<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1998
REGISTRATION NO. 333-53581
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ESENJAY EXPLORATION, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 73-1421000
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
500 NORTH WATER STREET
SUITE 1100
CORPUS CHRISTI, TEXAS 78471
(512) 883-7464
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
MICHAEL E. JOHNSON
PRESIDENT
ESENJAY EXPLORATION, INC.
500 N. WATER STREET, SUITE 1100
CORPUS CHRISTI, TEXAS 78471
(512) 883-7464
(Name, Address and Telephone Number of Agent For Service)
--------------------------
WITH COPIES TO:
PORTER & HEDGES, L.L.P. VINSON & ELKINS L.L.P.
700 LOUISIANA 2300 FIRST CITY TOWER
HOUSTON, TEXAS 77002 1001 FANNIN STREET
(713) 226-0629 HOUSTON, TEXAS 77002
ATTN: SAMUEL N. ALLEN (713) 758-2222
ATTN: ALAN P. BADEN
--------------------------
Approximate date of commencement of proposed sale to the public.
As soon as practicable after the Registration Statement becomes effective.
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $.01 per share........................................ 4,600,000 (3)
Representative's warrant...................................................... 210,000 (2)
Common Stock issuable upon exercise of the Representative's warrant........... 210,000 (3)
</TABLE>
(1) Includes Underwriters' over-allotment option.
(2) Pursuant to Rule 457(g), no registration fee is required for the
Representative's warrants.
(3) Previously paid.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
4,000,000 SHARES
[LOGO]
COMMON STOCK
The 4,000,000 shares of common stock, par value $.01 per share ("Common
Stock"), offered hereby (the "Offering") are being sold by Esenjay Exploration,
Inc., a Delaware corporation (the "Company").
The Common Stock is quoted on the Nasdaq Small-Cap Market under the symbol
"ESNJ." On July 15, 1998, the closing price of the Common Stock, as reported by
the Nasdaq Small-Cap Market, was $4.125 per share.
Aspect Resources LLC ("Aspect") and Esenjay Petroleum Corporation ("EPC"),
affiliates of the Company, and David Berry, the Chairman of the Board of the
Company, have agreed to purchase an aggregate of 350,000 shares of the Common
Stock offered hereby. See "Summary--The Offering", "Principal Stockholders" and
"Underwriting."
------------------------
THESE ARE SPECULATIVE SECURITIES. FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON
STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 10.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1)(2) COMPANY(2)(3)(4)
<S> <C> <C> <C>
Per Share.............................................. $4.00 $0.28 $3.72
Total (3).............................................. $16,000,000 $1,120,000 $14,880,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). Does not reflect additional compensation to
the Representative of the Underwriters (the "Representative") in the form of
(i) a nonaccountable expense allowance of $300,000 and (ii) warrants to
purchase up to 210,000 shares of Common Stock at an exercise price of $7.20
per share. See "Underwriting."
(2) The Underwriters and the Company have agreed that $14,000 of the
underwriting discount attributable to the Common Stock being purchased by
Aspect, EPC and Mr. Berry will be reimbursed to the Company, thereby
increasing the Company's proceeds from this Offering by such amount.
(3) Before deducting offering expenses payable by the Company, estimated to be
$350,000.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
600,000 additional shares of Common Stock, solely to cover over-allotments,
if any, upon the same terms and conditions as the shares offered hereby. If
such over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$18,400,000, $1,288,000 and $17,112,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of such
shares will be made at the offices of Gaines, Berland Inc., New York, New York,
on or about July 21, 1998.
GAINES, BERLAND INC.
THE DATE OF THIS PROSPECTUS IS JULY 16, 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
IN ADDITION, CERTAIN UNDERWRITERS (INCLUDING SELLING GROUP MEMBERS, IF ANY) ALSO
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ SMALL-CAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. ON MAY 14,
1998, THE COMPANY CONSUMMATED A ONE-FOR-SIX REVERSE SPLIT OF THE COMPANY'S
COMMON STOCK (THE "REVERSE SPLIT"). ALL PER SHARE DATA SET FORTH HEREIN, UNLESS
OTHERWISE INDICATED, HAVE BEEN ADJUSTED TO REFLECT THE REVERSE SPLIT. UNLESS
OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THE
UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED. INVESTORS SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS,"
BEGINNING ON PAGE 10. REFERENCES HEREIN TO THE "COMPANY" MEAN ESENJAY
EXPLORATION, INC., A DELAWARE CORPORATION, FORMERLY KNOWN AS FRONTIER NATURAL
GAS CORPORATION. CERTAIN TERMS USED HEREIN RELATING TO THE OIL AND NATURAL GAS
INDUSTRY ARE DEFINED IN A GLOSSARY OF CERTAIN INDUSTRY TERMS INCLUDED ELSEWHERE
IN THIS PROSPECTUS.
THE COMPANY
OVERVIEW
The Company is an independent energy company engaged in the exploration for
and development of natural gas and oil. The Company has assembled an inventory
of over 30 technology enhanced natural gas exploration projects along the Texas
and Louisiana Gulf Coast (the "Exploration Projects"). These Exploration
Projects include substantial interests in 28 projects the Company acquired on
May 14, 1998 (the "Acquisitions") from Esenjay Petroleum Corporation ("EPC") and
Aspect Resources LLC ("Aspect") pursuant to an Acquisition Agreement and Plan of
Exchange (as amended, the "Acquisition Agreement"). Cornerstone Ventures, L.P.,
a Houston, Texas, based investment banking firm with expertise in evaluating the
value of oil and gas exploration properties ("Cornerstone"), delivered to the
Company a written opinion that estimated the fair market value of the assets
acquired in the Acquisitions, as of January 23, 1998, to be $54.2 million. See
"Risk Factors--Uncertainty as to Estimates of Fair Market Values." The
Exploration Projects also include the Company's interest in the Starboard
Project in Terrebonne Parish, Louisiana, which consists of mineral leases and
options and a proprietary 3-D seismic survey over the Lapeyrouse Field. The
Company, EPC and Aspect have spent several years identifying and evaluating many
of the Exploration Projects.
In connection with the Acquisitions, an affiliate of Enron Corp. exercised
an option to exchange $3.8 million of debt Aspect owed to such Enron affiliate
for 675,000 shares of the Company's Common Stock that would otherwise have been
issued to Aspect in the Acquisitions, at an effective conversion rate of $5.63
per share. As a result of the Acquisitions and this exchange, EPC, Aspect and
the Enron affiliate own 43.91%, 36.27% and 5.74%, respectively, of the Company's
Common Stock.
Most of the Exploration Projects have been, are being, or will be enhanced
with 3-D seismic data in conjunction with computer aided exploration ("CAEX")
technologies. The 3-D seismic data acquired, when complete, will cover
approximately 1,500 square miles. A significant number of the Exploration
Projects have reached the drilling stage, and the Company has budgeted
approximately $25.0 million, in addition to funds already spent, to fund the
drilling of approximately 30 wells and to fund other exploration costs over the
next 12 months. The Company believes that the Exploration Projects represent a
diverse array of technology enhanced, 3-D seismic confirmed, ready to drill
natural gas exploration projects.
From November 1, 1997 (the effective date of the Acquisitions) through the
date hereof, approximately $4.91 million has been spent for the Company's
account on drilling and completion costs on the Exploration Projects. The
expenditures have funded costs of the Company's interests in 15 exploratory
wells, of which six have been completed, four are awaiting completion and five
were dry holes.
3
<PAGE>
STRATEGY
The Company's strategy is to expand its reserves, production and cash flow
through the implementation of an exploration program that focuses on (i)
obtaining dominant positions in core areas of exploration; (ii) enhancing the
value of the Exploration Projects and reducing exploration risks through the use
of 3-D seismic and CAEX technologies; (iii) maintaining an experienced technical
staff with the expertise necessary to take advantage of the Company's
proprietary 3-D seismic and CAEX seismic data; (iv) reducing exploration risks
by focusing on the identification of potential moderate-depth gas reservoirs,
which the Company believes are conducive to hydrocarbon detection technologies;
and (v) retaining operational control over critical exploration decisions.
OBTAIN DOMINANT POSITION IN CORE AREAS. The Company has identified core
areas for exploration along the Texas and Louisiana Gulf Coasts that have
geological trends with demonstrated histories of prolific natural gas
production from reservoir rocks high in porosity and permeability with
profiles suitable for seismic evaluation. Unlike the Gulf of Mexico, where
3-D seismic data typically is owned and licensed by many companies that
compete intensely for leases, the private right of ownership of onshore
mineral rights enables individual exploration companies to proprietarily
control the seismic data within focused core areas. The Company believes
that by obtaining substantial amounts of proprietary 3-D seismic data and
significant acreage positions within its core areas, it will be able to
achieve a dominant position in focused portions of those areas. With such a
dominant position, the Company believes it can better control the core
areas' exploration opportunities and future production, and can attempt to
minimize costs through economies of scale and other efficiencies inherent in
its focused approach. Such cost savings and efficiencies include the ability
to use the Company's proprietary data to reduce exploration risks and lower
its leasehold acquisition costs by identifying and purchasing leasehold
interests only in those focused areas in which the Company believes
exploratory drilling is most likely to be successful.
USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. The Company attempts to enhance
the value of its Exploratory Projects through the use of 3-D seismic and
CAEX technologies, with an emphasis on direct hydrocarbon detection
technologies. These technologies create computer generated 3-dimensional
displays of subsurface geological formations that enable the Company's
explorationists to detect seismic anomalies in structural features that are
not apparent in 2-D seismic surveys. The Company believes that 3-D seismic
technology, if properly used, will reduce drilling risks and costs by
reducing the number of dry holes, optimizing well locations and reducing the
number of wells required to exploit a discovery. The Company believes that
3-D seismic surveys are particularly suited to its Exploration Projects
along the Texas and Louisiana Gulf Coasts.
EXPERIENCED TECHNOLOGICAL TEAM. The Company maintains an experienced
technical staff, including engineers, geologists, landmen and other
technical personnel. After the Acquisitions, the Company hired most of EPC's
technical personnel, who, in some instances, have worked together for over
15 years. In addition, the Company has entered into a geotechnical services
consulting agreement with Aspect on certain of the Exploration Projects
pursuant to which Aspect provides the Company geophysical expertise in
managing the design, acquisition, processing and interpretation of 3-D
seismic data in conjunction with CAEX data.
FOCUSED DRILLING OBJECTIVES. In addition to using 3-D seismic and CAEX
technologies, the Company seeks to reduce exploration risks by exploring at
moderate depths that are deep enough to discover sizeable gas accumulations
(generally 8,000 to 12,500 feet) and that also are conducive to direct
hydrocarbon detection, but not so deep as to be highly exposed to the
greater mechanical risks and drilling costs incurred in the deep plays in
the region. In conjunction with interpreting the 3-D seismic and CAEX data
relating to the Company's moderate depth wells, the Company anticipates it
will identify potential prospects in deep gas provinces that the Company may
elect to pursue.
4
<PAGE>
CONTROL OF EXPLORATION AND OPERATIONAL FUNCTIONS. The Company believes that
having control of the most critical functions in the exploration process
will enhance its ability to successfully develop its Exploration Projects.
The Company has a majority interest in many of the Exploration Projects,
including proprietary interests in most of the 3-D seismic data relating to
those projects. Although the Company has partners in the Exploration
Projects in which it does not own a majority interest, in most cases, the
Company owns a greater interest than any of its project partners. As a
result, in most of its Exploration Projects, the Company will be able to
influence the areas to explore, manage the land permitting and option
process, determine seismic survey areas, oversee data acquisition and
processing, prepare, integrate and interpret the data and identify each
prospect drillsite. In addition, the Company will be the operator of most of
the wells drilled within the Exploration Projects.
EXPLORATION PROJECTS
Most of the Exploration Projects are concentrated within the Downdip Frio,
Wilcox and Texas Hackberry core project areas in South Texas. The remaining
Exploration Projects consist of the Starboard Project, as well as other projects
in Texas, Louisiana and Mississippi, that either are in early stage exploration
areas that may develop into new core project areas, or non-core area projects,
which are projects that are not presently expected to be further expanded.
Each of the Exploration Projects differs in scope and character and consists
of one or more types of assets, such as 3-D seismic data, leasehold positions,
lease options, working interests in leases, royalty interests or other mineral
rights. The Company's percentage interest in each Exploration Project (the
"Project Interest") represents the portion of the interest in the Exploration
Project it shares with its other project partners. Therefore, the Company's
Project Interest in an Exploration Project should not be confused with the
working interest the Company will own when any given well is drilled. The
Company's working interest in the wells on each Exploration Project may be
higher or lower than its Project Interest.
The following table sets forth certain information about each of the
Exploration Projects. For further information, see "Business and
Properties--Exploration Projects."
5
<PAGE>
EXPLORATION PROJECTS
<TABLE>
<CAPTION>
ACRES LEASED OR
UNDER OPTION AT
MAY 15, 1998(1) SQUARE MILES OF 3-D
----------------------- SEISMIC DATA RELATING PROJECT
PROJECT AREAS GROSS NET TO PROJECT AREA(2) INTEREST
- ----------------------------------------------- --------- ------------ ----------------------- ---------------
<S> <C> <C> <C> <C>
SOUTH TEXAS
DOWNDIP FRIO CORE AREA
Big Gas Sand................................. 24,700 5,557 65 22.5%
Blessing..................................... 10,672 2,471 22 24.0%
Tidehaven.................................... 9,145 1,742 28 40.5%
El Maton..................................... 7,277 3,044 29 46.5%
Midfield..................................... 2,228 569 21 37.5%
Matagorda I(3)............................... 11,444 6,879 50 74.0%
Matagorda II(4).............................. 7,480 3,859 60 66.0%
Southwest Pheasant........................... 10,000 7,500 10 75.0%
Geronimo..................................... 9,616 1,792 76 20.0%
Houston Endowment............................ 3,969 1,071 50 27.0%
Wolf Point................................... 1,520 546 8 45.5%
Sheriff Field................................ 54,000 40,500 72 75.0%
West Jeffco.................................. 13,500 6,075 60 45.0%
La Rosa...................................... 7,689 589 25 8.0%
Piledriver................................... 640 400 2 62.5%
WILCOX CORE AREA
Hall Ranch................................... 8,510 3,521 57 41.5%
Hordes Creek................................. 6,972 2,601 25 41.5%
Mikeska...................................... 7,239 2,490 31 38.0%
Duval, McMullen.............................. 1,979 1,781 12 90.0%
TEXAS HACKBERRY CORE AREA
Lox B........................................ 11,700 2,925 71 25.0%
West Port Acres.............................. 800 100 21 12.5%
Big Hill/Stowell............................. 10,000 5,000 56 50.0%
East Jeffco.................................. 24,000 12,000 65 50.0%
West Beaumont................................ 11,200 700 23 6.25%
LOUISIANA
Starboard.................................... 6,682 5,905 35 12.0%-48.0%
Tack......................................... 480 300 12 75.0%
OTHER TEXAS
Willacy County............................... 11,485 8,784 50 78.875%
Caney Creek.................................. 21,000 2,625 32 12.5
East Texas Pinnacle Reef (5)................. -- -- 400 --
MISSISSIPPI
Thompson Creek............................... 1,325 512 12 56.0%
Lipsmacker................................... 5,758 943 64 22.0%
--------- ------------ ------
Total...................................... 303,010 132,781 1,544
--------- ------------ ------
--------- ------------ ------
</TABLE>
- ------------------------
(1) Gross acres refers to the number of acres leased or under option in which
the Company owns an undivided interest. Net acres were determined by
multiplying the gross acres leased or under option times the Company's
working interest therein.
(2) Represents 3-D seismic data acquired or to be acquired. See "Business and
Properties--Exploration Projects--Exploration Project Descriptions."
(3) The Company has entered into an agreement to sell a 26.7% Project Interest
in this Exploration Project for $694,200 for costs incurred before
commencement of drilling operations.
(4) The Company has entered into an agreement to sell a 26.7% Project Interest
in this Exploration Project for $694,200 for costs incurred before the
commencement of drilling operations.
(5) Consists of 400 square miles of 3-D seismic data to which Aspect has rights
pursuant to a license agreement, and in which the Company may acquire an
interest pursuant to a geophysical technical services consulting agreement
with Aspect.
6
<PAGE>
The Company was originally incorporated in Oklahoma on February 1, 1993. On
May 14, 1998, the Company reincorporated in Delaware. The Company's principal
executive offices are located at 500 North Water Street, Suite 1100, Corpus
Christi, Texas 78471, and its telephone number at such address is (512)
883-7464. The Company also maintains corporate finance and business development
offices at One Allen Center, Suite 2920, Houston, Texas 77002, and its telephone
number at such address is (713) 739-7100.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............. 4,000,000 shares. Aspect, EPC and David W. Berry,
Chairman of the Board of the Company, have agreed to
purchase an aggregate of 350,000 shares of Common Stock
in this Offering. See "Principal Stockholders" and
"Underwriting."
Common Stock outstanding after the
Offering(1)..................... 15,762,687 shares
Use of Proceeds................... To repay $7.8 million of indebtedness, for exploration
and development activities and for working capital. See
"Use of Proceeds."
Nasdaq Small-Cap Market Symbol.... ESNJ
</TABLE>
- ------------------------
(1) Does not include (i) up to 600,000 shares of Common Stock issuable pursuant
to the Underwriters' over-allotment option; (ii) 291,667 shares of Common
Stock issuable upon conversion of the Company's Series A Warrants; (iii)
776,250 shares of Common Stock issuable upon the exercise of the Company's
Series B Warrants; (iv) 595,833 shares of Common Stock issuable upon the
exercise of additional outstanding warrants, including warrants to purchase
210,000 shares of Common Stock issued to the Representative in connection
with this Offering (the "Representative's Warrant"); and (v) 104,000 shares
of Common Stock issuable upon the exercise of outstanding employee stock
options. See "Risk Factors--Shares Eligible for Future Sale;
Management--Option Grants" and "Underwriting."
RISK FACTORS
Prospective purchasers of Common Stock should carefully consider all of the
information contained in this Prospectus, particularly the factors set forth
under "Risk Factors" beginning on page 10.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary financial data below sets forth (i) the historical financial
data as of and for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1997 and 1998; (ii) pro forma financial data giving
effect to the Acquisitions, the redemption of 85,961 shares of the Company's 12%
Cumulative Convertible Preferred Stock, par value $.01 per share (the "Preferred
Stock") which was called for redemption on May 14, 1998, and the use of proceeds
from the Company's credit facility with Duke Energy Financial Services, Inc.
(the "Duke Credit Facility"), as if each of such transactions had occurred on
January 1, 1997; and (iii) pro forma as adjusted financial data giving effect to
the use and application of the net proceeds of the sale of the Common Stock
offered hereby. The historical financial data are derived from the Company's
audited financial statements. The financial data as of and for the three month
period ended March 31, 1997 and 1998 are derived from the Company's unaudited
consolidated financial statements. The unaudited consolidated financial
statements include all adjustments, consisting of normal recurring accruals,
that the Company considers necessary for a fair presentation of the Company's
financial position as of such dates and the results of operations and cash flows
for such periods. Operating results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1998. The statement of operations and balance
sheet data are provided for comparative purposes only and should be read in
conjunction with the Company's historical consolidated financial statements
included elsewhere in this Prospectus. The pro forma information presented is
not necessarily indicative of the combined financial results as they may be in
the future or as they might have been for the periods indicated had the
Acquisitions been consummated as of January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, PRO FORMA MARCH 31, PRO FORMA
---------------------- DECEMBER 31, ---------------------- MARCH 31,
1996 1997 1997 1997 1998 1998
---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1)............................... $3,166,792 $ 908,609 $ 908,609 $ 405,647 $ (16,586) $ (16,586)
Cost and expenses
Production and exploration costs(2)..... 2,450,771 3,065,394 8,585,067 1,048,502 60,197 1,316,964
Depletion, depreciation &
amortization(3)....................... 2,237,648 315,880 315,880 132,774 53,568 53,568
Impairment of oil and gas
properties(4)......................... 51,000 349,384 349,384 -- -- --
Interest expense(5)..................... 783,872 60,942 687,422 4,133 19,223 180,852
General and administrative
expenses(6)........................... 2,217,099 2,070,812 3,553,812 572,260 459,014 819,014
Other expenses(7)....................... 451,421 -- -- -- -- --
---------- ---------- ------------ ---------- ---------- ----------
Net income (loss)......................... (5,025,019) (4,953,803) (12,582,956) (1,352,022) (608,588) (2,386,984)
Cumulative preferred stock dividend....... 103,153 103,153 -- 25,788 25,788 --
---------- ---------- ------------ ---------- ---------- ----------
Net income (loss) applicable to common
shareholders............................ $(5,128,172) $(5,056,956) ($12,582,956) $(1,377,810) $ (634,376) $(2,386,984)
---------- ---------- ------------ ---------- ---------- ----------
---------- ---------- ------------ ---------- ---------- ----------
Net income (loss) per common share,
adjusted for 1:6 reverse stock split.... $ (4.31) $ (3.07) $ (1.07) $ (0.84) $ (0.38) $ (0.20)
---------- ---------- ------------ ---------- ---------- ----------
---------- ---------- ------------ ---------- ---------- ----------
Weighted average common shares
outstanding, adjusted for 1:6 reverse
stock split............................. 1,190,343 1,646,311 11,803,011 1,644,317 1,655,984 11,812,684
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED(8)
---------- ---------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).............................................. $(1,148,584) $(3,124,406) $ 7,557,532
Properties and equipment, net.......................................... 3,491,694 60,691,695 60,691,695
Total assets........................................................... 6,359,392 62,523,730 71,540,477
Long-term debt (excluding current maturities).......................... 2,893,055 4,607,785 1,059,723
Stockholders' equity................................................... 1,203,024 53,429,136 67,317,771
</TABLE>
- ------------------------
Notes appear on following page.
8
<PAGE>
(1) Revenues decreased from $3.18 million for the year ended December 31, 1996
to $0.91 million for the same period of 1997, and from $0.41 million for the
three months ended March 31, 1997 to ($16,586) for the same period in 1998,
primarily as a result of ceased production from the Mobile Bay wells and
from the sale of producing properties. Negative revenues relate to the
effect of recognized losses on gas hedges in the quarter.
(2) Pro forma exploration costs include geological and geophysical, delay
rentals and exploration costs of $5.5 million and $1.3 million for the year
ended December 31, 1997 and for the three months ended March 31, 1998,
respectively, associated with the unproved prospects acquired from EPC and
Aspect pursuant to the Acquisition Agreement. Exploration costs for the
three months ended March 31, 1998 decreased $1.0 million from the same
period in 1997 due to dry holes drilled during 1997.
(3) Depletion, depreciation and amortization expense decreased from $2.2 million
for the year ended December 31, 1996 to $0.3 million for the same period in
1997, primarily due to the abandonment of previously producing wells in the
Mobil Bay prospect and the sale of certain oil and gas properties.
(4) Impairment of oil and gas properties increased from $51,000 in 1996 to
$349,384 in 1997 primarily due to the abandonment of previously producing
Mobile Bay wells.
(5) Interest expense decreased from $783,872 in 1996 to $60,942 in 1997
primarily due to the reduction in the Company's outstanding bank debt during
1997. Pro forma interest included interest associated with an EPC note
payable to Aspect of $24,490 and $11,132 for the year ended December 31,
1997 and for the three months ended March 31, 1998, respectively, which was
assumed by the Company and $601,990 and $150,497 associated with borrowings
under the Duke Credit Facility for the year ended December 31, 1997 and the
three months ended March 31, 1998, respectively.
(6) Pro forma general and administrative expenses include historical expense of
EPC in the amount of $1,483,000 and $360,000 for the year ended December 31,
1997 and for the three months ended March 31, 1998, respectively, which the
Company assumed in the Acquisitions.
(7) 1996 included other expense items for the purchase and settlements of
deferred gas contracts. There were no such expenses during 1997.
(8) As adjusted to reflect the receipt by the Company of the estimated net
proceeds from the issuance of the 4.0 million shares of Common Stock offered
hereby and the application of such net proceeds. See "Use of Proceeds" and
"Capitalization."
9
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus, including without limitation
statements under "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business and
Properties" regarding planned capital expenditures, the availability of capital
resources to fund capital expenditures, estimates of proved reserves, the number
of anticipated wells to be drilled in the future, the Company's financial
position, business strategy and other plans and objectives for future
operations, are forward-looking statements. Although the Company believes the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance such expectations will prove to have been correct. There are
numerous uncertainties inherent in estimating quantities of proved oil and
natural gas reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the Company's control.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates made by different engineers often vary from one another. In
addition, results of drilling, testing and production after the date of an
estimate may justify revisions of such estimate and such revisions, if
significant, would change the schedule of any further production and development
drilling. Accordingly, reserve estimates generally are different from quantities
of oil and natural gas that ultimately are recovered. Additional important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed elsewhere in this Prospectus. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by such factors.
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES CERTAIN RISKS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET FORTH
BELOW, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, BEFORE
MAKING ANY INVESTMENT IN THE COMMON STOCK.
EXPLORATION RISKS; RELIANCE ON CAEX AND 3-D SEISMIC TECHNOLOGY
The Company's principal activity has changed from the acquisition,
production and marketing of natural gas and oil reserves to exploration and
development activities. Exploratory drilling is a speculative activity, and
there can be no assurance as to the success of the Company's drilling program.
The Company's strategy is to enhance the value of its Exploration Projects
through the use of 3-D seismic and CAEX technologies, with an emphasis on direct
hydrocarbon detection technologies. These technologies create computer generated
3-D displays of subsurface geological formations that enable the Company's
explorationists to detect seismic anomalies and structural features that are not
apparent in 2-D seismic surveys; however, these technologies require greater
pre-drilling expenditures than traditional drilling strategies. Even when fully
used and properly interpreted, 3-D seismic data and visualization techniques
only assist geoscientists in identifying subsurface structures and hydrocarbon
indicators, and do not conclusively allow the interpreter to know if
hydrocarbons will in fact be present in such structures. Exploratory drilling
and, to a lesser extent, development drilling involve a high degree of risk that
no commercial production will be obtained or that the production will be
insufficient to recover drilling and completion costs. The costs of drilling,
completing and operating wells are uncertain. The Company's drilling operations
may be curtailed, delayed or canceled as a result of numerous factors, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment. Furthermore, completion of
a well does not assure a profit on the investment or a recovery of drilling,
completion and operating costs. The failure of the Company's current exploration
10
<PAGE>
activities would have a material adverse effect on the Company's future results
of operations and financial condition. See "Business and Properties--Drilling
Activity."
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon various
assumptions, including assumptions required by the Securities and Exchange
Commission (the "Commission") as to oil and gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. The process of
estimating oil and gas reserves is complex, requiring significant decisions and
assumptions in the evaluation of available geological, geophysical, engineering
and economic data for each reservoir. As a result, such estimates are inherently
imprecise. Actual future production, oil and gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves may vary substantially from the Company's estimates. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this Prospectus. In addition, the
Company's proved reserves may be subject to downward or upward revision based
upon production history, results of future exploration and development,
prevailing oil and gas prices and other factors, many of which are beyond the
Company's control. Actual production, revenues, taxes, development expenditures
and operating expenses with respect to the Company's reserves will likely vary
from the estimates used, and such variances may be material. See "Business and
Properties--Oil and Gas Reserves."
Information concerning the Company's proved reserves contained in this
Prospectus is based on the Company's estimates. The Company has not relied upon
a reserve report from an independent petroleum engineer with respect to such
estimates. Although the Company believes its estimates of its proved reserves
are based on sound judgments and analysis, there can be no assurance that the
Company's estimates will be as accurate as those that might have been prepared
by an independent petroleum engineer. See "Business and Properties--Oil and Gas
Reserves."
Approximately 94% of the Company's total proved reserves at December 31,
1997 were undeveloped, which are by their nature less certain than proved
developed reserves. Recovery of such reserves will require significant capital
expenditures and successful drilling operations. The reserve data set forth in
the Company's estimates assumes that substantial capital expenditures will be
required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated. See "Business and Properties--Oil and Gas
Reserves--Estimated Proved Reserves."
The present value of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
Commission requirements, the estimated future net cash flows from proved
reserves generally are based on prices and costs as of the date of the estimate,
whereas actual future prices and costs may be materially higher or lower. Actual
future net cash flows also will be affected by increases in consumption by gas
purchasers and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves, and thus their actual present
value, will be affected by the timing of both the production and the incurrence
of expenses in connection with the development and production of oil and gas
properties. In addition, the 10% discount factor, which the Commission requires
to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with the Company
or the oil and gas industry in general. See "Business and Properties--Oil and
Gas Reserves--Estimate of Future Net Revenue from Proved Reserves."
11
<PAGE>
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION
The Company's revenue, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. The Company's ability to maintain or increase its borrowing
capacity and to obtain additional capital on attractive terms also is
substantially dependent upon oil and gas prices. Prices for oil and natural gas
are subject to wide fluctuation in response to relatively minor changes in
supply and demand, market uncertainty and a variety of additional factors that
are beyond the Company's control. These factors include the level of consumer
product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, the foreign supply of oil and natural gas, the
price of oil and gas imports and overall economic conditions. From time to time,
oil and gas prices have been depressed by excess domestic and imported supplies.
There can be no assurance that current price levels will be sustained.
Predicting future oil and natural gas price movements with any certainty is not
possible. Declines in oil and natural gas prices may adversely affect the
Company's financial condition, liquidity and results of operations and may
reduce the amount of the Company's oil and natural gas that can be produced
economically. Market prices for oil have generally declined since December 1997.
Additionally, substantially all of the Company's sales of oil and natural gas
are made in the spot market or pursuant to contracts based on spot market prices
and not pursuant to long-term fixed price contracts. With the objective of
reducing price risk, the Company from time to time enters into hedging
transactions with respect to a portion of its expected future production. There
can be no assurance, however, that such hedging transactions will reduce risk or
mitigate the effect of any substantial or extended decline in oil or natural gas
prices. Any substantial or extended decline in the prices of oil or natural gas
would have a material adverse effect on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
In addition, the marketability of the Company's production depends upon the
availability and capacity of gas gathering systems, pipelines and processing
facilities. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If market factors were to change dramatically, the financial impact
on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the control of the Company and represent
a significant risk. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "Business and
Properties--Marketing."
Volatile oil and gas prices make it difficult to estimate the value of
producing properties for acquisition and often cause disruption in the market
for oil and gas producing properties, as buyers and sellers have difficulty
agreeing on such value. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploration projects.
See "Business and Properties--Acquisitions and Divestments."
RISK OF PRICE RISK MANAGEMENT TRANSACTIONS
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, the Company has in the past and expects to continue to enter
into oil and gas hedging arrangements. These arrangements may include futures
contracts on the New York Mercantile Exchange, fixed price delivery contracts
and financial swaps. These hedging arrangements may apply to only a portion of
the Company's production and provide only partial price protection against a
decline in natural gas prices. While intended to reduce the effects of
volatility of the price of oil and natural gas, such transactions may limit
potential gains by the Company if oil and natural gas prices were to rise
substantially over the price established by the hedge. In addition, such
transactions may expose the Company to the risk of financial loss in certain
circumstances, including instances in which (i) production is less than
expected; (ii) there is a widening of price differentials between delivery
points for the Company's production and the delivery point assumed in the
arrangement; (iii) the counter parties to the Company's future contracts fail to
perform under the
12
<PAGE>
contracts; or (iv) a sudden, unexpected event has a material impact on oil or
natural gas prices. See "Business and Properties--Hedging Activities and
Marketing."
The Company's only current swap arrangement is the swap arrangement required
by the Company's credit agreement with Bank of America NT&SA (the "Bank Credit
Agreement"). The swap agreement is for 62,500 MMBtu of the Company's monthly
Mid-Continent natural gas production for $1.566 per MMBtu for the period
beginning April 1, 1996 and ending January 31, 1999. The swap was reduced to
31,250 MMBtu on September 25, 1996, in connection with the sale of the N.E.
Cedardale field. The Company recorded a loss of $212,000 on this swap reduction.
The Company's net gas production has been less than the volumes hedged. As of
March 31, 1998, the Company had an accrued liability of $179,947 to recognize
the projected loss from the hedge. The Company has not recently conducted an
active hedging program other than as required by the Bank Credit Agreement. In
that regard, the Company had net losses of $814,029 in 1996, which includes the
$212,000 loss on the swap reductions, and $375,410 in 1997 on its required
hedged positions. See "Business and Properties--Hedging Activities and
Marketing."
HISTORY OF LOSSES; ACCUMULATED AND WORKING CAPITAL DEFICITS
For the years ended December 31, 1996 and 1997, the Company had net losses
of $5,025,019 and $4,953,803. The Company had a net loss of $608,588 for the
three months ended March 31, 1998. The Company's accumulated deficit as of March
31, 1998 was $13,545,450. On a pro forma basis for the year ended December 31,
1997 and the three months ended March 31, 1998, the Company had net losses of
$12,582,956 and $2,386,984, respectively. The Company anticipates that it will
continue to have net losses until it acquires or develops enough additional
producing gas and oil properties to achieve profitability. There can be no
assurance the Company will be able to do so.
ABILITY TO CONTINUE AS A GOING CONCERN
The auditors' report relating to the Company's audited balance sheets as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended
contains an explanatory paragraph as to the Company's ability to continue as a
going concern. Such going concern explanation relates only to the Company's
financial statements covered by the auditors' report. The Company believes that
the consummation of the Acquisitions and the receipt of the net proceeds of this
offering will allow the Company's independent auditors to delete the explanatory
paragraph in their report with respect to the Company's next audited financial
statements, but there can be no assurance in that regard. See "Independent
Auditors' Report" and Note 2 to Financial Statements.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company has made and intends to make substantial capital expenditures in
connection with the exploration and development of its gas and oil properties.
Historically, the Company has funded its capital expenditures through a
combination of internally generated funds, equity and long-term debt financing,
and short-term financing arrangements. Based on its current operations, the
Company anticipates that its capital expenditures through the end of 1998 will
be funded from (i) proceeds from the sale of the Common Stock offered hereby;
(ii) the availability of credit under the Company's Bank Credit Agreement and
other credit facilities; (iii) sales of promoted interests in the Exploration
Projects to industry partners; and (iv) if the foregoing financing sources are
inadequate, the sale of interests in the Company's assets to unaffiliated third
parties. The availability of credit under the Bank Credit Agreement is subject
to several variables, such as the level of production from existing wells,
prices of gas and oil and the Company's success in locating and producing new
reserves. The Company currently is attempting to renegotiate certain of the
terms of the Bank Credit Agreement to increase the borrowing capacity
thereunder, however, there can be no assurance that the Company will be
successful in doing so. The Company has a capital expenditure budget of $25.0
million for the 12 months following the date of this Prospectus. The proceeds of
this Offering and the borrowing capacity currently available under the Bank
Credit Agreement
13
<PAGE>
will not be sufficient to fund such budget in full. Therefore, unless the
Company finds additional sources of capital or negotiates an amendment to the
Bank Credit Agreement to create increased borrowing capacity, the Company will
be required to seek additional sources of capital to fund its capital
expenditure budget, sell interests in its Exploration Projects, or curtail its
drilling program. There can be no assurance that funds available to the Company
will be sufficient for the Company to carry out its proposed plans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
MORTGAGED GAS AND OIL PROPERTIES; CREDIT AGREEMENT COVENANTS AND RESTRICTIONS
The Company has granted to Bank of America NT&SA a mortgage on substantially
all of the Company's proved developed gas and oil properties to secure repayment
under the Bank Credit Agreement. In addition, the Company granted a mortgage to
Duke Energy Financial Services, Inc. on substantially all of the assets acquired
in the Acquisitions to secure repayment under the Duke Credit Facility, however,
indebtedness under the Duke Credit Facility will be repaid with a portion of the
proceeds from this Offering, and upon such repayment, the mortgage will be
released. The party providing financing for the Starboard Project (the
"Starboard Project Financing") has been granted an overriding royalty interest
in the Starboard Project properties. Repayment of amounts owed are payable only
from the proceeds of the overriding royalty interest, but such payments are
secured by a mortgage on the Starboard Project properties. These liens limit the
Company's ability to borrow additional funds. The amount of borrowings under the
Bank Credit Agreement is based on the maintenance of adequate natural gas and
oil reserves to support the amount borrowed. Should the estimated proved natural
gas and oil reserves or the price to be received for these reserves decline
below the required reserve value, the Company would be required either to
accelerate payment, repay a specified amount of the borrowings so as to have
adequate reserve value to support the borrowing, or provide additional
collateral for the loan. A failure by the Company to comply with the covenants
and restrictions contained in the Bank Credit Agreement, or obtain a waiver to
such covenants and restrictions, will constitute a default under the terms of
the Bank Credit Agreement and the Starboard Project Financing, resulting in the
indebtedness under both of those credit arrangements becoming immediately due
and payable and enabling the lenders to foreclose against the collateral for the
loans. The Company historically has not been, and currently is not, in
compliance with all its covenants under the Bank Credit Agreement, but has
secured waivers of default for past noncompliance. The Company expects, but
cannot assume, that waivers will continue to be granted in the future. Moreover,
the Company believes that upon consummation of this Offering, the Company will
be in compliance with all of the covenants of the Bank Credit Agreement. The
Company believes, but cannot assure, it will be able to continue to make the
payments required by the Bank Credit Agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
RESERVE REPLACEMENT
As is customary in the oil and gas exploration and production industry, the
Company's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless the
Company replaces its estimated proved reserves (through development, exploration
or acquisition), the Company's proved reserves generally will decline as they
are produced.
The Company's current strategy includes increasing its reserve base through
acquisitions of leaseholds with drilling potential and by continuing to exploit
its existing properties. There can be no assurance, however, that the Company's
exploration and development projects will result in significant additional
reserves or that the Company will have continuing success drilling productive
wells at economically viable costs. Furthermore, while the Company's revenues
may increase if prevailing oil and gas prices increase significantly, the
Company's finding costs for additional reserves could also increase. For a
discussion of the Company's reserves, see "Business and Properties--Oil and Gas
Reserves."
14
<PAGE>
OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled and that
title problems, compliance with governmental requirements, mechanical
difficulties or shortages or delays in the delivery of drilling rigs and other
equipment may limit the Company's ability to market its production. There can be
no assurance that new wells drilled by the Company will be productive or that
the Company will recover all or any portion of its investment. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells but
also from wells that are productive but do not produce sufficient net revenues
to return a profit after drilling, operating and other costs. In addition, the
Company's properties may be susceptible to hydrocarbon drainage from production
by other operators on adjacent properties.
Industry operating risks include the risk of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental hazards such as
oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of
any of which could result in substantial losses to the Company due to injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.
Additionally, many of the Company's oil and gas operations are located in an
area that is subject to tropical weather disturbances, some of which can be
severe enough to cause substantial damage to facilities and possibly interrupt
production. In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance will be adequate to cover losses or
liabilities. The Company cannot predict the continued availability of insurance
at premium levels that justify its purchase. Losses and liabilities arising from
uninsured or under-insured events could have a material adverse effect on the
financial condition and results of operations of the Company.
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
may be subject to production curtailments. The curtailments may vary from a few
days to several months. In most cases the Company will be provided only limited
notice as to when production will be curtailed and the duration of such
curtailments. The Company is currently not curtailed on any of its production.
See "Business and Properties--Operating Hazards and Insurance."
CONTROL BY PRINCIPAL SHAREHOLDERS.
As a result of the Acquisitions, EPC owns approximately 44% and Aspect owns
approximately 36.27% of the Company's issued and outstanding Common Stock. As a
result, each of EPC and Aspect are in a position to substantially influence the
outcome of shareholder votes on the election of directors and other matters.
Moreover, EPC and Aspect together have sufficient voting power to control the
approval of any matter brought before the Company's shareholders. EPC and Aspect
have not entered into any agreement with respect to the voting of their Common
Stock. In addition, if EPC or Aspect were to sell a significant number of their
shares of Common Stock in the public market, the prevailing market price of the
Common Stock could be adversely affected. See "--Shares Eligible for Future
Sale."
MINORITY OWNERSHIP OF OIL AND GAS INTERESTS.
The Company owns a minority interest in some of the Exploration Projects.
Operational decisions, such as the selection of drill sites, when to drill
wells, the amount to be expended on any well, determining whether to conduct
recompletion or other activities, and similar matters will be made by the
operators of the wells on each Exploration Project. The interests of the
operators of the wells and of the majority working interest owners in many cases
may not be aligned with the Company's interests. Therefore, the Company may be
unable to control many important aspects of the operation and development of
15
<PAGE>
Exploration Projects on which it owns a minority interest, and the development
of those Exploration Projects may be conducted in a fashion that is adverse to
the Company's best interests. See "Business and Properties--Exploration
Projects."
UNCERTAINTY AS TO ESTIMATES OF FAIR MARKET VALUES
The Company engaged Cornerstone to deliver a written opinion to the
Company's Board of Directors (the "Cornerstone Opinion") to estimate the fair
market value of the assets acquired in the Acquisitions. The Cornerstone Opinion
estimates such fair market value to be approximately $54.2 million as of January
23, 1998. Cornerstone's estimate of the fair market value of the assets acquired
in the Acquisitions was based upon a variety of factors including (i) an
analysis of the risk adjusted reserves (derived from a comprehensive
assessment), (ii) estimated replacement costs that a buyer would incur to bring
individual projects or properties to their current state of development, (iii)
current industry factors such as supply and demand for oil and gas, commodity
prices and availability of seismic and drilling equipment and (iv) oil and gas
prices on the date of the Cornerstone Opinion. For the analysis of risk adjusted
reserves, Cornerstone received Company-provided data and made adjustments
Cornerstone deemed appropriate to reflect what it felt would reasonably be
categorized as possible reserves in accordance with the definition of the
Society of Petroleum Engineers. Prices for oil and gas generally have declined
since such date. There can be no assurance that Cornerstone's estimate of the
fair market value of such assets would be as high as that contained in the
Cornerstone Opinion if Cornerstone relied on current oil and gas prices in
reaching its opinion. Cornerstone's estimates of the fair market values of the
assets do not purport to be appraisals or necessarily reflect the prices at
which such assets could actually be sold. Because such estimates are inherently
subject to uncertainty and based upon numerous factors or events beyond the
control of the parties to the Acquisition Agreement or their respective
advisors, no assurances can be given that such estimates will prove to be
accurate. See "Business and Properties--General."
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various United States federal, state
and local governmental laws and regulations that change from time to time in
response to economic or political conditions. Matters subject to regulation
include discharge permits for drilling operations, drilling and abandonment
bonds, reports concerning operations, the spacing of wells, and unitization and
pooling of properties, environmental protection, and taxation. From time to
time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and gas wells below actual
production capacity in order to conserve supplies of oil and gas. In addition,
the production, handling, storage, transportation and disposal of oil and gas,
by-products thereof and other substances and materials produced or used in
connection with oil and gas operations are subject to regulation under laws and
regulations primarily relating to protection of human health and the
environment. Failure to comply with these laws and regulations may result in the
assessment of administrative, civil, and criminal penalties, as well as
injunctive relief. The Company also may be subject to substantial clean-up costs
for any toxic or hazardous substance that may exist under any of its current
properties or properties that it has owned or operated in the past. To date,
expenditures related to complying with these laws and regulations and for
remediation of existing environmental contamination have not been significant in
relation to the Company's results of operations.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation. In addition,
the recent trend toward stricter standards in environmental legislation and
regulation is likely to continue. For instance, legislation has been proposed in
Congress from time to time that would reclassify certain crude oil and natural
gas exploration and production wastes as "hazardous wastes" which would make the
reclassified wastes subject to much more stringent handling, disposal and
clean-up requirements. If such legislation were to be enacted, it could have a
significant impact on the Company's
16
<PAGE>
operating costs, as well as the oil and gas industry in general. The Company
could incur substantial costs to comply with environmental laws and regulations,
and the Company is unable to predict the ultimate cost of compliance with these
requirements or their effect on its production. See "Business and Properties--
Regulation."
TITLE DEFECTS
Title to the Company's oil and gas leases, including those purchased in the
Acquisitions, will not be examined until drill sites are selected. As is
customary in the industry in the case of undeveloped properties, little
investigation of record title is made at the time of acquisition other than a
preliminary review of local records. Although title will be examined before
drilling on a site commences, as is customary in the industry, the Company does
not intend to purchase title insurance, and there can be no assurance that
losses relating to any lease will not result from title defects, defects in the
assignment of leasehold rights or prior encumbrances. See "Business and
Properties--Title to Properties."
COMPETITION FOR GAS AND OIL LEASES AND SEISMIC PERMITS
Substantial competition exists for gas and oil leases and there can be no
assurance the Company will be able to acquire the gas and oil leases it seeks.
Similar competition exists for seismic permits without which 2-D and 3-D seismic
surveys cannot be conducted. There can be no assurance the Company can obtain
the permits necessary to conduct seismic surveys it may desire to conduct. The
seismic permitting risk can be greater in the State of Louisiana, where current
law requires permits from owners of at least an undivided 80% interest in each
tract over which a seismic survey is proposed to be conducted. See "Business and
Properties--Competition."
CONFLICTS OF INTEREST
Michael E. Johnson and Charles J. Smith each own 50% of EPC's common stock
and Alex M. Cranberg owns a controlling interest in Aspect. Their respective
relationships with EPC and Aspect create conflicts of interest with their
serving as directors of the Company. Aspect has retained a substantial interest
in many of the projects that Aspect transferred to the Company pursuant to the
Acquisition Agreement, and Aspect has the right to acquire oil and gas interests
in areas adjacent to those covered by the Exploration Projects. Aspect's
participation in these additional exploration projects creates a conflict of
interest with the Company. The Acquisition Agreement provides, however, that
Aspect will not participate in any exploration project in the areas of mutual
interest created pursuant to the Acquisition Agreement. In addition, Aspect and
the Company have entered into an agreement that for a period of three years
beginning May 19, 1998, before selling any projects that Aspect owns now or may
own during such three year period in certain defined counties surrounding the
Exploration Projects, Aspect will first offer to sell such project to the
Company at a price and on terms identical to those initially offered to third
party purchasers. Nonetheless, Aspect will continue to participate in oil and
gas exploration activities outside the areas established by the Acquisition
Agreement and the areas adjacent thereto. Aspect is not obligated to offer the
Company a participation in those projects, and Aspect will be in competition
with the Company to that extent. See "Business and Properties--Conflicts of
Interest."
BROAD DESCRETION IN USE OF PROCEEDS
The board of directors has broad discretion to allocate the proceeds of the
Offering. The Company plans to use $7.8 million, or 54.8%, of the net proceeds
of the Offering for the repayment of debt and $6.4 million, or 45.2%, of the net
proceeds of the Offering for exploration and development activities. The actual
allocation of funds, however, will depend on the Company's success in exploring
for, finding and developing gas and oil reserves. If results do not meet the
Company's requirements due to unanticipated expenses, lack of success or
otherwise, it may reallocate the proceeds among other current exploration and
development projects or pursue different exploration and development activities,
or seek to acquire
17
<PAGE>
additional natural gas or oil assets. If the Company uses a portion of the net
proceeds of the Offering to acquire or lease additional natural gas or oil
assets or other interests in prospects, the Company will not be required under
Delaware law to seek stockholder approval of such transactions. See "Use of
Proceeds."
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major integrated and independent gas and oil companies for the
acquisition of desirable gas and oil properties and leases, for the equipment
and labor required to develop and operate such properties, and in the marketing
of natural gas to end-users. Many of these competitors have financial and other
resources substantially greater than those of the Company. In addition, many of
the Company's larger competitors may be better able to respond to factors that
affect the demand for oil and natural gas production, such as changes in
worldwide oil and natural gas prices and levels of production, the cost and
availability of alternative fuels and the application of government regulations.
The Company also competes in attracting and retaining technical personnel,
including geologists, geophysicists and other specialists. Although the Company
believes the technical staff EPC provided after consummation of the Acquisitions
enhances the Company's professional staff, there can be no assurance the Company
will be able to attract or retain technical personnel in the future. See
"Business and Properties--Competition."
DIVIDEND POLICY--COMMON STOCK
The Company does not currently pay cash dividends on its Common Stock and
does not anticipate paying dividends in the near future. The Company is
restricted under the terms of the Bank Credit Agreement from making
distributions of any type with respect to any class of its capital stock unless
it meets certain financial requirements (the "Restricted Payment Tests"),
including the maintenance of a current ratio of not less than 1.1:1 and
maintenance of tangible net worth in excess of $5,000,000, after giving effect
to the proposed distribution. The Company currently does not meet all of the
Restricted Payment Tests and, unless it receives a waiver from such tests, is
restricted under the terms of the Bank Credit Agreement from making any dividend
payments or other distribution with respect to any class of its capital stock.
The Company believes that upon consummation of this Offering, the Company will
be in compliance with the Restricted Payment Tests. See "Dividend Policy."
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent upon the performance of certain of its
executive officers. The Company has not entered into employment agreements with
these executive officers. There can be no assurance the Company will be able to
enter into any such employment agreements or otherwise to retain such officers.
The Company does not maintain key-man life insurance on any of its employees.
See "Management--Directors and Executive Officers."
SHARES ELIGIBLE FOR FUTURE SALE
As of May 15, 1998, the Company had a total of 11,762,687 shares of Common
Stock outstanding after giving effect to the Reverse Split and the Acquisitions.
Of these shares, 1,429,990 shares are freely transferable by persons other than
affiliates, as defined in regulations under the Securities Act, without
restriction or further registration under the Securities Act. An additional
225,985 shares of Common Stock outstanding are "Restricted Securities" within
the meaning of Rule 144 under the Securities Act and may not be sold in the
absence of registration under the Securities Act, unless an exemption from
registration is available, including the exemption provided by Rule 144. Under
Rule 144 as currently in effect, all such shares are currently eligible for
sale, subject to certain volume limitations and restrictions on the manner of
sale.
18
<PAGE>
The Company issued 10,106,702 shares of Common Stock to EPC, Aspect, an
affiliate of Enron Corp. and certain of Aspect's employees as consideration for
the assets acquired in the Acquisitions and certain overriding royalty interests
relating thereto. Such shares, which constitute 85.92% of all of the issued and
outstanding Common Stock, are Restricted Securities; however, the Company has
filed a registration statement with respect to the Common Stock issued in the
Acquisitions, and the Commission has declared such registration statement
effective under the Securities Act. In addition, certain affiliates of the
Company are purchasing an aggregate of 350,000 shares of Common Stock in this
Offering, all of which will be freely tradable. Although EPC, Aspect and such
Enron Corp. affiliate may resell the Common Stock issued to them pursuant to the
Acquisition Agreement pursuant to such registration statement, EPC and Aspect
have indicated they have no present intention to do so. In addition, EPC, Aspect
and the affiliates of the Company who are purchasing shares of Common Stock in
this Offering have entered into written agreements with the Representative that
they will not sell any of their Common Stock until the expiration of 180 days
after the date of this Prospectus, and such Enron Corp. affiliate has entered
into a written agreement with the Representative that it will not sell any of
its Common Stock until the expiration of 90 days after the date of this
Prospectus.
Approximately 1,767,750 shares of Common Stock are issuable upon the
exercise of existing options and warrants. Of such shares, 50,000 are issuable
upon exercise of warrants with an exercise price of $3.00 per share issued to
EPC, Aspect and an affiliate of the Representative in connection with the Duke
Credit Facility and in connection with a previous credit facility the Company
entered into with an affiliate of Aspect, and repayment of indebtedness of which
was guaranteed by EPC and an affiliate of the Representative (the "Initial
Bridge Facility"). In addition (i) 291,667 shares are issuable upon exercise of
the Company's Series A Warrants at an exercise price of $36.00 per share; (ii)
776,250 shares are issuable upon exercise of the Company's Series B Warrants at
an exercise price of $12.15 per share; (iii) 193,334 shares are issuable upon
exercise of warrants issued to the underwriters in connection with certain of
the Company's previous equity offerings at exercise prices ranging from $12.15
per share to $34.50 per share; (iv) 210,000 shares are issuable upon exercise of
the Representative's Warrant at an exercise price of $7.20 per share, and (v)
246,500 shares are issuable upon the exercise of additional outstanding options
and warrants with exercise prices ranging from $3.78 to $24.00 per share. All of
such shares have been or may be registered for resale pursuant to registration
rights agreements.
The sale of a material number of the shares of Common Stock eligible for
resale without restriction in the public markets or that will be eligible for
resale without restriction upon registration pursuant to applicable registration
rights agreements could have a material adverse effect on the trading price of
the Company's Common Stock.
YEAR 2000 COMPLIANCE
The Company has recognized the need to ensure its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company operates on an internally designed software package
that is compliant with the year 2000. The Company is attempting to identify
other potential areas of risk and has begun addressing these in its planning,
purchasing and daily operations. The total costs of connecting all internal
systems, equipment and operations to the year 2000 has not been fully
quantified, but it is not expected to be a material cost to the Company.
However, no estimates can be made as to the potential adverse impact resulting
from the failure of third party service providers and vendors to prepare for the
year 2000. If any interruptions occur, they may have a material adverse effect
on the Company's business, financial condition and results of operations.
Furthermore, there can be no assurance that the Company's customers and
suppliers are or will be year 2000 compliant. The failure of the Company's
customers and suppliers to achieve year 2000 compliance could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000."
19
<PAGE>
DISCRETIONARY ISSUANCE; ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the issuance of preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of holders of the Common Stock. In the event of
issuance, the preferred stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
Company, which could have the effect of discouraging bids for the Company and,
thereby, prevent shareholders from receiving the maximum value for their shares.
Although the Company has no present intention to issue any preferred stock,
there can be no assurance the Company will not do so in the future.
In addition to the provision for the issuance of preferred stock, the
Company's Certificate of Incorporation and Bylaws include several other
provisions that may have the effect of inhibiting a change of control of the
Company. These include a classified Board of Directors, no shareholder action by
written consent and advance notice requirements for shareholder proposals and
director nominations. These provisions may discourage a party from making a
tender offer for or otherwise attempting to obtain control of the Company.
Moreover, as a Delaware corporation, the Company is subject to the provisions of
the Delaware General Corporation Law (the "DGCL") that could make it difficult
or tend to discourage attempts to acquire the Company. The DGCL includes
provisions that are intended to encourage persons considering unsolicited tender
offers or other unilateral takeover proposals to negotiate with the Company's
Board of Directors rather than pursue non-negotiated takeover attempts. See
"Description of Securities--Provisions Affecting Control of the Company."
LIMITED LIABILITY OF DIRECTORS; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation, as permitted by the DGCL,
eliminates in some circumstances the monetary liability of the Company's
directors for breach of their fiduciary duty as directors. In those
circumstances the Company's directors will not be liable to the Company or its
shareholders for breach of such duty. The Company's Certificate of Incorporation
also provides that the Company shall indemnify its directors and officers to the
full extent permitted by the DGCL.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are approximately $14.2 million ($16.5 million if the
Underwriters' over-allotment option is exercised in full), after deducting
Underwriters' discounts and commissions, the Representative's nonaccountable
expense allowance of $300,000 and additional estimated expenses of the Offering
of $350,000 payable by the Company.
Of such net proceeds, the Company intends to use $7.8 million to repay
indebtedness under the Duke Credit Facility and the remainder for exploration
activities on the Exploration Projects. As of the date hereof, a total of
approximately $11.0 million of costs for exploration activities have been
incurred. Therefore, the net proceeds of this Offering will be insufficient to
pay all of the costs the Company has incurred on exploration activities through
the date hereof.
The following table illustrates the Company's intended use of the net
proceeds of this Offering and the percentage of such net proceeds represented by
each purpose:
<TABLE>
<CAPTION>
APPROXIMATE PERCENT OF
USE OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
- ---------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Exploration activities(1)....................................... $ 6,430,000 45.2%
Repayment of debt............................................... 7,800,000 54.8%
-------------- -----
Total......................................................... $ 14,230,000 100.0%
-------------- -----
-------------- -----
</TABLE>
- ------------------------
(1) Includes payment of approximately $4.75 million of the aggregate $7.55
million of costs incurred by Aspect and EPC before the closing of the
Acquisitions and approximately $6.25 million in additional exploration costs
incurred as of the date hereof.
Borrowings under the Duke Credit Facility bear interest at the prime rate
plus 4.0% (12.5% as of the date hereof). All amounts outstanding under the Duke
Credit Facility mature no later than July 31, 1999. Proceeds from the Duke
Credit Facility were used to repay borrowings under the Initial Bridge Facility,
which was a $1.8 million credit facility that an affiliate of Aspect provided to
the Company to fund operational and exploration requirements before the closing
of the Acquisitions. Aggregate borrowings of $500,000, plus interest, under the
Initial Bridge Facility were repaid in full with the proceeds of the Duke Credit
Facility.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that the proceeds from this Offering, together with
projected cash flow from operations, the borrowing capacity available under the
Bank Credit Agreement and other sources, will be sufficient to satisfy its
contemplated capital and operating cash requirements through fiscal 1998,
however, such Offering proceeds and borrowing capacity under the Bank Credit
Agreement are not anticipated to be sufficient to fund the Company's capital
expenditure budget for the 12 months following the date hereof. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources." If cash flows do not develop as
anticipated, funds are not available under the Bank Credit Agreement or if the
Company's proposed plans or the basis for its assumptions change, the Company
may be required to obtain additional sources of capital or curtail its
exploration activities. Moreover, additional funds available under the Bank
Credit Agreement may not be available if the Company's then existing natural gas
and oil reserves are not sufficient to secure the additional borrowings. The
Company has used most of its existing assets to secure the Bank Credit
Agreement, the Starboard Project Financing and the Duke Credit Facility, and
there can be no assurance additional assets will be available to secure
additional borrowings.
The Company plans to use a substantial amount of the proceeds from this
Offering for exploration and development activities. The actual allocation of
funds, however, will depend on the Company's success
21
<PAGE>
in exploring for, finding and developing gas and oil reserves. If results do not
meet the Company's requirements (due to unanticipated expenses, lack of success
or otherwise), the board of directors may reallocate the proceeds among other
current exploration and development projects or pursue different exploration and
development activities, or seek to acquire additional natural gas or oil assets.
See "Risk Factors--Broad Discretion in Use of Proceeds." The Company may use a
portion of the proceeds to acquire or lease other interests in prospects. Any
decision to make an acquisition will be dependent on consideration of a variety
of factors, including business prospects, purchase price and financial terms of
the transaction. The Company has no agreements, understandings or arrangements
with respect to any acquisition. Pending application of the net proceeds
described above, the Company will invest such net proceeds in short term
investment grade interest bearing securities.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition and other relevant factors. The Company
does not expect to declare or pay any dividends on Common Stock in the
foreseeable future. The Company also is restricted under the terms of the Bank
Credit Agreement from making distributions of any type with respect to any class
of its capital stock unless it meets the Restricted Payment Tests provisions of
the Bank Credit Agreement, including the maintenance of a current ratio of not
less than 1.1:1 and maintenance of tangible net worth in excess of $5,000,000,
after giving effect to the proposed distribution. The Company currently does not
meet all of the Restricted Payment Tests and, accordingly, is restricted under
the terms of the Bank Credit Agreement from making any dividend payments or
other distribution with respect to any class of its capital stock.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq Small-Cap Market under the symbol
"ESNJ." On July 15, 1998, the closing price of the Common Stock as reported by
the Nasdaq Small-Cap Market was $4.125.
The following table sets forth, for the periods indicated, the high and low
sales prices of the Common Stock as reported on the Nasdaq Small-Cap Market
after giving effect to the Reverse Split, assuming that such high and low sales
prices after giving effect to the Reverse Split are six times the pre-Reverse
Split prices.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
First Quarter............................................................................. $ 16.125 $ 8.532
Second Quarter............................................................................ $ 16.125 $ 11.250
Third Quarter............................................................................. $ 16.500 $ 9.750
Fourth Quarter............................................................................ $ 17.625 $ 12.00
YEAR ENDED DECEMBER 31, 1997:
First Quarter............................................................................. $ 21.375 $ 12.375
Second Quarter............................................................................ $ 14.250 $ 10.125
Third Quarter............................................................................. $ 12.00 $ 3.75
Fourth Quarter............................................................................ $ 12.00 $ 4.125
YEAR ENDED DECEMBER 31, 1998:
First Quarter............................................................................. $ 7.125 $ 4.125
Second Quarter............................................................................ $ 6.375 $ 4.00
Third Quarter through July 15, 1998....................................................... $ 4.375 $ 4.125
</TABLE>
On July 15, 1998, there were approximately 94 common shareholders of record
and 2,670 beneficial owners of the Common Stock.
22
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
March 31, 1998; (ii) the pro forma capitalization of the Company at March 31,
1998 after giving effect to the Acquisitions, the redemption of the Preferred
Stock and the receipt and application of the proceeds from the Duke Credit
Facility; and (iii) the pro forma capitalization of the Company as adjusted to
give effect to the sale of the 4.0 million shares of Common Stock offered hereby
and the application of the net proceeds therefrom as described under "Use of
Proceeds." This table should be read in conjunction with the financial
statements and related notes of the Company appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
-------------- -------------- --------------
<S> <C> <C> <C>
Long-term debt, excluding current maturities, net of
unamortized discount of $44,224 (1)............................ $ 2,893,055 $ 4,607,785 $ 1,059,723
Stockholders' equity:
Convertible Preferred Stock; $.01 par
value, 5,000,000 shares authorized; 85,961
issued and outstanding (0 shares outstanding
on a pro forma basis)........................................ 860 -- --
Common Stock; $.01 par value,
40,000,000 shares authorized; 1,655,984 shares issued and
outstanding; 11,812,684 shares pro forma and 15,812,684
shares pro forma as adjusted (2)............................. 16,560 118,127 158,127
Unamortized value of warrants issued (3)....................... (20,371) (20,371) (20,371)
Additional paid-in capital..................................... 14,751,425 66,876,830 80,725,465
Retained earnings (deficit).................................... (13,545,450) (13,545,450) (13,545,450)
-------------- -------------- --------------
Total stockholders' equity................................... 1,203,024 53,429,136 67,317,771
-------------- -------------- --------------
Total capitalization....................................... $ 4,096,079 $ 58,036,921 $ 68,377,494
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
- ------------------------
(1) In addition to the amount of pro forma as adjusted long-term debt shown as
being repaid from the proceeds of the Offering, the Company intends to repay
amounts borrowed after March 31, 1998 that are not reflected in the table.
(2) Includes 50,000 shares of Common Stock issuable upon the exercise of
in-the-money warrants held by Aspect, EPC and an affiliate of the
Representative, which warrants are assumed to have been exercised; does not
include 1,717,500 shares of Common Stock issuable upon the exercise of
additional outstanding warrants and options. See "Summary--The Offering" and
"Underwriting."
(3) Common shares subscribed in 1993 but unpaid.
23
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The historical financial information for the year ended December 31, 1997
are derived from the Company's audited financial statements. The pro forma
consolidated statement of operations information for the year ended December 31,
1997 and for the three months ended March 31, 1998 combine the Company's
historical information as adjusted to give effect to the Acquisitions, the
redemption of the Preferred Stock and the use of proceeds from the Duke Credit
Facility as if they had occurred on January 1, 1997. The pro forma balance sheet
information as of March 31, 1998 is presented as if the Acquisitions had been
consummated on that date. The pro forma statements of operations and balance
sheet are provided for comparative purposes only and should be read in
conjunction with the Company's historical consolidated financial statements
included elsewhere in this Prospectus. The pro forma information presented is
not necessarily indicative of the combined financial results as they may be in
the future or as they might have been for the periods indicated had the
Acquisitions been consummated as of January 1, 1997 and March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------
COMPANY PRO FORMA REFINANCING
HISTORICAL ADJUSTMENTS TRANSACTION PRO FORMA
----------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
Gas and oil revenues...................................... $ 664,126 $ 664,126
Realized gain (loss) on commodity transaction............. (375,410) (375,410)
Gain (loss) on sale of assets............................. 452,020 452,020
Unrealized loss on commodity transactions................. (128,936) (128,936)
Operating fees............................................ 55,021 55,021
Other revenues............................................ 241,788 241,788
----------- ----------------- ----------- ------------
Total revenues.......................................... 908,609 908,609
----------- ----------------- ----------- ------------
Cost and expenses:
Lease operating expense................................... 427,240 427,240
Production taxes.......................................... 24,497 24,497
Transportation and gathering costs........................ 143,265 143,265
Depletion, depreciation and
amortization............................................ 315,880 315,880
Impairment of oil and gas properties...................... 349,384 349,384
Exploration costs......................................... 2,258,702 $5,519,673(a) 7,778,375
Delay rentals............................................. 211,690 211,690
Interest expense.......................................... 60,942 626,480(b)(f) 687,422
General and administrative................................ 2,070,812 1,483,000(e) 3,553,812
----------- ----------------- ----------- ------------
Total costs and expenses................................ 5,862,412 7,629,153 13,491,565
----------- ----------------- ----------- ------------
Net loss.................................................... (4,953,803) (7,629,153) (12,582,956)
----------- ----------------- ----------- ------------
Cumulative preferred stock dividend......................... 103,153 $(103,153)(d) --
----------- ----------------- ----------- ------------
Net loss available for common stockholders................ $(5,056,956) $(7,629,153) $ 103,153 $(12,582,956)
----------- ----------------- ----------- ------------
----------- ----------------- ----------- ------------
Net loss per common share................................. $ (3.07) $ (1.07)
----------- ------------
----------- ------------
Weighted average number of common shares outstanding........ 1,646,311 11,803,011
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
---------------------------------------------------------------
COMPANY REFINANCING
HISTORICAL PRO FORMA ADJUSTMENTS TRANSACTION PRO FORMA
------------ --------------------- ----------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Revenues:
Gas and oil revenues.......................... $ 48,503 $ 48,503
Realized gain (loss) on commodity
transaction................................. (47,875) (47,875)
Gain (loss) on sale of assets................. 2,875 2,875
Unrealized loss on commodity transactions..... (51,011) (51,011)
Operating fees................................ 6,992 6,992
Other revenues................................ 23,930 23,930
------------ ----------- ----------- -------------
Total revenues.............................. (16,586) (16,586)
------------ ----------- ----------- -------------
Cost and expenses:
Lease operating expense....................... 69,773 69,773
Production taxes.............................. (1,090) (1,090)
Transportation and gathering costs............ 639 639
Depletion, depreciation and amortization...... 53,568 53,568
Exploration costs............................. 3,560 $ 1,256,767(a) 1,260,327
Delay rentals................................. (12,685) (12,685)
Interest expense.............................. 19,223 161,629 (b)(f 180,852
General and administrative.................... 459,014 360,000(e) 819,014
------------ ----------- ----------- -------------
Total costs and expenses.................... 592,002 1,778,396 2,370,398
------------ ----------- ----------- -------------
Net loss........................................ (608,588) (1,778,396) $ (2,386,984)
------------ ----------- ----------- -------------
Cumulative preferred stock dividend............. 25,788 (25,788 (d) --
------------ ----------- ----------- -------------
Net loss available for common stock........... $ (634,376) $ (1,778,396) $ 25,788 $ (2,386,984)
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
Net loss per common share..................... $ (0.38) $ (0.20)
------------ -------------
------------ -------------
Weighted average number of common shares
outstanding................................... 1,655,984 11,812,684
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------------------------------------------------------
COMBINED
COMPANY ENTITIES PRO FORMA REFINANCING
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTION PRO FORMA
------------ -------------- -------------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET:
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 188,495 $ 150,000(c) $ 338,495
Accounts receivable, net of allowance for
doubtful accounts of $7,915.............. 176,507 176,507
Prepaid and other expenses................. 141,074 141,074
Current portion of notes receivable from
EPC...................................... 466,664 $ (466,664)(h) --
Receivables from affiliates................ 97,765 $ 564,338(f) 662,103
------------ -------------- -------------------- -------------- -----------
Total current assets................... 1,070,505 564,338 150,000 (466,664) 1,318,179
Property and equipment:
Oil and gas properties....................... 3,635,538 19,866,800(g) 34,333,200(g) 3,000,000(b) 60,835,538
Other property and equipment................. 1,151,592 1,151,592
------------ -------------- -------------------- -------------- -----------
4,787,130 19,866,800 34,333,200 3,000,000 61,987,130
Less accumulated DD&A...................... (1,295,435) (1,295,435)
------------ -------------- -------------------- -------------- -----------
Property and equipment, net.............. 3,491,695 19,866,800 34,333,200 3,000,000 60,691,695
Other assets................................. 513,856 513,856
Notes receivable from EPC.................... 1,283,336 (1,283,336)(h) --
------------ -------------- -------------------- -------------- -----------
Total other assets..................... 1,797,192 (1,283,336) 513,856
Total assets........................... $ 6,359,392 $20,431,138 $34,483,200 $ 1,250,000 $62,523,730
------------ -------------- -------------------- -------------- -----------
------------ -------------- -------------------- -------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................... $ 824,400 $ 1,000,000(f) $ 1,824,440
Revenue distribution payable............... 74,325 74,325
Accrued expenses........................... 331,964 35,622(f) 367,586
Current portion of long-term debt.......... 988,360 564,338(f) $ 623,536(b) 2,176,234
------------ -------------- -------------- -----------
Total current liabilities.............. 2,219,089 1,599,960 623,536 4,442,585
Long-term debt............................... 1,846,165 1,714,730(b) 3,560,895
Non-recourse debt............................ 864,000 864,000
Accrued interest on non-recourse debt........ 227,114 227,114
------------ -------------- -------------- -----------
Total liabilities...................... 5,156,368 1,599,960 2,338,266 9,094,594
Stockholder's Equity:
Cumulative convertible preferred stock, $.01
par value.................................. 860 (860)(d) --
Common stock, $.01 par value................. 16,560 $ 101,567(c)(g) 118,127
Unamortized value of warrants issued......... (20,371) (20,371)
Paid-in capital.............................. 14,751,425 18,831,178 34,381,633(c)(g) (1,087,406)(d) 66,876,830
Retained deficit............................. (13,545,450) (13,545,450)
------------ -------------- -------------------- -------------- -----------
Total stockholders' equity............. 1,203,024 18,831,178 34,483,200 (1,088,266) 53,429,136
------------ -------------- -------------------- -------------- -----------
Total liabilities and stockholders' equity... $ 6,359,392 $20,431,138 $34,483,200 $ 1,250,000 $62,523,730
------------ -------------- -------------------- -------------- -----------
------------ -------------- -------------------- -------------- -----------
</TABLE>
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS AND BALANCE SHEET
(a) Geological and geophysical, delay rentals and exploratory dry hole costs for
the year ended December 31, 1997 and the three months ended March 31, 1998
amounted to $5,519,673 and $1,256,767, respectively. These amounts are
related to properties with no proved reserves, and are charged to expense
under the successful efforts method of accounting, whereas they had been
previously capitalized by EPC and Aspect under the full cost method of
accounting. All other costs incurred by EPC and Aspect related to the
acquired prospects are leasehold acquisitions costs which are capitalized
for both full cost and successful efforts.
(b) In conjunction with the Acquisition Agreement, the Company entered into the
Initial Bridge Facility with Aspect Management Corporation on January 19,
1998, to provide bridge financing for operations and initial prospect
development. The principal amount of $1.8 million bore interest at 18.0%,
and was payable in twelve equal monthly installments including interest
beginning no later than March 31, 1998. Subsequently, on February 23, 1998,
also in conjunction with the Acquisition Agreement, the Company replaced the
Initial Bridge Facility with the $7.8 million Duke Credit Facility. The Duke
Credit Facility bears interest at prime plus 4% (initially 12.5%), and is
payable in eleven monthly installments equal to one thirtieth ( 1/30th) of
the outstanding principal on July 31, 1998, with the first of such
installments commencing on August 31, 1998, and continuing thereafter
through June 30, 1999, with the remaining principal outstanding balance due
on July 31, 1999. On the date of the execution of the Duke Credit Facility,
the outstanding amount on the Initial Bridge Facility was $500,000. This
amount was subsequently transferred to the Duke Credit Facility. In
addition, the Company redeemed its Preferred Stock as part of the
Acquisitions, and as such, has drawn on the Duke Credit Facility for the
funds necessary to redeem the Preferred Stock. The redemption price plus
accrued and unpaid dividends at December 31, 1997 was $1,088,266. This
amount combined with the current outstanding amount on the Duke Credit
Facility is $4,838,266. Interest expense associated with the borrowings was
$601,990 and $150,497 for the year ended December 31, 1997 and the three
months ended March 31, 1998, respectively. As of March 31, 1998, $1,290,204
was included as current portion of long-term debt, with the remaining
balance of $3,548,062 classified as long-term. To date, approximately $3.0
million of the outstanding amount has been used for prospect development,
with the remaining amounts used for operations.
(c) In connection with the Initial Bridge Facility discussed in Note (b), the
Company issued warrants to purchase 50,000 shares of Common Stock at an
exercise price of $3.00 per share. The $150,000 in proceeds from those
warrants are included in cash at March 31, 1998. In addition, $131,250 is
included in prepaid interest for the discount received between the grant
price and the market price on the date of the grant. Since the recipients
have guaranteed their pro rata share of the Duke Credit Facility, the
prepaid interest will be amortized over the term of the underlying debt of
17 months.
(d) In connection with the Acquisition Agreement discussed in Note (b) above,
the Company redeemed its Preferred Stock at a redemption price of $10.26 per
share including all accrued and unpaid dividends. At March 31, 1998, the
total redemption price for the 85,961 shares of outstanding Preferred Stock
was $1,088,266.
(e) Historical general and administrative expenses associated with personnel and
facilities of EPC that the Company assumed as a result of the Acquisitions
amounted to approximately $1,483,000 and $360,000 for the year and three
months ended December 31, 1997 and March 31, 1998, respectively.
(f) Additions to working capital include the following:
<TABLE>
<CAPTION>
ACQUIRED
ASSETS ADJUSTMENTS
-------------- ------------
<S> <C> <C>
Liabilities of EPC assumed by the Company.............................. $ (1,000,000)
Proceeds from Warrants................................................. $ 150,000
Accrued interest associated with EPC note payable to Aspect assumed by
the Company(1)....................................................... (35,622)
Transfer of advances to EPC to oil and gas properties.................. (466,664)
Accounts receivable from Aspect to EPC assumed by the Company.......... 564,338
Current portion of long-term debt...................................... (564,338) (617,576)
-------------- ------------
Total working capital (deficit)........................................ $ (1,035,622) $ (934,240)
-------------- ------------
-------------- ------------
</TABLE>
- --------------------------
(1) EPC and Aspect have interests in common oil and gas prospects. Aspect
advanced EPC amounts to develop and explore those prospects. The
entities have no common ownership or interests outside of those
prospects.
(g) The Company issued 10,106,702 shares of Common Stock in exchange for working
interests in undeveloped oil and gas prospects with a historical full cost
basis of $19,866,800 and estimated fair market value of approximately $54.2
million based on the Cornerstone Opinion.
(h) Upon closing of the Acquisition Agreement, advances made to EPC to fund the
exploration and development of the the acquired prospects that became assets
of the Company were transferred to oil and gas properties. These amounts are
included as notes receivable in the historical financial statements and
amount to $1,750,000, of which $466,664 is classified as current, with the
remaining balance of $1,283,336 classified as long-term.
27
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1996
and 1997 have been derived from the Company's audited consolidated financial
statements. The selected consolidated financial data as of and for the three
month periods ended March 31, 1997 and 1998 are derived from the Company's
unaudited consolidated financial statements. The unaudited consolidated
financial statements include all adjustments consisting of normal recurring
accruals that the Company considers necessary for a fair presentation of the
Company's financial position as of such dates and the results of operations and
cash flows for such periods. Operating results for the three months ended March
31, 1998 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1998. Selected Financial Data should be read
in conjunction with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements of the Company
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
---------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Oil and gas revenues(1)......................................... $3,176,861 $ 664,126 $ 327,435 $ 48,503
Operating fees.................................................. 213,834 55,021 14,234 6,992
Other revenues(2)............................................... (223,903) 189,462 63,978 (72,081)
---------- ---------- ---------- ---------
Total revenues................................................ 3,166,792 908,609 405,647 (16,586)
---------- ---------- ---------- ---------
Costs and expenses:
Lease operating expense......................................... 556,925 427,240 96,698 69,773
Production taxes................................................ 207,969 24,497 8,784 (1,090)
Transportation and gathering costs.............................. 368,716 143,265 90,394 639
Depletion, depreciation and amortization(3)..................... 2,237,648 315,880 132,774 53,568
Impairment of oil and gas properties(5)......................... 51,000 349,384 -- --
Exploration costs(4)............................................ 1,317,161 2,258,702 852,626 3,560
Delay rentals(6)................................................ -- 211,690 -- (12,685)
Interest expense................................................ 783,872 60,942 4,133 19,223
General and administrative expense.............................. 2,217,099 2,070,812 572,260 459,014
Other costs and expenses(7) 451,421 -- -- --
---------- ---------- ---------- ---------
Total expenses................................................ 8,191,811 5,862,412 1,757,669 592,002
---------- ---------- ---------- ---------
Net loss...................................................... (5,025,019) (4,953,803) (1,352,022) (608,588)
Cumulative preferred stock dividend............................. 103,153 103,153 25,798 25,798
---------- ---------- ---------- ---------
Net income (loss) applicable to common stockholders............. $(5,128,172) $(5,056,956) $(1,377,810) $(634,376)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Net income (loss) per common share(8)......................... $ (4.31) $ (3.07) $ (0.84) $ (0.38)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Weighted average number of common shares(8)..................... 1,190,343 1,646,311 1,644,317 1,655,984
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------- AS OF MARCH 31,
1996 1997 1998
---------- ---------- -------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).......................................... $4,159,034 $ (413,377) $(1,148,584)
Property and equipment, net........................................ 3,435,924 3,144,370 3,491,695
Total assets....................................................... 9,631,192 4,576,008 6,359,392
Long-term debt (excluding current maturities)...................... 1,069,886 1,080,954 2,893,055
Stockholders' equity............................................... 6,738,826 1,804,820 1,203,024
</TABLE>
- ------------------------------
(1) Oil and gas revenues decreased from $3.18 million in 1996 to $0.66 million
in 1997, and from $0.33 million for the three months ended March 31, 1997 to
$48,503 for the same period in 1998 primarily due to ceased production from
the Mobile Bay wells and the sale of producing properties.
(2) Other revenues increased from ($0.2) million in 1996 to $.2 million in 1997
primarily due to the gain on the sale of assets and a decrease in realized
losses on commodity transactions. Other revenues decreased from $63,978 for
the three months ended March 31, 1997 to ($72,081) for the same period in
1998 due to losses on commodity transactions.
(3) Depletion, depreciation and amortization decreased from $2.2 million in 1996
to $0.3 million in 1997 primarily due to the abandonment of previously
producing wells in the Mobile Bay prospect and the sale of certain oil and
gas properties.
28
<PAGE>
(4) Impairment of oil and gas properties increased from $51,000 in 1996 to
$349,384 in 1997 primarily due to the abandonment of previously producing
wells in the Mobile Bay prospect.
(5) Exploration costs and delay rentals increased from $1.3 million in 1996 to
$2.5 million in 1997 primarily due to the dry holes drilled in 1997.
Exploration costs and delay rentals decreased from $1.0 million for the
three months ended March 31, 1997 to ($9,125) for the same period in 1998
due to dry holes drilled in 1997.
(6) Interest expense decreased from $783,872 in 1996 to $60,942 in 1997
primarily due to the reduction in the Company's outstanding bank debt during
1997.
(7) 1996 includes other expense items for the purchase and settlement of
deferred gas contracts. There were no such expenses during 1997.
(8) Weighted average shares outstanding and net loss per common share have been
adjusted to reflect the 1:6 Reverse Split effected on May 14, 1998.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis reviews the Company's operations for
the years ended December 31, 1997 and 1996 and for the three months ended March
31, 1998 and 1997, and should be read in conjunction with its consolidated
Financial Statements and related notes thereto.
OVERVIEW
On May 14, 1998, the Company (i) consummated the Acquisitions, and in
connection therewith, issued 10,906,702 shares of its Common Stock to EPC,
Aspect and certain other persons in exchange for the Exploration Projects and
certain overriding royalty interests therein; (ii) completed a one-for-six
Reverse Split of its Common Stock; (iii) reincorporated in the State of Delaware
and changed its name to Esenjay Exploration, Inc.; and (iv) called for
redemption all of its issued and outstanding Preferred Stock. The Company
believes that the consummation of the Acquisitions, along with the addition of
experienced staff and management (many of whom have worked together for over 15
years), and the implementation of its corporate restructuring, positions the
Company as a technology driven exploration company with a diverse array of
technology enhanced exploration projects. The Company also believes consummating
the Acquisitions will enhance its ability to access capital markets.
Since November 1, 1997, which was the effective date of the Acquisitions, 15
wells have been drilled for the Company's account. Of these wells, six have been
completed, four are awaiting completion and five were dry holes.
The opportunities set forth in the Company's Exploration Project portfolio
will require significant amounts of capital funding throughout the remainder of
1998 and into 1999. The Company's success in accessing this capital will have a
significant impact on its growth opportunities. See "--Liquidity and Capital
Resources."
The Company is on a successful efforts accounting basis, and booked the
Exploration Projects acquired pursuant to the Acquisition Agreement at their
estimated fair market value based on the Cornerstone Opinion. As a result of the
tax rules applicable to the acquisitions, the Company will likely not be able to
fully use its existing net operating loss carry forward in the future.
YEAR 2000
The Company has recognized the need to ensure its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company operates on an internally designed software package
that is compliant with the year 2000. The Company is attempting to identify
other potential areas of risk and has begun addressing these in its planning,
purchasing and daily operations. The total costs of connecting all internal
systems, equipment and operations to the year 2000 has not been fully
quantified, but it is not expected to be a material cost to the Company.
However, although no estimates can be made as to the potential adverse impact
resulting from the failure of third party service providers and vendors to
prepare for the year 2000, the Company intends to formulate a plan to deal with
potential year 2000 issues.
COMPARISON OF MARCH 31, 1998 TO MARCH 31, 1997
REVENUE. Total Revenues decreased 104.09% from $405,647 for the quarter
ended March 31, 1997 to a negative $16,586 for the quarter ended March 31, 1998.
Total gas and oil revenues decreased 85.19% from $327,435 to $48,503. The
decrease in gas and oil revenues was primarily attributable to ceased production
for the Mobile Bay wells which came on stream in December of 1995. Gas and oil
revenues associated with Mobile Bay declined from $131,087 for the quarter ended
March 31, 1997, compared to no revenues for the quarter ended March 31, 1998. A
30
<PAGE>
contributing factor to the decline in gas and oil revenues was the sale of other
interests and gas price fluctuations. The negative $16,586 resulted from a
realized loss on commodity transactions of $47,875 in the quarter. The Company
recorded gas and oil revenues associated with these other interests of $46,696
for the quarter ended March 31, 1997.
Gain on sale of assets decreased by $129,160 from $132,035 in the first
quarter 1997 to $2,875 in the first quarter of 1998. Operating fees to the
Company decreased from $14,234 in the first quarter of 1997 to $6,992 in the
first quarter of 1998. The Company realized losses from various commodity
transactions totaling $47,875 in the first quarter of 1998, compared to $121,937
in the first quarter of 1997. These swap agreement losses were attributable to
various transactions in which the Company hedged its future gas delivery
obligations as a requirement for its Bank Credit Agreement. The determination of
gains or losses is directly affected by the spot gas prices being higher or
lower than the hedge contracts in place for the same period. In addition to the
realized losses from commodity transactions, the Company accrued $51,011 for
unrealized losses for the quarter ended March 31, 1998. There were no accrued
losses for the quarter ended March 31, 1997. In addition to the foregoing, the
Company had other revenues of $23,930 in the first quarter of 1998 as compared
to $53,880 in the first quarter of 1997.
COSTS AND EXPENSES. Total costs and expenses of the Company decreased
66.36% from $1,757,669 in the first quarter of 1997 to $592,002 in the first
quarter of 1998. The decrease in costs and expenses was primarily attributable
to a combination of decreases in exploration costs, general and administrative
expenses, transportation and gathering costs, depletion, depreciation and
amortization expense, lease operating expense and production taxes. These
decreases were offset by interest expense increases.
Exploration costs decreased 99.58% from $852,626 for the first quarter of
1997 to $3,560 for the first quarter 1998. The exploration costs for the first
quarter 1998 reflect charges attributable to expensed investments, and costs
incurred for dry hole costs associated with exploratory drilling in 1997.
General and administrative expense ("G&A") decreased by 19.79% from $572,260
for the first quarter 1997 to $459,014 for the first quarter 1998. The decrease
was attributable to overhead reduction measures initiated during 1997.
Transportation and gathering costs decreased 99.29% from $90,394 for the
first quarter 1997 to $639 for the first quarter 1998. The decrease was almost
entirely attributable to the ceased production of the Mobile Bay wells.
Depletion, Depreciation and Amortization Expense ("DD&A") decreased by
59.65% from $132,774 for the first quarter of 1997 to $53,568 for the first
quarter of 1998. The decrease was primarily attributable to the July 1, 1997
sale of certain Company properties located in Texas, Oklahoma and Arkansas, and
the ceased production from the Mobile Bay wells.
Lease operating expense decreased 27.84% from $96,698 for the first quarter
1997 to $69,773 for the first quarter 1998. The reduction was attributable to
the sale of certain Company properties effective July of 1997, and a decline in
rework activity.
Production taxes declined 112.40% from $8,784 for the first quarter of 1997
to ($1,090) for the first quarter of 1998, due to reduced production as a result
of the sale of certain Company interest effective July 1, 1997, and due to a
production tax credit refund in the amount of $3,682 from the State of Oklahoma
for a production enhancement project completed August 17, 1994.
Interest expense increased 365.11% from $4,133 for the first quarter of 1997
to $19,223 for the first quarter of 1998. The increase was primarily attributed
to the Duke Credit Facility. The Company capitalized a large portion of its
interest in its Starboard Prospect, which capitalized amounts totaled $79,102
for the first quarter of 1998 and $56,866 for the first quarter of 1997.
NET INCOME (LOSS). The net loss decreased from $1,352,022 to $608,588 for
the first quarter ended March 31, 1997 and March 31, 1998, respectively. This
decrease was due to the factors discussed above.
31
<PAGE>
The net loss per common share decreased from a net loss of $0.84 per share
in the first quarter of 1997 to a net loss of $0.38 per share in the first
quarter of 1998, computed on a post-Reverse Split basis. This is reflective of
the increase in net loss of $743,434 from the first quarter of 1997 as compared
to the first quarter of 1998. As a result of the Common Stock offering completed
on August 14, 1996, and additional stock issued to an investment advisor during
1997, there were 1,655,984 weighted average common equivalent shares at March
31, 1998 as compared to approximately 1,644,317 at March 31, 1997.
COMPARISON OF 1997 TO 1996
REVENUE. Total revenues decreased 71.3% from $3,166,792 for the year ended
December 31, 1996, to $908,609 for the year ended December 31, 1997.
Total gas and oil revenues decreased 79.1% from $3,176,861 to $664,126. The
decrease in gas and oil revenues was primarily attributable to ceased production
from the Mobile Bay wells, which came on stream in December of 1995, and from
the sale of properties discussed below. A contributing factor in the decline in
gas and oil revenues was the sale of the Company's N.E. Cedardale field located
in Major County, Oklahoma in September 1996. The Company recorded gas and oil
revenues associated with these factors of $2,003,251 for 1996 and $62,471 for
1997. The remainder of this decrease is primarily attributable to sales of other
interests and gas price fluctuations. Operating fees to the Company decreased
from $213,834 for the year 1996 to $55,021 for the year 1997, due to the sale of
a substantial portion of the Company's operated properties. The decrease in gas
and oil revenues was partially offset by an increase in gain on sale of assets
of $201,583, from $250,437 reported for 1996, to $452,020 reported for 1997. The
increase is due to the sell down of certain Company prospects and the sale of
certain Company properties located in Texas, Oklahoma and Arkansas. The Company
realized losses from various commodity transactions totaling $375,410 for the
year ended December 31, 1997. The decrease in the loss is primarily attributable
to the amended swap agreement with Bank of America in September of 1996, which
decreased the volume of the swap agreements. This compares to a realized loss of
$814,029 for the same period 1996. Settlement costs in connection with the
amendment to the swap agreement with Bank of America totaling $212,000 are
included in the 1996 realized losses from commodity transactions. These swap
agreement losses were attributable to various transactions in which the Company
hedged its future gas delivery obligations as a requirement under the Bank
Credit Agreement. The determination of gains or losses is directly affected by
the spot gas prices being higher or lower than the hedge contracts for the same
period. In addition to the realized losses from commodity transactions, the
Company accrued $128,936 for unrealized losses for the year ended December 31,
1997. This was the amount by which the hedges in place exceeded the production.
There were no accrued losses at December 31, 1996. The Company also had other
revenues of $241,788 for the year ended December 31, 1997 as compared to
$339,689 for the year ended December 31, 1996. The reduction is primarily
attributable to reduced revenues realized from the performance of exploratory
and geophysical data processing on a fee basis. Included in the year ended
December 31, 1997 other revenue is a net gain of $25,794 from the Company's
officers deferred compensation settlement, which was executed on August 15,
1997.
COSTS AND EXPENSES. Total costs and expenses decreased 28.4% from $8,191,811
in 1996 to $5,862,412 in 1997. Although there were increases in exploration
costs, delay rentals and unrealized loss on commodity transactions there were
decreases in lease operating expenses, production taxes, transportation,
depreciation, interest expense, cost of settling gas contracts and futures
contracts and general and administrative expenses, which resulted in the net
decrease as more fully described below.
Exploration costs increased 71.5% from $1,317,161 in 1996 to $2,258,702 in
1997. The exploration costs in 1997 reflect $380,464 of charges attributable to
expensed investments, and $1,772,746 of dry hole costs. The increase was due to
increased exploratory drilling.
32
<PAGE>
Delay rental transactions were $211,690 for the year ended December 31,
1997. This increase was primarily attributed to rental obligations of the
Company's Starboard Project in Terrebonne Parish, Louisiana. There were no such
transactions for the same period in 1996.
Lease operating expense decreased 23.3% from $556,925 in 1996 to $427,240 in
1997. The reduction in lease operating costs was attributable to the sale of
operated properties, including the N.E. Cedardale field sale in September of
1996, and a decline in rework activities. Of the year ended December 31, 1997
total lease operation costs, $99,809 was attributable to plugging and
abandonment costs of the Company's Mobile Bay wells, which were plugged during
1997. Production taxes declined 88.2% from $207,969 in 1996 to $24,497 in 1997
due to reduced production as a result of the sale of certain of the Company's
properties, including the N.E. Cedardale field and other properties in Texas,
Arkansas and Oklahoma.
Transportation and gathering costs decreased from $368,716 in 1996 to
$143,265 in 1997. The decrease was almost entirely attributable to the ceased
production of the Mobile Bay wells.
DD&A expense decreased by 85.9% from $2,237,648 in 1996 to $315,880 in 1997.
The decrease was primarily attributable to the sale of certain of the Company's
properties, including the N.E. Cedardale field.
Interest expense decreased to $60,942 in 1997 from $783,872 in 1996. The
decrease was primarily attributable to the substantial loan principal repayment
made to Bank of America under the Credit Agreement. During 1997, the Company
capitalized a large portion of its interest in its ongoing Starboard Project,
which capitalized amounts totaled $107,387 in 1996 and $235,977 in 1997.
Cost of settling gas contracts and futures contracts was attributable to the
settlement of a gas sales contract with Waldorf Corporation ($368,690) and the
settlement of a gas swap agreement, due to a reduction in quantities covered
thereunder in connection with the sale of the N.E. Cedardale field ($212,000)
for the year ended December 31, 1996. The Company incurred no similar costs in
1997.
G&A expenses decreased by 6.5% from $2,217,099 in 1996 to $2,070,812 in
1997. This was primarily attributable to overhead reduction measures initiated
during 1997.
Impairment of Oil and Gas Properties increased from $51,000 in 1996 to
$349,384 in 1997. This was primarily due to the abandonment of previously
producing wells, of which $323,353 was attributable to the Company's Mobile Bay
wells.
NET INCOME (LOSS). The net loss decreased from $5,025,019 to $4,953,803 for
the year ended December 31, 1996, and December 31, 1997, respectively. This
decrease was due to the factors discussed above.
The net loss per common share decreased from a net loss of $4.31 per share
in 1996 to a net loss of $3.07 per share in 1997, computed on a post-Reverse
Split basis. This is reflective of the decrease in the net loss of $71,217 from
the year ended December 31, 1996 to the year ended December 31, 1997 and a
change in the number of weighted average equivalent shares outstanding. As a
result of the Common Stock offering finalized on August 14, 1996, there were
approximately 1,646,311 weighted average common equivalent shares at December
31, 1997, as compared to approximately 1,190,343 weighted average common
equivalent shares at December 31, 1996.
KNOWN AND ANTICIPATED TRENDS, CONTINGENCIES AND DEVELOPMENTS IMPACTING FUTURE
OPERATING RESULTS
The Company's future operating results will be substantially dependent upon
the success of the Company's efforts to develop the properties acquired in the
Acquisitions, as well as the Starboard Project and other prospects. Because the
Company divested substantially all of its oil and gas properties in the
Mid-Continent region by the end of 1996, revenues from the operation and sale of
such properties have been substantially reduced during 1997 and will be reduced
in future years. Further, following a sharp and unexpected drop in production
from the Company's Mobile Bay wells during the fourth quarter of 1996,
33
<PAGE>
the Company's share of revenues from Mobile Bay was substantially reduced during
1997. Revenues from the operation of the Mid-Continent and Mobile Bay properties
and the sale of Mid-Continent properties constituted the substantial majority of
the Company's revenues during 1996.
As a result of the loss of revenues from the Mid-Continent region and Mobile
Bay, the Company's revenues during 1997 were sharply reduced. While management
believes that the Acquisitions and the Starboard Project represent the most
promising prospects in the Company's history, none of those prospects are
currently producing revenue to the Company, and each will require substantial
outlays of capital to explore, develop and produce.
LIQUIDITY AND CAPITAL RESOURCES
The Company has budgeted $25.0 million to fund the drilling of approximately
30 wells on the Exploration Projects and other exploration costs over the next
12 months. The Company's sources of financing include the proceeds of this
Offering, the borrowing capacity under the Bank Credit Agreement and other
credit facilities, the sale of promoted interests in the Exploration Projects to
industry partners and cash provided from operations. The Company anticipates it
will receive approximately $14.2 million in net proceeds from this Offering. Of
such proceeds, $7.8 million will be used to repay the Duke Credit Facility, and
the remainder will be used for exploration activities on the Exploration
Projects, including the payment of approximately $4.755 million of the aggregate
$7.755 million of costs incurred by Aspect and EPC on the Exploration Projects
before the closing of the Acquisition, $6.25 million in additional exploration
costs incurred as of the date hereof, and for working capital and general
corporate purposes. Based on the foregoing, the Company will require additional
sources of capital to fund its exploration budget over the next 12 months. The
Company currently is attempting to renegotiate the terms of the Bank Credit
Agreement to obtain additional borrowing capacity thereunder. If the Company is
unable to obtain such additional borrowing capacity thereunder, or is unable to
access additional sources of outside financing, the Company will either have to
sell interests in its Exploration Projects to fund its exploration program or
curtail its exploration activities over the next 12 months. Such curtailing of
exploration activities could include reducing the number of wells drilled,
slowing exploratary activities on projects that the Company operates, selling
interests in the Company's project inventory or a combination of the foregoing.
The Company historically has addressed its long-term liquidity needs through
the issuance of debt and equity securities, through bank credit and other credit
facilities and with cash provided by operating activities. Its major obligations
at March 31, 1998, consisted principally of (i) servicing loans under the Bank
Credit Agreement and other loans, (ii) servicing the Duke Credit Facility; (iii)
servicing the Starboard Project Financing, (iii) payment of preferred stock
dividends, (iv) funding of the Company's exploration activities, and (v) funding
of the day-to-day general and administrative costs. The Company also had
unrealized losses on commodity transactions of $179,947 for the period ended
March 31, 1998.
The Company booked the assets acquired in the Acquisitions at $54.2 million,
which was the estimated fair market value of such assets as determined by
Cornerstone. Items effected by the Acquisitions include (i) an increase in the
Company's current liabilities by the assumption of approximately $4.755 million
of net post-effective date costs related to the assets acquired in the
Acquisitions, plus $1 million of additional current liabilities assumed from EPC
pursuant to the Acquisition Agreement, (ii) an increase in overhead resulting
from the hiring of additional technical staff and additional management; and
(iii) adopting a business plan that budgets over $25.0 million net to the
Company's interest in exploratory costs over the next 12 months. Certain costs
associated with these obligations may be offset by future revenues from wells
drilled since the effective date of the Acquisitions and other revenue
anticipated from wells scheduled to be drilled in the second and third quarters
of 1998. The Company cannot, however, assure that such revenues will be
forthcoming, nor can it project the revenues anticipated from such sources over
the next 12 months.
34
<PAGE>
Many of the factors that may affect the Company's future operating
performance and long-term liquidity are beyond the Company's control, including,
but not limited to, oil and natural gas prices, governmental actions and taxes,
the availability and attractiveness of financing and its operational results.
The Company continues to examine alternative sources of long-term capital,
including bank borrowings, the issuance of debt instruments, the sale of common
stock or other equity securities, the issuance of net profits interests, sales
of promoted interests in its Exploration Projects, and various forms of joint
venture financing. In addition, the prices the Company receives for its future
oil and natural gas production and the level of the Company's production will
have a significant impact on future operating cash flows.
WORKING CAPITAL. At March 31, 1998, the Company had a cash balance of
$188,495 and a working capital deficit of $1,148,584 as compared to a cash
balance of $690,576 and a working capital deficit of $413,377 at December 31,
1997. The decrease in cash and working capital was primarily attributable to the
operating loss incurred during the quarter.
In addition to the changes in cash, the decrease in working capital was
attributable to several other factors. Current asset decreases of $45,357 in
accounts receivable (due to reduced exploration activity) and $108,254 in
prepaid and other expenses (primarily due to expensing of previously prepaid
amounts related to the Starboard Project) were offset by the $466,664 current
portion of notes receivable from affiliates. These notes represented the current
portion of loans from the Company to EPC that were used to fund post-effective
date costs on Exploration Projects acquired from EPC. Primary changes in current
liabilities were a $86,956 reduction in accounts payable (due to reduced
exploration activity) and a $587,275 increase in the current portion of
long-term debt, which relates to the current portion of debt under the Duke
Credit Facility.
CASH FLOWS. Cash flows used in operations totaled $756,522 for the quarter
ended March 31, 1998. Of particular significance is a cost of $344,896 in other
assets, which primarily relates to capitalized costs of the Acquisitions and
certain financing transactions. Cash flows used in investing activities totaled
$2,151,578. Cash flows used in investing activities included $403,250 of capital
expenditures on gas and oil properties, including $3,560 in exploration costs
that were included in the operating loss for the period but were excluded from
operating cash flows, and $1,750,000 that represents a note receivable from EPC.
Cash flows from financing activities reflected cash provided by financings
of $2,406,019 for the first quarter of 1998. Cash flows from financing
activities consisted of proceeds from debt issuance of $3,000,000 from the Duke
Credit Facility offset by repayments on long-term debt of $593,981.
Set forth below is a description of the Company's credit facilities.
BANK CREDIT AGREEMENT. The Bank Credit Agreement is a $15.0 million credit
facility with Bank of America NT&SA as lender. As of July 15, 1998, the Company
had $168,888 outstanding under the Bank Credit Agreement and had $2.5 million of
additional borrowing capacity thereunder. The borrowing capacity under the Bank
Credit Agreement is subject to reduction based upon the value of the oil and gas
properties securing the loans thereunder. The Bank Credit Agreement is secured
by a first mortgage on all of the Company's proved producing properties owned as
of March 31, 1998. The Company does not currently intend to borrow additional
amounts under this facility, but has begun discussions with the lender to
restructure the facility to more appropriately serve the Company's current and
anticipated needs throughout the balance of this year. The lender has indicated
an intention and desire to do so, but no agreement has yet been reached, and
there is no assurance that such an agreement will be forthcoming. The Company
presently is in noncompliance with the minimum cash flow covenants of the Bank
Credit Agreement, but has secured a waiver of various covenants through June 30,
1998. The Company anticipates that the lender will waive the noncompliance in
the future, but there is no current assurance that it will do so.
The Bank Credit Agreement required the Company to enter into a swap
agreement on 62,500 MMBtu of its monthly Mid-Continent natural gas production
for $1.566 per MMBtu for the period
35
<PAGE>
beginning April 1, 1996 and ending January 31, 1999. The swap, which is the
Company's only current hedge, was reduced to 31,250 MMBtu on September 25, 1996,
in connection with the sale of the N.E. Cedardale field. The Company recorded a
loss of $212,000 on this swap reduction. The Company's net gas production
currently is less then the volumes hedged. As of December 31, 1997, the Company
had an accrued liability of $128,936 to recognize the projected loss from the
hedge. The Company has not recently conducted an active hedging program other
than as required by the Bank Credit Agreement. In that regard, the Company had
net losses of $814,029 in 1996, which includes the $212,000 loss on the swap
reductions, and $375,410 in 1997 on its required hedged positions.
THE DUKE CREDIT FACILITY. The Duke Credit Facility is a $7.8 million
facility that can be used for certain defined purposes. As of July 15, 1998, the
Company has borrowed $7.8 million under the Duke Credit Facility. Of the $7.8
million borrowed, $1.25 million was used for general corporate purposes and
costs of exploration, and $3.0 million was loaned to EPC to pay exploration
costs associated with EPC's interests in the Exploration Projects conveyed by
EPC to the Company upon closing of the Acquisitions and $1.1 million was used to
fund the redemption of the Preferred Stock, and an additional $2.45 million was
used to fund exploration costs and working capital.
The Duke Credit Facility bears interest at the rate of a national prime rate
plus 4% per annum. The lender also receives cash payments equal to an overriding
royalty of 0.6% of the Company's interest in wells drilled by the Company while
the Duke Credit Facility is outstanding. In addition, the lender has the right
to gather, process, and transport and market, at competitive market rates,
natural gas produced from a majority of the projects the Company acquired
pursuant to the Acquisitions until the earlier to occur of five years from the
date of the Duke Credit Facility or until the lender has marketed one hundred
Bcf of natural gas from those properties. The Duke Credit Facility is secured by
mortgages on most of the Company's undeveloped exploration projects. The Duke
Credit Facility is repayable in 12 monthly payments commencing August 31, 1998,
or sooner, if the borrower sells interests in the collateral or closes any
underwritten public offering of securities. A portion of the proceeds of this
Offering will be used to repay the Duke Credit Facility in full. See "Use of
Proceeds."
STARBOARD PROJECT FINANCING. The Starboard Project Financing is an $864,000
facility pursuant to which the lender has agreed to advance to the Company an
amount equal to up to 50% of certain costs related to the development of the
Starboard Project, including acquisition of leasehold interests and the design,
permitting and implementation, conducting, processing and interpretation of a
3-D seismic survey over the Starboard Project area. The borrowings are secured
by a first mortgage on the properties comprising the Starboard Project.
Borrowings under the Starboard Project Financing are repayable solely from
revenues attributable to an overriding royalty interest granted to the lender
equal to 8% of the Company's original interest in the Starboard Project, which
is payable until such time as the lender has received an amount equal to the
loan borrowings plus costs and a 15% internal rate of return. After such funds
have been repaid, the overriding royalty interest is reduced to 2%. The Company
has drawn its entire borrowing capacity under the Starboard Project Financing,
therefore, Starboard Project Financing will not be available to provide
additional funds for development of the Starboard Project.
The Company expects that if it does not complete this Offering or secure
additional financing or other sources of capital it will deplete its current
cash reserves and fully use its credit facilities by the third quarter of 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. In 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share"
and SFAS No. 129, "Disclosure Information about Capital Structure," which have
been reflected in the Company's year-end 1997 financial statements. In 1997,
FASB also issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information," each
of which require expanded disclosures effective for 1998. The Company does not
expect the application of these statements to have a material effect on its
financial position, liquidity or results of operations.
36
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
The Company is an independent energy company engaged in the exploration for
and development of natural gas and oil. The Company has assembled an inventory
of over 30 technology enhanced natural gas Exploration Projects along the Texas
and Louisiana Gulf Coasts. These Exploration Projects include substantial
interests in 28 projects the Company acquired on May 14, 1998 pursuant to the
Acquisition Agreement. Cornerstone delivered to the Company a written opinion
that estimated the fair market value of the assets acquired in the Acquisitions,
as of January 23, 1998, to be $54.2 million. See "Risk Factors-- Uncertainty as
to Estimates of Fair Market Values." The Exploration Projects also include the
Company's interest in the Starboard Project in Terrebonne Parish, Louisiana,
which consists of mineral leases and options and a proprietary 3-D seismic
survey over the Lapeyrouse Field. The Company, EPC and Aspect have spent several
years identifying and evaluating many of the Exploration Projects.
In connection with the Acquisitions, an affiliate of Enron Corp. exercised
an option to exchange $3.8 million of debt Aspect owed to such Enron affiliate
for 675,000 shares of the Company's Common Stock that would otherwise have been
issued to Aspect in the Acquisitions, at an effective conversion rate of $5.63
per share. As a result of the Acquisitons and this exchange, EPC, Aspect and the
Enron affiliate own 43.91%, 36.27%, and 5.74%, respectively, of the Company's
Common Stock.
Most of the Exploration Projects have been, are being, or will be enhanced
with 3-D seismic data in conjunction with CAEX technologies. The 3-D seismic
data acquired, when complete, will cover approximately 1,500 square miles. A
significant number of the Exploration Projects have reached the drilling stage,
and the Company has budgeted approximately $25.0 million, in addition to funds
already spent, to fund the drilling of approximately 30 wells and to fund other
exploration costs over the next 12 months. The Company believes that its
Exploration Projects represent a diverse array of technology enhanced, 3-D
seismic confirmed, ready to drill natural gas exploration projects.
From November 1, 1997 (the effective date of the Acquisitions) through the
date hereof, approximately $4.91 million has been spent for the Company's
account on drilling and completion costs on the Exploration Projects. The
expenditures have funded costs of the Company's interests in 15 exploratory
wells, of which six have been completed, four are awaiting completion and five
were dry holes.
STRATEGY
The Company's strategy is to expand its reserves, production and cash flow
through the implementation of an exploration program that focuses on (i)
obtaining dominant positions in core areas of exploration; (ii) enhancing the
value of the Exploration Projects and reducing exploration risks through the use
of 3-D seismic and CAEX technologies; (iii) maintaining an experienced technical
staff with the expertise necessary to take advantage of the Company's
proprietary 3-D seismic and CAEX seismic data; (iv) reducing exploration risks
by focusing on the identification of potential moderate-depth gas reservoirs,
which the Company believes are conducive to hydrocarbon detection technologies;
and (v) retaining operational control over critical exploration decisions.
OBTAIN DOMINANT POSITION IN CORE AREAS. The Company has identified core
areas for exploration along the Texas and Louisiana Gulf Coasts that have
geological trends with demonstrated histories of prolific natural gas
production from reservoir rocks high in porosity and permeability with
profiles suitable for seismic evaluation. Unlike the Gulf of Mexico, where
3-D seismic data typically is owned and licensed by many companies that
compete intensely for leases, the private right of ownership of onshore
mineral rights enables individual exploration companies to proprietarily
control the seismic data within focused core areas. The Company believes
that by obtaining substantial amounts of proprietary 3-D seismic data and
significant acreage positions within its core areas, it will be able to
achieve a dominant position in focused portions of those areas. With such
dominant position, the
37
<PAGE>
Company believes it can better control the core areas' exploration
opportunities and future production, and can attempt to minimize costs
through economies of scale and other efficiencies inherent in its focused
approach. Such cost savings and efficiencies include the ability to use the
Company's proprietary data to reduce exploration risks and lower its
leasehold acquisition costs by identifying and purchasing leasehold
interests only in those focused areas in which the Company believes
exploratory drilling is most likely to be successful.
USE OF 3-D SEISMIC AND CAEX TECHNOLOGIES. The Company attempts to enhance
the value of its Exploratory Projects through the use of 3-D seismic and
CAEX technologies, with an emphasis on direct hydrocarbon detection
technologies. These technologies create computer generated 3-dimensional
displays of subsurface geological formations that enable the Company's
explorationists to detect seismic anomalies in structural features that are
not apparent in 2-D seismic surveys. The Company believes that 3-D seismic
technology, if properly used, will reduce drilling risks and costs by
reducing the number of dry holes, optimizing well locations and reducing the
number of wells required to exploit a discovery. The Company believes that
3-D seismic surveys are particularly suited to its Exploration Projects
along the Texas and Louisiana Gulf Coasts.
EXPERIENCED TECHNOLOGICAL TEAM. The Company maintains an experienced
technical staff, including engineers, geologists, landmen and other
technical personnel. After the Acquisitions, the Company hired most of EPC's
technical personnel, who, in some instances, have worked together for over
15 years. In addition, the Company has entered into a geotechnical services
consulting agreement with Aspect on certain of the exploration projects
pursuant to which Aspect provides the Company geophysical expertise in
managing the design, acquisition, processing and interpretation of 3-D
seismic data in conjunction with CAEX data.
FOCUSED DRILLING OBJECTIVES. In addition to using 3-D seismic and CAEX
technologies, the Company seeks to reduce exploration risks by exploring at
moderate depths that are deep enough to discover sizeable gas accumulations
(generally 8,000 to 12,500 feet) and that also are conducive to direct
hydrocarbon detection, but not so deep as to be highly exposed to the
greater mechanical risks and drilling costs incurred in the deep plays in
the region. In conjunction with interpreting the 3-D seismic and CAEX data
relating to the Company's moderate depth wells, the Company anticipates it
will identify potential prospects in deep gas provinces that the Company may
elect to pursue.
CONTROL OF EXPLORATION AND OPERATIONAL FUNCTIONS. The Company believes that
having control of the most critical functions in the exploration process
will enhance its ability to successfully develop its Exploration Projects.
The Company has acquired a majority interest in many of the Exploration
Projects, including proprietary interests in most of the 3-D seismic data
relating to those projects. Although the Company has partners in many of the
Exploration Projects in which it does not own a majority interest, in most
cases, the Company owns a greater interest than any of its project partners.
As a result, in most of its Exploration Projects, the Company will be able
to influence the areas to explore, manage the land permitting and option
process, determine seismic survey areas, oversee data acquisition and
processing, prepare, integrate and interpret the data and identify each
prospect drillsite. In addition, the Company will be the operator of most of
the wells drilled within the Exploration Projects.
Concurrent with the closing of the Acquisitions, the Company took several
steps to further its newly implemented business strategy. The Company changed
its name from Frontier Natural Gas Corporation to Esenjay Exploration, Inc., so
it would be identified with its exploration activities. It completed a
one-for-six reverse stock split that provided adequate available shares to issue
to close the Acquisitions and conduct its business into the future. In addition,
the Company reincorporated in Delaware, the leading state for incorporations in
the United States and the one it believes has the most extensive and
well-developed body of corporate law. The Company believes that the consummation
of the Acquisitions, along with the addition of experienced staff and management
(many of whom have worked together for over 15 years),
38
<PAGE>
and the implementation of its corporate restructuring, positions the Company as
a technology driven exploration company with a diverse array of technology
enhanced projects.
EXPLORATION PROJECTS
The Exploration Projects include substantial interests in 30 projects
located primarily along the Texas Gulf Coast. Through March 31, 1998, EPC and
Aspect had incurred historical exploration and development costs of $19,866,800
on the projects acquired in the Acquisitions, and the Company had incurred
historical exploration and development costs of $2,185,000 on the Starboard
Project. These costs include costs associated with leasehold acquisitions,
geological and geophysical analysis, delay rentals and dry hole costs. Most of
the Exploration Projects have been, are being, or will be enhanced with 3-D
seismic data and CAEX technologies. The 3-D seismic data acquired will, when
complete, cover approximately 1,500 square miles.
Many of the Exploration Projects acquired in the Acquisitions have
participants other than EPC and Aspect. EPC delivered over 90% of its interests
in its contributed Exploration Projects to the Company and retained the balance.
Aspect delivered 100% of its interests in several Exploration Projects and
delivered at least 50% of its interest in most of its remaining contributed
Exploration Projects. EPC and Aspect are responsible for their pro rata costs
attributable to their retained interests.
Most of the Exploration Projects are concentrated within the Downdip Frio,
Wilcox and Texas Hackberry core project areas. The Downdip Frio core area
generally is in the middle Texas Gulf Coast where the Company believes Frio
targets exist at moderate depths. The Wilcox core area generally is in the
middle Texas Gulf Coast in an area the Company believes to have prospects for
Wilcox sand exploration. The Texas Hackberry core area is located in Jefferson
and Orange Counties, Texas, in an area in which the Company believes offers
drilling opportunities in the Hackberry (Frio) formations, as well as Miocene
and deeper Vicksburg sands. Other Exploration Projects consist of the Starboard
Project, as well as other projects in Louisiana and Mississippi that either are
in early stage exploration areas that may develop into new core project areas,
or non-core area projects, which are projects that are not presently expected to
be further expanded.
Each of the Exploration Projects differs in scope and character and consists
of one or more types of assets, such as 3-D seismic data, leasehold positions,
lease options, working interests in leases, royalty interests or other mineral
rights. The Company's percentage interest in each Exploration Project (a
"Project Interest") represents the portion of the interest in the Exploration
Project it shares with its other project partners. Therefore, the Company's
Project Interest in an Exploration Project should not be confused with the
working interest that the Company will own when a given well is drilled. The
Company's working interest in the wells on each Exploration Project may be
higher or lower than its Project Interest.
The following table sets forth certain information about each of the
Exploration Projects:
39
<PAGE>
EXPLORATION PROJECTS
<TABLE>
<CAPTION>
ACRES LEASED OR UNDER
OPTION AT MAY 15,
1998(1) SQUARE MILES OF 3-D
---------------------- SEISMIC DATA RELATING
PROJECT AREAS GROSS NET TO PROJECT AREA (2) PROJECT INTEREST
- --------------------------------------------- --------- ----------- ----------------------- -----------------
<S> <C> <C> <C> <C>
SOUTH TEXAS
DOWNDIP FRIO CORE AREA
Big Gas Sand............................... 24,700 5,557 65 22.5%
Blessing................................... 10,672 2,471 22 24.0%
Tidehaven.................................. 9,145 1,742 28 40.5%
El Maton................................... 7,277 3,044 29 46.5%
Midfield................................... 2,228 569 21 37.5%
Matagorda I(3)............................. 11,444 6,879 50 74.0%
Matagorda II(4)............................ 7,480 3,859 60 66.0%
Southwest Pheasant......................... 10,000 7,500 10 75.0%
Geronimo................................... 9,616 1,792 76 20.0%
Houston Endowment.......................... 3,969 1,071 50 27.0%
Wolf Point................................. 1,520 546 8 45.5%
Sheriff Field.............................. 54,000 40,500 72 75.0%
West Jeffco................................ 13,500 6,075 60 45.0%
La Rosa.................................... 7,689 589 25 8.0%
Piledriver................................. 640 400 2 62.5%
WILCOX CORE AREA
Hall Ranch................................. 8,510 3,521 57 41.5%
Hordes Creek............................... 6,972 2,601 25 41.5%
Mikeska.................................... 7,239 2,490 31 38.0%
Duval, McMullen............................ 1,979 1,781 12 90.0%
TEXAS HACKBERRY CORE AREA
Lox B...................................... 11,700 2,925 71 25.0%
West Port Acres............................ 800 100 21 12.5%
Big Hill/Stowell........................... 10,000 5,000 56 50.0%
East Jeffco................................ 24,000 12,000 65 50.0%
West Beaumont.............................. 11,200 700 23 6.25%
LOUISIANA
Starboard.................................. 6,682 5,905 35 12.0%-48.0%
Tack....................................... 480 300 12 75.0%
OTHER TEXAS
Willacy County............................. 11,485 8,784 50 78.875%
Caney Creek................................ 21,000 2,625 32 12.5%
East Texas Pinnacle Reef(5)................ -- -- 400 --
MISSISSIPPI
Thompson Creek............................... 1,325 512 12 56.0%
Lipsmacker................................... 5,758 943 64 22.0%
--------- ----------- -----
Total.................................... 303,010 132,781 1,544
--------- ----------- -----
--------- ----------- -----
</TABLE>
- ------------------------
(1) Gross acres refers to the number of acres leased or under option in which
the Company owns an undivided interest. Net acres were determined by
multiplying the gross acres leased or under option times the Company's
working interest therein.
(2) Represents 3-D seismic data acquired or to be acquired. See "--Exploration
Projects--Exploration Project Descriptions."
(3) The Company has entered into an agreement to sell a 26.7% Project Interest
in this Exploration Project for $694,200 for costs incurred before
commencement of drilling operations.
(4) The Company has entered into an agreement to sell a 26.7% Project Interest
in this Exploration Project for $694,200 for costs incurred before the
commencement of drilling operations.
40
<PAGE>
(5) Consists of 400 square miles of 3-D seismic data to which Aspect has rights
pursuant to a license agreement, and to which the Company may acquire on
interest pursuant to a geophysical technical services agreement with Aspect.
EXPLORATION PROJECT DESCRIPTIONS. Set forth below is a description of the
Exploration Projects. The amounts specified for the interests in the Exploration
Projects and gross and net acreage of each Exploration Project were determined
as of the date of this Prospectus. Estimates of drilling and completion costs
are gross amounts and are not necessarily net to the Company's interests in the
related Exploration Projects. In addition, predictions of well costs are
estimates only, and actual costs may vary based on, among other factors, down
hole conditions and costs for drilling rigs at the time of drilling. In
prospects where 3-D seismic surveys are not yet shot, processed and interpreted,
such data may, when available, enhance or condemn previously identified
prospects or leads.
DOWNDIP FRIO CORE AREA PROJECTS
BIG GAS SAND. The Company has a 22.5% Project Interest in this 3-D seismic
project, which consists of approximately 24,700 gross (5,557 net) acres of
leases and options in Galveston County, Texas. The primary geological areas the
Company has identified for potential drilling are the Frio and Vicksburg sands.
An onshore seismic survey is scheduled for mid-1998. The estimated cost to drill
and complete a shallow well is approximately $900,000 with deeper wells costing
over $3.5 million.
BLESSING. The Company has a 24.0% Project Interest, which consists of
approximately 10,672 gross (2,471 net) acres of leases and options under 22
square miles of 3-D seismic coverage in Matagorda County, Texas. A 3-D seismic
survey was conducted in conjunction with the Tidehaven 3-D shoot. See
"--Tidehaven Project". The Company has generated several upper Frio prospect
leads from this 3-D data set. The Company has drilled an upper Frio Sands well.
The Company's working interest in the well is 33.935%, although the Company's
Project Interest in the remaining portion of the project is 24.0%. The deepest
pay zone in the well currently has been flow tested at a rate exceeding two
million cubic feet of gas and 35 bbls of condensate per day. The Company
believes other pay zones exist up-hole and are behind pipe. The estimated costs
of drilling and completing a shallow well in this project area are approximately
$550,000. The estimated cost to drill and complete a deep well is approximately
$1.3 million.
TIDEHAVEN. The Company has a 40.5% Project Interest, which consists of
leases and options covering over 9,145 gross (1,742 net) acres in Matagorda
County, Texas. These leases overlay a series of known field pays and multiple
fault blocks made this structure a 3-D seismic candidate. Initial interpretation
of the 28 square mile 3-D seismic data set is nearly complete. The Company has
drilled and has completed or is completing two wells in the lower Frio. The
estimated cost to drill and complete a well ranges from approximately $550,000
to $1.5 million, depending upon depth.
EL MATON. The Company has a 46.5% Project Interest, which consists of
leases and options covering approximately 7,277 gross (3,044 net)acres in
Matagorda County, Texas. A 29 square mile 3-D seismic survey was started in late
May 1997 as an extension of the Tidehaven shoot. This seismic survey has been
completed and is in the interpretation phase. The geologic setting and target
zones are the same as for Tidehaven. The Company believes that the information
obtained at Tidehaven will benefit the El Maton Project. The Company has
identified several prospect leads. The estimated cost to drill and complete a
well ranges from approximately $550,000 to $1.5 million, depending upon depth.
MIDFIELD. The Company has a 37.5% Project Interest, which consists of
leases and options covering approximately 2,228 gross (569 net) acres in
Matagorda County, Texas. The project is an extension of the Tidehaven, Blessing
and El Maton 3-D seismic shoots. All four of these 3-D seismic surveys have been
merged. The Midfield Project is adjacent to, and up basin from, the El Maton
Project. The geologic setting and target zones are similar to Tidehaven. Initial
data interpretation on a 21 square mile 3-D seismic survey over this acreage has
been disappointing for the zones that have historically been productive in the
area; however, the data has revealed two potential shallow drilling locations.
These locations require additional geological interpretation before drilling can
be scheduled. The estimated cost to drill and complete a well is approximately
$550,000.
41
<PAGE>
MATAGORDA I. The Company has a 74.0% Project Interest, which consists of
approximately 11,444 gross (6,879 net) acres of lease options in Matagorda
County, Texas. Review of existing 2-D seismic data suggests to the Company that
several undrilled fault segments may exist. The Company believes that deeper
sand objectives have not been adequately tested. A 3-D seismic survey is
scheduled for mid-year 1998 as part of an adjacent project. See "--Matagorda II
Project". The Company has entered into an agreement to sell a 26.7% Project
Interest in this project for $675,000 through pre-drilling. The estimated cost
to drill and complete a shallow well is approximately $550,000, with deeper
wells costing approximately $1.3 million.
MATAGORDA II. The Company has a 66.0% Project Interest, which consists of
approximately 7,480 gross (3,859 net) acres of lease options in Matagorda
County, Texas. A 1,000 acre wildcat prospect has been identified for the entire
package of Tex Miss sands. In addition, two exploitation/development prospects
have been generated within the project area and are scheduled for a 3-D seismic
survey mid-year 1998. The Matagorda II 3-D seismic shoot will be completed in
conjunction with the Matagorda I Project. The Company has entered into an
agreement to sell a 26.7% Project Interest in this project for $675,000 through
pre-drilling. The estimated cost to drill and complete a shallow well is
approximately $550,000, with deeper wells costing approximately $1.3 million.
SOUTHWEST PHEASANT. The Company has a 75.0% Project Interest, which
consists of 10,000 gross (7,500 net) acres of lease options in Matagorda County,
Texas. The primary target objectives are the middle and lower Frio sands. A
portion of the project area is covered by an old Mobil 3-D seismic survey that
has been reprocessed and reinterpreted. The Company has identified several
shallow prospects. Interpretation of deeper formations is not yet complete. The
estimated cost to drill and complete a shallow well is approximately $550,000,
with deeper wells costing approximately $1.3 million.
GERONIMO. The Company has a 20.0% Project Interest, which consists of
approximately 9,616 gross (1,792 net) acres of leases and options in San
Patricio County, Texas. A 76 square mile 3-D seismic survey has been shot, and
the Company has identified several prospective drillsites. One well has been
drilled that is currently being completed in one of two potential pay sands, and
is currently testing at a rate of approximately 66 bbls of oil and 108 Mcfgd. A
deep Vicksburg test well is currently scheduled to be drilled in 1998. The
estimated cost to drill and complete a well is approximately $600,000 for a
shallow well and approximately $1.2 million for an intermediate depth well, with
deeper Vicksburg wells costing over $4.0 million.
HOUSTON ENDOWMENT. The Company has a 27.0% Project Interest, which consists
of approximately 3,969 gross (1,071 net) acres of leases and options in San
Patricio and Aransas Counties, Texas. A 50 square mile 3-D seismic survey has
been acquired. EPC drilled one dry hole within the project area before execution
of the Acquisition Agreement. The Company believes the dry hole provided
subsurface data that has set up an updip location to be drilled. The Company
plans to drill two wells within the project area in 1998. The first well has
been drilled. It logged 15 feet of net pay and currently is awaiting testing and
completion. Additionally several shallow and deep prospects remain to be
drilled. The estimated cost to drill and complete a shallow well is
approximately $700,000 with deeper wells costing approximately $1.3 million.
WOLF POINT. The Company has a 45.5% Project Interest, which consists of
approximately 1,520 gross (546 net) acres of state leases in Calhoun County,
Texas. EPC drilled and completed five successful wells within the 3-D seismic
survey area before the Effective Date of the Acquisitions. The prospects require
directional drilling. Known field pays from this area are from the 7,200 foot
Frio, 7,500 foot Frio, 7,700 foot Frio, Broughton, Oats, Upper Middle and Lower
Melbourne sands. Additional geophysical interpretation is being conducted in an
attempt to identify direct hydrocarbon indicators. The Company has delineated
several potential drill sites. The estimated cost to drill and complete a well
is approximately $900,000.
42
<PAGE>
SHERIFF FIELD. The Company has a 75.0% Project Interest, which consists of
approximately 54,000 gross (40,500 net) acres of lease options in Calhoun
County, Texas. The Company believes this area is lightly explored for part of
the Lower Frio and Vicksburg formations southwest of Lavaca Bay. An independent
oil company has contracted to purchase this acreage block, which has not yet
been shot with 3-D seismic. This sale would net the Company approximately $1.2
million if consummated; however, the party that contracted to purchase such
acreage block has refused to close the transaction. Although Aspect has
instituted legal proceedings to compel the closing of the transaction, there can
be no assurance that Aspect will be successful in such proceedings.
WEST JEFFCO. The Company has a 45.0% Project Interest, which contains
13,500 gross (6,075 net) acres of lease options in Jefferson County, Texas.
Numerous prospect leads have been generated within the area via log shows,
detailed structural mapping and 2-D seismic data. Deep exploration zones also
are targeted. Before drilling, the Company plans to shoot a 3-D seismic survey
that is scheduled to start in the third quarter of 1998. The estimated cost to
drill and complete a shallow well is approximately $650,000, with deeper wells
costing approximately $1.6 million.
LA ROSA. The Company has a non-operating 8.0% Project Interest, which
consists of approximately 7,689 gross (589 net) acres of leases and options in
Refugio County, Texas. A 25 square mile 3-D seismic shoot has been acquired and
interpreted. The Company believes the prospective targets are multipay Frio with
the upside of the project being the wildcat potential of the Vicksburg. Three
wells have been drilled since the Effective Date of the Acquisition Agreement
for the Company's account. One of these wells has been completed as a Frio sand
producer and is awaiting a pipeline connection, and two wells were dry holes.
The estimated cost to drill and complete a Frio sand well is approximately
$450,000.
PILEDRIVER. The Company has a 62.5% Project Interest, which consists of 640
gross (400 net) acres of leases located in Chambers County, Texas. The
objectives are two Frio sands. One of these target sands had what the Company
believes to be a significant gas test at the top of the sand in a well that it
believes is down dip to the Company's acreage recently conducted by Western
Geophysical. The Company intends to acquire and interpret 3-D seismic data over
the project area before making any drilling decisions. The estimated cost to
drill and complete a well is approximately $1.85 million.
WILCOX CORE AREA PROJECTS
HALL RANCH. The Company has a 41.5% Project Interest, which consists of
leases and options covering approximately 8,510 gross (3,521 net) acres under a
57 square mile 3-D seismic survey in Karnes County, Texas. The Company believes
the Hall Ranch area is on an under-explored ridge on trend with several
producing fields. Multiple potential pay zones in four expanded fault blocks
have been delineated in the Wilcox sands from approximately 8,000 to 17,000
feet. Known field pays are from Wilcox reservoirs in the Migura, Roeder, Bunger,
Hackney, Middle Wilcox L series sands, and the Upper Wilcox. The Company has
delineated several potential drill sites. The Company has drilled and run
production casing on its first well on this project. Based upon review of
electrical logs, the Company believes this well has made a gas discovery in the
First Roeder and Migura sections of the Wilcox sands. This well was drilled at a
location in which the Company owns a 20.75% working interest. The Company owns a
41.5% working interest in the offset locations. The estimated cost to drill and
complete a well ranges from approximately $270,000 to $600,000 for shallow
wells, while wells completed in the deep zones (to 12,500 feet) cost
approximately $2.0 million.
HORDES CREEK. The Company has a 41.5% Project Interest, which contains
leases and options on approximately 6,972 gross (2,601 net) acres located in
Goliad County, Texas. The Company believes Hordes Creek has potential in the
Miocene, Frio, Yegua, and the Upper, Middle, and Lower Wilcox. Preliminary
migrated 3-D seismic data covering 25 square miles is being interpreted, and the
Company has identified five potential drilling locations. The Company currently
is attempting to delineate additional
43
<PAGE>
prospect leads from this data set. The Company has drilled two wells in the
project, both of which were dry holes. The estimated cost to drill and complete
a 9,500 foot well is approximately $800,000.
MIKESKA. The Company has a 38.0% Project Interest, which consists of leases
covering approximately 7,239 gross (2,490 net) acres located in Live Oak County,
Texas. Multiple pay potential exists from 8,500 feet to at least 16,000 feet.
This portion of the Wilcox trend contains known pays from the Hockley, four
Queen City sands, four Slick sands, six Luling sands, three Tom Lyne sands and
three to five House sands. A 31 square mile 3-D seismic survey has been shot and
the data is being interpreted. The Company has identified several drill sites. A
well has been drilled and is currently waiting to be completed in the Upper
Wilcox formation. The estimated cost to drill and complete a shallow well is
approximately $800,000, with deeper wells costing approximately $1.4 million.
DUVAL, MCMULLEN. The Company has a 90.0% Project Interest, which consists
of approximately 1,979 gross (1,781 net) acres of options in Duval and McMullen
Counties, Texas. The Company's immediate plans are to acquire a one year old
proprietary 3-D seismic survey and interpret the 3-D seismic data before
drilling. The estimated cost to drill and complete a shallow well is
approximately $800,000, with deeper wells costing approximately $1.2 million.
TEXAS HACKBERRY CORE AREA PROJECTS
LOX B. The Company has a 25.0% Project Interest, which consists of 11,700
gross (2,925 net) acres of leases and options in Jefferson County, Texas. The
primary objectives of this project are the Hackberry and Vicksburg formations.
The acreage has been evaluated with 71 square miles of 3-D seismic data. The
Company believes it has identified several potential prospects through the use
of seismicly detected hydrocarbon indicators. The 3-D seismic survey has been
merged with the West Port Acres data, and ultimately will be merged with the Big
Hill/Stowell and East Jeffco 3-D seismic surveys described below. The first
prospect will likely be drilled in mid-1998. The estimated cost to drill and
complete a Hackberry well is approximately $900,000.
WEST PORT ACRES. The Company has a 12.5% Project Interest, on which 800
gross (100 net) acres of leases in Jefferson County, Texas have been acquired
and a 21 square mile 3-D seismic survey has been conducted. The Company has
identified several Hackberry prospects. The estimated cost to drill and complete
a Hackberry well is approximately $1.5 million
BIG HILL/STOWELL. The Company has a 50.0% Project Interest, which consists
of over 10,000 gross (5,000 net) acres of leases and options in Jefferson
County, Texas. The initial seismic interpretation has been completed and the
Company has generated several prospects, some of which are scheduled for 1998
drilling. The estimated cost to drill and complete a shallow well is
approximately $700,000, with deeper wells costing approximately $1.5 million.
EAST JEFFCO. The Company has a 50.0% Project Interest, which consists of
24,000 (12,000 net) gross acres of leases and options in Jefferson County,
Texas. The Company is participating in a 65 square mile 3-D seismic survey that
is currently being shot, with Hackberry sands being the primary target. The
Company believes additional potential exists in the shallow Frio and deeper
Vicksburg formations. The estimated cost to drill and complete a Hackberry well
ranges from approximately $1.0 million to $1.5 million.
WEST BEAUMONT. The Company has a 6.25% Project Interest, which consists of
11,200 gross (700 net) acres of leases and options in Jefferson County, Texas. A
22.5 square mile 3-D seismic survey has been received and will be interpreted by
the Company. The estimated cost to drill and complete a Hackberry well is
approximately $1.3 million.
44
<PAGE>
LOUISIANA PROJECTS
STARBOARD. The Company has working interests in the leases over this
project ranging from 12.0% to 48.0%, depending upon the target formation depths.
A project consists of 6,682 gross (5,905 net) acres of leases in the Lapeyrouse
Field in Terrebonne Parish, Louisiana. The Company's partners include Fina Oil
and Chemical Company, two affiliates of public utilities, and a development
drilling financing commitment from Bank of America Illinois. The 3-D seismic
data has been shot, processed and interpreted. The project includes both
developmental and exploratory locations. After seismic interpretation, three
initial wells have been proposed, two of which are exploratory and one of which
is developmental. Drilling is expected to commence in the third quarter of 1998.
The estimated cost to drill and complete a well is approximately $4.4 million to
$7.5 million depending upon depth.
TACK. The Company has a 75.0% project interest which consists of 480 gross
(300 net) acres of leases in Cameron Parish, Louisiana. The primary target
objectives are in the Miocene series of sands. The Company is currently
interpreting a full fold, 12 square mile 3-D seismic shoot. The estimated cost
to drill and complete a well is approximately $1.3 million.
OTHER TEXAS PROJECTS
WILLACY COUNTY. The Company has a 78.875% Project Interest, which consists
of approximately 11,485 gross (8,784 net) acres of leases and options in Willacy
County, Texas. This project includes separate geologic structures known by four
different field names. The pre 3-D seismic geologic study of this area has
identified six possible drilling locations. These locations were selected based
on subsurface well correlation and production analysis. A 50 square mile 3-D
seismic survey is scheduled to be shot in the third quarter of 1998. Two of the
locations in the project have been drilled. Both have logged multiple pay zones
and both are awaiting completion.The estimated cost to drill and complete a well
is approximately $550,000.
CANEY CREEK. The Company has a 12.5% Project Interest, which consists of
options and leases covering 21,000 gross (2,625 net) acres in Matagorda and
Wharton Counties, Texas. The project targets the Frio and Yegua reservoirs. A 32
square mile 3-D seismic survey has been conducted and the interpretation of the
data is currently being conducted. The estimated cost to drill and complete a
shallow well is approximately $700,000, with deeper wells costing approximately
$2.0 million.
EAST TEXAS PINNACLE REEF TREND. Aspect and certain of its affiliates have
licenses covering approximately 400 square miles of 3-D seismic data pertaining
to the East Texas Cotton Valley Reef Trend. This seismic data is recently
acquired and most of it is proprietary. Currently, there is no acreage position
or defined drilling opportunity associated with this project. The Company
intends to enter into a joint venture with Aspect or its affiliates to attempt
to generate drillable prospects. The joint venture will, if consummated, be
subject to the terms of any licensing or other agreements currently in effect.
MISSISSIPPI PROJECTS
THOMPSON CREEK. The Company has a 56.0% Project Interest, which consists of
approximately 1,325 gross (512 net) acres of leases and options in Wayne County,
Mississippi. The Company has generated a prospect from subsurface and 2-D
seismic data indicating multiple potential oil pays ranging from 7,000 feet to
17,000 feet in depth. However, the Company intends to acquire and interpret 3-D
seismic data before commencing drilling. Approximately 12 square miles of full
fold 3-D seismic data will be necessary to image the acreage position. A 3-D
seismic survey is being conducted by a seismic vendor over this area and the
processed data should be delivered in the third quarter of 1998. The estimated
cost to drill and complete a 15,500 foot Cotton Valley well is approximately
$1.5 million.
45
<PAGE>
LIPSMACKER. The Company has a 22.0% Project Interest, which consists of
approximately 5,758 gross (943 net) acres of leases and options in Choctaw,
Alabama and Clarke Counties, Mississippi. EPC completed a 64 square mile 3-D
seismic survey in the fall of 1996, and while several drilling locations were
tested, the results generally were disappointing. The Company believes there are
two remaining drillable locations. The Company is currently evaluating whether
it will invest its own capital in drilling these wells. The estimated cost to
drill and complete a well is approximately $1.2 million.
CAEX TECHNOLOGY AND 3-D SEISMIC
The Company, either directly or through its partners, uses CAEX technology
to collect and analyze geological, geophysical, engineering, production and
other data obtained about potential gas or oil prospects. The Company uses this
technology to correlate density and sonic characteristics of subsurface
formations obtained from 2-D seismic surveys with like data from similar
properties, and uses computer programs and modeling techniques to determine the
likely geological composition of a prospect and potential locations of
hydrocarbons.
Once all available data has been analyzed to determine the areas with the
highest potential within a prospect area, the Company may conduct 3-D seismic
surveys to enhance and verify the geological interpretation of the structure,
including its location and potential size. The 3-D seismic process produces a
three-dimensional image based upon seismic data obtained from multiple
horizontal and vertical points within a geological formation. The calculations
needed to process such data are made possible by computer programs and advanced
computer hardware.
While large oil companies have used 3-D seismic and CAEX technologies for
approximately 20 years, these methods were not affordable by smaller,
independent gas and oil companies until more recently, when improved data
acquisition equipment and techniques and computer technology became available at
reduced costs. The Company began using 3-D seismic and CAEX technologies in 1992
and is using these technologies on a continuing basis. The Company believes that
its use of CAEX and 3-D seismic technology may provide it with certain
advantages in the exploration process over those companies that do not use this
technology. These advantages include better delineation of the subsurface, which
can reduce exploration risks and help optimize well locations in productive
reservoirs. The Company believes these advantages can be readily validated based
upon general industry experience as well as the experiences of Aspect and EPC.
Because computer modeling generally provides clearer and more accurate projected
images of geological formations, the Company believes it is better able to
identify potential locations of hydrocarbon accumulations and the desirable
locations for wellbores. However, the Company has not used the technology
extensively enough to arrive at any conclusion regarding the Company's ability
to interpret and use the information developed from the technology.
EXPLORATION AND DEVELOPMENT
The Company considers the Gulf Coast to be the premier area in the United
States to explore for significant new reserves. This conclusion is based on
several characteristics including (i) a large number of productive intervals
throughout a significant sedimentary section, (ii) numerous wells with which to
calibrate 3-D seismic data and (iii) complicated geological formations that the
Company believes 3-D seismic technology is particularly well suited to
interpretation. In 1994, the Company began devoting more of its energy to the
Gulf Coast region. The Company initially entered this area by evaluating the
onshore shallow Frio/Miocene Trend. Its emphasis expanded to include larger
exploration targets represented by large geological features such as those
present in the Starboard Project. Upon completion of the Acquisitions, the
Company spread its focus over 30 exploration projects along the Gulf Coast and
intends to expand its project inventory in these areas. The Company's
Exploration Project inventory is along the Gulf Coast of Texas, Louisiana,
Alabama and Mississippi. The focus is on natural gas exploration prospects with
a numerical concentration along the Texas Gulf Coast, many of which were
delineated by seismic hydrocarbon indicators. Additional 2-D and 3-D seismic
surveys may be required to evaluate these areas
46
<PAGE>
more fully, and when determined appropriate, the Company intends to acquire
acreage and drill wells as indicated by the evaluations.
The Company intends to drill prospects where the formations being tested are
known to be productive in the general area and where it believes 3-D seismic can
be used to increase resolution and thereby reduce risk. The extent to which the
Company will pursue its activities in the Gulf Coast region will be determined
by the availability of the Company's resources and the availability of joint
venture partners.
ACQUISITIONS AND DIVESTMENTS
The Company has periodically acquired producing natural gas and oil
properties. In connection with each acquisition, the Company considers (i)
current and historic production levels and reserve estimates, (ii) exploitation;
(iii) capital requirements; (iv) proximity of product markets; (v) regulatory
compliance; (vi) acreage potential; and (vii) existing production transportation
capabilities. The Company also considers the historic financial operating
results and cash flow potential of each acquisition opportunity and whether the
acquisition will improve the operations of other acquired properties. Evaluation
of the merits of a particular acquisition is based, to the extent relevant, on
all of the above factors as well as other factors deemed relevant by the
Company's management.
The Company has currently deemphasized its producing property acquisition
activities. The Company intends to limit its near term producing property
acquisitions to opportunities that facilitate its exploration activities. The
Company may readdress this approach if it identifies an opportunity it believes
to be of exceptional benefit to its shareholders.
In September 1996, the Company completed the sale of its N.E. Cedardale
field in Major County Oklahoma to OXY USA, Inc., for consideration totaling
$3,550,000. The properties sold represented a substantial portion of the
Company's Oklahoma production. The divestiture of the Oklahoma properties
further facilitated the Company's focus of its resources on its Gulf Coast
projects and reduced debt service requirements over the next three years in an
amount greater than the anticipated net revenue from the properties sold. The
sale included cash of $2,840,000 and certain exchange properties that were
concurrently sold to a third party for $710,000, netting the Company $3,550,000.
HEDGING ACTIVITIES AND MARKETING
The Company markets its natural gas through monthly spot sales. Because
sales made under spot sales contracts result in fluctuating revenues to the
Company depending upon the market price of gas, the Company may enter into
various hedging agreements to minimize the fluctuations and the effect of price
declines or swings. During January 1996, the Company, as required by the Bank
Credit Agreement, entered into a swap agreement on 62,500 MMBtu of its monthly
Mid-Continent natural gas production for $1.566 per MMBtu for the period
beginning April 1, 1996 and ending January 31, 1999. The swap, which is the
Company's only current hedge, was reduced to 31,250 MMBtu on September 25, 1996,
in connection with the sale of the N.E. Cedardale field. The Company recorded a
loss of $212,000 on this swap reduction. The Company's net gas production
currently is less then the volumes hedged. As of March 31, 1998 the Company had
an accrued liability of $179,947 to recognize the projected loss from the
hedges. The Company has not recently conducted an active hedging program other
than as required by the Credit Agreement. In that regard, the Company had net
losses of $814,029 in 1996, which includes the $212,000 loss on the swap
reductions, and $375,410 in 1997 on its required hedged positions.
All of the Company's oil production is now sold under market-sensitive or
spot price contracts. The Company's revenues from oil sales fluctuate depending
upon the market price of oil. No purchaser accounted for more than 10% of the
Company's total revenue in 1996 or 1997. The Company does not believe the loss
of any existing purchaser would have a material adverse effect on the Company.
47
<PAGE>
In December 1991, the Company entered into and performed under a seven-year
fixed price contract with an industrial end-user, Waldorf Corporation, for the
delivery of 7.1 Bcf of natural gas. The contract included certain prepayments to
the Company. The agreement was satisfied in January 1996 when the Company
entered into an agreement with Waldorf to terminate the agreement as of January
31, 1996. The Company paid Waldorf $2,181,489, which represents a return of
Waldorf's advance on 2,490,103 MMBTU's of natural gas, plus a settlement payment
of $313,912. The Company has been able to sell all natural gas production to
other sources at equal or higher prices since the termination of the contract.
The Company anticipates that it will be able to continue to sell all available
natural gas production in the foreseeable future.
The lender under the Duke Credit Facility has the right to gather, process,
transport and market, at competitive market rates, natural gas produced from a
majority of the projects the Company acquired pursuant to the Acquisitions until
the earlier to occur of five years from the date of the Duke Credit Facility or
until the lender has marketed 100 Bcf of natural gas under the Duke Credit
Facility.
PRINCIPAL AREAS OF OPERATIONS
The Company owns and operates producing properties located in four states
with proved reserves located primarily in Louisiana, Oklahoma and Texas. Before
the Acquisitions, the Company owned interests in six wells it operates and also
owned non-operated interests in approximately 27 producing wells in Oklahoma,
Louisiana and Texas. Daily production from both operated and non-operated wells
net to the Company's interest averaged 332.34 Mcf per day and 19.96 Bbls of oil
per day for the year ended December 31, 1997. These properties have provided the
Company's revenues to date. Pursuant to the Acquisitions, the Company acquired
interests in ten wells that are complete or being completed, nine of which are
being operated by the Company. Initial production rates are not available on
these wells.
GAS AND OIL RESERVES
Set forth below is certain information concerning the Company's net proved
reserves, projected future production, estimated future net revenue from proved
reserves and the present value of such estimated net revenue as of the dates set
forth below. The Company has not obtained a report of an independent petroleum
engineer with respect to the reserve estimates set forth below. The estimates do
not include any amounts for reserves on interests acquired pursuant to the
Acquisitions. The estimates were based upon a review of production histories and
other geologic, economic, ownership and engineering data. In determining the
estimates of the reserve quantities that are economically recoverable, the
Company used selling prices and estimated development and production costs in
effect as of the dates of such estimates and, where no prior sales existed,
selling prices and production costs of comparable wells in the general area were
used. In accordance with guidelines promulgated by the Commission, no price or
cost escalation or deescalation was considered.
ESTIMATED PROVED RESERVES. The following table sets forth summary
information regarding the Company's gas and oil reserves at December 31, 1997.
<TABLE>
<CAPTION>
GAS
GAS OIL EQUIVALENT
(MCF) (BBL) (MCFE)(1)
---------- --------- ----------
<S> <C> <C> <C>
Proved developed reserves................................ 521,345 24,358 667,493
Proved undeveloped reserves.............................. 4,979,018 90,041 5,519,264
Total proved reserves.................................. 5,500,363 114,399 6,186,757
</TABLE>
- ------------------------
(1) Oil production is converted to Mcfe at the rate of six Mcf of natural gas
per Bbl of oil, based upon the approximate energy content of natural gas
and oil.
48
<PAGE>
ESTIMATE OF FUTURE NET REVENUE FROM PROVED RESERVES. The following table
sets forth summary information regarding estimated future net revenue and the
present value of future net revenue from the Company's net proved reserves as of
December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Estimated total future net revenue (1).......................................... $8,283,153
Present value of future net revenue (2)......................................... $4,025,657
</TABLE>
- ------------------------
(1) Estimated future net revenue represents estimated future gross revenue to be
generated from the production of proved reserves, net of estimated
production and future development costs, using prices and costs in effect as
of the date indicated. The amounts shown do not give effect to non-property
related expenses, such as general and administrative expenses, debt service
and future income tax expense or to depreciation, depletion and
amortization.
(2) Present value is calculated by discounting estimated future net revenue by
10% annually.
DRILLING ACTIVITY
The Company drilled only one well in each of 1991, 1992 and 1993, and each
of such wells was productive. In 1994, the Company drilled five exploratory
wells, of which four were productive, and one developmental well, which was not
productive. In 1995, the Company drilled seven exploratory wells of which four
were productive. In 1996, the Company participated in the drilling of four wells
of which two were productive. In 1997, the Company participated in eight wells,
drilled one sidetrack operation in an existing wellbore, which operations have
resulted in two successful completions, six dry holes, and one unsuccessful
sidetrack operation due to mechanical difficulties. Since November 1, 1997 (the
effective date of the Acquisitions) through the date hereof, 15 wells have been
drilled for the Company's account, of which six have been completed, four are
awaiting completion and five were dry holes.
PRODUCTIVE WELL SUMMARY
The following table sets forth certain information regarding the Company's
ownership as of
December 31, 1997 of productive gas and oil wells in the areas indicated.
<TABLE>
<CAPTION>
GAS OIL
---------------------- ----------------------
GROSS NET GROSS NET
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Oklahoma........................................................ 5 .04 8 .20
Texas........................................................... 1 0.07 5 2.22
Louisiana....................................................... 2 0.79 -- --
Kansas.......................................................... 1 0.10 -- --
- --
--- ---
Total......................................................... 9 1.00 13 2.42
- --
- --
--- ---
--- ---
</TABLE>
49
<PAGE>
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, average prices received and average production costs associated with
the Company's sale of gas and oil for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------
1996 1997
------------ ----------
<S> <C> <C>
Net Production:
Oil (Bbl)....................................................... 9,276 7,286
Gas (Mcf)....................................................... 1,406,016 121,304
Gas equivalent (Mcfe)........................................... 1,461,672 165,020
Average sales price:
Oil ($per Bbl).................................................. $ 20.99 $ 20.28
Gas ($per Mcf).................................................. $ 2.18 $ 2.06
Average production expenses and taxes
($per Mcfe)(1)................................................ $ 0.78 $ 2.13
</TABLE>
- ------------------------
(1) Includes $164,792 in costs associated with fulfillment of contractual
transportation obligations on the Company's Mobil Bay Properties. If this
amount were not included, the average production taxes and excess for Mcfe
would have been $1.13.
LEASEHOLD ACREAGE
The following table sets forth as of December 31, 1997, the gross and net
acres of proved developed and proved undeveloped gas and oil leases which the
Company holds or has the right to acquire. The information set forth below does
not include the acreage acquired in the Acquisitions.
<TABLE>
<CAPTION>
PROVED UNDEVELOPED
PROVED DEVELOPED
-------------------- --------------------
STATE GROSS NET GROSS NET
- -------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Oklahoma................................................ 38,606 14,091 1,370 452
Texas................................................... 10,742 1,999 54 54
Alabama................................................. 5,156 4,877 5,710 1,805
Arkansas................................................ 1,672 357 6,360 2,544
Louisiana............................................... 1,474 449 4,075 3,397
Kansas.................................................. 1,600 126 -- --
--------- --------- --------- ---------
Total............................................. 59,250 21,899 17,569 8,252
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
50
<PAGE>
COMPETITION
The gas and oil industry is highly competitive in all of its phases. The
Company encounters strong competition from other gas and oil companies in all
areas of its operations, including the acquisition of exploratory and producing
properties, the permitting and conducting of seismic surveys and the marketing
of gas and oil. Many of these competitors possess greater financial, technical
and other resources than the Company. Competition for the acquisition of
producing properties is affected by the amount of funds available to the
Company, information about producing properties available to the Company and any
standards the Company establishes from time to time for the minimum projected
return on investment. Competition also may be presented by alternative fuel
sources, including heating oil and other fossil fuels, There has been increased
competition for lower risk development opportunities and for available sources
of financing. In addition, the marketing and sale of natural gas and processed
gas are competitive. Because the primary markets for natural gas liquids are
refineries, petrochemical plants and fuel distributors, prices generally are set
by or in competition with the prices for refined products in the petrochemical,
fuel and motor gasoline markets.
REGULATION
GENERAL. The gas and oil industry is extensively regulated by federal,
state and local authorities. In particular, gas and oil production operations
and economics are affected by price controls, environmental protection statutes,
tax statutes and other laws and regulations relating to the petroleum industry,
as well as changes in such laws, changing administrative regulations and the
interpretations and application of such laws, rules and regulations. Gas and oil
industry legislation and agency regulation are under constant review for
amendment and expansion for a variety of political, economic and other reasons.
Numerous regulatory authorities, federal, and state and local governments issue
rules and regulations binding on the gas and oil industry, some of which carry
substantial penalties for failure to comply. The regulatory burden on the gas
and oil industry increases the Company's cost of doing business and,
consequently, affects its profitability. The Company believes it is in
compliance with all federal, state and local laws, regulations and orders
applicable to the Company and its properties and operations, the violation of
which would have a material adverse effect on the Company or its financial
condition.
SEISMIC PERMITS. Current law in the State of Louisiana requires permits
from owners of at least an undivided 80% interest in each tract over which the
Company intends to conduct seismic surveys. As a result, the Company may not be
able to conduct seismic surveys covering its entire area of interest. Moreover,
3-D seismic surveys typically are conducted from various locations both inside
and outside the area of interest to obtain the most detailed data of the
geological features within the area. To the extent that the Company is unable to
obtain permits to access locations to conduct the seismic surveys, the data
obtained may not be as detailed as might otherwise be available.
EXPLORATION AND PRODUCTION. The Company's operations are subject to various
regulations at the federal, state and local levels. Such regulations include (i)
requiring permits for the drilling of wells; (ii) maintaining bonding
requirements to drill or operate wells; and (iii) regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled, the plugging and abandoning of wells
and the disposal of fluids used in connection with well operations. The
Company's operations also are subject to various conservation regulations. These
include the regulation of the size of drilling and spacing units, the density of
wells that may be drilled, and the unitization or pooling of gas and oil
properties. In addition, state conservation laws establish maximum rates of
production from gas and oil wells, generally prohibiting the venting or flaring
of gas, and impose certain requirements regarding the ratability of production.
The effect of these regulations is to limit the amount of gas and oil the
Company can produce from its wells and to limit the number of wells or the
locations at which the Company can drill. Recently enacted legislation and
regulatory action in Texas and Oklahoma is intended to reduce the total
production of natural gas in those states. Although such
51
<PAGE>
restrictions have not had a material impact on the Company's operations to date,
the extent of any future impact therefrom cannot be predicted.
NATURAL GAS MARKETING, GATHERING AND TRANSPORTATION. Federal legislation
and regulatory controls in the United States have historically affected the
price of the natural gas produced by the Company and the manner in which such
production is marketed. The transportation and sale for resale of natural gas in
interstate commerce are regulated by the Federal Energy Regulatory Commission
("FERC") pursuant to the Natural Gas Act and the Natural Gas Policy Act of 1978
("NGPA"). The maximum selling prices of natural gas were formerly established
pursuant to regulation. However, on July 26, 1989, the Natural Gas Wellhead
Decontrol Act of 1989 ("Decontrol Act") was enacted, which terminated wellhead
price controls on all domestic natural gas on January 1, 1993 and amended the
NGPA to remove completely by January 1, 1993 price and nonprice controls for all
"first sales" of natural gas, which will include all sales by the Company of its
own production. Consequently, sales of the Company's natural gas currently may
be made at market prices, subject to applicable contract provisions. The FERC's
jurisdiction over natural gas transportation was unaffected by the Decontrol
Act.
The FERC also regulates interstate natural gas transportation rates and
service conditions, which affect the marketing of natural gas produced by the
Company, as well as the revenues received by the Company for sales of such
natural gas. Since the latter part of 1985, the FERC has endeavored to make
interstate natural gas transportation more accessible to gas buyers and sellers
on an open and nondiscriminatory basis. The FERC's efforts have significantly
altered the marketing and transportation of natural gas. Commencing in April
1992, the FERC issued Order Nos. 636, 636-A, 636-B and 636-C (collectively,
"Order No. 636"), which, among other things, require interstate pipelines to
"restructure" their services to provide transportation separate or "unbundled"
from the pipelines' sales of gas. Also, Order No. 636 requires interstate
pipelines to provide open-access transportation on a nondiscriminatory basis
that is equal for all natural gas shippers. Order No. 636 has been implemented
through decisions and negotiated settlements in individual pipeline services
restructuring proceedings. In many instances, the result of Order No. 636 and
related initiatives has been to substantially reduce or eliminate the interstate
pipelines' traditional role as wholesalers of natural gas, and has substantially
increased competition and volatility in natural gas markets. The FERC has issued
final orders in virtually all Order No. 636 pipeline restructuring proceedings.
In July 1996, the United States Court of Appeals for the District of Columbia
Circuit largely upheld Order No. 636 and remanded certain issues for further
explanation or clarification. Numerous petitions for review of the individual
pipeline restructuring orders are currently pending in that court. The issues
remanded for further action do not appear to materially affect the Company.
Proceedings on the remanded issues are currently ongoing before the FERC
following its issuance of Order No. 636-C in February 1997. Although it is
difficult to predict when all appeals of pipeline restructuring orders will be
completed or their impact on the Company, the Company does not believe that it
will be affected by the restructuring rule and orders any differently than other
natural gas producers and marketers with which it competes.
Although Order No. 636 does not regulate natural gas production operations,
the FERC has stated that Order No. 636 is intended to foster increased
competition within all phases of the natural gas industry. It is unclear what
impact, if any, increased competition within the natural gas industry under
Order No. 636 will have on the Company and its natural gas marketing efforts.
Although Order No. 636 could provide the Company with additional market access
and more fairly applied transportation service rates, terms and conditions, it
could also subject the Company to more restrictive pipeline imbalance tolerances
and greater penalties for violation of those tolerances. The Company does not
believe, however, that it will be affected by any action taken with respect to
Order No. 636 materially differently than other natural gas producers and
marketers with which it competes.
The FERC has recently announced its intention to reexamine certain of its
transportation-related policies, including the appropriate manner for setting
rates for new interstate pipeline construction, the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
52
<PAGE>
for resale in the secondary market, the price that shippers can charge for their
released capacity, and the use of negotiated and market-based rates and terms
and conditions for interstate gas transmission. Several pipelines have obtained
FERC authorization to charge negotiated rates as an alternative to traditional
cost-of-service rate making methodology. In February 1997, the FERC announced a
broad inquiry into issues facing the natural gas industry to assist the FERC in
establishing regulatory goals and priorities in the post-Order No. 636
environment. In December 1997, the FERC requested comments on the financial
outlook of the natural gas pipeline industry, including among other matters,
whether the FERC's current rate making policies are suitable in the current
industry environment. In April 1998, the FERC issued a new rule to further
standardize pipeline transaction tariffs that, as the result of newly
standardized provisions regarding firm intra day transportation nominations,
could adversely affect the reliability of scheduled interruptible transportation
service on some pipelines. While any resulting FERC action would affect the
Company only indirectly, any new rules and policy statements may have the effect
of enhancing competition in natural gas markets.
Additional proposals and proceedings that might affect the natural gas
industry are considered from time to time by Congress, the FERC, state
regulatory bodies and the courts. The Company cannot predict when or if any such
proposals might become effective, or their effect, if any, on the operations of
the Company. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by the FERC and Congress will continue indefinitely
into the future. The regulatory burden on the oil and natural gas industry
increases the Company's cost of doing business and, consequently, affects its
profitability and cash flow. In as much as such laws and regulations are
frequently expanded, amended or reinterpreted, the Company is unable to predict
the future cost or impact of complying with such regulations.
LOUISIANA LEGISLATION. The Louisiana legislature passed Act 404 in 1993,
which permits a party transferring an oil field site to establish a
site-specific trust account for such oil field. If the site-specific trust
account is established in accordance with the requirements of the statute, the
party transferring the oil field site shall not thereafter be held liable by the
state for any site restoration costs or actions associated with the transferred
oil field site. The parties to a transfer may elect not to establish a site-
specific trust account, however, in the absence of such an account, the
transferring party will continue to have liability for the costs of restoration
of the site. If the parties to a transfer elect to establish a site-specific
trust account pursuant to the statute, the Louisiana Department of Natural
Resources ("DNR") requires an oil field site restoration assessment to be made
at the time of the transfer or within one year thereafter, to determine the site
restoration requirements existing at the time of transfer. Based upon the site
restoration assessment, the parties to the transfer must propose to the DNR a
funding schedule for the site-specific trust account, providing for some
contribution to the account at the time of transfer and at least quarterly
payment thereafter. If the DNR approves the establishment and funding of the
site-specific trust account, the purchaser will thereafter be the responsible
party to the state, except that the failure of a transferring party to make a
good faith disclosure of all oil field site conditions existing at the time of
the transfer will render that party liable for the costs of restoration of such
undisclosed conditions in excess of the balance of the site-specific trust fund.
OIL SALES AND TRANSPORTATION RATES. The FERC also regulates rates and
service conditions for interstate transportation of crude oil, liquids and
condensate, which can affect the amount the Company receives from the sale of
these products. Rates for such transportation are generally subject to an
indexing system under which rates may be increased as long as they do not exceed
an index rate that is tied to inflation. Over time, this indexing system could
have the effect of increasing the cost of transporting crude oil, liquids and
condensate by pipeline. Sales of crude oil, condensate and gas liquids by the
Company are not regulated and are made at market prices. The price the Company
receives from the sale of these products is affected by the cost of transporting
the products to market.
53
<PAGE>
ENVIRONMENTAL MATTERS. The Company's oil and natural gas exploration,
development and production operations are subject to stringent federal, state
and local laws and regulations governing the discharge of materials into the
environment or otherwise relating to environmental protection. Numerous
governmental agencies, such as the U.S. Environmental Protection Agency ("EPA"),
issue regulations to implement and enforce such laws, which often require
difficult and costly compliance measures that carry substantial administrative,
civil and criminal penalties or may result in injunctive relief for failure to
comply. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentrations of
various substances that can be released into the environment in connection with
drilling and production activities, limit or prohibit construction or drilling
activities on certain lands lying within wilderness, wetlands, ecologically
sensitive and other protected areas, require remedial action to prevent
pollution from former operations, such as plugging abandoned wells, or closing
pits, and impose substantial liabilities for pollution resulting from the
Company's operations. In addition, these laws and regulations may restrict the
rate of oil and natural gas production below the rate that would otherwise
exist. The regulatory burden on the oil and gas industry increases the cost of
doing business and consequently affects its profitability. Changes in
environmental laws and regulations occur frequently, and any changes that result
in more stringent and costly waste handling, storage, transport, disposal or
cleanup requirements could have a material adverse effect on the Company's
operations and financial position, as well as those of the oil and gas industry
in general. While management believes that the Company is in substantial
compliance with current applicable environmental laws and regulations and the
Company has neither experienced any material adverse effect nor experts any
significant capital expenditures from compliance with these environmental
requirements, there is no assurance that this trend will continue in the future.
The Comprehensive Environmental Response, Compensation and Liability Act, as
amended ("CERCLA"), also known as "Superfund," and comparable state laws imposes
liability without regard to fault or the legality of the original conduct, on
certain classes of persons who are considered to be responsible for the release
of a "hazardous substance" into the environment. These persons include (i) the
current owner and operator of a facility from which hazardous substances are
released, (ii) owners and operators of the facility at the time the disposal of
hazardous substances took place, (iii) generators of hazardous substances who
arranged for the disposal or treatment at or transportation to such facility of
hazardous substances and (iv) transporters of hazardous substances to disposal
or treatment facilities selected by them. Under CERCLA, such persons may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources and for the costs of certain health studies, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release of hazardous
substances or other pollutants into the environment. Furthermore, although
petroleum, including crude oil and natural gas, is exempt from CERCLA, at least
two courts have ruled that certain wastes associated with the production of
crude oil may be classified as "hazardous substances" under CERCLA, and thus
such wastes may become subject to liability and regulation under CERCLA.
Regulatory programs aimed at remediation of environmental releases could have a
similar impact on the Company.
The Resource Conservation and Recovery Act, as amended ("RCRA"), generally
does not regulate most wastes generated by the exploration and production of oil
and gas. RCRA specifically excludes from the definition of hazardous waste
"drilling fluids, produced waters, and other wastes associated with the
exploration, development, or production of crude oil, natural gas or geothermal
energy." However, these wastes may be regulated by EPA or state agencies as
solid waste. Moreover, ordinary industrial wastes, such as paint wastes, waste
solvents, laboratory wastes, and waste compressor oils, may be regulated as
hazardous waste. Pipelines used to transfer oil and gas may also generate some
hazardous wastes. Although the costs of managing solid and hazardous waste may
be significant, the Company does not expect to experience more burdensome costs
than similarly situated companies involved in oil and gas exploration and
production.
54
<PAGE>
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although the Company has used operating and disposal
practices that were standard in the industry at the time, hydrocarbons or other
wastes may have been disposed of or released on or under the properties owned or
leased by the Company or on or under other locations where such wastes have been
taken for disposal. In addition, many of these properties have been operated by
third parties whose treatment and disposal or release of hydrocarbons or other
wastes was not under the Company's control. These properties and the wastes
disposed thereon may be subject to CERCLA, RCRA, and analogous state laws. Under
such laws, the Company could be required to remove or remediate previously
disposed wastes (including waste disposal of or released by prior owners or
operators), or property contamination (including groundwater contamination by
prior owners or operators), or to perform remedial plugging or pit closure
operations to prevent future contamination.
The Federal Water Pollution Control Act of 1972 as amended ("FWPCA"), also
known as the Clean Water Act ("CWA") and analogous state laws, impose
restrictions and strict controls regarding the discharge of pollutants including
produced waters and other oil and gas wastes, into state waters or waters of the
United States. The discharge of pollutants into regulated waters is prohibited,
except in accord with the terms of a permit issued by EPA or the state. These
proscriptions also prohibit certain activity in wetlands unless authorized by a
permit issued by the U.S. Army Corps of Engineers. Sanctions for unauthorized
discharges include administrative, civil and criminal penalties, as well as
injunctive relief.
The Oil Pollution Act of 1990, as amended ("OPA"), pertains to the
prevention of and response to spills or discharges of hazardous substances or
oil into navigable waters of the United States. Under OPA, a person owning or
operating a facility or equipment (including land drilling equipment) from which
there is a discharge or threat of a discharge of oil into or upon navigable
waters or adjoining shorelines is liable, regardless of fault, as a "responsible
party" for removal costs and damages. Federal law imposes strict, joint and
several liability on facility owners for containment and clean-up costs and
certain other damages, including natural resource damages, arising from a spill.
The OPA establishes a liability limit for onshore facilities of $350 million;
however, a party cannot take advantage of this liability limit if the spill is
caused by gross negligence or willful misconduct or resulted from a violation of
a federal safety, construction, or operating regulation. If a party fails to
report a spill or cooperate in the cleanup, the liability limits otherwise do
not apply. Federal regulations under the OPA and FWPCA also require certain
owners and operators of facilities that store or otherwise handle oil, such as
the Company, to prepare and implement spill prevention, control and
countermeasure plans and spill response plans relating to possible discharge of
oil into surface waters. The Company believes that it is in substantial
compliance with the requirements of the OPA and FWPCA and that any
non-compliance would not have a material adverse effect on the Company.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried
working, net profits, working and other similar interests and contractual
arrangements customary in the gas and oil industry, liens for current taxes not
yet due and other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records).
Investigations including a title opinion of local counsel generally are made
before commencement of drilling operations. The Company has granted to an
affiliate of a major public utility a mortgage on its interest in the Starboard
Project to secure repayment of the funding provided by the affiliate and
relating to the prospect, and has granted to Bank of America NT&SA a mortgage on
virtually all remaining producing gas and oil properties to secure repayment
under the Bank Credit Agreement.
OPERATING HAZARDS AND INSURANCE
The gas and oil business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formations, and environmental hazards such as oil spills, gas
55
<PAGE>
leaks, ruptures or discharges of toxic gases, the occurrence of any of which
could result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, cleanup responsibilities, regulatory
investigation and penalties and suspension of operations.
The Company maintains a gas and oil lease operator insurance policy that
insures the Company against certain sudden and accidental risks associated with
drilling, completing and operating its wells. There can be no assurance that
this insurance will be adequate to cover any losses or exposure to liability.
The Company also carries comprehensive general liability policies and an
umbrella policy. The Company and its subsidiaries carry workers' compensation
insurance in all states in which they operate. The Company maintains various
bonds as required by state and federal regulatory authorities. Although the
Company believes these policies are customary in the industry, they do not
provide complete coverage against all operating risks. An uninsured or partially
insured claim, if successful and of sufficient magnitude, could have a material
adverse effect on the Company and its financial condition. If the Company
experiences significant claims or losses, the Company's insurance premiums could
be increased, which may adversely affect the Company and its financial
condition, or limit the ability of the Company to obtain coverage. Any
difficulty in obtaining coverage may impair the Company's ability to engage in
its business activities.
FACILITIES
The Company leases approximately 7,600 square feet of office space in
Houston, Texas, at an annual rent of $117,068. The lease expires in September
2001. The Company leases approximately 13,280 square feet of office space in
Corpus Christi, Texas. The monthly rent is $11,287, and the lease expires on
June 30, 2003. The Company believes it will be able to renew the lease on
acceptable terms. The Company currently is leasing more office space than it
needs in Houston, and intends to sublet a portion of its office space in 1998.
EMPLOYEES
The Company has five full-time and one part-time employees in its Houston,
Texas office, and 26 employees in its Corpus Christi, Texas office. Their
functions include management, production, engineering, geology, land, legal, gas
marketing, accounting, financial planning and administration. Certain operations
of the Company's field activities are accomplished through independent
contractors who are supervised by the Company. The Company believes its
relations with its employees and contractors are good. No employees of the
Company are represented by a union.
LEGAL PROCEEDINGS
EPC was a defendant in a lawsuit regarding injuries to a oil field worker
not employed by the Company that resulted in a judgment against EPC of
approximately $17,700,000. The judgment was settled by EPC's insurers, who
agreed to make cash payments to the plaintiff, and by EPC who agreed to
implement a mutually agreeable work safety plan in exchange for approximately
$6.0 million in punitive damages that otherwise would have been payable to the
plaintiff. The settlement was entered into and approved by the court entering an
agreed judgment on December 3, 1997. On approximately April 16, 1998, the
plaintiff filed an action against both EPC and the Company alleging, in part,
that EPC has failed and refused to implement an appropriate safety plan and
entered negotiations with the Company to convey material assets to it which, if
consummated, would negate plaintiffs benefits to be obtained by EPC's safety
plan, thereby fraudulently inducing plaintiff to settle the judgment against
EPC. The Company believes the claims are not supported by the facts and are
without merit. The Company and EPC intend to vigorously defend the claims.
56
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the Company's
directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- -------------------------------------------------
<S> <C> <C>
David W. Berry(1)............. 48 Chairman of the Board
Alex M. Cranberg(1)(2)........ 43 Vice Chairman of the Board
Michael E. Johnson(1)......... 50 Director, President and Chief Executive Officer
Charles J. Smith(1)........... 71 Director
Alex B. Campbell(3)........... 40 Director
William D. Dodge, III(2)...... 45 Director
Jack P. Randall(2)(3)......... 48 Director
Hobart A. Smith(3)............ 61 Director
David B. Christofferson....... 49 Senior Vice President, Secretary and General
Counsel
</TABLE>
- ------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
DAVID W. BERRY has served as President of the Company since the
incorporation of its predecessor in August 1988, and has served as Chairman of
the Board of Directors since 1991. In 1978, he formed Berry Petroleum
Corporation, which was a regional natural gas and oil exploration company. In
1976 he co-founded Vulcan Energy Corporation, a Tulsa, Oklahoma based
exploration and production company. Mr. Berry has served as the State Finance
Chairman of the Oklahoma State Republican Party, as a Trustee for the Oklahoma
Museum of Art and on the United States Senatorial Trust Committee. Mr. Berry is
a member of the Texas Independent Producers and Royalty Owners Association.
ALEX M. CRANBERG has been a director of the Company since May 14, 1998. He
has been President of Aspect Management Corporation, the manager of Aspect,
since its inception in 1993. He joined Houston Oil and Minerals Corp. in 1977
where he served in various engineering and financial roles. He has managed the
oil and gas portfolio of General Atlantic Partners, a private investment firm,
since 1981. He is on the Board of Directors of Brigham Exploration, Inc., a
public company, and Westport Oil and Gas, Inc., a private exploration and
production company active in the Rocky Mountain and Gulf Coast Regions. He
received a BS in petroleum engineering from the University of Texas and an MBA
from Stanford University.
MICHAEL E. JOHNSON has been a director, President and Chief Executive
Officer of the Company since May 14, 1998. He was President of EPC from 1978
until joining the Company. Mr. Johnson was an operations engineer for Atlantic
Richfield Co. from 1971 to 1976 and worked for Tana Oil and Gas before
co-founding EPC, where he has managed all exploration activities, coordinated
outside technical support and raised capital from industry partners. He received
a BS degree in mechanical engineering from the University of Southwestern
Louisiana.
CHARLES J. SMITH has been a director of the Company since May 14, 1998. He
has served as Chairman and Chief Executive Officer of EPC since its formation in
1978. Mr. Smith acts as EPC's senior land and administrative officer. He was a
practicing attorney specializing in oil and gas law from 1963 to 1987. Before
1963, he was a petroleum landman for Humble Oil and Refining Company. Mr. Smith
received a BBA in industrial management from the University of Texas and was
admitted to practice law in Texas in 1959 after attending South Texas School of
Law and the completion of off-campus studies.
57
<PAGE>
ALEX B. CAMPBELL has been a director of the Company since May 14, 1998. He
has been Vice President of Aspect Management Corporation since August 1996 and
is responsible for land and corporate development and legal issues. He served as
landman for Grynberg Petroleum and TXO Production Corp. from 1980 to 1984,
focusing on the Rocky Mountain Region, then as division landman for Lario Oil &
Gas Company from 1984 to 1996, where he was responsible for administration,
prospect marketing, contract lease negotiation, exploration permitting, surface
owner negotiations and property acquisition negotiation and due diligence. He
has a BA in business/pre-law from Colorado State University, and an MBA from
Colorado State University.
WILLIAM D. DODGE, III has been a director of the Company since May 14, 1998.
He has been Regional President of Pacific Southwest Bank, Corpus Christi, Texas
since 1995. He has been active in banking since 1977, including serving as
President of The Bank of Robstown, Texas from 1982 until 1995. He also serves in
a number of civic roles, including as Chairman of the Port of Corpus Christi
Authority, and serving on the Board of Directors of Columbia Northwest Hospital.
Mr. Dodge is a member of the Editorial Review Board SAM Advanced Management
Journal at the Texas A&M University-Corpus Christi College of Business. He
received a BA degree from the University of Texas at Austin and attended the
Southwestern Graduate School of Banking, Southern Methodist University.
JACK P. RANDALL has been a director of the Company since May 14, 1998. He
founded Randall & Dewey, Inc. in 1989 and has served as its President since that
time. Randall & Dewey is a Houston, Texas, based transaction advisory firm
focusing on oil and gas mergers, acquisitions, divestments, trades and
alliances. Before founding Randall & Dewey, he was with Amoco Production Company
from 1975 to 1989, where his service included acting as Manager of Acquisitions
and Investments. Mr. Randall is a member of the Board of Directors of
Crosstimbers Oil Company, the chairman of the Petroleum Engineering Visiting
Committee at the University of Texas at Austin, and a member of the
Implementation Advisory Committee for the Oil Recovery Center of Excellence at
the University of Texas at Austin. He also is a member of the Society for
Petroleum Engineers, the American Petroleum Institute and the Independent
Petroleum Association of America. He received BS and MS degrees in engineering
from the University of Texas.
HOBART A. SMITH has been a director of the Company since May 14, 1998. He
has served as a director of Harken Energy Corporation since 1997 and a
consultant to Smith International, Inc. since 1991. From 1987 to 1991, Mr. Smith
was Vice President of Customer Relations for Smith International, Inc. From 1965
to 1987, he held numerous positions, including many executive offices with Smith
Tool, Inc., a subsidiary of Smith International, Inc. Mr. Smith has more than 30
years of experience in the oil services industry. Mr. Smith received a BA from
Claremont McKenna College.
DAVID B. CHRISTOFFERSON joined the Company in 1989 and served as a director
until May 14, 1998. Mr. Christofferson currently is Senior Vice President,
Secretary and General Counsel of the Company. He also serves as its Principal
Financial Officer. Mr. Christofferson has been active in the natural gas and oil
industry for over 20 years. He also served as General Counsel to two independent
natural gas and oil companies and to a natural gas marketing company. Mr.
Christofferson is a member of the Texas Independent Producers and Royalty Owners
Association. He received a BBA in finance and a Juris Doctor from the University
of Oklahoma. He also received a Masters of Divinity degree from Phillips
University. He is admitted to practice law in Oklahoma.
KEY OFFICERS
In addition to the directors and executive officers listed above, the
following former EPC employees have significant responsibilities with the
Company.
HOWARD E. WILLIAMS, 55, is Vice President and Treasurer. Mr. Williams joined
EPC in 1981 and became the Company's Principal Accounting Officer on May 14,
1998. He is responsible for supervising and coordinating all of the Company's
accounting activities. Before joining EPC, Mr. Williams practiced public
accounting for 17 years with "Big 8," regional and local accounting firms. Mr.
Williams is a graduate of Texas A&I University with a BBA in Accounting.
58
<PAGE>
LINDA D. SCHIBI, 41, is Vice President-Land. Mrs. Schibi joined EPC in 1978
and became the Company's Land Manager in charge of the day-to-day land
operations on May 14, 1998. She coordinates the activities of outside landmen
and supervises in-house land department operations. Mrs. Schibi also functions
as oil and gas marketing manager with responsibility for the marketing of the
Company's operated oil and gas properties. She is a Certified Petroleum Landman.
She attended Del Mar College.
DALE W. ALEXANDER, 42, is Vice President-Exploitation. He served EPC as a
consultant in the area of reservoir and exploitation engineering from 1991 until
May 14, 1998, when he became the Company's Vice President--Exploration. Mr.
Alexander is responsible for determining pre-drill economics, risk weighting
drilling projects and coordination of reserve reports. From 1988 to 1991, he was
with Kamlock Oil & Gas Company. He was an exploitation/reservoir engineer for
EPC from 1983 to 1988. He also has worked for Champlin Petroleum Company, and
Union Oil of California. Mr. Alexander has a BS in Petroleum Engineering from
the University of Texas.
MICHAEL E. MOORE, 40, is Vice President-Exploration. Mr. Moore joined EPC in
1982 as a staff geologist and became the Company's Exploration Manager on May
14, 1998. Mr. Moore is responsible for reviewing all outside geological projects
as well as supervising the activities of in-house and retainer geological staff.
He previously was employed as a field geologist with J.R. Weber, Inc., a
consulting firm in Denver, Colorado. He received a BS in Geology from the
University of Texas.
WILLIAM L. JACKSON, 42, is Senior Vice President-Operations. Mr. Jackson
joined EPC in 1982 and, on May 14, 1998, became the Company's Chief Engineering
Officer responsible for all oil and gas drilling, completion, workover, and
production operations. He previously served with Acock Engineering and Mueller
Engineering as an on-site petroleum engineering consultant on drilling and
workovers for oil and gas wells in the South Texas area. He received a BS in
Petroleum Engineering and an MBA from the University of Texas.
59
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation, including bonuses, paid by
the Company during each of the three fiscal years ended December 31, 1995, 1996
and 1997 to the Chief Executive Officer and to its other executive officers
(other than the Chief Executive Officer) of the Company and its subsidiaries.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
----------------------------------
AWARDS OF ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(1) COMPENSATION
- --------------------------------------------------- --------- ---------- --------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
David W. Berry..................................... 1997 $ 134,400 -- 32,000(2) $ 44,965 (3)
Chairman of the Board, 1996 124,000 -- 20,000(2) 20,145 (3)
Chief Executive Officer 1995 120,000 -- -- 18,367 (3)
and President
David B. Christofferson............................ 1997 $ 112,000 -- 58,667(2) $ 47,888 (4)
Director, Executive Vice 1996 103,000 -- 16,667(2) 22,469 (4)
President, Chief Financial 1995 85,000 5,000 -- 20,080 (4)
Officer and Secretary
S. Gordon Reese, Jr. (5)........................... 1997 $ 100,000 -- -- $ 6,553 --
Senior Vice President 1996 98,900 -- 16,250 -- --
1995 70,000 35,000 -- -- --
Michael A. Barnes(6)............................... 1997 $ 100,000 -- 4,167 -- --
Vice President of 1996 61,750 -- 4,167 -- --
Exploration and 1995 -- -- -- -- --
Production
</TABLE>
- ------------------------
(1) Represents the number of shares issuable pursuant to vested and non-vested
stock options after giving effect to the Reverse Split.
(2) In 1997 all stock options previously granted to Mr. Berry and Mr.
Christofferson were canceled and new stock options were granted to them
pursuant to the Employee Option Plan--1997 (the "1997 Plan"). Amounts stated
for 1997 include regrants of such canceled options. See "--Option
Repricings" and "--Employment Agreements."
(3) In 1997, the Company settled its deferred compensation liability to Mr.
Berry for a payment of $80,537. Of this amount, a total of $56,063 had been
reported as earned compensation in the years 1993-96, and the balance of
$24,474 is reported as earned in 1997.
(4) In 1997, the Company settled its deferred compensation liability to Mr.
Christofferson for a payment of $95,170. Of this amount, a total of $72,694
had been reported as earned compensation in the years 1993-96, and the
balance of $22,476 is reported as earned in 1997. See "--Deferred
Compensation."
(5) Mr. Reese ceased to be an officer of the Company on December 31, 1997.
(6) Mr. Barnes ceased to be an officer of the Company upon consummation of the
Acquisitions.
60
<PAGE>
OPTION GRANTS
The following table sets forth certain information relating to option grants
made in 1997 to the individuals named in the Summary Compensation Table above.
See "--Executive Compensation."
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
--------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK
NUMBER OF GRANTED TO PRICE APPRECIATION MARKET
SECURITIES OF EMPLOYEES FOR PRICE
UNDERLYING IN FISCAL EXERCISE OPTION TERM(3) ON
OPTIONS 1997 PRICE PER EXPIRATION ------------------ GRANT
NAME GRANTED(1) YEAR(2) SHARE(1) DATE 5% 10% DATE
- ---------------------------------------- ------------- ---------- --------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Berry.......................... 32,000(4) 30% $3.78 11/07 $136,000 $316,000 $ 95,040(8)
David B. Christofferson................. 58,667(4) 54% $3.78 11/07 $249,920 $580,820 $ 174,240(8)
S. Gordon Reese, Jr.(5)................. -- -- -- -- -- -- --
Michael A. Barnes(6).................... 4,167(7) 4% $7.68 4/07 $ 1,500 $ 25,000 $ 17,250
</TABLE>
- ------------------------
(1) After giving effect to the Reverse Split.
(2) Based on options to purchase a total of 107,667 shares of Common Stock
(after giving effect to the Reverse Split) granted during 1997, of which
7,500 (or 7%) have expired.
(3) Potential values stated are the result of using the Commission's method of
calculating 5% and 10% appreciation in value from the date of grant to the
end of the option term. Such assumed rates of appreciation and potential
realizable values are not necessarily indicative of the appreciation, if
any, that may be realized in future periods.
(4) Consists of options issued under the 1997 Plan, all of which are currently
exercisable. Such options were issued in 1997 in replacement of certain
options and stock appreciation rights issued in previous years. See
"--Option Repricings."
(5) Mr. Reese ceased to be an executive officer of the Company on December 31,
1997.
(6) Mr. Barnes ceased to be an officer of the Company upon consummation of the
Acquisitions.
(7) All options were granted under the 1997 Plan. One-third of the options are
currently exercisable and the remaining two-thirds become exercisable over
1998 and 1999.
(8) See "--Option Repricings."
61
<PAGE>
OPTION REPRICINGS
In the last quarter of 1997, the Company determined to attempt to consummate
a significant corporate transaction to satisfy the Company's need for additional
capital resources. In connection with pursuing such a transaction, Mr. Berry and
Mr. Christofferson entered into Incentive Agreements and Contract Settlement
Agreements with the Company pursuant to which each of Mr. Berry and Mr.
Christofferson were entitled to receive certain Incentive Payments and Contract
Settlement Payments upon the consummation of such a transaction. The Acquisition
Agreement qualified as such a transaction, and their existing employment
agreements terminated upon the consummation of the Acquisitions.
In negotiating the terms of the Incentive Agreements and Contract Settlement
Agreements, Mr. Berry and Mr. Christofferson determined that their existing
stock options would expire 90 days after their termination of employment. The
Compensation Committee of the Board of Directors, which was comprised of outside
directors, recognized that the expiration of those options would result in a
disincentive for Mr. Berry and Mr. Christofferson to help the Company pursue a
significant corporate transaction. Therefore, the Compensation Committee
determined that Mr. Berry's and Mr. Christofferson's existing stock options
should be canceled and replaced with new stock options that would terminate on
the date their old options would have expired if their employment with the
Company was not terminated. As an added incentive, the Compensation Committee
determined to reprice Mr. Berry's and Mr. Christofferson's options so they could
more readily benefit from any upturn in the Company's Common Stock trading price
upon the consummation of a significant corporate transaction.
When determining the price at which Mr. Berry's and Mr. Christofferson's new
options would be exercisable, the Compensation Committee took the average
closing price of the Company's Common Stock on the Nasdaq Small-Cap Market over
the 20 day trading period immediately preceding the option reprice date, and
multiplied such average trading price by 0.65. The Compensation Committee
believed that the discount to the average trading price was appropriate because
the shares of Common Stock issuable upon exercise of the repriced options would
not be freely tradeable and the discount was appropriate to reflect the actual
fair market value of the illiquid shares that would be received upon the
exercise of the new options.
The following table sets forth certain information with respect to
replacement stock options granted to Mr. Berry and Mr. Christofferson during the
year ended December 31, 1997, which are also reported above under "--Option
Grants."
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
OF
UNDERLYING
OPTIONS / MARKET PRICE OF
SARS STOCK AT TIME OF EXERCISE PRICE AT NEW
REPRICED OR REPRICING OR TIME OF REPRICING EXERCISE
NAME DATE AMENDED(1) AMENDMENT(1) OR AMENDMENT(1) PRICE(1)
- --------------------------------------- --------- ----------- ----------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
David W. Berry......................... 12/3/97 20,000(2) $ 5.82 $ 9.72 $ 3.78
President and Chief Executive Officer 12/3/97 4,000(3) $ 5.82 $ 18.60 $ 3.78
David B. Christofferson................ 12/3/97 30,000(4) $ 5.82 $ 10.08 $ 3.78
Executive Vice President, General 12/3/97 4,000(3) $ 5.82 $ 18.60 $ 3.78
Counsel and Secretary 12/3/97 16,667(2) $ 5.82 $ 8.82 $ 3.78
<CAPTION>
LENGTH OF
ORIGINAL OPTION
TERM REMAINING AT
DATE OF REPRICING
OR AMENDMENT
NAME (MONTHS)
- --------------------------------------- -----------------
<S> <C>
David W. Berry......................... 102
President and Chief Executive Officer 69
David B. Christofferson................ 62
Executive Vice President, General 69
Counsel and Secretary 102
</TABLE>
- --------------------------
(1) After giving effect to the Reverse Split.
(2) Consists of options to purchase shares of Common Stock pursuant to the 1996
Plan.
(3) Consists of units, each of which included an option to purchase one share of
Common Stock and a stock appreciation right ("SAR") equal to two times the
difference between the exercise price of the option and the
62
<PAGE>
market value of the SAR at the date of exercise, so that one unit had the
value of three options, all issued pursuant to the 1993 MISP.
(4) Consists of options to purchase 30,000 shares of Common Stock (after giving
effect to the Reverse Split) pursuant to the Company's 1993 Incentive Stock
Option Plan.
OPTION EXERCISE AND YEAR-END VALUES
The following table sets forth certain information as of December 31, 1997
with respect to the unexercised options to purchase Common Stock to the
individuals named in the Summary Compensation Table above. See "--Executive
Compensation." None of such individuals exercised any stock options during 1997.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE
MONEY-OPTIONS AT DECEMBER
OPTIONS AT DECEMBER 31, 1997 31, 1997(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
David W. Berry........................................... 32,000 -- $ 28,992 --
David B. Christofferson.................................. 58,667 -- $ 53,192 --
S. Gordon Reese, Jr...................................... -- -- -- --
Michael A. Barnes........................................ 1,389 2,778 -- --
</TABLE>
- ------------------------
(1) Based on the last sale price of the Common Stock on the Nasdaq Small-Cap
Market on December 31, 1997 of $4.68 (as adjusted for the Reverse Split).
DEFERRED COMPENSATION
Pursuant to employment agreements with Messrs. Berry, Orgill and
Christofferson, deferred compensation accrued annually payable at the rate of
$9,000 per year for each year the executive was employed by the Company. The
payment of such compensation is deferred until retirement at which time it is
payable for a period of 15 years. In lieu of receiving such deferred
compensation upon retirement, in 1997 the Company paid Mr. Berry $80,537 and Mr.
Christofferson $95,170, which amounts were based upon a present value
calculation of the deferred compensation accrued as of August 30, 1997.
OPTION PLANS
MANAGEMENT INCENTIVE STOCK PLAN--1993. The MISP-1993 authorized the
issuance of up to 40,000 units (after giving effect to the Reverse Split). Each
unit consists of (i) an option to purchase one share of Common Stock and (ii) a
cash payment ("Stock Appreciation Right" or "SAR") to be made by the Company
when the option is exercised. The value of the SAR is equal to twice the amount
by which the fair market value of the Common Stock on the date of exercise of
the option exceeds the exercise price. Currently, all units have expired or have
been canceled by the Board of Directors other than 6,000 units currently
outstanding, all of which expire by August 1998.
STOCK INCENTIVE OPTION PLAN--1996. The 1996 Plan authorized the issuance of
up to 58,334 options (after giving effect to the Reverse Split) to purchase one
share of Common Stock. Currently, all options have expired or have been canceled
by the Board of Directors other than 9,500 options currently outstanding, all of
which expire by August 1998.
EMPLOYEE OPTION PLAN--1997. The 1997 Plan authorizes the issuance of up to
115,892 options (after giving effect to the Reverse Split) to purchase one share
of Common Stock. Options to purchase 96,000 shares are currently outstanding.
63
<PAGE>
The Company has agreed that for so long as the Common Stock is listed for
trading on the Boston Stock Exchange, exercise price of all future stock options
will be at least 85% of the fair market value of the Company's Common Stock on
the date of grant.
In addition, the Company intends to implement a new employee stock option
plan in which all of the Company's employees will be eligible to participate.
Shares issuable under such plan are not anticipated to exceed 5.0% of the issued
and outstanding shares of Common Stock after the Offering, however, the terms of
such plan have not be finalized.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of May 14, 1998, with
respect to the Common Stock owned by (i) each person known by management to own
beneficially more than 5% of the Company's outstanding Common Stock; (ii) each
of the Company's directors and executive officers; and (iii) all directors and
executive officers of the Company as a group. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to such
shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
SHARES(2)(3)(4)
------------------------
NUMBER OF BEFORE AFTER
NAME OF BENEFICIAL OWNER SHARES(1) OFFERING OFFERING
- --------------------------------------------------------------------------- ---------- ----------- -----------
<S> <C> <C> <C>
Esenjay Petroleum Corporation.............................................. 5,177,760(5) 43.97% 30.87%
1100 CCNB Center South
500 North Water Street
Corpus Christi, Texas 78471
Aspect Resources LLC....................................................... 4,285,190(6) 36.37% 25.54%
511 16th Street, Suite 300
Denver, Colorado 80202
Joint Energy Development Investments II Limited Partnership................ 675,000 5.74% 4.02%
1200 17th St., Suite 2750
Denver, Colorado 80202
David W. Berry............................................................. 142,155(7) 1.20% *
Alex M. Cranberg........................................................... 4,297,090(8) 36.47% 25.60%
511 16th Street, Suite 300
Denver, Colorado 80202
Michael E. Johnson......................................................... 5,177,760(9) 43.97% 30.87%
1100 CCNB Center South
500 North Water Street
Corpus Christi, Texas 78471
Charles J. Smith........................................................... 5,177,760(9) 43.97% 30.87%
1100 CCNB Center South
500 North Water Street
Corpus Christi, Texas 78471
Alex B. Campbell........................................................... -- * *
William D. Dodge, III...................................................... -- * *
Jack P. Randall............................................................ -- * *
Hobart A. Smith............................................................ 1,667 * *
David B. Christofferson.................................................... 68,000 10) *
Directors and executive officers as a group (9 persons)(11)................ 223,722 1.90% 1.33%
</TABLE>
- ------------------------
* Less than 1%.
64
<PAGE>
(1) Includes all shares with respect to which each person, executive officer or
director who directly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares the power to vote or to direct
voting of such shares or to dispose or to direct the disposition of such
shares. Includes shares that may be purchased under stock options
exercisable within 60 days.
(2) Based on 11,762,687 shares of Common Stock outstanding at May 14, 1998 plus,
for each beneficial owner, those number of shares underlying exercisable
options held by each executive officer or director.
(3) Percent of class for any shareholder listed is calculated without regard to
shares of Common Stock issuable to others upon exercise of outstanding stock
options. Any shares a shareholder is deemed to own by having the right to
acquire by exercise of an option or warrant are considered to be outstanding
solely for the purpose of calculating that shareholder's ownership
percentage.
(4) Does not include any portion of an aggregate of 350,000 shares being
purchased in this Offering by certain of the Company's affiliates.
(5) Includes 12,500 shares of Common Stock issuable upon the exercise of
warrants. Does not include 165,000 shares of Common Stock anticipated to be
purchased in this Offering.
(6) Includes 18,750 shares of Common Stock issuable upon the exercise of
warrants. Does not include 165,000 shares of Common Stock anticipated to be
purchased in this Offering.
(7) Includes options to purchase 32,000 shares of Common Stock that are
currently exercisable. Does not include 20,000 shares of Common Stock
anticipated to be purchased in this Offering.
(8) Includes (i) 11,900 shares of Common Stock owned and (ii) 4,285,190 shares
of Common Stock owned by Aspect, which includes 18,750 shares issuable upon
the exercise of warrants, as to which Mr. Cranberg disclaims beneficial
ownership.
(9) Includes 5,165,260 shares of Common Stock owned, and 12,500 shares of Common
Stock issuable upon exercise of currently exercisable warrants held by, EPC,
as to which Messrs. Johnson and Smith disclaim beneficial ownership.
(10) Includes options to purchase 58,667 shares of Common Stock that are
currently exercisable. Does not include 20,000 shares of Common Stock
anticipated to be purchased in this Offering.
(11) Includes 63,250 shares issuable pursuant to options held by executive
officers and directors that are currently exercisable. Does not include any
shares as to which beneficial ownership is disclaimed.
CERTAIN TRANSACTIONS
The Company and Aspect Management Corporation, the manager of Aspect
("Aspect Management"), have entered into a Geotechnical Services Consulting
Agreement pursuant to which Aspect Management is to perform geotechnical
services for the Company in connection with certain oil and gas properties to
which both parties share an ownership interest. To the extent that Aspect
Management pays or advances costs or expenses associated with certain assets on
behalf of the Company, and to the extent Aspect Management hires independent
contractors, such costs and expenses will be billed to the Company. Aspect
Management must obtain the Company's approval to enter into any related contract
or agreement that has a cost exceeding $50,000 net to the Company. The Company
must pay Aspect Management for services rendered in an amount equal to Aspect's
employee costs, overhead costs and general and administrative costs associated
with the services rendered thereunder. The agreement terminates on May 14, 2002,
unless terminated by either party with 90 days' written notice to the other
party.
The Company and Aspect Management have entered into a Land Services
Consulting Agreement pursuant to which Aspect Management will provide certain
land-related services to the Company in connection with oil and gas properties
to which the Company and Aspect share an ownership interest. To
65
<PAGE>
the extent that Aspect Management pays or advances costs or management expenses
associated with assets, and to the extent Aspect Management hires independent
contractors, such cost and expenses will be billed to the Company. The Company
must pay Aspect Management for services rendered in an amount equal to Aspect's
employee costs, overhead costs and general and administrative costs associated
with the services rendered thereunder. The agreement will be effective until May
14, 2002, unless terminated by either party by giving the other party 90 days'
written notice.
Aspect received warrants to purchase 9,375 shares of Common Stock at an
exercise price of $3.00 per share in connection with providing financing under
the Initial Bridge Facility, and received warrants to purchase an additional
9,375 shares of Common Stock at an exercise price of $3.00 per share in
connection with guaranteeing a portion of the indebtedness under the Duke Credit
Facility. In addition, EPC received warrants to purchase an aggregate of 12,500
shares of Common Stock at an exercise price of $3.00 per share in connection
with guaranteeing a portion of the indebtedness under the Initial Bridge
Facility and under the Duke Credit Facility.
The Company and EPC have entered into an agreement pursuant to which the
Company loaned to EPC $3.0 million of the proceeds from the Duke Credit Facility
to be used for exploration activities on the Exploration Projects acquired from
EPC pursuant to the Acquisitions. EPC is required to repay such loan, plus
accrued interest, at the rate of prime plus 4.0% (12.5% as of the date hereof),
upon the payment by the Company to EPC of the first $3.0 million of
post-effective date costs incurred by EPC on exploration activities on such
Exploration Projects.
Mr. Berry and Mr. Christofferson (each an "Employee") each entered into an
Incentive Agreement and a Contract Settlement Agreement, and their employment
agreements with the Company were terminated upon the closing of the
Acquisitions. Pursuant to the Incentive Agreements and Contract Settlement
Agreements, the Company agreed that if the Company closes a significant
corporate transaction, and the Employee does not resign as an executive officer
before that time, the Company would pay an Incentive Payment of $134,000 to Mr.
Berry and $112,000 to Mr. Christofferson, as well as a Contract Settlement
Payment of $134,000 to Mr. Berry and $112,000 to Mr. Christofferson, at which
time Mr. Berry and Mr. Christofferson would be released from all further
obligations to the Company other than contractual confidentiality obligations.
Each of the Incentive Payments and the Contract Settlement Payments are in the
form of promissory notes bearing interest at the rate of 10% per year payable by
the Company to the Employees, with the principal amount being paid at a minimum
of $5,000 per month, beginning the first day of the third month after the
closing of the significant corporate transaction, and all principal and accrued
interest being due and payable upon the earlier of September 30, 1998, or the
completion of a public sale of any equity or debt securities of the Company,
whichever is earlier. Each of the employees, at their discretion, may defer
payment of up to 50% of the principal amount due until January 15, 1999. The
Contract Settlement Payments are intended to satisfy the Employees existing
employment contracts. Incentive Payments are intended to compensate the
Employees for their services in soliciting, negotiating and closing a
significant corporate transaction and not in satisfaction of any prior
obligations to the Company. The Incentive Payments are in addition to any other
obligations or payments due to the Employees, including the settlement of their
previously existing employment contracts. In addition, as an inducement to the
Employees to continue to solicit and close a change of control transaction, and
regardless of whether such a transaction occurs, all of the stock options
previously granted to the employees by the Company were canceled, and the
Company issued to each of the employees new stock options pursuant to the
Employee Option Plan. See "--Option Grants" and "--Option Repricing."
The Acquisitions constituted a significant corporate transaction pursuant to
which the Incentive Payments and Contract Settlement Payments are payable to Mr.
Berry and Mr. Christofferson. Mr. Berry and Mr. Christofferson have no further
contractual obligations to the Company other than confidentiality obligations
and any contractual arrangements they may negotiate with the Company in the
future.
66
<PAGE>
Effective May 1, 1996, Jeffrey Orgill and the Company agreed to the
termination of Mr. Orgill's employment agreement and Mr. Orgill resigned as Vice
President of Exploration and Production as of May 1, 1996. Mr. Orgill entered
into a consulting agreement with the Company effective May 1, 1996 that expired
in March 1998. Mr. Orgill was paid $10,000 per month under the terms of the
consulting agreement and the Company paid $120,000 to Mr. Orgill during 1997 for
consulting services.
The Company made advances to officers and affiliates of the Company during
1996 and 1997 of $51,143 and $48,380, respectively, and received repayments of
$18,741 and $99,216, respectively. The December 31, 1996 and 1997 receivables
include approximately $47,787 and $47,787, respectively, from an affiliated
partnership for which the Company serves as the managing general partner.
During 1996, as a part of the Company's relocation to Houston, Texas, the
Company purchased the homes of David W. Berry and David B. Christofferson, both
officers of the Company, for $191,395 and $178,000, respectively. These amounts
in each case were ascertained by averaging two independent MAI appraisals to
determine fair market value. The Company subsequently sold the homes at a sales
contract price of $176,200 and $178,000, respectively, pursuant to which sales
contracts the Company received net sales proceeds after commissions and other
selling expenses of $158,847 and $165,626, respectively.
Any future transaction between the Company and any of its directors,
officers or owners of five percent or more of the Company's then outstanding
Common Stock will be on terms no less favorable than would reasonably be
expected from an independent third party, and will be approved by a majority of
the directors who do not have an interest in the proposed transaction and who
have had access to the Company's outside legal counsel with respect to such
transaction.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock, $.01 par value per share.
As of July 15, 1998, 11,762,687 shares of Common Stock were issued and
outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters submitted to a vote of shareholders. There is no cumulative voting with
respect to the election of directors. Accordingly, holders of a majority of the
shares entitled to vote in any election of directors may elect all of the
directors standing for election. Subject to preferences that may be applicable
to any then outstanding class of preferred stock, the holders of Common Stock
are entitled to receive such dividends, if any, as may be declared by the Board
of Directors from time to time out of legally available funds. Upon liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company that are legally
available for distribution, after payment of all debts and other liabilities and
subject to the prior rights of holders of any class of preferred stock then
outstanding. The holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The rights, preferences and privileges of
holders of Common Stock are subject to the rights of the holders of shares of
any series of preferred stock that the Company may issue in the future.
The Company's by-laws provide that stockholders owning an aggregate of at
least ten percent of the Company's issued and outstanding Common Stock can call
a special meeting of stockholders for any purpose.
PREFERRED STOCK
Shares of preferred stock may be issued from time to time in one or more
series with such designations, voting powers, if any, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations and restrictions thereof, as are determined by resolution of the
Board
67
<PAGE>
of Directors of the Company. The issuance of preferred stock, while providing
flexibility in connection with possible financing, acquisitions and other
corporate purposes, could, among other things, adversely affect the voting power
of holders of Common Stock and, under certain circumstances, be used as a means
of discouraging, delaying or preventing a change in control of the Company.
PROVISIONS AFFECTING CONTROL OF THE COMPANY
In addition to the control that will be vested in the existing stockholders
of the Company upon consummation of the Offering, the Company's Certificate of
Incorporation and Bylaws may affect control of the Company.
SIZE AND CLASSIFIED BOARD. The Company's Board of Directors currently
consists of eight members. However, the Company's Certificate of Incorporation
provides that the number of directors should be no less than four and no more
than fourteen, and such number may be determined from time to time under the
Bylaws or upon resolution of the Board of Directors. Directors need not be
stockholders. In case of vacancies in the Board of Directors, including
vacancies occurring by reason of an increase in the number of directors, a
majority of the remaining members of the Board, even though less than a quorum,
may elect directors to fill to such vacancies to hold office until the next
annual meeting of the stockholders or until their successors are elected and
qualify. The Company's Certificate of Incorporation also classifies the
Company's Board of Directors into three classes serving staggered, three-year
terms. Classification of the Board of Director's could have the effect of
extending the time during which the existing Board of Directors could control
the operating policies of the Company even though opposed by the holders of a
majority of the outstanding shares of the Common Stock.
REMOVAL OF DIRECTORS. Under the DGCL, a director of a corporation generally
may be removed, with or without cause, by the holders of a majority of the
shares entitled to vote at an election of directors. However, unless the
corporation's certificate of incorporation provides otherwise, if the
corporation's board of directors is classified, such as the Company's Board,
directors may be removed only for cause and only by stockholder action.
Generally, the vote for removal would require the affirmative vote of a majority
of shares entitled to vote at an election of directors. The Company intends to
propose an amendment to its Certificate of Incorporation to permit the removal
of directors with or without cause. Such proposal will be voted upon at the
Company's next annual meeting of stockholders. EPC and Aspect, who collectively
own approximately 81% of the Company's Common Stock, have informed the Company
that they intend to vote in favor of such proposal.
DELAWARE LAW PROVISIONS
The Company is a Delaware corporation and is subject to Section 203 of the
DGCL. Generally, Section 203 prohibits the Company from engaging in a "business
combination" (as defined in Section 203 of the DGCL) with an "interested
stockholder" (defined generally as a person owning 15% or more of the Company's
outstanding voting stock) for three years following the date that person becomes
an interested stockholder, unless (i) before that person became an interested
stockholder, the Company's Board of Directors either approved the transaction
which resulted in the stockholder becoming an interested stockholder or approved
the business combination; (ii) upon completion of the transaction that resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the Company and by employee stock plans that do not provide employees with
the right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer); or (iii) following the
transaction in which that person became an interested stockholder, the business
combination is approved by the Company's Board of Directors and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock not owned by the interested
stockholder.
68
<PAGE>
Section 203 restrictions also do not apply to certain business combinations
proposed before the consummation or abandonment of and after the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was either not an interested stockholder during the previous
three years or who became an interested stockholder with the approval of the
Company's Board of Directors. The extraordinary transaction must be approved or
not opposed by a majority of the Board of Directors who were directors before
any person became an interested stockholder in the previous three years or who
were recommended for election or elected to succeed such directors by a majority
of such directors then in office.
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with EPC and
Aspect with respect to the 9,368,367 shares of Common Stock they received in the
Acquisitions and the 31,250 shares of Common Stock issuable upon the exercise of
their warrants to purchase Company Stock. The agreement grants to EPC and Aspect
up to three demand and unlimited piggyback registrations. The Company has filed
a shelf registration statement with respect to all of such shares of Common
Stock. Such registration statement also covers (i) 675,000 shares of Common
Stock issued to an affiliate of Enron Corp. in the Acquisitions, (ii) 63,335
shares of Common Stock issued to certain of Aspect's employees in the
Acquisitions, (iii) 32,000 shares of Common Stock issuable upon the exercise of
stock options held by Mr. Berry and (iv) 68,000 shares of Common Stock on behalf
of Mr. Christofferson, of which 58,667 shares are issuable upon the exercise of
options.
The Company has entered into a registration rights agreement with Hi-Chicago
Trust with respect to 12,500 shares of Common Stock and 50,000 shares of Common
Stock issuable upon the exercise of a warrant. Such agreement grants to
Hi-Chicago Trust two demand and unlimited piggyback registrations. The Company
has filed a registration statement with respect to the Common Stock and the
shares issuable upon exercise of the warrant, and such registration statement
has been declared effective under the Securities Act.
The Company also has entered into a registration rights agreement with
Weisser, Johnson & Co. with respect to 250,00 shares of Common Stock and a
registration rights agreement with LaSalle Street Natural Resources Corporation
with respect to 250,000 shares of Common Stock. In addition, the Representative
has registration rights with respect to the 210,000 shares of Common Stock
issuable upon the exercise of the Representative's Warrant.
Each of these registration rights agreements contain provisions that permit
the managing underwriter in an underwritten public offering to cut back the
number of shares of Common Stock requested to be included in a piggyback
registration if the managing underwriter believes that the number of shares
requested to be included is greater than the number of shares that can be sold.
TRANSFER AGENT AND REGISTRAR
The transfer and registrar for the Common Stock is Bank One Oklahoma.
69
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Gaines, Berland Inc. is acting as
representative (the "Representative"), have severally agreed to purchase from
the Company the respective number of shares of Common Stock set forth opposite
their names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
Gaines, Berland Inc.................................................................................. 3,105,000
Credit Lyonnais Securities (USA) Inc................................................................. 75,000
Jefferies & Company, Inc............................................................................. 75,000
Johnson Rice & Company L.L.C......................................................................... 75,000
Petrie Parkman & Co.................................................................................. 75,000
Schroder & Co. Inc................................................................................... 75,000
BlueStone Capital Partners, L.P...................................................................... 40,000
Chatsworth Securities LLC............................................................................ 40,000
Fahnestock & Co. Inc................................................................................. 40,000
First Southwest Company.............................................................................. 40,000
Hanifen, Imhoff Inc.................................................................................. 40,000
Hoak Breedlove Wesneski & Co......................................................................... 40,000
Ladenburg Thalmann & Co. Inc......................................................................... 40,000
Neidiger, Tucker, Bruner, Inc........................................................................ 40,000
Pennsylvania Merchant Group Ltd...................................................................... 40,000
Southeast Research Partners, Inc..................................................................... 40,000
Starr Securities, Inc................................................................................ 40,000
Van Kasper & Company................................................................................. 40,000
Wedbush Morgan Securities Inc........................................................................ 40,000
----------
Total............................................................................................ 4,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other considerations. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of Common Stock if any are purchased.
The Underwriters, through the Representative, have advised the Company that
they propose to offer the Common Stock initially at the public offering price
set forth on the cover page of this Prospectus; that the Underwriters may allow
to selected dealers a concession of $0.15 per share; and that such dealers may
reallow a concession of $0.10 per share to certain other dealers. After the
public offering, the offering price and other selling terms may be changed by
the Underwriters. The Common Stock is included for quotation on the Nasdaq
Small-Cap Market.
The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to an aggregate of 600,000 additional shares of Common Stock,
exercisable at the public offering price less the underwriting discount. If the
Underwriters exercise such over-allotment option, then each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof as the number of shares of Common
Stock to be purchased by it as shown in the above table bears to the 4,000,000
shares of Common Stock offered hereby. The Underwriters may exercise such option
only to cover over-allotment made in connection with the sale of the shares of
Common Stock offered hereby.
The Company, its executive officers and directors, EPC and certain of its
affiliates, Aspect and an affiliate of Enron Corp. have agreed that they will
not sell or dispose of any shares of Common Stock for a
70
<PAGE>
period of 180 days (90 days in the case of Mr. Christofferson and such Enron
Corp. affiliate) after the closing of this Offering without the prior written
consent of the Representative. Notwithstanding the foregoing, under certain
circumstances, certain holders of the Common Stock subject to such restrictions
on transfer may pledge their Common Stock to secure indebtedness or transfer
their Common Stock to their affiliates (provided the pledgee or transferee
agrees to become subject to such restrictions on transfer), or may transfer
their Common Stock to charitable organizations after December 15, 1998.
In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, a warrant (the
"Representative's Warrant") to purchase from the Company up to 210,000 shares of
Common Stock. The Representative's Warrant is exercisable, in whole or in part,
at an exercise price of $7.20 per share at any time during the three-year period
commencing one year after the effective date of the Registration Statement of
which this Prospectus is a part. The Representative's Warrant contains
provisions providing for adjustment of the exercise price and the number and
type of securities issuable upon exercise of the Representative's Warrant should
any one or more of certain specified events occur. The Representative's Warrant
grants to the holders thereof certain rights of registration for the securities
issuable upon exercise of the Representative's Warrant.
The Representative has reserved an aggregate of 350,000 shares of Common
Stock for sale at the public offering price to Aspect, EPC and Mr. Berry. The
Representative and such persons currently anticipate that Aspect and EPC each
will purchase 165,000 of such shares, and Mr. Berry will purchase 20,000 of such
shares; however such shares may be purchased by such persons in different
proportions, or may be allocated to certain affiliates or principals of such
persons. The Underwriters and the Company have agreed that $14,000 of the
underwriting discount attributable to such shares will be reimbursed to the
Company, thereby increasing the Company's proceeds from this Offering by such
amount.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities Act
or to contribute to payments that the Underwriters may be required to make in
respect thereof. The Company has agreed to pay to the Representative a
nonaccountable expense allowance of $300,000.
As permitted by Rule 103 under the Exchange Act certain Underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Common Stock may make bids for or purchases of the Common Stock in the
Nasdaq Small-Cap Market until such time, if any, when a stabilizing bid for such
securities has been made. Rule 103 generally provides that (i) a passive market
maker's net daily bid purchase of the Common Stock may not exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calender months (or any 60 consecutive days ending within the 10 days)
immediately preceeding the filing date of the registration statement of which
this Proscectus forms a part, (ii) a passive market maker may not effect
transaction or display bids for the Common Stock at a price that exceeds the
highest independent bid for the Common stock by persons who are not passive
market makers and (iii) bids made by passive market makers must be identified as
such.
The Company and the Representative entered into an engagement letter dated
December 3, 1997, pursuant to which the Representative agreed to provide
financial advisory services to the Company. In connection with such engagement,
the Representative acted as the Company's financial advisor in connection with
the Acquisitions and rendered an opinion that, subject to certain assumptions
and analyses set forth in such opinion, the consideration paid to EPC and Aspect
pursuant to the Acquisition Agreement was fair to the Company's shareholders
from a financial point of view. The Company agreed to pay the Representative
$200,000 and reimburse the Representative for $15,000 of expenses incurred
before execution of the engagement letter and to further reimburse the
Representative for additional out-of-pocket expenses reasonably incurred in
connection with its engagement, including the reasonable fees and disbursements
of the Representative's legal counsel. Such fees and expenses were for financial
advice in connection with the Acquisitions, including the fairness opinion
related thereto. The Company also agreed to pay the Representative a fee equal
of $200,000 upon the closing of any additional equity funding or
71
<PAGE>
mezzanine funding not underwritten by the Representative in excess of $10.0
million within 18 months of the date of the engagement letter, provided the
Acquisitions have been completed. Such $200,000 fee is not payable if the
Company completes an underwritten public offering with the Representative as the
underwriter within such 18 month period. This Offering constitutes an
underwritten public offering that cancels the Company's obligations to pay such
$200,000 fee.
The Representative has performed underwriting and financial advisory
services for the Company in the past and anticipates it will continue to provide
such services in the future. In connection with prior services, the
Representative was issued 67,500 shares of Common Stock and warrants to purchase
67,500 shares of the Company's Common Stock at an exercise price of $12.15 per
share.
An affiliate of the Representative participated in 37.5% of Aspect's
obligation to lend funds to the Company under the Initial Bridge Facility and
granted a limited guaranty of the Company's repayment obligations under the Duke
Credit Facility, and in exchange for such participation and guaranty, received
warrants to purchase an aggregate of 18,750 shares of Common Stock at an
exercise price of $4.00 per share. Neither these warrants nor the Common Stock
issuable upon the exercise thereof may be sold, transferred, hypothecated,
pledged or otherwise disposed of until one year from the date of this
Prospectus.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby are
being passed upon for the Company by Porter & Hedges, L.L.P., Houston, Texas.
Certain legal matters relating to this offering will be passed upon for the
Underwriter by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements at December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, included in this
Prospectus have been audited by Deloitte & Touche LLP independent auditors, as
stated in their report appearing herein, and have been so included in reliance
upon such reports given upon the authority of that firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form SB-2
(together with all amendments and exhibits thereto, the "Registration
Statement") filed by the Company with the Commission under the Securities Act.
This Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement for
further information with respect to the Company and the Securities offered
hereby. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance,
reference is made to the copy of such document so filed. Each such statement is
qualified in its entirety by such reference.
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Facilities
maintained by the Commission at its principal offices at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices at 7 World Trade Center,
13th Floor, New York, New York 10048, and the Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Such information also may be
obtained on the Internet through the Commission's EDGAR database at
HTTP://WWW.SEC.GOV.
72
<PAGE>
GLOSSARY OF CERTAIN INDUSTRY TERMS
The terms used in this Prospectus are defined as set forth below. All
volumes of natural gas referred to herein are stated at the legal pressure base
of the state or area where the reserves exist and at 60 degrees Fahrenheit and,
in most instances, are rounded to the nearest major multiple.
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BBLS/D. Stock tank barrels per day.
BCF. Billion cubic feet.
BCFE. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
COMPLETION. The installation of permanent equipment for the production of
oil or gas or, in the case of a dry hole, the reporting of abandonment to the
appropriate agency.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DRY HOLE OR WELL. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
EXPLORATORY WELL. A Well drilled to find and produce oil or gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil or gas in another reservoir or to extend a known reservoir.
FARM-IN OR FARM-OUT. An agreement whereunder the owner of a working
interest in an oil and natural gas lease assigns the working interest or a
portion thereof to another party who desires to drill on the leased acreage.
Generally, the assignee is required to drill one, or more wells in order to earn
its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."
FIELD. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
FINDING COSTS. Costs associated with acquiring and developing proved oil
and natural gas reserves which are capitalized by the Company pursuant to
generally accepted accounting principles, including all costs involved in
acquiring acreage, geological and geophysical work and the cost of drilling and
completing wells.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
MCF. One thousand cubic feet of gas.
MCF/D. One thousand cubic feet of gas per day.
73
<PAGE>
MCFE. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MBBLS. One thousand barrels of crude oil or other liquid hydrocarbons.
MMCF One million cubic feet.
MMCF/D. One million cubic feet per day.
MMCFE. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids,
which approximates the relative energy content of crude oil, condensate and
natural gas liquids as compared to natural gas. Prices have historically been
higher or substantially higher for crude oil than natural gas on an energy
equivalent basis.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
NORMALLY PRESSURED RESERVOIRS. Reservoirs with a formation-fluid pressure~
equivalent to 0.465 psi per foot of depth from the surface. For example, if the
formation pressure is 4,650 psi at 10,000 feet, then the pressure is considered
to be normal.
PRESENT VALUE. When used with respect to oil and natural gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using prices
and costs in effect as of the date indicated, without giving effect to
nonproperty-related expenses such as general and administrative expenses, debt
service and future income tax expense or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
PRODUCTIVE WELL. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
PROVED DEVELOPED NONPRODUCING RESERVES. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
PROVED DEVELOPED PRODUCING RESERVES. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and able to produce to market.
PROVED DEVELOPED RESERVES. Proved reserves that can be expected to be
recovered from existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED LOCATION. A site on which a development well can be
drilled consistent with-spacing rules for purposes of recovering proved
undeveloped reserves.
PROVED UNDEVELOPED RESERVES. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
RECOMPLETION. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
RESERVOIR. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
74
<PAGE>
ROYALTY INTEREST. An interest in an oil and natural gas property entitling
the owner to a share of oil or gas production free of costs of production.
3-D SEISMIC. Advanced technology method of detecting accumulations of
hydrocarbons identified through a three-dimensional picture of the subsurface
created by the collection and measurement of the intensity and timing of sound
waves transmitted into the earth as they reflect back to the surface.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains proved
reserves.
WORKING INTEREST. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
WORKOVER. Operations on a producing well to restore or increase production.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996....................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996............. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Condensed Consolidated Balance Sheet (unaudited) as of March 31, 1998...................................... F-24
Condensed Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997
(unaudited).............................................................................................. F-25
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997
(unaudited).............................................................................................. F-26
Notes to Condensed Consolidated Financial Statements (unaudited)........................................... F-27
</TABLE>
F-1
<PAGE>
ESENJAY EXPLORATION, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Esenjay Exploration, Inc.
We have audited the accompanying consolidated balance sheets of Esenjay
Exploration, Inc. (formerly Frontier Natural Gas Corporation) and subsidiaries
(the "Company") as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Deloitte & Touche LLP
Houston, Texas
March 27, 1998(May 14, 1998 with
respect to the second
paragraph of Note 2 and
the third and fourth
paragraphs of Note 10)
F-2
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 690,576 $4,956,656
Accounts receivable, net of allowance for doubtful accounts of $15,488 at December
31, 1997 and $10,533 at December 31, 1996........................................ 221,864 366,498
Prepaid expenses and other......................................................... 249,328 282,317
Receivables from affiliates........................................................ 105,171 152,419
------------- ------------
Total current assets............................................................. 1,266,939 5,757,890
Property and equipment:
Gas and oil properties, at cost--successful efforts method of accounting........... 3,235,848 5,280,115
Other property and equipment....................................................... 1,169,127 1,074,727
------------- ------------
4,404,975 6,354,842
Less accumulated depletion, depreciation and amortization.......................... (1,260,605) (2,918,918)
------------- ------------
3,144,370 3,435,924
Other assets......................................................................... 164,699 437,378
------------- ------------
Total assets..................................................................... $ 4,576,008 $9,631,192
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 911,396 $ 725,222
Revenue distribution payable....................................................... 68,131 360,163
Current portion of long-term debt.................................................. 401,085 304,540
Accrued and other liabilities...................................................... 299,704 208,931
------------- ------------
Total current liabilities........................................................ 1,680,316 1,598,856
Long-term debt....................................................................... 22,680 325,394
Non-recourse debt.................................................................... 864,000 681,618
Accrued interest on non-recourse debt................................................ 194,274 62,874
Other long-term liabilities.......................................................... 9,918 223,624
------------- ------------
Total liabilities................................................................ 2,771,188 2,892,366
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock $.01 par value; 5,000,000 shares authorized;
85,961 shares issued and outstanding at December 31, 1997 and 1996; ($859,610
aggregate redemption and liquidation preference at December 31, 1997 and 1996)... 860 860
Common stock:
Class A Common stock, $.01 par value; 40,000,000 shares authorized; 1,655,984 and
1,644,317 outstanding at December 31, 1997 and December 31, 1996, respectively
(1)............................................................................ 16,560 16,443
Unamortized value of warrants issued............................................... (27,163) (54,325)
Common stock subscribed............................................................ -- 45,000
Common stock subscription receivable............................................... -- (45,000)
Additional paid-in capital (1)..................................................... 14,751,425 14,681,542
Accumulated deficit................................................................ (12,936,862) (7,905,694)
------------- ------------
Total stockholders' equity....................................................... 1,804,820 6,738,826
------------- ------------
Total liabilities and stockholders' equity....................................... $ 4,576,008 $9,631,192
------------- ------------
------------- ------------
</TABLE>
- --------------------------
(1) After giving effect to the 1:6 reverse stock split effected on May 14, 1998.
See Note 10.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Gas and oil revenues.............................................................. $ 664,126 $ 3,176,861
Realized gain (loss) on commodity transactions.................................... (375,410) (814,029)
Unrealized loss on commodity transactions......................................... (128,936) --
Gain on sale of assets............................................................ 452,020 250,437
Operating fees.................................................................... 55,021 213,834
Other revenues.................................................................... 241,788 339,689
------------- -------------
Total revenues.................................................................. 908,609 3,166,792
------------- -------------
Costs and expenses:
Lease operating expense........................................................... 427,240 556,925
Production taxes.................................................................. 24,497 207,969
Transportation and gathering costs................................................ 143,265 368,716
Gas purchases under deferred contract............................................. -- 82,461
Depletion, depreciation and amortization.......................................... 315,880 2,237,648
Impairment of oil and gas properties.............................................. 349,384 51,000
Exploration costs................................................................. 2,258,702 1,317,161
Interest expense.................................................................. 60,942 783,872
Deferred gas contract settlement.................................................. -- 368,960
General and administrative expense................................................ 2,070,812 2,217,099
Delay rentals..................................................................... 211,690 --
------------- -------------
Total costs and expenses........................................................ 5,862,412 8,191,811
------------- -------------
Loss before provision for income taxes.............................................. (4,953,803) (5,025,019)
Benefit (provision) for income taxes................................................ -- --
------------- -------------
Net loss............................................................................ (4,953,803) (5,025,019)
Cumulative preferred stock dividend................................................. 103,153 103,153
------------- -------------
Net loss applicable to common stockholders.......................................... $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
Net loss per common share(1)........................................................ $ (3.07) $ (4.31)
------------- -------------
------------- -------------
Weighted average number of common shares outstanding(1)............................. 1,646,311 1,190,343
</TABLE>
- ------------------------
(1) After giving effect to the 1:6 reverse stock split effected on May 14, 1998.
See Note 10.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A COMMON UNAMORTIZED
PREFERRED STOCK SHARES(1) VALUE OF ADDITIONAL
------------------------ -------------------- WARRANTS PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT ISSUED CAPITAL(1) DEFICIT
----------- ----------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... 85,961 $ 860 843,067 $ 8,431 -- $ 7,909,032 $ (2,854,887)
Issuance of common stock........ -- -- 801,250 8,012 -- 6,657,010 --
Warrant issued for services..... -- -- -- -- $ (82,500) 115,500 --
Cumulative preferred stock
dividend...................... -- -- -- -- -- -- (25,788)
Amortization of warrants........ 28,175
Net loss........................ -- -- -- -- -- -- (5,025,019)
----------- ----- --------- --------- ------------ ----------- ------------
Balance, December 31, 1996...... 85,961 860 1,644,317 16,443 (54,325) 14,681,542 (7,905,694)
----------- ----- --------- --------- ------------ ----------- ------------
Issuance of common stock........ -- -- 11,667 117 -- 69,883 --
Cumulative preferred stock
dividend...................... -- -- -- -- -- -- (77,365)
Amortization of warrants........ -- -- -- -- 27,162 -- --
Net loss........................ -- -- -- -- -- -- (4,953,803)
----------- ----- --------- --------- ------------ ----------- ------------
Balance, December 31, 1997...... 85,961 $ 860 1,655,984 $ 16,560 $ (27,163) $14,751,425 $(12,936,862)
----------- ----- --------- --------- ------------ ----------- ------------
----------- ----- --------- --------- ------------ ----------- ------------
</TABLE>
- ------------------------
(1) After giving effect to the 1:6 reverse stock split effected on May 14, 1998.
See Note 10.
The accommpanying notes are an integral part of these financial statements.
F-5
<PAGE>
ESENJAY EXPLORATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ (4,953,803) $ (5,025,019)
Adjustments to reconcile net loss to net cash (used) in operating activities:
Depletion, depreciation and amortization....................................... 315,880 2,237,648
Impairment of oil and gas properties........................................... 349,384 51,000
Deferred gas contract settlement............................................... -- 368,960
Gain on sale of assets......................................................... (452,020) (250,437)
Gain on settlement of deferred compensation agreement.......................... (25,794) --
Deferred revenues under gas contract........................................... -- (74,400)
Amortization of financing costs and warrants................................... 46,128 710,573
Unrealized loss on commodity transitions....................................... 128,936 --
Exploration costs.............................................................. 2,258,702 1,317,161
Changes in operating assets and liabilities:
Trade and affliliate receivables............................................. 191,882 303,975
Prepaid expenses and other................................................... 198,418 (103,580)
Other assets................................................................. 272,679 (191,791)
Accounts payable............................................................. 186,174 (279,119)
Revenue distribution payable................................................. (292,032) (132,909)
Accrued and other............................................................ (118,936) (2,647)
------------- -------------
Net cash (used) in operating activities........................................ (1,894,402) (1,070,585)
------------- -------------
Cash flows used in investing activities:
Capital expenditures--gas and oil properties..................................... (3,023,253) (3,515,841)
Capital expenditures--other property and equipment............................... (159,679) (203,808)
Proceeds from sale of assets..................................................... 1,002,540 4,671,088
------------- -------------
Net cash provided by (used) in investing activities............................ (2,180,392) 951,439
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of debt................................................... 182,382 4,717,280
Repayments of long-term debt..................................................... (296,303) (3,745,369)
Debt issuance cost............................................................... -- (183,387)
Payment for settlement of deferred gas contract.................................. -- (2,181,489)
Preferred stock dividends paid................................................... (77,365) (25,788)
Net proceeds from issuance of common stock....................................... -- 6,430,647
------------- -------------
Net cash (used) in by financing activities..................................... (191,286) 5,011,894
------------- -------------
Net increase (decrease) in cash and cash equivalents............................... (4,266,080) 4,892,748
Cash and cash equivalents at beginning of year..................................... 4,956,656 63,908
------------- -------------
Cash and cash equivalents at end of year........................................... $ 690,576 $ 4,956,656
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest........................................................... $ 141,356 $ 818,769
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statments.
F-6
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION--The Company's primary business activities include gas
and oil exploration, production and sales, primarily in the Southwestern and
Gulf Coast areas of the United States. The accompanying consolidated financial
statements include the accounts of the Company, and its subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS--The Company considers all investments with a maturity of
three months or less when purchased to be cash equivalents.
GAS AND OIL PROPERTIES--The Company uses the successful efforts method of
accounting for gas and oil exploration and development costs. All costs of
acquired wells, productive exploratory wells, and development wells are
capitalized. Exploratory dry hole costs, geological and geophysical costs, and
lease rentals on non-producing leases are expensed as incurred. Gas and oil
leasehold acquisition costs are capitalized. Costs of unproved properties are
transferred to proved properties when reserves are proved. Gains or losses on
sale of leases and equipment are recorded in income as incurred. Valuation
allowances are provided if the net capitalized costs of gas and oil properties
at the field level exceed their realizable values based on expected future cash
flows. Unproved properties are periodically assessed for impairment and, if
necessary, a loss is recognized by providing an allowance.
The costs of multiple producing properties acquired in a single transaction
are allocated to individual producing properties based on estimates of gas and
oil reserves and future cash flows.
Depletion is provided by the unit of production method based upon reserve
estimates. Depletion, depreciation and amortization includes approximately
$349,384 and $51,000 in 1997 and 1996, respectively, in impairment of gas and
oil properties, due to changes in reserve estimates.
OTHER PROPERTY AND EQUIPMENT--Other property and equipment is carried at
cost. The Company provides for depreciation of other property and equipment
using the straight-line method over the estimated useful lives of the assets,
which range from three to ten years.
Upon sale or retirement of an asset, the cost of the asset disposed of and
the related accumulated depreciation are removed from the accounts, and the
resulting gain or loss is reflected in income.
INCOME TAXES--The Company accounts for income taxes on an asset and
liability method which requires the recognition of deferred tax liabilities and
assets for the tax effects of temporary differences between the financial and
tax bases of assets and liabilities, operating loss carryforwards, and tax
credit carryforwards.
COMMODITY TRANSACTIONS--The Company attempts to minimize the price risk of a
portion of its future oil and gas production with commodity futures contracts.
Gains and losses on these contracts are recognized in the period in which
revenue from the related gas and oil production is recorded or when the
contracts are closed. To the extent that the quantities hedged under the
commodity transaction exceed current production, the Company recognizes gains or
losses on the overhedged amount.
F-7
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CAPITALIZED INTEREST--The Company capitalizes interest costs incurred on
exploration projects. The interest capitalized for the years ended December 31,
1997 and 1996 was approximately $235,977 and $107,000, respectively.
GAS BALANCING--The Company records gas revenue based on the entitlement
method. Under this method, recognition of revenue is based on the Company's
pro-rata share of each well's production. During such time as the Company's
sales of gas exceed its pro-rata ownership in a well, a liability is recorded,
and conversely a receivable is recorded for wells in which the Company's sales
of gas are less than its pro-rata share. At December 31, 1997, the Company's gas
balancing position was approximately 29,244 MCF overproduced.
EXPLORATION COSTS--The Company expenses exploratory dry hole costs,
geological and geophysical costs, and impairment of unproved properties. During
1996, $43,000 of such costs represented geological and geophysical costs
expensed as required under the successful efforts method of accounting. There
were no such costs incurred in 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Statement of Financial Accounting
Standards No. 107. "Disclosures about Fair Value of Financial Instruments"
requires disclosure regarding the fair value of financial instruments for which
it is practical to estimate that value. The carrying amount of cash and cash
equivalents, accounts receivable and accounts payable, approximates fair market
value because of the short maturity of those instruments. The fair value of the
Company's long-term debt is estimated to approximate carrying value based on the
borrowing rates currently available to the Company for bank loans with similar
terms and average maturities.
The Company has interest rate and gas swap agreements that subject it to
off-balance sheet risk. The unrealized losses on these contracts, as disclosed
in the following footnotes, are based on market quotes. These unrealized losses
are not recorded in the consolidated financial statements to the extent the
swaps qualify for hedge accounting.
STOCK-BASED COMPENSATION--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation." SFAS 123 establishes a
fair value method and disclosure standards for stock-based employee compensation
arrangements, such as stock purchase plans and stock options. It also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from non-employees, requiring that such transactions be accounted
for based on fair value. As allowed by SFAS 123, the Company will continue to
follow the provisions of Accounting Principles Board Opinion No. 25 ("APB") for
its stock-based employee compensation arrangements. SFAS 123 requires entities
that elect to continue to measure compensation cost using APB 25 to disclose
proforma information computed as if the fair value based accounting method of
SFAS 123 had been applied for all awards granted after December 15, 1994.
EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share" and Statement of Financial Accounting Standards No. 129
("SFAS 129"), "Disclosure of Information about Capital Structure." SFAS 128
establishes standards for computing and presenting earnings per share ("EPS")
and requires restatement of all prior-period EPS data presented. SFAS 129
establishes standards for disclosing information about an entity's capital
structure. Basic earnings per share has been computed by dividing net income to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income to common
shareholders (as adjusted) by the weighted
F-8
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
average number of common shares outstanding plus dilutive potential common
shares. For the years ended December 31, 1997 and 1996 all potentially diluted
securities are anti-dilutive and therefore are not included in the earnings per
share calculation.
The following table presents information necessary to calculate basic and
diluted earnings per share for periods indicated, with 1996 being restated to
conform with the requirements of the Statement of Financial Accounting Standards
No. 128 Earning Per Share, described below.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
BASIC EARNINGS PER SHARE
Weighted Average Common Shares Outstanding as Restated for the 1:6 Reverse Stock
Split Effected on May 14, 1998 (See Note 10)................................... 1,646,311 1,190,343
Basic (Loss) Per Share, as Restated.............................................. $ (3.07) $ (4.31)
------------- -------------
------------- -------------
EARNINGS FOR BASIC COMPUTATION
Net (Loss)....................................................................... $ (4,953,803) $ (5,025,019)
Preferred Share Dividends........................................................ (103,153) (103,153)
------------- -------------
Net Income (Loss) to Common Shareholders (Basic (Loss) Per Share Computation).... $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
</TABLE>
RECLASSIFICATION--Certain reclassifications have been made to the 1996
financial statements to conform them to the classification used in 1997.
2. GOING CONCERN:
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced a significant decline in operations including declines in ongoing
gas and oil production. These declines have created a significant working
capital deficit and depleted cash reserves. As a result of the declining
positions, the Company has also failed to meet its financial debt covenants
although it has secured a waiver through the earlier of the consummation of the
Acquisitions or June 1998. In the event that the Company is not able to secure
future waivers and the debt is ultimately called, the Company may not be able to
timely meet this demand.
The Company has prepared an operating budget for 1998 which projects a
negative cash flow. Such negative cash flows are expected to further deplete
existing cash balances. The Company has obtained a bridge financing arrangement
from Duke Energy Financial Services, Inc. in connection with the proposed
Acquisitions discussed in Note 10. Such Acquisition was approved by the
Company's stockholders and consummated on May 14, 1998. Nevertheless, if the
Company is unsuccessful in its attempt to secure permanent financing and/or
equity capital, the Company will be required to sell substantial interests in
its exploration projects in order to continue as a going concern. The Company is
actively pursuing various sources of permanent financing and/or equity capital.
3. STOCKHOLDERS' EQUITY:
As a result of the Company's 1:6 reverse stock split effected May 14, 1998,
all numbers of common shares and per share amounts have been restated for all
periods. See Note 10.
F-9
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
Effective November 12, 1993, the Company completed its initial public
offering of 350,000 Units of its securities. Each unit consisted of two (2)
shares of cumulative convertible preferred stock (valued at $10.00 per share),
one-sixth ( 1/6) share of common stock (valued at $24.00) and one-sixth ( 1/6)
warrant ("Series A Warrant") (valued at $0.60). During 1995, the Company offered
to exchange one (1) share of cumulative convertible preferred stock plus all
unpaid and accrued preferred dividends for two-third's ( 2/3) share of common
stock and two (2) Series A Warrants for a limited period. The Company concluded
its offer on May 26, 1995 with a total of 603,939 shares of convertible
preferred stock tendered. As a result of the offering, the Company issued
402,626 shares of Common Stock and 201,313 Series A Warrants. After May 26,
1995, the exchange ratio reverted to the original conversion terms. The Company
reflected the market value of the additional one-third ( 1/3)share of common
stock paid as a one-time premium to induce conversion of the cumulative
convertible preferred stock as an addition to net loss in computing loss
applicable to common shareholders in the amount of $2,415,756. The Company was
relieved of $232,285 of accrued dividends relating to the shares tendered, which
has been offset against the inducement premium. As of December 31, 1997 and
1996, 85,961 shares of cumulative convertible preferred stock were outstanding.
In connection with the debt financing obtained during the first quarter of
1996, the Company, pursuant to an agreement with a financial advisor, agreed to
pay a combination of cash, stock and warrants (See--"Warrants") in consideration
for assisting with obtaining the financing. The Company paid $200,000 in cash
and issued 25,000 shares of the Company's common stock to the advisor on June 6,
1996. These shares have been valued at $234,375, the fair market value at the
date granted.
On August 14, 1996, the Company closed the sale of a public offering of
1,350,000 Units of its securities. Subsequently, the Company sold an additional
over all allotment of 202,500 Units. Each Unit consisted of one-half ( 1/2)
share of Common Stock and one-half ( 1/2) Series B Redeemable Common Stock
Purchase Warrant ("Series B Warrants"). The price for each Unit was $30.375. The
net proceeds, after underwriter's commission and expenses, was approximately
$6,431,000.
CONVERTIBLE PREFERRED STOCK--The Board of Directors of the Company has
adopted a Certificate of Designations creating a series of convertible preferred
stock consisting of 1,000,000 shares, par value $.01 per share, none of which
was outstanding as of December 31, 1997 and 1996. Shares of the convertible
preferred stock may be issued from time to time in one or more series with such
designations, voting powers, if any, preferences, and relative participating,
optional or other special rights, and such qualifications, limitations and
restrictions thereof, as are determined by resolution of the Board of Directors
of the Company. However, the holders of the shares of the convertible preferred
stock will not be entitled to receive liquidation preference of such shares,
until the liquidation preference of any other series or class of the Company's
stock hereafter issued that ranks senior as to liquidation rights to the
cumulative convertible preferred stock has been paid in full.
CUMULATIVE CONVERTIBLE PREFERRED STOCK--Holders of shares of cumulative
convertible preferred stock will be entitled to receive, when and if declared by
the Board of Directors out of funds at the time legally available, cash
dividends at a maximum annual rate of $1.20 per share, payable quarterly,
commencing 90 days after the date of first issuance. Dividends are cumulative
from the date of issuance of the cumulative convertible preferred stock. During
1997 and 1996, $77,365 and $25,788 was declared and paid in cumulative preferred
stock dividends. The Company has undeclared and unpaid dividends in the amount
of $180,518 ($1.50 per share) on its cumulative preferred stock for the period
from May 1, 1995 to
F-10
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
December 31, 1997. The Company is not required to declare and pay such
dividends; however, until such dividends are paid current, the Company is
precluded from paying dividends to its common shareholders.
In the event of any liquidation, dissolution or wind-up of the Company,
holders of shares of cumulative convertible preferred stock are entitled to
receive the liquidation preference of $10.00 per share, plus an amount equal to
any accrued and unpaid dividends to the payment date, before any payment or
distribution is made to the holders of common stock, or any series or class of
the Company's stock hereafter issued, that will rank junior as to liquidation
rights to the cumulative convertible preferred stock.
The holders of cumulative convertible preferred stock will not have voting
rights except as required by law in connection with certain defaults and as
provided to approve certain future actions including any changes in the
provisions of the stock or the issuance of additional shares equal or senior to
the stock. Whenever dividends on the cumulative convertible preferred stock have
not been paid in an aggregate amount equal to at least six quarterly dividends,
the number of directors of the Company will be increased by two and the holders
of preferred stock will be entitled to elect these additional directors.
REDEMPTION--The cumulative convertible preferred stock is redeemable for
cash, in whole or in part, at the option of the Company, at $10.00 per share,
plus any accrued and unpaid dividends, whether or not declared.
OPTIONAL CONVERSION--At any time after the initial issuance of the
cumulative convertible preferred stock and prior to the redemption thereof, the
holders of cumulative convertible preferred stock shall have the right,
exercisable at their option, to convert any or all of such shares into common
stock at the rate of conversion described below. During 1997 no shares of
cumulative convertible preferred stock were converted to common stock under the
original conversion terms. Automatic Conversion--If, at any time after the
initial issuance thereof, the last reported sales price of the cumulative
convertible preferred stock as reported on the NASDAQ System (or the closing
sale price as reported on any national securities exchange on which the
cumulative convertible preferred stock is then listed), shall, for a period of
10 consecutive trading days, exceed $13.00, then, effective as of the closing of
business on the tenth such trading day, all shares of cumulative convertible
preferred stock then outstanding shall immediately and automatically be
converted into shares of common stock and warrants at the rate of conversion
described below.
CONVERSION RATE--The conversion rate for the cumulative convertible
preferred stock (i.e., the number of shares of common stock into which each
share of cumulative convertible preferred stock is convertible) is determined by
dividing the conversion price then in effect by $30.00. The initial conversion
price is $60.00; therefore, the cumulative convertible preferred stock is
initially convertible into common stock and Series A Warrants at the conversion
rate of one-third ( 1/3) share of common stock and one-third ( 1/3) Series A
Warrant for each share of cumulative convertible preferred stock converted.
WARRANTS--Each Series A Warrant issued in the initial public offering and in
the conversion of the cumulative convertible preferred stock entitles the holder
thereof to purchase one-sixth ( 1/6) share of common stock at a price equal to
$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 $1.25 each on
30 days notice. As of December 31, 1997 and 1996, there were 263,013 Series A
Warrants outstanding.
F-11
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
Each Series B Warrant issued in the August 1996 public securities offering
entitles the holder to purchase one-sixth ( 1/6) share of common stock for
$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 $0.06 per Series B Warrant, at any time after the Series B
Warrants become exercisable, upon not less than 30 days notice, if the last sale
price of the common stock has been at least 200% of the then exercise price of
the Series B Warrants for the 20 consecutive trading days ending on the third
day prior to the date on which the notice of redemption is given.
The Company has also issued a common stock warrant to purchase 4,167 shares
of common stock at $24.00 per share in connection with a loan agreement. This
warrant expires five (5) years from the effective date of the Company's initial
public offering. The loan was paid in full in 1993.
The Company and Hi-Chicago Trust agreed to a settlement in December 1995
whereby the Company issued 12,500 shares of common stock and a stock purchase
warrant to purchase up to 50,000 shares of common stock at an exercise price of
$18.00 per share to settle a claim asserted by Hi-Chicago Trust. The warrant is
exercisable through the earlier of 60 months from the settlement date or for a
period of 30 days after the closing bid price of the Company's stock equals or
exceeds $36.00 per share for sixty consecutive trading days. The issued shares
are unregistered.
In 1996, the Company issued to a bank providing financing, a warrant to
purchase up to 41,667 shares of common stock for a period of five years
beginning January 3, 1996, at an exercise price of the highest average of the
daily closing bid prices for thirty (30) consecutive trading days between
January 1, 1996, and June 30, 1996. The Company has recorded the warrants at a
value of approximately $82,500 as unamortized value of warrants issued. The
warrants are being amortized using the interest method with an unamortized
balance of $27,163 at December 31, 1997.
The Company has also issued a warrant to purchase 41,667 shares of the
Company's common stock at $12.00 per share to a financial advisor. The warrant
has a five year term commencing on January 12, 1996 and provides for
anti-dilution protection, registration rights, and permits partial exercise at
the election of the holder by exchanging the warrants with appreciated value
equal to each exercise price in lieu of cash. If additional funds are not
borrowed from the bank, a portion of the warrants will be returned. The Company
has recorded the warrants, which are not subject to return at their fair value
of approximately $33,000. The warrants subject to return will be recorded when
additional funds are borrowed.
On January 15, 1997, the Board of Directors authorized the Company to enter
into an agreement with Riches In Resources, Inc. to perform investor relations
services for the Company on a fee basis through January 15, 1999, and month to
month thereafter, which fee may be paid either in cash or in common stock at the
election of the Company. The Company elected to compensate Riches In Resources,
Inc. partially in cash and partially in stock, therefore Riches In Resources,
Inc. was issued 11,667 shares of common stock during 1997. At December 31, 1997,
the Company had prepaid consultant costs of $17,701 in association with this
transaction.
In the first quarter of 1998, the Company, in connection with a financing
arrangement, issued warrants to purchase 25,000 shares of common stock at an
exercise price of $3.00 per share.
EMPLOYEE OPTION PLAN--1997--The plan authorizes the issuance of up to
115,892 options to purchase one (1) share of common stock. Options to purchase
100,167 shares of common stock at prices ranging from $3.78 to $11.28 are
currently outstanding of which 5,167 expire in June of 1998.
F-12
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
Under the plan, the Board may grant options to officers and other employees
and shall provide for an automatic receipt of options by directors who are not
full time employees. Each option shall consist of an option to purchase one
share of common stock at an exercise price that shall be at least the fair
market value of the Common stock on the date of the grant of the option.
However, the Board may authorize vesting options as it deems necessary; such is
the case of certain officers reissued options under this plan during 1997.
Unless otherwise so designated, the options shall be exercisable at a rate of
33 1/3% on January 1, the year following the effective date of the grant, and
33 1/3% each January 1 thereafter. The Option holder's right is cumulative.
Unless otherwise designated by the Board, if the employment of the Option holder
is terminated for any reason, all unexercised Options shall terminate, be
forfeited and shall lapse within three months thereafter. The options have a
maximum life of ten years from the date of issuance.
STOCK INCENTIVE OPTION PLAN--1996--The 1996 stock incentive option plan was
approved by the Company's stockholders in June, 1996, and 58,333 shares of
common stock were initially reserved for issuance thereunder.
Currently, all options under the plan have expired or have been canceled by
the Board of Directors other than 21,667 options currently outstanding, of which
19,333 expire by June of 1998.
MANAGEMENT INCENTIVE STOCK PLAN
The Plan initially authorized the issuance of up to 40,000 units. Each unit
consists of (i) an option to purchase one (1) share of Common Stock and (ii) a
cash payment ("Stock Appreciation Right" or "SAR") to be made by the Company
when the option is exercised. The value of the SAR is equal to twice the amount
by which the fair market value of the Common Stock on the date of the exercise
of the option exceeds the exercise price. Currently all units have expired or
have been canceled by the Board of Directors other than 8,000 units currently
outstanding, 7,000 of which expire by June 1998.
The following table summarizes activity under the Company's stock option
plans for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
EMPLOYEE
INCENTIVE MANAGEMENT STOCK INCENTIVE OPTION
STOCK OPTION PLAN INCENTIVE STOCK PLAN OPTION PLAN--1997 PLAN--1997
------------------------ ------------------------ ------------------------ -----------
1997 1996 1997 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares available for grant.... -- 30,000 -- 20,000 1,333 58,533 115,892
Shares under option at end of
period...................... -- 30,000 8,000 18,667 20,333 57,000 100,167
Option price per share........ -- $ 10.074 $12.00-21.00 $12.00-21.00 $8.82-12.75 $8.82-12.75 $3.78-11.28
Shares exerciseable at end of
period...................... -- 26,000 8,000 17,000 6,778 -- 90,667
Sales exercised during the
period...................... -- -- -- -- -- -- --
Sales canceled................ 30,000 -- 10,667 17,000 36,667 --
Weighted option price......... -- $ 10.074 $ 18.12 $ 18.54 $ 10.02 $ 9.414 $ 4.20
</TABLE>
STOCK OPTION PLANS--The Company has three fixed option plans which reserve
shares of common stock for issuance to executives, key employees and directors.
The Company has adopted the disclosure-only
F-13
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation". Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
three stock option plans been determined based on fair value at the grant date
for awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net loss applicable to common stockholders and net loss per common and
common equivalent share would have been the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net loss applicable to common stockholders--as reported............................ $ (5,056,956) $ (5,128,172)
------------- -------------
------------- -------------
Net loss applicable to common stockholders--pro forma.............................. $ (5,679,620) $ (5,296,335)
------------- -------------
------------- -------------
Net loss per common share--as reported............................................. $ (3.07) $ (4.32)
------------- -------------
------------- -------------
Net loss per common share--pro forma............................................... $ (3.42) $ (4.44)
------------- -------------
------------- -------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividends; expected volatility of 60%; risk-free interest rate
of 5.71% and 6.50% in 1997 and 1996, respectively; and expected lives of five
(5) years.
OPTION REPRICINGS
In the last quarter of 1997, the Company determined to attempt to consummate
a significant corporate transaction in order to satisfy the Company's need for
additional capital resources. In connection with pursuing such a transaction,
Mr. Berry and Mr. Christofferson entered into Incentive Agreements and Contract
Settlement Agreements with the Company pursuant to which each of Mr. Berry and
Mr. Christofferson are entitled to receive certain Incentive Payments and
Contract Settlement Payments upon the consummation of such a transaction. Their
existing employment agreements will terminate upon the consummation of a
significant corporate transaction.
In negotiating the terms of the Incentive Agreements and Contract Settlement
Agreements, Mr. Berry and Mr. Christofferson determined that their existing
stock options would expire 90 days after their termination of employment. The
Compensation Committee of the Board of Directors which was comprised of Messrs.
Sweeny and Elliott, each of whom was an outside director, recognized that the
expiration of those options would result in a disincentive for Mr. Berry and Mr.
Christofferson to help the Company pursue a significant corporate transaction.
Therefore, the Compensation Committee determined that Mr. Berry's and Mr.
Christofferson's existing stock options should be canceled and replaced with new
stock options that would terminate not sooner than the date their old options
would have expired if their employment with the Company was not terminated. As
an added incentive, the Compensation Committee determined to reprice Mr. Berry's
and Mr. Christofferson's options so they could more readily benefit from any
upturn in the Company's Common Stock trading price upon the consummation of a
significant corporate transaction.
When determining the price at which Mr. Berry's and Mr. Christofferson's new
options would be exercisable, the Compensation Committee took the average
closing price of the Company's Common Stock on the Nasdaq Small-Cap Market over
the 20 day trading period immediately preceding the option
F-14
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
reprice date, and multiplied such average trading price by 65%. The Compensation
Committee believed that the discount to the average trading price was
appropriate because the shares of Common Stock issuable upon exercise of the
repriced options would not be freely tradeable and the discount was appropriate
to reflect the actual fair market value of the illiquid shares that would be
received upon the exercise of the new options.
The following table sets forth certain information with respect to
replacement stock options granted to Mr. Berry and Mr. Christofferson during the
year ended December 31, 1997, which are also reported above under "--Option
Grants."
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES OF LENGTH OF ORIGINAL
UNDERLYING MARKET PRICE OF EXERCISE OPTION TERM
OPTIONS/SARS STOCK AT TIME OF PRICE AT TIME NEW REMAINING AT DATE
REPRICED OR REPRICING OR OF REPRICING EXERCISE OF REPRICING OR
NAME DATE AMENDED AMENDMENT OR AMENDMENT PRICE AMENDMENT (MONTHS)
- ----------------------------------- --------- ------------- ----------------- ------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
David W. Berry..................... 12/3/97 20,000(1) $ 5.82 $ 9.72 $ 3.78 102
President and 12/3/97 4,000(2) $ 5.82 $ 18.60 $ 3.78 69
Chief Executive Officer
David B. Christofferson............ 12/3/97 30,000(3) $ 5.82 $ 10.08 $ 3.78 62
Executive Vice 12/3/97 4,000(2) $ 5.82 $ 18.60 $ 3.78 69
President, General 12/3/97 16,667(1) $ 5.82 $ 8.82 $ 3.78 102
Counsel and Secretary
</TABLE>
- ------------------------
(1) Consists of options to purchase shares of Common Stock pursuant to the Stock
Incentive Option Plan--1996.
(2) Consists of units, each of which included an option to purchase one (1)
share of Common Stock and a stock appreciation right ("SAR") equal to two
times the difference between the exercise price of the option and the market
value of the SAR at the date of exercise, so that one (1) unit had the value
of three (3) options, all issued pursuant to the Management Incentive Option
Plan.
(3) Consists of options to purchase 30,000 shares of Common Stock pursuant to
the Company's 1993 Incentive Stock Option Plan.
4. SALE OF GAS AND OIL ASSETS AND SEISMIC DATA:
On September 27, 1996, the Company sold its N.E. Cedardale field located in
Major County, Oklahoma to OXY USA Inc., for consideration totaling $3,550,000
which included cash of $2,840,000 and certain exchange properties which were
concurrently sold to a third party for $710,000. The sale was effective
September 1, 1996 and the Company incurred a loss of $10,523. The properties
sold represented a substantial portion of the Company's production. In
connection with the sale, the Company recorded a loss of $212,000 resulting from
the reduction in the quantity of gas covered by a swap agreement. The Company
sold various other properties in a number of different transactions during 1997
and 1996. These sales resulted in an aggregate gain of approximately $485,813
and $272,000 for 1997 and 1996, respectively.
F-15
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GAS SALE AGREEMENT:
Effective December 1, 1991, the Company entered into a Gas Sale Agreement to
deliver gas to an end-user over a specified period of time in the future.
The Company was committed to deliver 7,100,000 MMBTU of gas to the purchaser
over a period of seven years beginning December 1, 1991. The Company was allowed
to deliver gas to satisfy the commitment from its own reserves or from
purchasing gas on the open market. The Company delivered 44% from purchases on
the open market for the year ended December 31, 1996 as follows:
<TABLE>
<CAPTION>
FOR YEAR ENDED
DECEMBER 31,
1996 (MMBTU)
---------------
<S> <C>
Gas purchased on open market.................................................. 43,783
Gas delivered from Company reserves........................................... 55,417
------
Total deliveries.............................................................. 99,200
------
------
</TABLE>
The purchase price under the contract was fixed at $1.50 per MMBTU over the
life of the contract. The contract required the prepayment by the purchaser of
$0.75 per MMBTU for the remaining contract obligations. On January 5, 1996, the
Company entered into an agreement with the end user to terminate the Gas Sales
Agreement as of January 31, 1996. The Company paid the end user $2,181,489 which
represents a return of its $.75 advance on 2,490,103 MMBTU of gas plus a
settlement payment of $313,912.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Note payable pursuant to a credit agreement with a bank of $293,888 and $493,888 ended
December 31, 1997 and 1996 respectively, interest at LIBOR rate (reserve adjusted),
plus one and seven-eighths percent (1.875%) (7.25% at December 31, 1997 and 1996),
payable in monthly installments, due in various monthly amounts through December,
1998, collateralized by producing oil and gas properties; net of discount of $18,966
and $37,931 ending December 31, 1997 and 1996 respectively.......................... $ 274,922 $ 455,956
Non-recourse loan, payable out of an 8% ORRI on the Starboard Prospect, interest
accrued at 15%...................................................................... 864,000 681,618
Note payable to bank, interest at 7.49% to 12.5%, payable in monthly installments, due
in various amounts through 2001, collateralized by other property and equipment..... 48,843 73,978
Note payable, interest at 12%, payable monthly, principal due December 31, 1997....... 100,000 100,000
------------ ------------
1,287,765 1,311,552
Less current portion.................................................................. 401,085 304,540
------------ ------------
$ 886,680 $ 1,007,012
------------ ------------
------------ ------------
</TABLE>
F-16
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
Maturities of long-term debt (excluding non-recourse debt, which is solely
dependent upon the successful development and future production, if any, of the
Starboard Prospect) are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
YEAR 1997
- ------------------------------------------------------------------- ---------------
<S> <C>
1998............................................................... $ 401,085
1999............................................................... 16,459
2000............................................................... 6,221
2001............................................................... --
2002............................................................... --
</TABLE>
On January 3, 1996, the Company entered into a $15,000,000 credit agreement
with a bank. The agreement provided for the immediate funding of $4,000,000
which was used to terminate the Gas Sales Agreement and repay the deferred gas
revenues incurred under the Gas Sales Agreement, payoff the note payable to a
bank due August 1, 1996, pay the bank fees related to the financing with the
remainder being used to pay current liabilities.
The remaining funds are to be available for specified future drilling and
acquisition activities of the Company subject to the approval of the bank. The
Company repaid a substantial portion of this borrowing with proceeds from the
sale of its N.E. Cedardale properties in September of 1996. Due to this early
repayment of borrowings, the Company reduced debt issuance costs by $293,000 and
discount on notes payable by $207,000 and recorded these amounts as interest
expense. The loan is secured by a mortgage on all of the Company's significant
producing properties. As part of the credit agreement, the Company is subject to
certain covenants and restrictions, among which are the limitations on
additional borrowing, and sales of significant properties, working capital,
cash, and net worth maintenance requirements and a minimum debt to net worth
ratio. As additional consideration for the loan, the Company assigned the bank
an overriding royalty interest in the mortgaged properties. The required
covenants during 1997 are as follows:
<TABLE>
<CAPTION>
COVENANT, AS DEFINED
- --------------------------------------------------------------------------------
<S> <C>
Tangible Net Worth.............................................................. $ 5,000,000
Current Ratio................................................................... 1.1 : 1.0
Debt to Capitalization.......................................................... 0.6 : 1.0
Cash Flow Ratio................................................................. 3.0 : 1.0
Cash on Hand.................................................................... $ 200,000
Working Capital................................................................. $ 400,000
</TABLE>
The Company does not believe it will be able to comply with certain of the
covenants. The Company has obtained a waiver of the covenant through June 30,
1998. Management believes that the Company will require an additional waiver or
waivers during 1998.
In addition, the Company has entered into an interest rate swap guaranteeing
a fixed interest rate of 8.28% on the loan, and the Company will pay fees of
one-eighth of 1% (.0125%) on the unused portion of the commitment amount. The
unrealized loss on the interest rate swap agreement was $28,000 at December 31,
1996. At December 31, 1997 the unrealized loss was $21,910.
F-17
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
On March 12, 1996, the Company completed a financial package with a group
funded by a public utility to evaluate and develop a project in Terrebonne
Parish, Louisiana. This group will participate in 48% of all costs of evaluation
and development of the project area and provide a non-recourse loan to fund the
Company's 48% share of the leasehold and seismic evaluation costs of the
project. The loan is secured by a mortgage on the Company's interest in the
project. As of December 31, 1997, the Company has received advances aggregating
$864,000 on the non-recourse loan. The non-recourse loan will be paid solely by
the assignment on an 8% overriding royalty interest in the future revenues of
the financed project. Future funding will be provided as costs are incurred.
7. INCOME TAXES:
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net operating tax loss carryforward............................. $ 4,332,710 $ 3,494,442
Property and equipment.......................................... (2,936,284) (1,942,813)
Employee benefits............................................... -- 76,032
Valuation allowance............................................. (3,254,886) (1,627,661)
------------- -------------
Net deferred tax asset (liability)............................ $ -- $ --
------------- -------------
------------- -------------
</TABLE>
The Company has recorded a deferred tax valuation allowance since, based on
an assessment of all available historical evidence, it is more likely than not
that future taxable income will not be sufficient to realize the tax benefit.
The Company and its subsidiaries have estimated net operating loss carryforwards
("NOLs") at December 31, 1997, of approximately $12,743,267, which may be used
to offset future taxable income. The operating loss carryforwards expire in the
tax years 2006 through 2012.
The ability of the Company to utilize NOLs and tax credit carryforwards to
reduce future federal income taxes of the Company may be subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
One such limitation is contained in Section 382 of the Code which imposes an
annual limitation on the amount of a corporation's taxable income that can be
offset by those carryforwards in the event of a substantial change in ownership
as defined in Section 382 ("Ownership Change"). In general, Ownership Change
occurs if during a specified three-year period there are capital stock
transactions, which result in an aggregate change of more than 50% in the
beneficial ownership of the stock of the Company. The Company may have incurred
such an Ownership Change.
8. RELATED PARTY TRANSACTIONS:
The Company made advances to officers and affiliates of the Company during
1997 and 1996 of $48,380 and $51,143, respectively, and received repayments of
$99,216 and $18,741, respectively. The December 31, 1997 and 1996 receivables
include approximately $47,787, from an affiliated partnership for which the
Company serves as the managing general partner. During 1996, as a result of the
Company's relocation, the Company purchased the homes of two officers for a
total aggregate cost of approximately $369,000. The houses were sold for a total
aggregate sales price of approximately $354,000 and the net amount realized by
the Company was approximately $324,000.
F-18
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under lease agreements, which are classified
as operating leases. Lease expense under these agreements was $112,432 in 1997
and $106,440 in 1996. A summary of future minimum rentals on these
non-cancelable operating leases is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
YEAR 1997
- ------------------------------------------------------------------- ---------------
<S> <C>
1998............................................................... $ 117,068
1999............................................................... $ 117,068
2000............................................................... $ 117,068
2001............................................................... $ 78,045
</TABLE>
The Company has entered into employment agreements with two officers. Two of
these agreements expire December 31, 1999 (and automatically renew for
additional one-year terms each December 31 unless specifically terminated by
either the Company or individual). The Company has entered into an incentive
agreement and a contract settlement agreement with two officers. Their
employment agreements with the Company will be terminated upon the closing of
the Acquisitions.
Pursuant to the incentive agreements and contract settlement agreements, in
the event the Acquisitions are closed, or in the event there is another
transaction which results in a change of control of the Company, it will pay
incentive payments totaling $246,000, as well as contract settlement payments
totaling $246,000. Each of the incentive payments and the contract settlement
payments may be paid in the form of promissory notes due not later than
September 30, 1998.
The Company is party to various lawsuits arising in the normal course of
business. Management believes the ultimate outcome of these matters will not
have a material effect on the Company's consolidated financial position, results
of operations, and net cash flows.
Pursuant to the credit agreement with the bank, the Company entered into a
natural gas swap agreement on 62,500 MMBTU of natural gas per month at $1.566
per MMBTU for Mid-Continent gas for the period from April 1, 1996 through
January 31, 1999. The swap was amended to 31,250 MMBTU on September 25, 1996,
due to the sale of the N.E. Cedardale field. The Company recorded a loss of
$212,000 in connection with this reduction in quantities covered by the swap
agreement. Currently the Company's monthly natural gas production is
substantially less than the natural gas swap that is in place. The total
unrealized loss on the amended swap agreement was $128,936 at December 31, 1997.
The Company has a hedge in place, which limits the potential cost per MMBTU it
may have to settle at a price of $3.13 per MMBTU, for 31,250 MMBTU per month in
January and February 1998.
10. SUBSEQUENT EVENT
On January 19, 1998, the Company entered into the Acquisition Agreement with
EPC and Aspect. Pursuant to the terms and conditions of the Acquisition
Agreement and subject to approval by the Company's shareholders the Company will
purchase from EPC (the "EPC Assets") and Aspect (the "Aspect Assets") certain
undeveloped oil and gas exploration projects in the onshore Gulf Coast area (the
"Acquisitions"). The Company will issue up to 5,165,985 shares of Common Stock
to EPC in exchange for the EPC Assets, and will issue up to 4,941,440 shares of
Common Stock to Aspect or its assigns in exchange for the Aspect Assets. As part
of the Acquisition, the Company intends to redeem its Cumulative Committee
Preferred Stock at its redemption price of $10.00 per share plus all accrued and
unpaid dividends.
F-19
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENT (CONTINUED)
In conjunction with the Acquisition Agreement, Aspect committed to lend the
Company up to $1,800,000, and in January and February advanced $500,000 on said
credit facility. The facility was repaid by the Company on February 23, 1998,
when the Company entered into a $7,800,000 credit agreement with Duke Energy
Financial Services, Inc. Said new credit facility provides for up to $4,800,000
prior to closing of the Acquisitions, $1,800,000 of which can be used directly
by the Company and $3,000,000 to be utilized solely to loan to EPC to pay
exploratory costs incurred on the EPC Assets after the effective date of the
Acquisitions and prior to closing thereof. An additional $3,000,000 will be
available to the Company after closing of the Acquisitions to pay additional
exploratory costs. The credit facility bears interest at a national prime rate
plus 4%. In addition, the lender will be paid cash payments equal to an
overriding royalty of 0.6% of production attributable to the Company's interest
in wells drilled by the Company while the credit facility is outstanding. The
lender also has a right to gather, process, transport and market, at competitive
market rates, natural gas produced from a majority of the projects the Company
intends to acquire pursuant to the Acquisitions. The facility is secured by
mortgages on most of the Company's undeveloped exploration projects. The assets
to be acquired in the acquisition will be subject to such mortgages. The
facility is repayable in eleven monthly payments equal to 1/30 of the principal
plus interest, plus a final monthly payment of all remaining principal plus
interest commencing August 31, 1998, or sooner in the event the Company sells
interests in the collateral or closes any underwritten public offering of
securities.
On May 14, 1998 a Special Meeting of Stockholders of the Company was held
pursuant to a solicitation of proxy mailed on or about April 24, 1998 to all the
stockholders of record as of the close of business on April 1, 1998. The
stockholders approved and ratified the following:
<TABLE>
<S> <C>
(i) the approval of the Acquisitions;
(ii) the approval of a 1:6 reverse split of the presently outstanding Common Stock;
(iii) the approval of the reincorporation of the Company in the state of Delaware and a
change in the Company's name to Esenjay Exploration, Inc.; and
(iv) the election of seven directors.
</TABLE>
As a result of the above stockholder actions, the Acquisitions were closed,
the Company's preferred stock was called for redemption and the reverse split,
reincorporation and name change were effected. Accordingly, all numbers of
common shares and per share calculations have been restated to reflect the 1:6
reverse stock split.
The Acquisition Agreement calls for the Company to issue up to 5,165,260
shares of Common Stock after giving effect to the reverse split to EPC in
exchange for undeveloped oil and gas prospects and to issue up to 4,941,440
shares of Common Stock after giving effect to the reverse split to Aspect and
its assigns for the Aspect assets. The combined assets of Aspect and EPC have a
historical full cost basis of $19.9 million and a fair market value of
$54,200,000. In addition, after the effective date and prior to the date of
closing, EPC incurred approximately $3,800,000 in exploration and development
costs associated with the prospects and Aspect incurred approximated $3,955,000
in such costs, all of which incurred costs are for the account of the Company.
F-20
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED):
The Company's proved gas and oil reserves are located in the United States.
Proved reserves are those quantities of natural gas and crude oil which, upon
analysis of geological and engineering data, demonstrate with reasonable
certainty to be recoverable in the future from known gas and oil reservoirs
under existing economic and operating conditions (i.e. price and costs as of the
date the estimate is made). Proved developed (producing and non-producing)
reserves are those proved reserves which can be expected to be recovered through
existing wells with existing equipment and operating methods. Proved undeveloped
gas and oil reserves are reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation.
FINANCIAL DATA
The Company's gas and oil producing activities represent substantially all
of the business activities of the Company. The following costs include all such
costs incurred during each period, except for depreciation and amortization of
costs capitalized:
COSTS INCURRED IN GAS AND OIL EXPLORATION AND PRODUCTION ACTIVITIES:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Acquisition of properties
Proved.................................................................... $ 765,678 $ 1,305,219
Unproved.................................................................. 242,205 644,323
Exploration costs........................................................... 1,861,432 182,147
Development costs........................................................... 153,938 313,152
------------ ------------
Total costs incurred.................................................... $ 3,023,253 $ 2,444,841
------------ ------------
------------ ------------
</TABLE>
CAPITALIZED COSTS:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
Proved and unproved properties being amortized............................. $ 1,181,811 $ 4,681,518
Unproved properties not being amortized.................................... 2,054,037 598,596
Less accumulated amortization.............................................. (438,044) (2,277,984)
------------ -------------
Net capitalized costs.................................................. $ 2,797,804 $ 3,002,130
------------ -------------
------------ -------------
</TABLE>
ESTIMATED QUANTITIES OF PROVED GAS AND OIL RESERVES:
The estimates of proved producing reserves were estimated. Proved reserves
cannot be measured exactly because the estimation of reserves involves numerous
judgmental and arbitrary determinations.
F-21
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
Accordingly, reserve estimates must be continually revised as a result of new
information obtained from drilling and production history or as a result of
changes in economic conditions.
<TABLE>
<CAPTION>
CRUDE OIL, CONDENSATE
AND NATURAL GAS
LIQUIDS (BARRELS)
NATURAL GAS (MCF) ---------------------
--------------------------
YEARS ENDED DECEMBER
YEARS ENDED DECEMBER 31, 31,
-------------------------- ---------------------
1997 1996 1997 1996
----------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of period......................................... 8,901,555 18,564,141 183,735 279,501
Purchases of minerals-in-place.............................. -- 2,615,187 -- 84,096
Sales of minerals-in-place.................................. (159,528) (10,092,754) (3,857) (187,006)
Revisions of previous estimates............................. (3,129,076) (791,059) (59,121) 8,534
Extensions, discoveries and other additions................. 8,715 12,056 928 7,886
Production.................................................. (121,304) (1,406,016) (7,286) (9,276)
----------- ------------- --------- ----------
End of period............................................... 5,500,363 8,901,555 114,399 183,735
----------- ------------- --------- ----------
----------- ------------- --------- ----------
Proved developed reserves:
Beginning of period......................................... 985,524 7,307,717 46,420 72,515
----------- ------------- --------- ----------
----------- ------------- --------- ----------
End of period............................................... 521,345 985,524 24,358 46,420
----------- ------------- --------- ----------
----------- ------------- --------- ----------
</TABLE>
Reserves of wells, which have performance history, were estimated through
analysis of production trends and other appropriate performance relationships.
Where production and reservoir data were limited, the volumetric method was used
and it is more susceptible to subsequent revisions.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS:
The standardized measure of discounted future net cash flows is based on
criteria established by Financial Accounting Standards Board Statement No. 69,
"Accounting for Oil and Gas Producing Activities" and is not intended to be a
"best estimate" of the fair value of the Company's oil and gas properties. For
this to be the case, forecasts of future economic conditions, varying price and
cost estimates, varying discount rates and consideration of other than proved
reserves (i.e., probable reserves) would have to be incorporated into the
valuations.
Future net cash inflows are based on the future production of proved
reserves of natural gas, natural gas liquids, crude oil and condensate as
estimated by petroleum engineers by applying current prices of gas and oil (with
consideration of price changes only to the extent fixed and determinable and
with consideration of the timing of gas sales under existing contracts or spot
market sales) to estimated future production of proved reserves. Average year
end prices used in determining future cash inflows for natural gas and oil for
the periods ended December 31, 1997 and 1996 were as follows: 1997--$2.46 per
MCF--Gas, $15.70 per barrel--Oil; 1996--$4.13 per MCF--Gas, $24.42 per
barrel--Oil, respectively. Future net cash flows are then calculated by reducing
such estimated cash inflows by the estimated future expenditures (based on
current costs) to be incurred in developing and producing the proved reserves
and by the estimated future income taxes. Estimated future income taxes are
computed by applying the appropriate year-end tax rate to the future pretax net
cash flows relating to the Company's estimated proved oil and gas reserves. The
estimated future income taxes give effect to permanent differences and tax
credits and allowances.
F-22
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL GAS AND OIL INFORMATION (UNAUDITED): (CONTINUED)
The following table sets forth the Company's estimated standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Future cash inflows................................................................ $ 15,752,040 $ 41,251,837
Future development and production costs............................................ (7,468,887) (8,288,416)
Future income tax expenses......................................................... (365,224) (6,628,489)
------------- -------------
Future net cash flows.............................................................. 7,917,929 26,334,932
Discount........................................................................... (4,019,429) (9,576,388)
------------- -------------
Standardized measure of discounted future net cash flows........................... $ 3,898,500 $ 16,758,544
------------- -------------
------------- -------------
</TABLE>
The following table sets forth changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Standardized measure of discounted future cash flows--beginning of period......... $ 16,758,544 $ 16,404,620
Sales of oil and gas produced, net of operating expenses.......................... (312,198) (1,977,577)
Net changes in sales prices and production costs.................................. (10,601,580) 7,177,867
Extensions, discoveries and improved recovery, less related costs................. 30,952 187,877
Change in future development costs................................................ (433,134) (17,400)
Previously estimated development costs incurred during the year................... 162,610 115,440
Revisions of previous quantity estimates.......................................... (4,973,603) (1,940,104)
Accretion of discount............................................................. 2,169,632 2,004,973
Net change of income taxes........................................................ 4,810,619 (1,292,670)
Purchases of minerals-in-place.................................................... -- 7,787,886
Sales of minerals-in-place........................................................ (371,728) (11,270,558)
Changes in production rates (timing) and other.................................... (3,341,614) (421,810)
-------------- --------------
Standardized measure of discounted future cash flows--end of period............... $ 3,898,500 $ 16,758,544
-------------- --------------
-------------- --------------
</TABLE>
F-23
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1998
-------------
<S> <C>
Current assets:
Cash and cash equivalents........................................................................ $ 188,495
Accounts receivable, net of allowance for doubtful accounts of $7,915 at March 31, 1998.......... 176,507
Prepaid expenses and other....................................................................... 141,074
Current portion notes receivable from EPC........................................................ 466,664
Receivables from affiliates...................................................................... 97,765
-------------
Total current assets........................................................................... 1,070,505
Property and equipment:
Gas and oil properties, at cost-successful efforts method of accounting.......................... 3,635,538
Other property and equipment..................................................................... 1,151,592
-------------
4,787,130
Less accumulated depletion, depreciation and amortization........................................ (1,295,435)
-------------
3,491,695
Other assets....................................................................................... 513,856
Notes receivable from EPC.......................................................................... 1,283,336
-------------
Total assets................................................................................... $ 6,359,392
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................. $ 824,440
Revenue distribution payable..................................................................... 74,325
Current portion of long-term debt................................................................ 988,360
Accrued and other liabilities.................................................................... 331,964
-------------
Total current liabilities...................................................................... 2,219,089
Long-term debt..................................................................................... 1,846,165
Non-recourse debt.................................................................................. 864,000
Accrued interest on non-recourse debt.............................................................. 227,114
Other long-term liabilities........................................................................ --
-------------
Total liabilities.............................................................................. 5,156,368
Commitments and contingencies
Stockholders' equity:
Cumulative convertible preferred stock $.01 par value, 5,000,000 shares authorized; 85,961 shares
issued and outstanding at March 31, 1998 ($859,610 aggregate liquidation preference at March
31, 1998....................................................................................... 860
Common Stock:
Class A common stock, $.01 par value, 40,000,000 shares authorized; 1,655,984 outstanding at
March 31, 1998(1)............................................................................. 16,560
Unamortized value of warrants issued............................................................. (20,371)
Additional paid-in capital (1)................................................................... 14,751,425
Accumulated Deficit.............................................................................. (13,545,450)
-------------
Total stockholders' equity..................................................................... 1,203,024
-------------
Total liabilities and stockholders' equity..................................................... $ 6,359,392
-------------
-------------
</TABLE>
- ------------------------
(1) After giving effect to the 1:6 reverse stock split effected on May 14, 1998.
See Note 6.
The accompanying notes are an integral part of these financial statements
F-24
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
----------- -------------
<S> <C> <C>
Revenues:
Gas and oil revenues................................................................ $ 48,503 $ 327,435
Realized gain (loss) on commodity transactions...................................... (47,875) (121,937)
Unrealized loss on commodity transactions........................................... (51,011) --
Gain on sale of assets.............................................................. 2,875 132,035
Operating fees...................................................................... 6,992 14,234
Other revenues...................................................................... 23,930 53,880
----------- -------------
Total revenues.................................................................... (16,586) 405,647
----------- -------------
Costs and expenses:
Lease operating expense............................................................. 69,773 96,698
Production taxes.................................................................... (1,090) 8,784
Transportation and gathering costs.................................................. 639 90,394
Depletion, depreciation and amortization............................................ 53,568 132,774
Exploration costs................................................................... 3,560 852,626
Interest expense.................................................................... 19,223 4,133
General and administrative expense.................................................. 459,014 572,260
Delay rentals....................................................................... (12,685) --
----------- -------------
Total costs and expenses.......................................................... 592,002 1,757,669
----------- -------------
Loss before provision for income taxes................................................ (608,588) (1,352,022)
Benefit (provision) for income taxes.................................................. -- --
----------- -------------
Net loss.............................................................................. (608,588) (1,352,022)
Cumulative preferred stock dividend................................................... 25,788 25,788
----------- -------------
Net loss applicable to common stockholders............................................ $ (634,376) $ (1,377,810)
----------- -------------
----------- -------------
Net loss per share(1)................................................................. $ (0.38) $ (1.16)
----------- -------------
----------- -------------
Weighted average number of common shares outstanding(1)............................... 1,655,984 1,644,317
</TABLE>
- ------------------------
(1) After giving effect to the 1:6 reverse stock split effected May 14, 1998.
See Note 6.
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
ESENJAY EXPLORATION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................. $ (608,588) $(1,352,022)
Adjustments to reconcile net loss to net cash (used) in operating activities:
Depletion, depreciation and amortization............................................ 53,568 132,774
Impairment of oil and gas properties................................................ -- --
Gain on sale of assets.............................................................. (2,875) (132,035)
Amortization of financing costs and warrants........................................ 21,564 30,343
Unrealized loss on commodity transactions........................................... 51,011 --
Exploration costs................................................................... 3,560 852,626
Changes in operating assets and liabilities
Trade and affiliate receivables................................................... 52,763 (23,282)
Prepaid expenses and other........................................................ 108,254 170,295
Other assets...................................................................... (359,188) (1,028)
Accounts payable.................................................................. (86,956) (11,760)
Revenue distribution payable...................................................... 6,194 (173,684)
Accrued and other................................................................. 4,171 (158,993)
---------- -----------
Net cash (used) in operating activities........................................... (756,522) (348,280)
---------- -----------
Cash flows used in investing activities:
Capital expenditures--gas and oil properties.......................................... (403,250) (1,330,312)
Capital expenditures--other property and equipment.................................... (13,328) (73,646)
Notes receivable from EPC............................................................. (1,750,000) --
Proceeds from sale of assets.......................................................... 15,000 540,568
---------- -----------
Net cash provided by (used) in investing activities................................. (2,151,578) (863,390)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt........................................................ 3,000,000 225,534
Repayments of long-term debt.......................................................... (593,981) (74,443)
Debt issuance costs................................................................... -- --
Preferred stock dividends paid........................................................ -- (25,788)
---------- -----------
Net cash provided by (used) in financing activities................................. 2,406,019 125,303
---------- -----------
Net increase (decrease) in cash and cash equivalents.................................. (502,081) (1,086,867)
Cash and cash equivalents at beginning of period........................................ 690,576 4,956,686
---------- -----------
Cash and cash equivalents at end of period.............................................. $ 188,495 $ 3,869,789
---------- -----------
---------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest................................................................ $ 98,325 $ 34,157
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying unaudited condensed consolidated financial statements of
Esenjay Exploration, Inc. and its subsidiaries (the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Interim results are not necessarily indicative of results
for a full year.
A summary of the Company's significant accounting policies is presented on
pages 30 and 31 of its 1997 Form 10KSB/A filed with the SEC. Users of financial
information are encouraged to refer to the footnotes contained therein when
reviewing interim financial results. There have been no material changes in the
accounting policies followed by the Company during 1998.
The accompanying interim financial statements contain all the material
adjustments, which are in the opinion of management, consistent with the
adjustments necessary to present the fairly stated consolidated financial
position, results of operations, cash flows and stockholder's equity of the
Company for the interim period. Certain prior period amounts have been
reclassified to conform with the current period presentation.
2. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
1998
------------
<S> <C>
Note payable pursuant to a credit agreement with a bank of $218,888 at March 31, 1998 interest at
LIBOR rate (reserve adjusted), plus one and seven-eights percent (1.875%)(7.25% at March 31,
1998), payable in monthly installments, due in various monthly amounts through December 1998,
collateralized by producing oil and gas properties, net of discount of $14,224 at March 31,
1998.............................................................................................. $ 204,664
Non-recourse loan, payable out of an 8% ORRI on the Starboard Prospect, interest accrued at 15%..... 864,000
Notes payable to bank, interest at 7.49% to 12.5%, payable in monthly installments, due in various
amounts through 2001, collateralized by other property and equipment.............................. 29,861
Note payable, interest at 12%, payable monthly, principal due December 31, 1997..................... 100,000
Note payable pursuant to a credit agreement with an energy lending institution, $2,500,000 at March
31, 1998, interest at prime rate plus 4% payable monthly, principal due in eleven monthly
installments commencing August 31, 1998........................................................... 2,500,000
------------
3,698,525
Less current portion................................................................................ 988,360
------------
$ 2,710,165
------------
------------
</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 will be
available for specified future drilling and
F-27
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. LONG-TERM DEBT: (CONTINUED)
acquisition activities of the Company subject to the approval of the bank. The
Company repaid a substantial portion of this borrowing with proceeds from the
sale of its N.E. Cederdale properties in September of 1996. Due to this early
repayment of borrowings, the Company reduced debt issuance costs by $293,000 and
discount on notes payable by $207,000 and recorded these amounts as interest
expense. The loan is secured by a mortgage on all of the Company's significant
producing properties. As part of the credit agreement, the Company is subject to
certain covenants and restriction, among which are the limitations on additional
borrowing, and sales of significant properties, working capital, cash, and net
worth maintenance requirements and minimum debt to net worth ratio. As
additional consideration for the loan, the Company assigned the bank an
overriding royalty interest in the mortgaged properties. The required covenants
during 1998 are as follows:
<TABLE>
<CAPTION>
COVENANT AS DEFINED
- --------------------------------------------------------------------------------
<S> <C>
Tangible Net Worth.............................................................. $ 5,000,000
Current Ratio................................................................... 1,1:1,0
Debt to Capitalization.......................................................... 0.6:1.0
Cash Flow Ratio................................................................. 3.0:1.0
Cash on Hand.................................................................... $ 200,000
Working Capital................................................................. $ 400,000
</TABLE>
The Company has not been able and, does not believe it will be able, to
comply with certain of the covenants. The Company has obtained a waiver of the
covenants through June 30, 1998. Management believes that the Company will
require an additional waiver or waivers during 1998.
In addition, the Company entered into an interest rate swap guaranteeing a
fixed interest rate of 8.28% on the loan, and the Company will have paid fees of
one-eighth of 1% (.0125%) on the unused portion of the commitment amount. On
April 24, 1998, the Company settled this swap agreement resulting in a realized
loss of $28,500.
On March 12, 1996, the Company completed a financial package with a group
funded by a public utility to evaluate and develop a project in Terrebonne
Parish, Louisiana. This group will participate in 48% of all costs of evaluation
and development of the project area and provide a non-recourse loan to fund 48%
of the Company's share of the leasehold and seismic evaluation costs of the
project. The loan is secured by a mortgage on the Company's interest in the
project. As of March 31, 1998, the Company has received advances aggregating
$864,000 on the non-recourse loan. The non-recourse loan will be paid solely by
the assignment on an 8% overriding royalty interest in the future revenues of
the financed project. Future funding will be provided as costs are incurred. The
loan is now fully funded.
In conjunction with the Acquisition Agreement, Aspect committed to lend the
Company up to $1,800,000, and in January and February advanced $500,000 on said
credit facilty. The facility was repaid by the Company on February 23, 1998,
when the Company entered into a $7,800,000 credit agreement with Duke Energy
Financial Services, Inc (the "Duke Credit Facililty"). The Duke Credit Facility
provides for borrowings of up to $4,800,000 prior to closing of the
Acquisitions, $1,800,000 of which was used directly by the Company and
$3,000,000 of which was loaned to EPC to pay exploratory costs incurred on the
assets acquired from EPC in the Acquisitions after the effective date of the
Acquisitions and prior to closing thereof. An additional $3,000,000 became
available to the Company after closing of the Acquisitions to pay additional
exploratory costs and to fund the costs of redemption of the Company's
convertible preferred
F-28
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. LONG-TERM DEBT: (CONTINUED)
stock. The Duke Credit Facility bears interest at a national prime rate plus
4.0%. In addition, the lender will be paid cash payments equal to an overriding
royalty of 0.6% of the Company's interest in wells drilled by the Company while
the credit facility is outstanding. The lender also has a right to gather,
process, transport and market, at competitive market rates, natural gas produced
from a majority of the projects the Company acquired pursuant to the
Acquisitions. The facility is secured by mortgages on most of the Company's
undeveloped exploration projects. The assets acquired in the Acquisitions are
subject to such mortgages. The facility is repayable in eleven monthly payments
equal to 1/30 of the principal plus interest, plus a final monthly payment of
all remaining principal plus interest commencing August 31, 1998, or sooner in
the event the Company sells interests in the collateral or closes any
underwritten public offering of securities.
3. DISPOSITION OF OIL AND GAS PROPERTIES
In the first quarter of 1997 the Company divested its interest in a well
located in Oklahoma and promoted its interest in a prospect located in South
Louisiana for a total of $381,321 and realized a gain of $166,143. This gain was
partially offset by a realized loss of $34,108 which was associated with the
relocation of the Company headquarters to Houston, Texas. There was no such
activity in the first quarter of 1998.
4. NOTES RECEIVABLE FROM EPC
The Duke Credit Facility provides for borrowings of up to $4,800,000 prior
to the closing of the Acquisitions, of which $3,000,000 was used to make loans
to EPC to pay exploratory costs incurred on the assets acquired by the Company
in the Acquisitions, which costs were incurred after the effective date of the
Acquisition Agreement and prior to closing. The Duke Credit Facility bears an
interest rate at a national prime rate plus 4.0%. The Duke Credit Facility is
repayable in eleven monthly payments equal to 1/30 of the principal, plus
interest, and a final monthly payment of the remaining principal and interest,
commencing on August 31, 1998. As of March 31, 1998, the funds expended in
connection with these exploratory costs were $1,750,000, of which $466,664
represented the current portion and $1,283,336 represented the long-term
portion.
5. COMMITMENTS AND CONTINGENCIES
The Company previously entered into employment agreements with two officers
that covered periods through December 31, 1999. In 1997 the Company entered into
incentive agreements and contract settlement agreements with the two officers.
Pursuant to the incentive agreements and contact settlement agreements, upon the
closing of the Acquisitions, the Company became obligated to pay incentive
payments totaling $246,000, as well as contract settlement payments totaling
$246,000 to said officers. Each of the incentive payments and the contract
payments may be paid in the form of promissory notes due not later than
September 30, 1998. Upon closing of the Acquisitions the employment agreements
were settled by execution of such promissory notes.
The Company is a party to various lawsuits arising in the normal course of
business. Management believes the ultimate outcome of these matters will not
have a material effect on the Company's consolidated financial position, results
of operations and net cash flows.
F-29
<PAGE>
ESENJAY EXPLORATION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Pursuant to the credit agreement with the bank, the Company entered into a
natural gas swap agreement on 62,500 MMBTU of natural gas per month at $1.566
per MMBTU for Mid-Continent gas for the period from April 1, 1996 through
January 31, 1999. The swap was amended to 31,250 MMBTU on September 25, 1996,
due to the sale of the N.E. Cedardale field. The Company recorded a loss of
$212,000 in connection with this reduction in quantities covered by the swap
agreement. Currently the Company's monthly natural gas production is
substantially less than the natural gas swap that is in place. The total
unrealized loss on the amended swap agreement was $179,947 at March 31, 1998.
6. SUBSEQUENT EVENT
On May 14, 1998 a Special Meeting of Stockholders of the Company was held
pursuant to a solicitation of proxy mailed on or about April 24, 1998 to all the
stockholders of record as of the close of business on April 1, 1998. The
stockholders approved and ratified the following:
<TABLE>
<S> <C>
(i) the approval of the Acquisition Agreement;
(ii) the approval of a 1:6 reverse split of the presently outstanding Common Stock;
(iii) the approval of the reincorporation of the Company in the state of Delaware and a
change of the Company's name to Esenjay Exploration, Inc.; and
(iv) the election of seven directors.
</TABLE>
As a result of the above stockholder actions, the Acquisitions were closed,
the Company's preferred stock was called for redemption and the reverse split,
reincorporation and name change were effected. Accordingly, all numbers of
common shares and per share calculations have been restated to reflect the 1:6
reverse stock split.
The Acquisition Agreement calls for the Company to issue up to 5,165,260
shares of Common Stock after giving effect to the reverse split to EPC in
exchange for undeveloped oil and gas prospects and to issue up to 4,941,440
shares of Common Stock after giving effect to the reverse split to Aspect and
its assigns for the Aspect assets. The combined assets of Aspect and EPC have a
historical full cost basis of $19.9 million and a fair market value of
$54,200,000. In addition, after the effective date and prior to the date of
closing, EPC incurred approximately $3,800,000 in exploration and development
costs associated with the prospects and Aspect incurred approximated $3,955,000
in such costs, all of which incurred costs were for the account of the Company.
F-30
<PAGE>
- -------------------------------------------
-------------------------------------------------
- -------------------------------------------
-------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Cautionary Statement Regarding Forward-Looking Statements................. 10
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 22
Price Range of Common Stock............................................... 22
Capitalization............................................................ 23
Pro Forma Financial Statements............................................ 24
Selected Financial Data................................................... 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 30
Business and Properties................................................... 37
Management................................................................ 57
Principal Stockholders.................................................... 64
Certain Transactions...................................................... 65
Description of Securities................................................. 67
Underwriting.............................................................. 70
Legal Matters............................................................. 72
Experts................................................................... 72
Available Information..................................................... 72
Glossary of Certain Industry Terms........................................ 73
Index to Financial Statements............................................. F-1
</TABLE>
4,000,000 SHARES
[LOGO]
COMMON STOCK
--------------------------
P R O S P E C T U S
--------------------------
GAINES, BERLAND INC.
JULY 16, 1998
- -------------------------------------------
-------------------------------------------------
- -------------------------------------------
-------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
1* Form of Underwriting Agreement.
3(a) Certificate of Incorporation of the Company.
3(b) Certificate of Amendment to the Certificate of Incorporation of Frontier Natural Gas Corporation, filed
with the Secretary of State of Oklahoma on May 14, 1998, to effect a one for six reverse split of the
common stock of Frontier Natural Gas Corporation.
3(c)* Amended By-Laws of the Company.
5(a)* Opinion of Porter & Hedges, L.L.P.
10(a) Contract Settlement Agreement between Frontier Natural Gas Corporation and David W. Berry dated
effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as Exhibit
10(b).
10(b) Contract Settlement Agreement between Frontier Natural Gas Corporation and David B. Christofferson
dated effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as
Exhibit 10(d).
10(c) Frontier Natural Gas Corporation Incentive Stock Option Plan as currently in effect is incorporated by
reference to the Company's Registration Statement 33-69640-FW dated September 29, 1993, wherein the
same appears as Exhibit 10.5.
10(d) Engagement Agreement between Weisser, Johnson & Co. Capital Corporation and Frontier Natural Gas
Corporation dated May 10, 1995 as amended January 12, 1996, as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995
dated March 29, 1996, wherein the same appears as Exhibit 10(h).
10(e) Common Stock Purchase Warrant with Hi-Chicago Trust as currently in effect as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 dated March
29, 1996, wherein the same appears as Exhibit 10(i).
10(f) $15,000,000 Credit Agreement dated as of January 3, 1996, between Frontier Natural Gas Corporation as
the borrower and Bank of America Illinois, as the lender, as currently in effect and incorporated by
reference to the Company's report on Form 8-K dated January 9, 1996.
10(g) $15,000,000 Credit Agreement dated as of January 3, 1996, between Frontier Natural Gas Corporation as
the borrower and Bank of America Illinois, as the lender, Amendment No. 1 to Credit Agreement, dated
November 1, 1996, as currently in effect, as incorporated by reference to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997 dated March 31, 1997, wherein the same
appears as Exhibit 10(m).
10(h) Lease Agreement dated July 16, 1996, by and between the Company and Allen Center Company as
incorporated by reference to the Company's registration statement 333-06261 dated July 31, 1996,
wherein the same appears as Exhibit 10.23.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(i) Loan Agreement by and between Frontier Natural Gas Corporation and 420 Energy Investments, Inc. dated
March 1, 1996, as currently in effect as incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29, 1996, wherein the same
appears as Exhibit 10(r).
10(j) Warrant Agreement between Frontier Natural Gas Corporation and LaSalle Street Natural Resources
Corporation dated as of January 3, 1996, as currently in effect as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29,
1996, wherein the same appears as Exhibit 10(s).
10(k) Frontier Natural Gas Corporation Stock Incentive Plan 1996 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995
dated March 29, 1996, wherein the same appears as Exhibit 10(t).
10(l) 3-D Seismic Participation Agreement dated May 30, 1996, by and between Frontier Natural Gas Corporation
and Fina Oil and Chemical Company.
10(m) Unit Purchase Option Agreement between Frontier Natural Gas Corporation and Gaines, Berland Inc. dated
August 8, 1996.
10(n) Frontier Natural Gas Corporation Employee Option Plan-1997 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997
dated April 6, 1998, wherein the same appears as Exhibit 10(o).
10(o) Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier National
Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April
6, 1998, wherein the same appears as Exhibit 2.
10(p) Credit Agreement by and between Frontier Natural Gas Corporation and Duke Energy Financial Services,
Inc. dated as of February 23, 1998, as currently in effect as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April 6,
1998, wherein the same appears as Exhibit 10(p).
10(q) Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 14, 1998.
10(r) Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 14, 1998.
10(s) Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 14,
1998.
10(t) Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 23, 1998.
10(u) Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 23, 1998.
10(v) Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 23,
1998.
10(w) Plan and Agreement of Merger dated as of May 14, 1998, by and between Esenjay Exploration, Inc., a
Delaware corporation, and Frontier Natural Gas Corporation as incorporated by reference to the
Company's Proxy Statement filed with the Securities and Exchange Commission on April 24, 1998,
wherein the same appeared as Appendix F.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(x) First Amendment to Acquisition Agreement and Plan of Exchange dated as of April 20, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(y) Second Amendment to Acquisition Agreement and Plan of Exchange dated as of May 13, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(z) Exchange Agreement dated as of May 13, 1998, by and between Frontier Natural Gas Corporation, and R.
Michael Looney, James E. Rogers and Steven L. Creger.
10(aa) Exchange Agreement entered into as of May 14, 1998, by and between Frontier Natural Gas Corporation,
and Joint Energy Development Investments II Limited Partnership.
10(bb) Frontier Natural Gas Corporation Section 351 Plan of Exchange, among Frontier Natural Gas Corporation,
Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(cc) Registration Rights Agreement dated as of May 14, 1998, by and among Esenjay Petroleum Corporation,
Aspect Resources LLC, and Frontier Natural Gas Corporation.
10(dd) Assignment and Assumption Agreement dated as of May 14, 1998, by and between Frontier Natural Gas
Corporation, and Aspect Resources LLC.
10(ee) Assignment and Assumption Agreement dated as of May 14, 1998, by and between Frontier Natural Gas
Corporation, and Esenjay Petroleum Corporation.
10(ff) Geotechnical Services Consulting Agreement effective May 14, 1998, by and among Frontier Natural Gas
Corporation, and Aspect Management Corporation.
10(gg) Land Services Consulting Agreement effective May 14, 1998, by and between Frontier Natural Gas
Corporation, and Aspect Management Corporation.
10(hh) Bill of Sale and Assignment entered into as of May 14, 1998, by James E. Rogers, R. Michael Looney and
Steven L. Creger, for the benefit of Frontier Natural Gas Corporation.
10(ii) Letter Agreement dated May 14, 1998, between Aspect Resources LLC and Frontier Natural Gas Corporation,
regarding a right of first offer arrangement involving the Halo Region.
10(jj) Form of Partial Assignment, Bill of Sale and Conveyance dated effective November 1, 1997, from Esenjay
Petroleum Corporation to Esenjay Exploration, Inc., used in connection with the conveyance of oil and
gas properties from Esenjay Petroleum Corporation to Frontier Natural Gas Corporation, pursuant to
the Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier
Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(kk) Form of Partial Assignment, Bill of Sale and Conveyance dated effective November 1, 1997, from Aspect
Resources LLC to Esenjay Exploration, Inc., used in connection with the conveyance of oil and gas
properties from Aspect Resources LLC to Frontier National Gas Corporation, pursuant to the
Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier
National Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(ll) Letter Agreement dated January 12, 1998, between Bank of America National Trust and Savings
Association, Frontier Natural Gas Corporation, Frontier, Inc., Frontier Acquisition Corporation, and
Frontier Exploration and Production Corporation, regarding the Credit Agreement dated as of January
3, 1996, as amended.
10(mm)* Form of Representative's Warrant.
11 See Note 1 to the audited consolidated financial statements.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
21 A list of the Company's subsidiaries is incorporated by reference to the Company's Annual Report on
Form 10-KSB for fiscal year ended December 31, 1997 dated April 6, 1998.
23(a)* Consent of Porter & Hedges, L.L.P. included in Exhibit 5(a).
23(b)* Consent of Deloitte & Touche LLP.
24(a) Power of Attorney dated May 14, 1998 from Michael E. Johnson to David B. Christofferson.
24(b) Power of Attorney dated May 14, 1998 from Alex M. Cranberg to David B. Christofferson.
24(c) Power of Attorney dated May 14, 1998 from Alex B. Campbell to David B. Christofferson.
24(d) Power of Attorney dated May 14, 1998 from Charles J. Smith to David B. Christofferson.
24(e) Power of Attorney dated May 14, 1998 from Hobart A. Smith to David B. Christofferson.
24(f) Power of Attorney dated May 14, 1998 from Jack P. Randall to David B. Christofferson.
</TABLE>
- ------------------------
* Filed herewith.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and has duly caused this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereon duly authorized in the City of Houston, State of Texas on July 14, 1998.
<TABLE>
<S> <C> <C>
ESENJAY EXPLORATION, INC.
By: * /s/ MICHAEL E. JOHNSON
-----------------------------------------
Michael E. Johnson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933 this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities indicated on July 14, 1998.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
*/s/ MICHAEL E. JOHNSON
- ------------------------------ President, Chief Executive July 14, 1998
Michael E. Johnson Officer, and Director
/s/ DAVID W. BERRY
- ------------------------------ Chairman of the Board July 14, 1998
David W. Berry
/s/ DAVID B. CHRISTOFFERSON
- ------------------------------ Principal Financial July 14, 1998
David B. Christofferson Officer
/s/ HOWARD E. WILLIAMS
- ------------------------------ Chief Accounting Officer July 14, 1998
Howard E. Williams
*/s/ ALEX M. CRANBERG
- ------------------------------ Vice Chairman of the Board July 14, 1998
Alex M. Cranberg
*/s/ ALEX B. CAMPBELL
- ------------------------------ Director July 14, 1998
Alex B. Campbell
II-5
<PAGE>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
*/s/ CHARLES J. SMITH
- ------------------------------ Director July 14, 1998
Charles J. Smith
- ------------------------------ Director July 14, 1998
William D. Dodge, III
*/s/ HOBART A. SMITH
- ------------------------------ Director July 14, 1998
Hobart A. Smith
*/s/ JACK P. RANDALL
- ------------------------------ Director July 14, 1998
Jack P. Randall
*By: /s/ DAVID B. CHRISTOFFERSON
------------------------------
David B. Christofferson
ATTORNEY-IN-FACT
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
1* Form of Underwriting Agreement.
3(a) Certificate of Incorporation of the Company.
3(b) Certificate of Amendment to the Certificate of Incorporation of Frontier Natural Gas Corporation, filed
with the Secretary of State of Oklahoma on May 14, 1998, to effect a one for six reverse split of the
common stock of Frontier Natural Gas Corporation.
3(c)* Amended By-Laws of the Company.
5(a)* Opinion of Porter & Hedges, L.L.P.
10(a) Contract Settlement Agreement between Frontier Natural Gas Corporation and David W. Berry dated
effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as Exhibit
10(b).
10(b) Contract Settlement Agreement between Frontier Natural Gas Corporation and David B. Christofferson
dated effective January 1, 1998, as incorporated by reference to the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997 dated April 6, 1998, wherein the same appears as
Exhibit 10(d).
10(c) Frontier Natural Gas Corporation Incentive Stock Option Plan as currently in effect is incorporated by
reference to the Company's Registration Statement 33-69640-FW dated September 29, 1993, wherein the
same appears as Exhibit 10.5.
10(d) Engagement Agreement between Weisser, Johnson & Co. Capital Corporation and Frontier Natural Gas
Corporation dated May 10, 1995 as amended January 12, 1996, as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995
dated March 29, 1996, wherein the same appears as Exhibit 10(h).
10(e) Common Stock Purchase Warrant with Hi-Chicago Trust as currently in effect as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 dated March
29, 1996, wherein the same appears as Exhibit 10(i).
10(f) $15,000,000 Credit Agreement dated as of January 3, 1996, between Frontier Natural Gas Corporation as
the borrower and Bank of America Illinois, as the lender, as currently in effect and incorporated by
reference to the Company's report on Form 8-K dated January 9, 1996.
10(g) $15,000,000 Credit Agreement dated as of January 3, 1996, between Frontier Natural Gas Corporation as
the borrower and Bank of America Illinois, as the lender, Amendment No. 1 to Credit Agreement, dated
November 1, 1996, as currently in effect, as incorporated by reference to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997 dated March 31, 1997, wherein the same
appears as Exhibit 10(m).
10(h) Lease Agreement dated July 16, 1996, by and between the Company and Allen Center Company as
incorporated by reference to the Company's registration statement 333-06261 dated July 31, 1996,
wherein the same appears as Exhibit 10.23.
10(i) Loan Agreement by and between Frontier Natural Gas Corporation and 420 Energy Investments, Inc. dated
March 1, 1996, as currently in effect as incorporated by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29, 1996, wherein the same
appears as Exhibit 10(r).
10(j) Warrant Agreement between Frontier Natural Gas Corporation and LaSalle Street Natural Resources
Corporation dated as of January 3, 1996, as currently in effect as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995 dated March 29,
1996, wherein the same appears as Exhibit 10(s).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(k) Frontier Natural Gas Corporation Stock Incentive Plan 1996 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995
dated March 29, 1996, wherein the same appears as Exhibit 10(t).
10(l) 3-D Seismic Participation Agreement dated May 30, 1996, by and between Frontier Natural Gas Corporation
and Fina Oil and Chemical Company.
10(m) Unit Purchase Option Agreement between Frontier Natural Gas Corporation and Gaines, Berland Inc. dated
August 8, 1996.
10(n) Frontier Natural Gas Corporation Employee Option Plan-1997 as currently in effect as incorporated by
reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997
dated April 6, 1998, wherein the same appears as Exhibit 10(o).
10(o) Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier National
Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC as incorporated by reference
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April
6, 1998, wherein the same appears as Exhibit 2.
10(p) Credit Agreement by and between Frontier Natural Gas Corporation and Duke Energy Financial Services,
Inc. dated as of February 23, 1998, as currently in effect as incorporated by reference to the
Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 dated April 6,
1998, wherein the same appears as Exhibit 10(p).
10(q) Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 14, 1998.
10(r) Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 14, 1998.
10(s) Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 14,
1998.
10(t) Warrant Agreement between Frontier Natural Gas Corporation and Gaines, Berland Energy Fund, L.P. dated
January 23, 1998.
10(u) Warrant Agreement between Frontier Natural Gas Corporation and Esenjay Petroleum Corporation dated
January 23, 1998.
10(v) Warrant Agreement between Frontier Natural Gas Corporation and Aspect Resources LLC dated January 23,
1998.
10(w) Plan and Agreement of Merger dated as of May 14, 1998, by and between Esenjay Exploration, Inc., a
Delaware corporation, and Frontier Natural Gas Corporation as incorporated by reference to the
Company's Proxy Statement filed with the Securities and Exchange Commission on April 24, 1998,
wherein the same appeared as Appendix F.
10(x) First Amendment to Acquisition Agreement and Plan of Exchange dated as of April 20, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(y) Second Amendment to Acquisition Agreement and Plan of Exchange dated as of May 13, 1998, by and among
Frontier Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(z) Exchange Agreement dated as of May 13, 1998, by and between Frontier Natural Gas Corporation, and R.
Michael Looney, James E. Rogers and Steven L. Creger.
10(aa) Exchange Agreement entered into as of May 14, 1998, by and between Frontier Natural Gas Corporation,
and Joint Energy Development Investments II Limited Partnership.
10(bb) Frontier Natural Gas Corporation Section 351 Plan of Exchange, among Frontier Natural Gas Corporation,
Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(cc) Registration Rights Agreement dated as of May 14, 1998, by and among Esenjay Petroleum Corporation,
Aspect Resources LLC, and Frontier Natural Gas Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------------
<C> <S>
10(dd) Assignment and Assumption Agreement dated as of May 14, 1998, by and between Frontier Natural Gas
Corporation, and Aspect Resources LLC.
10(ee) Assignment and Assumption Agreement dated as of May 14, 1998, by and between Frontier Natural Gas
Corporation, and Esenjay Petroleum Corporation.
10(ff) Geotechnical Services Consulting Agreement effective May 14, 1998, by and among Frontier Natural Gas
Corporation, and Aspect Management Corporation.
10(gg) Land Services Consulting Agreement effective May 14, 1998, by and between Frontier Natural Gas
Corporation, and Aspect Management Corporation.
10(hh) Bill of Sale and Assignment entered into as of May 14, 1998, by James E. Rogers, R. Michael Looney and
Steven L. Creger, for the benefit of Frontier Natural Gas Corporation.
10(ii) Letter Agreement dated May 14, 1998, between Aspect Resources LLC and Frontier Natural Gas Corporation,
regarding a right of first offer arrangement involving the Halo Region.
10(jj) Form of Partial Assignment, Bill of Sale and Conveyance dated effective November 1, 1997, from Esenjay
Petroleum Corporation to Esenjay Exploration, Inc., used in connection with the conveyance of oil and
gas properties from Esenjay Petroleum Corporation to Frontier Natural Gas Corporation, pursuant to
the Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier
Natural Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(kk) Form of Partial Assignment, Bill of Sale and Conveyance dated effective November 1, 1997, from Aspect
Resources LLC to Esenjay Exploration, Inc., used in connection with the conveyance of oil and gas
properties from Aspect Resources LLC to Frontier National Gas Corporation, pursuant to the
Acquisition Agreement and Plan of Exchange dated as of January 19, 1998, by and among Frontier
National Gas Corporation, Esenjay Petroleum Corporation, and Aspect Resources LLC.
10(ll) Letter Agreement dated January 12, 1998, between Bank of America National Trust and Savings
Association, Frontier Natural Gas Corporation, Frontier, Inc., Frontier Acquisition Corporation, and
Frontier Exploration and Production Corporation, regarding the Credit Agreement dated as of January
3, 1996, as amended.
10(mm)* Form of Representative's Warrant.
11 See Note 1 to the audited consolidated financial statements.
21 A list of the Company's subsidiaries is incorporated by reference to the Company's Annual Report on
Form 10-KSB for fiscal year ended December 31, 1997 dated April 6, 1998.
23(a)* Consent of Porter & Hedges, L.L.P. included in Exhibit 5(a).
23(b)* Consent of Deloitte & Touche LLP.
24(a) Power of Attorney dated May 14, 1998 from Michael E. Johnson to David B. Christofferson.
24(b) Power of Attorney dated May 14, 1998 from Alex M. Cranberg to David B. Christofferson.
24(c) Power of Attorney dated May 14, 1998 from Alex B. Campbell to David B. Christofferson.
24(d) Power of Attorney dated May 14, 1998 from Charles J. Smith to David B. Christofferson.
24(e) Power of Attorney dated May 14, 1998 from Hobart A. Smith to David B. Christofferson.
24(f) Power of Attorney dated May 14, 1998 from Jack P. Randall to David B. Christofferson.
</TABLE>
- ------------------------
*Filed herewith.
<PAGE>
Exhibit 1
5,750,000 Shares of Common Stock
ESENJAY EXPLORATION, INC.
----------------------------------------
UNDERWRITING AGREEMENT
----------------------------------------
July 15, 1998
GAINES, BERLAND INC.
As Representative of the
several Underwriters named in
Schedule I attached hereto
c/o Gaines, Berland Inc.
1055 Stewart Avenue
Bethpage, New York 11714
Ladies and Gentlemen:
Esenjay Exploration, Inc., a Delaware corporation (the "COMPANY"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the several underwriters named in SCHEDULE I hereto (the "UNDERWRITERS")
5,000,000 shares of its common stock, par value $.01 per share (the "COMMON
STOCK"), which 5,000,000 shares of Common Stock are herein referred to as the
"FIRM SHARES." In addition, the Company proposes to sell to the Underwriters,
at the option of the Underwriters, an aggregate of up to an additional 750,000
shares of Common Stock (the "OPTION SHARES") for the sole purpose of covering
over-allotments in the sale of the Firm Shares. The respective amounts of the
Firm Shares to be so purchased by the Underwriters are set forth opposite their
names in SCHEDULE I hereto. The Firm Shares and any Option Shares purchased by
the Underwriters are herein referred to as the "SHARES." In connection with the
proposed issuance and sale of the Shares, the Company proposes to issue to
Gaines, Berland Inc. a Warrant (the "WARRANT") to purchase from the Company
191,250 shares of Common Stock (the "WARRANT SHARES") pursuant to the terms and
conditions set forth in the Warrant (a form of which is attached hereto as
Annex A).
The Shares are more fully described in the Registration Statement referred
to hereafter.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
A. The Company represents and warrants to, and agrees with, the
Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement, and amendments
thereto, on Form SB-2 (No. 333-53581), for the registration of the Shares,
the Warrant and the Warrant Shares under the
<PAGE>
Securities Act of 1933 (the "ACT"). Such registration statement,
including the prospectus, financial statements and schedules, exhibits
and all other documents filed as a part thereof, as amended at the time
of effectiveness of the registration statement, including any information
deemed to be a part thereof as of the time of effectiveness pursuant to
paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of
the Commission under the Act (the "REGULATIONS"), and any additional
related registration statement filed pursuant to Rule 462(b) of the Act,
is herein called the "REGISTRATION STATEMENT," and the prospectus, in
the form first filed with the Commission pursuant to Rule 424(b) of the
Regulations, or filed as part of the Registration Statement at the time
of effectiveness if no Rule 424(b) or Rule 434 filing is required, is
herein called the "PROSPECTUS." The term "PRELIMINARY PROSPECTUS" as
used herein means a preliminary prospectus as described in Rule 430 of
the Regulations.
(b) At the time of effectiveness of the Registration Statement
or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations,
when any supplement to or amendment of the Prospectus is filed with
the Commission (but only after any such amendment becomes effective),
and at the Closing Date and the Additional Closing Date, if any (as
hereinafter respectively defined), the Registration Statement and the
Prospectus and any amendments thereof and supplements thereto complied
or will comply in all material respects with the applicable provisions
of the Act and the Regulations and do not or will not contain an
untrue statement of a material fact and do not or will not omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein (i) in the case of the
Registration Statement, not misleading, and (ii) in the case of the
Prospectus, in light of the circumstances under which they were made,
not misleading. When any related preliminary prospectus was first
filed with the Commission (whether filed as part of the registration
statement for the registration of the Shares, the Warrant and the
Warrant Shares or any amendment thereto or pursuant to Rule 424(a) of
the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such preliminary prospectus and
any amendments thereof and supplements thereto complied in all
material respects with the applicable provisions of the Act and the
Regulations and did not contain an untrue statement of a material fact
and did not omit, other than omissions contemplated by the Act and the
Regulations, to state any material fact required to be stated therein
or necessary in order to make the statements therein in light of the
circumstances under which they were made not misleading. No
representation and warranty is made in this subsection (b), however,
with respect to any information contained in or omitted from the
Registration Statement or the Prospectus or any related preliminary
prospectus or any amendment thereof or supplement thereto in reliance
upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein
stated expressly for use in connection with the preparation thereof.
If Rule 434 is used, the Company will comply with the requirements of
Rule 434.
(c) Deloitte & Touche LLP, which has certified the financial
statements and supporting schedules included in the Registration
Statement, are independent public accountants with regard to the
Company as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as
disclosed in the Registration Statement and the Prospectus, there has
been no material adverse change or any development that could
-2-
<PAGE>
reasonably be expected to result in a material adverse change in the
business, prospects, properties, operations, condition (financial or
other) or results of operations of the Company and its Subsidiaries
(as defined below) taken as a whole, whether or not arising from
transactions in the ordinary course of business, and since the date of
the latest balance sheet presented in the Registration Statement and
the Prospectus, neither the Company nor any of its Subsidiaries has
incurred or undertaken any liabilities or obligations, direct or
contingent, which are material to the Company and its subsidiaries
taken as a whole, except for liabilities or obligations which are
disclosed in or contemplated by the Registration Statement and the
Prospectus. Except as disclosed in or contemplated by the Prospectus,
since the date of the last audited financial statements included in
the Prospectus, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital
stock.
(e) This Agreement, the Warrant and the transactions
contemplated herein and therein have been duly and validly authorized
by the Company, and this Agreement and the Warrant have been duly and
validly executed and delivered by the Company. This Agreement and the
Warrant are valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, except to the
extent that rights to indemnity may be limited by applicable federal
or state securities laws or the public policy underlying such laws.
(f) The execution, delivery and performance of this Agreement,
the Warrant and the consummation of the transactions contemplated
hereby and thereby do not and will not (i) conflict with or result in
a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both,
would constitute a default) or require consent under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its Subsidiaries, pursuant
to the terms of any agreement, instrument, franchise, license or
permit to which the Company or any of its Subsidiaries is a party or
by which any of such corporations or their respective properties or
assets may be bound or (ii) violate or conflict with any provision of
the organizational documents of the Company or any of its Subsidiaries
or any judgment, decree, order, statute, rule or regulation of any
court or any public, governmental or regulatory agency or body,
domestic or foreign, having jurisdiction over the Company or any of
its Subsidiaries or any of their respective properties or assets. No
consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its Subsidiaries or any of their respective
properties or assets is required for the execution, delivery and
performance of this Agreement, the Warrant or the consummation of the
transactions contemplated hereby and thereby, including the issuance,
sale and delivery of the Shares to be issued, sold and delivered by
the Company hereunder, except the registration of the Shares, the
Warrant and Warrant Shares under the Act, the clearance of the
offering of the Shares with the NASD, and such consents, approvals,
authorizations, orders, registrations, filings, qualifications,
licenses and permits as may be required under foreign and state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters. The Company has full
power and authority to authorize, issue and sell the Shares, the
Warrant and the Warrant Shares as contemplated by this Agreement.
-3-
<PAGE>
(g) All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable and have
not been issued in violation of or subject to any preemptive rights.
The Shares, when delivered and sold in accordance with this Agreement,
will be duly and validly issued and outstanding, fully paid and
nonassessable, and will not have been issued in violation of or
subject to any preemptive rights. The Company has authorized and
outstanding capitalization as set forth in the Registration Statement
and the Prospectus. The Common Stock, the Firm Shares and the Option
Shares conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(h) The Warrant Shares, when issued pursuant to the terms and
conditions of the Warrant, will be duly and validly authorized and
issued, fully paid and nonassessable and will have not been issued in
violation of or subject to any preemptive rights.
(i) Each of the Company and its subsidiaries (sometimes referred
to herein as the "SUBSIDIARIES") has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation. The Company has no Subsidiaries
that are limited partnerships, limited liability companies or other
forms of entities other than corporations. Each of the Company and
its Subsidiaries is duly qualified and in good standing as a foreign
corporation in each of the jurisdictions listed on Schedule III
hereto, which are the only jurisdictions in which the character or
location of its properties (owned, leased or licensed) or the nature
or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which could
not in the aggregate reasonably be expected to have a material adverse
effect on the Company and its Subsidiaries taken as a whole. Each of
the Company and its Subsidiaries has or will have by the Closing Date
all requisite power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public, regulatory or
governmental agencies and bodies, to own, lease and operate its
properties and conduct its business as now being conducted and as
described in the Registration Statement and the Prospectus (other than
such consents, approvals, authorizations, orders, registrations,
qualifications, licenses and permits the failure to obtain could not
reasonably be expected to have a material adverse effect on the
Company and its Subsidiaries as a whole), and no such consent,
approval, authorization, order, registration, qualification, license
or permit contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus. All of
the issued and outstanding shares of capital stock of each Subsidiary
of the Company have been duly authorized and validly issued and are
fully paid and nonassessable and are owned by the Company, directly or
through its Subsidiaries, free from liens, encumbrances, claims,
security interests, restrictions on transfer (other than restrictions
arising under federal and applicable foreign and state securities and
Blue Sky Laws and those arising under the Company's credit facilities
as described in the Registration Statement), stockholders' agreement,
voting trust and any other defects of title.
(j) Except as disclosed in or contemplated by the Registration
Statement and the Prospectus, there are no outstanding securities of
the Company or any Subsidiary convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of Common
Stock of the Company or shares of capital stock of any Subsidiary,
respectively, and there are no outstanding options, warrants or rights
of any character obligating the Company
-4-
<PAGE>
or any Subsidiary to issue any shares of its capital stock or any
securities convertible or exchangeable or evidencing the right to
purchase or subscribe therefor; and except as disclosed in the
Registration Statement and the Prospectus, no holder of securities of the
Company or any Subsidiary or any other person has the right, contractual
or otherwise, which has not been satisfied or effectively waived, to
cause the Company to sell or otherwise issue to them, or to permit them
to underwrite the sale of, any of the Shares.
(k) Except as disclosed in the Registration Statement and the
Prospectus, the Company and its Subsidiaries have generally
satisfactory or good and indefeasible title to all the producing oil
and gas properties described in the Prospectus as being owned by them,
free and clear of any liens, encumbrances, equities, or claims of any
nature, except for the liens for taxes not yet due, liens, claims and
encumbrances under gas sales contracts, operating agreements,
geophysical exploration agreements, farm-out and farm-in agreements,
participation agreements, unitization and pooling agreements, and such
other agreements as are customarily found in connection with
comparable exploration, drilling, producing and marketing operations,
or in connection with the acquisition of producing properties, and
other liens, claims, contracts, encumbrances and title defects that
are, singly and in the aggregate, not material in amount and do not
materially interfere with the Company's or such Subsidiary's use and
enjoyment of its oil and gas properties and liens under the Company's
credit facilities as described in the Registration Statement.
(l) The engineering values attributed to the oil and gas
properties of the Company disclosed in the Registration Statement and
Prospectus and prepared by the Company reflect in all material
respects the ownership interests of the Company in the properties
therein as the dates specified therein, except as otherwise disclosed
in the Registration Statement and Prospectus. The information
underlying the estimates of the Company's reserves is complete and
accurate in all material respects and no facts have arisen of which
the Company has knowledge that might cause a reasonable person to
believe that any of such information was incorrect or incomplete in
any material respect.
(m) Except as disclosed in the Registration Statement and the
Prospectus, the Company and its Subsidiaries possess or will possess
on the Closing Date, adequate certificates, authorities or permits
issued by appropriate governmental agencies or bodies necessary to
conduct the business now operated by them, except for such
certificates, authorities or permits the failure of which to obtain
could not reasonably be expected to have a material adverse effect on
the Company or any of its Subsidiaries taken as a whole, and have not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its Subsidiaries, could
individually or in the aggregate reasonably be expected to have a
material adverse effect on the Company and its Subsidiaries taken as a
whole.
(n) Except as disclosed in the Registration Statement and the
Prospectus, no labor dispute with the employees of the Company or any
Subsidiary exists or, to the knowledge of the Company, is imminent
that could reasonably be expected to have a material adverse effect on
the Company and its Subsidiaries taken as a whole.
(o) The Company and its Subsidiaries own, possess or license
adequate trademarks, trade names and other rights to inventions, know-how,
patents, copyrights,
-5-
<PAGE>
confidential information and other intellectual property (collectively,
"INTELLECTUAL PROPERTY RIGHTS") necessary to conduct the business now
operated by them, or presently employed by them, and have not received
any notice of termination of any license or notice of infringement of or
conflict with asserted rights of others with respect to any intellectual
property rights that, if determined adversely to the Company or any of
its Subsidiaries, could, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole.
(p) To the Company's knowledge and except as disclosed in the
Registration Statement and the Prospectus, neither the Company nor any
of its Subsidiaries (i) is in material violation of any applicable
statute, rule, regulation, decision or order of any governmental
agency or body or any court, domestic or foreign, relating to the use,
disposal or release of hazardous or toxic substances or relating to
the protection or restoration of the environment or human exposure to
hazardous or toxic substances (collectively, "ENVIRONMENTAL LAWS"),
(ii) owns or operates any real property contaminated at levels harmful
to human health and the environment with any substance that is subject
to any environmental laws, (iii) is liable for any off-site disposal
or contamination pursuant to any environmental laws, or (iv) is
subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim could individually or in
the aggregate reasonably be expected to have a material adverse effect
on the Company and its Subsidiaries taken as a whole; and the Company
has not received written notice of any pending investigation which
might lead to such a claim.
(q) Except as disclosed in the Registration Statement and the
Prospectus, there is no litigation or governmental proceeding to which
the Company or any of its Subsidiaries is a party or to which any
property of the Company or any of its Subsidiaries is subject or which
is pending or, to the knowledge of the Company, contemplated against
the Company or any of its Subsidiaries which could reasonably be
expected to result in any material adverse change in the business,
prospects, properties, operations, condition (financial or other) or,
results of operations of the Company and its Subsidiaries taken as a
whole or which is required to be disclosed in the Registration
Statement and the Prospectus.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which
constitutes or which could reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares.
(s) The financial statements of the Company, including the notes
thereto and supporting schedules included in the Registration
Statement and the Prospectus, present fairly in all material respects
the financial position of the Company as of the dates indicated and
the results of its operations and cash flows for the periods
specified; except as otherwise stated in the Registration Statement,
such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent
basis; and the supporting schedules included in the Registration
Statement present fairly in all material respects the information
required to be stated therein; and the assumptions used in preparing
the pro forma financial statements included in the Registration
Statement and the Prospectus provide a reasonable basis for presenting
the significant effects directly attributable to the
-6-
<PAGE>
transactions or events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma columns therein reflect the proper application of those
adjustments to the corresponding historical financial statement amounts.
(t) Except as described in the Registration Statement and the
Prospectus, no holder of securities of the Company has any rights to
the registration of securities of the Company because of the filing of
the Registration Statement or otherwise in connection with the sale of
the Shares contemplated hereby that have not been waived.
(u) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration
as an "investment company" under the Investment Company Act of 1940.
(v) The Company and the Subsidiaries have filed all federal,
state, local and foreign tax returns which are required to be filed
through the date hereof, or have received extensions thereof, and have
paid all taxes shown on such returns and all assessments received by
them to the extent that the same are material and have become due.
(w) None of the Company, any Subsidiary, director, officer,
agent, employee or other person associated with or acting on behalf of
the Company and the Subsidiaries has, directly or indirectly: used any
corporate funds for unlawful contributions, gifts, entertainment or
other unlawful expenses relating to political activity; made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate, payoff,
influence payment, kickback or other unlawful payment.
(x) No transaction has occurred between or among the Company,
the Subsidiaries or any of their officers or directors or any
affiliates of any such officers or directors that is required to be
described in and is not described in the Registration Statement and
the Prospectus.
(y) The Shares have been approved for listing on the Nasdaq
Smallcap Market ("NASDAQ") and the Boston Stock Exchange ("BSE")
subject to notice of issuance.
(z) Except as disclosed in the Registration Statement and the
Prospectus, there are no contracts, agreements or understandings
between the Company and any person that would give rise to a valid
claim against the Company or any Underwriter for a brokerage
commission, finder's fee or other like payment in connection with the
sale or resale of Shares under this Agreement.
(aa) Except as described in the Registration Statement, there are
no outstanding options, warrants, or rights of any character
obligating the Company to issue any shares of Common Stock that are
currently exercisable or will become exercisable within 180 days of
the date of the Prospectus.
(bb) The Company has obtained and delivered to you before the
date hereof the written agreements of each of the persons listed on
Schedule II that, for a period of 180 days,
-7-
<PAGE>
and in the case of David B. Christofferson and Joint Energy Development
Investments II Limited Partnership ("JEDI") 90 days, after the date of
the final Prospectus filed with the Commission pursuant to Rule 424(b),
such persons will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, or file with the Commission a
registration statement under the Act relating to, any additional shares
of the Company's securities or securities convertible into or
exchangeable or exercisable for any shares of the Company's securities,
or publicly disclose the intention to make any such offer, sale, pledge,
disposal or filing, without the prior written consent of Gaines, Berland
Inc.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to sell to the several
Underwriters and the Underwriters, severally and not jointly, agree to
purchase from the Company, at a purchase price of $____ per share, the
number of Firm Shares set forth opposite the respective names of the
Underwriters on SCHEDULE I hereto plus any additional number of Shares
that the Underwriter may become obligated to purchase pursuant to the
provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Firm Shares shall be made at the office of
Vinson & Elkins L.L.P., 2300 First City Tower, 1001 Fannin Street,
Houston, Texas 77002-6760, or such other place as shall be agreed upon
by you and the Company, at 9:00 A.M., Houston, Texas time, on the
third or fourth business day (as permitted under Rule 15c6-1 under the
Exchange Act) (unless such time and date are postponed in accordance
with the provisions of Section 9 hereof) following the date the
Registration Statement becomes effective (or, if the Company has
elected to rely upon Rule 430A of the Regulations, the third or fourth
business day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the public offering price of the Shares),
or at such other time not later than ten business days after such date
as shall be agreed upon by you and the Company (such time and date of
payment and delivery being herein called the "CLOSING DATE").
Delivery of the certificates for the Firm Shares and any Option Shares
shall be made to you for the respective accounts of the several
Underwriters against payment by the several Underwriters through the
Representative of the purchase price for the Firm Shares or Option
Shares, as the case may be, by wire transfer of federal (same day)
funds, to the account(s) designated by the Company.
(c) Certificates for the Firm Shares shall be registered in such
name or names and in such authorized denominations as you may request
in writing at least two full business days prior to the Closing Date.
The Company will permit you to examine and package such certificates
for delivery at least one full business day prior to the Closing Date.
(d) In addition, the Company hereby grants to the several
Underwriters the option to purchase up to 750,000 Option Shares at the
same purchase price per share to be paid by the several Underwriters
to the Company for the Firm Shares as set forth in this Section 2, for
the sole purpose of covering over-allotments in the sale of Firm
Shares by the several Underwriters. This option may be exercised at
any time in whole or in part on or before the thirtieth day following
the effective date of the Registration Statement, by written notice by
you to the Company. Such notice shall set forth the aggregate number
of Option
-8-
<PAGE>
Shares as to which the option is being exercised and the date and time,
as reasonably determined by you, when the Option Shares are to be
delivered (each such date and time being herein sometimes referred to as
an "ADDITIONAL CLOSING DATE"); PROVIDED, HOWEVER, that the Additional
Closing Date shall not be earlier than the Closing Date or earlier than
the second full business day after the date on which the option shall
have been exercised nor later than the tenth full business day after the
date on which the option shall have been exercised (unless such time and
date are postponed in accordance with the provisions of Section 9
hereof). Certificates for the Option Shares shall be registered in such
name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing
Date. The Company will permit you to examine and package such
certificates for delivery at least one full business day prior to the
Additional Closing Date.
The number of Option Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of
Option Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter in SCHEDULE I hereto (or such
number increased as set forth in Section 9 hereof) bears to 5,000,000,
subject, however, to such adjustments to eliminate any fractional
shares as you in your sole discretion shall make.
3. OFFERING. Upon your authorization of the release of the Firm
Shares, the several Underwriters propose to offer the Firm Shares for sale to
the public upon the terms set forth in the Prospectus. To the extent, if at
all, that any Option Shares are purchased pursuant to Section 2 hereof, the
Underwriters will offer them to the public on the foregoing terms.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the several Underwriters that:
(a) If the Registration Statement has not yet been declared
effective, the Company will use its reasonable commercial efforts to
cause the Registration Statement and any amendments thereto to become
effective as promptly as possible, and if Rule 430A is used or the
filing of the Prospectus is otherwise required under Rule 424(b) or
Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within
the prescribed time period and will provide evidence satisfactory to
you of such timely filing. If the Company elects to rely on Rule 434,
the Company will prepare and file a term sheet that complies with the
requirements of Rule 434.
The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration
Statement and any amendments thereto become effective, (ii) of any
request by the Commission for any amendment of or supplement to the
Registration Statement or the Prospectus or for any additional
information, (iii) of the mailing or delivery to the Commission for
filing of any amendment of or supplement to the Registration Statement
or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or
any post-effective amendment thereto or of the initiation, or the
threatening, of any proceedings therefor, (v) of the receipt of any
comments from the Commission, and (vi) of the receipt by the Company
of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for that purpose. If the
-9-
<PAGE>
Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of
any such stop order and, if issued, to obtain the lifting of such
order as soon as possible. The Company will not file any amendment to
the Registration Statement or any amendment of or supplement to the
Prospectus (including the prospectus required to be filed pursuant to
Rule 424(b) or Rule 434) that differs from the prospectus on file at
the time of the effectiveness of the Registration Statement before or
after the effective date of the Registration Statement to which you
shall reasonably object in writing within a reasonable time (but in
any event within four business days) after being timely furnished in
advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act but in any event within nine
months after the date of the Prospectus any event shall have occurred
as a result of which the Prospectus as then amended or supplemented
would, in the judgment of the Underwriters or the Company, include an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if it shall be necessary at any time to amend or
supplement the Prospectus or Registration Statement to comply with the
Act or the Regulations, the Company or you, as the case may be, will
notify the other promptly and the Company will prepare and file with
the Commission an appropriate amendment or supplement (in form and
substance satisfactory to you) which will correct such statement or
omission and will use its reasonable commercial efforts to have any
amendment to the Registration Statement declared effective as soon as
possible.
(c) The Company will promptly deliver to you one signed copy of
the Registration Statement, including exhibits (other than exhibits
that are incorporated by reference), and all amendments thereto, and
the Company will promptly deliver to each of the several Underwriters
such number of copies of any preliminary prospectus, the Prospectus,
the Registration Statement, and all amendments of and supplements to
such documents, if any, as you may reasonably request. The Prospectus
shall be furnished on or prior to 3:00 P.M., New York time, on the
second business day following the later of the execution and delivery
of this Agreement or the effective time of the Registration Statement.
(d) The Company will endeavor in good faith, in cooperation with
you, at or prior to the time the Registration Statement becomes
effective, to qualify the Shares for offering and sale under the
securities laws relating to the offering or sale of the Shares of such
jurisdictions as you may designate and to use its reasonable
commercial efforts to maintain such qualification in effect for so
long as required for the distribution thereof, except that in no event
shall the Company be obligated in connection therewith to qualify as a
foreign corporation, to execute a general consent to service of
process or to take any other action that would subject the Company to
service of process.
(e) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to
you as soon as practicable, but not later than 45 days after the end
of its fiscal quarter in which the first anniversary date of the
effective date of the Registration Statement, an earnings statement
(within the meaning of Section 11(a) of the Act) covering a period of
at least twelve consecutive months beginning after the effective date
of the Registration Statement.
-10-
<PAGE>
(f) During the period of 180 days, from the date of the
Prospectus, the Company will not issue, sell, offer or agree to sell,
grant any option for the sale of, or otherwise dispose of or agree to
dispose of, directly or indirectly, any Common Stock (or any
securities convertible into, exercisable for or exchangeable for
Common Stock or other capital stock of the Company) at a price less
than the price to the public of the Shares sold hereunder; and the
Company will use its reasonable commercial efforts to obtain similar
undertakings of each of its officers, directors and securityholders
(including, without limitation, its optionholders), all of which are
listed on SCHEDULE II hereto, not to engage in any of the
aforementioned transactions on their own behalf, other than the
Company's sale of Shares hereunder, the Company's issuance of Common
Stock upon the exercise of presently outstanding stock options and
warrants, and the Company's issuance of Common Stock or other capital
stock of the Company or options to acquire Common Stock or such other
capital stock described in the Prospectus.
(g) During the period of three years from the effective date of
the Registration Statement, the Company will furnish to the
Representative copies of (i) all reports to its stockholders; and
(ii) all reports, financial statements and proxy or information
statements filed by the Company with the Commission or any national
securities exchange.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company agrees that it will not accelerate the vesting
or exercisability of any options, warrants, or rights of any character
obligating the Company to issue any shares of Common Stock so that any
such options, warrants, or rights shall become exercisable within 180
days of the Closing Date or any Additional Closing Date.
5. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company agrees to pay all reasonable costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus and
any amendments thereof or supplements thereto (including, without limitation,
fees and expenses of the Company's accountants and counsel), and the cost of
duplicating and distributing the underwriting documents (including this
Agreement, the Selected Dealers Agreement and the Agreement Among Underwriters)
and all other documents related to the public offering of the Shares (including
those supplied to the Underwriters in quantities as hereinabove stated),
(ii) the travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Shares, (iii) the issuance, transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes payable
thereon, (iv) the qualification of the Shares under state or foreign securities
or Blue Sky Laws, including the costs of printing and mailing a preliminary and
final "Blue Sky Survey" and the reasonable fees of counsel for the Underwriters
and such counsel's reasonable disbursements in relation thereto, (v) quotation
of the Shares on the NASDAQ, (vi) filing fees of the Commission and the National
Association of Securities Dealers, Inc., (vii) the cost of printing certificates
representing the Shares, and (viii) the cost and charges of any transfer agent
or registrar. In addition, the Company has agreed to pay you a nonaccountable
expense allowance of $300,000. It is understood, however, that except as
provided in this Section 5 and Sections 7, 8 and 11(d) of this Agreement, the
Underwriters will
-11-
<PAGE>
pay their own costs and expenses, including the fees and expenses of their
counsel, transfer taxes on resale of any Shares by them, and any advertising
expenses connected with any offers they may make.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Firm Shares and the Option
Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company herein contained, as of the date
hereof and as of the Closing Date (or in the case of the Option Shares as of the
Additional Closing Date), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Vinson & Elkins L.L.P.
("UNDERWRITERS' COUNSEL") pursuant to this Section 6 of any material
misstatement or omission, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement, including any related
registration statement filed pursuant to Rule 462(b) under the Act,
shall have become effective not later than 5:30 P.M., New York time,
on the date of this Agreement or at such later time and date as shall
have been consented to in writing by you; if the Company shall have
elected to rely upon Rule 430A or Rule 434 of the Regulations, the
Prospectus shall have been filed with the Commission in a timely
fashion in accordance with Section 4(a) hereof; and, at or prior to
the Closing Date and Additional Closing Date, as the case may be, no
stop order suspending the effectiveness of the Registration Statement
or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the
Commission.
(b) At the Closing Date and each Additional Closing Date, you
shall have received the opinion of Porter & Hedges, L.L.P., counsel
for the Company, dated the Closing Date or the Additional Closing
Date, as the case may be, addressed to the Underwriters, in form and
substance reasonably satisfactory to Underwriters' Counsel, and
subject to customary qualification and limitations, to the effect
that:
(i) Each of the Company and its Subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation or
formation. Each of the Company and its Subsidiaries is duly
qualified and in good standing as a foreign corporation in each
jurisdiction described in Schedule III hereto. Each of the
Company and its Subsidiaries has all requisite power and
authority to own, lease and license its respective properties and
conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus. All of the issued
and outstanding capital stock of each Subsidiary has been duly
and validly issued and is fully paid and nonassessable and, to
such counsel's knowledge: (i) was not issued in violation of, and
is free of, preemptive rights and (ii) is owned directly or
indirectly by the Company, free and clear of any lien,
encumbrance, claim, security interest, restriction on transfer
(other than any restriction arising under foreign securities
laws, federal securities laws or state securities or Blue Sky
Laws), stockholders' agreement, voting trust or other defect of
title whatsoever.
(ii) The Company has authorized capital stock as set forth
under the caption "Capitalization" in the Registration Statement
and the Prospectus. All of the outstanding shares of Common
Stock are duly and validly authorized and issued, are fully paid
and nonassessable and to such counsel's knowledge were not issued
in
-12-
<PAGE>
violation of or subject to any preemptive rights. The Shares to be
delivered by the Company on the Closing Date or Additional Closing
Date, as the case may be, have been duly and validly authorized
and, when delivered against payment therefor in accordance with
this Agreement, will be duly and validly issued, fully paid and
nonassessable and to such counsel's knowledge will not have been
issued in violation of or subject to any preemptive rights. Each
of the Underwriters who acquires Shares from the Company for value
in good faith without notice of any adverse claim will receive good
and valid title to the Firm Shares and the Option Shares being sold
by the Company hereunder, free and clear of all liens,
encumbrances, claims, security interests, restrictions on transfer
(other than restrictions arising under foreign securities laws and
state securities and Blue Sky Laws), stockholders' agreements,
voting trusts and other defects of title whatsoever. The Common
Stock, the Firm Shares and the Option Shares conform in all
material respects as to legal matters to the descriptions thereof
contained in the Registration Statement and the Prospectus under
the caption "Description of Securities", and, assuming the
certificates for the Common Stock are in the form filed with the
Commission, are in due and proper form and comply with the
requirements of the Delaware General Corporation Law, the Company's
certificate of incorporation and by-laws, and the requirements of
the NASDAQ and the BSE.
(iii) Except as disclosed in or contemplated by the
Registration Statement and the Prospectus, to the knowledge of
such counsel, (i) there are no outstanding securities of the
Company or any Subsidiary convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of
Common Stock of the Company or shares of capital stock,
partnership interests or membership interests of any Subsidiary,
respectively, and (ii) there are no outstanding options,
warrants, or rights of any character obligating the Company or
any Subsidiary to issue any shares of its capital stock, any
partnership interests or any membership interests, as applicable,
or any securities convertible or exchangeable or evidencing the
right to purchase or subscribe therefor; and except as described
in the Registration Statement and the Prospectus, to the
knowledge of counsel, no holder of securities of the Company or
any Subsidiary or any other person has the right, contractual or
otherwise, which has not been satisfied or effectively waived, to
cause the Company to sell or otherwise issue to them, or to
permit them to underwrite the sale of, any of the Shares.
(iv) This Agreement and the Warrant have been duly and
validly authorized, executed and delivered by the Company.
(v) To such counsel's knowledge, there is no litigation or
governmental or other action, suit, proceeding or investigation
before any court or before or by any public, regulatory or
governmental agency or body pending or threatened against, or
involving the properties or business of, the Company or any of
its Subsidiaries, which, if resolved against the Company or such
Subsidiary, individually or, to the extent involving related
claims or issues, in the aggregate, is of a character required to
be disclosed in the Registration Statement and the Prospectus
which has not been disclosed therein.
-13-
<PAGE>
(vi) The execution, delivery, and performance of this
Agreement, the Warrant and the consummation of the transactions
contemplated hereby and thereby do not and will not (A) conflict
with or result in a breach of any of the terms and provisions of,
or constitute a default (or an event which with notice or lapse
of time, or both, would constitute a default) or require consent
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company
or any of its Subsidiaries pursuant to the terms of any
agreement, instrument, franchise, license or permit known to such
counsel to which the Company or any of its Subsidiaries is a
party or by which any of such corporations or their respective
properties or assets may be bound or (B) violate or conflict with
any provision of the organizational documents of the Company or
any of its Subsidiaries, or, to the knowledge of such counsel
(assuming compliance with foreign securities laws and state
securities and Blue Sky Laws) any judgment, decree, order,
statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction
over the Company or any of its Subsidiaries or any of their
respective properties or assets; PROVIDED, HOWEVER, that such
counsel need not express any opinion with respect to compliance
with any foreign, federal or state securities, statutes, rules or
regulations except as specifically stated in the opinion of such
counsel. To such counsel's knowledge, no consent, approval,
authorization, order, registration, filing, qualification,
license or permit of or with any court or any public,
governmental, or regulatory agency or body having jurisdiction
over the Company or any of its Subsidiaries or any of their
respective properties or assets is required for the execution,
delivery and performance of this Agreement, the Warrant or the
consummation of the transactions contemplated hereby and thereby,
except for (1) such as may be required under foreign securities
laws or state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares, the Warrant or the
Warrant Shares by the Underwriters (as to which such counsel need
express no opinion), (2) the clearance of the offering of the
Shares with the NASD, and (3) such as have been made or obtained
under the Act.
(vii) The Registration Statement and the Prospectus and
any amendments thereof or supplements thereto (other than the
financial statements and schedules and other financial and
petroleum engineering data included therein, as to which no
opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Regulations.
(viii) The Registration Statement is effective under the
Act, and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or any
post-effective amendment thereof has been issued and no
proceedings therefor have been initiated or threatened by the
Commission, and all filings required by Rule 424(b) of the
Regulations have been made.
(ix) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings known to such counsel
between the Company and any person granting such person the right
to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such
securities in the
-14-
<PAGE>
securities registered pursuant to the Registration Statement or in
any securities being registered pursuant to any other registration
statement filed by the Company under the Act; and to such counsel's
knowledge all rights to require registration of any securities
under that agreement have been waived with respect to the offering
contemplated hereby.
(x) In addition, such opinion shall also contain a
statement that such counsel has participated in conferences with
officers and representatives of the Company, representatives of
the independent public accountants for the Company and the
Underwriters at which the contents and the Prospectus and related
matters were discussed, and no facts have come to the attention
of such counsel which leads such counsel to believe that either
the Registration Statement at the time it became effective
(including the information deemed to be part of the Registration
Statement at the time of effectiveness pursuant to Rule 430A or
Rule 434, if applicable), or any amendment thereof made prior to
the Closing Date or Additional Closing Date, as the case may be,
as of the date of such amendment, contained an untrue statement
of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing
Date or the Additional Closing Date, as the case may be, as of
the date of such amendment or supplement) contained or contains
an untrue statement of a material fact or omitted or omits to
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it
being understood that such counsel need express no belief or
opinion with respect to the financial statements and schedules
and other financial and petroleum engineering data included
therein).
(xi) The Shares to be sold under this Agreement have been
approved for quotation on the NASDAQ and the BSE upon notice of
issuance.
In rendering such opinion, such counsel may (A) rely as to
matters involving the application of laws other than the laws of the
United States upon the laws of the State of Texas and the corporate
laws of the State of Delaware; (B) render their opinion on the basis
that this Agreement and the matters addressed in their opinion are
subject to and governed by Texas law (without regard to conflict of
law principles); (C) as to matters of fact, to the extent they deem
proper, rely on certificates of responsible officers of the Company
and certificates or other written statements of officers of
departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company and
its Subsidiaries, provided that copies of any such statements or
certificates shall be delivered to Underwriters' counsel; and (D) as
to the opinion set forth in (viii) above, rely upon oral statements of
and written correspondence from the Commission.
(c) At the Closing Date and each Additional Closing Date, you
shall have received a certificate of the Chief Executive Officer and
the Chief Financial Officer of the Company, dated the Closing Date or
Additional Closing Date, as the case may be, to the effect that
(i) the condition set forth in subsection (a) of this Section 6 has
been satisfied, (ii) as of the date hereof and as of the Closing Date
or Additional Closing Date, as the case may be, the representations
and warranties of the Company set forth in Section 1 hereof are
-15-
<PAGE>
accurate, (iii) as of the Closing Date or the Additional Closing Date,
as the case may be, the obligations of the Company to be performed
hereunder on or prior thereto have been duly performed, and
(iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (A) the
Company and its Subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding, and (B) there has not been any material adverse change, or
any development that could reasonably be expected to result in a
material adverse change, in the business, properties, operations,
financial condition, or results of operations of the Company and its
Subsidiaries taken as a whole, except in each case as disclosed in or
contemplated by the Registration Statement and the Prospectus.
(d) At the time this Agreement is executed and at the Closing
Date (and each Additional Closing Date), you shall have received a
letter, from Deloitte & Touche LLP, independent public accountants for
the Company, dated, respectively, as of the date of this Agreement and
as of the Closing Date or Additional Closing Date, as the case may be,
addressed to the Underwriters and in form and substance satisfactory
to you, to the effect that: (i) they are independent accountants with
respect to the Company within the meaning of the Act and the
Regulations; (ii) stating that, in their opinion, the financial
statements and schedules of the Company audited by them and included
in the Registration Statement and the Prospectus comply as to form in
all material respects with the applicable accounting requirements of
the Act and the Regulations with respect to registration statements on
Form SB-2; (iii) on the basis of procedures (but not an audit in
accordance with generally accepted auditing standards) consisting of a
reading of the minutes of meetings and consents of the stockholders
and board of directors of the Company and the committees of such board
subsequent to December 31, 1997 as set forth in the minutes books
through a specified date not more than five business days prior to the
date of delivery of such letter, inquiries of officers and other
employees of the Company and its Subsidiaries who have responsibility
for financial and accounting matters of the Company with respect to
transactions and events subsequent to December 31, 1997 to a date not
more than five days prior to the date of such letter, nothing has come
to their attention that would cause them to believe that: (A) with
respect to the period subsequent to December 31, 1997, there were, as
of a specified date not more than five days prior to the date of such
letter, any changes in long-term indebtedness of the Company or any
decrease, excluding net losses, of the Company, capital stock of the
Company, or stockholders' equity of the Company, in each case as
compared with the amounts shown in the most recent balance sheet of
the Company, as applicable, included in the Registration Statement and
the Prospectus, except for changes or decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter, or (B) that during the period from
January 1, 1997 to a specified date not more than five days prior to
the date of such letter, there was any decrease, as compared with the
corresponding period in the prior fiscal year, in total revenues of
the Company, except for decreases which the Registration Statement and
the Prospectus disclose have occurred or may occur or which are set
forth in such letter; (iv) they have read the unaudited pro forma
financial statements included in the Registration Statement and
inquired of officials of the Company about the basis for their
determination of the pro forma adjustments, and whether the unaudited
pro forma financial statements included in the Registration Statement
comply as to form in all material respects with the applicable
accounting requirements of rule 11-02 of Regulation S-X; (v) they have
proved the arithmetic accuracy of the application of
-16-
<PAGE>
the pro forma adjustments to the historical amounts in the unaudited
pro forma financial statements; (vi) on the basis of the review referred
to in (iv) and (v) above, nothing came to their attention that caused them
to believe that the unaudited pro forma financial statements included
in the Registration Statement do not comply as to form in all material
respects with the applicable accounting requirements of rule 11-02 of
Regulation S-X and that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements; and (vii) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, and
other financial information pertaining to the Company set forth in the
Registration Statement and the Prospectus, which have been specified
by you prior to the date of this Agreement, and they (Deloitte &
Touche LLP) are willing to perform to the extent that such amounts,
numbers, percentages, and information may be derived from the general
accounting and financial records of the Company which are subject to
the internal controls of the Company's accounting system, and
excluding any questions requiring an interpretation by legal counsel,
with the results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by you (which
procedures do not constitute an examination in accordance with
generally accepted auditing standards) set forth in such letter.
(e) All proceedings taken in connection with the sale of the
Firm Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to you and to
Underwriters' counsel, and the Underwriters shall have received from
Underwriters' counsel a favorable opinion, dated as of the Closing
Date and the Additional Closing Date, as the case may be, with respect
to the issuance and sale of the Shares, the Registration Statement and
the Prospectus and such other related matters, as you may reasonably
require, and the Company shall have furnished to Underwriters' counsel
such documents as they reasonably request for the purpose of enabling
them to pass upon such matters.
(f) You shall have received from each person who is listed on
SCHEDULE II hereto, an agreement to the effect that such person will
not, directly or indirectly, without your prior written consent,
offer, sell, offer or agree to sell, grant any option to purchase or
otherwise dispose (or announce any offer, sale, grant of an option to
purchase or other disposition) of any shares of Common Stock (or any
securities convertible into, exercisable for or exchangeable or
exercisable for shares of Common Stock) for a period of 180 days, and
with respect to David B. Christofferson and JEDI 90 days, after the
date of the Prospectus.
(g) At the Closing Date, the Shares shall have been approved for
quotation on the NASDAQ and the BSE.
(h) At the Closing Date, the Company shall have executed and
entered into a Warrant Agreement in substantially the form attached
hereto as ANNEX A granting and issuing to the Representative a warrant
to purchase pursuant to such Warrant Agreement 191,250 shares of
Common Stock.
(i) Prior to the Closing Date and each Additional Closing Date,
the Company shall have furnished to you such further information,
certificates and documents as you may reasonably request.
-17-
<PAGE>
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to you or to Underwriters'
counsel pursuant to this Section 6 shall not have been in all material respects
reasonably satisfactory in form and substance to you and to Underwriters'
Counsel, all obligations of the Underwriters hereunder may be canceled by you
at, or at any time prior to, the Closing Date and the obligations of the
Underwriters to purchase the Additional Shares may be canceled by you at, or at
any time prior to, the Additional Closing Date. Notice of such cancellation
shall be given to the Company in writing, or by telephone, telex or telegraph,
confirmed in writing.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
against any and all losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to reasonable
attorneys' fees and any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any
and all amounts paid in settlement of any claim or litigation), joint
or several, to which they or any of them may become subject under the
Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement, or any related preliminary prospectus or the
Prospectus, if used within the time period specified in
Section 4(A)(b) hereof and as supplemented by any post-effective
supplement or as amended by any amendment that has become effective,
or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein (i) in the case of the
Registration Statement, not misleading, and (ii) in the case of the
Prospectus, in light of the circumstances under which they were made,
not misleading; PROVIDED, HOWEVER, that the Company will not be liable
in any such case to the extent but only to the extent that any such
loss, liability, claim, damage or expense arises out of or is based
upon any such untrue statement or alleged untrue statement or omission
or alleged omission made therein in reliance upon and in conformity
with written information furnished to the Company by or on behalf of
any Underwriter through you, in each case expressly for use therein
and PROVIDED, FURTHER, that the Company will not be liable to any
Underwriter or any person controlling such Underwriter with respect to
any such untrue statement or omission made in any preliminary
prospectus that is corrected in the Prospectus (or any amendment or
supplement thereto) if the person asserting any such loss, claim,
damage or liability purchased Shares from such Underwriter but was not
sent or given a copy of the Prospectus (as amended or supplemented) at
or prior to the written confirmation of the sale of such Shares to
such person in any case where such delivery of the Prospectus (as
amended or supplemented) is required by the Act, unless such failure
to deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with Section 4(b) or (c) of this
Agreement. This indemnity agreement will be in addition to any
liability which the Company may otherwise have including under this
Agreement.
(b) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the
Company, each of the officers of the
-18-
<PAGE>
Company who shall have signed the Registration Statement, and each other
person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any
and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act,
the Exchange Act or otherwise, insofar as such losses, liabilities,
claims, damages or expenses (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof
that has become effective or any post-effective supplement thereto, or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent,
but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through you expressly for
use therein, and any such loss, liability, claim, damage or expense
arising out of, based upon or resulting from the fact that a copy of the
Prospectus (as then amended or supplemented) was not sent or given to a
person to whom any Shares were sold at or before the written
confirmation of the sale of the Shares and the untrue statement or
omission was corrected in the Prospectus (as so amended or
supplemented), unless the failure to deliver the Prospectus (as amended
or supplemented) was a result of noncompliance by the Company with
Section 4(A)(b) or (c) of this Agreement. This indemnity will be in
addition to any liability which any Underwriter may otherwise have
including under this Agreement. The Company acknowledges that the
statements set forth in the last paragraph of the outside cover page of
the Prospectus, the last paragraph of the inside cover page and in the
first four and the sixth paragraphs under the caption "Underwriting" in
the Prospectus constitute the only information furnished in writing by
or on behalf of any Underwriter expressly for use in the Registration
Statement, any related preliminary prospectus or the Prospectus or in
any amendment thereof or supplement thereto, as the case may be.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect thereof is
to be made against the indemnifying party under such subsection,
notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it
may have under this Section 7 except to the extent that it has been
prejudiced in any material respect by such failure or from any
liability which it may have otherwise). In case any such action is
brought against any indemnified party, the indemnifying party will be
entitled to participate therein, and to the extent it may elect by
written notice delivered to the indemnified party promptly after
receiving the aforesaid notice from such indemnified party, to assume,
jointly with any other indemnifying party or parties, the defense
thereof with counsel reasonably satisfactory to such indemnified
party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any
such case, but the fees and expenses of such counsel shall be at the
expense of such indemnified party or parties unless (i) the employment
of such counsel shall have been
-19-
<PAGE>
authorized in writing by one of the indemnifying parties in
connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel to have
charge of the defense of such action within a reasonable time
after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded
that there may be defenses available to it or them which are
different from or additional to those available to one or all
of the indemnifying parties (in which case the indemnifying
parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any
of which events such fees and expenses shall be borne by the
indemnifying parties. It is understood that in no event shall
the Company be liable for the fees and expenses of more than
one firm of attorneys (in addition to local counsel) for all
Underwriters and their controlling persons, which firm shall
be designated by you, in connection with any one action or
separate but similar or related actions arising out of the
same general allegations or circumstances. No indemnifying
party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the
entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be
sought under this Section 7 or Section 8 hereof (whether or
not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party
from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party. In
addition, no such settlement, compromise or consent by any
indemnified party shall be binding on any indemnifying party
without such indemnifying party's consent (which consent shall
not be unreasonably withheld) for purposes of the indemnifying
party's indemnity obligations under this Agreement or
otherwise. Any consent of any indemnified party under this
paragraph may be given on behalf of all actual and potential
indemnified parties by you in the case of parties indemnified
pursuant to Section 7(a) above and by the Company in the case
of parties indemnified pursuant to Section 7(b) above.
(d) Any party granted the right to direct the defense of any
action under this Section 7 shall (i) keep the other parties informed
of material developments in the action, (ii) promptly submit to the
other parties copies of all pleadings, responsive pleadings, motions
and other similar legal documents and papers received in connection
with the action, and (iii) permit the other parties and their counsel,
to the extent practicable, to confer on the conduct of the defense of
the action. The parties shall make available to each other and each
other's counsel and accountants all of its or their books and records
relating to the action, and each party shall render to the other such
assistance as may be reasonably required in order to insure the proper
and adequate defense of the action. The parties shall use their
respective good faith efforts to avoid the waiver of any privilege of
another party. The assumption of the defense of any matter by an
indemnifying party shall not constitute an admission of responsibility
to indemnify or in any manner impair or restrict such party's rights
to later seek to be reimbursed its costs and expenses if
indemnification with respect to such matter was not required.
8. CONTRIBUTION. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7 hereof is
applicable but for any reason (other than the failure to provide notice to the
indemnifying party or parties as provided in Section 7(c) above) held to be
unavailable
-20-
<PAGE>
from a party or is insufficient to hold harmless a party indemnified
thereunder, the Company and the Underwriters shall contribute to the
aggregate losses, claims, damages, liabilities and expenses of the nature
contemplated by such indemnification provisions (including any investigation,
legal and other expenses incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claims asserted, but
after deducting in the case of losses, claims, damages, liabilities and
expenses suffered by the Company any contribution received by the Company
from persons, other than the Underwriters, who may also be liable for
contribution, including persons who control the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company)
as incurred to which the Company and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative
benefits received by the Company and the Underwriters from the offering of
the Shares or, if such allocation is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Underwriters, on the other hand, shall be
deemed to be in the same proportion as (x) the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company, on the one hand, bears to (y) the
underwriting discounts and commissions received by the Underwriters, on the
other hand, in each case as set forth in the table on the cover page of the
Prospectus (and as each such amount may be similarly determined to give
effect to the sale of the Option Shares, if any). The relative fault of the
Company and of the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Company and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this Section 8, (i) in
no case shall any Underwriter (except as may be provided in the Agreement
Among Underwriters) be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of
this Section 8, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall
have the same rights to contribution as such Underwriter and each person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed the Registration Statement, each director of the Company and each
person named in the Registration Statement as about to become a director of
the Company shall have the same rights to contribution as the Company,
subject in each case to clauses (i) and (ii) of this Section 8. Any party
entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect
of which a claim for contribution may be made against another party or
parties under this Section 8, notify such party or parties from whom
contribution may be sought, but the omission to so notify such party or
parties shall not relieve the party or parties from whom contribution may be
sought from any obligation it or they may have under this Section 8 or
otherwise except to the extent that
-21-
<PAGE>
the contributing party has been prejudiced in any material respect by such
failure or from any liability which it may have otherwise.
9. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Option Shares hereunder,
and if the Firm Shares or Option Shares with respect to which such
default relates do not (after giving effect to arrangements, if any,
made by you or the Company pursuant to subsection (b) below) exceed in
the aggregate 10% of the number of shares of Firm Shares or Option
Shares, as the case may be, which all Underwriters have agreed to
purchase hereunder, then such Firm Shares or Option Shares to which
the default relates shall be purchased by the non-defaulting
Underwriters in proportion to the respective proportions which the
numbers of Firm Shares set forth opposite their respective names in
SCHEDULE I hereto bear to the aggregate number of Firm Shares set
forth opposite the names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of
the Firm Shares or Option Shares, as the case may be, you may in your
discretion arrange for yourself or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so
agree) to purchase such Firm Shares or Option Shares, as the case may
be, to which such default relates on the terms contained herein. In
the event that within five calendar days after such a default you do
not arrange for the purchase of all of the Firm Shares or Option
Shares, as the case may be, to which such default relates as provided
in this Section 9, and within an additional five calendar days the
Company has not arranged for the purchase of any remaining Firm Shares
or Option Shares, as the case may be, by another party or parties
reasonably satisfactory to you, this Agreement or, in the case of a
default with respect to the Option Shares, the obligations of the
Underwriters to purchase and of the Company to sell the Option Shares
shall thereupon terminate, without liability on the part of the
Company or the Underwriters with respect thereto (except in each case
as provided in Sections 5, 7(a), (b) and (c) and 8 hereof), but
nothing in this Agreement shall relieve a defaulting Underwriter or
Underwriters of its or their liability, if any, to the other several
Underwriters and the Company for damages occasioned by its or their
default hereunder.
(c) In the event that the Firm Shares or Option Shares to which
the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as
aforesaid, you or the Company shall have the right to postpone the
Closing Date or Additional Closing Date, as the case may be, for a
period, not exceeding five business days, in order to effect whatever
changes may thereby be made necessary in the Registration Statement or
the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the
Registration Statement or the Prospectus which, in the opinion of
Underwriters' counsel, may thereby be made necessary or advisable.
The term "Underwriter" as used in this Agreement shall include any
party substituted under this Section 9 with like effect as if it had
originally been a party to this Agreement with respect to such Firm
Shares and Option Shares.
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All
representations and warranties, covenants and agreements of the Underwriters
and the Company contained in this Agreement, including the agreements
contained in Section 5, the indemnity agreements contained in Section 7 and
the contribution
-22-
<PAGE>
agreements contained in Section 8, shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
Underwriter or any controlling person thereof or by or on behalf of the
Company, and shall survive delivery of and payment for the Shares to and by
the several Underwriters. The representations contained in Section 1 and the
agreements contained in Sections 5, 7, 8 and 11(d) hereof shall survive the
termination of this Agreement including pursuant to Sections 9 or 11 hereof.
11. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective upon the later of (i)
when you and the Company shall have received notification of the
effectiveness of the Registration Statement, or (ii) the execution of
this Agreement. Until this Agreement becomes effective as aforesaid,
it may be terminated by the Company by notifying you or by you by
notifying the Company, and the Company and the Underwriters shall have
no liability under this Agreement or otherwise except as provided in
Sections 5, 7, 8 and 11(d) hereof. Notwithstanding the foregoing, the
provisions of this Section 11 and of Sections 1, 5, 7 and 8 hereof
shall at all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at any
time prior to the Closing Date or the obligations of the Underwriters
to purchase the Option Shares at any time prior to the Additional
Closing Date, as the case may be, if since the date hereof (A) any
domestic or international event or act or occurrence has materially
disrupted, or in your opinion will in the immediate future materially
disrupt, the market for the Company's securities or securities in
general; or (B) trading on the New York Stock Exchange or on the
NASDAQ generally or with respect to securities of the Company shall
have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall
have been required, on the New York Stock Exchange or on the NASDAQ by
order of the New York Stock Exchange or the NASDAQ or by order of the
Commission or any other governmental authority having jurisdiction; or
(C) a banking moratorium has been declared by a state or federal
authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Option Shares, as the case may
be, shall have become effective; or (D) if a moratorium in foreign
exchange trading by major international banks or persons has been
declared; or (E) if the United States becomes engaged in hostilities
or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United
States; or (F) if there shall have been such change in the market for
the Company's securities or securities in general or in political,
financial or economic conditions, if the effect of any such event as
in your judgment makes it inadvisable to proceed with the offering,
sale and delivery of the Firm Shares or the Option Shares, as the case
may be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall
be by telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you
as provided in Section 11(a) hereof or (ii) Sections 9(b) or 11(b)
hereof), or if the sale of the Shares provided for herein is not
consummated because any condition to the obligations of the several
Underwriters set forth herein is not satisfied or because of any
refusal, inability or failure on the part of the Company to perform
any agreement herein or comply with any provision hereof, the Company
agrees,
-23-
<PAGE>
subject to demand by you, to reimburse the Underwriters for
all out-of-pocket expenses (including the reasonable fees and expenses
of their counsel), incurred by the several Underwriters in connection
herewith.
12. NOTICE. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to
any Underwriter, shall be mailed, delivered, or telexed or telegraphed and
confirmed in writing, to such Underwriter c/o Gaines, Berland Inc., 1055
Stewart Avenue, Bethpage, New York, N.Y. 10714, Attention: Peter H. Blum; if
sent to the Company shall be mailed, delivered, or telegraphed and confirmed
in writing, at 500 North Water Street, Suite 1100, Corpus Christi, Texas
78471, Attention: Michael E. Johnson.
13. PARTIES. You represent and agree that you are authorized to
act on behalf of the several Underwriters named in SCHEDULE I hereto and the
Company shall be entitled to act and rely on any request, notice, consent,
waiver or agreement purportedly given on behalf of the Underwriters when the
same shall have been given by you on such behalf. This Agreement shall inure
solely to the benefit of, and shall be binding upon, the several Underwriters
and the Company and the controlling persons, directors, officers, employees
and agents referred to in Sections 7 and 8, and their respective successors
and assigns, and no other person shall have or be construed to have any legal
or equitable right, remedy or claim under or in respect of or by virtue of
this Agreement or any provision herein contained. The term "successors and
assigns" shall not include a purchaser, in its capacity as such, of Shares
from any of the Underwriters.
14. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, but without
regard to principles of conflict of law.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
16. JURISDICTION OF DISPUTES. THE COMPANY HEREBY SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE COURTS IN THE BOROUGH OF
MANHATTAN IN THE CITY OF NEW YORK IN ANY SUIT OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
(SIGNATURE PAGE FOLLOWS)
-24-
<PAGE>
If the foregoing correctly sets forth the understanding among you,
the Company please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among us. It is
understood that your acceptance of this letter on behalf of each Underwriter
is pursuant to the authority set forth in a form of Agreement Among
Underwriters, manually or facsimile executed counterparts of which have been
submitted to the Company for examination, but without warranty on your part
as to the authority of the signers thereof.
Very truly yours,
THE COMPANY:
ESENJAY EXPLORATION, INC., a Delaware
corporation
By
----------------------------------------
Michael E. Johnson
President and Chief Executive Officer
Accepted as of the date first above written.
GAINES, BERLAND INC.
By
-------------------------------------
Peter H. Blum
Senior Managing Director
On behalf of themselves and the other several
Underwriters named in Schedule I hereto.
-25-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF FIRM
SHARES TO BE
NAME OF UNDERWRITER PURCHASED
- -------------------------------------------- ---------------
<S> <C>
Gaines, Berland Inc. .......................
Total:
</TABLE>
<PAGE>
SCHEDULE II
LOCKUP LIST OF DIRECTORS, OFFICERS AND STOCKHOLDERS
David W. Berry
Alex M. Cranberg
Michael E. Johnson
Charles J. Smith
Alex B. Campbell
William D. Dodge, III
Jack P. Randall
Hobart A. Smith
David B. Christofferson
Esenjay Exploration Corporation
Aspect Resources LLC
Joint Energy Development Investments II Limited Partnership
<PAGE>
SCHEDULE III
SUBSIDIARIES
<PAGE>
Exhibit 3.(c)
AMENDED BYLAWS
OF
ESENJAY EXPLORATION, INC.
<PAGE>
INDEX
ARTICLE I STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1. Annual Meeting . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2. Special Meetings . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3. Notice or Meetings . . . . . . . . . . . . . . . . . . . . 1
Section 1.4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.5. Adjournment. . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.6. Organization . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.7. Voting . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.8. Business at Stockholders Meetings. . . . . . . . . . . . . 3
ARTICLE II BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.1. Number and Term of Office. . . . . . . . . . . . . . . . . 4
Section 2.2. Chairman of the Board. . . . . . . . . . . . . . . . . . . 4
Section 2.3. Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.4. Notice of Special Meetings.. . . . . . . . . . . . . . . . 4
Section 2.5. Quorum and Organization of Meetings. . . . . . . . . . . . 4
Section 2.6. Committees . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.7. Action Without Meetings. . . . . . . . . . . . . . . . . . 5
Section 2.8. Telephone Meetings . . . . . . . . . . . . . . . . . . . . 6
Section 2.9. Nominations. . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.1. Executive Officers . . . . . . . . . . . . . . . . . . . . 7
Section 3.2. Powers and Duties. . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV RESIGNATIONS, REMOVALS, AND VACANCIES . . . . . . . . . . . . . . . 7
Section 4.1. Resignations . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.2. Removals . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.3. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE V CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 5.1. Stock Certificates . . . . . . . . . . . . . . . . . . . . 8
Section 5.2. Transfer of Shares . . . . . . . . . . . . . . . . . . . . 8
Section 5.3. Fixing Record Date . . . . . . . . . . . . . . . . . . . . 8
Section 5.4. Lost Certificates. . . . . . . . . . . . . . . . . . . . . 9
Section 5.5. Regulations. . . . . . . . . . . . . . . . . . . . . . . . 9
i
<PAGE>
ARTICLE VI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.1. Corporate Seal . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.2. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . 9
Section 6.3. Notices and Waivers Thereof. . . . . . . . . . . . . . . .10
Section 6.4. Stock of Other Corporations or Other Interests . . . . . .10
ARTICLE VII AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .11
ii
<PAGE>
ESENJAY EXPLORATION, INC.
A DELAWARE CORPORATION
AMENDED BYLAWS
ARTICLE I
STOCKHOLDERS
SECTION 1.1. ANNUAL MEETING.
An annual meeting of stockholders for the purpose of electing directors and
of transacting such other business as may come before it shall be held each year
at such date, time, and place, either within or without the State of Delaware,
as may be specified by the Board of Directors.
SECTION 1.2. SPECIAL MEETINGS.
Special meetings of stockholders for any purpose or purposes may be held
at any time only upon call of a majority of the Board of Directors or by
stockholders owning an aggregate of at least ten percent of the Corporation's
issued and outstanding stock, at such time and place either within or without
the State of Delaware as may be stated in the notice.
SECTION 1.3. NOTICE OR MEETINGS.
Written notice of stockholders meetings, stating the place, date, and hour
thereof, and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by the Chairman of the Board, if
any, the President, any Vice President, the Secretary, or an Assistant
Secretary, to each stockholder entitled to vote thereat at least ten (10) days
but not more than sixty (60) days before the date of the meeting, unless a
different period is prescribed by law.
SECTION 1.4. QUORUM.
Except as otherwise provided by law or in the Certificate of Incorporation
or these Bylaws, at any meeting of stockholders, the holders of a majority of
the outstanding shares of each class of stock entitled to vote at the meeting
shall be present or represented by proxy in order to constitute a quorum for the
transaction of any business. In the absence of a quorum, a majority in interest
of the stockholders present who are entitled at the time to vote or the chairman
of the meeting may adjourn the meeting from time to time in the manner provided
in Section 1.5 of these Bylaws until a quorum shall attend.
<PAGE>
SECTION 1.5. ADJOURNMENT.
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment was taken. At the adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty (30) days, or if
after the adjournment, a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting.
SECTION 1.6. ORGANIZATION.
The Chairman of the Board, if any, or in his absence the President, or in
their absence any Vice President, shall call to order meetings of stockholders
and shall act as chairman of such meetings. The Board of Directors or, if the
Board fails to act, the stockholders may appoint any stockholder, director, or
officer of the Corporation to act as chairman of any meeting in the absence of
the Chairman of the Board, the President, and all Vice Presidents.
The Secretary of the Corporation shall act as secretary of all meetings of
stockholders, but, in the absence of the Secretary, the chairman of the meeting
may appoint any other person to act as secretary of the meeting.
SECTION 1.7. VOTING.
Except as otherwise provided by law or in the Certificate of Incorporation
or these Bylaws and except for the election of directors, at any meeting duly
called and held at which a quorum is present, a majority of the votes cast at
such meeting upon a given question by the holders of outstanding shares of stock
of all classes of stock of the Corporation entitled to vote thereon who are
present in person or by proxy shall decide such question. At any meeting duly
called and held for the election of directors at which a quorum is present,
directors shall be elected by a plurality of the votes cast by the holders
(acting as such) of shares of stock of the Corporation entitled to elect such
directors. The Board of Directors in advance of any stockholders' meeting may
appoint one or more inspectors to act at the meeting or any adjournment thereof.
If inspectors are not so appointed, the person presiding at a stockholders'
meeting may, and on the request of any stockholder entitled to vote thereat
shall, appoint one or more inspectors. In case any person appointed as
inspector fails to appear or act, the vacancy may be filled by the Board in
advance of the meeting or at the meeting by the person present thereat. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to discharge the duties of inspector at such meeting with
strict impartiality and according to the best of his ability.
2
<PAGE>
SECTION 1.8. BUSINESS AT STOCKHOLDERS MEETINGS.
At an annual or special meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before a meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) brought before the meeting by or at the direction of
the Board of Directors, (c) properly brought before an annual meeting by a
stockholder or (d) if, and only if, the notice of a special meeting provides for
business to be brought before the meeting by stockholders, properly brought
before the meeting by a stockholder. For business to be properly brought before
the meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than forty (40) days
prior to the meeting; provided, however, that in the event less than forty-five
(45) days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the tenth day following the day on which such notice of
the date of the meeting was mailed or such disclosure was made, but not less
than five days prior to the meeting. A stockholder's notice to the Secretary
shall set forth (a) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting,
(b) the name and address, as they appear on the Corporation's books, of the
stockholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.8. The
chairman of a meeting shall, if the facts warrant, determine that business was
not properly brought before the meeting and in accordance with the provisions of
this Section 1.8, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1. NUMBER AND TERM OF OFFICE.
The business, property, and affairs of the Corporation shall be managed by
or under the direction of a Board of at least four (4) and no more than fourteen
(14) directors; provided, however, that the Board, by resolution adopted by vote
of a majority of the then authorized number of directors, may increase or
decrease the number of directors within such minimum and maximum limitations.
The directors shall be elected by the holders of shares entitled to vote thereon
at the annual meeting of stockholders, and each shall serve as provided herein
and until his respective successor has been elected and qualified. The
directors shall be divided into three (3) classes, as nearly equal in number as
reasonably possible, with the terms of office of the first class to expire at
3
<PAGE>
the 2000 annual meeting of stockholders, the term of office of the second class
to expire at the 1999 annual meeting of stockholders and the term of office of
the third class to expire at the 1998 annual meeting of stockholders. At each
annual meeting of stockholders following such initial classification and
election, directors elected to succeed those directors whose terms expire shall
be elected for a term of office to expire at the third succeeding annual meeting
of stockholders after their election.
SECTION 2.2. CHAIRMAN OF THE BOARD.
The directors may elect one of their members to be Chairman of the Board of
Directors. The Chairman shall be subject to the control of and may be removed
by the Board of Directors. He shall perform such duties as may from time to
time be assigned to him by the Board.
SECTION 2.3. MEETINGS.
The annual meeting of the Board of Directors, for the election of officers
and the transaction of such other business as may come before the meeting, shall
be held without notice at the same place as, and immediately following, the
annual meeting of the stockholders.
Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time and
place as shall be designated in the notice of the meeting whenever called by the
Chairman of the Board, the President or by a majority of the directors then in
the office.
SECTION 2.4. NOTICE OF SPECIAL MEETINGS.
The Secretary, or in his absence, any other officer of the Corporation,
shall give each director notice of the time and place of holding of special
meetings of the Board of Directors by mail or overnight courier at least five
(5) days before the meeting, or by facsimile, telegram, cable, or personal
service at least three (3) days before the meeting. Unless otherwise stated in
the notice thereof, any and all business may be transacted at any meeting
without specification of such business in the notice.
SECTION 2.5. QUORUM AND ORGANIZATION OF MEETINGS.
A majority of the total number of members of the Board of Directors as
constituted from time to time shall constitute a quorum for the transaction of
business, but, if at any meeting of the Board of Directors (whether or not
adjourned from a previous meeting) there shall be less than a quorum present, a
majority of those present may adjourn the meeting to another time and place, and
the meeting may be held as adjourned without further notice or waiver. Except
as otherwise provided by law or in the Certificate of Incorporation or these
Bylaws, a majority of the directors present at any meeting at which a quorum is
present may decide any question brought before such meeting.
4
<PAGE>
Meetings shall be presided over by the Chairman of the Board, if any, or in
his absence by the President, or in the absence of both by such other person
as the directors may select. The Secretary of the Corporation shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
SECTION 2.6. COMMITTEES.
The Board of Directors may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the Corporation. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified as members of a committee and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent provided in the resolution of the Board of Directors, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business, property, and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have power or authority in reference to
amending the Certificate of Incorporation of Corporation (except that a
committee may, to the extent authorize in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
pursuant to authority expressly granted to the Board of Directors by the
Corporation's Certificate of Incorporation, fix any of the preferences or rights
of such shares relating to dividends, redemption, dissolution, any distribution
of assets of the Corporation, or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the same
or any other class or classes of stock of the Corporation), adopting an
agreement of merger or consolidation under Sections 251 or 252 of the General
Corporation Law of the State of Delaware, recommending to the stockholders the
sale, lease, or exchange of all or substantially all of the Corporation's
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of dissolution, or amending these Bylaws; and,
unless the resolution expressly so provided, no such committee shall have the
power or authority to declare a dividend, to authorize the issuance of stock, or
to adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of the State of Delaware. Each committee which may be
established by the Board of Directors pursuant to these Bylaws may fix its own
rules and procedures. Notice of meetings of committees, other than of regular
meetings provided for by the rules, shall be given to committee members. All
action taken by committees shall be recorded in minutes of the meetings.
SECTION 2.7. ACTION WITHOUT MEETINGS.
Nothing contained in these Bylaws shall be deemed to restrict the power of
members of the Board of Directors or of any committee designated by the Board to
take any action required or permitted to be taken by them without a meeting.
5
<PAGE>
SECTION 2.8. TELEPHONE MEETINGS.
Nothing contained in these Bylaws shall be deemed to restrict the power of
members of the Board of Directors, or any committee designated by the Board, to
participate in a meeting of the Board, or committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other.
SECTION 2.9. NOMINATIONS.
Nominations for the election of directors shall be made by the Board of
Directors or by any stockholder entitled to vote in the election of directors
generally. However, any stockholder entitled to vote in the election of
directors generally may nominate one or more persons for election as directors
at a meeting only if timely notice of such stockholder's intent to make such
nomination or nominations has been given in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
fewer than forty (40) days prior to the meeting; provided, however, that in the
event that less than forty-five (45) days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received no later than the close of business
on the tenth day following the day on which such notice of the date of the
meeting was mailed or such public disclosure was made. Each such notice shall
set forth (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote for the election of directors on the date of such notice and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; (d) such other information regarding each nominee
proposed by such stockholders as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (e) the consent of each nominee to serve as a director
of the Corporation if so elected.
If the chairman of the meeting for the election of directors determines
that a nomination of any candidate for election as a director at such meeting
was not made in accordance with the applicable provisions of this Section 2.9,
such nomination shall be void.
6
<PAGE>
ARTICLE III
OFFICERS
SECTION 3.1. EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a President, one or more
Vice Presidents, a Treasurer, and a Secretary, each of whom shall be elected by
the Board of Directors. The Board of Directors may elect or appoint such other
officers (including a Controller and one or more Assistant Treasurers and
Assistant Secretaries) as it may deem necessary or desirable. Each officer
shall hold office for such term as may be prescribed by the Board of Directors
from time to time. Any person may hold at one time two or more offices.
SECTION 3.2. POWERS AND DUTIES.
The Chairman of the Board, if any, or, in the absence of the Chairman of
the Board, the President, shall preside at all meetings of the stockholders and
of the Board of Directors. The President shall be the chief executive officer
of the Corporation. In the absence of the President, a Vice President appointed
by the President or, if the President fails to make such appointment, by the
Board, shall perform all the duties of the President. The officers and agents
of the Corporation shall each have such powers and authority and shall perform
such duties in the management of the business, property, and affairs of the
Corporation as generally pertain to their respective offices, as well as such
power and authorities and such duties as from time to time may be prescribed by
the Board of Directors.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
SECTION 4.1. RESIGNATIONS.
Any director or officer of the Corporation, or any member of any committee,
may resign at any time by giving written notice to the Board of Directors, the
President, or the Secretary of the Corporation. Any such resignation shall take
effect at the time specified therein or, if the time be not specified therein,
then upon receipt thereof. The acceptance of such resignation shall not be
necessary to make it effective.
7
<PAGE>
SECTION 4.2. REMOVALS.
The Board of Directors, by a vote of not less than a majority of the entire
Board, at any meeting thereof or by written consent, at any time may, to the
extent permitted by law, remove with or without cause from office or terminate
the employment of any officer or member of any committee and may, with or
without cause, disband any committee. Any director or the entire Board of
Directors may be removed, with cause, by the holders of a majority of the shares
entitled at the time to vote at an election of directors.
SECTION 4.3. VACANCIES.
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from increase in the number of directors, may be filled
at any time by a majority of the directors then in office (even though less than
a quorum remains) or, in the case of any vacancy in the office of any director,
by the stockholders who are at the time entitled to vote at an election of
directors, and, subject to the provisions of this Article IV, the person so
chosen shall hold office until his successor shall have been elected and
qualified.
ARTICLE V
CAPITAL STOCK
SECTION 5.1. STOCK CERTIFICATES.
The certificates for shares of the capital stock of the Corporation shall
be in such form as shall be prescribed by law and approved, from time to time,
by the Board of Directors.
SECTION 5.2. TRANSFER OF SHARES.
Shares of the capital stock of the Corporation may be transferred on the
books of the Corporation only by the holder of such shares or by his duly
authorized attorney, upon the surrender to the Corporation or its transfer agent
of the certificate representing such stock properly endorsed.
SECTION 5.3. FIXING RECORD DATE.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action.
the Board of Directors may fix, in
8
<PAGE>
advance, a record date, which, unless otherwise provided by law, shall not be
more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other actions.
SECTION 5.4. LOST CERTIFICATES.
The Board of Directors or any transfer agent of the Corporation may
direct a new certificate or certificates representing stock of the
Corporation to be issued in place of any certificate or certificates
theretofore issued by the Corporation, alleged to have been lost, stolen, or
destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen, or destroyed. When authorizing
such issue of a new certificate or certificates, the Board of Directors (or
any transfer agent of the Corporation authorized to do so by a resolution of
the Board of Directors) may, in its discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as the Board of Directors (or any transfer
agent so authorized) shall direct to indemnify the Corporation against any
claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen, or destroyed or the issuance
of such new certificate or certificates, and such requirement may be general
or confined to specific instances.
SECTION 5.5. REGULATIONS.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issuance,
transfer, registration, cancellation, and replacement of certificates
representing stock of the Corporation.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. CORPORATE SEAL.
The corporate seal shall have inscribed thereon the name of the Corporation
and shall be in such form as may be approved from time to time by the Board of
Directors.
SECTION 6.2. FISCAL YEAR.
The fiscal year of the Corporation shall begin on the 1st day of January in
each year and terminate on the 31st day of December in each succeeding year.
9
<PAGE>
SECTION 6.3. NOTICES AND WAIVERS THEREOF.
Whenever any notice whatever is required by law, the Certificate of
Incorporation, or these Bylaws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail or overnight courier, or, in the case of directors or
officers, by facsimile, telegram, or cable, addressed to such address as appears
on the books of the Corporation. Any notice given by facsimile, telegram, or
cable shall be deemed to have been given when it shall have been transmitted and
any notice given by mail or overnight courier, shall be deemed to have been
given when it shall have been deposited with an overnight courier, or in the
United States mail with postage thereon prepaid. Whenever any notice is
required to be given by law, the Certificate of Incorporation, or these Bylaws,
a written waiver thereof, signed by the person entitled to such notice, whether
before or after the meeting or the time stated therein, shall be deemed
equivalent in all respects to such notice to the full extent permitted by law.
SECTION 6.4. STOCK OF OTHER CORPORATIONS OR OTHER INTERESTS.
Unless otherwise ordered by the Board of Directors, the President, the
Secretary, and such attorneys or agents of the Corporation as may be from time
to time authorized by the Board of Directors or the President, shall have full
power and authority on behalf of this Corporation to attend and to act and vote
in person or by proxy at any meeting of the holders of securities of any
corporations or other entity in which this Corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The President, the Secretary, or such attorneys or
agents, may also execute and deliver on behalf of the Corporation powers of
attorney, proxies, consents, waivers, and other instruments relating to the
shares or securities owned or held by this Corporation.
10
<PAGE>
ARTICLE VII
AMENDMENTS
The holders of shares entitled at the time to vote for the election of
directors shall have power to adopt, amend, or repeal the Bylaws of the
Corporation by vote of not less than a majority of such shares, and except as
otherwise provided by law, the Board of Directors shall have power equal in all
respects to that of the stockholders to adopt, amend, or repeal the Bylaws by
vote of not less than a majority of the entire Board. However, any Bylaws
adopted by the Board may be amended or repealed by vote of the holders of a
majority of the shares entitled at the time to vote for the election of
directors.
ADOPTED AND APPROVED as of this 15th day of July, 1998.
/s/ David B. Christofferson
------------------------------------
David B. Christofferson, SECRETARY
11
<PAGE>
Exhibit 5.(a)
July 16, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Esenjay Exploration, Inc.
Ladies and Gentlemen:
We have represented Esenjay Exploration, Inc., a Delaware corporation
(the "Company"), in connection with its Registration Statement on Form SB-2
(the "Registration Statement"), under the Securities Act of 1933, as amended,
of up to 4,600,000 shares (the "Primary Shares") of its common stock, par
value $.01 per share ("Common Stock"), warrants (the "Warrants") to purchase
up to 210,000 shares of Common Stock, and 210,000 shares of Common Stock
issuable upon exercise of such warrants (the "Warrant Shares"). In such
capacity, we have examined the Certificate of Incorporation, bylaws and
corporate proceedings of the Company, and based upon such examination and
having regard for applicable legal principles, it is our opinion that:
(i) the 4,600,000 Primary Shares will, upon issuance, be duly
authorized, validly issued, fully paid and non-assessable, outstanding shares
of the Company's Common Stock;
(ii) the Warrants will, upon issuance, be duly authorized, validly
issued, fully paid and non-assessable warrants of the Company; and
(iii) the Warrant Shares will, upon issuance in accordance with the terms
of the Warrants, be duly authorized, validly issued, fully paid and
non-assessable outstanding shares of the Company's Common Stock.
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters"
in the Prospectus included as part of the Registration Statement.
Very truly yours,
/s/ Porter & Hedges, L.L.P.
PORTER & HEDGES, L.L.P.
<PAGE>
Exhibit 10.(mm)
ANNEX A
WARRANT FOR COMMON STOCK
W/CASHLESS EXERCISE
ESENJAY EXPLORATION, INC.
Warrant for the Purchase of Shares of Common Stock,
par value $0.01 per share
No. 1 191,250 Shares
THIS CERTIFIES that, GAINES, BERLAND INC. (the "HOLDER"), is entitled
to subscribe for and purchase from ESENJAY EXPLORATION, INC., a Delaware
corporation (the "COMPANY"), upon the terms and conditions set forth herein, at
any time or from time to time after July 15, 1999, and before 5:00 P.M. on July
15, 2002, New York time (the "EXERCISE PERIOD"), 191,250 shares of the Company's
Common Stock, par value $0.01 per share ("COMMON STOCK"), at a price of $7.20
per share, as adjusted from time to time as described in Section 6 hereof (the
"EXERCISE PRICE"). This Warrant is the warrant or one of the warrants
(collectively, including any warrants issued upon the exercise or transfer of
any such warrants in whole or in part, the "WARRANTS") issued pursuant to the
Underwriting Agreement, dated July 15, 1998, between Gaines, Berland Inc., as
representative of the several Underwriters named therein, and the Company. The
term the "HOLDER" as used herein shall include any transferee to whom this
Warrant has been transferred in accordance with the terms hereof and with
applicable law.
The number of shares of Common Stock issuable upon exercise of the
Warrants (the "WARRANT SHARES") and the Exercise Price may be adjusted from time
to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period, as to
the whole or any lesser number of whole Warrant Shares, by the surrender of this
Warrant (with the election at the end hereof duly executed) to the Company at
its office at 500 North Water Street, Suite 1100, Corpus Christi, Texas 78471,
or at such other place as is designated in writing by the Company, together with
a certified or bank cashier's check payable to the order of the Company in an
amount equal to the Exercise Price multiplied by the number of Warrant Shares
for which this Warrant is being exercised (the "STOCK PURCHASE PRICE").
2. (a) In lieu of the payment of the Stock Purchase Price, the
Holder shall have the right (but not the obligation), to require the Company to
convert this Warrant, in whole or in part, into shares of Common Stock (the
"CONVERSION RIGHT") as provided for in this Section 2. Upon exercise of the
Conversion Right, the Company shall deliver to the Holder (without payment by
the Holder of any of the Stock Purchase Price) that number of shares of Common
Stock (the "CONVERSION SHARES") equal to the quotient obtained by dividing (x)
the value of this Warrant (or portion thereof as to which the Conversion Right
is being exercised if the Conversion Right is being exercised in part) at the
time the Conversion Right is exercised (determined by subtracting the aggregate
Stock Purchase Price of the shares of Common Stock as to which the Conversion
Right is being exercised in effect immediately prior to the exercise of the
Conversion Right from the aggregate Current Market Price (as hereinafter
defined) of the shares of Common Stock as to which the Conversion Right is being
exercised immediately prior to the exercise of the Conversion Right) by (y) the
Current Market Price
<PAGE>
of one share of Common Stock immediately prior to the exercise of the Conversion
Right. As used herein and for the purpose of any computation under Section 6,
the Current Market Price per share of Common Stock on any date shall be deemed
to be the average of the daily closing prices for the 30 consecutive trading
days immediately preceding the date in question. The closing price for each day
shall be the last reported sales price regular way or, in case no such reported
sale takes place on such day, the closing bid price regular way, in either case
on the principal national securities exchange (including, for purposes hereof,
The Nasdaq SmallCap Market) on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, the highest reported bid price for the Common
Stock as furnished by the National Association of Securities Dealers, Inc.
through Nasdaq or a similar organization if Nasdaq is no longer reporting such
information. If on any such date the Common Stock is not listed or admitted to
trading on any national securities exchange and is not quoted by Nasdaq or any
similar organization, the fair value of a share of Common Stock on such date,
as determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error, shall be used.
(b) The Conversion Rights provided under this Section 2 may be
exercised in whole or in part and at any time and from time to time while any
Warrants remain outstanding. In order to exercise the Conversion Right, the
Holder shall surrender to the Company, at its offices, this Warrant with the
Notice of Conversion at the end hereof duly executed. The presentation and
surrender shall be deemed a waiver of the Holder's obligation to pay all or any
portion of the aggregate purchase price payable for the shares of Common Stock
as to which such Conversion Right is being exercised. This Warrant (or so much
thereof as shall have been surrendered for conversion) shall be deemed to have
been converted immediately prior to the close of business on the day of
surrender of such Warrant for conversion in accordance with the foregoing
provisions.
3. Upon each exercise of the Holder's rights to purchase Warrant
Shares or Conversion Shares, the Holder shall be deemed to be the holder of
record of the Warrant Shares or Conversion Shares issuable upon such exercise or
conversion, notwithstanding that the transfer books of the Company shall then be
closed or certificates representing such Warrant Shares or Conversion Shares
shall not then have been actually delivered to the Holder. As soon as
practicable after each such exercise or conversion of this Warrant, the Company
shall issue and deliver to the Holder a certificate or certificates for the
Warrant Shares or Conversion Shares issuable upon such exercise or conversion,
registered in the name of the Holder or its designee. If this Warrant should be
exercised or converted in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the right
of the Holder to purchase the balance of the Warrant Shares (or portions
thereof) subject to purchase hereunder.
4. Any Warrants issued upon the transfer or exercise or conversion
in part of this Warrant shall be numbered and shall be registered in a
Warrant Register as they are issued. The Company shall be entitled to treat
the registered holder of any Warrant on the Warrant Register as the owner in
fact thereof for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Warrant on the part of any
other person, and shall not be liable for any registration or transfer of
Warrants which are registered or to be registered in the name of a fiduciary
or the nominee of a fiduciary unless made with the actual knowledge that a
fiduciary or nominee is committing a breach of trust in requesting such
registration or transfer, or with the knowledge of such facts that its
participation therein amounts to bad faith. This Warrant shall be
transferable only on the books of the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative,
or accompanied by proper evidence of succession, assignment, or authority to
transfer. In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his
or its authority shall be produced. Upon any registration of transfer, the
Company shall deliver a new Warrant or Warrants to the person entitled
thereto. This Warrant may be exchanged, at the option of the Holder thereof,
for another Warrant, or other Warrants of different denominations, of like
tenor and representing in the aggregate the right to purchase a like number
-2-
<PAGE>
of Warrant Shares (or portions thereof), upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "ACT"), and the rules
and regulations thereunder.
5. The Company shall at all times reserve and keep available out of
its authorized and unissued Common Stock, solely for the purpose of providing
for the exercise of the rights to purchase all Warrant Shares and/or Conversion
Shares granted pursuant to the Warrants, such number of shares of Common Stock
as shall, from time to time, be sufficient therefor. The Company covenants that
all shares of Common Stock issuable upon exercise of this Warrant, upon receipt
by the Company of the full Exercise Price therefor, and all shares of Common
Stock issuable upon conversion of this Warrant, shall be validly issued, fully
paid, and nonassessable, without any personal liability attaching to the
ownership thereof, and will not be issued in violation of any preemptive rights
of stockholders, optionholders, warrantholders and any other persons and the
Holders will receive good title to the securities purchased by them,
respectively, free and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements and voting trusts which might be created
by acts or omissions to act of the Company.
6. (a) In case the Company shall at any time after the date the
Warrants were first issued (i) declare a dividend on the outstanding Common
Stock payable in shares of its capital stock, (ii) subdivide the outstanding
Common Stock, (iii) combine the outstanding Common Stock into a smaller number
of shares, or (iv) issue any shares of its capital stock by reclassification of
the Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing corporation),
then, in each case, the Exercise Price, and the number and kind of securities
issuable upon exercise or conversion of this Warrant, in effect at the time of
the record date for such dividend or of the effective date of such subdivision,
combination, or reclassification, shall be proportionately adjusted so that the
Holder after such time shall be entitled to receive the aggregate number and
kind of shares which, if such Warrant had been exercised or converted
immediately prior to such time, he would have owned upon such exercise or
conversion and been entitled to receive by virtue of such dividend, subdivision,
combination, or reclassification. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) In case the Company shall distribute to all holders of Common
Stock (including any such distribution made to the stockholders of the Company
in connection with a consolidation or merger in which the Company is the
continuing corporation) evidences of its indebtedness, cash (other than any cash
dividend which, together with any cash dividends paid within the 12 months prior
to the record date for such distribution, does not exceed 5% of the Current
Market Price at the record date for such distribution) or assets (other than
distributions and dividends payable in shares of Common Stock), or rights,
options, or warrants to subscribe for or purchase Common Stock, or securities
convertible into or exchangeable for shares of Common Stock, then, in each case,
the Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the record date for the determination of stockholders
entitled to receive such distribution by a fraction, the numerator of which
shall be the Current Market Price per share of Common Stock on such record date,
less the fair market value (as determined in good faith by the board of
directors of the Company, whose determination shall be conclusive absent
manifest error) of the portion of the evidences of indebtedness or assets so to
be distributed, or of such rights, options, or warrants or convertible or
exchangeable securities, or the amount of such cash, applicable to one share,
and the denominator of which shall be such Current Market Price per share of
Common Stock. Such adjustment shall be made whenever any such distribution is
made, and shall become effective on the record date for the determination of
stockholders entitled to receive such distribution.
-3-
<PAGE>
(c) No adjustment in the Exercise Price shall be required if such
adjustment is less than $0.05; PROVIDED, HOWEVER, that any adjustments which by
reason of this Section 6 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Section 6 shall be made to the nearest cent or to the nearest
one-thousandth of a share, as the case may be.
(d) In any case in which this Section 6 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the Holder, if the Holder exercised or converted this Warrant
after such record date, the shares of Common Stock, if any, issuable upon such
exercise or conversion over and above the shares of Common Stock, if any,
issuable upon such exercise or conversion on the basis of the Exercise Price in
effect prior to such adjustment; PROVIDED, HOWEVER that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing the
Holder's right to receive such additional shares upon the occurrence of the
event requiring such adjustment.
(e) Upon each adjustment of the Exercise Price as a result of the
calculations made in this Section, this Warrant shall thereafter evidence the
right to purchase, at the adjusted Exercise Price, that number of shares
(calculated to the nearest thousandth) obtained by dividing (i) the product
obtained by multiplying the number of shares purchasable upon exercise of this
Warrant prior to adjustment of the number of shares by the Exercise Price in
effect prior to adjustment of the Exercise Price, by (ii) the Exercise Price in
effect after such adjustment of the Exercise Price.
(f) Whenever there shall be an adjustment as provided in this Section
6, the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to the Holder, at its address as it shall
appear in the Warrant Register, which notice shall be accompanied by an
officer's certificate setting forth the number of Warrant Shares purchasable
upon the exercise of this Warrant and the Exercise Price after such adjustment
and setting forth a brief statement of the facts requiring such adjustment and
the computation thereof, which officer's certificate shall be conclusive
evidence of the correctness of any such adjustment absent manifest error.
(g) The Company shall not be required to issue fractions of shares of
Common Stock or other capital stock of the Company upon the exercise or
conversion of this Warrant. If any fraction of a share would be issuable on the
exercise or conversion of this Warrant (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price of such share of Common Stock on the date
of exercise or conversion of this Warrant.
7. (a) In case of any consolidation with or merger of the Company
with or into another corporation (other than a merger or consolidation in which
the Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise or conversion of this Warrant solely
the kind and amount of shares of stock and other securities, property, cash, or
any combination thereof receivable upon such consolidation, merger, sale, lease,
or conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised or converted immediately prior to such
consolidation, merger, sale, lease, or conveyance, and (ii) make effective
provision in its certificate of incorporation or otherwise, if necessary, to
effect such agreement. Such agreement shall provide for adjustments which shall
be as nearly equivalent as practicable to the adjustments in Section 6.
(b) In case of any reclassification or change of the shares of Common
Stock issuable upon exercise or conversion of this Warrant (other than a change
in par value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more
-4-
<PAGE>
classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the shares of
Common Stock (other than a change in par value, or from no par value to a
specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the Holder shall have the right thereafter to receive upon exercise
or conversion of this Warrant solely the kind and amount of shares of stock
and other securities, property, cash, or any combination thereof receivable
upon such reclassification, change, consolidation, or merger by a holder of
the number of shares of Common Stock for which this Warrant might have been
exercised or converted immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made
for adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 6.
(c) The above provisions of this Section 7 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
8. In case at any time the Company shall propose
(a) to pay any dividend or make any distribution on shares of
Common Stock in shares of Common Stock or make any other distribution
(other than regularly scheduled cash dividends which are not in a greater
amount per share than the most recent such cash dividend) to all holders of
Common Stock; or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding
shares of Common Stock, or any consolidation, merger, sale, lease, or
conveyance of property, described in Section 7; or
(d) to effect any liquidation, dissolution, or winding-up of
the Company; or
(e) to take any other action which would cause an adjustment to
the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be entitled to receive any such dividend, distribution, rights,
warrants, or other securities are to be determined, (ii) the date on which any
such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
9. The issuance of any shares or other securities upon the exercise
or conversion of this Warrant, and the delivery of certificates or other
instruments representing such shares or other securities, shall be made without
charge to the Holder for any tax or other charge in respect of such issuance.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of any certificate
in a name other than that of the Holder and the Company shall not be required to
issue or deliver any such certificate unless and until the person or persons
requesting the issue
-5-
<PAGE>
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
10. (a) The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a Registration Statement on Form SB-2 (file no.
333-53581) (as declared effective on July _____, 1998, the "REGISTRATION
STATEMENT"), which registered under the Securities Act of 1933 (the "ACT") the
Warrant and the shares of Common Stock underlying the Warrant (the "WARRANT
SHARES"). The Company shall keep effective the Registration Statement or
qualification contemplated by this Section 10 and shall from time to time amend
or supplement the Registration Statement, preliminary prospectus, final
prospectus, application, document and communication for such period of time as
shall be required to permit all Holders to complete the offer and sale of the
Warrant Shares covered thereby. The Company shall in no event be required to
keep any such registration or qualification in effect for a period in excess of
one year from July 15, 2002.
(b) The Company shall use its best efforts to cause the Warrant
Shares so registered to be registered or qualified for sale under the securities
or blue sky laws of such jurisdictions as the Holder or such holders may
reasonably request; PROVIDED, HOWEVER, that the Company shall not for any such
purpose be required to (A) qualify generally to do business as a foreign
corporation in any jurisdiction wherein it is not otherwise required to be so
qualified, (B) subject itself to taxation in any jurisdiction wherein it is not
so subject or (C) consent to general service of process in any such jurisdiction
or otherwise take action that would subject it to the general jurisdiction of
the courts of any jurisdiction to which it is not so subject.
(c) The Company shall furnish to each Holder such number of copies of
the Registration Statement and of each amendment and supplement thereto (in each
case, including all exhibits), such reasonable number of copies of each
prospectus contained in such Registration Statement and each supplement or
amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Holder may reasonably request to facilitate the
disposition of the Warrant Shares included in such registration.
(d) The Company shall furnish each Holder of any Warrant Shares so
registered with an opinion of its counsel (reasonably acceptable to the Holders)
to the effect that (i) the Registration Statement has become effective under the
Act and no order suspending the effectiveness of the Registration Statement,
preventing or suspending the use of the Registration Statement, any preliminary
prospectus, any final prospectus, or any amendment or supplement thereto has
been issued, nor has the Commission or any securities or blue sky authority of
any jurisdiction instituted or threatened to institute any proceedings with
respect to such an order, (ii) the Registration Statement and each prospectus
forming a part thereof (including each preliminary prospectus), and any
amendment or supplement thereto, complies as to form with the Act and the rules
and regulations thereunder, and (iii) such counsel has no knowledge of any
material misstatement or omission in such Registration Statement or any
prospectus, as amended or supplemented. Such opinion shall also state the
jurisdictions in which the Warrant Shares have been registered or qualified for
sale pursuant to the provisions of Section 10(c).
(e) The Company agrees that until all the Warrant Shares have been
sold under the Registration Statement, it shall keep current in filing all
reports, statements and other materials required to be filed with the Commission
to permit all Holders of the Warrant Shares to sell such securities under the
Registration Statement.
11. (a) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless each Holder, its officers, directors, partners,
employees, agents, and counsel, and each person, if any, who controls any such
person within the meaning of Section 15 of the Act or Section 20(a) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 11, but not be
limited to, reasonable attorneys' fees and any and all reasonable expense
whatsoever incurred in investigating,
-6-
<PAGE>
preparing, or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation), as and when incurred, arising out of, based upon, or in connection
with (i) any untrue statement or alleged untrue statement of a material fact
contained (A) in the Registration Statement, preliminary prospectus, or final
prospectus (as from time to time amended and supplemented), or any amendment or
supplement thereto, relating to the sale of any of the Warrant Shares, or (B) in
any application or other document or communication (in this Section 11
collectively called an "APPLICATION") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to register or qualify any of the Warrant Shares under
the securities or blue sky laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company with respect to
such Holder by or on behalf of such person expressly for inclusion in the
Registration Statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Warrant. The foregoing agreement to indemnify shall
be in addition to any liability the Company may otherwise have, including
liabilities arising under this Warrant.
If any action is brought against any Holder or any of its officers,
directors, partners, employees, agents, or counsel, or any controlling persons
of such person (an "INDEMNIFIED PARTY") in respect of which indemnity may be
sought against the Company pursuant to the foregoing paragraph, such indemnified
party or parties shall promptly notify the Company in writing of the institution
of such action (but the failure so to notify shall not relieve the Company from
any liability pursuant to this Section 11(a) and the Company shall promptly
assume the defense of such action, including the employment of counsel (which
counsel shall be reasonably satisfactory to such indemnified party or parties
and will not exceed one law firm) and payment of expenses. Such indemnified
party or parties shall have the right to employ its or their own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
such indemnified party or parties unless the employment of such counsel shall
have been authorized in writing by the Company in connection with the defense of
such action or the Company shall not have promptly employed counsel reasonably
satisfactory to such indemnified party or parties to have charge of the defense
of such action or such indemnified party or parties shall have reasonably
concluded that there may be a conflict of interest between the indemnified party
or parties and the Company in the conduct of the defense of such action in any
of which events such fees and expenses shall be borne by the Company and the
Company shall not have the right to direct the defense of such action on behalf
of the indemnified party or parties. Anything in this Section 11 to the
contrary notwithstanding, the Company shall not be liable for any settlement of
any such claim or action effected without its written consent, which shall not
be unreasonably withheld. The Company shall not, without the prior written
consent of each indemnified party that is not released as described in this
sentence, settle or compromise any action, or permit a default or consent to the
entry of judgment in or otherwise seek to terminate any pending or threatened
action, in respect of which indemnity may be sought hereunder (whether or not
any indemnified party is a party thereto), unless such settlement, compromise,
consent, or termination includes an unconditional release of each indemnified
party from all liability in respect of such action. The Company agrees promptly
to notify the Holders of the commencement of any litigation or proceedings
against the Company or any of its officers or directors in connection with the
sale of any Warrant Shares or any preliminary prospectus, prospectus,
registration statement, or amendment or supplement thereto, or any application
relating to any sale of any Warrant Shares.
(b) The Holder agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Warrant Shares held by the Holder, each
other person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, and its or their respective
counsel, to the same extent as the foregoing indemnity from the Company to the
Holder in Section 11(a), but only with respect to statements or omissions, if
any, made in any registration statement, preliminary prospectus, or final
prospectus (as from
-7-
<PAGE>
time to time amended and supplemented), or any amendment or supplement thereto,
or in any application, in reliance upon and in conformity with written
information furnished to the Company with respect to the Holder by or on behalf
of the Holder expressly for inclusion in any such registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be. If any action shall be
brought against the Company or any other person so indemnified based on any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, and in respect of which
indemnity may be sought against the Holder pursuant to this Section 11(b), the
Holder shall have the rights and duties given to the Company, and the Company
and each other person so indemnified shall have the rights and duties given to
the indemnified parties, by the provisions of Section 11(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 11(a) or
11(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Holders of the Warrant Shares
included in such registration in the aggregate (including for this purpose any
contribution by or on behalf of an indemnified party), as a second entity, shall
contribute to the losses, liabilities, claims, damages, and expenses whatsoever
to which any of them may be subject, on the basis of relevant equitable
considerations such as the relative fault of the Company and such Holders in
connection with the facts which resulted in such losses, liabilities, claims,
damages, and expenses. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission, or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission, or
alleged omission relates to information supplied by the Company or by such
Holders, and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement, alleged statement, omission,
or alleged omission. The Company and the Holder agree that it would be unjust
and inequitable if the respective obligations of the Company and the Holders for
contribution were determined by pro rata or per capita allocation of the
aggregate losses, liabilities, claims, damages, and expenses (even if the Holder
and the other indemnified parties were treated as one entity for such purpose)
or by any other method of allocation that does not reflect the equitable
considerations referred to in this Section 11(c). In no case shall any Holder
be responsible for a portion of the contribution obligation imposed on all
Holders in excess of its pro rata share based on the number of shares of Common
Stock owned (or which would be owned upon exercise of all Warrant Shares) by it
and included in such registration as compared to the number of shares of Common
Stock owned (or which would be owned upon exercise of all Warrant Shares) by all
Holders and included in such registration. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 11(c), each person, if any, who
controls any Holder within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act and each officer, director, partner, employee, agent, and
counsel of each such Holder or control person shall have the same rights to
contribution as such Holder or control person and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed
any such registration statement, each director of the Company, and its or their
respective counsel shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 11(c). Anything in this
Section 11(c) to the contrary notwithstanding, no party shall be liable for
contribution with respect to the settlement of any claim or action effected
without its written consent. This Section 11(c) is intended to supersede any
right to contribution under the Act, the Exchange Act or otherwise.
-8-
<PAGE>
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Warrant (and upon surrender of any
Warrant if mutilated), and upon reimbursement of the Company's reasonable
incidental expenses, the Company shall execute and deliver to the Holder thereof
a new Warrant of like date, tenor, and denomination.
13. The Holder of any Warrant shall not have, solely on account of
such status, any rights of a stockholder of the Company, either at law or in
equity, or to any notice of meetings of stockholders or of any other proceedings
of the Company, except as provided in this Warrant.
15. This Warrant shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.
Dated: July 15, 1998
ESENJAY EXPLORATION, INC.
By:
---------------------------------------
Michael E. Johnson
President and Chief Executive Officer
[Seal]
- --------------------------
Secretary
-9-
<PAGE>
FORM OF ASSIGNMENT
(TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE
ATTACHED WARRANT)
FOR VALUE RECEIVED, ___________________________________ hereby sells,
assigns, and transfers unto __________________ a Warrant to purchase __________
shares of Common Stock, par value $0.01 per share, of Esenjay Exploration, Inc.
(the "COMPANY"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint ________________________ attorney to
transfer such Warrant on the books of the Company, with full power of
substitution.
Dated:
------------------
Signature
--------------------------------
NOTICE
The signature on the foregoing Assignment must correspond to the name as
written upon the face of this Warrant in every particular, without alteration or
enlargement or any change whatsoever.
-10-
<PAGE>
To: Esenjay Exploration, Inc.
500 North Water Street
Suite 1100
Corpus Christi, Texas 78471
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase ____________
Warrant Shares covered by the within Warrant and tenders payment herewith in the
amount of $____________ in accordance with the terms thereof, and requests that
certificates for such securities be issued in the name of, and delivered to:
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
(PRINT NAME, ADDRESS AND SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: Name:
------------------ -----------------------------------
(PRINT)
Address:
------------------------------
------------------------------
------------------------------
----------------------------------------
(SIGNATURE)
-11-
<PAGE>
To: Esenjay Exploration, Inc.
500 North Water Street
Suite 1100
Corpus Christi, Texas 78471
CASHLESS EXERCISE FORM
(TO BE EXECUTED UPON CONVERSION OF THE ATTACHED WARRANT)
The undersigned hereby irrevocably elects to surrender its Warrant for the
number of shares of Common Stock as shall be issuable pursuant to the cashless
exercise provisions of the within Warrant, in respect of ____________ shares of
Common Stock underlying the within Warrant, and requests that certificates for
such securities be issued in the name of and delivered to:
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
(PRINT NAME, ADDRESS AND SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER)
and, if such number of shares shall not be all the shares exchangeable or
purchasable under the within Warrant, that a new Warrant for the balance of the
Warrant Shares covered by the within Warrant be registered in the name of, and
delivered to, the undersigned at the addressed stated below.
Dated: Name:
------------------ -----------------------------------
(PRINT)
Address:
------------------------------
------------------------------
------------------------------
----------------------------------------
(SIGNATURE)
-12-
<PAGE>
Exhibit 23(b)
INDEPENDENT AUDITORS' CONSENT
Esenjay Exploration, Inc.:
We consent to the inclusion in this Amendment No. 1 to Registration Statement
No. 333-53581 of Esenjay Exploration, Inc. (formerly Frontier Natural Gas
Corporation) on Form SB-2 of our report dated March 27, 1998 (May 14, 1998,
with respect to the second paragraphs of Note 2 and the third and fourth
paragraphs of Note 10) (which expresses an unqualified opinion and includes
an explanatory paragraph relating to the Company's ability to continue as a
going concern) for the year ended December 31, 1997 and to the reference to
us under the heading "Experts" in the Prospectus, which is part of such
Registration Statement.
DELOITTE & TOUCHE LLP
Houston, Texas
July 16, 1998
