.
[Signatures on Following Page]
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IN WITNESS WHEREOF, this Agreement 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
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C O R N E R S T O N E
- -------------------------------------------------------------------------------
INVESTMENT BANKERS
6363 Woodway, Suite 970
Houston, Texas 77057-1735
713-952-0186
Fax: 713-952-9861
E-mail: [email protected]
January 23, 1998
David B. Christofferson
Executive Vice President
Frontier Natural Gas Corporation
500 Dallas Street, Suite 2920
Houston, Texas 77002
Re: Valuation of assets to be conveyed to Frontier Natural Gas Corporation by
Esenjay Petroleum Corporation and Aspect Resources, LLC
Dr. Mr. Christofferson:
Frontier Natural Gas Corporation ("Client" or "Company") has requested
our opinion with respect to the fair market value of certain oil and gas
assets to be conveyed to Client by Esenjay Petroleum Corporation ("Esenjay")
and Aspect Resources, LLC ("Aspect") in a transaction that is pending,
subject to the approval of the shareholders of the Company.
As part of its investment banking services, Cornerstone Ventures, L.P.
("Cornerstone") helps clients negotiate mergers, acquisitions and
divestitures, arranges project and corporate financing, and furnishes
valuations of closely-held companies and assets. Cornerstone is registered
with the Securities and Exchange Commission under the Investment Advisors Act
of 1940, and with the Texas State Securities Board. Cornerstone complies
with the Uniform Standards of Professional Appraisal Practice promulgated by
the Business Valuation section of the American Society of Appraisers, and
with the stringent standards imposed by the Internal Revenue Service.
For the purposes of this opinion, "value" means fair market value as
that term is defined by IRS ruling 59-60. This meaning of value is used
widely among buyers, sellers, investors, lenders, and valuation specialists,
and is reinforced by court decisions. A working definition of fair market
value is the price in cash at which a property would change hands between a
willing buyer and a willing seller, with neither party acting under
compulsion, and both parties having reasonable knowledge of relevant facts.
<PAGE>
David B. Christofferson
January 23, 1998
Page 2
In connection with this opinion, Cornerstone has reviewed the following
information:
- The draft Acquisition Agreement and Plan of Exchange regarding the
transaction.
- Detailed materials prepared by Esenjay and Aspect regarding the oil
and gas properties to be conveyed, including geologic and seismic
based maps, seismic data, lease maps, etc.
- A summary description of as well as summary information regarding each
of the oil and gas properties to be conveyed.
- The QUARTERLY RESERVE REPORT published by Cornerstone setting forth
prices paid per unit in actual purchases and sales of oil and gas
interests.
- Cornerstone's proprietary database containing information regarding
actual purchases and sales of oil and gas interests, including
information on recent transactions in the Company's areas of
exploration and production.
- Published data concerning historical and projected oil and gas prices
in the United States.
In addition, Cornerstone attended meetings in the offices of Esenjay and
Aspect to review the detailed data discussed above and to hear presentations
by, and ask questions of, the technical people involved with each specific
property to be conveyed.
In preparing this opinion, Cornerstone has relied upon the accuracy and
completeness of, and has not independently verified (other than employing its
own appropriate internal tests of reasonableness and consistency and
participating in the meetings described above) the business, financial,
geological, geophysical, engineering and other information supplied regarding
this assignment.
In formulating our opinion, Cornerstone also considered many factors
including, but not limited to, the following:
<PAGE>
David B. Christofferson
January 23, 1998
Page 3
- In all valuations of oil and gas interests, Cornerstone uses more than
one approach to arrive at an estimate that, because it is tested
(compared) against other estimates, is more reliable than any estimate
based upon a single approach. For properties that currently are
producing, the most widely used methodology is discounted future net
revenues derived from a comprehensive technical assessment of future
production and reserves. In this case, because the properties
currently are not producing, Cornerstone utilized prices paid in other
comparable transactions as a proxy.
- Calculations of estimated value were made on the basis of risk
adjusted reserves (derived from a comprehensive technical assessment).
Additionally, calculations were made of the estimated replacement
costs that a buyer would have to incur to bring the individual
properties to their current state of development. Both these
calculations then were compared to actual transactions, the details of
which Cornerstone has in its proprietary data base.
- The market supply/demand environment for oil and gas reserves and
exploration prospects in the United States, that has the
characteristics generally reflective of a seller's market, was
considered.
- The current commodity price environment was considered. Such price
environment has short-term volatility generally and particularly for
gas, which adds an extra element of risk to oil and gas reserve
transactions, but that is perceived by the market to be somewhat
stable over the long term at levels somewhat above current prices.
- Another relevant factor is the current active drilling environment for
oil and gas and its effect on the value of properties in the regions
where the oil and gas properties to be conveyed to the Company exist.
Schedule 1 reflects a tabulation of certain data concerning each of the
twenty-nine (29) properties to be conveyed to the Company from Esenjay and
Aspect. The first column of numbers reflects estimates of the total reserves,
in natural gas equivalent quantities (Bcfe), that can reasonably be expected
to be developed in each property. Esenjay and Aspect each had prepared
estimates of the potential reserves that they felt possibly could be found
for each property. After
<PAGE>
David B. Christofferson
January 23, 1998
Page 4
reviewing the data presented by each company and hearing a presentation as to
the stage of exploration and/or exploitation of each property, Cornerstone
made adjustments to the reserve estimates where appropriate to reflect what
it felt could reasonably be categorized as Possible Reserves in accordance
with the definition of the Society of Petroleum Engineers ("SPE"). The gross
reserve numbers reflected in the first column represents 100% of the possible
reserves for each property. It can be seen that the total reserves
associated with these properties is approximately 2.8 Tcfe. The next two (2)
columns reflect, by seller, the working interests in each property that is to
be conveyed to the Company. The next two (2) columns reflect, again by
seller, the net working interest reserves to be conveyed to the Company and
was determined by multiplying the gross reserves by the working interest to
be conveyed. It can be seen that the total working interest reserves to be
conveyed to the Company is approximately 1.0 Tcfe, comprised of 468 Bcfe from
Aspect and 576 Bcfe from Esenjay.
For purposes of valuation, each category of reserves defined by the SPE
are risked. The Society of Petroleum Evaluation Engineers ("SPEE") each
year tabulates the levels of risk that are used by its members for the
purpose of valuing oil and gas properties. The latest survey of the SPEE
indicates that the average risk factor used for reserves categorized as
possible is 6%, i.e., the estimated possible reserves would be multiplied by
6% to arrive at an expected reserve. Based on Cornerstone's QUARTERLY
RESERVE REPORT and its proprietary data base, the average value in the market
place for proved reserves is approximately $.85/Mcfe. If the 6% risk factor
is multiplied by the average reserve value of $.85/Mcfe, the result is that
possible reserves would have a fair market value of approximately $.05/mcfe.
Cornerstone has proprietary data that confirms that exploration properties of
the quality and type to be conveyed to the Company, in fact, have recently
sold in the marketplace at approximately the level of $.05/Mcfe of possible
reserves.
The last series of columns on Schedule 1 reflect the estimates of the
fair market value of the reserves to be conveyed to the Company. It can be
seen that the total value of such properties is approximately $54.5 million,
broken down as $25.7 million to be conveyed from Aspect and $28.8 million
from Esenjay.
As a test of reasonableness of the above described reserve-based
estimates, Cornerstone also undertook a series of calculations that are
reflected on Schedule 2. Based on Cornerstone's investment banking
experience in transactions that have taken
<PAGE>
David B. Christofferson
January 23, 1998
Page 5
place recently and its proprietary data base, a mathematical relationship can
be said to exist between the fair market value of a group of properties of
the quality and type to be conveyed to the Company and the approximate
replacement cost for a buyer to acquire the land position and seismic data
associated with such a group of properties, e.g., replacement costs.
Overall, we have found that the fair market value of such properties ranges
from 1.7 to 2.0 times their replacement costs.
In Schedule 2, the first column, again, reflects the working interests
to be conveyed to the Company. The second column reflects the gross acres
associated with the land position. It can be seen that the gross acreage
involved is approximately 294,000 acres. The next column reflects net acres
to be conveyed (gross multiplied by the working interest). It can be seen
that the net acres to be conveyed to the Company amounts to approximately
133,000 acres. The next column reflects Cornerstone's estimate of the average
cost to acquire such acreage. The next column reflects the estimated
replacement cost associated with the acreage to be conveyed to the Company
(acreage cost multiplied by the net acreage). It can be seen that the
estimated replacement costs associated with the acreage position to be
conveyed to the Company is approximately $16.6 million.
As to seismic data, the next two columns reflect the gross amount of
seismic assets in square miles to be conveyed to the Company that is
associated with each property. These seismic projects are in various stages
of development completion. Some seismic data have been acquired and fully
interpreted, others have yet to be acquired, but have been or are in the
process of being designed. Cornerstone has estimated the unit costs (per
square mile) to bring these projects to their current stage of development,
which is reflected in the next two columns. We then multiplied the gross
square miles associated with each project, times the working interest to be
conveyed, times the unit cost to arrive at each property's estimated net
seismic replacement cost. The total estimated replacement cost associated
with these seismic projects is $10.2 million. The last column reflects the
sum of the estimated land and seismic replacement costs for each property.
The aggregate replacement cost for these assets is approximately $26.8
million.
The calculated reserve-based fair market value of the properties is
approximately 2.0 times the aggregate estimated replacement cost associated
with them. This ratio is within the range of relational values that have
occurred in actual transactions.
<PAGE>
SCHEDULE 1
FRONTIER NATURAL GAS
CORPORATION
PROPERTY VALUATION
RESERVE BASED VALUE
<TABLE>
UNRISKED RESERVES
GROSS ASPECT ESENJAY FRONTIER ASPECT ESENJAY FRONTIER TOTAL
PROPERTY RESERVES W.I. W.I. W.I. RESERVES RESERVES RESERVES RESERVES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GILLOCK 250 22.50% 0.00% 0.00% 56 0 0 56
CANEY CREEK 250 12.50% 0.00% 0.00% 31 0 0 31
TIDEHAVEN 140 12.50% 28.00% 0.00% 18 39 0 57
EL MATON 90 12.50% 34.00% 0.00% 11 31 0 42
MIDFIELD 50 12.50% 25.00% 0.00% 6 13 0 19
WOLFPOINT 50 12.50% 33.00% 0.00% 6 17 0 23
HALL RANCH 325 12.50% 29.00% 0.00% 41 94 0 135
HOARDS CREEK 120 12.50% 29.00% 0.00% 15 35 0 50
MIKESKA 250 12.50% 25.50% 0.00% 31 64 0 95
PILE DRIVER 10 12.50% 50.00% 0.00% 1 5 0 6
HOUSTON ENDOWMENT 100 7.00% 20.00% 0.00% 7 20 0 27
LIPSMACKER 10 7.00% 15.00% 0.00% 1 2 0 2
BLESSING 50 7.00% 17.00% 0.00% 4 9 0 12
SOUTH RAYMONDVILLE 150 22.00% 57.00% 0.00% 33 86 0 119
GERONIMO 200 0.00% 20.00% 0.00% 0 40 0 40
THOMPSON CREEK 100 0.00% 56.00% 0.00% 0 56 0 56
LA ROSA 40 0.00% 8.00% 0.00% 0 3 0 3
SHERIFF 35 75.00% 0.00% 0.00% 26 0 0 26
S.W. PHEASANT 10 75.00% 0.00% 0.00% 8 0 0 8
LOVELL LAKE 150 50.00% 0.00% 0.00% 75 0 0 75
STOWELL/BIG HILL 75 50.00% 0.00% 0.00% 38 0 0 38
BAUER RANCH 60 45.00% 0.00% 0.00% 27 0 0 27
W. BEAUMONT 100 6.25% 0.00% 0.00% 6 0 0 6
LOX B 80 25.00% 0.00% 0.00% 20 0 0 20
WEST PORT ACRES 30 25.00% 0.00% 0.00% 8 0 0 8
EAST TEXAS 0 0.00% 0.00% 0.00% 0 0 0 0
BUCKEYE 40 0.00% 74.00% 0.00% 0 30 0 30
HAGIST RANCH 10 0.00% 90.00% 0.00% 0 9 0 9
DUNCAN SLOUGH 40 0.00% 66.00% 0.00% 0 26 0 26
CRAB LAKE 40 0.00% 0.00% 75.00% 0 0 30 30
LAPEYROUSE 400 0.00% 0.00% 45.00% 0 0 180 180
TOTAL 3,255 468 576 210 1,254
<CAPTION>
ASPECT ESENJAY FRONTIER TOTAL
PROPERTY VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
GILLOCK $2,812,500 $0 $0 $2,812,500
CANEY CREEK $1,562,500 $0 $0 $1,562,500
TIDEHAVEN $875,000 $1,960,000 $0 $2,835,000
EL MATON $562,500 $1,530,000 $0 $2,092,500
MIDFIELD $312,500 $625,000 $0 $937,500
WOLFPOINT $312,500 $825,000 $0 $1,137,500
HALL RANCH $2,031,250 $4,712,500 $0 $6,743,750
HOARDS CREEK $750,000 $1,740,000 $0 $2,490,000
MIKESKA $1,562,500 $3,187,500 $0 $4,750,000
PILE DRIVER $62,500 $250,000 $0 $312,500
HOUSTON ENDOWMENT $350,000 $1,000,000 $0 $1,350,000
LIPSMACKER $35,000 $75,000 $0 $110,000
BLESSING $175,000 $425,000 $0 $600,000
SOUTH RAYMONDVILLE $1,650,000 $4,275,000 $0 $5,925,000
GERONIMO $0 $2,000,000 $0 $2,000,000
THOMPSON CREEK $0 $2,800,000 $0 $2,800,000
LA ROSA $0 $160,000 $0 $160,000
SHERIFF $1,312,500 $0 $0 $1,312,500
S.W. PHEASANT $375,000 $0 $0 $375,000
LOVELL LAKE $3,750,000 $0 $0 $3,750,000
STOWELL/BIG HILL $1,875,000 $0 $0 $1,875,000
BAUER RANCH $1,350,000 $0 $0 $1,350,000
W. BEAUMONT $312,500 $0 $0 $312,500
LOX B $1,000,000 $0 $0 $1,000,000
WEST PORT ACRES $375,000 $0 $0 $375,000
EAST TEXAS $2,000,000 $0 $0 $2,000,000
BUCKEYE $0 $1,480,000 $0 $1,480,000
HAGIST RANCH $0 $450,000 $0 $450,000
DUNCAN SLOUGH $0 $1,320,000 $0 $1,320,000
CRAB LAKE $0 $0 $1,500,000 $1,500,000
LAPEYROUSE $0 $0 $9,000,000 $9,000,000
TOTAL $25,403,750 $28,815,000 $10,500,000 $64,718,750
PERCENTAGE OF TOTAL ASSETS FOR EACH COMPANY 39.25% 44.52% 16.22% 100.00%
</TABLE>
<PAGE>
David B. Christofferson
January 23, 1998
Page 6
For the reasons explained above, it is Cornerstone's opinion that the
estimated fair market value of the properties to be conveyed to the Company
is $54.5 million, broken down between Aspect and Esenjay as $25.7 million and
$28.8 million, respectively. The estimated fair market value of each
property to be conveyed is reflected in the last column of Schedule 1.
Cornerstone was compensated for this assignment in accordance with its
regular compensation schedule. There is no relationship between Cornerstone
and the Client that would impair the objectivity of this opinion.
Compensation for this opinion was independent of the conclusions reached.
CORNERSTONE VENTURES, L.P.
/s/ CORNERSTONE VENTURES, L.P.
<PAGE>
SCHEDULE 2
FRONTIER NATURAL GAS CORPORATION
PROPERTY VALUATION
REPLACEMENT COST ESTIMATE
<TABLE>
Total Gross Net Cost Acreage Existing
Property W.I. Acres Acres Per Acre Cost Seismic
<S> <C> <C> <C> <C> <C> <C>
GILLOCK 22.50% 24,693 5,556 $250 $1,388,981 0
CANEY CREEK 12.50% 20,911 2,614 $200 $522,775 34
TIDEHAVEN 40.50% 4,500 1,823 $200 $364,500 28
EL MATON 46.50% 7,000 3,255 $200 $651,000 38
MIDFIELD 37.50% 4,000 1,500 $200 $300,000 21
WOLFPOINT 45.50% 1,200 546 $250 $136,500 8
HALL RANCH 41.50% 8,300 3,445 $150 $516,675 57
HOARDS CREEK 41.50% 10,000 4,150 $150 $622,500 30
MIKESKA 38.00% 8,000 3,040 $250 $760,000 31
PILE DRIVER 62.50% 640 400 $200 $80,000 2
HOUSTON ENDOWMENT 27.00% 11,000 2,970 $200 $594,000 50
LIPSMACKER 22.00% 4,000 880 $100 $88,000 7
BLESSING 24.00% 10,000 2,400 $150 $360,000 22
SOUTH RAYMONDVILLE 79.00% 10,000 7,900 $200 $1,580,000
GERONIMO 20.00% 7,000 1,400 $200 $280,000 72
THOMPSON CREEK 56.00% 2,000 1,120 $250 $280,000 10
LA ROSA 8.00% 5,000 400 $150 $60,000 25
SHERIFF 75.00% 54,084 40,563 $25 $1,014,075
S.W. PHEASANT 75.00% 10,139 7,604 $200 $1,520,850 10
LOVELL LAKE 50.00% 23,543 11,772 $150 $1,765,725
STOWELL/BIG HILL 50.00% 11,745 5,873 $150 $880,875 56
BAUER RANCH 45.00% 13,494 6,072 $150 $910,845
W. BEAUMONT 6.25% 11,264 704 $150 $105,600 22
LOX B 25.00% 11,681 2,920 $150 $438,038 71
WEST PORT ACRES 25.00% 753 188 $150 $28,238 21
EAST TEXAS 0.00% 0 0 $0 $0
BUCKEYE 74.00% 8,500 6,290 $150 $943,500
HAGIST RANCH 90.00% 2,000 1,800 $50 $90,000 0
DUNCAN SLOUGH 66.00% 8,500 5,610 $50 $280,500
CRAB LAKE 75.00% 500 375 $350 $131,250 12
LAPEYROUSE 45.00% 8,900 4,005 $350 $1,401,750 35
TOTAL 303,347 137,174 $18,096,176 662
<CAPTION>
Planned Cost Cost Seismic Total
Property Seismic Existing Planned Cost Cost
<S> <C> <C> <C> <C> <C>
GILLOCK 65 $45,000 $5,000 $73,125 $1,462,106
CANEY CREEK $45,000 $5,000 $191,250 $714,025
TIDEHAVEN $45,000 $5,000 $510,300 $874,800
EL MATON $45,000 $5,000 $795,150 $1,446,150
MIDFIELD $45,000 $5,000 $354,375 $654,375
WOLFPOINT $45,000 $5,000 $163,800 $300,300
HALL RANCH $45,000 $5,000 $1,064,475 $1,581,150
HOARDS CREEK $45,000 $5,000 $560,250 $1,182,750
MIKESKA $45,000 $5,000 $530,100 $1,290,100
PILE DRIVER $45,000 $5,000 $56,250 $136,250
HOUSTON ENDOWMENT $45,000 $5,000 $607,500 $1,201,500
LIPSMACKER $45,000 $5,000 $69,300 $157,300
BLESSING $45,000 $5,000 $237,600 $597,600
SOUTH RAYMONDVILLE 60 $45,000 $5,000 $237,000 $1,817,000
GERONIMO $45,000 $5,000 $648,000 $928,000
THOMPSON CREEK 2 $45,000 $5,000 $257,600 $537,600
LA ROSA $45,000 $5,000 $90,000 $150,000
SHERIFF 72 $45,000 $5,000 $270,000 $1,284,075
S.W. PHEASANT $45,000 $5,000 $337,500 $1,858,350
LOVELL LAKE 100 $45,000 $5,000 $250,000 $2,015,725
STOWELL/BIG HILL $45,000 $5,000 $1,260,000 $2,140,875
BAUER RANCH 60 $45,000 $5,000 $135,000 $1,045,845
W. BEAUMONT $45,000 $5,000 $61,875 $167,475
LOX B $45,000 $5,000 $798,750 $1,236,788
WEST PORT ACRES $45,000 $5,000 $236,250 $264,488
EAST TEXAS 400 $45,000 $5,000 $0 $0
BUCKEYE 50 $45,000 $5,000 $185,000 $1,128,500
HAGIST RANCH 15 $45,000 $5,000 $67,500 $157,500
DUNCAN SLOUGH 60 $45,000 $5,000 $198,000 $478,500
CRAB LAKE 0 $110,000 $5,000 $990,000 $1,121,250
LAPEYROUSE 0 $110,000 $5,000 $1,732,500 $3,134,250
TOTAL 884 $12,968,450 $31,064,626
</TABLE>
<PAGE>
APPENDIX C
GAINES, BERLAND, INC.
February 10, 1998
CONFIDENTIAL
Board of Directors
Frontier Natural Gas Corporation
500 Dallas Street - Suite 2920
Houston, TX 77002
Gentlemen:
Gaines, Berland Inc. ("GBI") understands that Frontier Natural Gas
Corporation, an Oklahoma corporation ("Frontier" or the "Company"), has
entered into an Acquisition Agreement and Plan of Exchange substantially in
the form delivered to us on January 19, 1998 (the "Acquisition Agreement")
with Esenjay Petroleum Corporation, a Texas corporation, ("Esenjay") and
Aspect Resources, LLC, a Colorado limited liability company ("Aspect"). As
stated in the Agreement, the Company has agreed to acquire certain assets
from Esenjay and Aspect (or its affiliates or assigns) (the "Acquisitions")
in exchange for shares of the Company's common stock ("Common Stock"). At
closing, the Company will issue to Esenjay 30,991,563 shares of Common Stock
in exchange for the Esenjay assets and 29,648,636 shares of Common Stock to
Aspect (or its affiliates or assigns) in exchange for the Aspect assets,
(collectively, the "Consideration").
The Acquisitions are expected to be considered by the shareholders of
the Company at a special meeting of the shareholders and to be consummated on
or shortly after the date of such meeting.
You have asked for GBI's opinion, as investment bankers, as to whether
the Consideration to be paid to Esenjay and Aspect (or its affiliates or
assigns) by Frontier pursuant to the Acquisition Agreement is fair to the
Frontier shareholders from a financial point of view.
Gaines, Berland Inc., as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. We have acted as
financial advisor to the Board of Directors of Frontier in connection with
the Acquisitions and will receive fees for such services and the delivery of
this opinion.
In arriving at the opinion set forth below, GBI reviewed such
information and considered such financial data and other factors as GBI
deemed relevant under the circumstances, including among others, the
following: (i) the terms and conditions of the Acquisition Agreement, (ii)
the historical and current financial condition and results of operations of
the Company; (iii) certain non-public financial and non-financial information
prepared by the respective managements of the Company, Esenjay and Aspect,
which data was made available to GBI in its role as financial advisor to the
Company; (iv) published information regarding the financial performance and
operating characteristics of a selected group of companies that GBI deemed
comparable; (v) business prospects of the Company when taking into
consideration the impact of the Acquisitions; (vi) the historical and current
market prices for the Company's Common Stock and for the equity securities of
certain other companies with businesses that GBI considered relevant to its
inquiry; (vii) publicly available information, including research reports on
companies that GBI considered relevant to its inquiry; and (viii) the nature
and terms of other recent acquisition transactions in the onshore exploration
and drilling industry. GBI also met with certain officers and employees of
the Company, Esenjay and Aspect to discuss the foregoing, as well as other
matters believed relevant to its opinion.
<PAGE>
Frontier Natural Gas Corporation
February 10, 1998
Page 2
In addition, GBI relied on the opinion of Cornerstone Ventures L.P.
("Cornerstone"), which independently determined the fair market value of
certain oil and gas assets currently owned by Frontier, as well as the fair
market value of the Esenjay assets and Aspect assets to be conveyed to
Frontier upon consummation of this transaction. The Cornerstone opinion is
included as Exhibit A.
In its review and analysis and in rendering its opinion, GBI assumed and
relied upon the accuracy and completeness of the representations and
warranties made by the Company, Esenjay and Aspect in the Acquisition
Agreement, as well as all of the financial and other information provided to
it by the Company's management or publicly available, including without
limitation, information with respect to tax positions, contingent
liabilities, condition of assets and material contract terms, and GBI did not
assume any responsibility for the independent verification of such
information. GBI did not conduct a physical inspection of any of the
properties or facilities of the Company, Esenjay or Aspect. In preparing its
opinion, GBI did not independently verify the business, financial,
geological, geophysical, engineering and other information supplied regarding
Frontier, Esenjay and Aspect.
GBI's opinion was necessarily based upon information available to GBI,
and economic, financial, market and other conditions as they existed and
could be evaluated on the date of the opinion. Although subsequent
developments may affect its opinion, GBI does not have any obligation to
update, revise or reaffirm its opinion.
GBI's opinion was delivered for the information of the Company's Board
of Directors and does not constitute a recommendation to any shareholder of
Frontier as to how such shareholder should vote at the Frontier Special
Meeting of Shareholders. Further, GBI's opinion addresses only the fairness
from a financial point of view of the consideration to be paid to Esenjay and
Aspect pursuant to the Acquisition Agreement and does not address any other
terms of the Acquisitions or the Company's underlying business decision to
effect the Acquisitions.
It is understood that this letter is for the information of the Board of
Directors of Frontier in connection with its evaluation of the fairness to
Frontier shareholders, from a financial point of view, as of the date hereof,
of the Consideration to be paid pursuant to the Acquisition Agreement to
Esenjay and Aspect by Frontier. Without limiting the foregoing, in rendering
this opinion, GBI has not been engaged to act as an agent or fiduciary for
Frontier's shareholders or any other third party.
Based on and subject to the foregoing, we are of the opinion that the
Consideration to be paid to Esenjay and Aspect pursuant to the Acquisition
Agreement is fair to Frontier shareholders from a financial point of view.
Very truly yours,
GAINES, BERLAND INC.
By: /s/ Peter H. Blum
------------------------------
Peter H. Blum
Senior Managing Director
<PAGE>
March __, 1998
Esenjay Petroleum Corporation
500 N. Water St., Suite 1100 South
Corpus Christie, Texas 78471
Aspect Resources LLC
511 16th Street, Suite 300
Denver, Colorado 80202
Gentlemen:
This letter states our opinion regarding the material federal income tax
consequences arising from the acquisition of certain property by Frontier
Natural Gas Corporation ("FRONTIER") from Esenjay Petroleum Corporation
("ESENJAY") and Aspect Resources LLC ("ASPECT") pursuant to the Acquisition
Agreement and Plan of Exchange dated effective as of January 19, 1998 by and
among Frontier, Esenjay, and Aspect (the "ACQUISITION AGREEMENT").
The transactions that are the subject of the Acquisition Agreement,
including any transactions undertaken pursuant to Section 3.02(f) of the
Acquisition Agreement, are collectively referred to as the "ACQUISITIONS" for
purposes of this letter. The terms of the Acquisitions are set forth in the
Acquisition Agreement and described in the Registration Statement filed on
Form S-4 by the Company with the Securities and Exchange Commission on February
__, 1998 (the "REGISTRATION STATEMENT"). All capitalized terms used but not
defined in this letter have the same meanings given to them in the Acquisition
Agreement.
Our conclusions are based solely on the U.S. federal income tax laws. We
are not hereby addressing any other legal consequences arising under federal,
state, local, foreign or other law. We have examined such documents, corporate
records, and certificates (copies of which are attached; collectively, the
"CERTIFICATES") as we have considered necessary or appropriate for purposes of
rendering our opinion, including the Acquisition Agreement and the Registration
Statement. For purposes of such examination, we have assumed the authenticity
of all documents submitted to us as originals, the conformity to original
documents of all documents submitted to us as certified or photostatic copies
(and the authenticity of the originals of such documents), the genuineness of
all signatures, and the legal capacity of all natural persons.
<PAGE>
Esenjay Petroleum Corporation
Aspect Resources LLC
March __, 1998
Page 2
In rendering our opinion, we have relied upon the accuracy and completeness
of the facts, information, covenants and representations contained in the
documents and corporate records referenced above, including the Acquisition
Agreement, Registration Statement, and Certificates. Our opinion is conditioned
on the initial and continuing accuracy of the facts, information, covenants and
representations set forth in such documents and corporate records.
Additionally, we have assumed for purposes of rendering our opinion that the
Acquisitions are consummated in accordance with the terms and conditions of the
Acquisition Agreement.
Based solely upon and subject to the foregoing, we are of the opinion that:
1. The Acquisitions will satisfy the requirements of section 351 of
the Internal Revenue Code of 1986, as amended (the "CODE").
2. Frontier will not recognize any gain (or loss) in connection
with the issuance of shares of Frontier Common Stock as part of the
Acquisitions.
3. Esenjay and Aspect will not recognize any gain (or loss) from
the transfer of the Esenjay Assets and Aspect Assets respectively to
Frontier as part of the Acquisitions solely to the extent that Esenjay and
Aspect receive shares of Frontier Common Stock in exchange for such assets.
4. The adjusted basis that Frontier will obtain in the Esenjay
Assets and Aspect Assets will be equal to the adjusted basis that Esenjay
and Aspect respectively had in the Esenjay Assets and Aspect Assets
immediately prior to the Acquisitions, increased by the amount of gain, if
any, that Esenjay or Aspect respectively is required to recognize in
connection with the Acquisitions.
5. The adjusted basis that Esenjay and Aspect will obtain in the
Frontier Common Stock that they receive as part of the Acquisitions will be
equal to the adjusted basis that they had immediately prior to the
Acquisitions in the Esenjay Assets and Aspect Assets respectively,
increased by the amount of gain, if any, that they are required to
recognize respectively in connection with the Acquisitions, reduced by the
amount of money and the fair market value of any other boot that they
receive respectively as part of the Acquisitions, reduced by the amount of
the liabilities, if any, assumed from them respectively by Frontier as part
of the Acquisitions, and reduced by the amount of the liabilities, if any,
encumbering the Esenjay Assets and Aspect Assets respectively at the time
acquired by Frontier as part of the Acquisitions.
<PAGE>
Esenjay Petroleum Corporation
Aspect Resources LLC
March __, 1998
Page 3
6. The holding period that the Company will have in the Esenjay
Assets and Aspect Assets will include the holding period during which
Esenjay and Aspect respectively held the Esenjay Assets and Aspect Assets
prior to the Acquisitions.
7. The holding period that Esenjay and Aspect will have in the
Frontier Common Stock that they receive as part of the Acquisitions will
include the holding period prior to the Acquisitions during which they held
the Esenjay Assets and Aspect Assets respectively, but only to the extent
that the items of property comprising the Esenjay Assets and Aspect Assets
constituted either capital assets or property described in section 1231 of
the Code on the date of the Acquisitions.
The opinions that we state in this letter represent our best legal
judgment. However, they have no binding effect or official status of any kind.
It is possible that the Internal Revenue Service ("IRS") will disagree with all,
or some, of our conclusions. The opinions are based upon existing provisions of
the Code, the applicable Treasury Department regulations promulgated thereunder,
published rulings, procedures, and pronouncements of the IRS which are
authority, applicable legislative history, and judicial decisions. All such
authorities are subject to change at any time, either prospectively or
retroactively, and any such change could modify the opinions stated in this
letter. In rendering our opinions, we undertake no responsibility to advise you
of any such change in the federal income tax laws. The opinions may not be
relied upon to the extent that there is any such change in the federal income
tax laws that relate to the transactions that are the subject of this letter.
Our opinions address only the matters expressly set forth in this letter,
and no opinion is to be implied or inferred except as expressly stated in this
letter. The opinions stated in this letter are stated and effective as of the
Closing Date. This letter is solely for the benefit of Esenjay Petroleum
Corporation and Aspect Resources LLC, and may not be relied upon by any other
person without in each instance our prior written consent. This opinion may be
filed as an exhibit to the Registration Statement.
Sincerely,
CHAMBERLAIN, HRDLICKA, WHITE,
WILLIAMS & MARTIN
<PAGE>
APPENDIX E
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 read in its entirety as follows:
"The total number of shares of all classes of stock which the
corporation shall have authority to issue is 145,000,000, divided into
classes as follows: (i) 140,000,000 shares of Common Stock, par value
$.01 per share (the "Common Stock"), and (ii) 5,000,000 shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock")."
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.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Amendment to be signed by Michael E. Johnson, its President and attested by
David B. Christofferson, its Secretary, this ___ day of ______, 1998.
FRONTIER NATURAL GAS CORPORATION
By:
----------------------------------
Michael E. Johnson, PRESIDENT
ATTEST:
- -----------------------------------
David B. Christofferson, SECRETARY
<PAGE>
STATE OF TEXAS )
)
COUNTY OF HARRIS )
BEFORE ME personally appeared Michael E. Johnson, 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 __ day of _______, 1998.
---------------------------------------
NOTARY PUBLIC IN AND FOR THE
STATE OF TEXAS
---------------------------------------
NOTARY PUBLIC PRINTED NAME
MY COMMISSION EXPIRES:
-----------------
2
<PAGE>
APPENDIX F
PLAN AND AGREEMENT OF MERGER
REINCORPORATION OF FRONTIER NATURAL GAS CORPORATION
IN DELAWARE
PLAN AND AGREEMENT OF MERGER, dated as of ________, 1998, by and between
Esenjay Exploration, Inc., a Delaware corporation ("Newco" or the "Surviving
Corporation"), and Frontier Natural Gas Corporation, an Oklahoma corporation
("Frontier"). Frontier and Newco are hereinafter collectively referred to as
the "Merging Corporations."
W I T N E S S E T H:
WHEREAS, Newco is a corporation duly organized and validly existing under
the laws of the State of Delaware, with its registered office at 1209 Orange
Street, Wilmington, Delaware 19801, and with its principal executive offices at
One Allen Center, Suite 2920, Houston, Texas 77002;
WHEREAS, the authorized capital stock of Newco consists of 140,000,000
shares of common stock, par value $.01 per share ("Newco Common Stock"), and
5,000,000 shares of preferred stock, par value $.01 per share, of which, as of
the date hereof, ten shares of Newco Common Stock were issued and outstanding
and owned by Frontier;
WHEREAS, Frontier is a corporation duly organized and validly existing
under the laws of the State of Oklahoma, with its registered office at 735 First
National Building, Oklahoma City, Oklahoma 73102, and with its principal
executive offices at One Allen Center, Suite 2920, Houston, Texas 77002;
WHEREAS, the authorized capital stock of Frontier consists of 40,000,000
shares of common stock, par value $.01 per share ("Frontier Common Stock"), and
5,000,000 shares of preferred stock, par value, $.01 per share ("Frontier
Preferred Stock"), of which, as of the date hereof, approximately ______shares
of Frontier Common Stock and ____ shares of Frontier Preferred Stock, were
issued and outstanding, and _______shares of Frontier Common Stock were reserved
for issuance upon exercise of outstanding warrants and options;
WHEREAS, subject to the approval of the Frontier stockholders and prior to
the Effective Date (as defined below), Frontier intends to amend its Certificate
of Incorporation to increase the number of authorized shares of Frontier Common
Stock to 140,000,000 shares;
WHEREAS, subject to the approval of the Frontier stockholders of a
certain Acquisition Agreement and Plan of Exchange dated as of January 19,
1998 and prior to the Effective Date, the Company intends to issue up to
60,640,199 shares of Frontier Common Stock, in exchange for certain assets of
Esenjay Petroleum Corporation and Aspect Resources LLC;
WHEREAS, pursuant to the terms of a Certificate of Designations of
Convertible Preferred Stock, the board of directors of Frontier has approved the
redemption of all of the issued and outstanding shares of Frontier Preferred
Stock prior to the Effective Date;
WHEREAS, the respective boards of directors of Frontier and Newco deem it
desirable and in the best interests of their respective corporations and their
respective stockholders to merge, pursuant to the provisions of Section 252 of
the General Corporation Law of the State of Delaware and Section 1082 of the
Oklahoma General Corporation Act, Frontier into Newco in exchange solely for
shares of the Newco Common Stock, and have proposed, declared advisable,
<PAGE>
and approved such merger pursuant to this Plan and Agreement of Merger (the
"Agreement"), which Agreement has been duly approved by resolutions of the
respective boards of directors of Frontier and Newco; and
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, and to prescribe the terms and
conditions of the merger, the mode of carrying the same into effect, the manner
and basis of converting the shares of Frontier Common Stock into shares of Newco
Common Stock, and such other details and provisions as are deemed necessary or
proper, the parties hereby agree as follows:
ARTICLE I
MERGER
1:1 SURVIVING CORPORATION. Subject to the adoption and approval of this
Agreement by the requisite vote of the stockholders of each of the Merging
Corporations and to the other conditions hereinafter set forth, Frontier and
Newco shall be, upon the Effective Date, merged into a single surviving
corporation, which shall be Newco, one of the Merging Corporations, which shall
continue its corporate existence and remain a Delaware corporation governed by
and subject to the laws of that State.
1:2 STOCKHOLDER APPROVAL. This Agreement shall be submitted for adoption
and approval by the stockholders of each of the Merging Corporations in
accordance with the applicable laws of the States of Delaware and Oklahoma, at
separate meetings called and held for such purpose.
1:3 EFFECTIVE DATE. The merger shall become effective upon (i) the filing
of a Certificate of Merger with the Secretary of State of Delaware and the
issuance by the Secretary of State of Delaware of evidence of such filing, and
(ii) the filing of a Certificate of Merger with the Secretary of State of
Oklahoma and the issuance by the Secretary of State of Oklahoma of evidence of
such filing. The date upon which the merger shall become effective, as defined
by this Section 1:3, is referred to in this Agreement as the "Effective Date."
ARTICLE II
CONTINUED CORPORATE EXISTENCE OF SURVIVING CORPORATION
2:1 EXISTENCE. The identity, existence, purposes, powers, objects,
franchises, rights, and immunities of Newco, the Surviving Corporation, shall
continue unaffected and unimpaired by the merger, and the corporate identity,
existence, purposes, powers, objects, franchises, rights, and immunities of
Frontier shall be wholly merged into Newco, the Surviving Corporation, and Newco
shall be fully vested therewith. Accordingly, on the Effective Date, the
separate existence of Frontier, except insofar as continued by statute, shall
cease.
ARTICLE III
GOVERNING LAW AND CERTIFICATE OF INCORPORATION OF SURVIVING CORPORATION
3:1 DELAWARE LAW GOVERNS AND NEWCO'S CERTIFICATE OF INCORPORATION
SURVIVES. The laws of Delaware shall continue to govern the Surviving
Corporation. On and after the Effective Date, the Certificate of Incorporation
of Newco, as in effect on the Effective Date, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended in the
manner provided by law.
ARTICLE IV
BYLAWS OF SURVIVING CORPORATION
4:1 NEWCO'S BYLAWS SURVIVE. On and after the Effective Date, the Bylaws
of Newco as in effect on the Effective Date, shall be the Bylaws of the
Surviving Corporation until the same shall be altered, amended, or repealed,
-2-
<PAGE>
or until new Bylaws shall be adopted in accordance with the provisions of
law, the Certificate of Incorporation, and the Bylaws of the Surviving
Corporation.
ARTICLE V
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
5:1 DIRECTORS OF SURVIVING CORPORATION. The incumbent directors of
Frontier immediately before the Effective Date shall constitute the board of
directors of the Surviving Corporation from and after the Effective Date, and
such persons shall hold office until their successors are, in accordance with
the Bylaws of the Surviving Corporation, elected and qualify.
5:2 OFFICERS OF SURVIVING CORPORATION. The incumbent officers of Frontier
immediately before the Effective Date shall hold the same respective offices of
the Surviving Corporation from and after the Effective Date and until the first
meeting of directors following the next annual meeting of stockholders thereof,
or until their successors are elected in accordance with the Bylaws of the
Surviving Corporation.
5:3 VACANCIES. On or after the Effective Date, if a vacancy shall for any
reason exist in the board of directors or in any of the offices of the Surviving
Corporation, such vacancy shall be filled in the manner provided in the
Certificate of Incorporation or Bylaws of the Surviving Corporation.
ARTICLE VI
CAPITAL STOCK OF SURVIVING CORPORATION
6:1 CAPITAL STOCK AS IN NEWCO'S CERTIFICATE OF INCORPORATION. The
authorized number of shares of capital stock of the Surviving Corporation, the
par value, designations, preferences, rights, and limitations thereof, and the
express terms thereof, shall be as set forth in the Certificate of Incorporation
of the Surviving Corporation as in effect on the Effective Date.
ARTICLE VII
CONVERSION OF SECURITIES ON MERGER
7:1 NEWCO'S CAPITAL STOCK. Each of the shares of Newco Common Stock
issued and outstanding immediately before consummation of the merger on the
Effective Date (all of which are owned by Frontier) shall be extinguished and
deemed canceled for all purposes upon the Effective Date.
7:2 CONVERSION OF FRONTIER' STOCK. On the Effective Date, each share of
Frontier Common Stock then issued and outstanding (excluding any Frontier shares
which may then be held in the treasury of Frontier, all of which shares shall
cease to exist), without any action on the part of the holders thereof, shall
automatically become and be converted into one fully paid and nonassessable
share of the issued and outstanding Newco Common Stock.
7:3 EXCHANGE OF FRONTIER'S STOCK CERTIFICATES. As promptly as practicable
after the Effective Date, each holder of an outstanding certificate or
certificates theretofore representing shares of Frontier Common Stock may
surrender the same to an exchange agent of and designated by the Surviving
Corporation and such holder shall be entitled upon such surrender to receive in
exchange therefor a certificate or certificates representing the number of whole
shares of Newco Common Stock into which the shares of Frontier Common Stock
theretofore represented by the certificate or certificates so surrendered shall
have been converted as aforesaid. However, before any surrender, each
outstanding certificate representing issued and outstanding shares of Frontier's
Common Stock shall be deemed for all purposes (other than the right to receive
any dividend payable by Newco, which shall be deferred until such certificate
surrender) to evidence ownership of the number of whole shares of Newco Common
Stock into which the same shall have been converted.
-3-
<PAGE>
7:4 NEWCO FRACTIONAL SHARES. No certificates for fractional share
interests of Newco Common Stock will be issued, but, in lieu thereof, Newco
will settle all such fractional share interests in cash on the basis of the last
sale price for Frontier Common Stock (regular way or when-issued, as the case
may be) on the Nasdaq SmallCap Market, or if none, on the basis of the mean
between the closing bid and asked prices for Frontier Common Stock on such
exchange, on the last trading day next preceding the Effective Date.
7:5 FRONTIER' TRANSFER BOOKS CLOSED. Upon the Effective Date, the stock
transfer books of Frontier shall be deemed closed, and no transfer of any
certificates theretofore representing shares of Frontier shall thereafter be
made or consummated.
ARTICLE VIII
AGREEMENTS OF FRONTIER AND NEWCO PENDING EFFECTIVE DATE
8:1 STOCKHOLDERS MEETINGS. Frontier and Newco will each hold separate
meetings of stockholders for the purpose of considering and acting upon a
proposal to approve and adopt this Agreement and the merger contemplated hereby.
If the holders of at least a majority of all the outstanding shares of Frontier
shall vote in favor of the merger at its meeting, then Frontier (as the sole
stockholder of Newco) will vote all the outstanding shares of Newco in favor of
the merger at the later convening Newco meeting on that same day.
ARTICLE IX
ASSETS AND LIABILITIES
9:1 ASSETS AND LIABILITIES OF MERGING CORPORATIONS BECOME THOSE OF
SURVIVING CORPORATION. On the Effective Date, all rights, privileges, powers,
immunities, and franchises of each of the Merging Corporations, both of a public
and private nature, and all property, real, personal, and mixed, and all debts
due on whatever account, as well as stock subscriptions and all other choses or
things in action, and all and every other interest of or belonging to or due to
either of the Merging Corporations, shall be taken by and deemed to be
transferred to and shall be vested in the Surviving Corporation without further
act or deed, and all such rights, privileges, powers, immunities, franchises,
property, debts, choses or things in action, and all and every other interest of
the Merging Corporations shall be thereafter as effectually the property of the
Surviving Corporation as they were of the respective Merging Corporations, and
the title to any real or other property, or any interest therein, whether vested
by deed or otherwise, in either of the Merging Corporations, shall not revert or
be in any way impaired by reason of the merger; PROVIDED, HOWEVER, that all
rights of creditors and all liens upon any properties of each of the Merging
Corporations shall be preserved unimpaired, and all debts, liabilities,
restrictions obligations, and duties of the respective Merging Corporations,
including without limitation all obligations, liabilities, and duties as lessee
under any existing lease, shall thenceforth attach to the Surviving Corporation
and may be enforced against and by it to the same extent as if such debts,
liabilities, restrictions, obligations, and duties had been incurred or
contracted by it. Any action or proceeding pending by or against either of the
Merging Corporations may be prosecuted to judgment as if the merger had not
taken place, or the Surviving Corporation may be substituted in place of either
of the Merging Corporations.
9:2 CONVEYANCES TO SURVIVING CORPORATION. The Merging Corporations hereby
agree, respectively, that from time to time, as and when requested by the
Surviving Corporation, or by its successors and assigns, they will execute and
deliver or cause to be executed and delivered, all such deeds, conveyances,
assignments, and other instruments, and will take or cause to be taken such
further or other action as the Surviving Corporation, or its successors or
assigns, may deem necessary or desirable in order to vest or perfect in or
confirm to the Surviving Corporation, its successors and assigns, title to and
possession of all the property, rights, privileges, powers, immunities,
franchises, and interests referred to in this Article IX of this Agreement and
otherwise carry out the intent and purposes of this Agreement.
9:3 ACCOUNT TREATMENT. The assets and liabilities of the Merging
Corporations shall be taken up on the books of the Surviving Corporation in
accordance with generally accepted accounting principles, and the capital
surplus and retained earnings accounts of the Surviving Corporation shall be
determined, in accordance with generally accepted
-4-
<PAGE>
accounting principles, by the board of directors of the Surviving
Corporation. Nothing herein shall prevent the board of directors of the
Surviving Corporation from making any future changes in its accounts in
accordance with law.
9:4 CONSENT TO SERVICE OF PROCESS IN OKLAHOMA. The Surviving Corporation,
from and after the Effective Date of the Merger, agrees that it may be served
with process in the State of Oklahoma in any proceeding for the enforcement of
any obligation of Frontier as well as for the enforcement of any obligation of
the Surviving Corporation arising from the Merger, including any suit or
proceeding to enforce the right of any shareholder as determined in appraisal
proceedings pursuant to the provisions of Section 1091 of Title 18, Oklahoma
statutes, and irrevocably appoints the Secretary of State of the State of
Oklahoma as its agent to accept service of process in any such proceeding. Any
such process served upon the Secretary of State of the State of Oklahoma should
be forwarded to the Surviving Corporation, Esenjay Resources Corporation, One
Allen Center, Suite 2920, Houston, Texas 77002, Attn: General Counsel.
ARTICLE X
TERMINATION AND ABANDONMENT
10:1 TERMINATION. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the merger abandoned at
any time (whether before or after the approval and adoption thereof by the
stockholders of Frontier) before the Effective Date:
10:1:1 BY MUTUAL CONSENT. By mutual consent of Frontier and Newco;
10:1:2 BY FRONTIER OR NEWCO BECAUSE OF INSUFFICIENT FRONTIER
STOCKHOLDER VOTE. By Frontier or Newco, if the holders of at least a
majority of all the outstanding shares of Frontier shall not vote in favor
of approval and adoption of this Agreement and the merger contemplated
hereby at a special meeting of Frontier stockholders duly called and held;
10:1:3 BY FRONTIER OR NEWCO BECAUSE OF LEGAL PROCEEDINGS. By
either Frontier or Newco, if any suit, action, or other proceeding shall be
pending or threatened by the federal or a state government before any court
or governmental agency, in which it is sought to restrain, prohibit, or
otherwise affect the consummation of the merger contemplated hereby;
10:1:4 BY FRONTIER OR NEWCO IF MERGER NOT EFFECTIVE BY _____, 1998.
By either Frontier or Newco, if the merger shall not have become effective
on or before ____, 1998.
10:2 TERMINATION BY BOARD OF DIRECTORS. An election by Frontier or Newco
to terminate this Agreement and abandon the merger as provided in Section 10:1
shall be exercised on behalf of such corporation by its board of directors.
10:3 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to the provisions of Section 10:1 hereof,
this Agreement shall become void and have no effect, without any liability on
the part of any party hereto.
10:4 WAIVER OF CONDITIONS. Any of the terms or conditions of this
Agreement may be waived at any time by the party which is entitled to the
benefit thereof, by action taken by its board of directors, the executive
committee of its board of directors, or its president; PROVIDED, HOWEVER, that
no party hereto shall waive any term or condition hereof, unless in the judgment
of the board of directors, the executive committee, or president taking the
action, such waiver will not have a materially adverse effect on the benefits
intended under this Agreement to the stockholders of its or his corporation.
[SIGNATURE PAGE FOLLOWS]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed in their respective corporate names by their respective presidents and
attested by their respective secretaries, all as of the day and year first above
written.
ESENJAY EXPLORATION, INC.
(a Delaware corporation)
By
-------------------------------
David W. Berry, PRESIDENT Attest:
-------------------------
David B. Christofferson,
SECRETARY
FRONTIER NATURAL GAS CORPORATION
(an Oklahoma corporation)
By
-------------------------------
David W. Berry, PRESIDENT Attest:
-------------------------
David B. Christofferson,
SECRETARY
-6-
<PAGE>
CERTIFICATES OF CORPORATE SECRETARIES
I, David B. Christofferson, secretary of Esenjay Resources Corporation, a
Delaware corporation ("Newco"), do hereby certify that the plan and agreement of
merger (the "Agreement") to which this certificate is attached, after having
been duly signed on behalf of Newco and having been duly signed on behalf of
Frontier Natural Gas Corporation, an Oklahoma corporation, was duly adopted
pursuant to section 252 of the General Corporation Law of the State of Delaware
on the _____ day of ____________, 1998, by the affirmative vote of the holders
of a majority of the outstanding shares of the common stock of Newco, which
Agreement was thereby adopted as the act of the stockholders of Newco, and the
duly adopted agreement and act of Newco.
WITNESS MY HAND, this _________ day of ____________, 1998.
--------------------------------------
David B. Christofferson, SECRETARY
I, David B. Christofferson, secretary of Frontier Natural Gas Corporation,
an Oklahoma corporation ("Frontier"), do hereby certify that the plan and
agreement of merger to which this certificate is attached, after having been
duly signed on behalf of Frontier and having been duly signed on behalf of
Esenjay Exploration, Inc., a Delaware corporation, was duly adopted pursuant to
Section 1082 of the Oklahoma General Corporation Act, on the _____ day of
____________, 1998, by the affirmative vote of the holders of at least a
majority of the outstanding shares of the common stock of Frontier, which
Agreement was thereby adopted as the act of the stockholders of Frontier, and
the duly adopted agreement and act of Frontier.
WITNESS MY HAND, this ______ day of ____________, 1998.
--------------------------------------
David B. Christofferson, SECRETARY
-7-
<PAGE>
ACKNOWLEDGMENTS
THE STATE OF TEXAS )
COUNTY OF HARRIS )
BEFORE ME, the undersigned authority, in and for said County and State, on
this day personally appeared David W. Berry, president, and David B.
Christofferson, secretary, of Esenjay Exploration, Inc., a Delaware corporation,
each known to me to be the person and officer whose name is subscribed to the
foregoing instrument and acknowledged to me that he executed said instrument as
the act and deed of such corporation for the purposes and consideration therein
expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this _____ day of ________, 1998.
(SEAL)
----------------------------------------
NOTARY PUBLIC IN AND FOR HARRIS COUNTY,
TEXAS
____________
THE STATE OF TEXAS )
COUNTY OF HARRIS )
BEFORE ME, the undersigned authority, in and for said County and State, on
this day personally appeared David W. Berry, president, and David B.
Christofferson, secretary, of Frontier Natural Gas Corporation, an Oklahoma
corporation, each known to me to be the person and officer whose name is
subscribed to the foregoing instrument and acknowledged to me that he executed
said instrument as the act and deed of such corporation for the purposes and
consideration therein expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this _____ day of ________, 1998.
(SEAL)
----------------------------------------
NOTARY PUBLIC IN AND FOR HARRIS COUNTY,
TEXAS
-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 read in its entirety as follows:
"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: (i) 40,000,000 shares of Common Stock, par value
$.01 per share (the "Common Stock"), and (ii) 5,000,000 shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock")."
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.
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 9th day of February, 1998.
FRONTIER NATURAL GAS CORPORATION
By:
-----------------------------------
David W. Berry, PRESIDENT
ATTEST:
<PAGE>
- ----------------------------------
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 9th day of February, 1998.
--------------------------------------
NOTARY PUBLIC IN AND FOR THE
STATE OF TEXAS
--------------------------------------
NOTARY PUBLIC PRINTED NAME
MY COMMISSION EXPIRES:
----------------
<PAGE>
CONTRACT SETTLEMENT AGREEMENT BETWEEN
FRONTIER NATURAL GAS CORPORATION
AND DAVID W. BERRY
WHEREAS David W. Berry ("Employee") has an employment contract with Frontier
Natural Gas Corporation ("Frontier") dated effective January 1, 1993 (the
"Contract"); and
WHEREAS Frontier has negotiated with third parties including Aspect Resources
LLC and Esenjay Petroleum Corporation and others in regard to a transaction
which would result in a change of control of Frontier, (which change of control
shall be defined as a change of the majority of the Board of Directors of
Frontier and/or a transaction whereby over fifty percent of the equity
securities of Frontier are issued or committed to be issued to third parties,
and/or Frontier merges with another company, hereafter a "Change of Control");
and
WHEREAS The Board of Directors has determined that it is in the best interests
of Frontier to satisfy all obligations of Frontier previously incurred, or to be
incurred in the future, pursuant to the Contract, but subject to Frontier
closing a transaction which results in a Change of Control;
NOW THEREFORE
Frontier agrees that in the event Frontier closes any transaction which results
in a Change of Control prior to June 30, 1998 that Frontier shall pay to
Employee the sum of One Hundred and Thirty Four Thousand Four Hundred Dollars
($134,400.00), which amount shall be referred to herein as the "Settlement
Payment", and Employee shall be, upon closing of a transaction which results in
a Change of Control, automatically released from all obligations pursuant to
the Contract other than Employees confidentiality obligations to Frontier as set
forth in Paragraph 7.a. of the Contract. Said Settlement Payment and release
from obligations shall be in full satisfaction of the Contract, but in addition
to any other obligations owed Employee; and
Employee agrees that, subject only to timely payment of the Settlement Payment,
that Frontier shall, upon closing of a transaction resulting in a Change of
Control, have no further obligation to Employee pursuant to the Contract; and
The parties agree that the Settlement Payment shall be due and payable upon
closing of a transaction resulting in a Change of Control, and that it shall be
paid by delivery to Employee of a promissory note bearing interest at ten
percent per annum payable by Frontier to Employee with the principal amount
being paid at the minimum rate of five thousand dollars per month, beginning
the first day of the third calendar month after the referenced closing, and with
all principal and accrued interest being due and payable upon the earlier of
September 30, 1998 or the completion of the public sale of any equity and/or
debt securities of Frontier. The parties further agree that Employee, at
Employees sole discretion may defer payment of up to fifty percent of the
principal amount until January 15, 1999.
- ------------------------------------ January ____, 1998
David W. Berry.
Frontier Natural Gas Corporation
By: January ____, 1998
---------------------------------
It's:
-------------------------------
<PAGE>
CONTRACT SETTLEMENT AGREEMENT BETWEEN
FRONTIER NATURAL GAS CORPORATION
AND DAVID B. CHRISTOFFERSON
WHEREAS David B. Christofferson ("Employee") has an employment contract with
Frontier Natural Gas Corporation ("Frontier") dated effective January 1,
1993 (the "Contract"); and
WHEREAS Frontier has negotiated with third parties including Aspect Resources
LLC and Esenjay Petroleum Corporation and others in regard to a transaction
which would result in a change of control of Frontier, (which change of
control shall be defined as a change of the majority of the Board of
Directors of Frontier and/or a transaction whereby over fifty percent of the
equity securities of Frontier are issued or committed to be issued to third
parties, and/or Frontier merges with another company, hereafter a "Change of
Control"); and
WHEREAS the Board of Directors has determined that it is in the best
interests of Frontier to satisfy all obligations of Frontier previously
incurred, or to be incurred in the future, pursuant to the contract, but
subject to Frontier closing a transaction which results in a Change of
Control;
NOW THEREFORE
Frontier agrees that in the event Frontier closes any transaction which
results in a Change of Control prior to June 30, 1998 that Frontier shall pay
to Employee the sum of One Hundred and Twelve Thousand Dollars ($112,000.00),
which amount shall be referred to herein as the "Settlement Payment", and
Employee shall be, upon closing of a transaction which results in a Change of
Control, automatically released from all obligations pursuant to the Contract
other then Employees confidentiality obligations to Frontier as set forth in
Paragraph 7.a. of the Contract. Said Settlement Payment and release from
obligations shall be in full satisfaction of the Contract, but in addition to
any other obligations owed Employee; and
Employee agrees that, subject only to timely payment of the Settlement
Payment, that Frontier shall, upon closing of a transaction resulting in a
Change of Control, have no further obligation to Employee pursuant to the
Contract; and
The parties agree that the Settlement Payment shall be due and payable upon
closing of a transaction resulting in a Change of Control, and that it shall
be paid by delivery to Employee of a promissory note bearing interest at ten
percent per annum payable by Frontier to Employee with the principal amount
being paid at the minimum rate of five thousand dollars per month, beginning
the first day of the third calendar month after the referenced closing, and
with all principal and accrued interest being due and payable upon the
earlier of September 30, 1998 or the completion of the public sale of any
equity and/or debt securities of Frontier. The parties further agree that
Employee, at Employees sole discretion may defer payment of up to fifty
percent of the principal amount until January 15, 1999.
___________________________________ January ____, 1998
David B. Christofferson.
Frontier Natural Gas Corporation
By:_________________________________ January ____, 1998
It's:
-------------------------------
<PAGE>
FRONTIER NATURAL GAS CORPORATION
EMPLOYEE OPTION PLAN - 1997
1. PURPOSE. The purpose of this Employee Option Plan - 1997 ("the Plan")
is to further the interest of Frontier Natural Gas Corporation (hereinafter
called "the Company") by providing incentives for officers, managers, department
heads, corporate counsel, directors and employees of the Company who may be
designated for participation in the Plan and to provide additional means of
attracting and retaining competent personnel.
2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Company (hereinafter referred to as the "Board"). Subject to
the provisions of the Plan and applicable law, the Board is authorized to
interpret the Plan and to prescribe, amend and rescind rules and regulations
regulating the Plan and to make all other determinations necessary or advisable
for the administration of the Plan. In the event the Board forms an Executive
Compensation Committee, said Committee shall assume all of the responsibility
for the administration of the Plan.
3. PARTICIPANTS AND ALLOTMENTS. The Board shall determine and designate
from time to time those employees of the Company to whom options to purchase
shares of common stock of the Company pursuant to the Plan are to be granted and
who thereby become participants in the Plan. The Board shall allot to such
participants (the "Option Holders") in such amount as the Board shall from time
to time determine. No member of the Board shall have any right to vote or
decide upon any matter relating solely to himself or a member of his immediate
family or solely to any of his rights or benefits (or rights or benefits of a
member of his immediate family) under the Plan, provided, however that, the
Board of Directors may provide for the automatic annual grant of a
pre-determined number of stock options to each member of the Board of
Directors who is not an employee of the Company. Participation in the Plan
shall not confer any right of continuation of service as an employee of the
Company.
4. SHARES OF COMMON STOCK SUBJECT TO PLAN. Under this Plan, the Board
may from time to time grant options to purchase shares of common stock to
employees of the Company up to an aggregate of 695,350 shares. If any options
granted under the Plan shall terminate or expire, in whole or in part, the
shares so released from the options may be made the subject of additional
options granted under the Plan. The Company shall reserve and keep available
such number of shares of stock as will satisfy the requirements of all
outstanding options granted under the Plan. If there is any change in the
Company's shares of Common Stock, as by stock splits, reverse stock splits,
stock dividends or re-capitalization, the number of options outstanding and the
shares subject to options shall be appropriately adjusted by the Board.
5. OPTION PRICE. The Option price or prices shall be greater than or
equal to the fair market value of issued and outstanding shares of stock of the
Company at the date the Option is granted. For the purposes hereof, fair market
value shall be determined by the Board after due investigation and inquiry.
6. OTHER PROVISIONS. Each Option shall be subject to all provisions of
this Plan, including, but not limited to, the following terms and conditions:
(a) Options granted under the Plan shall be exercisable for a period of
ten years from the date of the grant.
(b) The Board shall grant Options to officers and other employees and
shall provide for the automatic receipt of options by directors who
are not full time employees. Each option shall consist of an option
("Option") to purchase one share of common stock at the exercise price
(as defined below). The Exercise Price shall be at least the fair
market value of the Common Stock on the date of the grant of the
Option.
EMPLOYMENT OPTION PLAN - 1997
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(c) The Board may in its discretion establish a schedule setting forth a
time period during which options may be exercised. Absent such a
schedule, the options shall be exercisable 33 1/3% on January 1 the
year following the effective date of the grant thereof, an additional
33 1/3% on January 1 of the second year following the grant thereof,
and the final 33 1/3% on January 1 of the third year following the
grant thereof. The Option Holder's right to exercise the options
shall, however, be cumulative.
(d) If the employment of the Option Holder by the Company is terminated
for any reason other than (i) his death, (ii) his discharge for
dishonesty or commission of a crime, or (iii) his employment with a
competitor of the Company without the Company's consent, the Option
Holder may, within three months thereafter, subject to provisions of
subsections 6(a) and (b) above, exercise the option to the extent that
the option was exercisable as of the date of termination of his
employment. All unexercised Options shall terminate, be forfeited and
shall lapse upon the expiration of said three-month period, or
immediately if the employment of the Option Holder is terminated by
the Company for any of the reasons set forth in (ii) or (iii) above.
(e) If the Option Holder dies (i) while employed by the Company or (ii)
within three months after termination of his employment for any reason
other than as set forth in subsections 6(c)(ii) or (iii) above, then
within six months after the date of Option Holder's death, subject to
the provisions of subsections 6(a) and (b) above, the Option may be
exercised by his estate or by any person who has acquired the Option
Holder's right to exercise the Option by bequest or inheritance to the
extent the Option was exercisable as of the date of his death. Upon
the expiration of such six-month period, all unexercised options shall
terminate, be forfeited and shall lapse.
(f) Except as otherwise provided in subsection 6(d) above, the Option and
all rights granted hereunder shall not be transferred by the Option
Holder, and may not be assigned, pledged or hypothecated in any way
and shall not be subject to execution, attachment or similar process.
Upon any attempt by the Option Holder to transfer the option, or to
assign, pledge, hypothecate or otherwise dispose of such Option or of
any rights granted hereunder, contrary to the provisions hereof, or
upon the levy of any attachment or similar process upon such Option or
such rights, such Option and such rights shall immediately become null
and void. The option shall be exercisable, during the lifetime of the
Option Holder, only by the Option Holder.
7. EXERCISE OF OPTIONS.
(a) To exercise the Option, the Option Holder or his successor shall give
written notice to the Company's President at the Company's principal
office. Within ten days of the receipt by the Company of such written
notice, the Company shall tender the Common Stock due pursuant to the
exercise of the Option. The Option Holder shall, concurrent with
acceptance of the tendered Common Stock, remit full payment for the
Common Stock being purchased pursuant to the Option to the Company.
The Option Holder shall also provide to the Company a written
statement that the shares are purchased for investment and not with a
view to distribution. However, this statement shall not be required
if the shares subject to the option are registered with the Securities
and Exchange Commission. If the option is exercised by the successor
of the Option Holder, following his death, proof shall be submitted,
satisfactory to the Board, of the right of the successor to exercise
the option.
(b) Shares of stock issued pursuant to this Plan which have not been
registered with the Securities and Exchange Commission shall bear the
following legend:
THE SECURITIES REPRESENTED BY THIS STOCK CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR APPLICABLE
STATE SECURITIES LAW (THE "STATE ACTS"), AND SHALL NOT BE SOLD,
PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED (WHETHER OR
NOT FOR CONSIDERATION) BY THE HOLDER EXCEPT UPON THE ISSUANCE TO THE
CORPORATION OF A FAVORABLE OPINION OF ITS COUNSEL AND/OR THE
EMPLOYMENT OPTION PLAN - 1997
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SUBMISSION TO THE CORPORATION OF SUCH OTHER EVIDENCE AS MAY BE
SATISFACTORY TO COUNSEL FOR THE CORPORATION, TO THE EFFECT THAT ANY
SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE ACT AND THE STATE ACTS.
(c) The Company shall not be required to transfer or deliver any
certificate or certificates for shares purchased upon any exercise of
such option: (i) until after compliance with all then applicable
requirements of law; and (ii) prior to admission of such shares to
listing on any stock exchange on which the stock may then be listed.
In no event shall the Company be required to issue fractional shares
to the Optionee.
8. REGISTRATION. If the Company shall be advised by its counsel that
shares of stock deliverable upon any exercise of an option are required to be
registered under the Securities Act of 1933, or that the consent of any other
authority is required for the issuance of same, the Company may effect
registration or obtain consent, and delivery of shares by the Company may be
deferred until registration is affected or consent obtained.
9. ISSUANCE OF STOCK. No stock shall be issued until full payment for
such stock has been made. The Option Holder shall have no rights as a
shareholder with respect to optioned shares until the date of the issuance of a
stock certificate to him for such shares. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such certificate is issued, except as provided in Sections 4 and 10
hereof.
10. CORPORATE REORGANIZATION. If there shall be any capital
reorganization or consolidation or merger of the Company with another
corporation or corporations, or any sale of all or substantially all of the
Company's properties and assets to any other corporation or corporations, then
all Options outstanding shall be exercisable for a thirty day period prior to
the effective date thereof. Options not so exercised shall expire upon the
effectiveness of such a transaction. This provision does not however, apply to
mergers where the Company is the survivor.
11. AMENDMENTS AND TERMINATION. The Board of Directors or the Committee
may terminate the Plan in whole or in part, may suspend the Plan in whole or in
part from time to time, and may amend the Plan from time to time, including the
adoption of amendments deemed necessary or desirable to qualify the Options
under the laws of various states (including tax laws) and under rules and
regulations promulgated by the Securities and Exchange Commission with respect
to the persons who are subject to the provisions of Section 16 of the Securities
Exchange Act of 1934, or to correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any Option granted thereunder,
without the approval of the share owners of the Company.
However, no action shall be taken without the approval of the share
owners of the Company if the Committee determines that the approval of share
owners would be necessary to retain the benefits of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended, or Section 162(m) of the Internal
Revenue Code of 1986, as amended.
12. OPTION AGREEMENT. The granting of an option shall take place only
when a written option agreement in the form of an Employee Option Plan 1997
Agreement is executed by or on behalf of the Company and the employee to whom
the Option is granted and such executed agreement is delivered to the Company.
13. PERIOD OF PLAN. No Option shall be granted on or after the tenth
anniversary of the date of adoption of the Plan by the Board of Directors of the
Company. The Plan shall expire on the later of such tenth anniversary date or
the date on which all Options granted under the Plan have expired or been
exercised in full.
EMPLOYMENT OPTION PLAN - 1997
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CREDIT AGREEMENT
by and between
FRONTIER NATURAL GAS CORPORATION
and
DUKE ENERGY FINANCIAL SERVICES, INC.
Dated as of February 23, 1998
<PAGE>
TABLE OF CONTENTS
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PAGE
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<S> <C>
ARTICLE 1 - DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . 2
1.1 DEFINED TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . .15
1.3 NUMBER AND GENDER OF WORDS . . . . . . . . . . . . . . . . . . . . .16
ARTICLE 2 - TERMS OF FACILITY. . . . . . . . . . . . . . . . . . . . . . . . . .16
2.1 ADVANCING COMMITMENT . . . . . . . . . . . . . . . . . . . . . . . .16
2.2 ADVANCES AND PAYMENTS UNDER THE NOTE . . . . . . . . . . . . . . . .18
2.3 REPAYMENT PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . .18
2.4 INTEREST RATES . . . . . . . . . . . . . . . . . . . . . . . . . . .19
2.5 PHANTOM OVERRIDES. . . . . . . . . . . . . . . . . . . . . . . . . .20
2.6 GENERAL PROVISIONS RELATING TO INTEREST. . . . . . . . . . . . . . .21
2.7 LOANS TO SATISFY OBLIGATIONS . . . . . . . . . . . . . . . . . . . .22
2.8 VOLUNTARY PREPAYMENT . . . . . . . . . . . . . . . . . . . . . . . .23
ARTICLE 3 - CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . .23
3.1 CONDITIONS OF LENDER . . . . . . . . . . . . . . . . . . . . . . . .23
3.2 FURTHER CONDITIONS TO EACH ADVANCE PURSUANT TO SUBSECTION 2.1(b) . .27
3.3 FURTHER CONDITIONS TO EACH ADVANCE PURSUANT TO SUBSECTION 2.1(c) . .28
3.4 FURTHER CONDITIONS TO EACH ADVANCE PURSUANT TO SUBSECTION 2.1(d) . .29
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . .30
4.1 EXISTENCE AND GOOD STANDING. . . . . . . . . . . . . . . . . . . . .30
4.2 DUE AUTHORIZATION. . . . . . . . . . . . . . . . . . . . . . . . . .30
4.3 VALID AND BINDING OBLIGATIONS. . . . . . . . . . . . . . . . . . . .30
4.4 SCOPE AND ACCURACY OF FINANCIAL STATEMENTS . . . . . . . . . . . . .30
4.5 LIABILITIES AND LITIGATION . . . . . . . . . . . . . . . . . . . . .31
4.6 TITLE TO ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . .31
4.7 AUTHORIZATIONS AND CONSENTS. . . . . . . . . . . . . . . . . . . . .31
4.8 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . .31
<PAGE>
4.9 PROPER FILING OF TAX RETURNS AND PAYMENT OF TAXES DUE. . . . . . . .32
4.10 ERISA COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . .32
4.11 INVESTMENT COMPANY ACT COMPLIANCE. . . . . . . . . . . . . . . . . .32
4.12 PUBLIC UTILITY HOLDING COMPANY ACT COMPLIANCE. . . . . . . . . . . .32
4.13 LIEN PRIORITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .32
4.14 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . .33
4.15 FULL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . .33
4.16 PLACES OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . .33
4.17 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
ARTICLE 5 - AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . .33
5.1 MAINTENANCE AND ACCESS TO RECORDS. . . . . . . . . . . . . . . . . .33
5.2 QUARTERLY FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . .33
5.3 ANNUAL FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . .34
5.4 COMPLIANCE CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . .34
5.5 RESERVE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . .34
5.6 PROSPECT REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . .35
5.7 QUARTERLY MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . .35
5.8 PROSPECT INFORMATION . . . . . . . . . . . . . . . . . . . . . . . .35
5.9 SALES AND PRODUCTION REPORTS . . . . . . . . . . . . . . . . . . . .36
5.10 PAYMENT STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .36
5.11 ADDITIONAL LIENS . . . . . . . . . . . . . . . . . . . . . . . . . .36
5.12 STATEMENT OF MATERIAL ADVERSE EFFECT . . . . . . . . . . . . . . . .36
5.13 TITLE DEFECTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .36
5.14 ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . .36
5.15 COMPLIANCE WITH LAWS AND PAYMENT OF TAXES. . . . . . . . . . . . . .36
5.16 MAINTENANCE OF EXISTENCE AND GOOD STANDING . . . . . . . . . . . . .37
5.17 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . . . .37
5.18 INITIAL EXPENSES OF THE LENDER . . . . . . . . . . . . . . . . . . .37
5.19 SUBSEQUENT EXPENSES OF THE LENDER. . . . . . . . . . . . . . . . . .37
5.20 MAINTENANCE OF TANGIBLE PROPERTY . . . . . . . . . . . . . . . . . .38
5.21 MAINTENANCE OF INSURANCE . . . . . . . . . . . . . . . . . . . . . .38
5.22 RIGHT OF INSPECTION. . . . . . . . . . . . . . . . . . . . . . . . .38
5.23 COMPLIANCE WITH ERISA. . . . . . . . . . . . . . . . . . . . . . . .38
5.24 NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
5.25 HAZARDOUS SUBSTANCES INDEMNIFICATION . . . . . . . . . . . . . . . .39
ARTICLE 6 - NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . .40
<PAGE>
6.1 OTHER DEBT OF BORROWER . . . . . . . . . . . . . . . . . . . . . . .40
6.2 GUARANTY OF PAYMENT OR PERFORMANCE . . . . . . . . . . . . . . . . .40
6.3 LOANS, ADVANCES OR INVESTMENTS . . . . . . . . . . . . . . . . . . .40
6.4 MORTGAGES OR PLEDGES OF ASSETS . . . . . . . . . . . . . . . . . . .40
6.5 CANCELLATION OF INSURANCE. . . . . . . . . . . . . . . . . . . . . .40
6.6 SALES OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . .41
6.7 SALE AND LEASEBACK . . . . . . . . . . . . . . . . . . . . . . . . .41
6.8 DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . .41
6.9 CHANGES IN CORPORATE STRUCTURE . . . . . . . . . . . . . . . . . . .41
6.10 PAYMENT OF ACCOUNTS PAYABLE. . . . . . . . . . . . . . . . . . . . .41
6.11 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . .41
6.12 LIMITATION ON NEGATIVE PLEDGE CLAUSES. . . . . . . . . . . . . . . .42
6.13 NATURE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . .42
6.14 NO SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . .42
ARTICLE 7 - EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . .42
7.1 EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . .42
7.2 RIGHTS UPON OCCURRENCE OF UNMATURED EVENT OF DEFAULT . . . . . . . .44
7.3 RIGHTS UPON OCCURRENCE OF AN EVENT OF DEFAULT. . . . . . . . . . . .45
ARTICLE 8 - MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . .45
8.1 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
8.2 AMENDMENTS AND WAIVERS . . . . . . . . . . . . . . . . . . . . . . .46
8.3 INVALIDITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
8.4 SURVIVAL OF AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . .46
8.5 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . .46
8.6 RENEWAL, EXTENSION OR REARRANGEMENT. . . . . . . . . . . . . . . . .47
8.7 WAIVERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
8.8 CUMULATIVE RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . .47
8.9 TAXES, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
8.10 EXHIBITS; CONFLICTS. . . . . . . . . . . . . . . . . . . . . . . . .47
8.11 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS . . . . . . . . . . . .47
8.12 JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
8.13 JURY TRIAL WAIVED. . . . . . . . . . . . . . . . . . . . . . . . . .48
8.14 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
8.15 EFFECTIVENESS. . . . . . . . . . . . . . . . . . . . . . . . . . . .48
8.16 DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
8.17 RIGHTS OF THIRD PERSON . . . . . . . . . . . . . . . . . . . . . . .48
<PAGE>
8.18 ANNOUNCEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .49
8.19 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . .49
8.20 SURVIVAL OF CERTAIN COVENANTS. . . . . . . . . . . . . . . . . . . .50
8.21 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . .50
</TABLE>
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of February 23, 1998, is by and
between FRONTIER NATURAL GAS CORPORATION, an Oklahoma corporation (the
"BORROWER"), and DUKE ENERGY FINANCIAL SERVICES, INC., a Delaware corporation
(the "LENDER").
W I T N E S S E T H T H A T:
The Borrower, Aspect Resources LLC, a Colorado limited liability
company ("ASPECT"), and Esenjay Petroleum Corporation, a Texas corporation
("ESENJAY"), have entered into that certain Acquisition Agreement and Plan of
Exchange Regarding the Acquisition of Certain Assets of Esenjay Petroleum
Corporation and Aspect Resources LLC by Frontier Natural Gas Corporation dated
January 19, 1998 (the "EXCHANGE AGREEMENT") whereby Aspect and Esenjay intend to
exchange certain oil and gas prospects in various stages of development for and
in consideration of common stock of the Borrower. The closing of such
transaction is subject to approval by the Securities and Exchange Commission of
the form of proxy statement to be presented to the existing shareholders of
common stock of the Borrower and then approval of such transaction by such
shareholders. Upon obtaining such approvals, such transaction shall close and
become effective and thereafter the Borrower desires to raise additional capital
by selling additional shares of its common stock to the public.
Prior to such transactions closing and becoming effective and the
raising of such additional capital, the Borrower projects it will incur
obligations in connection with certain oil and gas prospects presently owned by
the Borrower and Esenjay will incur obligations in connection with certain oil
and gas prospects presently owned by Esenjay and intended to be contributed to
the Borrower pursuant to the terms of the Exchange Agreement.
In order to facilitate the transactions contemplated by the Exchange
Agreement, the Borrower has requested the Lender to extend credit to the
Borrower in order to enable it to borrow from time to time on or before July 30,
1998 sums not to exceed, either singularly or cumulatively, $7,800,000.00 to be
used for the repayment of certain indebtedness the Borrower owes Aspect, for the
payment of development costs of certain oil and gas prospects, by the Borrower
as loans to Esenjay for Esenjay to develop certain oil and gas prospects and to
repay holders of all of the Borrower's existing preferred stock. The Lender
agrees to extend such credit to the Borrower upon the terms and subject to the
conditions hereinafter set forth.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained and of the loans and commitment hereinafter referred
to, the Borrower and the Lender agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
1.1 DEFINED TERMS. As used in this Agreement, the following terms have
the following meanings:
"ADVANCE" means a direct advance of immediately available funds
by the Lender to the Borrower or funds advanced to another Person for
and on behalf of and at the direction of the Borrower pursuant to
Section 2.1 of this Agreement.
"AFFILIATE" means any Person controlling, controlled by, or under
common control with, any other Person. For purposes of this
definition, "control" (including "controlled by" and "under common
control with") means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies
of such Person, whether through the ownership of voting securities or
otherwise.
"AGREEMENT" means this Credit Agreement and all exhibits and
schedules hereto, as the same may be amended from time to time
according to the terms hereof.
"ASPECT" has the meaning indicated in the recitals hereof.
"ASPECT DEBT" means the Debt of the Borrower owed Aspect, being
$500,000.00 of outstanding principal and evidenced by that certain
Promissory Note dated January 12, 1998 executed by the Borrower to the
order of Aspect in the principal face amount of $1,800,000.00.
"ASPECT PROSPECTS" means (a) those certain undivided interests of
Aspect in certain oil and gas prospects intended to be conveyed to the
Borrower pursuant to the Exchange Agreement and which undivided
interests in such prospects are more particularly described on Exhibit
III attached hereto and a similar undivided interest in any other Oil
and Gas Property or associated Right which Aspect may acquire in any
of the areas outlined on the plats attached hereto behind each
respective Aspect Prospect and (b) any other undivided interest of
Aspect in any other oil and gas prospects which from
2
<PAGE>
time to time Aspect proposes and the Borrower and the Lender agree in
writing become Aspect Prospects.
"ASPECT SUBORDINATION AGREEMENT" means that certain Subordination
by and among Aspect, the Lender and the Borrower relating to the
subordination by Aspect of the repayment of Debt owed Aspect by the
Borrower to the repayment of the Obligations.
"BANK OF AMERICA DEBT" means the Debt of the Borrower owed Bank
of America Illinois, an Illinois banking corporation, which is
governed by that certain Credit Agreement dated as of January 3, 1996
between the Borrower and Bank of America Illinois.
"BORROWER" has the meaning indicated in the opening paragraph
hereof.
"BORROWER PROSPECTS" means (a) all of the undivided interest of
the Borrower in the oil and gas prospects described on Exhibit IV
attached hereto and any other interest in any Oil and Gas Property or
associated Right which the Borrower may acquire in any of the areas
outlined on the plats attached hereto behind each respective Borrower
Prospect and (b) any other undivided interest of the Borrower in any
other oil and gas prospects which from time to time the Borrower
proposes and the Lender agrees in writing become Borrower Prospects.
"BORROWING REQUEST" means a written application by the Borrower
for an Advance. Each such Borrowing Request shall specify the
requested amount of such Advance, the requested date of such Advance
and the purposes for which proceeds for such Advance will be used.
"BUSINESS DAY" means a day other than a Saturday, Sunday or legal
holiday for commercial banks in the State of Colorado.
"CLOSING DATE" means the date when all the conditions precedent
set forth in Section 3.1 of this Agreement have been fulfilled.
"COLLATERAL" means the Property now or at any time hereafter
securing the Obligations.
"COMMITMENT" means the obligation of the Lender as set forth
herein (a) contemporaneously with the execution and delivery of this
Agreement to extend credit by means of an Advance to the Borrower to
repay the Aspect
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Debt in full, (b) through the earlier of the date the Exchange Transactions
close and become effective or May 15, 1998, to extend credit to the
Borrower by means of Advances for the purposes set forth in
Subsection 2.1(b), with the sum of all such Advances made pursuant to
Subsections 2.1(a) and (b) from the date hereof through such earlier
date not to exceed either singularly or cumulatively, (i) $1,200,000.00
prior to the execution and delivery of the 420 Energy Investments Consent
or (ii) $1,800,000.00 after the execution and delivery of the 420 Energy
Investments Consent, (c) through the earlier of the date the Exchange
Transactions close and become effective or May 15, 1998, to extend credit
to the Borrower by means of Advances for the purposes set forth in
Subsection 2.1(c), with the sum of all such Advances made pursuant to
Subsection 2.1(c) from the date hereof through such earlier date not to
exceed either singularly or cumulatively, $3,000,000.00, and (d) if the
Exchange Transactions close and are effective by May 15, 1998, to extend
credit to the Borrower by means of Advances for the purposes set forth in
Subsection 2.1(d), with the sum of all Advances made from the date hereof
through June 30, 1998 not to exceed, singularly or cumulatively, (i)
$7,200,000.00 prior to the execution and delivery of the 420 Energy
Investments Consent or (ii) $7,800,000.00 after the execution and
delivery of the 420 Energy Investments Consent.
"COMPLIANCE CERTIFICATES" means the certificates of the president
or executive vice president of the Borrower submitted to the Lender
from time to time pursuant to this Agreement, which certificates shall
be substantially in the form attached hereto as Exhibit II.
"CONTESTED IN GOOD FAITH" means contested in good faith by
appropriate and lawful proceedings diligently conducted, reasonably
satisfactory to the Lender, (a) in which foreclosure, distraint, sale,
forfeiture, levy, execution or other similar proceedings have not been
initiated or have been stayed and continue to be stayed, (b) in which
a good faith contest will not materially detract from the value of the
Collateral, jeopardize the Rights of the Lender with respect to the
Collateral, interfere in any material respect with the operation by
the Borrower of its business, or otherwise have a Material Adverse
Effect, and (c) for which matter a reserve or other appropriate
provision has been established in accordance with the requirements of
GAAP.
"DEBT" of any Person means, to the extent of such Person's
liability, (a) all items of indebtedness for borrowed money,
obligations, and liabilities (whether matured or unmatured, liquidated
or unliquidated, direct or indirect,
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joint or several, contingent or otherwise), which in accordance with GAAP
should be classified upon such Person's balance sheet as liabilities, but
in any event including liabilities secured by any Lien existing on
Property of such Person or a Subsidiary of such Person, (b) the deferred
purchase price of Property or services and direct and contingent
obligations incurred in connection with letters of credit and similar
agreements and obligations as a lessee under leases which have been, or
which in accordance with GAAP should be, capitalized for financial
reporting purposes, (c) all guaranties, endorsements (other than for
collection or deposit in the ordinary course of business), and other
contingent obligations of such Person with respect to obligations of other
Persons of the types described in clauses (a) and/or (b) preceding,
(d) liabilities of unfunded vested benefits under any Plan, (e) Swaps
of such Person and (f) all obligations to supply funds to, invest in
or maintain working capital or equity capital of any other Person, or
otherwise to maintain the net worth or solvency or any balance sheet
condition of any other Person.
"DEBTOR RELIEF LAWS" means the Bankruptcy Code of the United
States of America, as amended from time to time, and all other
applicable liquidation, conservatorship, bankruptcy, moratorium,
rearrangement, receivership, insolvency, reorganization, or similar
debtor relief Laws or general equitable principles from time to time
in effect affecting the Rights of creditors generally.
"DEFAULT RATE" means a per annum rate of interest equal to the
Prime Rate plus eight percent (8%), but in no event to exceed the
Highest Lawful Rate.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) which together with the Borrower would be treated as a
single employer under Section 4001 of ERISA.
"ESENJAY" has the meaning indicated in the recitals hereof.
"ESENJAY CREDIT AGREEMENT" means that certain Credit Agreement
dated of even date herewith by and between the Borrower, as lender,
and Esenjay, as borrower.
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"ESENJAY PROSPECTS" means (a) those certain undivided interests
of Esenjay in certain oil and gas prospects intended to be conveyed to
the Borrower pursuant to the Exchange Agreement and which undivided
interests in such prospects are more particularly set forth on Exhibit
V attached hereto and any other interest in any Oil and Gas Property
or associated Right which Esenjay may acquire in any of the areas
outlined on the plats attached hereto as behind each respective
Esenjay Prospect and (b) any other undivided interest of Esenjay in
any other oil and gas prospects which from time to time Esenjay
proposes and the Borrower and the Lender agree in writing become
Esenjay Prospects.
"ESENJAY SUBORDINATION AGREEMENT" means that certain
Subordination by and among Esenjay, the Lender and the Borrower
relating to the subordination by Esenjay of the repayment of Debt owed
Esenjay by the Borrower to the repayment of the Obligations.
"EVENT OF DEFAULT" means any of the events specified in Section
7.1, provided that the requirements, if any, for the giving of notice,
the lapse of time, or both, or any other condition specified in
Section 7.1 have been satisfied.
"EXCHANGE AGREEMENT" has the meaning indicated in the recitals
hereof.
"EXCHANGE TRANSACTIONS" means the exchange of the Esenjay
Prospects by Esenjay and the Aspect Prospects by Aspect for common
stock of the Borrower as set forth in the Exchange Agreement.
"FACILITY RATE" means a varying rate of interest per annum equal
to the Prime Rate, from time to time in effect, plus four percent
(4%).
"FINANCIAL STATEMENTS" means statements of financial condition,
as at the point in time and for the period indicated, and consisting
of at least a balance sheet and related statements of operations,
stockholders' equity and cash flows and, when audited, accompanied by
the certification of independent certified public accountants, and
footnotes to any of the foregoing.
"420 ENERGY INVESTMENTS DEBT" means the Debt of the Borrower owed
420 Energy Investments, Inc., a Delaware corporation, which is
governed by that certain Loan Agreement dated as of March 1, 1996 as
amended by that certain First Amendment to Loan Agreement dated
effective September 1, 1996 between the Borrower and 420 Energy
Investments, Inc.
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<PAGE>
"420 ENERGY INVESTMENTS CONSENT" means the written consent, in
form and substance acceptable to the Lender at its sole discretion, of
420 Energy Investments, Inc. to the execution, delivery and
recordation of Security Documents encumbering the same Oil and Gas
Properties of the Borrower which are encumbered to secure the 420
Energy Investments Debt. Without limiting the Lender's discretion to
approve the form and substance of such consent, such consent shall not
require the Lender to subordinate the Debt governed by this Agreement
to the 420 Energy Investments Debt or require the Lender to limit,
forego or postpone any of its Rights under the Loan Documents.
"GAAP" means, generally accepted accounting principles
established by the Financial Accounting Standards Board and in effect
in the United States from time to time during the term of this
Agreement and applied on a basis consistent with that adopted in the
Financial Statements of the Borrower to be delivered to the Lender.
"GAINES BERLAND" means Gaines Berland Energy Fund, L.P., a
Delaware limited partnership.
"GUARANTIES" means those certain Limited Obligation Guaranty
Agreements dated of even date herewith of each of the Guarantors in
favor of the Lender pursuant to which the Guarantors each
unconditionally guarantees the payment and performance of up to a
certain amount of all of the Obligations, as such Limited Obligation
Guaranty Agreements may be amended from time to time.
"GUARANTORS" means each of Aspect, Esenjay and Gaines Berland.
"HAZARDOUS SUBSTANCES" means any flammables, explosives,
radioactive materials, hazardous wastes, asbestos or any material
containing asbestos, polychlorinated biphenyls (PCB's), toxic
substances or related materials, petroleum and petroleum products and
associated oil or natural gas exploration, production and development
wastes or any substances defined as "hazardous substances," "hazardous
materials," "hazardous wastes" or "toxic substance" under the
Comprehensive Environmental Response, Compensation and Liability Act,
as amended; the Superfund Amendments and Reauthorization Act, as
amended; the Hazardous Materials Transportation Act, as amended; the
Resource Conservation and Recovery Act, as amended; the Toxic
Substances Control Act, as amended; or any other law, statute,
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<PAGE>
ordinance, rule, regulation or order now or hereafter enacted or
promulgated by any governmental authority with jurisdiction and
relating to the protection of the environment.
"HIGHEST LAWFUL RATE" means the maximum rate (or, if the context
so permits or requires, an amount calculated at such rate) of interest
(if any) that, at the time in question, would not cause the interest
charged on the Obligations owed to the Lender to exceed the maximum
amount that the Lender would be allowed to contract for, charge, take,
reserve or receive under applicable Law after taking into account, to
the extent required by applicable Law, all relevant payments and
charges under the Loan Documents.
"INVESTMENT" in any Person means any stock, bond, note or other
evidence of Debt or any other security (other than current trade and
customer accounts) of, investment or partnership interest in or loan
to, such Person.
"LAWS" means all applicable statutes, laws, ordinances, rules,
rulings, interpretations, regulations, judgments, requirements,
governmental authorizations (including licenses, permits, franchises
and other governmental consents necessary for the ownership or
operation of Property), orders, writs, injunctions or decrees (or
interpretations of any of the foregoing) of any political subdivision,
state, commonwealth, nation, country, territory, possession, county,
parish, municipality or Tribunal.
"LENDER" has the meaning indicated in the opening paragraph
hereof.
"LIEN" means any lien, charge, claim, restriction, mortgage,
mechanic's lien, materialmen's lien, pledge, hypothecation, inchoate
lien, assignment, deposit arrangement, conditional sale or other title
retention agreement, financing lease, security interest, security
agreement or other encumbrance, whether arising by contract or under
Law, and includes reservations, exceptions, encroachments, easements,
rights-of-way, covenants, conditions, leases and other title
exceptions and the filing of any financing statement under the Uniform
Commercial Code of the State of Texas or comparable Law of any
jurisdiction.
"LIMITATION PERIOD" means any period during which the calculation
of interest as provided in any of the Loan Documents would result in
interest exceeding the Highest Lawful Rate.
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<PAGE>
"LIQUID INVESTMENTS" means Investments in (a) United States
government issued securities, obligations of the United States
government or any agency thereof and any obligations guaranteed by the
United States government with maturities of no more than one year, (b)
certificates of deposit or repurchase agreements issued by the Lender,
(c) certificates of deposit, in an aggregate amount not to exceed
$100,000.00 at any one time as to any one issuer, issued by other
banks or financial institutions organized under the Laws of the United
States or any state thereof, having capital surplus and undivided
profits aggregating at least $100,000,000.00 and with deposits insured
by the Federal Deposit Insurance Corporation, and (d) commercial paper
with a rating by Moody's Investor Service, Inc. of no less than A and
with maturities of no more than nine months from the date of
acquisition thereof.
"LITIGATION" means any proceeding, claim, lawsuit, and/or
investigation conducted, or threatened and known to the Person in
question, by or before any Tribunal.
"LOAN DOCUMENTS" means this Agreement, the Note, the Guaranties,
the Security Documents and all other notes, deeds of trust,
restatements, ratifications and amendments of deeds of trust,
financing statements, guaranties, security agreements, pledge
agreements, documents, instruments and other agreements now or
hereafter delivered pursuant to the terms of, or in connection with,
this Agreement, the Obligations and/or the Collateral, and all
renewals, extensions and restatements of, and amendments and
supplements to any or all of the foregoing.
"LOANS" means the loans and extensions of credit by the Lender to
or for the account of the Borrower pursuant to this Agreement.
"MATERIAL ADVERSE EFFECT" means any material and adverse effect
on (a) the assets, liabilities, financial condition, business or
operations of the Borrower that are material to the business or
financial condition of the Borrower, or (b) the ability of any of the
Borrower to meet its Obligations under any of the Loan Documents on a
timely basis as provided herein or therein.
"MORTGAGED PROPERTIES" shall mean Oil and Gas Properties of the
Borrower subject to the Liens of the Security Documents from time to
time to secure the Debt evidenced by the Note.
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<PAGE>
"MULTI-EMPLOYER PLAN" means a Plan described in Section
4001(9)(3) of ERISA which covers employees of the Borrower or any
ERISA Affiliate.
"NET REVENUE INTEREST" means that proportionate portion of
production attributable to the owner of an undivided interest in and
to any Oil and Gas Property after deduction for royalty burdens,
overriding royalty burdens or other burdens on production, if any,
except severance, production, windfall profits and other similar
taxes.
"NOTE" means that certain promissory note in the face amount of
$7,800,000.00 dated of even date herewith made by the Borrower to the
order of the Lender, in the form attached hereto as Exhibit I,
together with all deferrals, renewals or extensions thereof, which
promissory note shall evidence the Advances made to the Borrower by
the Lender pursuant to Section 2.1 and funds advanced and applied
pursuant to Section 2.7.
"OBLIGATIONS" means all present and future loans, advances,
indebtedness, obligations, covenants, duties and liabilities, and all
renewals for any period, increases and extensions thereof, or any part
thereof, now or hereafter owing to the Lender by the Borrower or the
Guarantors arising from or pursuant to any of the Loan Documents,
together with all interest accruing thereon, and costs, expenses, and
attorneys' fees incurred in the enforcement or collection thereof,
whether such indebtedness, obligations, and liabilities are direct,
indirect, fixed, contingent, liquidated, unliquidated, joint, several,
or joint and several, and all other indebtedness or obligations of any
type whatsoever now or hereafter owing to the Lender by the Borrower,
whether or not in connection with any of the Loan Documents.
"OIL AND GAS PROPERTIES" means fee, leasehold or other interests
in or under mineral estates or oil, gas and other liquid or gaseous
hydrocarbon leases with respect to properties situated in the United
States, including, without limitation, overriding royalty and royalty
interests, leasehold estate interests, net profits interests,
production payment interests and mineral fee interests, together with
contracts executed in connection therewith and all tenements,
hereditaments, appurtenances and properties, real or personal,
appertaining, belonging, affixed or incidental thereto.
"OVERRIDE PERCENTAGE" means a percentage equal to the product of
(a) six-tenths of one percent (0.6%) times (b) the result of the
number of days (not to exceed one hundred eighty (180)) from the date
of this Agreement to the
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date the Debt evidenced by the Note is repaid in full divided by one
hundred eighty (180) days.
"OVERRIDE WELL" means the Well Area established for any oil and
gas well drilled on a Prospect, spudded after the date of this
Agreement and prior to December 31, 2000, and completed as an oil and
gas well capable of producing in paying quantities; provided, however,
it shall not include any oil and gas wells drilled on an Aspect
Prospect if the Exchange Transactions do not close and become
effective.
"PAYMENT STATEMENT" means each statement prepared by or under the
supervision of the chief financial officer of the Borrower and
submitted to the Lender pursuant to Section 5.10, and setting forth in
such detail and with such supporting documentation as may reasonably
be required by the Lender, a statement of the calculation by the
Borrower of the amount of any charge due the Lender pursuant to
Section 2.5 on such date, including, without limitation, when such
Payment Statement is prepared in connection with a charge due the
Lender pursuant to Subsection 2.5(b), a statement of the gross volume
of sales and actual production during such month from all of the
Override Wells and prices received for such production, all of which
shall be certified by the chief financial officer of the Borrower as
having been prepared in good faith and on the basis of the best
information available to Borrower as of the time of preparation
thereof.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereof, established pursuant to Subtitle A of Title IV of
ERISA.
"PERMITTED LIENS" means: (a) Liens for Taxes, not yet due or
which are being Contested in Good Faith; (b) Liens in connection with
workers' compensation, unemployment insurance or other social security
(other than Liens created by Section 4068 of ERISA), old age pension
or public liability obligations which are not yet due or which are
being Contested in Good Faith; (c) vendors', carriers',
warehousemen's, repairmen's, mechanics', workmen's, materialmen's,
construction or other similar Liens arising by operation of Law in the
ordinary course of business or incident to the construction or
improvement of any Property in respect of obligations which are not
yet due or which are being Contested in Good Faith; (d) Liens to
operators and non-operators under joint operating agreements arising
in the ordinary course of business to secure amounts owing, which
amounts are not yet due or are being Contested in Good Faith; (e)
Liens under production sales agreements, division orders, operating
agreements and other agreements customary in the oil and gas business
for processing, producing and selling hydrocarbons; (f) Liens
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created in favor of the Lender securing Obligations hereunder and other
Liens expressly permitted under the Security Documents; (g) easements,
rights-of-way, restrictions and other similar encumbrances, and minor
defects in the chain of title which are customarily accepted in the
oil and gas financing industry, none of which interfere with the
ordinary conduct of the business of the owner of the Property or
materially detract from the value or use of the Property to which they
apply; (h) Liens of record under terms and provisions of the leases,
unit agreements, assignments and other transfer of title documents in
the chain of title under which the owner of the relevant Property
acquired such Property; (i) Liens securing the purchase price or
existing under conditional sale of title retention contracts for
equipment purchased in the normal course of business of the Borrower,
provided that such Lien shall not extend to or cover any other
Property of the Borrower; (j) Liens securing the Bank of America Debt
provided that such Liens shall not extend to or cover any other
Property of the Borrower except as set forth on Exhibit VI attached
hereto; and (k) Liens securing the 420 Energy Investments Debt
provided that such Liens shall not extend to or cover any other
Property of the Borrower except as set forth on Exhibit VII attached
hereto.
"PERSON" means any individual, sole proprietorship, firm,
corporation, trust, association, institution, partnership, joint
venture, Tribunal or other entity.
"PHANTOM OVERRIDE" means an overriding royalty interest
calculated for each Override Well equal to (a) the Override Percentage
times (b) (i) the Net Revenue Interest that the Borrower owns in an
Override Well on the date such Override Well was spudded and (ii) the
Net Revenue Interest which Esenjay and/or Aspect owns in an Override
Well on the date such Override Well was spudded and which was intended
to be conveyed to the Borrower pursuant to the Exchange Agreement.
"PHANTOM OVERRIDE FUTURE REVENUES" means the projections of
future net income to be derived from reserves of hydrocarbons
classified as "proved producing", "proved shut-in" or "proved behind
pipe", and based on projections of (a) future production from the
indicated Oil and Gas Properties and (b) a pricing assumption (i) for
oil of the 12 Months Futures Strip Price for light sweet crude oil
adjusted for location and grade and (ii) for gas of the 12 Months
Futures Strip Price for natural gas adjusted for location and grade.
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<PAGE>
"PLAN" means any pension plan that is covered by Title IV of
ERISA and maintained by the Borrower or any such plan to which the
Borrower is required to contribute.
"PREFERRED SHARES" means 85,961 shares of the Borrower's issued
and outstanding preferred stock, $.01 par value per share, being all
of the outstanding preferred stock of the Borrower as of the date of
this Agreement.
"PRIME RATE" means at any time the "prime rate" then most
recently published in the "Money Rates" or equivalent section of the
WALL STREET JOURNAL, provided that if a "prime rate" range is
published by the WALL STREET JOURNAL, then the middle of that range
will be the "Prime Rate".
"PROPERTY" means any interest in any kind of property or asset,
whether real, personal or mixed, tangible or intangible.
"PROSPECTS" means the Aspect Prospects, the Borrower Prospects
and the Esenjay Prospects.
"PROSPECT DEVELOPMENT COSTS" means amounts owed to other Persons
incurred by (a) the Borrower with respect to any of the Borrower
Prospects prior to the date the Exchange Transactions close and become
effective, (b) Esenjay with respect to any of the Esenjay Prospects
prior to the date the Exchange Transactions close and become effective
or (c) the Borrower with respect to any of the Prospects on or after
the date the Exchange Transactions close and become effective for
seismic options, seismic permits, options to acquire Oil and Gas
Properties, Oil and Gas Properties, recording fees, title examination,
lease broker fees and expenses, all other amounts owed other Persons
to obtain or maintain Rights in the Prospects necessary or advisable
for exploration and development of hydrocarbons on such Prospects,
seismic data, interpretation of seismic data, all other geologic and
geophysical costs related to the exploration and development of
hydrocarbons on such Prospects, and the drilling, testing, logging,
completing, equipping for production or plugging and abandoning any
oil and gas well located on such Prospects.
"RESERVOIR" means a separate, identifiable underground
accumulation of oil, gas and/or associated hydrocarbons segregated
from other such accumulations and characterized by a single pressure
system.
"REPORTABLE EVENT" and "PROHIBITED TRANSACTION" have the meanings
given to those terms under ERISA.
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"RIGHTS" means rights, remedies, powers and privileges.
"SECTION" or "SUBSECTION" means a section or subsection in this
Agreement unless specified otherwise.
"SECURITY DOCUMENTS" means the documents described in Subsection
3.1(a)(7) of this Agreement and all other documents now or hereafter
existing which provide the Lender with Collateral, as the same may be
amended or restated from time to time.
"SUBSIDIARY" of any Person means any corporation of which an
aggregate of fifty percent (50%) or more of the stock of any class or
classes is owned of record or beneficially, directly or indirectly, by
such Person, if the holders of the stock of such class or classes are
ordinarily entitled to vote for the election of a majority of the
directors (or individuals performing similar functions) of such
corporation (irrespective of whether, at the time in question, stock
of any other class or classes of such corporation shall have or might
have voting power by reason of the happening of any contingency).
"SWAPS" means, with respect to any Person, foreign exchange
transactions and commodity, currency and interest rate swaps, floors,
caps, collars, forward sales, options, other similar transactions and
combinations of the foregoing.
"TAXES" means all taxes, assessments, filing or other fees,
levies, imposts, duties, deductions, withholdings, stamp taxes,
interest equalization taxes, capital transaction taxes, foreign
exchange taxes or charges, or other charges of any nature whatsoever
from time to time or at any time imposed by any Law or Tribunal.
"TRIBUNAL" means any court, governmental department or authority,
commission, board, bureau, agency, arbitrator or instrumentality of
any state, political subdivision, commonwealth, nation, territory,
county, parish or municipality, whether now or hereafter existing,
having jurisdiction over the Lender, the Borrower or any of their
respective Property.
"12 MONTHS FUTURES STRIP PRICE" means for light sweet crude oil
or natural gas, as the case may be, (a) in the case of the additional
charge paid pursuant to Subsection 2.5(c), the average of the high and
low prices on the New York Mercantile Exchange for each month from and
including February 2001 through and including January 2002 as reported
in the "Futures Prices"
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section of the WALL STREET JOURNAL published on January 2, 2001 or the
first day thereafter the WALL STREET JOURNAL is published and (b) in the
case of an additional charge paid pursuant to Subsection 2.5(d), the
average of the high and low prices on the New York Mercantile Exchange for
each of the immediately succeeding twelve (12) months following the
effective date of the relevant sale as reported in the "Futures Prices"
section of the WALL STREET JOURNAL published on the effective date of such
relevant sale or the first day thereafter the WALL STREET JOURNAL is
published.
"UNMATURED EVENT OF DEFAULT" means any event or occurrence which
solely with the lapse of time or the giving of notice or both will
ripen into an Event of Default.
"WELL AREA" means, with respect to any oil and gas well, the area
within a particular Reservoir that can, as determined by statute
and/or the appropriate governmental authority having jurisdiction, be
efficiently and economically drained by such well. For purposes of
the foregoing: (a) as to any particular well located in the States of
Texas, the Well Area for such well shall be (i) the proration unit, if
any, from time to time allocated by the governmental authority having
jurisdiction to such well for the Reservoir to which such well is
completed, or (ii) in the absence of such a proration unit, the
spacing unit from time to time established for the Reservoir to which
such well is completed by statute or by rule, regulation or order
issued by the governmental authority having jurisdiction, and (b) as
to any particular well located in a State other than Texas, the Well
Area for such well shall be the drilling unit, spacing unit or
proration unit, as the case may be, from time to time established for
the Reservoir to which such well is completed by statute or by rule,
regulation or order issued by the governmental authority having
jurisdiction. In the absence of an applicable statute or an
applicable rule or special order issued by a governmental authority
having jurisdiction establishing the area within a particular
Reservoir that can be efficiently and economically drained by a
particular well, the Well Area within such Reservoir for such well
shall be (a) 160 acres, in the event such oil and gas well is drilled
and completed as a gas well in such Reservoir, and (b) 40 acres, in
the event such oil and gas well is drilled and completed as an oil
well in such Reservoir.
1.2 ACCOUNTING TERMS. All accounting and financial terms used in any
of the Loan Documents and the compliance with each covenant contained in the
Loan Documents that relates to financial matters shall be determined in
accordance with GAAP, except to the extent that a deviation therefrom is
expressly stated in such Loan Documents.
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1.3 NUMBER AND GENDER OF WORDS. Whenever the singular number is used
in any Loan Document, the same shall include the plural where appropriate,
and VICE VERSA; words of any gender in any Loan Document shall include each
other gender where appropriate; and the words "herein," "hereof," "hereunder"
and other words of similar import refer to the relevant Loan Document as a
whole and not to any particular part, section or subdivision thereof.
ARTICLE 2
TERMS OF FACILITY
2.1 ADVANCING COMMITMENT. (a) Contemporaneously with the execution and
delivery of this Agreement, but subject to the terms and conditions
(including, without limitation, the rights of the Lender to terminate the
Commitment hereunder upon an Event of Default or Unmatured Event of Default)
and relying on the representations and warranties contained in this Agreement
and the other Loan Documents, the Lender agrees to make an Advance to the
Borrower in the amount of $500,000.00 which will be used by the Borrower to
repay the Aspect Debt in full.
(b) Subject to the terms and conditions (including, without
limitation the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or Unmatured Event of Default) and relying on the
representations and warranties contained in this Agreement and the other Loan
Documents, from time to time until the earlier of the date the Exchange
Transactions have closed and become effective or May 15, 1998, the Lender
agrees to make Advances to the Borrower following receipt by the Lender of a
Borrowing Request on or before 10:00 a.m. Mountain Standard or Daylight
Savings Time, as the case may be, five (5) Business Days prior to the date of
the requested Advance, in such amounts as the Borrower may request, provided,
however, that each Advance shall be in an amount not less than $100,000.00,
be an integral multiple of $10,000.00, no Advance shall be made which will
cause the sum of all Advances made pursuant to Subsections 2.1(a) and (b) to
exceed, either singularly or cumulatively, (i) $1,200,000.00 prior to the
execution and delivery of the 420 Energy Investments Consent or (ii)
$1,800,000.00 after the execution and delivery of the 420 Energy Investments
Consent, and the proceeds of any such Advance shall be used only to pay
Prospect Development Costs relating to the Borrower Prospects and/or only up
to $250,000.00 per calendar month of general and administrative expense of
the Borrower. The Borrower may transmit Borrowing Requests to the Lender by
mail, personal delivery, telefacsimile, telex or other method; but the Lender
shall not be obligated to make Advances on the requested date unless the
Lender has received, on or before 10:00 a.m. Mountain Standard or Daylight
Savings Time, as the case may be, the relevant Borrowing Request five (5)
Business Days prior to such requested date.
(c) Subject to the terms and conditions (including, without
limitation the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or
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Unmatured Event of Default) and relying on the representations and warranties
contained in this Agreement and the other Loan Documents, from time to time
until the earlier of the date the Exchange Transactions have closed and
become effective or May 15, 1998, the Lender agrees to make Advances to the
Borrower following receipt by the Lender of a Borrowing Request on or before
10:00 a.m. Mountain Standard or Daylight Savings Time, as the case may be,
five (5) Business Days prior to the date of the requested Advance, in such
amounts as the Borrower may request, provided, however, that each Advance
shall be in an amount not less than $100,000.00, be an integral multiple of
$10,000.00, no Advance shall be made which will cause the sum of all Advances
made pursuant to this Subsection 2.1(c) to exceed, either singularly or
cumulatively, $3,000,000.00, and the proceeds of any such Advance shall be
loaned by the Borrower to Esenjay pursuant to and governed by the Esenjay
Credit Agreement. The Borrower may transmit Borrowing Requests to the Lender
by mail, personal delivery, telefacsimile, telex or other method; but the
Lender shall not be obligated to make Advances on the requested date unless
the Lender has received, on or before 10:00 a.m. Mountain Standard or
Daylight Savings Time, as the case may be, the relevant Borrowing Request
five (5) Business Days prior to such requested date.
(d) Subject to the terms and conditions (including, without
limitation the right of the Lender to terminate the Commitment hereunder upon
an Event of Default or Unmatured Event of Default) and relying on the
representations and warranties contained in this Agreement and the other Loan
Documents, from time to time from the date the Exchange Transactions have
closed and become effective until July 30, 1998, the Lender agrees to make
Advances to the Borrower following receipt by the Lender of a Borrowing
Request on or before 10:00 a.m. Mountain Standard or Daylight Savings Time,
as the case may be, five (5) Business Days prior to the date of the requested
Advance, in such amounts as the Borrower may request, provided, however, that
each Advance shall be in an amount not less than $100,000.00, be an integral
multiple of $10,000.00, no Advance shall be made which will cause the sum of
all Advances made pursuant to this Section 2.1 to exceed, either singularly
or cumulatively, (i) $7,200,000.00 prior to the execution and delivery of the
420 Energy Investments Consent or (ii) $7,800,000.00 after the execution and
delivery of the 420 Energy Investments Consent, and the proceeds of all such
Advances shall be used by the Borrower to pay Prospect Development Costs
relating to the Prospects, repay the holders of the Preferred Shares in full
and/or only up to $250,000.00 per calendar month of general and
administrative expense of the Borrower. The Borrower may transmit Borrowing
Requests to the Lender by mail, personal delivery, telefacsimile, telex or
other method; but the Lender shall not be obligated to make Advances on the
requested date unless the Lender has received, on or before 10:00 a.m.
Mountain Standard or Daylight Savings Time, as the case may be, the relevant
Borrowing Request five (5) Business Days prior to such requested date.
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The Advances made by the Lender to the Borrower pursuant to the
Commitment shall be made at the office of the Lender at 370 Seventeenth
Street, Suite 900, Denver, Colorado, 80202 and shall be evidenced by the Note.
2.2 ADVANCES AND PAYMENTS UNDER THE NOTE. The Lender is authorized by
the Borrower to attach to and to make a part of the Note a ledger (and
continuations thereto, if necessary) reflecting the amount of all Advances
made by the Lender and each payment made by the Borrower. Each time such an
Advance is made against or payment (including a prepayment) is made on the
Note, the Lender is authorized but not required to make a notation on the
ledger forming a part thereof reflecting the amount advanced or paid and the
date thereof; provided, however, that the failure of the Lender to do so
shall not relieve the Borrower of its liability hereunder or under the Note.
The aggregate unpaid amount of such Advances reflected by the
notations by the Lender on its records or the ledger sheets affixed to the
Note shall be deemed rebuttably presumptive evidence of the principal amounts
owing on the Note. The liability for payment of principal and interest
evidenced by the Note shall be limited to principal amounts actually advanced
and outstanding pursuant to this Agreement and the other Loan Documents and
interest accrued on such amounts calculated in accordance with this Agreement.
2.3 REPAYMENT PROVISIONS. All outstanding principal Debt for all
Advances evidenced by the Note shall be repayable:
(a) in eleven (11) monthly installments each equal to one
thirtieth (1/30th) of the outstanding principal Debt evidenced by the
Note on July 31, 1998, the first of such installments commencing
August 31, 1998 and continuing thereafter on the last day of each
succeeding calendar month through and including June 30, 1999; and
(b) in an installment equal to all of the principal outstanding
Debt evidenced by the Note on July 31, 1999.
Interest as it accrues on principal amounts evidenced by the Note
and calculated as provided herein and in the Note shall be due and payable
monthly commencing on the last day of March, 1998, and continuing thereafter
on the last day of each succeeding calendar month while any amount remains
owing on the Note, the interest payment in each instance to be that which has
been earned and remains unpaid.
Notwithstanding anything to the contrary herein, immediately upon
receipt by the Borrower of any monies for the sale or transfer of any of its
Property after July 1, 1998, the Borrower shall repay the Debt evidenced by
the Note in an installment equal to the lesser
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of (a) all Debt evidenced by the Note or (b) all such monies received by the
Borrower in connection with such sale or transfer, with such amount being
applied first to accrued and unpaid interest, the remainder to principal.
Notwithstanding anything to the contrary herein, within three (3)
Business Days of receipt by the Borrower of any monies raised in connection
with an underwritten public offering of any of its stock, the Borrower shall
repay the Debt evidenced by the Note in an installment equal to the lesser of
(a) all Debt evidenced by the Note or (b) all such monies received by the
Borrower on that day, with such amount being applied first to accrued and
unpaid interest, the remainder to principal.
All payments required pursuant to this Agreement or the Note shall
be made in immediately available funds; shall be deemed received by the
Lender on the next Business Day following receipt if such receipt is after
2:00 p.m. on any Business Day; and shall be made at the offices of the Lender
at 370 Seventeenth Street, Suite 900, Denver, Colorado 80202, provided,
however, the Lender may, upon notice to the Borrower, designate a different
place of payment. With each payment of principal, interest or other amount
made to the Lender, the Borrower will on the same day notify the Lender Attn:
Jeffrey B. Goodman by facsimile (713) 627-6271 of the details of such payment.
Certain of the Security Documents contain an assignment unto and in
favor of the Lender of all oil, gas and other minerals produced and to be
produced from or attributable to the Mortgaged Properties together with all
of the revenues and proceeds attributable to such production, and such
Security Documents further provide that all such revenues and proceeds which
may be so collected by the Lender pursuant to such assignment shall be
applied to the payment of the Note and the satisfaction of all other Debt to
be secured by such Security Documents. The Lender and the Borrower expressly
acknowledge and agree that so long as no Event of Default shall have occurred
and be continuing, the Lender shall be entitled only to payment on the Note
as set forth above, and the Borrower, to the extent of its rights apart from
this Agreement, shall be entitled to receive all proceeds of production
directly from the relevant purchasers or parties accounting for proceeds from
the sale of production. In connection with the rights of the Lender to all
proceeds or production upon the occurrence and continuation of an Event of
Default, the Borrower hereby grants the Lender a power of attorney, which
power is coupled with an interest and is irrevocable, to complete in all
respects and deliver to the addressee the letter transfer orders executed in
connection with the Security Instruments upon the occurrence and continuance
of an Event of Default.
2.4 INTEREST RATES. Principal amounts outstanding under the Note shall
bear interest at the Facility Rate (but in no event greater than the Highest
Lawful Rate) per annum, calculated on the basis of a year consisting of a
three hundred sixty day (360) year and
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twelve (12) 30-day months as provided by Article 5069-1H.003 Vernon's TEXAS
CIVIL STATUTES, as amended. Should default occur in the payment of the Note
and collection proceedings be instituted, all past due interest and principal
under the Note shall bear interest at the lesser of the Highest Lawful Rate
or the Default Rate per annum, calculated on the basis of a year consisting
of a three hundred sixty day (360) year and twelve (12) 30-day months as
provided by Article 5069-1H.003 Vernon's TEXAS CIVIL STATUTES, as amended and
if no Highest Lawful Rate exists, all past due interest and principal under
the Note shall bear interest at the Default Rate, calculated on the basis of
a year consisting of a three hundred sixty day (360) year and twelve (12)
30-day months as provided by Article 5069-1H.003 Vernon's TEXAS CIVIL
STATUTES, as amended.
2.5 PHANTOM OVERRIDES. (a) As consideration for the Commitment by the
Lender and in addition to interest accruing on principal evidenced by the
Note, the Borrower agrees to the following additional charges set forth in
this Section 2.5 and payable out of revenues of the Borrower.
(b) As such an additional charge, the Borrower will make a monthly
payment to the Lender equal to an amount of money that the Lender would have
received during the preceding calendar month if (i) the Lender owned a
Phantom Override in every Override Well, (ii) hydrocarbons attributable to
each such Phantom Override were sold at the same time, for the same price and
to the same purchaser of production that the hydrocarbons attributable to the
working interest which each such Phantom Override burdens were sold and (iii)
proceeds from the sale of hydrocarbons attributable to each such Phantom or
Override were received by the Lender from the respective purchasers of
production at the same time that the proceeds from the sale of hydrocarbons
attributable to the working interest which each such Phantom Override burdens
were received by the owner thereof (provided, however, the first payment
shall be equal to an amount of money the Lender would have received if
proceeds from the sale of production attributable to each such Phantom
Override from the date of first production for each Override Well were
received by the Lender during the preceding calendar month). Such monthly
payment shall commence the earlier of August 31, 1998 or the last day of the
first succeeding month after the Debt evidenced by the Note is repaid in full
and continue on the last day of such succeeding calendar month until the
Lender has been paid for all hydrocarbons produced through December 31, 2000
and attributable to the Phantom Override in each of the Override Wells.
(c) As such an additional charge, the Borrower will make a payment
to the Lender on April 1, 2001 in an amount equal to the present worth,
discounted at a rate of ten percent (10%) per annum, of Phantom Override
Future Revenues attributable to the Phantom Override in all of the Override
Wells as of January 1, 2001. The basis for such determination shall be the
reserve report dated effective January 1, 2001 submitted to the Lender by the
Borrower pursuant to Section 5.5.
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(d) Notwithstanding anything to the contrary in Subsections 2.5(b)
or (c), if the Borrower and/or Esenjay sells its interests in an Override
Well prior to January 1, 2001, as such an additional charge, the Borrower
will make a payment to the Lender within five (5) Business Days of the date
of any sale by the Borrower and/or Esenjay of its interests in such Override
Well in an amount equal to the present worth, discounted at a rate of ten
percent (10%) per annum, of Phantom Override Future Revenues attributable to
the Phantom Override in such Override Well as of the effective date of such
sale by the Borrower and/or Esenjay. The basis for such determination shall
be the most recent reserve report submitted to the Lender by the Borrower
pursuant to Section 5.5, adjusted for cumulative production since the
effective date of such reserve report. If either the Borrower or the Lender
in good faith determines that the most recent reserve report does not
accurately reflect the value of the Override Well sold, then the Borrower
shall obtain from the independent firm of petroleum engineers who prepared
the Borrower's most recent reserve report or another firm of independent
petroleum engineers acceptable to the Lender, an updated reserve report
effective through the effective date of such sale as to such Override Well.
When the Borrower pays the charge due the Lender pursuant to this Subsection
2.5(d) for an Override Well sold, the Borrower will no longer pay the charges
to the Lender due pursuant to Subsections 2.5(b) and (c) as they relate to
the Override Well sold.
2.6 GENERAL PROVISIONS RELATING TO INTEREST. It is the intention of
the parties hereto to comply strictly with the applicable usury Laws as in
effect from time to time; and in this connection, there shall never be taken,
reserved, contracted for, collected, charged or received on any Loan or any
other Obligation interest in excess of that which would accrue at the Highest
Lawful Rate. For purposes of Articles 5069-1D and 5069-1H, Vernon's TEXAS
CIVIL STATUTES, as amended, the Borrower agrees that the Highest Lawful Rate
shall be the "weekly rate ceiling" as defined in such article, provided that
the Lender may also rely, to the extent permitted by applicable Laws, on
alternative maximum rates of interest under such other applicable Laws, if
greater.
Notwithstanding anything herein or in the Note or the other Loan
Documents to the contrary, if during any Limitation Period the calculation of
interest at the rate otherwise due to the Lender would result in interest in
excess of that which would accrue at the Highest Lawful Rate, then during
such Limitation Period, the interest rate to be charged on the Obligations
shall be the Highest Lawful Rate, and the requirement of the Borrower for the
payment of other amounts, if any, constituting interest, shall be suspended
only to the extent that such fees are, when added to interest accruing on the
Note and other Obligations, if any, in excess of the Highest Lawful Rate.
During any period of time following a Limitation Period, to the extent
permitted by Laws applicable to the Lender, the interest rate to be charged
on the Obligations shall remain at the Highest Lawful Rate until such time as
there has been paid to the Lender: (a) the amount of interest in excess of
the amount
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accruing at the Highest Lawful Rate that the Lender would have received
during the Limitation Period if the otherwise applicable rate had been in
effect at all times and (b) all interest and fees otherwise payable to the
Lender hereunder as if the otherwise applicable rate had been in effect at
all times during such Limitation Period.
If under any circumstances the aggregate amount paid on the
Obligations includes amounts that are by Law deemed to be interest which
exceed the Highest Lawful Rate (the "EXCESS INTEREST"), the Borrower
stipulates that such payment and collection will have been and will be deemed
to have been, to the fullest extent permitted by applicable Laws, the result
of mathematical error on the part of the Borrower and the Lender, and the
Lender shall promptly credit the amount of such excess interest on the
principal amount of the outstanding Obligations, or if the principal amount
of the Obligations shall have been paid in full, refund the excess interest
to the Borrower. In the event that the maturity of the Note is accelerated
by reason of an election of the Lender resulting from any Event of Default or
by reason of operation of Subsection 7.3(a), or in the event of any
prepayment, then such consideration that constitutes interest under Laws
applicable to the Lender may never exceed the Highest Lawful Rate, and excess
interest, if any, provided for in the Note, this Agreement or otherwise shall
be cancelled automatically by the Lender as of the date of such acceleration
or prepayment and, if theretofore paid, shall be credited by the Lender on
the principal amount of the Obligations, or if the principal amount of the
Obligations shall have been paid in full, refunded by the Lender to the
Borrower.
All sums paid, or agreed to be paid, to the Lender for the use,
forbearance, and detention of the proceeds of the Loans shall, to the extent
permitted by applicable Law, be amortized, prorated, allocated, and spread
throughout the full term of the Obligations until paid in full so that the
actual rate of interest is uniform, but does not exceed the Highest Lawful
Rate, throughout the full term hereof.
2.7 LOANS TO SATISFY OBLIGATIONS. The Lender may, but shall not be
obligated to, make Loans and apply proceeds thereof to the satisfaction of
any warranty, representation, covenant or other Obligation of the Borrower
contained in this Agreement or the other Loan Documents and which are
necessary, in the good faith opinion of the Lender, to enforce its Rights,
protect or preserve the Collateral or the Liens thereon in favor of the
Lender and the priorities thereof, or avoid a Material Adverse Effect, and
contemporaneously with so doing, the Lender shall furnish the Borrower
written notice as to the amount and date of any such Loan. The Lender shall
not advance funds pursuant to this Section without notifying the Borrower of
the warranty, representation, covenant or other Obligation to be satisfied by
such proposed advance of funds and shall give the Borrower five (5) Business
Days from the date of such notice to satisfy such warranty, representation,
covenant or other Obligation. Any funds so advanced and applied shall be
evidenced by the Note, shall be payable on
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demand and shall bear interest at the Default Rate from the time of the
making of such Loan until the time of repayment.
2.8 VOLUNTARY PREPAYMENT. The Borrower shall have the right and option
to prepay, at any time without premium or penalty, all or any part of the
balance outstanding on the Note. Any such prepayments of Debt evidenced by
the Note shall be applied first to the payment of accrued and unpaid interest
thereon and then to the reduction of principal.
ARTICLE 3
CONDITIONS PRECEDENT
3.1 CONDITIONS OF LENDER. The execution and delivery of this Agreement
by the Lender and the making of the Advance to or for the benefit of the
Borrower as set forth in Subsection 2.1(a) is subject to the fulfillment of
the following conditions precedent, with all documents to be delivered to the
Lender to be in form and substance satisfactory to the Lender:
(a) The Lender shall have received the following documents,
appropriately executed and acknowledged and in multiple counterparts
as requested by the Lender:
(1) This Agreement and the Note executed by the Borrower;
(2) Certificates of the appropriate Tribunals of the State
of Oklahoma, dated reasonably near the Closing Date, to the
effect that attached thereto are the articles of
incorporation of the Borrower and all amendments thereto,
and that it is duly incorporated and in good standing with
respect to the payment of all franchise or similar Taxes;
(3) A copy of the bylaws of the Borrower and all amendments
thereto, accompanied by a certificate issued by its
secretary or assistant secretary that such copies are
correct and complete;
(4) Certificates of the appropriate Tribunals of the States
where the Prospects are located, dated reasonably near the
Closing Date, to the effect that it is duly qualified to
transact business in such jurisdictions and is in good
standing with respect to the payment of franchise and
similar Taxes;
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(5) Certificate of incumbency and signatures of all
officers of the Borrower who will be authorized to execute
the Loan Documents on its behalf, executed by the president
or vice president and the secretary or an assistant
secretary;
(6) A copy of the corporate resolutions of the Borrower
approving the Loan Documents and authorizing the
transactions contemplated therein, duly adopted by its board
of directors and accompanied by a certificate of the
secretary or an assistant secretary that such copy is a true
and correct copy of resolutions duly adopted by written
consent or at a meeting of the board of directors, that such
resolutions constitute all the resolutions adopted with
respect to such transactions, and that such resolutions have
not been amended, modified or revoked in any respect, and
are in full force and effect as of the Closing Date;
(7) The following documents creating, evidencing and
perfecting Liens in favor of the Lender to secure the
Obligations:
(i) A Mortgage, Collateral Assignment,
Security Agreement and Financing Statement from
the Borrower in favor of the Lender covering the
Oil and Gas Properties described on Exhibit VIII
attached hereto;
(ii) A Financing Statement from the Borrower
covering accounts from the sale of oil and gas
produced from such Oil and Gas Properties
described on Exhibit VIII attached hereto and
equipment and other personal property associated
therewith;
(iii) undated letter transfer orders
directed to the party remitting to the Borrower
proceeds from the sale of production from such Oil
and Gas Properties described on Exhibit VIII
attached hereto and instructing that such proceeds
be remitted to the Lender for the account of the
Borrower;
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(iv) a Security Agreement and Collateral
Assignment of Note and Liens from the Borrower in
favor of the Lender covering the Debt of Esenjay
owed the Borrower governed by the Esenjay Credit
Agreement and collateral for such Debt;
(v) the promissory note evidencing the Debt
of Esenjay owed the Borrower and governed by the
Esenjay Credit Agreement properly endorsed to the
Lender; and
(vi) a financing statement from the Borrower
associated with (iv) above;
(8) Certificate of incumbency and signatures of all
officers of Esenjay who will be authorized to execute its
Guaranty and the Esenjay Subordination Agreement on its
behalf, executed by the president or vice president and the
secretary or an assistant secretary;
(9) A copy of the corporate resolutions of Esenjay
approving its Guaranty and the Esenjay Subordination
Agreement and authorizing the transactions contemplated
therein, duly adopted by its board of directors and
accompanied by a certificate of the secretary or an
assistant secretary that such copy is a true and correct
copy of resolutions duly adopted by written consent or at a
meeting of the board of directors, that such resolutions
constitute all the resolutions adopted with respect to such
transactions, and that such resolutions have not been
amended, modified or revoked in any respect, and are in full
force and effect as of the Closing Date;
(10) Certificate of incumbency and signatures of all
managers of Aspect who will be authorized to execute its
Guaranty and the Aspect Subordination Agreement on its
behalf, executed by a member of Aspect;
(11) A copy of the company resolutions of Aspect approving
its Guaranty and the Aspect Subordination Agreement and
authorizing the transactions contemplated therein, duly
adopted
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by its members and accompanied by a certificate of a member of
Aspect that such copy is a true and correct copy of resolutions
duly adopted by written consent or at a meeting of the members, that
such resolutions constitute all the resolutions adopted with respect
to such transactions, and that such resolutions have not been
amended, modified or revoked in any respect, and are in full force
and effect as of the Closing Date;
(12) Certificate of incumbency and signatures of all
managers of Gaines Berland Management Company LLC, the
general partner of Gaines Berland, who will be authorized to
execute the Guaranty of Gaines Berland on behalf of Gaines
Berland Management Company as general partner of Gaines
Berland, executed by a manager of Gaines Berland Management
Company LLC;
(13) A copy of the resolutions of Gaines Berland Management
Company LLC, the general partner of Gaines Berland approving
the Guaranty of Gaines Berland and authorizing the
transactions contemplated therein, duly adopted by the
managers of Gaines Berland Management Company LLC and
accompanied by a certificate of a manager that such copy is
a true and correct copy of resolutions duly adopted by the
managers, that such resolutions constitute all the
resolutions adopted with respect to such transactions, and
that such resolutions have not been amended, modified or
revoked in any respect, and are in full force and effect as
of the Closing Date;
(14) The Guaranties executed by the respective Guarantors;
(15) The Aspect Subordination Agreement executed by Aspect
and the Borrower;
(16) The Esenjay Subordination Agreement executed by Esenjay
and the Borrower;
(17) The Exchange Agreement shall not have been amended or
modified;
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(18) The opinion of legal counsel to the Borrower, which
opinion shall be accompanied by such supporting
documentation as the Lender or its legal counsel may
reasonably require; and
(19) Such other agreements, documents, instruments,
opinions, certificates, waivers, consents, and evidence as
the Lender may reasonably request in compliance with or to
accomplish the terms and provisions of any of the Loan
Documents;
(b) The representations and warranties contained in Article 4
shall be true and correct in all material respects on the date of
execution of this Agreement;
(c) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing;
(d) The Lender shall have approved in all respects, at its
discretion, the Mortgaged Properties existing as of the date of this
Agreement, including, without limitation, title to and the
environmental status of such Mortgaged Properties;
(e) All of the conditions set forth in Section 3.1 of the
Esenjay Credit Agreement shall have occurred to the satisfaction of
the Lender, at its discretion;
(f) Each of the Borrower, Esenjay and Aspect shall have executed
and delivered the letter agreement with Duke Energy Field Services,
Inc. relating to the gathering, processing, marketing and transporting
of hydrocarbons for certain of the Prospects, a copy of which is
attached hereto as Exhibit IX;
(g) The Aspect Prospects and the Esenjay Prospects are free and
clear of all sales contracts, preferential purchase rights, rights of
first refusal, rights to match or any other restrictions upon any
Right of Aspect or Esenjay, as the case may be, to gather, process,
market and transport hydrocarbons produced therefrom, except as set
forth on Exhibit X attached hereto; and
(h) All legal matters incident to the execution of this
Agreement shall be satisfactory to the firm of Henderson & Hammon,
L.L.P., special counsel for the Lender.
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3.2 FURTHER CONDITIONS TO EACH ADVANCE PURSUANT TO SUBSECTION 2.1(b).
The obligation of the Lender to make any Advance pursuant to Subsection
2.1(b) is subject to the fulfillment of the following further conditions
precedent:
(a) The representations and warranties contained in Article 4
shall be true and correct in all material respects as of the date of
Advance;
(b) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing or will have occurred at the completion of
making the Advance;
(c) No Material Adverse Effect shall have occurred since the
Closing Date;
(d) The Lender shall have received a Borrowing Request;
(e) The Lender shall have received with the Borrowing Request a
list in reasonable detail of the Prospect Development Costs to be paid
with the proceeds of such Advance and be accompanied by evidence of
such Prospect Development Costs, as is requested by the Lender; and
(f) All legal matters incident to the consummation of such Loan
shall be satisfactory to the then special counsel for the Lender.
3.3 FURTHER CONDITIONS TO EACH ADVANCE PURSUANT TO SUBSECTION 2.1(c).
The obligation of the Lender to make any Advance pursuant to Subsection
2.1(c) is subject to the fulfillment of the following further conditions
precedent:
(a) The representations and warranties contained in Article 4
shall be true and correct in all material respects as of the date of
Advance;
(b) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing or will have occurred at the completion of
making the Advance;
(c) No Material Adverse Effect shall have occurred since the
Closing Date;
(d) The Lender shall have received a Borrowing Request;
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(e) All of the conditions set forth in Section 3.2 of the
Esenjay Credit Agreement shall have occurred to the satisfaction of
the Lender, at its discretion;
(f) The Lender shall have received with the Borrowing Request
copies of all documentation delivered to the Borrower by Esenjay
pursuant to Section 3.2 of the Esenjay Credit Agreement; and
(g) All legal matters incident to the consummation of such Loan
shall be satisfactory to the then special counsel for the Lender.
3.4 FURTHER CONDITIONS TO EACH ADVANCE PURSUANT TO SUBSECTION 2.1(d).
The obligation of the Lender to make any Advance pursuant to Subsection
2.1(d) is subject to the fulfillment of the following further conditions
precedent:
(a) The Exchange Transactions shall have closed and become
effective by May 15, 1998;
(b) The Aspect Prospects and the Esenjay Prospects shall have
been conveyed to the Borrower free and clear of all Liens, except
Permitted Liens, and free and clear of all sales contracts,
preferential purchase rights, rights of first refusal, rights to match
or any other restrictions upon any Right of the Borrower to gather,
process, market and transport hydrocarbons produced therefrom, except
as set forth on Exhibit X attached hereto;
(c) Aspect shall execute and deliver to the Lender an amendment
in form and substance satisfactory to the Lender increasing the
limitation of its Guaranty to $2,175,000.00 and Esenjay shall execute
and deliver to the Lender an amendment in form and substance
satisfactory to the Lender increasing the limitation of its Guaranty
to $1,950,000.00;
(d) The representations and warranties contained in Article 4
shall be true and correct in all material respects as of the date of
Advance;
(e) No Event of Default or Unmatured Event of Default shall have
occurred and be continuing or will have occurred at the completion of
making the Advance;
(f) No Material Adverse Effect shall have occurred since the
Closing Date;
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(g) The Lender shall have received a Borrowing Request;
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(h) The Lender shall have received with the Borrowing Request a
list in reasonable detail of the Prospect Development Costs to be paid
with the proceeds of such Advance and be accompanied by evidence of
such Prospect Development Costs, as is requested by the Lender; and
(i) All legal matters incident to the consummation of such Loan
shall be satisfactory to the then special counsel for the Lender.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
To induce the Lender to enter into this Agreement and to make the
Loans hereunder, the Borrower represents and warrants to the Lender (which
representations and warranties shall survive the delivery of the Note and the
making of the Loans) that:
4.1 EXISTENCE AND GOOD STANDING. The Borrower is a corporation, duly
organized, legally existing and in good standing under the Laws of the State
of Oklahoma and is duly qualified and in good standing as a foreign
corporation in all jurisdictions where any Prospect is located.
4.2 DUE AUTHORIZATION. The execution and delivery by the Borrower of
this Agreement and the borrowings hereunder, the execution and delivery by
the Borrower of the Note and the other Loan Documents, the repayment of the
Loans and interest and fees provided in the Note and this Agreement and the
performance of all Obligations of the Borrower under this Agreement and the
other Loan Documents, are within the corporate power of the Borrower, have
been duly authorized by all necessary corporate action on behalf of the
Borrower and do not (a) require the consent of any Tribunal or other Person
which has not been obtained, (b) contravene or conflict with any provision of
applicable Law or the charter or bylaws of the Borrower, (c) contravene,
conflict with or result in a default under any indenture, instrument,
contract or other agreement to which the Borrower is a party or by which its
Properties may be presently bound or encumbered, or (d) result in or require
the creation or imposition of any Lien upon any of the Property of the
Borrower, other than Permitted Liens.
4.3 VALID AND BINDING OBLIGATIONS. This Agreement and the other Loan
Documents constitute valid and binding obligations of the Borrower,
enforceable in accordance with their respective terms, except as limited by
Debtor Relief Laws.
4.4 SCOPE AND ACCURACY OF FINANCIAL STATEMENTS. The Financial
Statements of the Borrower as of October 31, 1997, including any schedules
and notes pertaining thereto, which have been delivered to the Lender have
been prepared in accordance with GAAP and
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fairly and accurately present the financial condition and the results of the
operations thereof in all material respects, as of the dates and for the
periods stated therein.
4.5 LIABILITIES AND LITIGATION. Except for (a) liabilities shown in
the Financial Statements of the Borrower as of October 31, 1997 and furnished
to the Lenders, (b) the Aspect Debt (which shall be repaid in full
contemporaneously with the execution and delivery of this Agreement) and (c)
liabilities incurred in the ordinary course of business since the date of
such Financial Statements, the Borrower does not have any material
liabilities of any nature, direct or contingent; and the Borrower is not in
default with respect to any such material liabilities or any material
agreements by which it is bound.
There is no judgment against the Borrower, nor, except as set forth
on Exhibit XI attached hereto, is there any Litigation or other action of any
nature pending before any Tribunal or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or its Property.
4.6 TITLE TO ASSETS. The Borrower has indefeasible title to all of its
Property, free and clear of all Liens, except for Permitted Liens. All of
the Borrower Prospects are free and clear of all sales contracts,
preferential purchase rights, rights of first refusal, rights to market or
any other restrictions upon any Right of Borrower to gather, process, market
or transport hydrocarbons produced therefrom, except as set forth on Exhibit
X attached hereto.
4.7 AUTHORIZATIONS AND CONSENTS. Except for that obtained from Bank of
America Illinois and except for the consent of 420 Energy Investments, Inc.
which has not been obtained, no authorization, consent, approval, exemption,
franchise, permit or license of, or filing (except for filings required to
perfect and maintain perfection of the Liens created by the Security
Documents) with, any Tribunal or any third Person is required to authorize,
or is otherwise required in connection with, the valid execution, delivery
and performance by the Borrower of this Agreement, the other Loan Documents
or any other agreement contemplated hereby or the repayment by the Borrower
of the Obligations.
4.8 COMPLIANCE WITH LAWS. Neither the business nor any of the
activities of the Borrower as presently conducted violates any applicable
Law, the result of which violation would have a Material Adverse Effect. The
Borrower possesses all licenses, approvals, registrations, permits and other
authorizations necessary to enable it to carry on its businesses in all
material respects as now conducted. All such licenses, approvals,
registrations, permits and other authorizations are in full force and effect.
Furthermore, the Borrower does not have any reason to believe that it will
be unable to obtain the renewal of any such licenses, approvals,
registrations, permits and other authorizations in due course.
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4.9 PROPER FILING OF TAX RETURNS AND PAYMENT OF TAXES DUE. The
Borrower has duly and properly filed all Tax returns which are required to be
filed and has paid all Taxes due pursuant to such returns or pursuant to any
assessment received, except such Taxes, if any, as are being Contested in
Good Faith. The charges and reserves on the Borrower's books with respect to
any Taxes are adequate, and the Borrower does not owe any deficiency or
additional assessment in a material amount in connection with Taxes.
4.10 ERISA COMPLIANCE. The Borrower does not currently contribute to,
or has any obligation to contribute to, and has not at any time contributed
to, or had an obligation to contribute to, any Multi-employer Plan. The
Borrower will not, during the term of this Agreement, assume an obligation,
or acquire any entity or the assets of any entity which has at any time had
an obligation, to contribute to any Multi-employer Plan. Since the effective
date of ERISA, no Reportable Event or Prohibited Transaction has occurred
with respect to any Plan of the Borrower. Each Plan established or
maintained by the Borrower meets the minimum funding standards of Section 302
of ERISA and otherwise is in compliance with all applicable provisions of
ERISA. The Borrower has filed all reports required by ERISA and required to
be filed with respect to each Plan. The Borrower does not have any knowledge
of any event that could result in any material liability of the Borrower to
the PBGC. The Borrower has met all requirements with respect to funding the
Plans imposed by ERISA or the PBGC. Since the effective date of Title IV of
ERISA, there have not been any nor are there now existing any events or
conditions that would permit any Plan to be terminated under circumstances
that would cause the lien provided under Section 4068 of ERISA to attach to
the assets of the Borrower. The value of the Plans' benefits guaranteed under
Title IV of ERISA on the date hereof does not exceed the value of such Plans'
assets allocable to such benefits as of the date of this Agreement and shall
not be permitted to do so hereafter.
4.11 INVESTMENT COMPANY ACT COMPLIANCE. The Borrower is not an
"investment company" or directly or indirectly controlled by or acting on
behalf of any Person which is an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
4.12 PUBLIC UTILITY HOLDING COMPANY ACT COMPLIANCE. The Borrower is not
subject to the provisions of the Public Utility Holding Company Act of 1935,
as amended.
4.13 LIEN PRIORITY. The Liens created in favor of the Lender under the
Security Documents constitute and shall remain first priority Liens to secure
the Obligations, subject only to Permitted Liens.
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4.14 USE OF PROCEEDS. All proceeds of Advances made pursuant to this
Agreement shall be used generally as set forth in Section 2.1 of this
Agreement and specifically as represented by the Borrower in each Borrowing
Request.
4.15 FULL DISCLOSURE. All of the Loan Documents and all written
statements furnished by the Borrower, Esenjay and/or Aspect in connection
with the consummation of the transactions contemplated by this Agreement,
when taken together, do not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements contained
herein or therein not misleading as of the date made or deemed made.
4.16 PLACES OF BUSINESS. The chief executive office and principal place
of business of the Borrower is 500 Dallas, Suite 2920, Houston, Texas 77002.
All records of the Borrower are maintained at such offices. After the
Exchange Transactions close and become effective the Borrower intends to move
its chief executive office and principal place of business to 500 N. Water
Street, Suite 1100, Corpus Christi, Texas 78471.
4.17 SUBSIDIARIES. The Borrower owns all of the issued and outstanding
capital stock of Frontier Acquisition Corporation, an Oklahoma corporation,
Frontier, Inc., an Oklahoma corporation, and Frontier Exploration &
Production Corporation, an Oklahoma corporation. Frontier Acquisition
Corporation owns all of the issued and outstanding capital stock of Petroleum
Acquisition Corporation, a Delaware corporation. The Borrower has no other
Subsidiaries.
ARTICLE 5
AFFIRMATIVE COVENANTS
So long as any Debt evidenced by the Note remains unpaid or the
Lender remains obligated to make Advances, and in absence of written consent
of the Lender to the contrary:
5.1 MAINTENANCE AND ACCESS TO RECORDS. The Borrower will keep adequate
records, in accordance with GAAP or other established industry practices, of
all of its transactions so that at any time, and from time to time, its true
and complete financial condition may be readily determined and, at the
Lender's reasonable request, make all such records available for the Lender's
inspection and permit the Lender to make and take away copies thereof.
5.2 QUARTERLY FINANCIAL STATEMENTS. The Borrower will deliver to the
Lender, as soon as available but in no event later than sixty (60) days after
the end of each of the first three fiscal quarters of the Borrower, the
unaudited Financial Statements of the Borrower and all of its Subsidiaries
reflecting the financial condition and results of operations of the
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Borrower and all of its Subsidiaries on a consolidated and consolidating
basis as at the end of such period and from the beginning of such fiscal year
to the end of such period, as applicable. Such Financial Statements shall be
certified by the chief financial officer of the Borrower as having been
prepared in accordance with GAAP and presenting the financial condition and
the results of the operations of the Borrower and all of its Subsidiaries on
a consolidated and consolidating basis subject to changes resulting from
year-end audit adjustments.
5.3 ANNUAL FINANCIAL STATEMENTS. The Borrower will deliver to the
Lender, as soon as available but in no event later than ninety (90) days
after the close of each fiscal year of the Borrower, annual audited Financial
Statements of the Borrower and all of its Subsidiaries reflecting the
financial condition of the Borrower and all of its Subsidiaries on a
consolidated and consolidating basis, together with a report and opinion on
such Financial Statements issued by a nationally recognized firm of
independent certified public accountants or another firm of independent
certified public accountants satisfactory to the Lender.
5.4 COMPLIANCE CERTIFICATES. The Borrower will deliver to the Lender
with each Financial Statement delivered pursuant to Sections 5.2 or 5.3 a
duly executed Compliance Certificate.
5.5 RESERVE REPORT. The Borrower will deliver to the Lender promptly
after March 1, 1998, and in any event prior to April 1, 1998, two reports, in
form and substance satisfactory to the Lender, one prepared by Hofmann
Engineering Co. and the other prepared by Netherland, Sewell & Associates,
Inc., which reports shall set forth as of January 1, 1998, projections of
future net income from hydrocarbons classified as "proved producing", "proved
shut-in", "proved behind pipe" and "proved undeveloped" attributable to all of
the Oil and Gas Properties of the Borrower as of January 1, 1998 and (b) such
other information concerning such Oil and Gas Properties of the Borrower as
the Lender may reasonably request, including, without limitation,
engineering, geological and performance data.
The Borrower will deliver to the Lender promptly after March 1 of
each year, commencing March 1, 1999, and in any event prior to April 1, 1998
of each such year, (a) a report, in form and substance satisfactory to the
Lender, prepared by a nationally recognized firm of independent petroleum
engineers, which report shall set forth, as of January 1 of the appropriate
year, projections of future net income from hydrocarbons classified as
"proved producing", "proved shut-in", "proved behind pipe" and "proved
undeveloped" attributable to all of the Oil and Gas Properties of the
Borrower and (b) such other information concerning the Oil and Gas Properties
of the Borrower as the Lender may reasonably request, including, without
limitation, engineering, geological and performance data.
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The Borrower will deliver to the Lender promptly after receipt
thereof, any other reserve report prepared for or on behalf of the Borrower
by an independent firm of independent petroleum engineers, setting forth
projections of future net income from hydrocarbons classified as "proved
producing", "proved shut-in", "proved behind pipe" and "proved undeveloped"
attributable to any of the Oil and Gas Properties of the Borrower.
5.6 PROSPECT REPORT. Commencing March 1, 1998, the Borrower will
deliver to the Lender promptly and in any event within ten (10) days after
the end of each calendar month, with respect to each of the Borrower
Prospects and, if the Exchange Transactions close and become effective, with
respect to each of the Prospects a report, in form and substance satisfactory
to the Lender, prepared by the Borrower and setting forth the activities of
the Borrower with respect to the seismic programs, seismic interpretation,
land acquisition and exploration and development for each of such Prospects
during the previous month. Such report shall be certified by the president
of the Borrower as being true and correct in all material respects.
5.7 QUARTERLY MEETINGS. Commencing April 14, 1998, the Borrower will
meet with the Lender on the second Tuesday of each calendar quarter (or such
other date as is mutually agreeable) at a time and place mutually agreeable
to review with respect to each of the Borrower Prospects and, if the Exchange
Transactions close and become effective, with respect to each of the
Prospects (a) the activities of the Borrower, costs and timing of seismic
programs, seismic interpretation, land acquisition and exploration and
development which has occurred since the last meeting, (b) the plans of the
Borrower, including, without limitation, a projected budget, for the next
fiscal quarter for seismic programs, seismic interpretation, land acquisition
and exploration and development and (c) such other matters at the Lenders
request.
5.8 PROSPECT INFORMATION. The Borrower will provide access to the
Lender, promptly upon the Lender's written request from time to time to such
information relating to any of the Borrower Prospects and, if the Exchange
Transactions close and become effective, any of the Prospects, including,
without limitation, (a) all seismic options, seismic permits, options to
acquire Oil and Gas Properties, Oil and Gas Properties and all other
contracts relating to such Prospects, (b) detailed maps of such Prospects,
(c) title materials relating to such Prospects, (d) seismic data and
interpretations relating to such Prospects and (e) AFEs, drilling reports,
logs, side wall cores, well tests, formation tests or completion reports
relating to any oil and gas wells located on such Prospects. Promptly upon
the Lender's written request, the Borrower will furnish copies of any such
information to the extent that it is reasonable do so.
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5.9 SALES AND PRODUCTION REPORTS. The Borrower will deliver to the
Lender, as soon as available and in any event within sixty (60) days after
the end of each calendar month, a report summarizing, as requested by the
Lender, (a) the gross volume of sales and actual production during such month
from all of the Oil and Gas Properties of the Borrower and current prices
being received for such production, (b) the related severance, gross
production, occupation, excise, sales, recording, ad valorem, gathering and
other similar taxes, if any, deducted from gross proceeds during such month
and (c) leasehold operating expenses and drilling expenditures attributable
thereto and incurred during such month.
5.10 PAYMENT STATEMENTS. The Borrower will deliver to the Lender with
the payment of each charge set forth in Section 2.5 a Payment Statement.
5.11 ADDITIONAL LIENS. Within five (5) Business Days of the written
request of the Lender, the Borrower will execute and deliver documentation,
in form and substance acceptable to the Lender at its reasonable discretion,
granting a Lien in favor of the Lender against any Oil and Gas Interests,
other Property or Rights owned by the Borrower in or relating to any Prospect
to secure repayment of the Debt evidenced by the Note.
5.12 STATEMENT OF MATERIAL ADVERSE EFFECT. The Borrower will deliver to
the Lender, promptly upon any officer of the Borrower having knowledge of any
Event of Default or event or condition (except for events or conditions as to
the economy of the United States as a whole or the oil and gas industry as a
whole) causing or likely to cause a Material Adverse Effect, a statement of
the president of the Borrower, setting forth the Event of Default or event or
condition causing or likely to cause a Material Adverse Effect and the steps
being taken with respect thereto.
5.13 TITLE DEFECTS. Other than Permitted Liens, the Borrower will clear
any title defects to the Oil and Gas Properties of the Borrower material in
value, in the sole reasonable opinion of the Lender, and, in the event any
such title defects are not cured in a timely manner, pay all related costs
and fees incurred by the Lender to do so.
5.14 ADDITIONAL INFORMATION. The Borrower will furnish to the Lender,
promptly upon the Lender's request from time to time, such additional
financial or other information concerning the assets, liabilities, operations
and transactions of the Borrower, as the Lender may reasonably request.
5.15 COMPLIANCE WITH LAWS AND PAYMENT OF TAXES. The Borrower will
comply in all material respects with all Laws and pay all Taxes, claims for
labor, supplies, rent and other obligations which, if unpaid, might become a
Lien against any of the its Oil and Gas Properties, except any of the
foregoing being Contested in Good Faith.
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5.16 MAINTENANCE OF EXISTENCE AND GOOD STANDING. The Borrower will
maintain its corporate existence or qualification and good standing in its
jurisdiction of incorporation and in all jurisdictions where a Prospect is
located.
5.17 FURTHER ASSURANCES. The Borrower will promptly cure any defects,
errors or omissions in the execution and delivery of the Loan Documents and,
upon notice, take such other action and immediately execute and deliver to
the Lender all such other and further instruments as may be reasonably
required or desired by the Lender from time to time in compliance with the
covenants and agreements made in this Agreement and the other Loan Documents,
including, without limitation, taking such action as may be required to cure
or correct any defects in title to any Oil and Gas Property (other than such
defects in title which are Permitted Liens) and to create, perfect and
maintain Liens on the Collateral and all other Property intended as security
for the Obligations.
5.18 INITIAL EXPENSES OF THE LENDER. The Borrower will pay (a) all
third party fees and expenses of the Lender up to $30,000.00 and (b) one-half
of all third party fees and expenses of the Lender in excess of $30,000.00
and up to $50,000.00 incurred in connection with the preparation and
negotiation of the Loan Documents, the satisfaction of the conditions
precedent set forth in Article 3 and the consummation for the transactions
contemplated herein, including attorneys' fees.
5.19 SUBSEQUENT EXPENSES OF THE LENDER. Upon request, the Borrower will
promptly reimburse the Lender for all amounts reasonably expended, advanced
or incurred by the Lender in connection with the preparation of any
assignments of, renewals of and amendments to any of the Loan Documents.
Upon request, the Borrower will promptly reimburse the Lender for all amounts
reasonably expended, advanced or incurred by the Lender to collect the Note
or to enforce the Rights of the Lender under this Agreement or any of the
other Loan Documents, all of which amounts shall be deemed compensatory in
nature and liquidated as to amount upon notice to the Borrower by the Lender
and which amounts will include, but not be limited to, (i) all court costs,
(ii) attorneys' fees, (iii) fees of auditors and accountants, (iv)
investigation expenses, (v) fees and expenses incurred in connection with the
Lender's participation as a member of the creditors' committee in a case
commenced under any Debtor Relief Laws, (vi) fees and expenses incurred in
connection with lifting the automatic stay prescribed in 11 U.S.C. Section
362, and (vii) fees and expenses incurred in connection with any action
pursuant to 11 U.S.C. Section 1129 incurred by the Lender in connection with
the collection of any sums due under this Agreement or the other Loan
Documents, together with interest at the Default Rate, calculated on a per
diem basis of a year of 365 days, on each such amount from the date of
notification to the Borrower that the same was expended, advanced or incurred
by the Lender until the date it is repaid to the Lender, with the Obligations
under this Section surviving the non-assumption of this Agreement in a case
commenced under any Debtor Relief Laws and being binding upon the
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Borrower, any guarantor or a trustee, receiver or liquidator of any such
party appointed in any such case.
5.20 MAINTENANCE OF TANGIBLE PROPERTY. The Borrower will maintain, or
to the extent that the right of operating is vested in others, will exercise
its best efforts to require the operator to maintain, all of the its
producing Oil and Gas Properties in good repair and working order and make
all necessary replacements thereof and operate such Property in a good and
workmanlike manner, unless the failure to do so would not have a Material
Adverse Effect.
5.21 MAINTENANCE OF INSURANCE. The Borrower will maintain insurance
with respect to its Oil and Gas Properties and business against such
liabilities, casualties, risks and contingencies and in such amounts as are
customarily maintained in the industry, and furnish to the Lender, on the
Closing Date and annually thereafter, certificates evidencing such insurance.
5.22 RIGHT OF INSPECTION. The Borrower will permit any authorized
representative of the Lender at its sole risk and expense to visit and
inspect any Collateral and any other Property of the Borrower at such
reasonable times and as often as the Lender may request.
5.23 COMPLIANCE WITH ERISA. The Borrower will furnish to the Lender (a)
promptly after the filing thereof with the United States Secretary of Labor
or the PBGC, copies of each annual and other report with respect to each Plan
or any trust created thereunder and (b) immediately upon becoming aware of
the occurrence of any Reportable Event or Prohibited Transaction in
connection with any Plan or any trust created thereunder, a written notice
specifying the nature thereof, what action is being taken or proposed to be
taken with respect thereto, and, when known, any action taken by the Internal
Revenue Service or any other Tribunal with respect thereto. The Borrower
will fund all current service pension liabilities as they are incurred under
the provisions of all Plans from time to time in effect and timely file all
reports required by ERISA and required to be filed with respect to each Plan.
5.24 NOTICE. The Borrower will immediately notify the Lender of (a) the
receipt of any notice from, or the taking of any action by, the holder of any
promissory note or other evidence of Debt of the Borrower with respect to a
claimed default, together with a statement specifying the notice given or
other action taken by such holder and what action the Borrower is taking or
proposes to take with respect thereto; (b) any legal, judicial or regulatory
proceedings affecting the Borrower in which the amount involved is material
and is not covered by insurance or that would, if adversely determined, have
a Material Adverse Effect; (c) any dispute between the Borrower and any
Tribunal or any Person that would, if adversely determined, have a Material
Adverse Effect; (d) information that in any way relates
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to or affects the filing of any financing statement or other security
instrument for the purpose of perfecting or continuing a Lien on the
Collateral; (e) any event that materially and adversely affects the
Collateral or the Rights of the Lender with respect to such Collateral; (f)
the occurrence of any Event of Default; and (g) any event or condition
(except for events or conditions to the economy of the United States as a
whole or the oil and gas industry as a whole) which could reasonably be
expected to cause a Material Adverse Effect.
5.25 HAZARDOUS SUBSTANCES INDEMNIFICATION. The Borrower indemnifies and
holds the Lender, its officers, employees, agents, shareholders and
Affiliates (each an "INDEMNIFIED PERSON") harmless from and against any and
all claims, losses, damages, liabilities, fines, penalties, charges,
administrative and judicial proceedings and orders, judgments, remedial
actions, requirements and enforcement actions of any kind, and all costs and
expenses incurred in connection therewith (including, without limitation,
attorneys' fees and expenses), arising directly or indirectly, in whole or in
part, from (a) the presence of any Hazardous Substances on, under or from its
Oil and Gas Properties, whether prior to or during the term hereof, (b) any
activity carried on or undertaken on or off its Oil and Gas Properties,
whether prior to or during the term hereof, and whether by the Borrower or
any predecessor in title or any employees, agents, contractors or
subcontractors of the Borrower or any predecessor in title, or any third
persons at any time occupying or present on its Oil and Gas Properties in
connection with the handling, treatment, removal, storage, decontamination,
cleanup, transport or disposal of any Hazardous Substances at any time
located or present on or under its Oil and Gas Properties, or (c) any
residual contamination on or under its Oil and Gas Properties or affecting
any natural resources in, on or under its Oil and Gas Properties, or any
contamination of any of the property or natural resources arising in
connection with the generation, use, handling, storage, transport or disposal
of any Hazardous Substance by the Borrower or any employee, agent, contractor
or subcontractor of the Borrower irrespective of whether any of such
activities were or will be undertaken in accordance with applicable laws,
regulations, codes and ordinances. WITHOUT LIMITING ANY PROVISION OF THIS
AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS, IT IS THE EXPRESS
INTENTION OF THE PARTIES THAT EACH INDEMNIFIED PERSON SHALL BE INDEMNIFIED
AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS,
DEFICIENCIES, JUDGMENTS AND REASONABLE EXPENSES ARISING OUT OF OR RESULTING
FROM THE ORDINARY NEGLIGENCE (WHETHER SOLE OR CONTRIBUTORY) OR STRICT
LIABILITY OF SUCH INDEMNIFIED PERSON. Notwithstanding anything to the
contrary in this Agreement, such indemnity shall survive repayment of the
Debt evidenced by the Note.
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ARTICLE 6
NEGATIVE COVENANTS
So long as any Debt evidenced by the Note remains unpaid or the
Lender remains obligated to make Advances, and in the absence of written
consent of the Lender to the contrary:
6.1 OTHER DEBT OF BORROWER. The Borrower will not incur, create,
assume or suffer to exist any Debt aggregating in excess of $50,000.00
except: (a) Loans hereunder, (b) unsecured current accounts payable incurred
in the ordinary course of business, provided such accounts are paid within
sixty (60) days of the invoice date or are being Contested in Good Faith, or
paid pursuant to other terms agreed to between the Borrower and the account
creditor, (c) the Bank of America Debt (provided, however, the principal
amount of the Bank of America Debt shall not increase above the principal
amount outstanding as of the date of this Agreement) and (d) the 420 Energy
Investments Debt (provided, however, the principal amount of the 420 Energy
Investments Debt shall not increase above the principal amount outstanding as
of the date of this Agreement).
6.2 GUARANTY OF PAYMENT OR PERFORMANCE. The Borrower will not
guarantee any contract or otherwise be or become liable in connection with
any obligation of any Person, except that the foregoing restriction shall not
apply to endorsements of instruments for collection in the ordinary course of
business.
6.3 LOANS, ADVANCES OR INVESTMENTS. The Borrower will not make or
agree to make or allow to remain outstanding any Investment, including,
without limitation, any loans or advances or the purchase (for cash or
securities) of all or a substantial part of the Property or capital stock of
any Person, except (a) advances or extensions of credit in the form of
accounts receivable incurred in the ordinary course of business and upon
terms common in the industry for such accounts receivable, (b) Liquid
Investments, or (c) the Exchange Transactions.
6.4 MORTGAGES OR PLEDGES OF ASSETS. The Borrower will not create,
incur, assume or permit to exist any Lien on any of its Property (now owned
or hereafter acquired), except Permitted Liens.
6.5 CANCELLATION OF INSURANCE. The Borrower will not allow any
insurance policy required to be carried hereunder to be terminated or lapse
or expire without provision for adequate renewal or replacement thereof.
41
<PAGE>
6.6 SALES OF PROPERTY. The Borrower will not sell, transfer or
otherwise dispose of, in one or any series of transactions, any of its
Property if such sale, transfer or disposition (a) transfers or disposes of
greater than an undivided ten percent (10%) of the undivided interest of the
Borrower in the Property, the undivided interest of Aspect in the Aspect
Prospects or the undivided interest of Esenjay in the Esenjay Prospects as of
the date of this Agreement, (b) exceeds $250,000.00 per transaction or (c)
exceeds $1,000,000.00 in the aggregate for any twelve month period. Nothing
in this Section shall be construed that the Lender is obligated to release
its Liens on any of Property sold.
6.7 SALE AND LEASEBACK. The Borrower will not enter into any
arrangement with any Person providing for the leasing by the Borrower of
Property which has been or is to be sold or transferred by the Borrower to
such Person or to any other Person to whom funds have been or are to be
advanced by such Person on the security of such Property or rental
obligations of the Borrower.
6.8 DIVIDENDS AND DISTRIBUTIONS. Other than the redemption of the
Preferred Shares in full contemporaneously with the closing of the Exchange
Transactions, the Borrower will not declare, pay or make, whether in cash or
other Property, any dividend or distribution on, or purchase, redeem or
otherwise acquire for value, any share of any class of its capital stock.
6.9 CHANGES IN CORPORATE STRUCTURE. Other than pursuant to the
consummation of the transactions contemplated by the Exchange Agreement or
pursuant to an underwritten public offering, the Borrower will not issue or
agree to issue additional shares of capital stock; enter into any transaction
of consolidation, merger or amalgamation; liquidate, wind up or dissolve (or
suffer any liquidation or dissolution); or convey, sell, lease, assign,
transfer or otherwise dispose of all or substantially all of its Property or
business.
6.10 PAYMENT OF ACCOUNTS PAYABLE. The Borrower will not allow any
account payable to be in excess of sixty (60) days past due, except such as
are being Contested in Good Faith.
6.11 TRANSACTIONS WITH AFFILIATES. The Borrower will not directly or
indirectly, enter into any transaction (including the sale, lease or exchange
of Property or the rendering of service) with any of its Affiliates, Esenjay,
any of Esenjay's Affiliates, Aspect, or any of Aspect's Affiliates, other
than as set forth in the Exchange Agreement or upon fair and reasonable terms
no less favorable than could be obtained in an arm's length transaction with
a Person which was not an Affiliate.
42
<PAGE>
6.12 LIMITATION ON NEGATIVE PLEDGE CLAUSES. The Borrower will not enter
into any agreement with any Person other than the Lender which prohibits or
limits the ability of the Borrower create, incur, assume or suffer to exist
any Lien upon any of its Property, whether now owned or hereafter acquired.
6.13 NATURE OF BUSINESS. The Borrower will not make any material change
in the character of its business as carried on at the date hereof.
6.14 NO SUBSIDIARIES. The Borrower will not own any Subsidiaries other
than those set forth in Section 4.17.
ARTICLE 7
EVENTS OF DEFAULT
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an Event of Default:
(a) The Borrower shall fail to pay when due any installment of
principal or interest on the Note or any charge payable under this
Agreement;
(b) Default shall occur in the due observance or performance of
any affirmative covenant required in this Agreement, the Note, the
Guaranties, any of the Security Documents or any of the other Loan
Documents, and such default shall remain unremedied for in excess of
twenty (20) days after the earlier of (i) notice given by the Lender,
or (ii) actual knowledge thereof by the Borrower;
(c) Default shall occur in the due observance or performance of
any negative covenant required in this Agreement, the Note, the
Guaranties, any of the Security Documents or any of the other Loan
Documents;
(d) The occurrence of an Event of Default as defined in the
Esenjay Credit Agreement;
(e) Any Financial Statement, representation, warranty or
certificate made or furnished by or on behalf of the Borrower or any
of the Guarantors to the Lender in connection with this Agreement or
other Loan Document, or as an inducement to the Lender to enter into
this Agreement, or in any instrument furnished in compliance with or
in reference to this Agreement or any other Loan Document, shall be
materially false, incorrect, or incomplete at or as of the time made;
43
<PAGE>
(f) Default shall be made by the Borrower (as principal or
guarantor or other surety) in payment or performance of any bond,
debenture, note or other evidence of Debt for borrowed money having an
outstanding principal amount in excess of $50,000.00, or under any
credit agreement, loan agreement, indenture, promissory note or
similar agreement or instrument executed in connection with any of the
foregoing, and such default shall remain unremedied for in excess of
the period of grace, if any, with respect thereto, with the effect of
accelerating the maturity of any such Debt or establishing a right to
accelerate the maturity of such Debt;
(g) The Borrower shall file a petition seeking relief for itself
under Debtor Relief Laws, or file an answer consenting to, admitting
the material allegations of or otherwise not controverting, or fail
timely to controvert a petition filed against it seeking relief under
Debtor Relief Laws;
(h) An order for relief shall be entered against the Borrower
under any Debtor Relief Laws, which order is not stayed, or upon the
entry of an order, judgment or decree by operation of Law or by a
court of competent jurisdiction which is not stayed, ordering relief
against the Borrower under, or approving as properly filed, a petition
seeking relief against any such Person under the provisions of any
Debtor Relief Laws, or appointing a receiver, liquidator, assignee,
sequestrator, trustee or custodian of the Borrower or of any
substantial part of its Property, or ordering the reorganization,
winding up or liquidation of any the Borrower's affairs, or upon the
expiration of sixty (60) days after the filing of any involuntary
petition against the Borrower seeking any of the relief specified in
the preceding Subsection or this Subsection without the petition being
dismissed prior to that time;
(i) The Borrower shall (i) make a general assignment for the
benefit of its creditors, (ii) consent to the appointment of or taking
possession by a receiver, liquidator, assignee, sequestrator, trustee
or custodian of the Borrower or any substantial part of its Property,
(iii) admit insolvency or inability to pay its debts generally as such
debts become due, (iv) fail generally to pay its debts as such debts
become due, or (v) take any action (or an action shall be taken by its
directors or majority stockholders) looking to the dissolution or
liquidation of the Borrower;
(j) Final judgment for the payment of money in excess of
$50,000.00 shall be rendered against the Borrower and such judgment
shall
44
<PAGE>
remain undischarged for a period of thirty (30) days during which execution
shall not be effectively stayed;
(k) The Security Documents shall for any reason, except to the
extent permitted by the terms thereof, cease to be in full force and
effect and valid, binding and enforceable in accordance with their
terms, cease to create a valid Lien of the priority required thereby
on any of the Collateral purported to be covered thereby, or, upon
perfection, cease to be a perfected Lien on any of the Collateral
purported to be covered thereby, or the Borrower or any other Person
who may have granted or purported to grant such Lien shall so state in
writing;
(l) A judgment creditor of any Person who is the owner of any of
the Collateral shall obtain possession of any of the Collateral by any
means, including, without limitation, levy, attachment or self help;
(m) The validity or enforceability of any of the Loan Documents
shall be contested by the Borrower, any of the Guarantors or any of
such Persons shall deny that it has any or further liability or
Obligation under any of the Loan Documents or allege that any of the
Loan Documents shall be construed or enforced other than in accordance
with their terms;
(n) The Borrower shall have concealed, removed, or permitted to
be concealed or removed, any part of its Property with the intent to
hinder, delay or defraud its creditors or any of them, or made or
suffered a transfer of any of its Property which is fraudulent under
any Debtor Relief Laws (except for such transfers in favor of the
Lender); or shall have made any transfer (other than in the ordinary
course of business) of its Property to or for the benefit of a
creditor at a time when other creditors similarly situated have not
been paid; or
(o) The Exchange Agreement shall be amended or modified.
7.2 RIGHTS UPON OCCURRENCE OF UNMATURED EVENT OF DEFAULT. At any time that
there exists an Unmatured Event of Default, any obligation of the Lender
hereunder to make Advances to or for the benefit of the Borrower shall be
suspended unless and until the Lender shall reinstate the same in writing, the
Unmatured Event of Default shall have been waived by the Lender or the relevant
Unmatured Event of Default shall have been remedied prior to the ripening into
an Event of Default.
45
<PAGE>
7.3 RIGHTS UPON OCCURRENCE OF AN EVENT OF DEFAULT.
(a) Upon the occurrence of any Event of Default specified in
Subsections (g), (h), (i) or (n) of Section 7.1, immediately and
without notice, (i) all Obligations evidenced by the Note shall
immediately become due and payable without presentment, demand,
protest, notice of protest or dishonor, notice of intent to
accelerate, notice of acceleration or other notice of any kind, all of
which are expressly waived by the Borrower and (ii) all obligations of
the Lender, if any, under this Agreement shall immediately and
automatically cease and terminate unless and until the Lender shall
reinstate any such obligation in writing.
(b) Upon the occurrence and at any time during the continuance
of any other Event of Default, (i) all obligations of the Lender, if
any, under this Agreement shall immediately and automatically cease
and terminate unless and until the Lender shall reinstate any such
obligation in writing and (ii) the Lender may by written notice to the
Borrower declare all Obligations evidenced by the Note to be
immediately due and payable without presentment, demand, protest,
notice of protest or dishonor, notice of intention to accelerate,
notice of acceleration or other notice of any kind, all of which are
expressly waived by the Borrower.
(c) The Borrower acknowledges and understands that under the
Laws of the State of Texas, unless waived, the Borrower has the right
to notice of the Lender's intent to accelerate the Obligations
evidenced by the Note, the right to notice of the actual acceleration
of the Obligations evidenced by the Note, and the right to presentment
of the Note by the Lender's demand for payment. The Borrower
acknowledges that it understands that it can waive these rights and by
the Borrower's execution of this Agreement it agrees to waive its
right to notice of intent to accelerate, its right to notice of
acceleration, and its right to presentment or other demand for
payment.
(d) In addition to the foregoing, upon the occurrence of any
Event of Default, the Lender may exercise any or all of the Rights
provided in any or all of the Loan Documents.
ARTICLE 8
MISCELLANEOUS
8.1 NOTICES. Any notice required or permitted to be given under or in
connection with this Agreement or any of the other Loan Documents (except as
may otherwise be expressly required therein) shall be in writing and shall be
mailed by certified mail, return
46
<PAGE>
receipt requested, postage prepaid, or sent by telex, telegram, telecopy or
other similar form of rapid transmission confirmed by mailing (by certified
mail, return receipt requested, postage prepaid) written confirmation at
substantially the same time as such rapid transmission, or personally
delivered to an officer of the receiving party. All such communications
shall be mailed, sent or delivered,
(a) if to the Borrower, to Frontier Natural Gas Corporation, 500
Dallas, Suite 2920, Houston, Texas 77002, Attn: David B.
Christofferson, or to such other address or to such individual's or
department's attention as the Borrower may have furnished the Lender
in writing; or
(b) if to the Lender, to Duke Energy Financial Services, Inc.,
5718 Westheimer, Suite 2000, Houston, Texas 77057, Attn: Jeffrey B.
Goodman, or to such other address or to such individual's or
department's attention as the Lender may have furnished the Borrower
in writing.
Any communication so addressed and mailed shall be deemed to be given when so
mailed, and any notice so sent by rapid transmission is acknowledged, and any
communication so delivered in person shall be deemed to be given when
receipted for or actually received by an authorized officer of the Borrower
or the Lender, as the case may be.
8.2 AMENDMENTS AND WAIVERS. Any provision of this Agreement or any of
the other Loan Documents may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed by the Borrower and the
Lender (and/or any other Person which is a party to any Loan Document being
amended or with respect to which a waiver is being obtained).
8.3 INVALIDITY. In the event that any one or more of the provisions
contained in this Agreement or any of the other Loan Documents shall for any
reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or any other Loan Document.
8.4 SURVIVAL OF AGREEMENTS. All representations and warranties of the
Borrower herein or in the other Loan Documents and all covenants and
agreements not fully performed before the effective date or dates of this
Agreement or the other Loan Documents shall survive such date or dates.
8.5 SUCCESSORS AND ASSIGNS. All covenants and agreements by or on
behalf of the Borrower in this Agreement and all of the other Loan Documents
shall bind its legal representatives, successors and assigns and shall inure
to the benefit of the Lender and its legal representatives, successors and
assigns.
47
<PAGE>
The Borrower may not assign its respective Rights or Obligations
hereunder or under the Note without the prior consent of the Lender.
Prior to any acceleration of the Debt evidenced by the Note or all
of such Debt otherwise being due and payable, the Lender, without the consent
of the Borrower, may not assign any portion of the Loans, the Note or the
Commitment.
After any acceleration of the Debt evidenced by the Note or all of
such Debt otherwise being due and payable, the Lender, without the consent of
the Borrower, may assign all or any portion of the Loans, the Note, or the
Commitment.
Notwithstanding anything to the contrary above, the Lender, without
the consent of the Borrower, may at any time assign all or any portion of the
Loans, the Note or the Commitment to or at the direction of a governmental
authority or agency.
8.6 RENEWAL, EXTENSION OR REARRANGEMENT. All provisions of this
Agreement and of any other Loan Documents, as presently existing or as they
may hereafter be amended, relating to the Note or other Obligations shall
apply with equal force and effect to each and all promissory notes
hereinafter executed which in whole or in part represent a renewal, extension
for any period, increase or rearrangement of any part of the Obligations
originally evidenced by the Note or of any part of such other Obligations.
8.7 WAIVERS. No waiver by the Lender of any of its Rights under this
Agreement, the other Loan Documents or otherwise shall be considered a waiver
of any other or subsequent Right. No course of dealing on the part of the
Lender, its officers, employees, consultants or agents, nor any failure or
delay by the Lender with respect to exercising any Right under any of the
Loan Documents shall operate as a waiver thereof.
8.8 CUMULATIVE RIGHTS. The Rights of the Lender under the Note, this
Agreement and each other Loan Document shall be cumulative, and the exercise
or enforcement of any such Right shall not preclude the exercise or
enforcement of any other Right.
8.9 TAXES, ETC. Any Taxes (excluding income taxes), together with
interest and penalties, if any, payable or ruled payable by federal or state
authority in respect of the Note, this Agreement or the other Loan Documents
shall be paid by the Borrower.
8.10 EXHIBITS; CONFLICTS. The exhibits attached to this Agreement are
incorporated herein and shall be considered a part of this Agreement for the
purposes stated herein. In the event of any direct conflict between any of
the provisions of such exhibits or any of the other Loan Documents and the
provisions of this Agreement, the provisions of this Agreement shall prevail.
48
<PAGE>
8.11 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles or
heading to articles, Sections, Subsections or other divisions of this
Agreement or the exhibits hereto are only for the convenience of the parties
and shall not be construed to have any effect or meaning with respect to the
other content of such articles, Sections, Subsections or other divisions,
such other content being controlling as to the agreement between the parties
hereto.
8.12 JURISDICTION. All actions or proceedings with respect to the Note,
this Agreement or any of the other Loan Documents may be instituted in the
courts of the State of Texas, the United States District Court for the
Southern District of Texas, or elsewhere to the extent that jurisdiction
shall exist apart from the provisions of this Section, as the Lender may
elect. By execution and delivery of this Agreement, the Borrower irrevocably
and unconditionally submits to the jurisdiction (both subject matter and
personal) of each such court, and irrevocably and unconditionally waives (a)
any objection it may now or hereafter have to the laying of venue in any of
such courts and (b) any claim that any action or proceeding brought in any of
such courts has been brought in an inconvenient forum. The choice of forum
and laying of venue as set forth in this Section 8.12 was negotiated in good
faith by the Borrower and the Lender and is a significant term of the bargain
between the Borrower and the Lender governed by this Agreement. The Borrower
and the Lender further agree that service of process, summons, notice of
document by U.S. registered mail to the address of each set forth above shall
be effective service of process for any action, suit or proceeding brought
against the other in any such court.
8.13 JURY TRIAL WAIVED. THE BORROWER AND THE LENDER HEREBY AGREE THAT
THEY SHALL AND HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF THEM, OR IN
ANY MATTER WHATSOEVER WHICH ARISES OUT OF OR IS CONNECTION IN ANY WAY WITH
THIS AGREEMENT.
8.14 COUNTERPARTS. This Agreement may be executed in two or more
counterparts and multiple originals of such counterparts, and it shall not be
necessary that the signatures of all parties hereto be contained on any one
counterpart hereof. Any executed Agreement or any counterpart thereof shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
8.15 EFFECTIVENESS. This Agreement shall not be effective until
delivered to, accepted and executed by the Lender and the Borrower.
8.16 DOCUMENTS. All Loan Documents and any other certificate, agreement
or other document provided or to be provided under the terms hereof shall be
in form and substance satisfactory to the Lender.
49
<PAGE>
8.17 RIGHTS OF THIRD PERSON. All provisions of this Agreement are
imposed solely and exclusively for the benefit of the Lender and the
Borrower. No other Person shall have standing to require satisfaction for
such provisions in accordance with their terms or be entitled to assume that
the Lender will refuse to perform its obligations hereunder in the absence of
strict compliance with any or all thereof, and any or all of such provisions
may be freely waived in whole or in part by the Lender at any time if in its
sole discretion it deems it advisable to do so.
8.18 ANNOUNCEMENTS. Each party covenants and agrees with the other
that, subject to applicable law, each party shall promptly advise and consult
with the other and obtain the other's written consent before issuing any
press release with respect to this Agreement or the transactions described
herein. Notwithstanding the above, the Borrower may issue a press release
with respect to this Agreement or the transactions described herein if the
Lender is not identified by its name, any Affiliate of the Lender is not
identified by its name or the Lender or any Affiliate of the Lender is
otherwise not identified and a Law requires the Borrower to issue such press
release.
8.19 CONFIDENTIALITY. In connection with the negotiation and
administration of this Agreement and the other Loan Documents, the Borrower
has furnished and from time to time will furnish the Lender written
information or the Lender has provided and from time to time will provide
access to information which is identified to the Lender in writing as
confidential (such information, other than any such information which (i) was
publicly available, or otherwise known to the Lender, at the time of
disclosure, (ii) subsequently becomes publicly available other than through
any act or omission by the Lender or (iii) otherwise subsequently becomes
known to the Lender, being hereinafter referred to as "CONFIDENTIAL
INFORMATION"). The Lender will use reasonable efforts to maintain the
confidentiality of any Confidential Information. The Lender will not use any
of the Confidential Information to compete with the Borrower in the
exploration and production business. It is understood, however, that the
foregoing will not restrict the Lender's ability to freely exchange such
Confidential Information with current or prospective investors, assignees and
advisors who obligate themselves to the terms of this Section 8.19 and who
further agree not to use any of the Confidential Information to compete with
the Borrower in the exploration and production business. It is further
understood that the foregoing will not prohibit the disclosure of any or all
Confidential Information if and to the extent that such disclosure may be
required or requested (w) by a Governmental Authority, (x) pursuant to court
order, subpoena or other legal process in connection with any pending or
threatened litigation hereunder, (y) otherwise as required by law, or (z) in
order to protect their interests or their rights or remedies hereunder or
under the other Loan Documents; in the event of any required disclosure under
clause (w), (x), or (y) above, the Lender agrees to use reasonable efforts to
inform the Borrower as promptly as practicable.
50
<PAGE>
8.20 SURVIVAL OF CERTAIN COVENANTS. The covenants of the Borrower set
forth in Sections 5.5 and 5.10 shall survive repayment of the Debt evidenced
by the Note and shall continue until all of the additional charges payable by
the Borrower to the Lender pursuant to Section 2.5 have been satisfied.
8.21 GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE UNITED STATES
OF AMERICA AND THE STATE OF TEXAS (EXCEPT TO THE EXTENT THE LOCATION OR
NATURE OF THE COLLATERAL REQUIRES THE APPLICATION OF THE LAWS OF OTHER
JURISDICTIONS TO BE APPLIED AS TO MATTERS OF CREATION, PERFECTION AND
PRIORITY OF LIENS AND THE RIGHTS OF THE LENDER UPON DEFAULT).
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be duly executed effective as of the date first above written.
FRONTIER NATURAL GAS
CORPORATION
By:
------------------------------------------
David W. Berry
President
DUKE ENERGY FINANCIAL
SERVICES, INC.
By:
------------------------------------------
Jeffrey B. Goodman
Vice President
51
<PAGE>
EXHIBIT 21 TO FORM 10-KSB
The subsidiaries of the Registrant are:
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
- ------------------------------------------------------------------------ --------------------
<S> <C>
Frontier Acquisition Corp. Oklahoma
Frontier Exploration and Production Corporation Oklahoma
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 690,576
<SECURITIES> 0
<RECEIVABLES> 237,352
<ALLOWANCES> (15,488)
<INVENTORY> 0
<CURRENT-ASSETS> 1,266,939
<PP&E> 4,404,975
<DEPRECIATION> (1,260,605)
<TOTAL-ASSETS> 4,576,008
<CURRENT-LIABILITIES> 1,743,190
<BONDS> 22,680
0
860
<COMMON> 99,359
<OTHER-SE> 1,704,601
<TOTAL-LIABILITY-AND-EQUITY> 4,576,008
<SALES> 664,126
<TOTAL-REVENUES> 908,609
<CGS> 0
<TOTAL-COSTS> 5,801,470
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,942
<INCOME-PRETAX> (4,953,803)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,953,803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,953,803)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
