-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, Y5epk/pR0wqiA7yJk5UjjP5qTZDFwUT9NjxpF0ZVcqa1BmVHvJFEu8HwCCT1vh7F PNax+xYJFMU2CNKO4SDU2Q== 0000912057-94-001034.txt : 19940325 0000912057-94-001034.hdr.sgml : 19940325 ACCESSION NUMBER: 0000912057-94-001034 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940324 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORNERSTONE NATURAL GAS INC CENTRAL INDEX KEY: 0000725625 STANDARD INDUSTRIAL CLASSIFICATION: 4922 IRS NUMBER: 741952257 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-09103 FILM NUMBER: 94517745 BUSINESS ADDRESS: STREET 1: 8080 N CENTRAL EXPWY STE 1200 STREET 2: 12TH FLR LOCK BOX 47 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2146915536 FORMER COMPANY: FORMER CONFORMED NAME: ENDEVCO INC DATE OF NAME CHANGE: 19920703 10-K 1 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11994 CORNERSTONE NATURAL GAS, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-1952257 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 8080 N.CENTRAL EXPRESSWAY 75206 SUITE 1200 (Zip Code) DALLAS, TEXAS (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (214) 691-5536 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock, $0.10 par value per share American Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILINGS REQUIREMENTS FOR THE PAST 90 DAYS. YES __X__ NO _____ INDICATE BY CHECK MARK WHETHER DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN THE PROXY STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. YES _____ NO __X__ INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND REPORTS REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A COURT. YES __X__ NO _____ AS OF MARCH 21, 1994, THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING WAS 12,515,959. THE AGGREGATE MARKET VALUE OF THE 6,172,333 SHARES OF COMMON STOCK HELD BY NONAFFILIATES OF CORNERSTONE NATURAL GAS, INC. AS OF SUCH DATE WAS APPROXIMATELY $10,030,041. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission on or before April 30, 1994, are incorporated herein by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS TO FORM 10-K PART I PAGE ---- 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-6 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 6-9 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 9 4. Submission of Matters to a Vote of Security Holders. . . . . . . 9 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . 10 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 11 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . 12-16 8. Financial Statements and Supplementary Data. . . . . . . . . . . 16-33 9. Changes in and Disagreements on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . 33 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 33 12. Security Ownership of Certain Beneficial Owners and Management . 33 13. Certain Relationships and Related Transactions . . . . . . . . . 33 PART IV 14. Exhibits, Financial Statement Schedules and Reports and Form 8-K . 33-41 ` PART I ITEM 1. BUSINESS. GENERAL Cornerstone Natural Gas, Inc. (formerly Endevco, Inc.), a Delaware corporation ("Cornerstone"), is engaged in the business of natural gas pipeline and natural gas processing operations. Natural gas pipeline operations include purchasing, gathering, transporting and marketing of natural gas. Natural gas processing operations include recovering and marketing of natural gas liquids ("NGLs") from natural gas and treating natural gas by removing noncommercial components. Natural gas processing operations also include refining condensate and crude oil into various petroleum products. Cornerstone, its subsidiaries and affiliated companies are herein collectively referred to as the "Company", unless the context otherwise indicates. The Company was incorporated under the laws of Texas in 1977 as Endevco, Inc. and was reincorporated under the laws of Delaware in May 1988. The Company changed its name in November 1993 to Cornerstone Natural Gas, Inc. in connection with its emergence from bankruptcy. The Company's principal administrative offices are located at 8080 North Central Expressway, Suite 1200, Dallas, Texas 75206 and the telephone number is (214) 691-5536. RECENT DEVELOPMENTS On June 4, 1993, Endevco, Inc. and its subsidiaries ANGIC, Inc. (formerly known as Cornerstone Natural Gas Company), Mississippi Fuel Company and Endevco Taft Company (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division (the "Bankruptcy Court"). No other subsidiary of the Company was included in the bankruptcy filing. On September 29, 1993, the Bankruptcy Court confirmed the Debtor's First Amended Joint Plan of Reorganization (the "Plan"), and the Plan was consummated on November 2, 1993. For details about the Plan see Note 2 of "Notes to Consolidated Financial Statements" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". NATURAL GAS PIPELINE OPERATIONS GENERAL. In November 1993, the Company transferred four of its natural gas gathering and transmission systems to its former Noteholders in return for the release of approximately $44.1 million in debt and accrued interest. See Note 2 of "Notes to Consolidated Financial Statements" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". However, management believes that it is essential to own natural gas pipeline systems in order to compete in the natural gas industry. Therefore, the Company will continue to pursue natural gas pipeline projects. Revenues from these operations are generated in two ways. First, natural gas is transported or purchased and sold using Company-owned facilities, resulting in what are termed "System sales". Second, natural gas is purchased and sold using only facilities owned by third parties, resulting in what are termed "Off-system sales". The Company's natural gas pipeline operations accounted for 53%, 49%, and 56% of consolidated revenues in 1993, 1992 and 1991 respectively. For information about revenues, operating earnings and identifiable assets, see Note 9 of "Notes to Consolidated Financial Statements". SYSTEM SALES. System sales accounted for 90%, 91%, and 94% of natural gas pipeline operations gross margin in 1993, 1992 and 1991 respectively. The Company has two primary strategies for utilizing its facilities to generate System sales. One is to aggregate supplies of natural gas connected to its systems and deliver the natural gas to local markets or connecting pipelines. The Company typically gathers natural gas at the wellhead or a central gathering location. This natural gas is primarily owned by independent producers, however, some is owned by major integrated oil companies. The Company either transports for a fee or purchases the natural gas at the wellhead and, if there is no local market, arranges transportation on the intrastate and interstate pipelines and resells it to local distribution companies ("LDCs"), utilities, commercial or industrial end-users or other natural gas marketing companies. The Company generally purchases natural gas under contracts whose prices are determined by prevailing market conditions. Gas is then resold at higher prices under sales contracts with similar pricing terms. The Company earns a margin equal to the difference between the gas purchase price it pays the supplier and the sales price it receives from the purchaser. The -1- Company also offers services such as marketing, gas control, contract administration and pipeline operations which are not usually available to small producers. The Company's other strategy is to identify a utility or industrial end-user whose natural gas is supplied from limited sources. As a result of the limited competition, these end-users often pay a premium price for their natural gas. Typically, the Company will enter into a long-term contract (3-10 years) to construct a pipeline and supply all, or some agreed upon minimum, of the end- user's natural gas needs. The Company generally shares a portion of the price savings with the end-user. This allows the end-user to pay less for their natural gas supply and the Company to recover its capital expenditures over a short period of time. The Company completed one such project in 1993, its Port Hudson System located in East Baton Rouge Parish, Louisiana. OFF-SYSTEM SALES. In addition to marketing natural gas gathered and transported through its systems, the Company purchases and sells gas acquired from others utilizing only third party systems. In such transactions, the Company usually contracts on a short-term "best efforts" basis with producers, pipelines or other suppliers and sells to LDCs, utilities, commercial or industrial end-users or other natural gas marketing companies. The volume of natural gas throughput for Off-system sales can vary significantly from month-to-month. Off-system sales allow the Company to respond quickly to changing market conditions particularly in peak demand periods. Off-system sales also allow the Company to develop new marketing relationships that can later be supplied by the Company's own facilities. GAS SUPPLIES. The Company does not own any natural gas reserves. However, the Company continually seeks new supplies of natural gas connected to its systems, both to offset natural declines and to provide new supplies to increase throughput. The Company purchases Off-system natural gas from a variety of suppliers including independent producers, major integrated oil companies and other natural gas marketing companies. With the advent of "open access" on the interstate pipelines, the Company has an abundant source of natural gas to supply its current markets. NATURAL GAS PROCESSING AND OPERATIONS GENERAL. The Company's original core business was the treating and processing of natural gas. Management is currently refocusing on this core business. The Company is in the process of relocating two cryogenic gas processing plants from Brazoria County, Texas to Lincoln Parish, Louisiana to replace existing refrigerated lean oil facilities. These plants will be used in conjunction with the Company's approximately 492 miles of gathering pipelines in North Louisiana. The plants, with an inlet capacity of 45-50 million cubic feet per day ("MMCFD"), are expected to be operational early in the second quarter of 1994. The Company entered into petroleum refining during the fourth quarter of 1988. Management of the reorganized Company believes it is necessary to decrease its emphasis on refining. Therefore, the Company discontinued operations at one of its two refineries in July 1993. Management is continuing to examine its alternatives to further decrease its emphasis on refining operations. The Company's gas processing and refining operations accounted for 47%, 51%, and 44% of consolidated revenues in 1993, 1992 and 1991 respectively. For more information about revenues, operating earnings and identifiable assets, see Note 9 of "Notes to Consolidated Financial Statements". GAS LIQUIDS EXTRACTION. The Company's gas liquids extraction operations consist primarily of extracting NGLs such as ethane, propane, butane and natural gasoline from a natural gas stream. Gathering facilities collect natural gas from producers' wells and transport it to a Company processing plant where it is separated into NGLs and residue gas. The NGLs are then either fractionated into differentiated component products by the Company or transported by truck to a central location for fractionation. Once fractionated, NGLs are transported by truck and sold to end-users or wholesalers. -2- The Company historically has installed a natural gas processing plant in areas where wells produce natural gas that either contain sufficient NGLs to economically process or that require processing to meet pipeline quality standards. The value of the NGLs is generally greater if extracted than if left in the natural gas stream. The Company agrees to install a natural gas processing plant in exchange for a portion of the proceeds from the NGLs extracted or for a fee. The Company may also receive a portion of the residue gas. Generally, gas liquids extraction services have been performed separately from the Company's natural gas pipeline operations. However, the Company has fully integrated its gathering and processing facilities in North Louisiana to provide full service to the producers. The Company gathers, treats, processes and often markets natural gas and NGLs for a percentage of the proceeds or, in some cases, for a fee. The Company's North Louisiana facilities are located in an area of known hydrocarbon production and although there can be no assurance of continued development, management believes that additional natural gas and gas liquids reserves will be developed to offset normal production declines in the area. The Company is working diligently to put several of its idle gas processing and treating plants back into service. See "Properties - Gas Liquids Recovery/Refining". The Company's gas liquids extraction operations would be adversely affected by a decline in NGL prices or a decline in natural gas throughput. PETROLEUM REFINING. The Company's refining operations consist of manufacturing petroleum products including unleaded gasoline, hydrocarbon solvents, diesel fuel, residual fuel oil and other related products from crude oil and condensate ("feedstock"). The feedstock is gathered by transporters from area leases by truck or pipeline to the plants. The feedstock is separated into major components by a series of processes and then blended and/or converted into finished products. The processes include distillation, hydrosulfurization, catalytic reforming, isomerization and fractionation. A solvent unit at the Claiborne plant adds a further process of splitting the diesel-kerosene stream into hydrocarbon solvents. The finished products are transported by truck or pipeline to wholesalers or end-users. The Company is putting less emphasis on its refining operations as a result of the working capital financing requirements and volatility of refining margins. GAS TREATING. Gas treating operations involve the treating of unmarketable natural gas to remove impurities and thus make it marketable. This service is generally performed for producers under contract, whereby the Company agrees to install and operate a facility to remove noncommercial components from gas dedicated to that facility. The services are normally conducted under long- term contracts for a fixed fee, a per unit fee, or a combination thereof. The Company's gas treating operations would be adversely affected by reduced volumes of gas treated. The Company is actively working to put its idle gas treating facilities back into service. See "Properties - Gas Liquids Recovery/Refining". MARKETS AND MAJOR CUSTOMERS NATURAL GAS PIPELINE OPERATIONS. The Company's reorganization included the transfer of four gas pipeline systems to the Company's former Noteholders. See Note 2 of "Notes to Consolidated Financial Statements" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". This significantly reduced the Company's natural gas pipeline operations. Additionally, the financial difficulties of the Company and associated uncertainties reduced the number of suppliers willing to do business on normal terms. As a result, the Company was limited in the amount of natural gas it could buy. The Company kept its major customers supplied first and sold to others only when supply was available. As such, the Company reduced the overall number of sales customers in 1993. During 1993, the Company's sales to Georgia Pacific Company accounted for 12% of consolidated revenues. During 1992 and 1991, the Company had no single customer from its natural gas pipeline operations responsible for over 10% of consolidated revenues. GAS PROCESSING AND OPERATIONS. The Company has begun to decrease its emphasis on refining operations. As a result, the Company had no single customer from its gas processing operations responsible for over 10% of consolidated revenues in 1993 or 1992. During 1991, the Company's sales to Continental Ozark accounted for 14% of consolidated revenues. -3- PRODUCT PRICES. During the three years ended December 31, 1993, the average sales prices for natural gas, significant NGLs, and refined products were as follows:
1993 1992 1991 -------- -------- -------- Natural gas sales ($/MMBTU): System sales . . . . . . . . . . . . . . . . . . $ 2.17 $ 1.80 $ 1.57 Off-system sales . . . . . . . . . . . . . . . . $ 2.24 $ 2.00 $ 1.94 Average NGL prices ($/Gal): Propane. . . . . . . . . . . . . . . . . . . . . $ 0.33 $ 0.32 $ 0.36 Butanes (Iso and Normal) . . . . . . . . . . . . $ 0.36 $ 0.38 $ 0.42 Natural gasoline . . . . . . . . . . . . . . . . $ 0.45 $ 0.49 $ 0.54 Refined product prices ($/Gal): Regular unleaded gasoline. . . . . . . . . . . . $ 0.53 $ 0.57 $ 0.62 Jet fuel . . . . . . . . . . . . . . . . . . . . $ 0.55 $ 0.57 $ 0.61 Diesel . . . . . . . . . . . . . . . . . . . . . $ 0.53 $ 0.56 $ 0.57 Solvents . . . . . . . . . . . . . . . . . . . . $ 0.67 $ 0.66 $ 0.74 Residual fuel oil and gas oil. . . . . . . . . . $ 0.43 $ 0.47 $ 0.49
The Company sometimes receives NGLs in kind as its fee for its gas processing services. Revenues from such operations are directly affected by fluctuations in NGL prices. The natural gas sales contracts and natural gas purchase contracts of the Company are generally interrelated as to term and pricing, and the Company's income is derived from either a fixed spread or a fixed fee per unit of natural gas. Although the margin between purchase and resale prices tends to fluctuate with the increase or decrease in the sales price of natural gas, such fluctuations are generally less severe and not necessarily directly correlative with the changes in natural gas prices. COMPETITION The natural gas pipeline and natural gas processing industries are highly competitive. In marketing natural gas, the Company has numerous competitors, including marketing affiliates of major interstate pipelines, the major integrated oil companies, and local and national gas gatherers, brokers and marketers of widely varying sizes, financial resources and experience. Certain competitors, such as major oil companies, have capital resources many times greater than those of the Company and control substantial supplies of natural gas. Local utilities and distributors of natural gas (some of which are customers of the Company) are, in some cases, engaged directly, and through affiliates, in marketing activities that compete with the Company. The Company competes against other companies in the gathering, marketing and transmission business for supplies of natural gas, for customers to whom to sell its natural gas, and for availability of pipeline capacity. Competition for natural gas supplies is primarily based on efficiency, reliability, availability of transportation and ability to pay a satisfactory price for the producer's natural gas. Competition for customers is primarily based upon reliability of supply and price of deliverable natural gas. Some of the Company's customers have the capability of using alternative fuels. In these cases, the Company also competes against companies capable of providing alternative fuels on the basis of price. Since the capacity of the major interstate pipelines is sometimes less than sufficient to transport all natural gas that could otherwise be purchased, the Company and its customers and suppliers are often in competition with other shippers for pipeline capacity. The Company's ability to transport its natural gas through third party pipelines may be adversely affected during periods of peak demand because the Company and some of its principal suppliers and purchasers have interruptible transportation rights. During periods of peak demand, shippers with firm transportation rights may displace natural gas being shipped by its customers and suppliers. The Company attempts to alleviate these problems by emphasizing sales to local markets or to customers having firm transportation rights on interstate pipelines. The Company has net operating loss ("NOL") carryforwards for income tax purposes of approximately $28.9 million. In addition, the Company has unused investment tax credits of approximately $1.6 million available to offset future federal income tax liabilities. Management expects these tax benefits to give the Company a competitive advantage when bidding -4- on new projects. GOVERNMENTAL REGULATION Governmental regulation has a significant effect on the Company's operations. Its facilities and operations are affected by both federal and state regulatory agencies. State regulatory agencies are responsible for the enforcement of applicable state statutes and regulations, and generally have the responsibility of enforcing the Natural Gas Pipeline Safety Act of 1968 and the regulations promulgated thereunder. The Federal Energy Regulatory Commission ("FERC") is responsible generally for enforcing federal statutes and regulations applicable to the natural gas industry, and the Environmental Protection Agency ("EPA") and other federal and state agencies are responsible for enforcing various environmental laws and regulations. FEDERAL REGULATION. The primary federal statutes associated with the regulation of the natural gas industry are the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the "NGPA"). The provisions of the statutes are effected through regulations promulgated by the FERC which are of particular relevance in the regulation of the natural gas industry. The NGA applies to (i) the transportation of natural gas in interstate commerce (ii) sales of natural gas for resale in interstate commerce and (iii) companies engaged in either the transportation of, or sale for resale of, natural gas in interstate commerce. The gathering and local distribution of natural gas, as well as transportation and sales transactions not included in the three aforementioned categories, are specifically excluded from the purview of the NGA. Further, the NGPA provided additional exceptions and exemptions from NGA regulation. The passage of the NGPA addressed partial deregulation of both the sale and the transportation of natural gas. Certain sales and transportation transactions, previously subject to NGA jurisdiction, were exempted from NGA jurisdiction. Section 311 of the NGPA allows, among other things, intrastate pipelines to perform certain specifically described types of transportation and sales transactions in interstate commerce without becoming subject to the NGA. The FERC has promulgated regulations to increase competition in the natural gas industry. The current regulatory scheme of the FERC is designed to make access to natural gas transportation services more available. Through its regulations, FERC has created the "open access" concept. Open access means that natural gas pipelines subject to this regulation must offer natural gas transportation services upon similar terms, and without undue discrimination, to all who desire such services. The FERC has attempted to create more competition in the natural gas industry by requiring interstate pipelines to "unbundle" their services. Unbundling means charging separately for each service (i.e., sales, transportation, storage, swing capacity, etc.), that the pipeline performs. The customer pays only for services actually requested. Although many of these initiatives are new, and their ultimate impact cannot be predicted, these efforts have increased and are generally expected to further increase access to transportation and other services which encourage greater competition among natural gas suppliers and transporters. The Company is dependent upon the transportation services of various interstate pipeline companies. Much of the natural gas purchased and sold by the Company is transported through the facilities of these companies. Thus, changes in the rules, regulations and policies implemented by the FERC with respect to interstate pipelines may impact the Company. The Company offers transportation services through its Texas intrastate pipeline systems on an open access basis subject to certain NGA-exempt provisions of the NGPA and applicable FERC regulations. Rates for transportation services through the Company's systems in Texas are, pursuant to special approval by the FERC, required to be established and approved by the Texas Railroad Commission. Thus, certain of the Company's operations are directly affected by the regulations and policies of FERC. STATE REGULATION. The Company's operations are also subject to regulation by various agencies of the states in which the Company operates. State regulatory requirements and policies, and the effects thereof, vary from state to state. Those of the states of Louisiana, Texas and Pennsylvania have the greatest impact on the Company due to the concentration of the Company's capital in such states and the volume of business associated therewith. The Company's operations in Texas are subject to the Texas Utility Regulatory Act, as implemented by the Texas Railroad Commission. Generally, the Texas Railroad Commission is vested with authority to ensure that rates charged for natural gas sales and transportation services are just and reasonable. The Company's operations within the states of Pennsylvania and -5- Louisiana are subject to regulation by the applicable state regulatory agencies, which generally regulate the rates and services offered by the Company in these states. ENVIRONMENTAL AND SAFETY MATTERS The Company's activities in connection with the operation and construction of pipelines, plants and other facilities for transporting, processing or treating natural gas and other products are subject to environmental regulation by federal and state authorities. This includes state air and water quality control boards and the EPA, which can increase the cost of planning, designing, initial installation and the operations of such facilities. The Occupational Safety and Health Administration's final rule on "Process Safety Management" which became law in February 1992, has been a labor intensive project requiring certain additional manpower. The Company is preparing its process hazard analyses and will implement any required changes. The law requires full compliance by 1996. It is not expected that the Company will be required in the near future to expend amounts that are material in relation to its total capital expenditures to comply with environmental or safety laws. EMPLOYEES At March 21, 1994, the Company had 129 full-time employees. ITEM 2. PROPERTIES. GATHERING AND TRANSMISSION SYSTEMS. The Company's gathering and transmission systems are primarily in Texas and Louisiana. The principal systems are the Port Hudson System, the Mountain Creek System, the Elm Grove System, the Gregg County System and the East Texas System. Two other pipeline systems (the Dubach and Claiborne Systems) are utilized in connection with the Company's gas processing operations. The Company completed construction and began initial deliveries through its Port Hudson System in April 1993. This 5.0 mile pipeline system has a capacity of 40 MMCFD and has averaged 20 MMCFD since completion. The Company has a five year contract to deliver natural gas to an industrial end-user in East Baton Rouge Parish, Louisiana. The Company receives natural gas through an interstate pipeline for redelivery. The Company completed construction and began initial deliveries through its Mountain Creek Pipeline System in November 1989. The Company owns 50% and is the operator of this approximately 15.5 mile system located near Dallas, Texas. This system has a capacity of approximately 225 MMCFD and averaged 26 MMCFD in 1993. The system delivers natural gas under a 20 year contract to a plant owned by a local electric company. The plant is obligated under the contract to take at least 50% of its natural gas supply from the Mountain Creek System. The Company completed construction and began initial deliveries through its Elm Grove System in October 1990. This approximately 5.4 mile system receives gas from a central gathering point and delivers it to a gas processing plant in Bossier Parish, Louisiana. The capacity of this system is approximately 20 MMCFD. Although this system only averaged 3 MMCFD in 1993, it is strategically located should new natural gas wells be drilled in the area. The Company completed construction and began initial deliveries through its Gregg County System in May 1990. This 1.6 mile pipeline system has a capacity of 10 MMCFD and averaged throughput in 1993 of approximately 2 MMCFD. The Company had an initial three year contract to deliver natural gas to an industrial end-user in Gregg County, Texas. The Company now operates on a year- to-year contract. The East Texas System consists of two separate pipelines, the Nacogdoches System and the Shelby County System. The East Texas System was constructed in April 1984 and was expanded in 1985. The East Texas System aggregates approximately 84 miles of gathering and transmission lines in Nacogdoches and Shelby Counties, Texas. This system averaged 3 MMCFD in 1993. The system gathers natural gas from the wellhead and is interconnected with four major pipelines (two intrastate and two interstate) that serve the Gulf Coast and Midwest markets. The Dubach System was acquired in November 1988 in connection with the Company's purchase of the Dubach and -6- Calhoun gas processing and refining plants. The system consists of approximately 302 miles of gathering lines and its principal purpose is to gather natural gas to be processed at the Company's North Louisiana facilities. The system averaged 41 MMCFD in 1993. The Company either charges a combined fee or retains a percentage of the products for gathering, treating and processing the natural gas. Residue gas at the tailgate of the Company's plants is delivered to both interstate and intrastate pipeline systems. The Claiborne System was acquired in August 1991 in connection with the Company's purchase of the Claiborne gas processing and refining plants. The system consists of approximately 190 miles of gathering lines and its principal purpose is to gather natural gas to be processed at the Company's Claiborne facilities in Claiborne Parish, Louisiana. The system averaged 25 MMCFD in 1993. The Company retains a percentage of the products for gathering, treating and processing the natural gas. Residue gas at the tailgate of the Company's plants is delivered to several interstate pipelines. The following table sets forth pertinent information with respect to the Company's natural gas gathering and transmission systems at December 31, 1993:
Date of Daily Average Daily Gathering and Acquisition Capacity Volume of Transmission or Initial of Gas Gas in 1993 Miles of Pipeline Systems Operation (MMCF)(1) (MMCF) (1) Pipeline (1) - ---------------- ----------- --------- ------------- ------------ Claiborne August 1991 100 25 190 Dubach November 1988 90 41 302 East Texas Systems April 1984 131 3 84 Elm Grove October 1990 20 3 5 Gregg County May 1990 10 2 2 Mountain Creek (2) November 1989 225 26 16 Port Hudson April 1993 40 20 5 Other Various N/A (3) 2 18 ------------- ------------ TOTAL - 100% Interest 122 622 ------------------ ------------ ------------------ ------------ TOTAL - Net Company Interest 109 614 ------------------ ------------ ------------------ ------------ (1) All capacity, volume, and mileage information is approximate. Amounts shown are for the total system and have not been reduced to reflect the Company's net ownership interest. All capacity information is subject to increases or decreases depending on operating pressures and point of delivery into or out of the system. (2) The Company owns a 50% interest in the joint venture that owns the Mountain Creek Pipeline. (3) Capacity for these systems is not meaningful.
GAS LIQUIDS RECOVERY/REFINING. The Company's primary gas processing, treating and refining facilities are located in North Louisiana. The Company also has facilities in Texas, Mississippi and Pennsylvania. Many of the facilities outside Louisiana are underutilized or idle as a result of diminished deliverability of the natural gas reserves behind the plants at then existing locations. Most of the idle or underutilized facilities are skid mounted to facilitate relocation. The Company is focusing on putting these facilities back into service. NORTH LOUISIANA FACILITIES The Company acquired the Calhoun and Dubach gas processing plants along with the Dubach refinery in November 1988. The Calhoun plant has the capacity to process 60 MMCFD of natural gas and averaged 26 MMCFD in 1993. The Calhoun plant is a refrigerated lean oil plant that recovers natural gas liquids and delivers them by pipeline to the Dubach facility for fractionation. The Calhoun plant delivers residue gas into an interstate pipeline. The Dubach gas processing plant was shut down in January 1993 in order to deliver Dubach System gas to the Company's Claiborne facility. All the Company's North Louisiana liquids are currently fractionated at the Dubach facility. The Company discontinued operations at its -7- Dubach refinery in July 1993 as the Company began reducing its emphasis on refining. The Company has two treating plants in North Louisiana, its Cummings and Fandango plants, which are used in conjunction with the Calhoun and Dubach facilities. The Fandango plant is currently idle. The Company acquired the Claiborne gas processing plant and refinery in August 1991. The Claiborne plant has a capacity of 60 MMCFD and with the addition of the Dubach gas, averaged 40 MMCFD in 1993. The Claiborne plant utilizes a refrigerated lean oil recovery system. In September 1993, the Company discontinued operations at its Claiborne fractionation unit and now fractionates all its liquids at the Dubach facility. The Claiborne refinery has a capacity to refine 8,000 barrels per day ("BPD") of crude oil and condensate. The Claiborne facility also has a solvent unit to further process about 2,500 BPD. The Company is in the process of moving its Bear Wallow and Cheyenne cryogenic recovery plants to North Louisiana at the Company's Dubach site. These plants were located in Brazoria County, Texas and have a combined capacity of 45-50 MMCFD. The Cheyenne plant was underutilized and the Bear Wallow plant was idle. Once the move is complete, the Company will discontinue operations at its Claiborne gas processing plant. Initial operation of the cryogenic plants is expected early in the second quarter of 1994. The cryogenic plants are more fuel efficient, achieve greater recoveries of NGLs, are less labor intensive, and have lower operating costs than the Company's current gas processing operations. TEXAS The Company's Cheyenne plant operated until November 1993 and is currently being moved to North Louisiana. The Company's Bear Wallow plant was idle in 1993. The Company owned 50% and was the operator of these plants until acquiring the remaining 50% in July 1993. The Cheyenne plant average inlet volume in 1993 was 10 MMCFD. The Company is treating natural gas in Dewitt County, Texas at its Gun Point III plant. This treating plant has a capacity of 53 MMCFD and averaged 6 MMCFD in 1993. The Company owns all or part of three idle cryogenic and two natural gas treating plants in Texas. OTHER The Company owns a 50% interest in a cryogenic recovery plant in Green County, Pennsylvania. This plant has an inlet capacity of 14 MMCFD and averaged 10 MMCFD in 1993. The Company also owns a gas treating plant in Brandon, Mississippi. This treating plant has a capacity of 17 MMCFD and averaged 12 MMCFD in 1993. The Company charges a fee per million cubic feet ("MCF") for this service. -8- The following table sets forth pertinent information with respect to the Company's significant operating natural gas processing and treating plants at December 31, 1993:
Plant Daily Average Daily Capacity of Gas Volume in Plant Plant Type (MMCF) (1) 1993 (MMCF) (1) - ----- ----------- --------------- --------------- Brandon Treating 17 12 Gun Point III Treating 53 6 Cummings Treating 10 2 Tembec (2) Processing 14 10 Calhoun Processing 60 26 Claiborne Processing 60 40 --------------- -------------- TOTAL - 100% Interest 214 96 ------------------- -------------- ------------------- -------------- TOTAL - Net Company Interest 207 91 ------------------- -------------- ------------------- -------------- 1. All capacity and volume information is approximate. Amounts shown are for the total plant and have not been reduced to reflect the Company's net ownership interest. 2. The Company owns 50% of the Tembec Plant.
ASSETS PLEDGED AS COLLATERAL. Virtually all of the Company's assets are pledged as collateral on various loans. See Note 4 of "Notes to Consolidated Financial Statements". ITEM 3. LEGAL PROCEEDINGS. On June 4, 1993, Endevco, Inc. and its subsidiaries ANGIC, Inc., Mississippi Fuel Company and Endevco Taft Company filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division. No other subsidiary of the Company was included in the bankruptcy filing. On September 29, 1993, the Bankruptcy Court confirmed the Debtor's First Amended Joint Plan of Reorganization, and the Plan was consummated on November 2, 1993. For details about the Plan see Note 2 of "Notes to Consolidated Financial Statements" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company is involved in certain legal actions and claims arising in the ordinary course of their business. It is the opinion of management (based on advice of legal counsel) that such litigation and claims will be resolved without material effect on the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters during the fourth quarter of the fiscal year covered by this Annual Report to a vote of security holders. -9- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock of the Company, par value $.10 per share, is traded on the American Stock Exchange under the symbol "CGA." Set forth below are the high and low sales prices for the common stock.
High Low ---- --- 1992 First Quarter . . . . . . . . . . . . . . . $ 2.25 $ 1.50 Second Quarter. . . . . . . . . . . . . . . 1.50 1.13 Third Quarter. . . . . . . . . . . . . . . 1.38 .56 Fourth Quarter . . . . . . . . . . . . . . . .75 .25 1993 First Quarter . . . . . . . . . . . . . . . .75 .38 Second Quarter . . . . . . . . . . . . . . . 1.25 .50 Third Quarter . . . . . . . . . . . . . . . 1.56 .88 Fourth Quarter . . . . . . . . . . . . . . 1.81 1.13 1994 First Quarter (through March 21, 1994) . . . 1.94 1.44
On March 21, 1994, the closing price for the common stock, as reported by the American Stock Exchange, was $1.63 per share. As of March 21, 1994, there were 575 holders of record of common stock. The Company believes that there are substantially more beneficial holders of common stock. The Company has not paid any cash dividends on its common stock and intends to retain its earnings for use in operations and for expansion of its business. In addition, the Company is prohibited from paying dividends under the terms of its loan agreements. See Note 4 of "Notes to Consolidated Financial Statements". -10- ITEM 6. SELECTED FINANCIAL DATA. The following selected financial information for the years ended December 31, 1989 through 1993, is derived from the consolidated financial statements of the Company for such years. The information should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere herein.
Year Ended December 31, ------------------------------------------------------------------ 1993 (1) 1992 1991 1990 1989 -------- ------ ------ ------ ------ (in thousands, except per share data) OPERATING DATA Revenues from continuing operations. . . . . . . . $ 215,625 $ 244,696 $ 209,272 $ 200,042 $ 194,625 Expenses . . . . . . . . . . . . . . . . . . . . . 220,097 245,695 207,994 195,416 190,033 Operating earnings (loss). . . . . . . . . . . . . (4,472) (999) 1,278 4,626 4,593 Other expense. . . . . . . . . . . . . . . . . . . (2,040) (5,428) (3,232) (5,020) (4,621) Loss from continuing operations. . . . . . . . . . (22,291) (5,630) (1,582) (338) (191) Loss from discontinued operations. . . . . . . . . - - - - (616) Net loss . . . . . . . . . . . . . . . . . . . . . (22,291) (5,630) (1,582) (338) (807) Preferred Stock dividend requirements. . . . . . . (791) (1,900) (1,900) (1,900) (1,900) Net loss applicable to common stock. . . . . . . . (23,082) (7,530) (3,482) (2,238) (2,707) Net loss per share: Continuing operations . . . . . . . . . . . . (2.66) (.97) (.46) (.29) (.29) Discontinued operations . . . . . . . . . . . - - - - (.08) Primary . . . . . . . . . . . . . . . . . . . (2.66) (.97) (.46) (.29) (.37) As of December 31, ------------------------------------------------------------------ 1993 (1) 1992 1991 1990 1989 -------- ------ ------ ------ ------ (in thousands) BALANCE SHEET DATA Total assets . . . . . . . . . . . . . . . . . . . $ 46,446 $ 114,549 $ 120,960 $ 146,710 $ 129,989 Net property, plant and equipment. . . . . . . . . 22,652 78,386 83,044 102,811 88,398 Working capital (deficit). . . . . . . . . . . . . (5,151) (39,924)(2) (3,995) (3,288) 4,574 Long-term debt . . . . . . . . . . . . . . . . . . 7,768 5,659 39,927 59,096 51,532 Preferred Stock plus accrued dividends in arrears. . . . . . . . . . . . . . - 25,736 23,725 21,715 19,704 Stockholders' equity . . . . . . . . . . . . . . . 11,554 12,159 19,548 22,785 24,727 (1) On November 2, 1993, the Company consummated the Plan. See Note 2 of "Notes to Consolidated Financial Statements". (2) Includes $36,965,000 of debt and $5,546,000 of interest subject to the Standstill Agreement. See Note 4 of "Notes to Consolidated Financial Statements."
-11- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. LIQUIDITY AND CAPITAL RESOURCES REORGANIZATION. On June 4, 1993, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. On September 29, 1993, the Bankruptcy Court issued an order confirming the Debtor's First Amended Joint Plan of Reorganization. On November 2, 1993, the following transactions resulted from the consummation of the Plan: (1) The Debtors paid approximately $2.1 million in cash and transferred their Mississippi Fuel, Ada, Chalybeate Springs and Leaf River gathering and pipeline systems along with certain contractual rights owned by the Debtors to the holders (the "Noteholders") of the Debtor's 9% Senior Notes, 11.7% Senior Notes and 11.5% Subordinated Convertible Debentures. The cash payments and transfer of assets was in full satisfaction of all allowed claims of the Noteholders (approximately $44.1 million of debt and accrued interest on the financial records of the Debtors). The Company paid in full all other creditors. (2) The Debtors paid approximately $4.6 million in cash and issued promissory notes in the aggregate of $2.5 million (the "Note") to the holders (the "Preferred Stockholders") of the Company's $9.50 Series A Cumulative Convertible Exchangeable Preferred Stock (the "Preferred Stock") in satisfaction of all allowed claims (approximately $27.0 million on the financial records of the Debtors, which includes the liquidation value of the Preferred Stock and all accrued and unpaid dividends thereon). The Note is secured by a lien on the stock of all the subsidiaries of Cornerstone and is guaranteed by its subsidiary, Cornerstone Pipeline Company (formerly known as Endevco Pipeline Company), which holds an interest in the Mountain Creek Joint Venture and also owns the Excelsior gathering system. Pursuant to the terms of the Note, the Company is prohibited from paying dividends or repurchasing shares of its capital stock. (3) All outstanding common stock, par value $.10 per share (the "Former Common Stock"), of Endevco, Inc. was canceled and each holder thereof was issued one share of the common stock of Cornerstone (the "New Common Stock") for each share of Former Common Stock held. Holders of the Former Common Stock constitute approximately 63% of the shares of New Common Stock. All outstanding stock options were canceled. (4) Pursuant to the First Amended Stock Purchase Agreement by and between Ray Davis, Trustee (the "Purchaser") and Cornerstone dated May 28, 1993, Ray Davis and his assigns acquired 4,576,659 shares of New Common Stock and warrants to acquire an additional 2,564,103 shares of New Common Stock with an exercise price of $.78 per share. The aggregate purchase price of such shares of New Common Stock and warrants was $3.0 million. The purchased shares constitute approximately 37% of the Company's issued and outstanding shares of New Common Stock. The purchased shares and the warrants, if exercised, would constitute approximately 47% of the fully diluted capital stock of the Company. (5) The Company entered into a term loan and revolving credit facility (the "Senior Loan") with a financial institution. The term portion of the Senior Loan was for $5.8 million and provides for monthly principal and interest payments. The interest is to be calculated at the applicable prime rate plus two percent. The revolving credit facility allows for working capital loans and standby letters of credit up to an aggregate of $6.0 million. A portion of the proceeds from the new Senior Loan were used to retire the remaining debt associated with the purchase of the original assets of Dubach Gas Company ("Dubach") as well as the debt incurred when the assets of Claiborne Gasoline Company were acquired. (6) The Company amended its Certificate of Incorporation to (1) change the Company's name to Cornerstone Natural Gas, Inc. from Endevco, Inc. and (2) provide for certain restrictions on the transfer of New Common Stock. One of the goals of the Company from the reorganization was to restructure the Company's debt obligations so they could be met from continuing operations. As part of the Plan, the Company is moving two of its cryogenic plants from Brazoria County, Texas to Lincoln Parish, Louisiana. The cost to move and install these plants is estimated to be $2.5 million. The cryogenic plants are expected to be operational early in the second quarter of 1994. The cryogenic plants are more fuel -12- efficient, achieve greater recoveries of NGLs, are less labor intensive, and have lower operating costs than the Company's current gas processing operations. Management expects these plants to significantly improve cash flows from operations by the second half of 1994. CAPITAL EXPENDITURES. The Company made capital expenditures of approximately $3.7 million in 1993. Approximately $1.6 million of these related to the building of a five mile pipeline to service a paper mill in East Baton Rouge Parish, Louisiana (the "Port Hudson Pipeline"). Approximately $1.2 million has been spent towards the moving of the two cryogenic plants to Lincoln Parish, Louisiana. The Company anticipates spending another approximately $1.3 million in 1994 to complete the project. The Company is continuing to evaluate its remaining assets in regard to its current strategic direction. As such, the Company is actively attempting to redeploy existing idle assets into new projects and is evaluating potential sales of nonperforming assets. The Company's Senior Loan requires lender approval to pursue major projects. The Company's capital budget for 1994 is limited under the the Senior Loan to $500,000 (excluding the moving of the two cryogenic gas processing plants). However, the Company continues to pursue projects that would require long-term borrowing. These funds and the approvals necessary under existing loan agreements will be secured prior to committing to any new projects. The Company believes that its current relationships with existing lenders will allow borrowing capacity for future capital requirements. However, each project will be separately evaluated, and must meet its own cash flow requirements. There can be no assurance regarding the Company's ability to obtain additional capital when needed on acceptable terms or that all necessary consents or waivers will be obtained from its lenders. LINE OF CREDIT. On July 1, 1993, Dubach discontinued operations at one of its two condensate refineries. As a result, the Company is buying less condensate and crude oil reducing the amount of standby letters of credit needed. Dubach reduced its line of credit to $10.0 million under which standby letters of credit can be issued. This line of credit expires March 31, 1994. Dubach has replaced this line of credit with a $2.6 million line of credit from a different financial institution. The maturity date of the new line is April 30, 1994. The current line of credit covers Dubach's requirements for buying condensate and crude oil for the refinery through March business. Dubach will need an extension of this line or must reduce its purchases of crude oil for April business. See Note 4 of "Notes to Consolidated Financial Statements." NOL CARRYFORWARDS. The Company has NOL carryforwards for income tax purposes of approximately $28.9 million which, if not previously utilized, will expire at various times from 2001 until 2008. In addition, the Company has unused investment tax credits of approximately $1.6 million available to offset future federal income tax liability. The Company considers such carryforwards and tax credits to be potentially valuable assets which may be used to shelter future taxable earnings from income taxes. If a change of ownership as defined in Internal Revenue Code Section 382 occurs, utilization of the NOL carryforwards could be severely limited. WORKING CAPITAL. The Company's working capital deficit was $5.2 million at December 31, 1993. The Company expects to maintain a working capital deficit throughout 1994 in order to effectively manage cash. Management believes that its improved cash flows from operations combined with amounts available under its $6.0 million line of credit will be sufficient to meet its cash requirements in 1994. -13- RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992 GENERAL. The Company's operations were negatively impacted in 1993 by the reorganization. The uncertainty related to the Company's financial condition limited the Company's ability to purchase natural gas. Many suppliers required prepayments or put restrictions on purchases which ultimately resulted in an increase in the cost of natural gas to the Company. Management believes that the negative influences of the reorganization will begin to dissipate in 1994. In addition, average margins on refined products decreased in 1993 from 1992. This combined with a decrease in emphasis on refining is expected to allow the Company to return to profitability. NATURAL GAS PIPELINE OPERATIONS. Sales volumes for natural gas declined in 1993 as the financial condition of the Company required curtailment of certain business activities. The following table provides pertinent information relating to the Company's natural gas pipeline operations.
Increase 1993 1992 (Decrease) ---- ---- ---------- (IN THOUSANDS) Gross margin . . . . . . . . . . . . . . . . . . $9,322 $13,933 $(4,611) Earnings from operations before depreciation . . 4,477 8,396 (3,919) (MILLION CUBIC FEET PER DAY) Natural gas sales . . . . . . . . . . . . . 215 276 (61)
The Company's natural gas pipeline operations contributed 44% of total consolidated gross margin in 1993 compared to 49% in the prior year. Earnings from operations before depreciation declined $3.9 million (47%) primarily as a result of a decrease in throughput of natural gas. As a result of the Company's reorganization, it became increasingly difficult to acquire supplies of natural gas. The Company utilized its supplies to ensure that it fulfilled its commitments on all its term sales contracts. From the limited supply, the Company was forced to curtail certain other marketing activities. This particularly impacted the assets transferred as part of the reorganization. Throughput on the transferred assets declined 63 MMCFD. The Company also experienced a decline in throughput of approximately 7 MMCFD on its Mountain Creek System. This was the result of maintenance performed on the power plant which is supplied by the Mountain Creek System. The maintenance required the plant to be taken off-line for three months. Additionally, this plant will have lower utilization in the future as the utility has replaced some of its needs with nuclear power. These declines in throughput were partially offset by the addition of the Company's Port Hudson System which began operations in April 1993. The Company's Off-system sales throughput declined 5 MMCFD (7%) in 1993. Gross margin on these sales decreased approximately $378,000. This was caused in part by an increase in the cost of supply relative to sales. Additionally, higher natural gas prices during most of 1993 limited the Company's ability to compete with utility tariffs in the northeast market areas. NATURAL GAS PROCESSING OPERATIONS. The following table provides pertinent information relating to the Company's gas processing operations.
Increase 1993 1992 (Decrease) ---- ---- ---------- (IN THOUSANDS) Gross margin . . . . . . . . . . . . . . . . . . $11,954 $14,527 $(2,573) Earnings from operations before depreciation . . 842 2,266 (1,424) (MILLION CUBIC FEET PER DAY) Natural gas inlet volumes . . . . . . . . . 112 100 12 (BARRELS PER DAY) Liquid sales volumes. . . . . . . . . . . . 12,324 14,465 (2,141)
Gross margin from gas processing operations contributed 56% of consolidated margin compared to 51% in the prior year. Earnings from operations declined $1.4 million (63%) in 1993. The decreased earnings was primarily the result of a decline -14- in margin per barrel sold. The Company discontinued operations at one of its two condensate refineries in July 1993. The Company also consolidated the usage of its North Louisiana facilities and was able to discontinue operations at one of its two fractionating units in September 1993. The Company expects the installation of cryogenic facilities in North Louisiana to significantly increase cash flow in 1994 from its gas processing operations. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses have declined $823,000 (20%) in 1993. This reflects specific management efforts to reduce overhead costs through consolidation and eliminations of functions and staff reductions. The Company significantly reduced its office space and has reduced its use of outside professional services. OTHER INCOME (EXPENSE). Interest expense decreased $2.4 million (47%) primarily as a result of the debt that was retired as part of the reorganization. The Company sold its interest in Three Rivers Pipeline Company and Allegheny Energy Marketing Company (collectively referred to as "Three Rivers") in January 1993. The Company's share of losses from its interest in Three Rivers was $555,000 in 1992. The Company recorded a gain from the sale of its interest in Three Rivers of $611,000 in 1993. REORGANIZATION ITEMS. The Company recorded a loss on the disposition and write downs of property, plant and equipment of $20.3 million in 1993. This included the assets transferred to the Noteholders and other assets that were considered impaired to the reorganized Company. The professional fees of $4.5 million incurred for the reorganization included primarily legal fees, consultant fees and bankruptcy costs. EXTRAORDINARY ITEM. The Company recorded a $9.1 million gain from the extinguishment of debt in conjunction with the reorganization. YEAR ENDED DECEMBER 31, 1992 COMPARED TO YEAR ENDED DECEMBER 31, 1991 GENERAL. The Company experienced a net loss applicable to common stockholders of $7.5 million in 1992 compared to a net loss of $3.5 million in 1991. The increase in net loss was primarily a result of decreased natural gas volumes on the Company's facilities, decreased unit margins from gas processing and refining, increased operating expenses (primarily repairs, maintenance and treating chemicals) and increased costs related to the negotiations of debt restructuring. NATURAL GAS PIPELINE OPERATIONS. The natural gas operations segment contributed 49% of total revenues and 48% of total gross margin during 1992, as compared to 56% and 57% respectively in 1991. Earnings before depreciation declined $2.0 million (20%) in 1992. This was primarily the result of reduced gross margin on the Company's Mississippi System and the disposition of its Hattiesburg Gas Storage facilities. The Company recorded $1.8 million of gross margin and $1.5 million of operating earnings before depreciation from the Hattiesburg facilities in 1991 before the disposition. The Company moved an average of 208 MMCFD through its facilities during 1992 compared to 241 MMCFD in 1991. The decrease in volume was primarily attributable to a 31 MMCFD decline on the Company's Mississippi System. Third party transportation on the Mississippi System declined 11 MMCFD as reserves were depleting without new drilling. The Company's volumes, bought for resale, declined 20 MMCFD. This was partially a result of the Company's financial difficulties which limited the supply of natural gas. Gross margin decreased $1.4 million (10%) in 1992. The Company's unit margin increased to $.16 per MCF from $.15 per MCF. The gross margin decline was primarily a result of the decreased throughput on the Mississippi System. Decreased third party gas transportation volumes resulted in a decline in gross margin of $964,000 while the decreased volumes, bought for resale, resulted in a decline of $1.1 million. These declines were partially offset by an increase in gross margin on the Company's Ada System of $731,000. The Ada System increase resulted from a greater average gross margin per unit in 1992. The Company's Off-system volumes increased 15% to 68 MMCFD in 1992. The gross margin increased 24% to $1.3 million in 1992. NATURAL GAS PROCESSING OPERATIONS. Gross margin increased $2.4 million (20%) in 1992, primarily as a result of a full year of operations from the Claiborne facilities compared to only five months in the previous year. Earnings from operations declined $2.2 million (46%) primarily from the Company's Dubach and Claiborne facilities. The decreased earnings reflect increased operating expenses and a decline in margin per barrel sold. Operating expenses increased due to (i) several major overhauls of compressors, (ii) repair of lightning damage, (iii) repair of natural gas lines in order to return them to service and (iv) repairs needed to meet environmental and safety standards. -15- GENERAL AND ADMINISTRATIVE. General and administrative costs decreased $1.3 million in 1992. This difference is primarily attributable to project development costs that were written off in 1991 related to projects that did not fit the Company's current strategic direction. OTHER INCOME (EXPENSE). Interest expense decreased $1.4 million in 1991. This was primarily a result of $10.2 million of principal payments made in 1991 and the sale of the Hattiesburg facilities. The $643,000 decrease in equity earnings (losses) of unconsolidated affiliates was largely the result of a $454,000 decrease in earnings from the Company's interest in Three Rivers. The Company sold its interest in Three Rivers in January 1993. In 1991, there was a $3.7 million gain recorded on the sale of the Hattiesburg facilities. Also in 1991, there was a loss of $1.6 million recorded in relation to a sale and leaseback on three of the Company's Texas pipeline systems. There were no sales of significant assets in 1992. OTHER MATTERS ACCOUNTING FOR INCOME TAXES. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("FAS 109"). The adoption of FAS 109 changed the Company's method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach. Under APB 11, the Company has deferred the tax effects of timing differences between financial reporting and taxable income. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Adoption of FAS 109 had no material impact on the Company's financial position at January 1, 1993, or the results of its operations for the year ended December 31, 1993. The Omnibus Budget Reconciliation Act of 1993 signed into law by President Clinton on August 10, 1993, contains several provisions affecting corporations. The most notable to the Company is an increase in the top corporate income tax rate from 34% to 35%. Although most provisions of the new law were effective January 1, 1993, it had no impact in 1993 and it is not anticipated to have any significant impact in 1994 due to the net operating loss position of the Company. EFFECTS OF CHANGING PRICES. Natural gas, NGLs and petroleum product prices have fluctuated significantly over the last three years. The Company, however, earns a margin which is the difference between the revenues from sales of products over the purchase costs of such. The change in margin, although it has declined over the three year period, is much less volatile than the change in product prices. Inflation has not had a significant impact on operating expenses in the last three years. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES Report of Ernst & Young, Independent Auditors. . . . . . . . . . . . . 17 Consolidated Statements of Operations for the Years Ended December 31, 1993, 1992, and 1991. . . . . . . . . . . . . . 18 Consolidated Balance Sheets at December 31, 1993 and 1992. . . . . . . 19 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992, and 1991. . . . . . . . . . . . . . 20 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1992, and 1991. . . . 21 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 22-33 -16- REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS The Board of Directors and Stockholders Cornerstone Natural Gas, Inc. We have audited the accompanying consolidated balance sheets of Cornerstone Natural Gas, Inc. and Subsidiaries (the "Company") at December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 1993. Our audits included the financial statement schedules listed in the Index at Item 14(a). These consolidated financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG Dallas, Texas March 7, l994 -17- CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------------------- 1993 1992 1991 ------------- ------------- --------------- Revenues (Note 9): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,625,000 $ 244,696,000 $ 209,272,000 Expenses: Cost of sales (Note 9). . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,349,000 216,236,000 180,550,000 Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,956,000 17,801,000 13,669,000 Depreciation and amortization (Note 3). . . . . . . . . . . . . . . . . . . . 6,451,000 7,494,000 8,329,000 General and administrative (Note 3) . . . . . . . . . . . . . . . . . . . . . 3,341,000 4,164,000 5,446,000 ----------- ----------- ----------- 220,097,000 245,695,000 207,994,000 ----------- ----------- ----------- Operating earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,472,000) (999,000) 1,278,000 ----------- ----------- ----------- Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,000 242,000 475,000 Interest expense (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . (2,764,000) (5,191,000) (6,553,000) Equity in net earnings (losses) of unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . (52,000) (407,000) 236,000 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,000 186,000 512,000 Gain (loss) on sale of assets, net. . . . . . . . . . . . . . . . . . . . . . 611,000 (258,000) 2,098,000 ----------- ----------- ----------- (2,040,000) (5,428,000) (3,232,000) ----------- ----------- ----------- Loss before reorganization items income taxes, and extraordinary item. . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,512,000) (6,427,000) (1,954,000) Reorganization items (Note 2): Loss on disposition and write downs of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . 20,274,000 - - Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,545,000 704,000 292,000 ----------- ----------- ----------- 24,819,000 704,000 292,000 ----------- ----------- ----------- Loss before income taxes and extraordinary item. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,331,000) (7,131,000) (2,246,000) Provision (benefit) for income taxes (Note 5): Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 181,000 168,000 Deferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1,682,000) (832,000) ----------- ----------- ----------- 45,000 (1,501,000) (664,000) ----------- ----------- ----------- Net loss before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . (31,376,000) (5,630,000) (1,582,000) Extraordinary item-gain on extinguishment of debt (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 9,085,000 - - ----------- ----------- ----------- Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,291,000) (5,630,000) (1,582,000) Preferred stock dividend requirements. . . . . . . . . . . . . . . . . . . . . . (791,000) (1,900,000) (1,900,000) ----------- ----------- ----------- Net loss applicable to common stock. . . . . . . . . . . . . . . . . . . . . . . $ (23,082,000) $ (7,530,000) $ (3,482,000) ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) per common and common equivalent share: Loss before extraordinary item. . . . . . . . . . . . . . . . . . . . . . . . $ (3.71) $ (.97) $ (.46) Extraordinary item. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.05 - - ----------- ----------- ----------- Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2.66) $ (.97) $ (.46) ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common and common equivalent shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . 8,691,000 7,758,000 7,602,000 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. -18- CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------ 1993 1992 -------- -------- ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,416,000 $ 6,882,000 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,101,000 19,861,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711,000 3,683,000 Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655,000 645,000 ------------- ------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,883,000 31,071,000 Property, plant and equipment, at cost (Note 3). . . . . . . . . . . . . . . . . . . 54,457,000 123,897,000 Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (31,805,000) (45,511,000) ------------- ------------- Net property, plant and equipment. . . . . . . . . . . . . . . . . . . . . 22,652,000 78,386,000 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,793,000 3,910,000 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,000 1,182,000 ------------- ------------- $ 46,446,000 $ 114,549,000 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt (Note 4) . . . . . . . . . . . . . . . . $ 2,501,000 $ 3,153,000 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,097,000 24,448,000 Accrued interest payable (Note 4) . . . . . . . . . . . . . . . . . . . . . . . 45,000 5,646,000 Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,000 175,000 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,000 608,000 Long-term debt subject to Standstill Agreement (Notes 2 and 4). . . . . . . . . . . . . . . . . . . . . . . . . . - 36,965,000 ------------- ------------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 25,034,000 70,995,000 Long-term debt (Notes 2 and 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,768,000 5,659,000 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,090,000 - Commitments and contingent liabilities (Notes 4 and 6) . . . . . . . . . . . . . . . Series A Cumulative Convertible Exchangeable Preferred Stock, $.10 par value; 200,000 shares authorized; 200,000 shares issued and outstanding in 1992 (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . - 25,736,000 Stockholders' equity (Notes 2, 4, 7 and 8): Common stock, $.10 par value; 25,000,000 shares authorized; 12,515,959 and 7,889,470 shares issued and outstanding in 1993 and 1992, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,252,000 789,000 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 51,298,000 29,284,000 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,996,000) (17,914,000) ------------- ------------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 11,554,000 12,159,000 ------------- ------------- $ 46,446,000 $ 114,549,000 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. -19- CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1993 1992 1991 -------- -------- -------- Cash flows from operating activities: Loss before extraordinary item. . . . . . . . . . . . . . . . . . . . . . . . . . $ (31,376,000) $ (5,630,000) $ (1,582,000) Noncash items included in loss before extraordinary item: Loss on disposition and write downs of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . 20,274,000 - - Interest compromised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,605,000 - - Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . 6,451,000 7,494,000 8,329,000 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1,682,000) (830,000) Write off of project development costs . . . . . . . . . . . . . . . . . . . . - 95,000 1,367,000 Equity in net (income) losses of unconsolidated affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000 407,000 (236,000) Loss (gain) on sale of assets, net . . . . . . . . . . . . . . . . . . . . . . (611,000) 258,000 (2,098,000) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,000 221,000 211,000 Reorganization items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,545,000 - - ------------ ------------ ------------ Working capital provided by operations before reorganization items. . . . . . . . . . . . . . . . . . . . . . . . . . 1,342,000 1,163,000 5,161,000 Changes in operating assets or liabilities which provided (used) cash during the period: Decrease in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 4,760,000 2,881,000 3,803,000 (Increase) decrease in inventory. . . . . . . . . . . . . . . . . . . . . . . . . 1,940,000 501,000 (1,885,000) (Increase) decrease in other current assets . . . . . . . . . . . . . . . . . . . (10,000) 7,000 348,000 Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . . . (3,152,000) 54,000 (5,511,000) Increase (decrease) in accrued interest payable . . . . . . . . . . . . . . . . . (55,000) 3,828,000 (223,000) Increase (decrease) in current taxes and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (481,000) (368,000) 142,000 Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 848,000 - - ------------ ------------ ------------ Cash provided by operations before reorganization items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,192,000 8,066,000 1,835,000 Cash used by reorganization items - professional fees. . . . . . . . . . . . . . . . (2,165,000) - - ------------ ------------ ------------ Cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . 3,027,000 8,066,000 1,835,000 Cash flows from investing activities: Proceeds from sale of assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 851,000 181,000 7,524,000 Additions to property, plant, and equipment . . . . . . . . . . . . . . . . . . . (3,742,000) (3,160,000) (7,339,000) (Increase) decrease in investment in unconsolidated affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 291,000 (208,000) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000 (279,000) 3,000 ------------ ------------ ------------ Cash used for investing activities. . . . . . . . . . . . . . . . . . . . . . . . (2,758,000) (2,967,000) (20,000) Cash flows from financing activities: Borrowings (reduction) of revolving debt. . . . . . . . . . . . . . . . . . . . . (1,625,000) - 2,000,000 Additional borrowings under long-term debt. . . . . . . . . . . . . . . . . . . . 5,800,000 - 4,450,000 Reduction of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,071,000) (2,865,000) (10,152,000) Reorganization items: Issuance of common stock and warrants . . . . . . . . . . . . . . . . . . . . . . 3,000,000 - - Retirement of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . (6,731,000) - - Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (108,000) 142,000 199,000 ------------ ------------ ------------ Cash used by financing activities. . . . . . . . . . . . . . . . . . . . . . . (4,735,000) (2,723,000) (3,503,000) ------------ ------------ ------------ Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . (4,466,000) 2,376,000 (1,688,000) Cash and cash equivalents: Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,882,000 4,506,000 6,194,000 ------------ ------------ ------------ End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,416,000 $ 6,882,000 $ 4,506,000 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosures of cash flow information Cash paid during the period for: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,042,000 $ 1,151,000 $ 6,743,000 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,000 $ 197,000 $ 170,000
The accompanying notes are an integral part of these consolidated financial statements. -20- CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1993
Additional Total Common Paid-In Accumulated Stockholders' Stock Capital Deficit Equity ------ ---------- ----------- ------------- Balance at December 31, 1990 . . . . . . . . . . . . . . . . . . . . . $ 757,000 $ 28,930,000 $ (6,902,000) $ 22,785,000 Issuance of common stock upon acquisition of minority ownership in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 44,000 - 46,000 Proceeds from issuance of common stock to employee benefit plan. . . . . . . . . . . . . . . . . . . 10,000 189,000 - 199,000 Preferred stock dividend requirements. . . . . . . . . . . . . . . . . - - (1,900,000) (1,900,000) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (1,582,000) (1,582,000) ----------- ----------- ------------ ----------- Balance at December 31, l991 . . . . . . . . . . . . . . . . . . . . . 769,000 29,163,000 (10,384,000) 19,548,000 ----------- ----------- ------------ ----------- Proceeds from issuance of common stock to employee benefit plan. . . . . . . . . . . . . . . . . . . 20,000 121,000 - 141,000 Preferred stock dividend requirements. . . . . . . . . . . . . . . . . - - (1,900,000) (1,900,000) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (5,630,000) (5,630,000) ----------- ----------- ------------ ----------- Balance at December 31, l992 . . . . . . . . . . . . . . . . . . . . . 789,000 29,284,000 (17,914,000) 12,159,000 ----------- ----------- ------------ ----------- Reorganization items (Note 2): Redemption of Series A Cumulative Convertible Exchangeable Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . - 19,448,000 - 19,448,000 Issuance of common stock and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458,000 2,543,000 - 3,001,000 Proceeds from issuance of common stock to employee benefit plan. . . . . . . . . . . . . . . . . . . . . . 5,000 23,000 - 28,000 Preferred stock dividend requirements. . . . . . . . . . . . . . . . - - (791,000) (791,000) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (22,291,000) (22,291,000) ----------- ----------- ------------ ----------- Balance at December 31, 1993 . . . . . . . . . . . . . . . . . . . . . $ 1,252,000 $ 51,298,000 $ (40,996,000) $ 11,554,000 ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial statements. -21- CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL AND SIGNIFICANT ACCOUNTING POLICIES (a) General and Principles of Consolidation Cornerstone Natural Gas, Inc. (formerly Endevco, Inc.), a Delaware corporation ("Cornerstone"), is engaged in the business of natural gas pipeline and natural gas processing operations. Natural gas pipeline operations include purchasing, gathering, transporting and marketing of natural gas. Natural gas processing operations include recovering and marketing of natural gas liquids ("NGLs") from natural gas and treating natural gas by removing noncommercial components. Natural gas processing operations also include refining condensate and crude oil into various petroleum products. The consolidated financial statements include the accounts of Cornerstone and its wholly owned and majority-owned subsidiaries (referred to collectively as the "Company") - Cornerstone Gas Processing, Inc. (formerly Endevco Natural Gas Company); Cornerstone Pipeline Company (formerly Endevco Pipeline Company); Endevco Producing Company; Cornerstone Gas Resources, Inc. (formerly Endevco Oil and Gas Company); Endevco Taft Company; Cornerstone Gas Gathering Company (formerly Cornerstone Pipeline Company); Pentex Petroleum, Inc.; Pentex Pipeline, Inc.; Endevco Three Rivers Company; Dubach Gas Company ("Dubach") and Cengaz Company. On September 30, 1993, ANGIC, Inc. (formerly known as Cornerstone Natural Gas Company) and Mississippi Fuel Company, both wholly owned subsidiaries, were merged into Cornerstone. The consolidated financial statements of the Company also include its proportionate share of the assets, liabilities, revenues and expenses of affiliated companies, partnerships and joint ventures if the Company owns at least a 50% interest. Affiliates in which the Company owns less than a 50% interest are accounted for using the equity method. The consolidated financial statements also include Endevco Industrial Gas Sales Company through 1991. Certain reclassifications of prior years' financial information have been made to conform to the current year presentation. (b) Cash Equivalents The Company considers all highly liquid investments with insignificant interest rate risk and original maturities of three months or less to be cash equivalents. (c) Inventory Inventory is stated at the lower of cost or market, determined by the first in, first out method. (d) Property, Plant and Equipment Depreciation of property, plant and equipment is provided using the straight-line method over the following estimated useful lives: Years ----- Pipelines and pipeline rights-of-way 5-20 Gas liquids recovery, treating and refining plants 10-20 Gas storage facilities 22 Equipment and other 3-15 Most of the Company's gas liquids recovery and gas treating plants are skid-mounted and moveable from one service location to another. The cost of moving the plants between service locations is capitalized and -22- amortized using the straight-line method over the life of the related service contract. (e) Goodwill Goodwill represents the excess of the cost over the net assets of businesses acquired and is amortized on a straight-line basis over periods of twenty to forty years. Goodwill is presented net of accumulated amortization of $496,419 and $379,606 at December 31, 1993 and 1992, respectively. (f) Income Taxes Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109) changing the method of accounting for income taxes. As permitted under the new rules, prior years' financial statements have not been restated to reflect the change. The adoption of FAS 109 changed the Company's method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach. Under APB 11, deferred income taxes are provided for income and expense items that are reported for income tax purposes in different years than for financial reporting purposes, whereas under FAS 109 deferred tax liabilities and assets are recognized for the expected future tax consequence of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The measurement of deferred income tax assets is adjusted by a valuation allowance, if necessary, to recognize future tax benefit only to the extent, based on available evidence, it is more likely than not, it will be realized. The effect on deferred taxes of a change in income tax rates is recognized in the period that includes the enactment date. Adoption of FAS 109 had no effect on the Company's financial position at January 1, 1993 or the results of its operations for the year ended December 31, 1993. (g) Earnings (Loss) per Common and Common Equivalent Share Earnings (loss) per common and common equivalent share are based on the weighted average number of shares outstanding during each year as adjusted for outstanding stock options and warrants, if dilutive, using the treasury stock method. Fully-diluted earnings per share for all years are not presented, because the effects of the assumed conversion of the 11.5% Subordinated Convertible Debentures or the Series A Cumulative Convertible Exchangeable Preferred Stock are antidilutive. (h) Concentrations of Credit Risk The Company markets natural gas and refined products to utilities, local distribution companies and industrial end-users. The Company performs ongoing credit evaluations of its customers and if deemed necessary, requires purchasers of the Company's products to prepay or issue standby letters of credit as collateral. Credit losses are provided for in the consolidated financial statements and consistently have been within management's expectations. The Company has cash deposits with various banks consisting principally of demand deposits and time deposits. These deposits generally have maturities of one year or less and bear minimal risk. The Company has not experienced any losses on its cash deposits. 2. Plan of Reorganization On June 4, 1993, Endevco, Inc. and its subsidiaries ANGIC, Inc., Mississippi Fuel Company and Endevco Taft Company (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division (the "Bankruptcy Court"). No other subsidiary of the Company was included in the bankruptcy filing. -23- On September 29, 1993, the Bankruptcy Court issued an order confirming the Debtor's First Amended Joint Plan of Reorganization (the "Plan"). On November 2, 1993, the following transactions resulted from the consummation of the Plan: (1) The Debtors paid approximately $2.1 million in cash and transferred their Mississippi Fuel, Ada, Chalybeate Springs and Leaf River gathering and pipeline systems along with certain contractual rights owned by the Debtors to the holders (the "Noteholders") of the Debtor's 9% Senior Notes, 11.7% Senior Notes and 11.5% Subordinated Convertible Debentures. The cash payments and transfer of assets is in full satisfaction of all allowed claims of the Noteholders (approximately $44.1 million of debt and accrued interest on the financial records of the Debtors). The Company paid in full all other creditors. (2) The Debtors paid approximately $4.6 million in cash and issued promissory notes in the aggregate of $2.5 million (the "Note") to the holders (the "Preferred Stockholders") of the Company's $9.50 Series A Cumulative Convertable Exchangeable Preferred Stock (the "Preferred Stock") in satisfaction of all allowed claims (approximately $27.0 million on the financial records of the Debtors, which includes the liquidation value of the Preferred Stock and all accrued and unpaid dividends thereon). The Note is secured by a lien on the stock of all the subsidiaries of Cornerstone and is guaranteed by its subsidiary, Cornerstone Pipeline Company, which holds an interest in the Mountain Creek Joint Venture and also owns the Excelsior gathering system. Pursuant to the terms of the Note, the Company is prohibited from paying dividends or repurchasing shares of its capital stock. (3) All outstanding common stock, par value $.10 per share (the "Former Common Stock"), of Endevco, Inc. was canceled and each holder thereof was issued one share of the common stock of Cornerstone (the "New Common Stock") for each share of Former Common Stock held. Holders of the Former Common Stock constitute approximately 63% of the shares of New Common Stock. All outstanding stock options were canceled. (4) Pursuant to the First Amended Stock Purchase Agreement by and between Ray Davis, Trustee (the "Purchaser") and Cornerstone dated May 28, 1993, Ray Davis and his assigns acquired 4,576,659 shares of New Common Stock and warrants to acquire an additional 2,564,103 shares of New Common Stock with an exercise price of $.78 per share. The aggregate purchase price of such shares of New Common Stock and warrants was $3.0 million. The purchased shares constitute approximately 37% of the Company's issued and outstanding shares of New Common Stock. The purchased shares and the warrants, if exercised, would constitute approximately 47% of the fully diluted capital stock of the Company. (5) The Company entered into a term loan and revolving credit facility (the "Senior Loan") with a financial institution. The term portion of the Senior Loan was for $5.8 million and provides for monthly principal and interest payments. The interest is to be calculated at the applicable prime rate plus two percent. The revolving credit facility allows for working capital loans and standby letters of credit up to an aggregate of $6.0 million. A portion of the proceeds from the Senior Loan were used to retire the remaining debt associated with the purchase of the original assets of Dubach as well as the debt incurred when the assets of Claiborne Gasoline Company were acquired. (6) The Company amended its Certificate of Incorporation to (1) change the Company's name to Cornerstone Natural Gas, Inc. from Endevco, Inc. and (2) provide for certain restrictions on the transfer of New Common Stock. The Company has accounted for all transactions related to the Chapter 11 proceedings in accordance with the Statement of Position 90-7 ("SOP 90-7") of the American Institute of Certified Public Accountants entitled, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." In addition, certain other property and equipment was written down as a result of the reorganization. These transactions resulted in a loss on -24- disposition and write downs of property, plant and equipment of approximately $20.3 million and an extraordinary gain from the forgiveness of debt of approximately $9.1 million. As a result of the reorganization, the Company believes that cash flows from its remaining operations combined with amounts available under its $6.0 million revolving credit facility will be sufficient to meet its projected cash requirements during 1994. -25- 3. PROPERTY, PLANT, AND EQUIPMENT A summary of property, plant, and equipment follows:
December 31, -------------------------- 1993 1992 ---- ---- Pipelines and pipeline rights-of-way . . . . $ 19,737,000 $ 86,416,000 Gas liquids recovery, treating and refining. 30,677,000 29,503,000 Equipment. . . . . . . . . . . . . . . . . . 1,744,000 5,548,000 Other. . . . . . . . . . . . . . . . . . . . 2,299,000 2,430,000 ----------- ------------ $ 54,457,000 $ 123,897,000 ----------- ------------ ----------- ------------
Interest cost capitalized during the construction of projects was $8,000 in 1993, $26,000 in 1992, and $69,000 in 1991. As part of the Plan, the Mississippi Fuel, Ada, Chalybeate Springs, and Leaf River pipeline gathering systems were transferred to the Noteholders during 1993. The carrying value of these assets was approximately $47.8 million at the time of the transfer. In addition, certain other property and equipment was written down as a result of the reorganization. These transactions resulted in a loss on disposition and write downs of property, plant, and equipment of approximately $20.3 million. See Note 2. The Company wrote off $131,000 of project development costs during 1992. These costs related to projects that no longer fit the Company's strategic plans. 4. LONG-TERM DEBT A summary of debt follows:
December 31, ----------------------- 1993 1992 ---- ---- Term portion of Senior Loan (a). . . . . . . $ 5,506,000 $ - Notes payable to former Preferred Stockholders (b) . . . . . . . . . . . . . 2,500,000 - 9% Senior Notes (Note 2) . . . . . . . . . . - 17,475,000 11.7% Senior Notes (Note 2). . . . . . . . . - 8,740,000 11.5% Subordinated Convertible Debentures (Note 2). . . . . . . . . . . . - 10,750,000 Subordinated secured notes payable (c). . . 2,213,000 2,448,000 Secured notes payable, non-recourse (d). . . - 5,079,000 Secured notes payable, non-recourse (e). . . - 1,195,000 Other. . . . . . . . . . . . . . . . . . . . 50,000 90,000 ----------- ------------ 10,269,000 45,777,000 Less: Current installments. . . . . . . . . 2,501,000 3,153,000 Long-term debt subject to Standstill Agreement (f). . . . . . . . . . . . . . . - 36,965,000 ----------- ------------ Long-term debt . . . . . . . . . . . . . . . $ 7,768,000 $ 5,659,000 ----------- ------------ ----------- ------------
(a) In November 1993, the Company entered into the Senior Loan with a financial institution. The $5.8 million term portion of the Senior Loan provides for monthly principal and interest payments. Interest is payable monthly at the applicable prime rate plus two percent. The revolving credit facility allows for working capital loans and standby letters of credit up to an aggregate of $6.0 million subject to a borrowing base as defined. As of December 31, 1993, $5.9 million was available from this line. As of December 31, 1993, there were no working capital loans outstanding -26- and the financial institution had issued, for the Company's benefit, approximately $3.7 million in standby letters of credit for natural gas purchases. The revolving credit facility expires October 31, 1995 unless extended. The Senior Loan is secured by essentially all the assets of the Company and includes provisions for mandatory prepayments of principal if certain financial results are achieved. The Senior Loan requires the Company to maintain certain financial ratios, prohibits the Company from paying dividends and restricts capital expenditures. A portion of the proceeds from the Senior Loan were used to retire the remaining debt associated with the purchase of the original assets of Dubach as well as the debt incurred when the assets of Claiborne Gasoline Company were acquired. (b) In conjunction with the reorganization, the Debtors issued promissory notes in the aggregate of $2.5 million to the Preferred Stockholders in satisfaction of all allowed claims (approximately $27.0 million on the financial records of the Debtors, which included the liquidation value of the Preferred Stock and all accrued and unpaid dividends thereon). The Note bears interest at prime rate plus two percent and is secured by a lien on the stock of all the subsidiaries of Cornerstone and is guaranteed by its subsidiary, Cornerstone Pipeline Company, which holds an interest in the Mountain Creek Joint Venture and also owns the Excelsior gathering system. The note is due in varying annual installments through December 31, 1997, and requires monthly payments of interest during the term of the note. Pursuant to the terms of the Note, the Company is prohibited from paying dividends or repurchasing shares of its capital stock. (c) In September, 1989, the Company's 50% owned Mountain Creek Joint Venture ("MCJV") borrowed $6.0 million from a financial institution. The debt is secured by MCJV pipeline facilities, and bears interest at prime rate plus two percent. The loan is due in varying quarterly installments which began January 1, 1990, with a balloon payment due October 1, 1996. The net book value of assets encumbered by the aforementioned debt at December 31, 1993, was approximately $4.7 million ($2.4 million relating to the Company's 50% ownership interest). (d) In connection with the acquisition of certain refining and processing facilities, Dubach entered into a Term Loan and Revolving Credit Agreement ("Agreement") with a financial institution. The Agreement originally provided for an acquisition loan and a revolving line of credit. Under the revolving line of credit, working capital loans and standby letters of credit were permitted. A portion of the proceeds from the Senior Loan were used to retire the acquisition loan and the working capital loan. The current line of credit permits standby letters of credit only. As of December 31, 1993, the financial institution had issued for the Company's benefit, approximately $10.0 million in standby letters of credit with the maximum available being $10.0 million, subject to a borrowing base. The maturity date of this revolving line of credit is March 31, 1994. Fees related to this revolving line of credit are 2% on letters of credit and a .5% fee on the unused portion of the line. This line is secured by the cash, accounts receivable, and inventory of Dubach. The Company has arranged for a revolving line of credit whereby standby letters of credit are permitted from a financial institution for March 1994 production. The agreement is secured by a second lien through subordination up to $2.6 million on the cash, inventory, and accounts receivable of Dubach. As of March 1, 1994, there were $2.6 million standby letters of credit issued and outstanding under this line of credit with the maximum being $2.6 million. The maturity date of this line of credit is April 30, 1994. Fees related to this agreement are 1 1/2% per annum. (e) Effective August 1, 1991, Dubach acquired the assets of Claiborne Gasoline Company in exchange for a $1.25 million note due to the seller in 120 monthly installments of approximately $25,000, including interest. These assets included approximately 190 miles of gas gathering pipeline facilities and related gas liquid recovery and refining facilities. A portion of the proceeds from the Senior Loan were used to retire the remainder of this debt. (f) In 1992, the Company was operating under a standstill and forbearance agreement (the "Standstill Agreement") with the Noteholders. This obligation was satisfied as part of the Plan (Note 2). -27- Aggregate maturities of long-term debt, for each of the five subsequent fiscal years are as follows: 1994. . . . . . . . . . . . . . $2,501,000 1995. . . . . . . . . . . . . . 2,120,000 1996. . . . . . . . . . . . . . 3,431,000 1997 . . . . . . . . . . . . . 1,550,000 1998 . . . . . . . . . . . . . 667,000 ----------- $10,269,000 ----------- -----------
5. INCOME TAXES Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109) changing the method of accounting for income taxes. As permitted under the new rules, prior years' financial statements have not been restated to reflect the change. There is no cumulative effect from the adoption of FAS 109 as of January 1, 1993, and no deferred tax provision for the year ended December 31, 1993. The significant components of the provision (benefit) for income taxes are as follows:
Year Ended December 31, ------------------------------------------------ Liability Method Deferred Method 1993 1992 1991 -------- -------------------------- Current . . . . . . $ 45,000 $ 181,000 $ 168,000 Deferred. . . . . . - (1,682,000) (832,000) ------- ---------- -------- $ 45,000 $(1,501,000) $(664,000) ------- ---------- -------- ------- ---------- --------
Deferred income taxes reflect the net tax effect of temporary differences between the financial reporting carrying amounts of assets and liabilities and income tax carrying amounts. The components of the Company's deferred tax liabilities and assets at December 31, 1993 and January 1, 1993 are as follows:
December 31, January 1, 1993 1993 ------------ ------------ Deferred tax liabilities: Property, plant and equipment . . . . . $ (2,240,000) $ (7,121,000) Deferred tax assets: NOL carryforwards . . . . . . . . . . . 9,842,000 7,260,000 Investment tax credit carryforwards . . 1,618,000 1,618,000 Alternative minimum tax credit carryforwards . . . . . . . . . . . . 104,000 104,000 Accrued liabilities and other . . . . . 289,000 205,000 ----------- ---------- 11,853,000 9,187,000 Less valuation allowance . . . . . . . . . . (9,613,000) (2,066,000) ----------- ---------- $ - $ - ----------- ---------- ----------- ----------
-28- The sources of deferred income taxes and the tax effect of each for the years ended December 31, 1992 and 1991 are as follows:
Year Ended December 31, ------------------------- 1992 1991 -------- -------- Excess tax depreciation over financial. $ 598,000 $ 777,000 Utilization of NOL carryforward . . . . (2,096,000) (1,172,000) Gain on asset sales . . . . . . . . . . (124,000) (336,000) Deferred state income tax benefit . . . (146,000) (98,000) Other . . . . . . . . . . . . . . . . . 86,000 (3,000) ---------- ---------- $(1,682,000) $ (832,000) ---------- ---------- ---------- ----------
The provision (benefit) for income taxes differed from amounts computed at the statutory federal income tax rate as follows:
Year Ended December 31, -------------------------------------------- 1993 1992 1991 -------- -------- -------- Tax benefit at statutory rate . . . . . . . . . . . . . $ (10,653,000) $ (2,425,000) $ (764,000) State income taxes, net of federal benefit. . . . . . . 29,000 48,000 51,000 Utilization of NOL not assured. . . . . . . . . . . . . 10,491,000 820,000 - Other . . . . . . . . . . . . . . . . . . . . . . . . . 178,000 56,000 49,000 ------------ ------------ ---------- $ 45,000 $ (1,501,000) $ (664,000) ------------ ------------ ---------- ------------ ------------ ----------
The Company has NOL carryforwards for income tax purposes of approximately $28.9 million which, if not previously utilized, will expire at various times from 2001 through 2008. In addition, the Company has unused investment tax credits of approximately $1.6 million available to offset future federal income tax liabilities. In general, the credits expire at various times from 1996 through 2001, unless previously utilized. The respective carryforwards are available to the Company in their full amounts unless a "change of ownership", as defined in Internal Revenue Code Section 382, occurs. If a change of ownership occurs utilization of the NOL carryforwards could be severely limited. 6. COMMITMENTS AND CONTINGENT LIABILITIES The Company leases office space, equipment and automobiles under lease obligations classified as operating leases. Rental expense under these leases was approximately $1.7 million in 1993, $2.1 million in 1992, and $1.8 million in 1991. At December 31, 1993, minimum future rental payments due under operating leases were as follows: 1994. . . . . . . . . . . . . . . . $ 375,000 1995. . . . . . . . . . . . . . . . 134,000 1996. . . . . . . . . . . . . . . . 8,000
The Company is involved in certain other legal actions and claims arising in the ordinary course of business. It is the opinion of management (based on advice of legal counsel) that such litigation and claims will be resolved without material effect on the Company's financial position. -29- 7. TRANSACTIONS WITH RELATED PARTIES On May 28, 1993, the Company entered into the First Amended Stock Purchase Agreement (the "Stock Purchase Agreement") with Ray Davis, Trustee. Under the Stock Purchase Agreement, the Purchaser agreed to purchase 4,576,659 shares of New Common Stock and warrants to acquire 2,564,103 shares of New Common Stock (with an exercise price of $.78 per share) for $3.0 million. On June 4, 1993 in connection with the Plan, Mr. Ray C. Davis became the Chairman of the Board of Directors and the Chief Executive Officer of the Company. At the same time, Mr. Kelcy L. Warren returned to the Company in his prior role of President and Chief Operating Officer. The Company felt that it was important that this management team was in place in order for the Company to complete its reorganization and recapitalization. In connection with the Company's emergence from bankruptcy on November 2, 1993, Mr. Davis purchased 381,388 shares of New Common Stock, Mr. Ben H. Cook purchased 1,618,612 shares of New Common Stock and Endevco Investors Joint Venture (the "Joint Venture") purchased 2,576,659 shares of New Common Stock. Mr. Davis is the managing partner of the Joint Venture and Mr. Cook and Mr. Warren each have an interest in the Joint Venture. Pursuant to the Stock Purchase Agreement, a warrant to purchase 769,231 shares of New Common Stock was issued to Mr. Davis, a warrant to purchase 512,821 shares of New Common Stock was issued to Mr. Cook, a warrant to purchase 769,231 shares of New Common Stock was issued to Mr. Warren. Each of the warrants entitle the holder to purchase shares of New Common Stock for $.78 per share. At the same time, the Company elected Mr. Cook, Mr. Ted Collins, Jr. and Mr. Richard D. Brannon to the Board of Directors of the Company pursuant to the terms of the Stock Purchase Agreement. Affiliates of Mr. Collins and Mr. Brannon are each indirectly partners in the Joint Venture. The shares of New Common Stock held by the Joint Venture are to be voted by Mr. Davis pro rata based on the instructions of the partners of the Joint Venture. Mr. David S. Hunt (a director of the Company) is a beneficiary of a trust that is a partner in the Joint Venture. Mr. Hunt has disclaimed beneficial ownership of such shares of New Common Stock. At December 31, 1993, the Company had approximately $120,000 of payables to Capstone Capital Corporation for expenses incurred that are to be reimbursed pursuant to the Plan. Mr. Davis and Mr. Cook own shares of the corporation. The Company is a party to an agreement with Energy Transfer I, Ltd. ("Energy Transfer"). Mr. Warren is the sole shareholder of the general partner of Energy Transfer and Messrs. Davis, Warren and Cook are indirect limited partners in Energy Transfer. Under such agreement, the Company receives a fixed fee to market natural gas and operate a natural gas pipeline for Energy Transfer. The Company received $35,000 from Energy Transfer in the year ended December 31, 1993. Mr. James W. Bryant (a director of the Company) is a party to a consulting agreement with the Company. Under the consulting agreement, which has a three year term, Mr. Bryant is to receive no less than $200,000 per year. Mr. Bryant is obligated under the consulting agreement to present certain projects to the Company which has a right of first refusal. If the Company elects to pursue a project originated by Mr. Bryant, then he is entitled to additional compensation. The Company is also a party to a joint venture agreement with an affiliate of Mr. Collins. Under such joint venture agreement, the Company and the affiliate of Mr. Collins each bear a portion of the costs for developing projects in the natural gas business and have a right of first refusal on such projects. 8. EMPLOYEE BENEFIT PLANS Under the Plan (Note 2) all outstanding stock options were canceled. An incentive stock option plan the ("Stock Plan") was approved by the Board of Directors on December 16, 1993, subject to Stockholders' approval. Under the Stock Plan, options to purchase up to 1,250,000 shares of the Company's authorized but unissued stock could be granted to key employees through 2003. Options under the Stock Plan were granted at an exercise price equal to 100% of the fair market value of the stock on the date of the grant. The options, of which 727,500 were outstanding at December 31, 1993, are exercisable at a rate not to exceed 20% for each year of employment completed (however 100% may be exercised under a change of control, as defined) after the date of grant and expire 10 years after the date of grant. The following is a summary of activity under the Stock Plan and all former stock option plans for the years ended December 31:
1993 1992 1991 -------- -------- -------- Outstanding at beginning of year. . . . . . . . . . . . . . . . . . . . . . 601,713 790,018 654,346
-30- Granted during year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727,500 75,000 374,500 Exercised or terminated during year . . . . . . . . . . . . . . . . . . . . 601,713 263,305 238,828 --------- ----------- ----------- Outstanding at end of year. . . . . . . . . . . . . . . . . . . . . . . . . 727,500 601,713 790,018 --------- ----------- ----------- --------- ----------- ----------- Exercisable at end of year. . . . . . . . . . . . . . . . . . . . . . . . . - 389,473 502,308 --------- ----------- ----------- --------- ----------- ----------- Per share price of exercisable options. . . . . . . . . . . . . . . . . . . $ - $1.63-$6.75 $0.83-$6.75 --------- ----------- ----------- --------- ----------- ----------- Per share price of grants during year . . . . . . . . . . . . . . . . . . . $ 1.125 $ 1.63 $2.13-$3.00 --------- ----------- ----------- --------- ----------- ----------- Per share price of options exercised during year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ none $ none $ none --------- ----------- ----------- --------- ----------- -----------
The Company maintains an incentive savings plan "Savings Plan" under Section 401(k) of the Internal Revenue Code, which is available to all employees who meet certain requirements. Under the Savings Plan, the Company matched participants' contributions up to 5% of the participant's compensation through 1993. Beginning in 1994, the Company will match 20% of the employees' contributions to the Savings Plan up to a maximum of five percent (5%) of the participant's compensation. The Company may, at its discretion, increase the matching percentage at year end and may match in New Common Stock or cash. The Company recorded expense of $250,000, $193,000, and $174,000 for 1993, 1992 and 1991, respectively, for its matching contribution. The Company currently provides no other post-employment benefits. -31- 9. SEGMENT INFORMATION Segment data as of and for the years ended December 31, 1993, 1992 and 1991, follows:
Gas Corporate Gas Pipeline Processing General and Operations Operations Administrative Combined ---------- ---------- -------------- -------- 1993: Revenue from unaffiliated sources . . . . . . . . . . . . . $ 114,722,000 $ 100,903,000 $ - $ 215,625,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 105,400,000 88,949,000 - 194,349,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Depreciation and amortization . . . . . . . . . . . . . . . 4,281,000 1,976,000 194,000 6,451,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Operating earnings (loss) . . . . . . . . . . . . . . . . . 196,000 (1,134,000) (3,534,000) (4,472,000) ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Identifiable assets . . . . . . . . . . . . . . . . . . . . 16,554,000 25,383,000 4,509,000 46,446,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Capital expenditures. . . . . . . . . . . . . . . . . . . . 1,913,000 1,800,000 29,000 3,742,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ 1992: Revenue from unaffiliated sources . . . . . . . . . . . . . $ 120,978,000 $ 123,718,000 $ - $ 244,696,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 107,045,000 109,191,000 - 216,236,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Depreciation and amortization . . . . . . . . . . . . . . . 5,231,000 1,953,000 310,000 7,494,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Operating earnings (loss) . . . . . . . . . . . . . . . . . 3,165,000 313,000 (4,477,000) (999,000) ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Identifiable assets . . . . . . . . . . . . . . . . . . . . 75,649,000 30,294,000 8,606,000 114,549,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Capital expenditures. . . . . . . . . . . . . . . . . . . . 1,529,000 1,566,000 65,000 3,160,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ 1991: Revenue from unaffiliated sources . . . . . . . . . . . . . $ 117,826,000 $ 91,446,000 $ - $ 209,272,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 101,086,000 79,464,000 - 180,550,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Depreciation and amortization . . . . . . . . . . . . . . . 6,037,000 1,918,000 374,000 8,329,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Operating earnings (loss) . . . . . . . . . . . . . . . . . 4,440,000 2,456,000 (5,618,000) 1,278,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Identifiable assets . . . . . . . . . . . . . . . . . . . . 73,729,000 32,265,000 14,966,000 120,960,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------ Capital expenditures. . . . . . . . . . . . . . . . . . . . 5,054,000 2,208,000 77,000 7,339,000 ------------ ------------ ----------- ------------ ------------ ------------ ----------- ------------
-32- The Company believes that the loss of any single customer would not have a material effect on the financial condition of the Company. There were no customers in 1992 that accounted for over 10% of consolidated revenues. Information regarding sales to major customers by segment for the years ended December 31, 1993 and 1991 is as follows:
Percentage of Gas Pipeline Gas Processing Consolidated Operations Operations Revenues ----------- ------------- ------------- 1993 Georgia Pacific . . . . . . . . . . . . . . . . . . . . . . $ 24,810,000 - 12% 1991 Continental Ozark . . . . . . . . . . . . . . . . . . . . . $ - $ 30,280,000 14%
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III The information required in response to Items 10, 11, 12, and 13 is included in the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 1994, pursuant to Regulation 14A and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Consolidated Financial Statements
Cornerstone Natural Gas, Inc. and Subsidiaries. Page ---- Report of Ernst & Young, Independent Auditors. . . . . . . . . . . . . . . . . . 17 Consolidated Statements of Operations for the Years Ended December 31, 1993, 1992, and 1991 . . . . . . . . . . . . . . . . . . . . . 18 Consolidated Balance Sheets at December 31, 1993 and 1992. . . . . . . . . . . . 19 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1992, and 1991 . . . . . . . . . . . . . . . . . . . . . 20 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993, 1992, and 1991 . . . . . . . . . . . 21 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . .22-33
(2) Consolidated Financial Statement Schedules. The consolidated financial statement schedules filed as a part of this report on Form 10-K follow the signature page. The following is a list of those schedules: Schedule V Property, Plant and Equipment Schedule VI Accumulated Depreciation and Amortization of Property, Plant, and Equipment Schedule X Supplementary Income Statement Information Schedules not included have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. -33- (3) Exhibits. Exhibit No. Document - ----------- -------- * 3.1 By-Laws, as Amended and Restated March 21, 1994, currently in effect. 3.2 Restated Certificate of Incorporation of Cornerstone Natural Gas, Inc. (incorporated by reference to Exhibit 2 filed January 10, 1994, Form 8-A). * 10.1 Cornerstone Natural Gas, Inc. 1993 Long-Term Incentive Plan. * 10.2 Amended and Restated Endevco, Inc. Employee Savings Plan effective July 1, 1991. 10.3 Endevco, Inc. Employee Savings Trust (incorporated by reference to 10.3 to Registration Statement No. 2-85830). 10.4 Amendment Number 1 to the Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.6 to December 31, 1991, Form 10-K). 10.5 Amendment Number 2 to the Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.7 to December 31, 1991, Form 10-K). 10.6 Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated January 11, l985, (incorporated by reference to Exhibit 10.65 to March 31, 1985 Form 10-Q). 10.7 Amendment to the Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated April 24, l985, (incorporated by reference to Exhibit 10.14 to December 31, 1991, Form 10-K). 10.8 Amendment to Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated October 7, l985, (incorporated by reference to Exhibit 10.15 to December 31, 1991, Form 10-K). 10.9 Amendment to Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated October 13, l987, (incorporated by reference to Exhibit 10.16 to December 31, 1991, Form 10-K). 10.10 Amendment to Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated October 22, l988, (incorporated by reference to Exhibit 10.17 to December 31, 1991, Form 10-K). 10.11 Modification and Ratification of Lease Agreement by and between Endevco, Inc. as Tenant and The Prudential Insurance Company of America, as Landlord, dated February 24, l993, (incorporated by reference to Exhibit 10.18 to December 31, 1992, Form 10-K). 10.12 Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated July 26, l991, (incorporated by reference to Exhibit 10.51 to December 31, 1991, Form 10-K). 10.13 First Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated August 28, l991, (incorporated by reference to Exhibit 10.52 to December 31, 1991, Form 10-K). 10.14 Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between -34- Dubach Gas Company and Union Bank dated December 20, 1991, (incorporated by reference to Exhibit 10.53 to December 31, 1991, Form 10-K). 10.15 Second Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated July 23, l992, (incorporated by reference to Exhibit 10.54 to December 31, 1992, Form 10-K). 10.16 Third Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated September 21, l992, (incorporated by reference to Exhibit 10.55 to December 31, 1992, Form 10-K). 10.17 Fourth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated October 22, l992, (incorporated by reference to Exhibit 10.56 to December 31, 1992, Form 10-K). 10.18 Fifth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated November 30, l992, (incorporated by reference to Exhibit 10.57 to December 31, 1992, Form 10-K). 10.19 Sixth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated January 29, l993, (incorporated by reference to Exhibit 10.58 to December 31, 1992, Form 10-K). 10.20 Seventh Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated February 22, l993, (incorporated by reference to Exhibit 10.59 to December 31, 1992, Form 10-K). 10.21 Eighth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated March 22, l993, (incorporated by reference to Exhibit 10.60 to December 31, 1992, Form 10-K). * 10.22 Ninth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated April 26, 1993. * 10.23 Tenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated May 24, 1993. * 10.24 Eleventh Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated June 21, 1993. * 10.25 Twelfth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated July 19, 1993. * 10.26 Thirteenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated August 23, 1993. * 10.27 Fourteenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated September 21, 1993. * 10.28 Fifteenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated October 28, 1993. -35- * 10.29 Sixteenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated December 21, 1993. 10.30 Subordination Agreement dated December 15, l988, (incorporated by reference to Exhibit 10.54 to December 31, 1991, Form 10-K). 10.31 Amendment dated March 27, l989, to Subordination Agreement dated December 15, l988, between Endevco, Inc. and Dubach Gas Company (incorporated by reference to Exhibit 10.55 to December 31, 1991, Form 10-K). 10.32 Second Amendment dated August 29, l990, to Subordination Agreement dated December 15, l988, between Endevco, Inc. and Dubach Gas Company (incorporated by reference to Exhibit 10.56 to December 31, 1991, Form 10-K). 10.33 Third Amendment dated September 21, 1990, to Subordination Agreement dated December 15, l988, between Endevco, Inc. and Dubach Gas Company (incorporated by reference to Exhibit 10.96 to December 31, 1990, Form 10-K). 10.34 Loan Agreement dated as of December 16, l988, by and between Dubach Gas Company and Endevco, Inc. (incorporated by reference to Exhibit 2 to December 16, 1988, Form 8-K). 10.35 General Partnership Agreement of Mountain Creek Joint Venture dated as of March 7, l989, by and between Western Natural Gas Company and Cornerstone Natural Gas Company (incorporated by reference to Exhibit 10.79 to December 31, 1989, Form 10-K). 10.36 Pipeline Construction and Operating Agreement dated March 7, l989, by and between Cornerstone Natural Gas Company and Mountain Creek Joint Venture (incorporated by reference to Exhibit 10.80 to December 31, 1989, Form 10-K). 10.37 Loan Agreement dated September 28, l989, by and between Mountain Creek Joint Venture and Chrysler Capital Corporation (incorporated by reference to Exhibit 10.82 to December 31, 1989, Form 10-K). 10.38 Participation Agreement dated July 17, l991, by and between Endevco and First Reserve Gas Storage Inc. (incorporated by reference to Exhibit 10.88 to December 31,1991, Form 10-K). * 10.39 Letter Agreement effective May 17, 1993, by and between Energy Transfer Corporation and Cornerstone Natural Gas, Inc. 10.40 Stock Purchase Agreement dated March 20, l993, by and between Endevco, Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit 10.136 to December 31, 1992, Form 10-K). 10.41 First Amendment Stock Purchase Agreement dated May 28, 1993, by and between Endevco, Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit 10.1 to June 17, 1993, to Form 8-K). * 10.42 Form and Schedule of Warrants to Purchase Common Stock of Cornerstone Natural Gas, Inc. * 10.43 Form and Schedule of Promissory Note dated November 2, 1993, between Cornerstone Natural Gas, Inc. and Preferred Stockholders. 10.44 Revolving Credit and Term Loan Agreement between Cornerstone Natural Gas, Inc. et al, and Bank of Oklahoma, National Association dated November 2, 1993, (incorporated by reference to Exhibit 10.3 to November 2, 1993, Form 8-K). * 10.45 Joint Venture Agreement between Cornerstone Natural Gas, Inc. and Merit Natural Gas Company -36- dated October 28, 1993. * 10.46 First Amended and Restated Intercreditor Agreement dated December 31, 1993, between Union Bank and Bank of Oklahoma, National Association. * 10.47 Subordination Agreement dated February 24, 1994, between Bank of Oklahoma, National Association and Premier Bank. * 10.48 Consulting Agreement between Endevco, Inc. and James W. Bryant dated June 4, 1993. * 22.1 List of Subsidiaries. * 23.1 Consent of Independent Auditors. - -------------------------------------- * Filed Herewith (b) Reports on Form 8-K (1) "Item 3. Bankruptcy." and "Item 7. Exhibits." were reported in a Current Report on Form 8-K filed October 14, 1993. (2) "Item 1. Change of Control of Registrant", "Item 2. Disposition of Assets", "Item 3. Bankruptcy" and "Item 7. Exhibits" were reported in a current report on Form 8-K filed November 15, 1993. -37- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORNERSTONE NATURAL GAS, INC. By:/s/ RAY C. DAVIS ---------------------- Ray C. Davis CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER Date: MARCH 22, l994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Capacity in Signatures Which Signed ---------- ------------ /s/ RAY C. DAVIS Chairman of the Board of Directors March 22, 1994 - ----------------------- and Chief Executive Officer (Ray C. Davis) /s/ KELCY L. WARREN President, Chief Operating March 22, 1994 - ----------------------- Officer and Director (Kelcy L. Warren) /s/ ROBERT L. CAVNAR Senior Vice President and Chief March 22, 1994 - ----------------------- Financial Officer (Robert L. Cavnar) /s/ RICHARD W. PIACENTI Vice President and Controller March 22, 1994 - ----------------------- (Richard W. Piacenti) /s/ RICHARD D. BRANNON Director March 22, 1994 - ----------------------- (Richard D. Brannon) /s/ JAMES W. BRYANT Director March 22, 1994 - ----------------------- (James W. Bryant) /s/ TED COLLINS, JR. Director March 22, 1994 - ----------------------- (Ted Collins, Jr.) /s/ BEN H. COOK Director March 22, 1994 - ----------------------- (Ben H. Cook) /s/ DAVID S. HUNT Director March 22, 1994 - ----------------------- (David S. Hunt) /s/ C. ROBERT SLEDGE Director March 22, 1994 - ----------------------- (C. Robert Sledge) -38- SCHEDULE V CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES PROPERTY, PLANT AND EQUIPMENT
Balance at Transfers Balance at Beginning Retirements & End Classification of Period Additions or Sales Other of Periodd -------------- ---------- ---------- ----------- --------- ---------- December 31, l993: Pipelines and Pipeline Rights-of-Way. . . . . . . . . . . $ 86,416,000 $ 1,686,000 $ 68,365,000 (a) $ - $ 19,737,000 Gas Storage . . . . . . . . . . . . . - - - - - Gas Liquids Recovery Plants . . . . . 21,312,000 1,362,000 - - 22,674,000 Gas Treating Plants . . . . . . . . . 8,191,000 163,000 351,000 - 8,003,000 Equipment . . . . . . . . . . . . . . 5,548,000 403,000 4,207,000 (a) - 1,744,000 Furniture and Fixtures. . . . . . . . 1,622,000 67,000 109,000 (a) - 1,580,000 Leasehold Improvements. . . . . . . . 424,000 - 60,000 (a) - 364,000 Buildings . . . . . . . . . . . . . . 139,000 21,000 77,000 (a) - 83,000 Land. . . . . . . . . . . . . . . . . 245,000 40,000 13,000 (a) - 272,000 ----------- ---------- ----------- ---------- ----------- $123,897,000 $ 3,742,000 $ 73,182,000 $ - $ 54,457,000 ----------- ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- December 31, l992: Pipelines and Pipeline Rights-of-Way. . . . . . . . . . . $ 85,347,000 $ 1,311,000 $ 213,000 $ (29,000) $ 86,416,000 Gas Storage . . . . . . . . . . . . . - - - - - Gas Liquids Recovery Plants . . . . . 20,166,000 1,146,000 - - 21,312,000 Gas Treating Plants . . . . . . . . . 8,266,000 288,000 340,000 (23,000) 8,191,000 Equipment . . . . . . . . . . . . . . 5,867,000 372,000 743,000 52,000 5,548,000 Furniture and Fixtures. . . . . . . . 1,591,000 31,000 - - 1,622,000 Leasehold Improvements. . . . . . . . 412,000 12,000 - - 424,000 Buildings . . . . . . . . . . . . . . 156,000 - 17,000 - 139,000 Land. . . . . . . . . . . . . . . . . 245,000 - - - 245,000 ----------- ---------- ----------- ---------- ----------- $122,050,000 $ 3,160,000 $ 1,313,000 $ - $123,897,000 ----------- ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- December 31, 1991: Pipelines and Pipeline Rights-of-Way. . . . . . . . . . . $ 87,309,000 $ 1,220,000 $ 3,322,000 $ 140,000 (b)(c) $ 85,347,000 Gas Storage . . . . . . . . . . . . . 14,746,000 3,181,000 18,153,000 226,000 (d) - Gas Liquids Recovery Plants . . . . . 17,668,000 1,610,000 - 888,000 (b)(c) 20,166,000 Gas Treating Plants . . . . . . . . . 7,884,000 382,000 - - 8,266,000 Equipment . . . . . . . . . . . . . . 6,132,000 844,000 602,000 (507,000) (b)(c) 5,867,000 Furniture and Fixtures. . . . . . . . 1,554,000 55,000 33,000 15,000 (b) 1,591,000 Leasehold Improvements. . . . . . . . 411,000 1,000 - - 412,000 Buildings . . . . . . . . . . . . . . 121,000 45,000 10,000 - 156,000 Land. . . . . . . . . . . . . . . . . 231,000 1,000 - 13,000 (b) 245,000 ----------- ---------- ----------- ---------- ----------- $136,056,000 $ 7,339,000 $ 22,120,000 $ 775,000 $ 122,050,000 ----------- ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- (a) Includes effect of transfer of assets to Noteholders in satisfaction of debt. (b) Includes effect of acquisition of 10% minority interest in subsidiary. (c) Includes effect of transfer of assets to partnership at net book value. (d) Reclassified from (to) other assets.
-39- SCHEDULE VI CORNERSTONE NATURAL GAS INC. AND SUBSIDIARIES ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Balance at Transfers Balance at Beginning Retirements & End Classification of Period Additions or Sales Other of Period -------------- ---------- ---------- ----------- --------- ---------- December 31, l993: Pipelines and Pipeline Rights-of-Way . . . . . . . . . . . . $ 28,154,000 $ 4,120,000 $ 23,200,000 (a) $ 4,217,000 (b) $ 13,291,000 Gas Storage . . . . . . . . . . . . . - - - - - Gas Liquids Recovery Plants . . . . . 7,725,000 1,263,000 - 117,000 (b) 9,105,000 Gas Treating Plants . . . . . . . . . 5,406,000 507,000 - 657,000 (b) 6,570,000 Equipment . . . . . . . . . . . . . . 2,274,000 358,000 1,743,000 (a) 97,000 (b) 986,000 Furniture and Fixtures. . . . . . . . 1,495,000 62,000 109,000 (a) - 1,448,000 Leasehold Improvements. . . . . . . . 400,000 17,000 61,000 (a) - 356,000 Buildings . . . . . . . . . . . . . . 57,000 7,000 19,000 (a) 4,000 (b) 49,000 ----------- ---------- ----------- ---------- ----------- $ 45,511,000 $ 6,334,000 $ 25,132,000 $ 5,092,000 $ 31,805,000 ----------- ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- December 31, l992: Pipelines and Pipeline Rights-of-Way . . . . . . . . . . . . $ 23,348,000 $ 5,003,000 $ 207,000 $ 10,000 $ 28,154,000 Gas Storage . . . . . . . . . . . . . - - - - - Gas Liquids Recovery Plants . . . . . 6,585,000 1,140,000 - - 7,725,000 Gas Treating Plants . . . . . . . . . 4,994,000 612,000 186,000 (14,000) 5,406,000 Equipment . . . . . . . . . . . . . . 2,320,000 413,000 463,000 4,000 2,274,000 Furniture and Fixtures. . . . . . . . 1,346,000 149,000 - - 1,495,000 Leasehold Improvements. . . . . . . . 347,000 53,000 - - 400,000 Buildings . . . . . . . . . . . . . . 66,000 8,000 17,000 - 57,000 ----------- ---------- ----------- ---------- ----------- $ 39,006,000 $ 7,378,000 $ 873,000 $ - $ 45,511,000 ----------- ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- December 31, 1991: Pipelines and Pipeline Rights-of-Way . . . . . . . . . . . . $ 19,132,000 $ 5,184,000 $ 986,000 $ 18,000 (c) $ 23,348,000 Gas Storage . . . . . . . . . . . . . 100,000 218,000 318,000 - - Gas Liquids Recovery Plants . . . . . 5,628,000 933,000 - 24,000 (c)(d) 6,585,000 Gas Treating Plants . . . . . . . . . 4,494,000 500,000 - - 4,994,000 Equipment . . . . . . . . . . . . . . 2,425,000 470,000 338,000 (237,000) (c)(d) 2,320,000 Furniture and Fixtures. . . . . . . . 1,109,000 241,000 7,000 3,000 (c) 1,346,000 Leasehold Improvements. . . . . . . . 286,000 61,000 - - 347,000 Buildings . . . . . . . . . . . . . . 71,000 6,000 11,000 - 66,000 ----------- ---------- ----------- ---------- ----------- $ 33,245,000 $ 7,613,000 $ 1,660,000 $ (192,000) $ 39,006,000 ----------- ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- (a) Includes effect of transfer of assets to Noteholders in satisfaction of debt. (b) Includes effect of write downs associated with the reorganization. (c) Includes effect of acquisition of 10% minority interest in subsidiary. (d) Includes effect of transfer of assets to partnership at net book value.
-40- SCHEDULE X CORNERSTONE NATURAL GAS, INC. AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION
Year Ended December 31, 1993 1992 1991 -------- -------- -------- Maintenance and repairs $ 2,455,000 $ 3,379,000 $ (a) Depreciation and amortization of intangible assets (a) (a) (a) Taxes, other than payroll and income taxes (a) (a) (a) Royalties (a) (a) (a) Advertising costs (a) (a) (a) (a) less than 1% of total revenues.
-41- INDEX TO EXHIBITS Exhibit No. Document - ----------- -------- * 3.1 By-Laws, as Amended and Restated March 21, 1994, currently in effect. 3.2 Restated Certificate of Incorporation of Cornerstone Natural Gas, Inc. (incorporated by reference to Exhibit 2 filed January 10, 1994, Form 8-A). * 10.1 Cornerstone Natural Gas, Inc. 1993 Long-Term Incentive Plan. * 10.2 Amended and Restated Endevco, Inc. Employee Savings Plan effective July 1, 1991. 10.3 Endevco, Inc. Employee Savings Trust (incorporated by reference to 10.3 to Registration Statement No. 2-85830). 10.4 Amendment Number 1 to the Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.6 to December 31, 1991, Form 10-K). 10.5 Amendment Number 2 to the Endevco, Inc. Employee Savings Trust (incorporated by reference to Exhibit 10.7 to December 31, 1991, Form 10-K). 10.6 Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated January 11, l985, (incorporated by reference to Exhibit 10.65 to March 31, 1985 Form 10-Q). 10.7 Amendment to the Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated April 24, l985, (incorporated by reference to Exhibit 10.14 to December 31, 1991, Form 10-K). 10.8 Amendment to Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated October 7, l985, (incorporated by reference to Exhibit 10.15 to December 31, 1991, Form 10-K). 10.9 Amendment to Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated October 13, l987, (incorporated by reference to Exhibit 10.16 to December 31, 1991, Form 10-K). 10.10 Amendment to Lease Agreement by and between Endevco, Inc. as Tenant and 8080 Central, Ltd. as Landlord, dated October 22, l988, (incorporated by reference to Exhibit 10.17 to December 31, 1991, Form 10-K). 10.11 Modification and Ratification of Lease Agreement by and between Endevco, Inc. as Tenant and The Prudential Insurance Company of America, as Landlord, dated February 24, l993, (incorporated by reference to Exhibit 10.18 to December 31, 1992, Form 10-K). 10.12 Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated July 26, l991, (incorporated by reference to Exhibit 10.51 to December 31, 1991, Form 10-K). 10.13 First Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated August 28, l991, (incorporated by reference to Exhibit 10.52 to December 31, 1991, Form 10-K). 10.14 Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated December 20, 1991, (incorporated by reference to Exhibit 10.53 to December 31, 1991, Form 10-K). 10.15 Second Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated July 23, l992, (incorporated by reference to Exhibit 10.54 to December 31, 1992, Form 10-K). 10.16 Third Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated September 21, l992, (incorporated by reference to Exhibit 10.55 to December 31, 1992, Form 10-K). 10.17 Fourth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated October 22, l992, (incorporated by reference to Exhibit 10.56 to December 31, 1992, Form 10-K). 10.18 Fifth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated November 30, l992, (incorporated by reference to Exhibit 10.57 to December 31, 1992, Form 10-K). 10.19 Sixth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated January 29, l993, (incorporated by reference to Exhibit 10.58 to December 31, 1992, Form 10-K). 10.20 Seventh Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated February 22, l993, (incorporated by reference to Exhibit 10.59 to December 31, 1992, Form 10-K). 10.21 Eighth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated March 22, l993, (incorporated by reference to Exhibit 10.60 to December 31, 1992, Form 10-K). * 10.22 Ninth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated April 26, 1993. * 10.23 Tenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated May 24, 1993. * 10.24 Eleventh Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated June 21, 1993. * 10.25 Twelfth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated July 19, 1993. * 10.26 Thirteenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated August 23, 1993. * 10.27 Fourteenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated September 21, 1993. * 10.28 Fifteenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated October 28, 1993. * 10.29 Sixteenth Amendment to the Amended and Restated Term Loan and Revolving Credit Agreement between Dubach Gas Company and Union Bank dated December 21, 1993. 10.30 Subordination Agreement dated December 15, l988, (incorporated by reference to Exhibit 10.54 to December 31, 1991, Form 10-K). 10.31 Amendment dated March 27, l989, to Subordination Agreement dated December 15, l988, between Endevco, Inc. and Dubach Gas Company (incorporated by reference to Exhibit 10.55 to December 31, 1991, Form 10-K). 10.32 Second Amendment dated August 29, l990, to Subordination Agreement dated December 15, l988, between Endevco, Inc. and Dubach Gas Company (incorporated by reference to Exhibit 10.56 to December 31, 1991, Form 10-K). 10.33 Third Amendment dated September 21, 1990, to Subordination Agreement dated December 15, l988, between Endevco, Inc. and Dubach Gas Company (incorporated by reference to Exhibit 10.96 to December 31, 1990, Form 10-K). 10.34 Loan Agreement dated as of December 16, l988, by and between Dubach Gas Company and Endevco, Inc. (incorporated by reference to Exhibit 2 to December 16, 1988, Form 8-K). 10.35 General Partnership Agreement of Mountain Creek Joint Venture dated as of March 7, l989, by and between Western Natural Gas Company and Cornerstone Natural Gas Company (incorporated by reference to Exhibit 10.79 to December 31, 1989, Form 10-K). 10.36 Pipeline Construction and Operating Agreement dated March 7, l989, by and between Cornerstone Natural Gas Company and Mountain Creek Joint Venture (incorporated by reference to Exhibit 10.80 to December 31, 1989, Form 10-K). 10.37 Loan Agreement dated September 28, l989, by and between Mountain Creek Joint Venture and Chrysler Capital Corporation (incorporated by reference to Exhibit 10.82 to December 31, 1989, Form 10-K). 10.38 Participation Agreement dated July 17, l991, by and between Endevco and First Reserve Gas Storage Inc. (incorporated by reference to Exhibit 10.88 to December 31,1991, Form 10-K). * 10.39 Letter Agreement effective May 17, 1993, by and between Energy Transfer Corporation and Cornerstone Natural Gas, Inc. 10.40 Stock Purchase Agreement dated March 20, l993, by and between Endevco, Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit 10.136 to December 31, 1992, Form 10-K). 10.41 First Amendment Stock Purchase Agreement dated May 28, 1993, by and between Endevco, Inc., and Ray Davis, Trustee (incorporated by reference to Exhibit 10.1 to June 17, 1993, to Form 8-K). * 10.42 Form and Schedule of Warrants to Purchase Common Stock of Cornerstone Natural Gas, Inc. * 10.43 Form and Schedule of Promissory Note dated November 2, 1993, between Cornerstone Natural Gas, Inc. and Preferred Stockholders. 10.44 Revolving Credit and Term Loan Agreement between Cornerstone Natural Gas, Inc. et al, and Bank of Oklahoma, National Association dated November 2, 1993, (incorporated by reference to Exhibit 10.3 to November 2, 1993, Form 8-K). * 10.45 Joint Venture Agreement between Cornerstone Natural Gas, Inc. and Merit Natural Gas Company dated October 28, 1993. * 10.46 First Amended and Restated Intercreditor Agreement dated December 31, 1993, between Union Bank and Bank of Oklahoma, National Association. * 10.47 Subordination Agreement dated February 24, 1994, between Bank of Oklahoma, National Association and Premier Bank. * 10.48 Consulting Agreement between Endevco, Inc. and James W. Bryant dated June 4, 1993. * 22.1 List of Subsidiaries. * 23.1 Consent of Independent Auditors. - ---------------------------------- * Filed Herewith EX-3.1 2 BY-LAWS CORNERSTONE NATURAL GAS, INC. EXHIBIT 3.1 BY-LAWS, AS AMENDED RESTATED: MARCH 21, 1994 ARTICLE 1: Offices 1.01 REGISTERED OFFICE. The registered office of the Corporation in the State of Delaware and the Corporation's registered agent at such office shall be such place and person as may from time to time be determined by the Board of Directors of the Corporation and reflected in an appropriate filing with the Secretary of State of Delaware. 1.02 OTHER OFFICES. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE 2: Shareholders 2.01 PLACE OF MEETINGS. All meetings of the Shareholders shall be held at such time and place, within or without the State of Delaware, as may be designated for that purpose from time to time by the Board of Directors or the President. 2.02 ANNUAL MEETING. An Annual Meeting of the Shareholders shall be held each year at 10:00 a.m. on a day during the month of May, to be selected by the Board of Directors. At the meeting, the Shareholders shall elect directors and transact such other business as may be properly brought before the meeting. 2.03 VOTING LIST. At least ten days before each meeting of Shareholders, a complete list of the Shareholders entitled to vote at the meeting, arranged in alphabetical order, with the address of each and the number of voting shares held by each, shall be prepared by the officer or agent having charge of the stock transfer books. The list, for a period of ten days prior to the meeting, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any Shareholder at any time during usual business hours. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof, and shall be subject to the inspection of any Shareholder during the whole time of the meeting. 2.04 SPECIAL MEETINGS. Special meetings of the Shareholders, for any purpose or purposes, unless otherwise prescribed by statute, the Certificate of Incorporation, any resolution adopted by the Board of Directors providing for the issuance of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation or these By-Laws, may be called by the President or the Board of Directors. Business transacted at a special meeting shall be confined to the subjects stated in the notice of the meeting. - 1 - 2.05 NOTICE. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the president, the secretary or the office or person calling the meeting, to each Shareholder of record entitled to vote at the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the Shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. 2.06 QUORUM. The holders of a majority of the shares issued and outstanding entitled to vote therein, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the Shareholders for the transaction of business except as otherwise provided by statute, the Certificate of Incorporation, any resolution adopted by the Board of Directors providing for the issuance of any cash or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation or these By- Laws. If, however, such quorum shall not be present or represented at any meeting of the Shareholders, the Shareholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time until a quorum shall be present or represented. Notice of adjournment of a meeting of Shareholders need not be given if the time and place to which it is adjourned are announced at such meeting, unless the adjournment is for more than 30 days or, after adjournment, a new record date is fixed for the adjourned meeting. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. 2.07 MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at any meeting, the vote of the holders of a majority of the shares having voting power present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes, the Certificate of Incorporation, any resolution or resolutions adopted by the Board of Directors providing for the issuance of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation or these By-Laws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The Shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough Shareholders to leave less than a quorum. 2.08 METHOD OF VOTING. Except as otherwise provided by law or by the Certificate of Incorporation of the Corporation, or the resolution or resolutions adopted by the Board of Directors providing for the issuance of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation, each Shareholder of record of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation, each Shareholder of record of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon the liquidation or winding up of the Corporation shall be entitled at each meeting of Shareholders to such number of votes for - 2 - each share of such stock as may be fixed in the Certificate of Incorporation or in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such stock, and each Shareholder of record Shareholders to one vote for each share of such stock, in each case, registered in such Shareholder's name on the books of the Corporation: (A) on the date fixed pursuant to Section 2.09 of Article 2 of these By-Laws as a record date for the determination of Shareholders entitled to notice of and to vote at meeting; or (B) if no such record date shall have been so fixed, then at the close of business on the day next preceding the date on which notice of such meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. At any meeting of the Shareholders, every Shareholder having the right to vote may vote either in person, or by proxy executed in writing by the Shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid after three (3) years from the date of its execution, unless otherwise made irrevocable by law. Each proxy shall be filed with the secretary of the Corporation prior to or at the time of the meeting. Voting for directors shall be in accordance with Section 2.06 of these By-Laws. 2.09 FIXING DATE FOR DETERMINATION OF SHAREHOLDERS OF RECORD. In order that the Corporation may determine the Shareholders entitled to notice of or to vote at any meeting of Shareholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. A determination of Shareholders entitled to notice of or to vote at a meeting provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.10 WAIVER OF NOTICE. Any notice required by law or these By-Laws may be waived by the person entitled to the notice by the execution of a written waiver of such notice or by appearing at any meeting of Shareholders without protest of or objection to the lack of notice to such person. 2.11 CONDUCT OF MEETING. At every meeting of the Shareholders, the Chairman of the Board of Directors, the president, or in their absence, the vice president designated by the Chairman of the Board or the president or, in the absence of such designation, a chairman (who shall be one of the vice presidents, if any is present) chosen by a majority in interest of the Shareholders of the Corporation present in person or by proxy and entitled to vote, shall act as chairman. The secretary of the Corporation, or in his absence, an assistant secretary, shall act as secretary of all meetings of the Shareholders. In the absence at such meeting of the secretary or assistant secretary, the chairman of the meeting may appoint another person to act as secretary of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations and the time allotted to questions or comments on the affairs of the - 3 - Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. 2.12 INSPECTORS. Either the Board of Directors or, in the absence of a designation of inspectors by the Board, the chairman of any meeting of Shareholders may, in its or such person's discretion, appoint two or more inspectors to act at any meeting of Shareholders. Such inspectors shall perform such duties as shall be specified by the Board or the chairman of the meeting. Inspectors need not be the Shareholders. No director or nominee for the office of director shall be appointed such inspector. ARTICLE 3: Directors 3.01 MANAGEMENT. The business and affairs of the Corporation shall be managed by the Board of Directors who may exercise all such powers of the Corporation and do all such lawful acts and things as are not (by statute or by the Certificate of Incorporation or by these By-Laws) directed or required to be exercised or done by the Shareholders. The directors shall act only as a Board and an individual director shall have no power as such. 3.02 NUMBER; QUALIFICATION. Subject to any increases in the number of Directors constituting the whole Board of Directors necessary to permit the election of any directors by the holders of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation upon the happening of any specified event described in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such class or series, the Board of Directors shall consist of not less than seven (7) and not more than nine (9) Directors, none of whom need be Shareholders or residents of any particular state. Subject to the foregoing, the exact number of Directors sitting on the Board of Directors at any particular time shall be established by a resolution of the Board of Directors. 3.03 CHANGES IN NUMBER. The number of Directors may be increased to a number greater than nine (9) or decreased to a number less than seven (7) from time to time by amendment to the By-Laws but no decrease shall have the effect of shortening the term of any incumbent Director. A Directorship to be filled by reason of an increase in the number of Directors may be filled by the Board of Directors for a term of office continuing until the next election of one or more Directors by the Stockholders, or may be filled by election at any annual or special meeting of the Stockholders called for that purpose. Notwithstanding the foregoing provisions of this Section 3.03, if, at any time, the holders of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation shall have a right to elect one or more Directors of the Corporation as a result of the Corporation's failure to pay any required divided or redemption payment or for any other reason, the number of Directors constituting the whole Board of Directors shall be, without further action by the Board, increased by such number of Directors which such holders shall be entitled to elect and the terms and conditions under which such Directors shall be elected shall, subject to the provisions of the Certificate of Incorporation of the Corporation, be as set forth in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such stock. - 4 - 3.04 ELECTION AND TERM OF OFFICE. Subject to the rights of the holders of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation to elect one or more Directors of the Corporation in the manner set forth in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such stock, Directors shall be elected annually by the Shareholders, except as provided in these By-Laws at Section 3.03 and Section 3.05. Except for Directors elected by a class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation, who shall have such terms of office as are provided in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such stock, each Director shall hold office until his respective successor is elected, or until his death, resignation or removal. 3.05 REMOVAL. Except for the removal of Directors who are elected by the holders of a class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation, who shall, except as provided by law, only be removed from office in the manner and for the reasons set forth in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such class or series of stock, any or all of the Directors may be removed, either for or without cause, at any meeting of Shareholders called expressly for that purpose, by the affirmative vote, in person or by proxy, of the holders of a majority of the shares then entitled to vote at an election of the Directors. 3.06 VACANCIES. Except for the filling of a vacancy of a Director elected by the holders of shares of a class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation, which vacancy shall be filled in the manner set forth in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such stock, any vacancy occurring in the Board of Directors (by death, resignation, removal or otherwise) may be filled by an affirmative vote of a majority of the remaining Directors though less than a quorum of the Board of Directors. Such Director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. 3.07 NOMINATION AND ELECTION OF DIRECTORS. Nominations for the election of Directors may be made by the Board of Directors or by any Shareholder entitled to vote for the election of Directors at a meeting may nominate persons for election as Directors only if written notice as such Shareholder's intent to make such nomination as given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of Shareholders, forty-five days in advance of such meeting, and (ii) with respect to an election to be held at a special meeting of Shareholders for the election of Directors, at the close of business on the fifth day following the day on which notice of such meeting is first given to Shareholders. Each such notice shall set forth: (a) the name and address of the Shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the Shareholder is a holder of record of stock of the Corporation and entitled to vote at such meeting 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 understanding between the Shareholder and each - 5 - 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 Shareholder; (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a Proxy Statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each 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. The Chairman of the meeting may refuse to acknowledge the nomination of any person not made in accordance with the foregoing procedure. Directors shall be elected by plurality vote. Notwithstanding the provisions of this Section 3.07, if, at any time, the holders of any class or series of stock having a preference over the Common Stock of the Corporation as to dividends or redemption or upon liquidation or winding up of the Corporation shall have a right to elect one or more Directors of the Corporation as a result of the Corporation's failure to pay any required dividend or redemption payment or for any other reason, the terms and conditions under which such Directors shall be nominated and elected shall, subject to the provisions of the Certificate of Incorporation of the Corporation, be as set forth in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such stock. If such resolution or resolutions does not provide for a mechanism for the nomination or election of Directors by the holders of such a class or series of stock, such Directors shall be nominated and elected in the manner provided in these By-Laws at Section 3.07. 3.08 PLACE OF MEETING. All meetings of the Board of Directors may be held at the principal offices of the Corporation or at such place either within or without the State of Delaware as may be designated from time to time by the Board of Directors. 3.09 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice immediately following each annual meeting of Shareholders of this Corporation and at such time and place as shall from time to time be determined by the Board of Directors. 3.10 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the President or any Director on three (3) days notice to each Director, either personally or by mail or by telegram. Except as otherwise expressly provided by statute, or by the Certificate of Incorporation, or by these By-Laws, neither the business to be transacted at, nor the purpose of, any special meeting need be specified in a notice or waiver of notice. 3.11 QUORUM; MAJORITY VOTE. At all meetings of the Board of Directors, a majority of the number of directors fixed by these By-Laws shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as otherwise specifically provided by statute or by the Certificate of Incorporation or by these By-Laws. If a quorum is not present at a meeting of the Board of Directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. - 6 - 3.12 COMPENSATION. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. 3.13 CONDUCT OF MEETINGS. The Board of Directors shall keep regular minutes of its proceedings. The Chairman of the Board, or in his absence, any director selected by the Directors present, shall preside at meetings of the Board of Directors. The secretary of the Corporation, or in his absence, any director selected by the directors present, shall act as secretary at meetings of the Board of Directors. The minutes shall be placed in the minute book of the Corporation. 3.14 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of the Board of Directors or any committee thereof may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the Board of Directors or of any such committee. Such consent shall have the same force and effect as a unanimous vote at a meeting. The signed consent, or a signed copy, shall be placed in the minute book. 3.15 PARTICIPATION IN MEETING BY MEANS OF COMMUNICATION EQUIPMENT. Any one or more members of the Board of Directors or any committee thereof may participate in any meeting of the Board or of any such committee by means of conference, telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in the meeting shall constitute presence in person at such meeting. ARTICLE 4: Notice 4.01 METHOD. Whenever the statute or the Certificate of Incorporation or these By-Laws, notice is required to be given to a director or Shareholder, and no provision is made as to how the notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given (a) in writing, by mail, postage prepaid, addressed to the director or Shareholder at the address appearing on the books of the Corporation, or (b) in any other method permitted by law. Any notice required or permitted to be given by mail shall be deemed given at the time when the same is thus deposited in the United States mail. 4.02 WAIVER. Whenever, by statute or the Certificate of Incorporation or these By-Laws, notice is required to be given to a Shareholder or director, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice. Attendance of a director or Shareholder at a meeting shall constitute a waiver of notice of such meeting, except where a director or Shareholder attends for the express purpose of objection to the transaction of any business on the ground that the meeting is not lawfully called or convened. - 7 - ARTICLE 5: Officers and Agents 5.01 NUMBER; QUALIFICATION; ELECTION; TERM. (A) The Corporation shall have: (1) A president, a vice president, a secretary and treasurer. (2) Such other officers (including a Chairman of the Board and additional vice presidents) and assistant officers and agents as the Board of Directors may deem necessary. (B) No officer or agent need be a Shareholder, a director or a resident of Delaware. (C) Officers shall be elected by the Board of Directors on the expiration of an officer's term or whenever a vacancy exists. Officers may be elected by the Board at any meeting. (D) Unless otherwise specified by the Board at the time of election or appointment, or in an employment contract approved by the Board, each officer's and agent's term shall end at the first meeting of the Board of Directors after the next annual meeting of Shareholders. He shall serve until the end of his term or, if earlier, his death, resignation or removal. (E) Any two or more offices may be held by the same person. 5.02 REMOVAL. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever, in its judgment, the best interests of the Corporation will be served thereby or by any committee or superior officer upon whom such power may be conferred by the Board. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 5.03 VACANCIES. If the office of the president, vice president, secretary, treasurer, assistant secretary (if any), or assistant treasurer (if any) become vacant by reason of death, resignation, removal, or otherwise, the Board of Directors shall elect a successor who shall hold office for the unexpired term, and until his successor is elected. 5.04 AUTHORITY. Officers and agents shall have such authority and perform such duties in the management of the Corporation as are generally ascribed to the respective offices provided in these By-Laws, or as may be determined by resolution of the Board of Directors not inconsistent with these By-Laws. 5.05 COMPENSATION. The compensation of officers and agents shall be fixed from time to time by resolution of the Board of Directors. - 8 - 5.06 PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the president shall be the chief executive officer of the Corporation and shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and officers of the Corporation, and shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the By-Laws. 5.07 VICE PRESIDENT. The vice presidents, in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the president, perform the duties and have the authority and exercise the powers of the president. They shall perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe or as the president may from time to time delegate. 5.08 SECRETARY. The secretary shall: (A) Attend all meetings of the Board of Directors and all meetings of the Shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. (B) Give, or cause to be given, notice of all meetings of the Shareholders and special meetings of the Board of Directors. (C) Keep in safe custody the seal of the Corporation (if any) and, when authorized by the Board of Directors, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his signature or by the signature of the treasurer or an assistant secretary. (D) Be under the supervision of the president and perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe or as the president may from time to time delegate. (E) Keep, or cause to be kept, a share register showing the names of the Shareholders and their addresses, the number, date of issue and class of shares represented by each outstanding share certificate; and the number and date of cancellation of each certificate surrendered for cancellation. 5.09 ASSISTANT SECRETARY. The assistant secretaries in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the secretary, perform the duties and have the authority and exercise the powers of the secretary. They shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe or as the president may from time to time delegate. 5.10 TREASURER. The treasurer shall: - 9 - (A) Have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements of the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. (B) Disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the Corporation. (C) If required by the Board of Directors, give the Corporation a bond in such form, in such sum, and with surety or sureties as shall be satisfactory to the Board for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. (D) Perform such other duties and have such other authority and powers as the Board of Directors may from time to time prescribe or as the president may from time to time delegate. 5.11 ASSISTANT TREASURER. The assistant treasurers in the order of their seniority, unless otherwise determined by the Board of Directors, shall, in the absence or disability of the treasurer, perform the duties and have the authority and exercise the powers of the treasurer. They shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe or the president may from time to time delegate. ARTICLE 6: Execution of Instruments 6.01 EXECUTION OF INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the Corporation. ARTICLE 7: Certificates and Shareholders 7.01 CERTIFICATES. Certificates in the form determined by the Board of Directors shall be delivered representing all shares to which Shareholders are entitled. Such certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof the holder's name, the number and class of shares, the par value of shares, or a statement that such shares are without par value, and such other matters as may be required by law. Each certificate shall be signed by the Chairman, Vice Chairman, President or any Vice President and the Secretary, Assistant Secretary, Treasurer or Assistant Treasurer, and may be sealed with the seal of the Corporation or a facsimile thereof. Any or all such signatures may be facsimiles - 10 - if countersigned by a transfer agent or registrar. Although any officer, transfer agent or registrar whose manual or facsimile signature is affixed to such a certificate ceases to be such officer, transfer agent or registrar before such certificate has been issued, it may nevertheless be issued by the Corporation with the same affect as if such officer, transfer agent or registrar were still such at the date of its issue. 7.02 ISSUANCE. Shares (both treasury and authorized but unissued) may be issued for such consideration (not less than par value) and to such persons as the Board of Directors may determine from time to time. Shares may not be issued until the full amount of the consideration, fixed as provided by law, has been received by the Corporation. 7.03 PAYMENT FOR SHARES. (A) KIND. The consideration for the issuance of shares shall consist of money paid, labor done (including services actually performed for the Corporation), or property (tangible or intangible) actually received. Neither promissory notes nor the promise of future services shall constitute payment for shares. (B) VALUATION. In the absence of fraud in the transaction, the judgment of the Board of Directors as to the value of consideration received shall be conclusive. (C) EFFECT. When consideration, fixed as provided by law, has been paid, the shares shall be deemed to have been issued and shall be considered fully paid and nonassessable. (D) ALLOCATION OF CONSIDERATION. The consideration received for shares shall be allocated by the Board of Directors, in accordance with law, between stated capital and capital surplus accounts. 7.04 SUBSCRIPTIONS. Unless otherwise provided in the subscription agreement, subscriptions of shares, whether made before or after organization of the Corporation, shall be paid in full at such time or in such installments and at such times as shall be determined by the Board of Directors. Any call made by the Board of Directors for payments on subscriptions shall be uniform as to all shares of the same series, as the case may be in case of default in the payment on any installment or call when payment is due as provided by law. 7.05 LIEN. For any indebtedness of a Shareholder to the Corporation, the Corporation shall have a first and prior lien on all shares of its stock owned by him and on all dividends or other distributions declared thereon. 7.06 LOST, STOLEN OR DESTROYED CERTIFICATES. Except as may otherwise be agreed upon by the Corporation with any particular holder of shares of any class or series of stock of the Corporation, the Corporation shall issue a new certificate in place of any certificate for shares previously issued if the registered owner of the certificate: (A) CLAIM. Makes proof in affidavit form that it has been lost, destroyed or wrongfully taken; and - 11 - (B) TIMELY REQUEST. Requests for the issuance of a new certificate before the Corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; and (C) BOND. Gives a bond in such form, and with such surety or sureties, with fixed or open penalty, as the Corporation may direct, to indemnify the Corporation (and its transfer agent and registrar, if any) against any claim that may be made on account of the alleged loss, destruction, or theft of the certificate; and (D) OTHER REQUIREMENTS. Satisfies any other reasonable requirements imposed by the Board of Directors. When a certificate has been lost, apparently destroyed or wrongfully taken, and the holder of record fails to notify the Corporation within a reasonable time after he has notice of it, and the Corporation registers a transfer of the shares represented by the certificates before receiving such notification, the holder of record is precluded from making any claim against the Corporation for the transfer or for a new certificate. 7.07 REGISTRATION OF TRANSFER. The Corporation shall register the transfer of the certificate for shares presented to it for transfer if: (A) ENDORSEMENT. The certificate is properly endorsed by the registered owner or by his duly authorized attorney; and (B) GUARANTY AND EFFECTIVENESS OF SIGNATURE. The signature of such person has been guaranteed by a national banking association or member of the New York Stock Exchange, and reasonable assurance is given that such endorsement is effective; and (C) ADVERSE CLAIMS. The Corporation has no notice of an adverse claim or has discharged any duty to inquire into such a claim; and (D) COLLECTION OF TAXES. Any applicable law relating to the collection of taxes has been complied with. 7.08 REGISTERED OWNER. Prior to due presentment for registration of transfer of a certificate for shares, the Corporation may treat the registered owner as the person exclusively entitled to vote, to receive notices and otherwise to exercise all the rights and powers of a Shareholder. 7.09 RESTRICTION ON TRANSFER. Any restrictions imposed by the Corporation on the sale or other disposition of its shares and on the transfer thereof must be copies at length or in summary form on the face, or so copied on the back and referred to on the face, on each certificate representing shares to which the restriction applies. - 12 - ARTICLE 8. Indemnification 8.01 THIRD PARTY ACTIONS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceedings, had reasonable cause to believe that his or her conduct was unlawful. 8.02 DERIVATIVE ACTIONS. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suite by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of Delaware or such other court shall deem proper. 8.03 DETERMINATION OF INDEMNIFICATION. Any indemnification under Section 8.01 or 8.02 hereof (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 8.01 or 8.02 hereof. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the Shareholders. - 13 - 8.04 RIGHT OF INDEMNIFICATION. Notwithstanding the other provisions of this Article 8, to the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 8.01 or 8.02 hereof, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorney's fees) actually and reasonably incurred by such person in connection therewith. 8.05 RIGHT TO INDEMNIFICATION UPON APPLICATION; PROCEDURE OF APPLICATION; ETC. Except as otherwise provided in the proviso to Section 8.02 hereof: (A) Any indemnification under Section 8.01 or 8.02 hereof shall be made no later than 45 days after receipt by the Corporation of the written request of the director, officer, employee or agent or former director, officer, employee or agent unless a determination is made within said 45- day period in accordance with Section 8.03 hereof that such person has not met the applicable standard of conduct set forth in Section 8.01 or 8.02 hereof. (B) The right to indemnification under Section 8.01 or 8.02 hereof or advances under Section 8.06 hereof shall be enforceable by the director, officer, employee or agent or former director, officer, employee or agent in any court of competent jurisdiction. The burden of proving that indemnification is not appropriate shall be on the Corporation. Neither the absence of any prior determination that indemnification is proper in the circumstances, nor a prior determination that indemnification is not proper in the circumstances, shall be a defense to the action or create a presumption that the director, officer, employee or agent or former director, officer, employee or agent has not met the applicable standard of conduct. The expenses (including attorney's fees and expenses) incurred by the director, officer, employee or agent or former director, officer, employee or agent in connection with successfully establishing his right to indemnification, in whole or in part, in any such action (or in any action or claim brought by him to recover under any insurance policy or policies referred to in Section 8.09 hereof) shall also be indemnified by the Corporation. (C) If any person is entitled under any provision of this Article 8 to indemnification by the Corporation for some or a portion of expenses, judgments, fines, penalties or amounts paid in settlement incurred by him, but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify such person for the portion of such expenses, judgments, fines, penalties and amounts to which he is entitled. 8.06. ADVANCEMENT OF EXPENSES. Expenses (including attorney's fees) incurred in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding within 15 days after request for such advance upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay all amounts advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such person is not entitled to be indemnified by the Corporation as authorized in this Article 8 or otherwise. - 14 - 8.07 INDEMNIFICATION AND ADVANCEMENT OF EXPENSES NOT EXCLUSIVE. The indemnification and advancement of expenses provided by, or granted pursuant to the other Sections of this Article 8 shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under any law, agreement, vote of Shareholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Article 8 shall be deemed to be provided by a contract between the Corporation and the director, officer, employee or agent who served in such capacity at any time while these By-Laws and other relevant provisions of the Delaware General Corporation Law and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. 8.08 INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the applicable provisions of the Delaware General Corporation Law. 8.09 DEFINITIONS OF CERTAIN TERMS. For purposes of this Article 8, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article 8 with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article 8, references to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise tax assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation that imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article 8. For purposes of this Article 8, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or other enterprise, or on information supplied to - 15 - him by the officers of the Corporation or other enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or other enterprise or on information or records given or reports made to the Corporation or other enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or other enterprise. The provisions of this Section 8.09 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Sections 8.01 or 8.02 hereof, as the case may be. 8.10. CONTINUATION AND SUCCESSORS. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article 8 shall continue as to any person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE 9: General Provisions 9.01 DIVIDENDS AND RESERVES. (A) DECLARATION AND PAVEMENT. Subject to statute and the Certificate of Incorporation, dividends may be declared by the Board of Directors in cash, in property, or in shares of the Corporation. The declaration and payment shall be at the discretion of the Board of Directors. (B) RECORD DATE. In order that the Corporation may determine the Shareholders entitled to receive payment of any dividend or other distribution, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 days prior to such dividend or other distribution. (C) RESERVES. By resolution, the Board of Directors may create such reserve or reserves out of the surplus of the Corporation as the directors, from time to time, in their discretion, think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the Corporation, or for any other purpose they think beneficial to the Corporation. The directors may modify or abolish any such reserve in the manner in which it was created. 9.02 BOOKS AND RECORDS. The corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its Shareholders and Board of Directors, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its Shareholders, giving the names and addresses of all Shareholders and the number and class of the shares held by each. 9.03 SEAL. The Corporation seal (if required) shall be in the style and form impressed at the end of these By-Laws. - 16 - 9.04 RESIGNATION. Any director, officer or agent may resign by giving written notice to the Board of Directors, or the president, or the secretary. The resignation shall take effect at the time specified therein, or immediately upon receipt if no time is specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 9.05 AMENDMENT OF BY-LAWS. These By-Laws may be altered, amended, or repealed at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting, provided notice of the proposed alteration, amendment or repeal is contained in the notice of such meeting. 9.06 RECORD DATE. Order that the Corporation may determine the Shareholders entitled to receive any allotment of any rights or the Shareholders 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 a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than 60 days prior to such action. ARTICLE 10: Committees 10.01 COMMITTEES. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board of Directors, Designate two (2) or more of the directors of the Corporation to constitute a committee or committees for any purpose or purposes, which, to the extent provided in such resolution or resolutions, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers that may require it; provided, however, that the designation of any such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by the Business Corporation Act of the State of Texas. Such committee or committees shall have such name or names and conduct business in such areas and under such rules and regulations as may be determined from time to time by resolution passed by a majority of the whole Board of Directors. Each such committee shall keep regular minutes of its meetings and shall report the same to the Board of Directors when required. A majority of the members of any Committee or committees shall constitute a quorum for the transaction of business, and the act of majority of those present at any meeting at which a quorum is present shall be the act of such committee. - 17 - EX-10.1 3 INCENTIVE PLAN EXHIBIT 10.1 CORNERSTONE NATURAL GAS, INC. 1993 LONG-TERM INCENTIVE PLAN Section 1. Purpose The purposes of the Cornerstone Natural Gas, Inc. 1993 Long-Term Incentive Plan (the "Plan") are to promote the interests of the Company and its stockholders by (i) attracting and retaining executive personnel and other key employees of outstanding ability; (ii) motivating executive personnel and other key employees, by means of performance-related incentives, to achieve longer-range performance goals; and (iii) enabling such employees to participate in the long-term growth and financial success of the Company. Section 2. Definitions "Act" shall mean the Securities Exchange Act of 1934, as amended. "Affiliates" shall mean (a) any corporation, other than the Company, in an unbroken chain of corporations ending with the Company if each of the corporations, other than the Company, owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain and (b) any corporation, other than the Company, in an unbroken chain of corporations beginning with the Company if each of the corporations, other than the last corporation in the unbroken chain, owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain "Agreement" shall mean the written agreement between the Company and a Participant evidencing the Option granted by the Company and the understanding of the parties with respect thereto. "Award" shall mean a grant or award under Section 6 through 10, inclusive, of the Plan, as evidenced in a written document delivered to a Participant as provided on Section 11(b). "Board of Directors" shall mean the Board of Directors of the Company. "Change in Control" shall be deemed to have occurred if (i) any person(s) (as such term is used in Sections 13(d) and 14(d)2 of the Act) or parties other than the current stockholders as of the date the Plan is approved becomes the beneficial owner (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities, or (ii) the stockholders of the Company approve a merger, consolidation, sale or disposition of all or substantially all of the Company's assets or plan of liquidation. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean the Compensation Committee of the Board of Directors. The committee shall be made up of at least two outside directors, and only outside directors may serve on the Committee. The outside director cannot be a former officer of the Company or a former employee receiving deferred compensation. The director cannot be an employee or 5% stockholder of another company that receives more than 5% of its gross receipts or $60,000 worth of business from the Company, whichever is less. "Common Stock" or "Stock" shall mean the common stock $0.10 par value per share of the Company. "Company" shall mean Cornerstone Natural Gas, Inc., a Delaware corporation. "Designated Beneficiary" shall mean the beneficiary designated by the Participant, in a manner determined by the Committee, to receive amounts due the Participant in the event of the Participant's death. In the absence of an effective designation by the Participant, Designated Beneficiary shall mean the Participant's estate. "Eligible Individuals" shall mean (a) key employees, including officers and directors who are also employees of the Company or of any of its Affiliates, (b) nonemployee directors or officers of the Company or of any of its Affiliates and (c) non-employee consultants and advisors who, in the opinion of the Committee, have the capacity for contributing in a substantial measure to the successful performance of the Company. Notwithstanding the foregoing provisions of this paragraph, to ensure that the requirements of Section 3(a)(i) are satisfied, the Board of Directors may from time to time specify individuals who shall not be eligible for the grant of Options or options or stock appreciation rights or allocations of stock under any plan of the Company or its Affiliates (as such terms are used in subsection (d)(3) of Rule 16b-3 promulgated under the Act); provided, however, that the Board of Directors may at any time determine that any individual who has been so excluded from eligibility shall become eligible for grants of Options and grants of such options or stock appreciation rights or allocations of stock under any plans of the Company and its Affiliates. "Employee" shall mean any key employee of the Employer. "Employer" shall mean the Company and any Subsidiary or Affiliate. "Fair Market Value" shall mean the closing price of the Common Stock on the date in question, or, if the Common Stock has not been traded on such date, the closing price on the first day prior thereto on which the Common Stock was so traded. "Fiscal Year" shall mean the fiscal year of the Company. "Incentive Stock Option" shall mean a stock option granted under Section 6 which is intended to meet the requirements of Section 422 of the Code. "Non-Stock Based Incentive Compensation" refers to incentive compensation whose value is not based in whole or in part on the value of Common Stock. "Nonqualified Stock Option" shall mean a stock option granted under Section 6 which is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Nonqualified Stock Option. "Participant" shall mean an individual who is selected by the Committee to receive an Award under the Plan. "Payment Value" shall mean the dollar amount assigned to a Performance Share which shall be equal to the Fair Market Value of the Common Stock on the day of the Committee's determination under Section 8 (c)(1) with respect to the applicable Performance Cycle. "Performance Cycle" or "Cycle" shall mean the period of years selected by the Committee during which the performance is measured for the purpose of determining the extent to which an award of Performance Shares has been earned. "Performance Goals" shall mean the objectives established by the Committee for a Performance Cycle, for the purpose of determining the extent to which Performance Shares which have been contingently awarded for such Cycle are earned. "Performance Share" shall mean an award granted pursuant to Section 8 of the Plan expressed as a share of Common Stock. "Restricted Period" shall mean the period of years selected by the Committee during which a grant of Restricted Stock or Restricted Stock Units may be forfeited to the Company. "Restricted Stock" shall mean shares of Common Stock contingently granted to a Participant under Section 9 of the Plan. "Restricted Stock Unit" shall mean a fixed or variable dollar denominated unit contingently awarded under Section 9 of the Plan. "Stock Appreciation Right" shall mean a right granted under Section 7. "Stock Unit Award" shall mean an award of Common Stock or units granted under Section 10. "Subsidiary" shall mean any business entity in which the Company possesses directly or indirectly fifty percent (50%) or more of the total combined voting power. Section 3. Administration (a) Committee The Plan shall be administered by the Committee. The Committee shall consist of not less than two individuals. All members of the Committee shall be (1) directors of the Company; and (2) "disinterested persons," as defined in Rule 16b-3(c)(2)(i) promulgated under the Act; and in such event members of the Committee shall not be eligible to receive Options or any equity securities under any plan of the Company or its Affiliates (except as specifically allowed by Rules 16(b)-3(c)(2)(i)(A)-(D) promulgated under the Act) within one (1) year prior to their appointment to the Committee or while they are serving as members of the Committee; provided, however, that this subparagraph incorporates and its restrictions shall be deemed to be modified according to any changes to Rule 16b-3 promulgated under the Act. (b) Duration, Removal, Etc. The members of the Committee shall serve at the pleasure of the Board of Directors, which shall have the power, at any time and from time to time, to remove members from the Committee or to add members thereto. Vacancies on the Committee, however caused, shall be filled by action of the Board of Directors. (c) Meetings and Actions of Committee The Committee shall elect one of its members as its Chairman and shall hold its meetings at such times and places as it may determine. All decisions and determinations of the Committee shall be made by the majority vote or decision of all of its members present at a meeting; provided, however, that any decision or determination reduced to writing and signed by all of the members of the Committee shall be as fully effective as if it had been made at a meeting duly called and held. The Committee may make any rules and regulations for the conduct of its business that are not inconsistent with the provisions hereof and with the bylaws of the Company as it may deem advisable. (d) Committee's Powers Subject to the express provisions hereof, the Committee shall have the authority, in its sole and absolute discretion, (1) to adopt, amend, and rescind administrative and interpretive rules and regulations relating to the Plan; (2) to determine the terms and provisions of the respective Agreements and Awards (which need not be identical), including provisions defining or otherwise relating to (i) subject to Section 6 of the Plan, the term and the period or periods and extent of exercisability of the Options, (ii) the extent to which the transferability of shares of Common Stock issued upon exercise of Options is restricted, (iii) the effect of termination of employment upon the exercisability of the Options, and (iv) the effect of approved leaves of absence (consistent with any applicable regulations of the Internal Revenue Service); (3) to accelerate the time of exercisability of any Option that has been granted; (4) to construe the terms of any Agreement and Award and the Plan; and (5) to make all other determinations and perform all other acts necessary or advisable for administering the Plan, including the delegation of such ministerial acts and responsibilities as the Committee deems appropriate. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Agreement or Award in the manner and to the extent it shall deem expedient to carry it into effect, and it shall be the sole and final judge of such expediency. The Committee shall have full discretion to make all determinations on the matters referred to in this Paragraph 3(d); such determinations shall be final, binding and conclusive. (e) No Liability for Good Faith Determinations Neither the members of the Board of Directors nor any member of the Committee shall be liable for any act, omission, or determination taken or made in good faith with respect to the Plan or any Option granted under it, and members of the Board of Directors and the Committee shall be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage, or expense (including attorneys' fees, the costs of settling any suit, provided such settlement is approved by independent legal counsel selected by the Company, and amounts paid in satisfaction of a judgment, except a judgment based on a finding of bad faith) arising therefrom to the full extent permitted by law and under any directors and officers liability or similar insurance coverage that may from time to time be in effect. Section 4. Eligibility All Eligible Individuals are eligible to be Participants in the Plan. Notwithstanding any provision contained herein to the contrary, a person shall not be eligible to receive an Incentive Stock Option hereunder unless he is an employee of the Company or an Affiliate, nor shall a person be eligible to receive an Incentive Stock Option hereunder if he, at the time such Option is granted, would own (within the meaning of Sections 422 and 424 of the Code) stock possessing more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Company or of an Affiliate unless at the time such Incentive Stock Option is granted the exercise price per share of Stock is at least one hundred and ten percent (110%) of the Fair Market Value of each share of Stock to which the Incentive Stock Option relates and the Incentive Stock Option is not exercisable after the expiration of five (5) years from the date it is granted. Section 5. Maximum Amount Available for Awards (a) The maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be a total of 1,250,000 shares of Common Stock. In addition, no Employee may receive an Award of Options, Restricted Stock or other Award in any calendar year which combined would equal more than 25% of all shares issued for Awards in that same year. Also, no Employee may receive Awards that in aggregate equal more than 25% of all shares issued over the life of this Plan. Shares of Common Stock may be made available from the authorized but unissued shares of the Company or from shares reacquired by the Company, including shares purchased in the open market. In the event that (i) an Option or Stock Appreciation Right is settled for cash or expires or is terminated unexercised as to any shares of Common Stock covered thereby, or (ii) any Award in respect of shares is cancelled or forfeited for any reason under the Plan without the delivery of shares of Common Stock, such shares shall thereafter be again available for award pursuant to the Plan. In the event that any Option or other Award granted hereunder is exercised through the delivery of shares of Common Stock, the number of shares of Common Stock available for Awards under the Plan shall be increased by the number of shares so surrendered, to the extent permissible under Rule 16b-3, as promulgated under the Act and as interpreted from time to time by the Securities and Exchange Commission or its staff. (b) In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar corporate event affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under this Plan, then the Committee shall, in its sole discretion, and in such manner as the Committee may deem equitable, adjust any or all of (1) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of Stock Appreciation Rights under the Plan, (2) the number and kind of shares subject of Stock Options and other Awards, and (3) the grant, exercise or conversion price with respect to any of the foregoing and/or, if deemed appropriate, make provision for cash payment to a Participant or a person who has an outstanding Option or other Award provided, however, that the number of shares subject to any Option or other Award shall always be a whole number. Section 6. Stock Options (a) Grant. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Eligible Individuals to whom Options shall be granted, the number of shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, or to grant Nonstatutory Stock Options, or to grant both types of options. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be prescribed by Section 422 of the Code, as from time to time amended, and any implementing regulations. (b) Option Price. The Committee shall establish the option price at the time each Option is granted, which price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. (c) Exercise. (1) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may, in its sole discretion, specify in the applicable Award or thereafter, provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of ten years from the date of such grant. The Committee may impose such conditions with respect to the exercise of Options, including without limitation, any relating to the application of federal or state securities laws, as it may deem necessary or advisable. (2) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price has been received by the Company. Such payment may be made in cash, or its equivalent, or, if and to the extent permitted by the Committee, by exchanging shares of Common Stock owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Stock so tendered to the Company, valued as of the date of such tender, is at least equal to such option price. Section 7. Stock Appreciation Rights (a) The Committee may, with sole and complete authority, grant Stock Appreciation Rights ("SARs") in tandem with an Option, in addition to an Option, or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem with or in addition to an Option may be granted either at the same time as the Option or at a later time. Stock Appreciation Rights shall not be exercisable earlier than six months after grant, or be exercisable after the expiration of ten years from the date of grant and shall have an exercise price of not less than 100% of the Fair Market Value of the Common Stock on the date of grant. (b) An SAR shall entitle the Participant to receive from the Company the difference between the Fair Market Value of one share of Common Stock on the date of the exercise of the SAR and (i) in the case of a SAR identified with a share of stock subject to an option, the option price of such option, unless the Committee in the grant specifies a higher price or (ii) in the case of any SAR, the Fair Market Value of one share of Common Stock on the grant date. SARs that are not subject to an option and can only be exercised during limited periods of time in order to comply with certain Securities and Exchange Rules, the Committee may determine at its discretion, that the exercise of the SAR during such limited period, shall be deemed to occur on the day which the Fair Market Value of the Common Stock is the highest during the limited period. Any such determination by the Committee may be changed by the Committee from time to time and may govern the exercise of Stock Appreciation Rights granted prior to such determination as well as Stock Appreciation Rights thereafter granted. The Committee shall determine upon the exercise of a Stock Appreciation Right whether such Stock Appreciation Right shall be settled in cash, shares of Common Stock, Stock Options, or a combination thereof. (c) A Limited SAR related to an Option which can only be exercised during limited periods following a Change in Control of the Company, may entitle the Participant to receive an amount based upon the highest price paid or offered for Common Stock in any transaction relating to the Change in Control or paid during the thirty-day period immediately preceding the occurrence of the Change in Control in any transaction reported on the American Stock Exchange. Section 8. Performance Shares (a) The Committee shall have sole and complete authority to determine the Employees who shall receive Performance Shares and the number of such shares for each Performance Cycle, and to determine the duration of each Performance Cycle and the value of each Performance Share. There may be more than one Performance Cycle in existence at any one time, and the duration of Performance Cycle may differ from each other. (b) The Committee shall establish Performance Goals for each Cycle on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. During any Cycle, the Committee may adjust the Performance Goals for such Cycle as it deems equitable in recognition of unusual or non-recurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. (c) (1) As soon as practicable after the end of a Performance Cycle, the Committee shall determine the number of Performance Shares which have been earned on the basis of performance in relation to the established Performance Goals. (2) Payment Values of earned Performance Shares shall be distributed to the Participant or, if the Participant has died, to the Participant's Designated Beneficiary, as soon as practicable after the expiration of the Performance Cycle and the Committee's determination under paragraph (1), above. The Committee shall determine whether Payment Values are to be distributed in the form of cash or shares of Common Stock. Section 9. Restricted Stock and Restricted Stock Units (a) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees to whom shares of Restricted Stock and Restricted Stock Units shall be granted, the number of shares of Restricted Stock and the number of Restricted Stock Units to be granted to each Participant, the duration of the Restricted Period during which, and the conditions under which, the Restricted Stock and Restricted Stock Units may be forfeited to the Company, and the other terms and conditions of such awards. The Restricted Period may be shortened, lengthened or waived by the Committee at any time in its discretion with respect to one or more Participants or Awards outstanding. (b) Shares of Restricted Stock and Restricted Stock Units may not be sold, assigned, transferred, pledged or otherwise encumbered, except as herein provided, during the Restricted Period. Certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. At the expiration of the Restricted Period, the Company shall deliver such certificates to the Participant or the Participant's legal representative. Payment for Restricted Stock Units shall be made to the Company in cash/or shares of Common Stock, as determined at the sole discretion of the Committee. Section 10. Other Stock Based Awards (a) In addition to granting Options, Stock Appreciation Rights, Performance Shares, Restricted Stock and Restricted Stock Units, the Committee shall have authority to grant to Participants Stock Unit Awards which can be in the form of Common Stock or units, the value of which is based, in whole or in part, on the value of Common Stock. Subject to the provisions of the Plan, including Section 11 (b) below, Stock Unit Awards shall be subject to such terms, restrictions, conditions, vesting requirements and payment rules (all of which are sometimes hereinafter collectively referred to as "rules") as the Committee may determine in its sole and complete discretion at the time of grant. The rules need not be identical for each Stock Unit Award. (b) In the sole and complete discretion of the Committee, a Stock Unit Award may be granted subject to the following rules: (1) Any shares of Common Stock which are part of a Stock Unit Award may not be assigned, sold, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued or, if later, the date provided by the Committee at the time of grant of the Stock Unit Award. (2) Stock Unit Awards may provide for the payment of cash consideration by the person to whom such Award is granted or provide that the Award, and any Common Stock to be issued in connection therewith, if applicable, shall be delivered without the payment of cash consideration, provided that for any Common Stock to be purchased in connection with a Stock Unit Award the purchase price shall be at least 50% of the Fair Market Value of such Common Stock on the date such Award is granted. (3) Stock Unit Awards may relate in whole or in part to certain performance criteria established by the Committee at the time of grant. (4) Stock Unit Awards may provide for deferred payment schedules and/or vesting over a specified period of employment. (5) In such circumstances as the Committee may deem advisable, the Committee may waive or otherwise remove, in whole or in part, any restriction or limitation to which a Stock Unit Award was made subject at the time of grant. (c) In the sole and complete discretion of the Committee, an Award, whether made as a Stock Unit Award under this Section 10 or as an Award granted pursuant to Sections 6 through 9, may provide the Participant with (i) dividends or dividend equivalents (payable on a current or deferred basis) and (ii) cash payments in lieu of or in addition to an Award. Section 11. General Provisions (a) Withholding. The Employer shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of payments of incentive awards in the form of Common Stock, at the Committee's discretion the Participant may be required to pay to the Employer the amount of any taxes required to be withheld with respect to such Common Stock, or, in lieu thereof, the Employer shall have the right to retain (or the Participant may be offered the opportunity to elect to tender) the number of shares of Common Stock whose Fair Market Value equals the amount required to be withheld. (b) Awards. Each Award hereunder shall be evidenced in writing, delivered to the Participant and shall specify the terms and conditions thereof and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment of the Participant and the effect thereon, if any, of a Change in Control of the Company. (c) Nontransferability. No Award shall be assignable or transferable except by will or the laws of descent and distribution, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant. Notwithstanding the above, in the discretion of the Committee, awards may be transferable pursuant to a Qualified Domestic Relations Order ("QDRO"), as determined by the Committee or its designee. (d) No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Employer. Further, the Employer expressly reserves the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (e) No Rights as Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she has become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Stock hereunder, the applicable Award shall specify if and to what extent the Participant shall not be entitled to the rights of a stockholder in respect of such Restricted Stock. (f) Construction of the Plan. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of Delaware. (g) Effective Date. Subject to the approval of the stockholders of the Company, the Plan shall be effective on December 16, 1993. No Options or Awards may be granted under the Plan after December 15, 2003; however, all previous awards made that have not expired under their original terms at the time the Plan expires will remain outstanding. (h) Amendment of Plan. The Board may suspend, terminate or amend the Plan at it's discretion. The Board will not be required to obtain stockholder approval of any amendment to the Plan except for increases in total shares under the Plan, or where such approval is necessary to assure the Plan's continued qualification under Rule 16b-3 of the Act, or compliance with the American Stock Exchange rules or the Code. (i) Amendment of Award. The Committee may amend, modify or terminate any outstanding Award without the Participant's consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without limitation, i) to change the date or dates as of which (A) an Option or Stock Appreciation Right becomes exercisable; (B) a Performance Share is deemed earned; (C) Restricted Stock becomes nonforfeitable; or (ii) to cancel and reissue an Award under such different terms and conditions as it determines appropriate. (j) Change in Control In order to preserve a Participant's rights under an Award in the event of a Change in Control of the Company, the Committee in its discretion may, at the time an Award is made or any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise of the Award, (ii) provide for the purchase of the Award upon the Participant's request for an amount of cash or other property that could have been received upon the exercise or realization of the Award had the Award been currently exercisable or payable, (iii) adjust the terms of the Award in a manner determined by the Committee to reflect the Change in Control, (iv) cause the Award to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable and in the best interests of the Company. (k) Information Confidential As partial consideration for the granting of each Option hereunder, the Award may, in the Committee's sole and absolute discretion, provide that the Participant shall agree with the Company that he will keep confidential all information and knowledge that he or she has relating to the manner and amount of his or her participation in the Plan; provided, however, that such information may be disclosed as required by law and may be given in confidence to the Participant's spouse, tax and financial advisors, or to a financial institution to the extent that such information is necessary to secure a loan. In the event any breach of this promise comes to the attention of the Committee, it shall take into consideration such breach, in determining whether to recommend the grant of any future Option to such Participant, as a factor militating against the advisability of granting any such future Option to such individual. (l) Other Benefits Participation in the Plan shall not preclude the Participant from eligibility in any other stock option plan of the Company or any Affiliate or any old age benefit, insurance, pension, profit sharing, retirement, bonus, or other extra compensation plans which the Company or any Affiliate has adopted, or may, at any time, adopt for the benefit of its employees. (m) Execution of Receipts and Releases Any payment of cash or any issuance or transfer of shares of Stock to a Participant, or to his legal representative, heir, legatee, or distributee, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Committee may require any Participant, legal representative, heir, legatee, or distributee, as a condition precedent to such payment, to execute a release and receipt therefor in such form as it shall determine. (n) Severability If any provision of this Plan is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and the Plan shall be construed and enforced as if the illegal or invalid provision had never been included herein. (o) Notices Whenever any notice is required or permitted hereunder, such notice must be in writing and personally delivered or sent by mail or by a nationally recognized courier service. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered on the date on which it is personally delivered, or, if mailed, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address which such person has previously specified by written notice delivered in accordance herewith or, if by courier, 24 hours after it is sent, addressed as described in this Section, or, if by facsimile machine, the time mechanically recorded on the document by the facsimile process. The Company or a Participant may change, at any time and from time to time, by written notice to the other, the address which it or he had previously specified for receiving notices. Until changed in accordance herewith, the Company and each Participant shall specify as its and his address for receiving notices the address set forth in the Agreement or Award pertaining to the shares to which such notice relates. (p) Waiver of Notice Any person entitled to notice hereunder may waive such notice. (q) Successors The Plan shall be binding upon each Participant, his legal representatives, heirs, legatees, and distributees, upon the Company, its successors, and assigns, and upon the Committee and its successors. (r) Headings The titles and headings of Sections and Paragraphs are included for convenience of reference only and are not to be considered in construction of the provisions hereof. EX-10.2 4 EMPL SVNGS PLAN EXHIBIT 10.2 ENDEVCO, INC. EMPLOYEE SAVINGS PLAN IMPORTANT NOTE Neither Connecticut General Life Insurance Company nor any of its employees can provide you with legal advice in connection with the execution of this document. Prior to execution of this document, you should consult your attorney on whether this document is appropriate for you. Table Of Contents ARTICLE I Definitions.................................. 1 ARTICLE II Service......................................18 ARTICLE III Eligibility, Enrollment and Participation....22 ARTICLE IV Contributions................................23 ARTICLE V Limitations on Allocations...................40 ARTICLE VI Distribution of Benefits.....................48 ARTICLE VI-A Direct Rollovers.............................52 ARTICLE VII Retirement Benefits..........................54 ARTICLE VIII Joint and Survivor Requirements..............55 ARTICLE IX Termination of Employment....................57 ARTICLE X Withdrawals..................................59 ARTICLE X-A Loans........................................62 ARTICLE XI Fiduciary Duties and Responsibilities........64 ARTICLE XII The Administrator............................65 ARTICLE XIII Participants' Rights.........................68 ARTICLE XIV Amendment or Termination of the Plan.........72 ARTICLE XV Miscellaneous................................74 ARTICLE XVI Top Heavy Provisions.........................76 ARTICLE XVII Trust Agreement..............................62 ENDEVCO, INC. EMPLOYEE SAVINGS PLAN THIS EMPLOYEE SAVINGS PLAN, made and executed at Dallas, Texas, by Endevco, Inc., a Delaware corporation (the "Company"), WITNESSETH THAT: WHEREAS, effective as of January 1, 1983, the Company established a qualified profit sharing plan known as the Endevco, Inc. Employee Savings Plan; and WHEREAS, effective as of January 1, 1987, the Company amended and restated said profit sharing plan to add a cash or deferred arrangement qualifying under the provisions of Section 401(k) of the Internal Revenue Code; and WHEREAS, effective as of January 1, 1989, the Company amended and restated said profit sharing plan to incorporate recent plan amendments and to make certain other changes; and WHEREAS, the Company now desires to continue said profit sharing plan with its cash or deferred arrangement by restating its plan document in its entirety to shorten its vesting schedule, to provide for plan loans, to discontinue the investment of participants, future pre-tax and after-tax contributions in Endevco, Inc. common stock, to otherwise modify the investment alternatives and procedures for such contributions and to make certain other changes; NOW, THEREFORE, pursuant to the authority reserved to the Company under Section 8.1 thereof, the Endevco, Inc. Employee Savings Plan is hereby amended and restated in its entirety, effective as of July 1, 1991, to read as follows: ARTICLE I DEFINITIONS 1.1 ACCRUED BENEFIT. The term Accrued Benefit means the value on any applicable date of the Participant's Account. 1.2 ACTIVE PARTICIPANT. The term Active Participant means any Participant who (a) performs duties as an Employee for the Employer, and (b) is not an inactive Participant. 1.3 ACTUAL CONTRIBUTION PERCENTAGE. The term Actual Contribution Percentage means the average of the Actual Contribution Ratios of a specified group computed to the nearest one-hundredth of one percent. 1.4 ACTUAL CONTRIBUTION PERCENTAGE TEST. (A) For each Plan Year, the Plan shall satisfy the contribution percentage requirement described in section 401(m)(2) of the Code and the regulations thereunder, which are incorporated herein by reference. The Plan satisfies the Actual Contribution Percentage Test if: (1) The Actual Contribution Percentage for the group of eligible Highly Compensated Employees is not more than the Actual Contribution Percentage for the group of all other eligible Employees multiplied by 1.25; or (2) The excess of the Actual Contribution Percentage for the group of eligible Highly Compensated Employees over the Actual Contribution Percentage for the group of all other eligible Employees is not more than two percentage points and the Actual Contribution Percentage for the group of eligible Highly Compensated Employees is not more than the Actual Contribution Percentage for the group of all other eligible Employees multiplied by two. (B) Special Rules. (1) For purposes of determining the Actual Contribution Percentage Test, Employee Contributions are considered to have been made in the Plan Year in which contributed to the Plan. Matching Contributions and Qualified Nonelective Contributions will be considered for a Plan Year only if allocated to the Employee's Account as of any date within the Plan Year being tested and only if made before the last day of the twelve- 1 month period immediately following he Plan Year to which such contributions relate. (2) A Matching Contribution that is forfeited to correct Excess Aggregate Contributions, or because the contribution to which it relates is treated as an Excess Contribution, Excess Deferral, or Excess Aggregate Contribution shall not be taken into account for purposes of the Actual Contribution Percentage Test. (3) The Employer shall maintain records sufficient to demonstrate satisfaction of the Actual Contribution Percentage Test, including records showing the extent to which Qualified Nonelective Contributions and Elective Deferral Contributions are taken into account. 1.5 ACTUAL CONTRIBUTION RATIO. (A) An Employee's Actual Contribution Ratio is the sum of the Contribution Percentage Amounts allocated to the Employee's Account for the Plan Year (including any amounts required to be taken into account under subparagraphs (b)(1) and (b)(2) of this section) divided by the Employee's Compensation for the Plan Year. If no Matching Contributions, Employee Contributions, Qualified Nonelective Contributions, or Elective Deferral Contributions are taken into account with respect to an eligible Employee, the Actual Contribution Ratio of the Employee is zero. (B) Special Rules. (1) In the event that this Plan is aggregated with one or more plans for purposes of section 410(b) of the Code (other than for purposes of the average benefit percentage test), or if one or more other plans satisfy the requirements of section 410(b) of the Code (other than the average benefit percentage test) only if aggregated with this Plan, then this section shall be applied by determining the Actual Contribution Ratios of Employees as if all such plans were a single plan. Plans may be aggregated only if they have the same Plan Year. (2) The Actual Contribution Ratio of a Highly Compensated Employee who is eligible to participate in more than one plan of the Employer to which Employee Contributions or Matching Contributions are made shall be calculated by treating all such plans in which the Employee is eligible to participate as one plan. For Plan Years beginning after December 31, 1988, if a Highly Compensated Employee participates in two or more plans that have different plan years, all plans ending with or within the same calendar year shall be treated 2 as a single plan. However, plans that are not permitted to be aggregated under Treasury Regulation section 1.401(m)-1(b) (3) (ii) shall not be aggregated for purposes of this section. (3) For purposes of determining the Actual Contribution Ratio of a Participant who is a 5-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Contribution Percentage Amounts and Compensation of such Participant shall include the Contribution Percentage Amounts (including any amounts required to be taken into account under subparagraphs (b)(1) and (b)(2) of this section) and Compensation for the Plan Year of all Family Members. If the Participant is required to be aggregated as a member of more than one family group under the Plan, all eligible Employees who are members of those family groups that include that Employee are aggregated as one family group. Family Members, with respect to Highly Compensated Employees, shall be disregarded as separate Employees in determining the Actual Contribution Ratio both for Participants who are Non-highly Compensated Employees and for Participants who are Highly Compensated Employees. (4) The determination and treatment of the Actual Contribution Ratio amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 1.6 ACTUAL DEFERRAL PERCENTAGE. The term Actual Deferral Percentage means the average of the Actual Deferral Ratios of a specified group, computed to the nearest one-hundredth of one percent. 1.7 ACTUAL DEFERRAL PERCENTAGE TEST. (A) For each Plan Year, the Plan shall satisfy the Actual Deferral Percentage Test described in section 401(k)(3) and the regulations thereunder, which are herein incorporated by reference. The Plan satisfies the Actual Deferral Percentage Test for a Plan Year only if: (1) The Actual Deferral Percentage for the group of eligible Highly Compensated Employees is not more than the Actual Deferral Percentage for the group of all other eligible Employees multiplied by 1.25; or (2) The excess of the Actual Deferral Percentage for the group of eligible Highly Compensated Employees over the Actual Deferral Percentage for the group of all other eligible Employees is not more than two percentage points, and the Actual Deferral Percentage for the 3 group of eligible Highly Compensated Employees is not more than the Actual Deferral Percentage for the group of all other eligible Employees multiplied by two. 4 (B) Special Rules. (1) For purposes of determining the Actual Deferral Percentage Test, Elective Deferral Contributions, Qualified Nonelective Contributions, and Qualified Matching Contributions must be allocated to the Employee's Account as of a date within the Plan Year being tested and must be made before the last day of the twelve-month period immediately following the Plan Year to which such contributions relate. (2) The Excess Deferrals of a Highly Compensated Employee shall be taken into account for purposes of the Actual Deferral Percentage Test. Conversely, the Excess Deferrals of an Employee who is a Non-highly Compensated Employee shall not be taken into account for purposes of the Actual Deferral Percentage Test. (3) The Employer shall maintain records sufficient to demonstrate satisfaction of the Actual Deferral Percentage Test, including the extent to which Qualified Nonelective Contributions and Qualified Matching Contributions are taken into account. 1.8 ACTUAL DEFERRAL RATIO. (A) An Employee's Actual Deferral Ratio for the Plan Year is the sum of the Employee's Deferral Percentage Amounts allocated to the Employee's Account for the Plan Year (including any amounts required to be taken into account under subparagraphs(b)(1) and (b)(2) of this section), divided by the Employee's Compensation taken into account for the Plan Year. If an eligible Employee makes no Elective Deferral Contributions, and no Qualified Matching Contributions or Qualified Nonelective Contributions are taken into account with respect to the Employee, the Actual Deferral Ratio of the Employee is zero. (B) Special Rules. (1) In the event that this Plan is aggregated with one or more plans for purposes of section 410(b) of the Code (other than for purposes of the average benefit percentage test), or if one or more other plans satisfy the requirements of section 410(b) of the Code (other than the average benefit percentage test) only if aggregated with this Plan, then this section shall be applied by determining the Actual Deferral Ratio of Employees as if all such plans were a single plan. Plans may be aggregated only if they have the same Plan Year. 5 (2) The Actual Deferral Ratio of a Highly Compensated Employee who is eligible to participate in more than one cash or deferred arrangement (as described in section 401 (k) of the Code) of the same Employer shall be calculated by treating all the cash or deferred arrangements in which the Employee is eligible to participate as one arrangement. If the cash or deferred arrangements that are treated as a single arrangement under the preceding sentence are parts of plans that have different plan years, the cash or deferred arrangements are treated as a single arrangement with respect to the plan years ending with or within the same calendar year. However, plans that are not permitted to be aggregated under Treasury Regulation section 1.401(k)-1(b)(3)(ii)(B) are not aggregated for purposes of this section. (3) For purposes of determining the Actual Deferral Ratio of a participant who is a 5-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Deferral Percentage Amounts and Compensation of such Participant shall include the Deferral Percentage Amounts (including any amounts required to be taken into account under subparagraphs (b)(1) and (b)(2) of this section) and Compensation for the Plan Year of Family Members. If an Employee is required to be aggregated as a member of more than one family group under the Plan, all eligible employees who are members of those family groups that include that Employee are aggregated as one family group. Family Members, with respect to such Highly Compensated Employees, shall be disregarded as separate Employees in determining the Actual Deferral Percentage both for Participants who are Non-highly Compensated Employees and for Participants who are Highly Compensated Employees. (4) The determination and treatment of the Actual Deferral Ratio amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. 1.9 BENEFICIARY. The Participant's spouse is the designated Beneficiary of the Participant's entire Vested Interest. However, each Participant shall have the right to designate another Beneficiary, subject to the requirements of the "Qualified Election" provisions of Article VIII, Joint and Survivor Requirements. The Participant may change the Beneficiary at any time, subject to the requirements of the "Qualified Election" provisions of Article VIII, Joint and Survivor Requirements. 6 If a Beneficiary has not been designated, or if a Beneficiary designation or change of Beneficiary designation does not meet the requirements of the "Qualified Election" provisions of Article VIII, Joint and Survivor Requirements, (including any designation made prior to August 23, 1984 by a married Participant who has an Hour of Service on or after August 23, 1984), or if no designated Beneficiary survives the Participant, the Participant's entire Vested Interest shall be distributed to the Participant's spouse, if living; otherwise to the executor or administrator of the Participant's estate. 1.10 BOARD OF DIRECTORS. The term Board of Directors means the Plan Sponsor's board of directors or other comparable governing body. 1.11 CODE. The term Code means the internal Revenue Code of 1986, as amended from time to time. 1.11a COMPANY STOCK. The term Company Stock means the common stock of Cornerstone Natural Gas, Inc. 1.12 COMPENSATION. (A) Except as otherwise provided in the Plan, the term Compensation means wages within the meaning of section 3401(a) of the Code for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a)(2) of the Code). (B) Compensation shall include only that Compensation which is actually paid to the Participant during the determination period. Except as provided elsewhere in the Plan, the determination period shall be the Plan Year. (C) Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the employee under sections 125, 402(a)(8), 402(h), or 403(b) of the Code; Compensation deferred under an eligible deferred compensation plan within the meaning of section 457(d) of the Code; and employee contributions described in section 414(h)(2) of the Code that are picked up by the employing unit and, thus, are treated as employer contributions. (D) The annual Compensation of each Participant taken into account or determining all benefits provided under the Plan for any determination period shall not exceed $200,000. This limitation shall be adjusted by the Secretary at the time and in the same manner as under section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year is effective for years beginning in such calendar year and the first adjustment to the $200,000 limitation is effected on January 1, 1990. If the period 7 for determining Compensation used in calculating an Employee's allocation for a determination period is a short Plan Year (i.e., shorter than 12 months), the annual Compensation limit is an amount equal to the otherwise applicable annual Compensation limit multiplied by a fraction, the numerator of which is the number of months in the short Plan Year, and the denominator of which is 12. In determining the Compensation of a Participant for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year. if, as a result of the application of such rules, the adjusted $200,000 limitation is exceeded, then either the limitation shall be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this section prior to the application of this limitation, or the limitation shall )De allocated among the affected individuals in an objective and nondiscriminatory manner based on a reasonable, good faith interpretation of section 401(a)(17) of the Code. The method chosen in the preceding sentence shall be uniformly applied to all affected individuals in a Plan Year Sod shall be applied consistently from year to year. If Compensation for any prior determination period is taken into account in determining an Employee's allocations or benefits for the current determination period, the Compensation for such prior determination period is subject to the applicable annual Compensation limit in effect for that prior year. For this purpose, for years beginning before January 1, 1990, the applicable annual Compensation limit is $200,000. 1.13 CONSIDERED NET PROFITS. The term Considered Net Profits means the entire amount of the accumulated or current operating profits (excluding capital gains from the sale or involuntary conversion of capital or business assets) of the Employer after all expenses and charges other than (i) the contributions made by the Employer to the Plan, and (ii) federal or state or local taxes based upon or measured by income, as determined by the Employer, either on an estimated basis or a final basis, in accordance with the generally accepted accounting principles used by the Employer. When the amount of Considered Net Profits has been determined by the Employer, and the contributions made by the Employer on the basis of such determination, for any Plan Year, such determination and contribution shall be final and conclusive and shall not be subject to change because of any adjustments in income or expense which may be required by the internal Revenue Service or otherwise. Such determination and contribution shall 8 not be open to question by any Participant either before or after the contributions by the Employer have been made. 9 1.14 CONTRIBUTION PERCENTAGE AMOUNTS. The term Contribution Percentage Amounts means the sum of the Employee Contributions, Matching Contributions, and Qualified Matching Contributions (to the extent not taken into account for purposes of the Actual Deferral Percentage Test) made under the Plan on behalf of the Employee for the Plan Year. The term Contribution Percentage Amounts also includes Qualified Nonelective Contributions and Elective Deferral Contributions treated as Matching Contributions and taken into account in determining the Employee's Actual Contribution Ratio for the Plan Year. 1.15 CONTRIBUTION PERIOD. The term Contribution Period means the Employer's pay period. 1.16 DEFERRAL PERCENTAGE AMOUNTS. The term Deferral Percentage Amounts means an Employee's Elective Deferral Contributions for the Plan Year. The term Deferral Percentage Amounts also includes Qualified Nonelective Contributions and Qualified matching Contributions treated as Elective Deferral Contributions and taken into account in determining the Employee's Actual Deferral Ratio for the Plan Year. 1.17 DISABILITY. The term Disability means a Participant's incapacity to engage in any substantial gainful activity because of a medically determinable physical or mental impairment which can be expected to result in death, or to be of long, continued and indefinite duration. Such determination of Disability shall be made by the Administrator with the advice of competent medical authority. All Participants in similar circumstances will be treated alike. 1.18 DISABILITY RETIREMENT DATE. The term Disability !Retirement Date means the first day of the month after the Plan Administrator has determined that a Participant's incapacity is a Disability. 1.19 EARLY RETIREMENT DATE. The term Early Retirement Date means the first day of the month coinciding with or next following the date a Participant is separated from Service with the Employer on or after the date he attains age 59 1/2 and has six Years of Service for any reason other than death or Disability, provided that on such date the Participant has not attained his Normal Retirement Age. 1.20 EFFECTIVE DATE. The term Effective Date means July 1, 1991. 1.21 ELECTIVE DEFERRAL CONTRIBUTION. The term Elective Deferral Contribution means any Employer Contribution made to the Plan at the election of the Participant, in lieu of cash compensation, and includes contributions made pursuant to a Salary Deferral Agreement or other deferral mechanism. 10 Solely for purposes of the dollar limitation specified in section 402(g) of the Code, with respect to any taxable year, a Participant's Elective Deferral Contributions are the sum of all employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in section 401(k) of the Code, any simplified employee pension cash or deferred arrangement described in section 402(h)(1)(B) of the Code, any plan as described under section 501(c)(18) of the Code, and any employer contributions made on behalf of a Participant for the purchase of a tax sheltered annuity contract under section 403(b) of the Code pursuant to a salary reduction agreement. The term Elective Deferral Contribution shall not include any deferrals properly distributed as excess annual additions. 1.22 EMPLOYEE. The term Employee means an individual who performs services for the Employer and who is either a common law employee of the Employer or a self-employed individual/owner employee treated as an Employee pursuant to Code section 401(c)(1). The term Employee also includes a Leased Employee who is treated as an Employee of the Employer-recipient pursuant to the provisions of Code section 414(n)(2) or 414(o)(2) (other than individuals covered by a plan described in Code section 414(n)(5)). For purposes of determining the Highly Compensated Employees, the Employer may elect, on a reasonable and consistent basis, to treat such Leased Employees covered by a plan described in Code section 414(n)(5) as Employees. 1.23 EMPLOYEE CONTRIBUTIONS. The term Employee Contributions means any contributions to the Plan after December 31, 1986 or any other plan that are designated or treated at the time of contribution as after-tax Employee Contributions and are allocated to a separate account to which the attributable earnings and losses are allocated. Such term includes Employee Contributions applied to the purchase of life insurance policies. Such term does not include repayment of loans or buy-back of benefits described in Code section 411(a)(7)(C) or employee contributions transferred to this Plan. 1.24 EMPLOYER. The term Employer means the Plan Sponsor and any other incorporated or unincorporated trade or business that may subsequently adopt the Plan with the consent of the Plan Sponsor. in the case of a group of employers which constitutes a controlled group of corporations (as defined in Code section 414(b)), or which constitutes trades or businesses (whether or not incorporated) which are under common control (as defined in Code section 414(c)) , or which constitutes an affiliated service group (as defined in Code section 414(m)), all such employers shall be considered a single employer for purposes of participation, vesting, Top-Heavy; provisions and determination of Highly Compensated Employees. 11 1.25 EMPLOYER CONTRIBUTION. The term Employer Contribution means any contribution made to the Plan by the Employer on behalf of a Participant, other than an Employee Contribution or Rollover Contribution. 1.26 ENTRY DATE. The term Entry Date means either the Effective Date or the first day of the month thereafter when an Employee who has fulfilled the eligibility requirements commences participation in the Plan. If an Employee is not in the active Service of the Employer as of his initial Entry Date, his subsequent Entry Date shall be the date he returns to the active Service of the Employer, provided he still meets the eligibility requirements. if an Employee does not enroll as a Participant as of his initial Entry Date, his subsequent Entry Date shall be the applicable Entry Date as specified above when the Employee actually enrolls as a Participant. 1.27 ERISA. The term ERISA means the Employee Retirement income Security Act of 1974 (PL 93-406) as it may be amended from time to time, and any regulations issued pursuant thereto as such Act and such regulations affect this Plan and Trust. 1.28 EXCESS AGGREGATE CONTRIBUTIONS. (A) The term Excess Aggregate Contributions means, with respect to any Plan Year, the excess of the aggregate amount of the Contribution Percentage Amounts actually made on behalf of Highly Compensated Employees for the Plan Year (including any amounts required to be taken into account under subparagraphs (b)(1) and (b)(2) of Section 1.5 of the Plan), over the maximum amount of contributions permitted under the Actual Contribution Percentage Test. The amount of Excess Aggregate Contributions for each Highly Compensated Employee is determined by using the method described in paragraph (b) of this section. (B) The amount of Excess Aggregate Contributions for a Highly Compensated Employee for a Plan Year is the amount (if any) by which the Employee's Employee Contributions and matching Contributions must be reduced for the Employee's Actual Contribution Ratio to equal the highest permitted Actual Contribution Ratio under the Plan. To calculate the highest permitted Actual Contribution Ratio under the Plan, the Actual Contribution Ratio of the Highly Compensated Employee with the highest Actual Contribution Ratio is reduced by the amount required to cause the Employee's Actual Contribution Ratio to equal the ratio of the Highly Compensated Employee with the next highest Actual Contribution Ratio. if a lesser reduction would enable the Plan to satisfy the Actual Contribution Percentage Test, only this lesser reduction may be made. This process shall be repeated until the Plan satisfies the Actual Contribution 12 Percentage Test. The highest Actual Contribution Percentage Ratio remaining under the Plan after leveling is the highest permitted Actual Contribution Ratio. For each Highly Compensated Employee, the amount of Excess Aggregate Contributions for a Plan Year is equal no the total Contribution Percentage Amounts (including any amounts required to be taken into account under subparagraphs (b)(1) and (b)(2) of Section 1.5 of the Plan), minus the amount determined by multiplying the Employees's highest permitted Actual Contribution Ratio (determined after application of this section) by the compensation used in determining the ratio. 1.29 EXCESS CONTRIBUTION. (A) The term Excess Contribution means, with respect to a Plan Year, the excess of Deferral Percentage Amounts made on behalf of eligible Highly Compensated Employees for the Plan Year (including any amounts required to be taken into account under subparagraphs (b)(1) and (b)(2) of Section 1.8 of the Plan) over the maximum amount of such contributions permitted under the Actual Deferral Percentage Test for the Plan Year. The amount of Excess Contributions for each Highly Compensated Employee is determined by using the method described in paragraph (b) of this section. (B) The amount of Excess Contributions for a Highly Compensated Employee for a Plan year is the amount (if any) by Which the Employee's Elective Deferral Contributions must be reduced for the Employee's Actual Deferral Ratio to equal the highest permitted Actual Deferral Ratio under the Plan. To calculate the highest permitted Actual Deferral Ratio under the Plan, the Actual Deferral Ratio of the Highly Compensated Employee with the highest Actual Deferral Ratio is reduced by the amount required to cause the Employee's Actual Deferral Ratio to equal the ratio of the Highly Compensated Employee with the next highest Actual Deferral Ratio. If a lesser reduction would enable the arrangement to satisfy the Actual Deferral Percentage Test, only this lesser reduction shall be made. This process shall be repeated until the cash or deferred arrangement satisfies the Actual Deferral Percentage Test. The highest Actual Deferral Ratio remaining under the Plan after leveling is the highest permitted Actual Deferral Ratio. 1.30 EXCESS DEFERRALS. The term Excess Deferrals means those Elective Deferral Contributions that are includible in a Participant's gross income under section 402(g) of the Code to the extent such Participant's Elective Deferral Contributions for a taxable year exceed the dollar limitation under such Code section. 13 1.31 FAIL-SAFE CONTRIBUTION. The term Fail-Safe Contribution means a Nonelective Contribution, designated by the Employer at the time of contribution as an Qualified Nonelective Contribution, which is contributed to the Plan solely for the purposes of satisfying either the Actual Deferral Percentage Test or the Actual Contribution Percentage Test and is made in accordance with the provisions of Article IV of this Plan. 1.32 FAMILY MEMBER. The term Family Member means, with respect to any Employee, such Employee's spouse and lineal ascendants and descendants and the spouses of such lineal ascendants and descendants. 1.33 FIDUCIARY. The term Fiduciary means any, or all, of the following, as applicable: (A) Any Person who exercises any discretionary authority or control respecting the management of the Plan or its assets; or (B) Person who renders investment advice for a fee or ocher compensation, direct or indirect, respecting any monies or other property of the Plan or has authority or responsibility to do so; or (C) Any Person who has discretionary authority or responsibility in the administration of the Plan; or (D) Any Person who has been designated by a Named Fiduciary pursuant to authority granted by the Plan, who acts to carry out a fiduciary responsibility, subject to any exceptions granted directly or indirectly by ERISA. 1.34 FORFEITURE. The term Forfeiture means the amount, if any, by which the value of a Participant's Account exceeds his Vested Interest following such Participant's Termination of Employment, and at the time specified in Section 9.1. 1.35 HIGHLY COMPENSATED EMPLOYEE. The term Highly Compensated Employee means any Highly Compensated Active Employee or Highly Compensated Former Employee as further defined herein. For purposes of the determination of Highly Compensated Employees, the term Compensation means Compensation as defined in Article V of the Plan, but includes the amount of any elective contributions made by the Employer on the Employee's behalf to a cafeteria plan established in accordance with the provisions of Code section 125, a qualified cash or deferred arrangement in accordance with the provisions of Code section 402(a)(8), a simplified employee pension plan in accordance with the provisions of Code section 402(h), or a tax sheltered annuity plan maintained in accordance with the provisions of Code section 403(b). 14 A "Highly Compensated Active Employee" is any Employee who performs services for the Employer during the current Plan Year and who, during the current Plan Year or the 12-month period immediately preceding such Plan Year: (A) Owns (or is considered to own within the meaning of section 318 of the Code, as modified by section 416(i)(1)(B)(iii) of the Code) more than 5% of the outstanding stock of the Employer or stock possessing more than 5% of the total combined voting power of all stock of the Employer, or, if the Employer is other than a corporation, owns more than 5% of the capital (or profits interest in the Employer. The determination of 5% ownership shall be made separately for each member of a controlled group of corporations (as defined in Code section 414(b)), or of a group of trades or businesses (whether of not incorporated) that are under common control (as defined in Code section 414(c)), or of an affiliated service group (as defined in Code section 414(m)); or (B) Receives Compensation in excess of $75,000 multiplied by the applicable cost-of-living adjustment factor prescribed under Code section 415(d) and then prorated in the case of a short Plan Year; or (C) Receives Compensation in excess of $50, 000, as adjusted for cost-of-living increases in accordance with Code section 415 (d) and then prorated in the case of a short Plan Year, and is in the top 20% of Employees ranked by Compensation; or (D) Is, at any time, an officer of the Employer and receives Compensation in excess of 50% of the amount in effect under Code section 415(b)(1)(A) for the applicable period. If no officer receives Compensation in excess of the amount specified above, the highest paid officer for the applicable period shall be a Highly Compensated Employee. In no event if there are more than 500 Employees, shall more than 50 Employees or, if there are less than 500 Employees, shall the greater of three Employees or 10% of all Employees, be taken into account as officers. In determining both the top 20% of Employees ranked ba Compensation for purposes of paragraph (C) above, and officers of the Employer for purposes of paragraph (D) above; Employees who have not completed six months of Service by the end of the applicable period, Employees who normally work less than 17-1/2 hours per week, Employees who normally work less than six months during a year, Employees who have not attained 21, and nonresident aliens who receive no earned income from U.S. sources shall be excluded. Also excluded under the above paragraph are Employees who are covered by an agreement which the Secretary of Labor finds to he 15 a collective bargaining agreement. Such Employees will be excluded only if retirement benefits were the subject of good faith bargaining, 90% of the Employees of the Employer are covered by the agreement, and the Plan covers only Employees who are not covered by the agreement. Notwithstanding the above provisions, an Employee, other than a 5% owner as described in paragraph .(a) above who was not highly compensated during the 12-month period immediately preceding the current Plan Year will not be considered to be a Highly Compensated Employee in the current Plan Year unless such Employee is one of the top 100 Employees ranked by Compensation for the current Plan Year. A "Highly Compensated Former Employee" is any former Employee who separated from Service with the Employer in a Plan Year preceding the current Plan Year and was a Highly Compensated Active Employee in either: (A) The Plan Year in which his separation from Service occurred; or (B) any Plan Year ending on or after such former Employee's 55th birthday. A former Employee is an Employee who performs no services for the Employer during a Plan Year (for example, by reason of a leave of absence). 1.36 INACTIVE PARTICIPANT. The term Inactive Participant means any Participant who does not currently meet the requirements to be an Active Participant due to a suspension of the performance of duties for the Employer. 1.37 LATE RETIREMENT DATE. The term Late Retirement Date means the first day of the month coinciding with or next following the date a Participant is separated from Service with the Employer after his Normal Retirement Age, for any reason other than death. 1.38 LEASED EMPLOYEE. The term Leased Employee means any person (other than an Employee of the recipient) who, pursuant to an agreement between the recipient and any other person ("leasing organization"), has performed services for the recipient (or for the Employer and related persons determined in accordance with Code section 414 (n) (6)) on a substantially full-time basis for a period of at least one year, and such services are of a type historically performed by employees in the business field of the recipient Employer. 1.39 MATCHING CONTRIBUTIONS. The term Matching Contributions means contributions node by the Employer to the Plan, on behalf of a Participant on account of either Elective Deferral Contributions, if any, or Employee Contributions, if any. 16 1.40 NAMED FIDUCIARY. The term Named Fiduciary means the Plan Administrator, the Trustee and any other Fiduciary designated in writing by the Employer, and any successor thereto. 1.41 NONHIGHLY COMPENSATED EMPLOYEE. The term Nonhighly Compensated Employee means an Employee who is not a Highly Compensated Employee. 1.42 NONELECTIVE CONTRIBUTIONS. The term Nonelective Contributions means contributions made by the Employer (other than Matching Contributions) than the Participant may not elect to have paid in cash or other benefits instead of being contributed no the Plan. 1.43 NORMAL RETIREMENT AGE. The term Normal Retirement Age means the daze the Participant attains age 65. 1.44 NORMAL RETIREMENT DATE. The term Normal Retirement Date means the first day of the month coinciding with or next following the date a Participant attains his Normal Retirement Age. 1.45 PARTICIPANT. The term Participant means any Employee of the Employer, who is or becomes eligible to participant under this Plan in accordance with its provisions and shall include an Active Participant and an Inactive Participant. 1.46 PARTICIPANT'S ACCOUNT. The term Participant's Account means the sum of the following sub-accounts held on behalf of each Participant: * Elective Deferral Contributions, if any, and earnings thereon. * Matching Contributions, if any, and earnings thereon. * Qualified Matching Contributions, if any, and earnings thereon. * Nonelective Contributions, if any, and earnings thereon. * Qualified Nonelective Contributions, if any, and earnings thereon. * Employee Contributions, if any, and earnings thereon. * Participant Contributions, if any, and earnings thereon. * Rollover Contributions, if any, and earnings thereon. A Participant's Account shall be invested in accordance with the rules established by the Plan Administrator, which shall be applied in a consistent and nondiscriminatory manner. 1.47 PARTICIPANT CONTRIBUTIONS. The term Participant Contributions means any contributions to the Plan before January 1, 1987 that are designated or treated at the time of contribution as after- 17 tax Participant Contributions and are allocated to a separate account to which the attributable earnings and losses are allocated. Such term does not include repayment of loans or buy-back of benefits described in Code section 411(a)(7)(C) or employee contributions transferred to this Plan. 1.48 PERSON. The term Person means any natural person, partnership, corporation, trust or estate. 1.49 PLAN. The term Plan means this Cornerstone Natural Gas, Inc. Employee Savings Plan, effective as of January 1, 1983, and as from time to time in effect thereafter. 1.50 PLAN ADMINISTRATOR. The terms Plan Administrator and Administrator are used interchangeably throughout the Plan and Trust and shall mean the Plan Sponsor. 1.51 PLAN SPONSOR. The term Plan Sponsor means Cornerstone Natural Gas, Inc. 1.52 PLAN YEAR. The term Plan Year means the 12-month period commencing on January 1 and ending on the following December 31. 1.53 QUALIFIED MATCHING CONTRIBUTIONS. The term Qualified Matching Contributions means Matching Contributions which are designated as Qualified Matching Contributions, and are immediately vested and nonforfeitable at all times and satisfy the Code section 401(k) withdrawal restrictions. 1.54 QUALIFIED NONELECTIVE CONTRIBUTIONS. The term Qualified Nonelective Contributions means Nonelective Contributions made by the Employer which are designated as Qualified Nonelective Contributions, are immediately vested and nonforfeitable at all times and satisfy the Code section 401(k) withdrawal restrictions. 1.55 ROLLOVER CONTRIBUTIONS. The term Rollover Contributions means contributions representing all or part of the entire amount of any distribution from a terminated pension (or profit sharing plan meeting the requirements of Code section 401(a) or any lump sum distribution received by an Employee from a pension or profit sharing plan meeting the requirements of Code section 401(a). 1.56 SALARY DEFERRAL AGREEMENT. The term Salary Deferral Agreement means an agreement between a Participant and the Employer to defer the Participant's Compensation for the purpose of making Elective Deferral Contributions to the Plan. 1.57 TERMINATION OF EMPLOYMENT. The term Termination of Employment means a severance of the Employer-Employee relationship which occurs prior to a Participant's Normal Retirement Age for any reason other than Early Retirement, Disability or death. 18 1.58 TRUST. The term Trust means the trust agreement entered into by the Employer and the Trustee, which trust agreement forms a part of, and implements the provisions of this Plan. 1.59 TRUSTEE. The term Trustee means one or more individuals collectively appointed and acting under the trust agreement, and any successor thereto. 1.60 VESTED INTEREST. The term Vested interest on any date means the nonforfeitable right to an immediate or deferred benefit in the amount which is equal to the following: (A) the value on that date of that portion of the Participant's Account that is attributable to the following contributions: * Elective Deferral Contributions, if any * Employee Contributions, if any * Participant Contributions, if any * Rollover Contributions, if any * Qualified Matching Contributions, if any * Qualified Nonelective Contributions, if any (B) plus the value on that date of that portion of the Participant's Account that is attributable to and derived from: * Matching Contributions, if any * Nonelective Contributions, if any Such contributions pursuant to Subsection (B) above shall be multiplied by the Vesting Percentage below to determine the Participant's Vested interest determined on the date applicable. 1.61 VESTING PERCENTAGE. The term Vesting Percentage means the Participant's nonforfeitable interest in contributions made by the Employer credited to his account that are not 100% immediately vested, plus the earnings thereon, computed as of the date of determining such percentage because of the occurrence of some event in accordance with the following schedules based on Years of Service with the Employer: For a Participant credited with an Hour of Service (as defined in Section 2.3) after June 30, 1991: YEARS OF SERVICE VESTING PERCENTAGE Less than 1 0% 1 but less than 2 20% 19 2 but less than 3 40% 3 but less than 4 60% 4 but less then 5 80% 5 or more 100% 20 For a Participant not credited with an Hour of Service after June 30, 1991: YEARS OF SERVICE VESTING PERCENTAGE Less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% However, if an Active Participant dies prior to attaining his Normal Retirement Age his Vesting Percentage shall be 100%. 21 ARTICLE II SERVICE 2.1 SERVICE. The term Service means active employment with the Employer as an Employee. For purposes of determining Service, employment with any company which is under common control with the Employer as specified in section 414 of the Internal Revenue Code shall be treated as employment with the Employer. 2.2 ABSENCE FROM EMPLOYMENT. Absence from employment on account of a leave of absence authorized by the Employer pursuant to the Employer's established leave policy will be counted as employment with the Employer provided that such leave of absence is of not more than two years duration. Absence from employment on account of active duty with the Armed Forces of the United States will be counted as employment with the Employer. if the Employee does not return to active employment with the Employer, his Service will be deemed to have ceased on the date the Administrator receives notice that such Employee will not return to the active Service of the Employer. The Employer's leave policy shall be applied in a uniform and nondiscriminatory manner to all Participants under similar circumstances. 2.3 HOUR OF SERVICE. The term Hour of Service means a period of Service during which an Employee shall be credited with one Hour of Service as described in (A), (B), (C), and (D) below: (A) Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Employer for the performance of duties. These hours shall be credited to the Employee for the computation period or periods in which the duties are performed; and (B) Each hour for which an Employee is directly or indirectly paid, or entitled to payment, by the Employer for reasons (such as vacation, sickness or Disability) other than for the performance of duties. Hours under this Subsection shall be calculated and credited pursuant to section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and (C) Each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by the Employer. These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made; and (D) Each hour for which an Employee is on an authorized unpaid leave (such as service with the Armed Forces, jury duty, educational leave) These hours shall be credited to the Employee for the computation period or periods in which such authorized leave takes place. However, no more than 501 hours shall be credited under this subparagraph (D). 22 Hours of Service will be credited for employment with other members of an affiliated service group (under Internal Revenue Code section 414(m)), a controlled group of corporations (under Internal Revenue Code section 414(b)) , or a group of trades or businesses under common control (under internal Revenue Code section 414(c)), of which the adopting employer is a member. Hours of Service will also be credited for any individual considered an Employee under internal Revenue Code section 414(n). In lieu of maintaining daily detailed records of the Hours of Service to be credited to Employees for the purposes of the Plan, each Employee shall be credited with 190 Hours of Service for each month during which such Employee would otherwise be required to be credited with. at least one Hour of Service under the foregoing provisions of this definition. Solely for purposes of determining whether a One-Year Break in Service, as defined in Section 2.4, for participation and vesting purposes has occurred in a computation period, an individual who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, eight Hours-of Service per day of such absence. For purposes of this paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of a birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this paragraph shall be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a One-Year Break in Service in that period, or (2) in all other cases, in the following computation period. 2.4 ONE-YEAR BREAK IN SERVICE. Except as provided below regarding eligibility, the term One-Year Break in Service means any Plan Year during which an Employee fails to complete more than 500 Hours of Service. 2.5 DETERMINING VESTING PERCENTAGE. Vesting credit shall be given for each Year of Service except those periods specified in Section 2.7. If a Participant completes less than 1,000 Hours of Service during a Plan Year while remaining in the Service of the Employer, his Vesting Percentage shall not be increased for such Plan Year. If an individual who ceases co be an Employee and is subsequently rehired as an Employee enrolls (or re-enrolls) in the Plan, upon his participation (or subsequent participation) his Vesting 23 Percentage shall then take into account all Year(s) of Service except those specified in Section 2.7. 2.6 YEAR(S) OF SERVICE. The term Year(s) of Service means a 12-consecutive-month period during which an Employee has completed at least 1,000 hours of service. (A) Eligibility Computation Period. For purposes of determining Years of Service and One-Year Breaks in Service for eligibility, the 12-consecutive-month period shall begin with the date on which an Employee's employment commenced and, where additional periods are necessary, succeeding anniversaries of his employment commencement date. The employment commencement date is the date on which the Employee first performs an Hour of Service for the Employer maintaining the Plan. The eligibility requirement specified in Article III is one or more full Years of Service. Such requirement shall be met upon completion of at least 1,000 Hours of Service for each Year of Service specified. (B) Vesting Computation Period. In computing Years of Service and One-Year Breaks in Service for vesting, the 12-consecutive-month period shall be the Plan Year. However, active participation as of the last day of the Plan Year is riot required in order for a Participant to be credited with a Year of Service for vesting purposes. For purposes of the Vesting Computation Period, if any Plan Year is less than 12-consecutive months, and if a Participant would have been credited with a Year of Service during the 12-consecutive-month period beginning on the first day of the short Plan Year, then the Participant will receive a Year of Service for the short Plan Year. The Participant receives credit for an additional Year of Service if the Participant would have been credited with a Year of Service for the Plan Year immediately following the short Plan Year. 2.7 EXCLUDED YEARS OF SERVICE. in determining the Vesting Percentage of an Employee, all Years of Service with the Employer shall be taken into account, except: * Plan Years during which a Participant did not complete at least 1,000 Hours of Service. * Years of Service excluded under the terms of the Plan as in effect on June 30, 1991. * If an Employee incurs a One-Year Break in Service prior to completing the number of Years of Service required no have a Vesting Percentage greater than 0%, Years of Service prior 24 to such break shall be excluded unless he completes an additional Year of Service before the number of such Employee's consecutive One-Year Breaks in Service equals or exceeds five. If an Employee incurred a One-Year Break in Service prior to January 1, 1985 and prior to completing two Years of Service, Years of Service prior to such break shall be excluded unless he completed an additional Year of Service before the number of his consecutive One-Year Breaks in Service prior to and including such break equals or exceeds the number of Years of Service he completed prior to such break. 2.8 PREDECESSOR ORGANIZATION SERVICE. For purposes of this Article, Service with a predecessor organization of the Employer shall be treated as Service with the Employer in any case in, which the Employer maintains the Plan of such predecessor organization. 2.9 PAST SERVICE CREDIT. if an Employee became employed by the Employer by reason of the acquisition by the Employer of the business known as Mississippi Fuel Company or the business known as Dubach Gas Company, such Employee's Years of Service, as determined under the foregoing provisions of this Article, shall be increased by one-half (rounded downward to the nearest whole year) of the length of such Employee's last continuous period of full-time employment with such business immediately before such acquisition. 25 ARTICLE III ELIGIBILITY, ENROLLMENT AND PARTICIPATION 3.1 ELIGIBILITY. Each Employee who was a Participant prior to the Effective Date and who is in the Service of the Employer on the Effective Date shall continue as a Participant in the Plan. Each other Employee, excluding a Leased Employee, shall be eligible to become a Participant as of the Effective Date or the Entry Date when he first meets the following requirements: * One Year of Service 3.2 ENROLLMENT AND PARTICIPATION. Each eligible Employee may enroll as of his Entry Date by completing and delivering to the Administrator an enrollment form and, if applicable, a Salary Deferral Agreement. He will then become a Participant as of his Entry Date. 3.3 RE-EMPLOYED EMPLOYEE. in the case of an individual who ceases to be an Employee and is subsequently rehired as an Employee, the following provisions shall apply in determining his eligibility to again participate in the Plan: (A) If the Employee had met the eligibility requirements specified in Section 3.1 prior to his separation from employment, he shall become an Active Participant in the Plan as of the date he is re-employed, after completing the applicable form(s), in accordance with Section 3.2. (B) If the Employee had not met the eligibility requirements specified in Section 3.1 prior to his separation from employment, he shall be eligible to participate in the Plan on the first Entry Date following his fulfillment of such eligibility requirements. For purposes of this Section, all Years of Service with the Employer, including any Years of Service prior to any One-Year Breaks in Service, shall be taken into account. 26 ARTICLE IV CONTRIBUTIONS 4.1 ELECTIVE DEFERRAL CONTRIBUTIONS. Each Active Participant may enter into a written Salary Deferral Agreement with the Employer in an amount equal to not less than 1% nor more than 15% of his Compensation for the Contribution Period. In consideration of such agreement, the Employer will make a contribution, for each Contribution Period on behalf of the Participant in an amount equal no the total amount by which the Participant's Compensation from the Employer was deferred during the Contribution Period pursuant to the Salary Deferral Agreement then in effect. Elective Deferral Contributions shall be paid by the Employer to the Trust not less frequently than monthly, but in no event later than 90 days following the date the amounts were deferred. Salary Deferral Agreements shall be governed by the following provisions: (A) Amounts contributed pursuant to a Salary Deferral Agreement shall be 100% vested and non-forfeitable at all times. (B) No Participant shall be permitted to have Elective Deferral contributions made under this Plan, or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in section 402(g) of the Code in effect at the beginning of the taxable year. However, this $7,000 limit shall not apply to certain amounts deferred in 1987 that were attributable to Service performed in 1986. (C) Amounts contributed pursuant to a Salary Deferral Agreement, which are not in excess of the limit described in Subsection (B) above, shall be subject to the Limitations on Allocations in accordance with Article V. Unless distributed pursuant to Section 4.18, Elective !Deferral Contributions that are in excess of the limit described in Subsection (B) shall also be subject to the Limitations on Allocations in accordance with Article V. (D) A Salary Deferral Agreement may be changed by a Participant twice during the Plan Year, on January I and July 1, or on August 1, 1992, by filing written notice thereof with the Administrator. Such notice shall be effective, and the Salary Deferral Agreement shall be changed on the date specified in such notice, which date must be at least 15 days after such notice is filed. (E) Elective Deferral Contributions shall be subject to the Actual Deferral Percentage Test limitations. 27 (F) Correction of Excess Contributions. (1) If the Plan Sponsor determines prior to the end of the Plan Year that the Actual Deferral Percentage Test may not be satisfied, the Plan Sponsor may take the corrective action specified in Section 4.14 of the Plan. (2) If, after the end of the Plan Year, the Plan Sponsor determines that the Plan will fail the Actual Deferral Percentage Test, the Plan Sponsor shall take the corrective action specified in Section 4.l6 or Section 4.19 of the Plan, or a combination of such corrective actions, in order to ensure than the Plan does not fail the Actual Deferral Percentage Test for the Plan Year being tested. 4.2 MATCHING CONTRIBUTIONS. For each Contribution Period, the Employer shall make a Matching Contribution in an amount equal to $1.00 for each $1.00 by which a Participant either defers his Compensation pursuant to a Salary Deferral Agreement or makes Employee Contributions pursuant to a payroll deduction order up to a maximum of 5% of his Compensation for the Contribution Period, subject to the Limitations on Allocations specified in Article V. One contribution as described above, for any Plan Year, shall be paid to the Trust at the end of the Plan Year, or as soon as possible on or after the last day of such Plan Year, but in any event not later than the date which is prescribed by law for filing the Employer's income tax return, including any extension thereof. The Matching Contribution shall be paid to the Trust not less frequently than monthly. Matching Contributions shall be subject to the Actual Contribution Percentage Test. The Plan Sponsor may designate at the time of contribution that all or a portion of such Matching Contributions be treated as Qualified Matching Contributions. If the Plan Sponsor determines prior to the end of the Plan Year that the Actual Contribution Percentage Test may not be satisfied, the Plan Sponsor may take the corrective action specified in Section 4.15 of the Plan. If, after the end of the Plan Year, the Plan Sponsor determines that the Plan will fail the Actual Contribution Percentage Test, the Plan Sponsor shall take the corrective action specified in Section 4.17 or Section 4.19 of the Plan, or a combination of such corrective actions, in order to ensure that the Plan does not fail the Actual Contribution Percentage Test for the Plan Year being tested. Such Matching Contribution shall be allocated as of the last day of the Contribution Period for which such contribution is made to each Participant who: 28 * is an Active Participant as of any day of the Contribution Period. Notwithstanding the above provision, an allocation will be made on behalf of a Participant who dies, retires, or becomes disabled during the Contribution Period. 4.3 NONELECTIVE CONTRIBUTIONS. The Employer may make a contribution under the Plan for any Plan Year of an amount that the Board of Directors shall determine by resolution. Such resolution shall either specify a fixed amount or specify a (definite formula by which a fixed amount can be determined. The contribution may be made in cash or in kind (including contributions in the form of Company Stock) or any combination thereof, at the discretion of the Board of Directors. The Plan Sponsor may designate at the time of contribution that all or a portion of such Nonelective Contribution be treated as a Qualified Nonelective Contribution. Such Nonelective Contribution shall be allocated as of the last day of the Plan Year for which such contribution is made to each Participant who: * is an Active Participant as of the last day of the Plan Year. Notwithstanding the above provision, an allocation will be made on behalf of a Participant who dies, retires, or becomes disabled during the Plan Year. For each Plan Year the contribution shall be allocated to each Participant eligible for an allocation thereof in the proportion that the sum of the Elective Deferral Contributions and Employee Contributions, up to 5% of such Participant's Compensation for the applicable Contribution Period, made to the Plan by or on behalf of each such Participant during that year bears to the sum of the Elective Deferral Contributions and Employee Contributions, up to 5% of all such Participants, Compensation for the applicable Contribution Period, made to the Plan by or on behalf of all such Participants during that year, subject to the Limitations on Allocations specified in Article V. The contribution as described above, for any Plan Year, shall be paid no the Plan and Trust at the end of the Plan Year, or as soon as possible on or after the last day of such Plan Year, but in any event not later than the date which is prescribed by law for filing the Employer's tax return, including any extension thereof. 4.4 FAIL-SAFE CONTRIBUTION. The Employer reserves the right to make a discretionary Nonelective Contribution to the Plan for any Plan Year, if the Plan Sponsor determines that such a contribution is necessary to ensure that either the Actual Deferral Percentage 29 Test or the Actual Contribution Percentage Test will be satisfied for that Plan Year. Such amount shall be designated by the Plan Sponsor at the time of contribution as a Qualified Nonelective Contribution and shall be known as a Fail-Safe Contribution. The Fail-Safe Contribution shall be made on behalf of all eligible non-Highly Compensated Employees who are Participants and who are considered under the Actual Deferral Percentage Test or the Actual Contribution Percentage Test. This contribution shall be allocated to the Participant's Account of each such Participant in an amount equal to a fixed percentage of such Participant's Compensation. The fixed percentage shall be equal to the minimum fixed percentage necessary tic be contributed by the Employer on behalf of each eligible non-Highly Compensated Employee who is a Participant so that the Actual Deferral Percentage Test or the Actual Contribution Percentage Test is satisfied. The Fail-Safe Contribution for any Plan Year as determined above shall be paid to the Trust at the end of the Plan Year, or as soon as possible on or after the last day of such Plan Year, but in no event later than the date which is prescribed by law for filing the Employer's income tax return, including any extensions thereof. 4.5 PROFITS NOT REQUIRED. Contributions to this Plan shall not be precluded because the Employer does not have Considered Net Profits. Notwithstanding the existence of Considered Net Profits, the Employer may determine in its sole discretion that it will make no contributions for such Plan Year. 4.6 PAYMENT OF EXPENSES. The Employer may contribute to the Plan the amount necessary to pay any applicable expense charges and administration charges. in lieu of the Employer contributing the amount necessary to pay such charges, these expenses may be paid from the Trust fund. 4.7 ALLOCATION OF FORFEITURES. The contributions made by the Employer shall be reduced by any Forfeitures available as an Employer credit in accordance with Section 9.3. 4.8 CREDITING OF ELECTIVE DEFERRAL OTHER CONTRIBUTIONS. Elective Deferral Contributions and other contributions made by the Employer shall be credited to the Participant Account of each Participant accordance with the provisions of Article XIII. 4.9 ROLLOVER CONTRIBUTIONS. Without regard to the Limitations on Allocations imposed under Article V, the Trustee may receive, on behalf of an Employee with the consent of the Administrative Committee, Rollover Contributions representing all or part of the entire amount of: 30 (A) any distribution from a terminated pension or profit sharing plan meeting the requirements of internal Revenue Code section 401(a); or (B) any lump sum distribution received by an Employee with the consent of the Administrative Committee from a pension or profit sharing plan meeting the requirements of Internal Revenue Code section 401(a). Rollover Contributions must be received from the Employee within 60 days of his receipt of the funds either directly from the pension or profit sharing plan described above or through the medium of an individual retirement account. In addition, Rollover Contributions may only include amounts attributable to employer contributions and earnings thereon, earnings on employee contributions, and employee contributions which were eligible for a tax deduction under Internal Revenue Code section 219 and earnings thereon. A Participant's Account shall be maintained on behalf of each Employee from whom Rollover Contributions are received, regardless of such Employee's eligibility to participate in the Plan in accordance with the requirements of Article III, and Rollover Contributions may be invested in any manner authorized under the provisions of this Plan. Rollover Contributions shall be credited to the Participant's Account and may be invested in any manner authorized under the provisions of this Plan. 4.10 EMPLOYEE CONTRIBUTIONS. As of his Entry Date each Active Participant may elect to make periodic Employee Contributions under the Plan in an amount equal to not less than it nor more than 51 of his Compensation by completing and delivering to the Administrator a payroll deduction order. Each Active Participant may redesignate a new permissible amount as an Employee Contribution twice each Plan Year, on January 1 and July 1, by notifying the Plan Administrator 15 days before such date. Such redesignation shall be made as if it were an original designation and shall be effective as of such date. Employee Contributions shall be subject to the terms of Article V. Employee Contributions shall be deducted by the Employer from the Participant's earnings while he has a payroll deduction order in effect and shall be paid by the Employer to the Trust not less frequently than monthly. Employee Contributions shall be subject to the Actual Contribution Percentage Test. If the Plan Sponsor determines prior to the end of the Plan Year that the Actual Contribution Percentage Test may not be 31 satisfied, the Employer may take the corrective action specified in Section 4.15 of the Plan. If, after the end of the Plan Year, the Plan Sponsor determines that the Plan will fail the Actual Contribution Percentage Test, the Employer shall take the corrective action specified in Section 4.17 or Section 4.19 of the Plan, or a combination of such corrective actions, in order to ensure that the Plan does not fail the Actual Contribution Percentage Test for the Plan Year being tested. 32 4.11 CREDITING OF EMPLOYEE CONTRIBUTIONS. Each Participant's Employee Contributions, if any, shall be credited to his Participant's Account. 4.12 SUSPENSION OF ELECTIVE DEFERRAL AND EMPLOYEE CONTRIBUTIONS. The following provisions shall apply with respect to suspension of Elective Deferral and Employee Contributions. (A) Elective Suspension. An Active Participant may elect to suspend his Salary Deferral Agreement for Elective Deferral Contributions or payroll deduction order for Employee Contributions by filing a written notice thereof with the Administrator at any time. The Salary Deferral Agreement or payroll deduction order, as the case may be, shall be suspended on the date specified in such notice, which date must be at least 15 days after such notice is filed. The notice shall specify the period for which such suspension shall be effective. Such period may extend indefinitely. If a Participant elects to suspend his Salary Deferral Agreement for Elective Deferral Contributions, his Salary Deferral Agreement shall be suspended for a period of at least six months. If a Participant elects to suspend his payroll deduction order for Employee Contributions and such Participant does not concurrently enter into, and does not have in effect at such time, a Salary Deferral Agreement for Elective Deferral Contributions, his payroll deduction order shall be suspended for a period of at least six months. (B) Suspension for Leave. A Participant who is absent from employment on account of an authorized leave of absence or military leave shall have his Salary Deferral Agreement and payroll deduction order suspended during such leave. Such suspension of contributions shall be effective on the date payment of Compensation by the Employer to him ceases, and shall remain in effect until payment of Compensation is resumed. (C) Withdrawal Suspension. An Active Participant who elects a withdrawal in accordance with Article X may have his Salary Deferral Agreement or payroll deduction order, as applicable, suspended on the date such election becomes effective. Such suspension shall remain in effect for the number of months specified therein. The Participant may elect to reactivate his Salary Deferral Agreement for Elective Deferral Contributions or payroll deduction order for Employee Contributions by filing a written notice thereof with the Plan Administrator. The Salary Deferral Agreement or payroll deduction order, as the case may be, shall be reactivated on the following January 1 or July 1 following the expiration of the suspension period described above. 33 4.13 DEDUCTIBILITY OF CONTRIBUTIONS. All contributions made to the Plan by the Employer are conditioned upon being currently deductible under Code section 404. 4.14 LIMITATION OF ELECTIVE DEFERRAL CONTRIBUTIONS. If the Plan Sponsor determines prior to the end of the Plan Year that the Plan may not satisfy the Actual Deferral Percentage Test for the Plan Year, the Plan Sponsor may require that the amount of Elective Deferral Contributions being allocated to the accounts of Highly Compensated Employees be reduced to the extent necessary to prevent Excess Contributions from being made to the Plan. Although the Employer may reduce the amount of Elective-Deferral Contributions that may be allocated to the Participant's Account of Highly Compensated Employees, the affected Employees shall continue to participate in the Plan. when the situation that resulted in the reduction of Elective Deferral Contributions ceases to exist, the Employer shall reinstate the amount of Elective Deferral Contributions elected by the Participant in the Salary Deferral Agreement to the fullest extent possible for all affected Participants in a nondiscriminatory manner. 4.15 LIMITATION OF MATCHING CONTRIBUTIONS AND EMPLOYEE CONTRIBUTIONS. if the Plan Sponsor determines prior to the end of the Plan Year that the Plan may not satisfy the Actual Contribution Percentage Test for the Plan Year, the Plan Sponsor may require that the amount of Matching Contributions or Employee Contributions, or both, being allocated to the Accounts of Highly Compensated Employees be reduced to the extent necessary to prevent Excess Aggregate Contributions from being made to the Plan. 4.16 CORRECTIVE DISTRIBUTION OF EXCESS CONTRIBUTIONS. (A) The Plan Sponsor may direct the Trustee to distribute Excess Contributions (and income allocable thereto) to the appropriate Highly Compensated Employee after the close of the Plan Year in which the Excess Contribution arose and within 12 months after the close of that Plan Year. (B) The income allocable to Excess Contributions is equal to the sun of the allocable gain or loss for the Plan Year and shall be determined as follows: (1) The income allocable to Excess Contributions is determined by multiplying the income for the Plan Year allocable to Deferral Percentage Amounts by a fraction. The numerator of the fraction is the Excess Contributions attributable to the Employee for the Plan Year. The denominator of the fraction is equal to the sum of: (A) The total account balance of the Employee attributable to Deferral Percentage Amounts as of the beginning of :he Plan Year; plus (B) The Employee's Deferral Percentage Amounts for the Plan Year. 34 (2) The allocable gain or loss for the period between the end of the Plan Year and the date of distribution shall not be taken into consideration when determining the income allocable to Excess Contributions. 35 (C) The amount of Excess Contributions to be distributed with respect to an Employee for a Plan Year shall be reduced by Excess Deferrals previously distributed to the Employee for the Employee's taxable year ending with or within the Plan Year. (D) The distribution of Excess Contributions made to the Family Members of a family group that was combined for purposes of determining a Highly Compensated Employee's Actual Deferral Ratio shall be allocated among the Family Members in proportion to the Elective Deferral Contribution (including any amounts required to be taken into account under subparagraphs (b)(1) and (b) (2) of Section 1.8 of the Plan) of each Family Member that is combined to determine the Actual Deferral Ratio. (E) A corrective distribution of Excess Contributions (and income) shall be made without regard to any Participant or spousal consent or any notice otherwise required under sections 411(a)(11) and 417 of the Code. (F) Any Matching Contributions or Qualified Matching Contributions that relate to the Excess Contribution being distributed shall be forfeited. The Matching Contribution so forfeited shall be in proportion to the applicable Employee's vested and nonvested interest in Matching Contributions under the Plan for the Plan !?ear in which the Excess Contribution arose. Forfeitures of !latching Contributions or Qualified Matching Contributions that relate to Excess Contributions shall be: (1) Applied to reduce Employer Contributions for the Plan Year in which the excess arose, but allocated as in (2) below, to the extent the excess exceeds Employer Contributions or the Employer has already contributed for such Plan Year. (2) Allocated, after all other Forfeitures under the Plan, to the Participant's Account of each Nonhighly Compensated Employee who made Elective Deferral Contributions during the Plan Year in which the excess arose in the ratio which each such Employee's Compensation for the Plan Year bears to the total Compensation of all such Employees for the Plan Year. The allocation shall be treated as a Matching Contribution for the purposes of the Plan. (G) In no case may the amount of Excess Contributions to be distributed for a Plan Year with respect to any Highly Compensated Employee exceed the amount of Elective Deferral Contributions made on behalf of the Highly Compensated Employee for the Plan Year. 36 (H) In the event of a complete termination of the Plan during the Plan Year in which an Excess Contribution arose, the corrective distribution must be made as soon as administratively feasible after the date of the termination of the Plan, but in no event later than 12 months after the date of termination. (I) Any distribution of less than the entire amount of Excess Contributions with respect to any Highly Compensated Employee shall be treated as a pro--rata distribution of Excess Contributions and allocable income or loss. 4.17 CORRECTION OF EXCESS AGGREGATE CONTRIBUTIONS. (A) Excess Aggregate Contributions may be corrected using one of the methods described in subparagraphs (1) and (2) below. The Plan Sponsor shall elect the method of correction to be used and shall apply such method to the correction of the Excess Annual Contribution for the Plan Year. (1) Method 1: (a) Any unmatched Employee Contributions (and income) allocated to the Plan for the Plan Year in which the Excess Aggregate Contribution arose shall be distributed to the appropriate Employee after the close of the Plan Year in which the Excess Aggregate Contribution arose and within 12 months after the close of that Plan Year. (b) If, after the application of subparagraph U) (A) above, an Excess Aggregate Contribution still exists, the remaining Excess Aggregate Contribution (and income) shall be forfeited, if forfeitable, or distributed on a pro--rata basis from the Employee's Account attributable to Contribution Percentage Amounts. The distribution or forfeiture shall be made after the close of the Plan Year in which the Excess Aggregate Contribution arose and within 12 months after the close of that Plan Year. Whether an amount is distributed or forfeited under this subparagraph (B) shall be determined based on the rules set forth in paragraph (b) of this section. (2) Method 2: (a) Any Matching Contributions (and Qualified Matching Contributions, to the extent not taken into account for purposes of the Actual Deferral Percentage Test), and income allocable thereto, shall be forfeited, if forfeitable, or distributed to the appropriate Highly Compensated Employee. The distribution or forfeiture shall be made after the close of the Plan Year in which 37 the Excess Aggregate Contribution arose and within 12 months after the close of that Plan Year. Whether an amount is forfeited or distributed shall be determined under the rules set forth in paragraph (b) of this section. (B) Determination of Distributable and Forfeitable Amounts. For purposes of paragraph (a) of this section: (1) An Excess Aggregate Contribution attributable to Employee Contributions, vested Matching Contributions, Qualified Matching Contributions (and, if: applicable, Qualified Nonelective Contributions and Elective Deferral Contributions) shall be distributed to the appropriate Highly Compensated Employee in accordance with the terms of this section. (2) An Excess Aggregate Contribution attributable to an Employee's nonvested Matching Contributions shall be forfeited in accordance with the terms of this section. (3) A Highly Compensated Employee's vested and nonvested interest in Matching Contributions (and income allocable thereto) attributable to Excess Aggregate Contributions shall be based on the proportion that represents the Employee's 'Vested interest in Matching Contributions under the Plan for the Plan Year in which the Excess Aggregate Contribution arose. (C) Forfeited Excess Aggregate Contributions. in accordance with paragraph (b) of this section, the amount that represents the Employee's nonvested interest in Matching Contributions (and income), and is attributable to Excess Aggregate Contributions, shall be forfeited. Forfeitures of Excess Aggregate Contributions shall be: (1) Applied to reduce Employer Contributions for the Plan Year in which the excess arose, but allocated as in (2) below, to the extent the excess exceeds Employer Contributions or the Employer has already contributed for such Plan Year. (2) Allocated, after all other Forfeitures under the Plan, to the Participant's Account of each Nonhighly Compensated Employee who made elective Deferral Contributions or Employee Contributions during the Plan Year in which the excess arose in the ratio which each such Employee's Compensation for the Plan Year bears to the total Compensation of all such Employees for the Plan Year. The allocation shall be treated as a Matching Contributions for the purposes of the Plan. (D) Income Allocable to Excess Aggregate Contributions. For purposes of this section, the income allocable to Excess Aggregate Contributions is equal to the sum of the allocable 38 gain or loss for the Plan Year, and shall be determined as follows: (1) The income allocable to Excess Aggregate Contributions is determined by multiplying the income for the Plan Year allocable to Contribution Percentage Amounts by a fraction. The numerator of the fraction is the Excess Aggregate Contributions for the Employee for the Plan Year. The denominator of the fraction is equal to the sum of: (A) the total account balance of the Employee attributable to Contribution Percentage Amounts as of the beginning of the Plan Year, plus (B) the Contribution Percentage Amounts for the Plan Year. (2) The allocable gain or loss for the period between the end of the Plan Year and the date of correction shall not be taken into consideration when determining the income allocable to Excess Aggregate Contributions. (E) The distribution of Excess Aggregate Contributions (and income) made to Family Members of a family group that was combined for purposes of determining a Highly Compensated Employee's Actual Contribution Ratio shall be allocated among Family Members in proportion to the Contribution Percentage Amounts (including any amounts required to be taken into account under subparagraphs (b)(1) and (b)(2) of Section 1.5 of the Plan) of each Family Member that are combined to determine the Actual Contribution Ratio. (F) In the event of a complete termination of the Plan during the Plan Year in which an Excess Aggregate Contribution arose, the corrective distribution or forfeiture shall be made as soon as administratively feasible after the date of termination of the Plan, but in no event later than 12 months after the date of termination. (G) If the entire account balance of a Highly Compensated Employee is distributed during the Plan Year in which the Excess Aggregate Contribution arose, the distribution shall be deemed to have been a corrective distribution of Excess Aggregate Contributions (and income) to the extent that a corrective distribution would otherwise have been required. (H) Any distribution of less than the entire amount of Excess Aggregate Contributions (and income) shall be treated as a pro--rate distribution of Excess Aggregate Contributions and allocable income or loss. (I) In no case may the amount of Excess Aggregate Contributions distributed to a Highly Compensated Employee exceed the amount of Employee Contributions and matching Contribution made on behalf of the Highly Compensated Employee for the Plan Year. 39 (J) A distribution of Excess Aggregate Contributions (and income) shall be made under this section without regard to any notice or consent otherwise required under sections 411 (a) (11) and 417 of the Code. 4.18 CORRECTIVE DISTRIBUTION OF EXCESS DEFERRALS. Notwithstanding any other provision of the Plan, Excess Deferrals, plus any income and minus any loss allocable thereto, may be distributed to any Participant to whose account Excess Deferrals were allocated for the individuals taxable year. Such a corrective (distribution shall be made in accordance with this section. (A) Correction of Excess Deferrals After Taxable Year. (1) Not later than the March 15 following the close of a Participant's taxable year, the Participant may notify the Plan of the amount of Excess Deferrals received by the Plan during that taxable year. The notification shall be in writing, shall specify the Participant's Excess Deferrals, and shall be accompanied by the Participant's written statement that if such amounts are not distributed, these amounts, when added to all other Elective Deferral Contributions made on behalf of the Participant during the taxable year, shall exceed the dollar limitation specified in section 402(g) of the Code. (2) The Participant is deemed to have notified the Plan of Excess Deferrals if, not later than the March 15 following the close of a Participant's taxable year, the Employer notifies the Plan on behalf of the Participant of the Excess Deferrals. Such Excess Deferrals shall be calculated by taking into account only Elective Deferral Contributions under the Plan and any other plans of the Employer. (3) Not later than the April 15 following the close of the taxable year, the Plan shall distribute to the Participant the amount of Excess Deferrals designated under subparagraphs (1) or (2) above. (B) Correction of Excess Deferrals During the Taxable Year. A Participant who has an Excess Deferral during a taxable year may receive a corrective distribution during the same year. Such a corrective distribution shall be made if: (1) The Participant designates the distribution as an Excess Deferral. The designation shall be made in the same manner as the notification described in subparagraph (a)(1) of this section. The Participant will be deemed to have designated the distribution as an Excess Deferral if the Employer makes the designation on behalf of the Participant to the extent that the Participant has Excess Deferrals for the 40 taxable year calculated by taking into account only Elective Deferral Contributions to the Plan and other plans of the Employer. (2) The corrective distribution is made after the date on which the Plan received the Excess Deferral. 41 (3) The Plan designates the distribution as a distribution of Excess Deferrals. (C) If the Participant provides the Employer with satisfactory evidence and written notice to demonstrate that all Elective Deferral Contributions by the participant in this Plan and any other qualified plan exceed the applicable limit under section 402 (g) of the Code for such individual's taxable year, then the Plan Administrator may (but is not required to) distribute sufficient Elective Deferral Contributions (not to exceed the amount of Elective Deferral Contributions actually contributed on behalf of the Participant to this Plan during the Participant's taxable year) from this Plan to allow the Participant to comply with the applicable limit. The evidence provided by the Participant must establish clearly the amount of Excess Deferrals. The Participant must present this evidence to the Plan Administrator by the March 1 following the end of the calendar year in which the Excess Deferrals occurred. (D) Income Allocable to Excess Deferrals. The income allocable to Excess Deferrals is equal to the sum of allocable gain or loss for the taxable year of the individual and shall be determined as follows: (1) The gain or loss allocable to Excess Deferrals is determined by multiplying the income for the taxable year allocable to Elective Deferral Contributions by a fraction. The numerator of the fraction is the Excess Deferrals by the Employee for the taxable year. The denominator of the fraction is equal to the sum of: (a) The total account balance of the Employee attributable to Elective Deferral Contributions as of the beginning of the tax year, plus (b) The Employee's Elective Deferral Contributions for the taxable year. (2) The income allocable to Excess Deferrals shall not include the allocable gain or loss for the period between the end of the taxable year and the date of distribution. (E) No Employee or Spousal Consent Required. A corrective distribution of Excess Deferrals (and income) shall be made without regard to any notice or consent otherwise required under sections 411(a)(11) and 417 of the Code. (F) Any Matching Contributions or Qualified Matching Contributions that relate to the Excess Deferral being distributed shall be forfeited. The Matching Contribution so forfeited shall be in proportion to the applicable Employee's vested and nonvested interest in matching Contributions under the Plan for the Plan Year in which the 42 Excess Deferral arose. Forfeitures of Matching Contributions or Qualified Matching Contributions that relate to Excess Deferrals shall be: (1) Applied to reduce Employer Contributions for the Plan Year in which the excess arose, but allocated as in (2) below, to the extent the excess exceeds Employer Contributions or the Employer has already contributed for such Plan Year. (2) Allocated, after all other Forfeitures under the Plan, to the Participant's Account of each Nonhighly Compensated Employee who made Elective Deferral Contributions during the Plan !Year in which the excess arose in the ratio which each such Employee's Compensation for the Plan Year bears to the total Compensation of all such Employees for the Plan Year. The allocation shall be treated as a Matching Contribution for the purposes of the Plan. 4.19 QUALIFIED CONTRIBUTIONS. In lieu of distributing Excess Contributions as provided in Section 4.16 of the Plan, or Excess Aggregate Contributions as provided in Section 4.17 of the Plan, the Employer may take the actions specified below in order to satisfy the Actual Deferral Percentage Test or the Actual Contribution Percentage Test, or both, pursuant to the regulations under the Code. (A) At the election of the Plan Sponsor, Qualified Nonelective Contributions or Qualified Matching Contributions, or both, may be taken into account as Elective Deferral Contributions for purposes of calculating the Actual Deferral Ratio of a Participant. The amount of Qualified Nonelective Contributions or Qualified Matching Contributions made under the terms of this Plan and taken into account as Elective Deferral Contributions for purposes of calculating the Actual Deferral Ratio, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be such Qualified Nonelective Contributions or Qualified Matching Contributions, or both, that are needed to meet the Actual Deferral Percentage Test. (B) At the election of the Plan Sponsor, Qualified Nonelective Contributions or Elective Deferral Contributions, or both, may be taken into account as Matching Contributions for purposes of calculating the Actual Contribution Ratio of a Participant. The amount of Qualified Nonelective Contributions or Elective Deferral Contributions made under the terms of this Plan and taken into account for purposes of calculating the Actual Contribution Ratio, subject to such other requirements as may be prescribed by the Secretary of the 43 Treasury, shall be such Qualified Nonelective Contributions or Elective Deferral Contributions, or both, that are needed to meet the Actual Contribution Percentage Test. (C) Any Qualified Nonelective Contribution, Qualified Matching Contribution, and Elective Deferral Contributions taken into account under paragraphs (a) or (b) must be allocated to the Employee's Account as of a date within the Plan Year in which the Excess Contribution or Excess Aggregate Contribution arose and must be paid to the Plan no later than the 12-month period immediately following the Plan Year to which the contribution relates. 4.20 MULTIPLE USE OF ALTERNATIVE LIMITATION. (A) Multiple use of the alternative limitation occurs if all of the conditions of this paragraph (a) are satisfied: (1) One or more Highly Compensated Employee of the Employer are eligible employees in both a cash or deferred arrangement subject to section 401(k) and a plan maintained by the Employer subject to section 401(m). (2) The sum of the Actual Deferral Percentage of the entire group of eligible Highly Compensated Employees under the arrangement: subject to section 401(k) and the actual Contribution Percentage of the entire group of eligible Highly Compensated Employees under the Plan subject to section 401(m) exceeds the aggregate limit of paragraph (c) of this section. (3) Actual Deferral Percentage of the entire group of eligible Highly Compensated Employees under -the arrangement subject to section 401(k) exceeds the amount described in section 401(k)(3)(A)(ii)(I). (4) The Actual Contribution Percentage of the entire group of eligible Highly Compensated Employees under the arrangement subject to section 401(m) exceeds the amount described in section 401(m)(2)(A)(i). (B) For purposes of this section, the aggregate limit is the greater of: (1) The sum of - (a) 1.25 times the greater of the relevant Actual Deferral Percentage, and (b) Two percentage points plus the lesser of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage. in no event, however, may this amount exceed twice the lesser of the relevant Actual Deferral Percentage or the Actual Contribution Percentage; or 44 (2) The sum of- (a) 1.25 times the lesser of the relevant Actual Deferral Percentage (Dr the relevant Actual Contribution Percentage, and (b) Two percentage points plus the greater of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage. In no event, however, may this amount exceed twice the greater of the relevant Actual Deferral Percentage or the relevant Actual Contribution Percentage. (C) For purposes of paragraph (b) of this section, the term "relevant Actual Deferral Percentage, means the Actual Deferral Percentage of the group of Nonhighly Compensated Employees under the arrangement subject to section 401(k) for the Plan Year, and the term "relevant Actual Contribution Percentage" means the Actual Contribution Percentage of the group of Nonhighly Compensated Employees eligible under the Plan subject to section 401(m) for the Plan Year beginning with or within the Plan Year of the arrangement subject to section 401(k). (D) The Actual Deferral Percentage and Actual Contribution Percentage of the group of eligible Highly Compensated Employees are determined after use of Qualified Nonelective Contributions and Qualified Matching Contributions to meet the requirements of the Actual Deferral Percentage Test and after use of Qualified Nonelective Contributions and Elective Deferral Contributions to meet the requirements of the Actual Contribution Percentage Test. The Actual Deferral Percentage and Actual Contribution Percentage of the group of Highly Compensated Employees are determined after any corrective distribution or forfeiture of Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions and after recharacterization of Excess Contributions required without regard to this section. Only plans and arrangements maintained by the Employer are taken into account under paragraph (b). If the Employer maintains two or more cash or deferred arrangements subject to section 401(k) that must be mandatorily disaggregated pursuant to section 401(k)-1(g)(11)(iii) multiple use is tested separately with respect to each plan. (E) If multiple use of the alternative limit occurs with respect to two or more plans or arrangements maintained by the Employer, it shall be corrected by reducing the Actual Contribution Percentage of Highly Compensated Employees in the manner described in paragraph (f) of this section. instead of making this reduction, the Employer may eliminate the multiple use of the alternative limitation by making Qualified Nonelective Contributions to the Plan. 45 (F) The amount of the reduction by which each Highly Compensated Employee's Actual Contribution Ratio is reduced shall be treated as an Excess Aggregate Contribution. The Actual Contribution Percentage of all Highly Compensated Employees under the plan subject to reduction shall be reduced so that there is no multiple use of the alternative limitation. 46 ARTICLE V LIMITATIONS ON ALLOCATIONS 5.1 LIMITATIONS ON ALLOCATIONS. Definitions - The following definitions are atypical terms which refer only to terms used in the Limitations on Allocations Sections of this Article V. (A) Annual Additions. The term Annual Additions shall mean the sum of the following amounts allocated on behalf of a Participant for a Limitation Year: (1) all contributions made by the Employer which shall include: * Elective Deferral Contributions, if any; * Matching Contributions, if any; * Qualified Matching Contributions, if any; * Nonelective Contributions, if any; * Qualified Nonelective Contributions, if any; (2) all Forfeitures, if any; (3) all Employee Contributions, if any. For the purposes of this Article, Excess Amounts reapplied under Section 5.2 (D) shall also be included as Annual Additions. Also, for the purposes of this Article, Employee Contributions are determined without regard to deductible employee contributions within the meaning of section 72(o) (5) of the Code. Amounts allocated, after March 31, 1984, to an individual medical account, as defined in Internal Revenue Code section 415(1) (2), which is part of a defined benefit plan maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Also, amounts derived from contributions paid or accrued attributable to post-retirement medical benefits allocated to the separate account of a key employee, as defined in Internal Revenue Code section 419A(d) (3), under a welfare benefit fund, as defined in internal Revenue Code section 419(e), maintained by the Employer, are treated as Annual Additions to a defined contribution plan. Contributions do not fail to be Annual Additions merely because they are Excess Deferrals, Excess Contributions or Excess Aggregate Contributions or merely because Excess Contributions or Excess Aggregate Contributions are corrected through distribution or recharacterization. 47 Excess Deferrals that are distributed in accordance with Section 4.18 of the Plan are not Annual Additions. Forfeited matching Contributions that are forfeited because the contributions to which they relate are treated as Excess Aggregate Contributions, Excess Contributions, or Excess Deferrals and that are reallocated to the Participant Accounts of other Participants for the Plan Year in which the forfeiture occurs, are treated as Annual Additions for the Participants to whose accounts they are reallocated and for the Participants from whose accounts they are forfeited. (B) Compensation. The term Compensation means wages within the meaning of section 3401(a) of the Code for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in section 3401(a) (2) of the Code). For Limitation Years beginning after December 31, 1991, for purposes of applying the limitations of this article, Compensation for a Limitation Year is the Compensation actually paid or made available during such Limitation Year. (C) Defined Contribution Dollar limitation. The term Defined Contribution Dollar Limitation shall mean $30,000 or, if greater, one-fourth of the defined benefit dollar limitation set forth in internal Revenue Code section 415(b) (1) as in effect for the Limitation Year. (D) Employer. The term Employer shall mean the Employer that adopts this Plan. in the case of a group of employers which constitutes a controlled group of corporations (as defined in internal Revenue Code section 414(b) as modified by section 415(h)), or which constitutes trades or business (whether or not incorporated) which are under common control (as defined in section 414(c) as modified by section 415(h)), or affiliated service groups (as defined in section 414(m)) of which the adopting Employer is a part, all such employers shall be considered a single Employer for purposes of applying the limitations of this Article. (E) Excess Amount. The term Excess Amount shall mean the excess of the Participant's Annual Additions for the Limitation Year over the Maximum Permissible Amount. (F) Limitation Year. The term Limitation Year shall mean the calendar year. (G) Maximum Permissible Amount. The term Maximum Permissible Amount shall mean the lesser of (1) the Defined Contribution Dollar Limitation, or (2) 25 % of the Participant's Compensation for the Limitation Year. 48 If a short Limitation Year is created because of an amendment changing the Limitation Year to a different period of 12 consecutive months, the Maximum Permissible Amount for the short Limitation Year will be the lesser of (1) the ]Defined Contribution Dollar Limitation multiplied by a fraction, the numerator of which is the number of months in the short Limitation Year, and the denominator of which is 12, or (2) 25% of the Participant's Compensation for the short Limitation Year. 5.2 LIMITATIONS ON ALLOCATIONS. If the Employer does not maintain any qualified plan in addition to this Plan: (A) The amount of Annual Additions which may be allocated under this Plan on a Participant's behalf for a Limitation Year shall not exceed the lesser of the Maximum Permissible Amount or any other limitation contained in this Plan. (B) Prior to the determination of the Participant's actual Compensation for a Limitation Year, the Maximum Permissible Amount may be determined on the basis of the Participant's estimated annual Compensation. Such Compensation shall be determined on a reasonable basis and shall be uniformly determined for all Participants similarly situated. Any employer contributions based on estimated annual Compensation shall be reduced by any Excess Amounts carried over from prior years. (C) As soon as is administratively feasible after the end of the Limitation Year, the Maximum Permissible Amount for such Limitation Year shall be determined on the basis of the Participant's actual Compensation for such Limitation Year. in the event a Participant separates from the Service of the Employer prior to the end of the Limitation Year, the Maximum Permissible Amount for such Participant shall hie determined prior to any distribution of his Participant's Account on the basis of his actual Compensation. Any Excess Amounts shall be disposed of in accordance with Section 5.2 (D). (D) If there is an Excess Amount with respect to a Participant for a; Limitation Year as a result (of a reasonable error in estimating the Participants annual compensation, an allocation of forfeitures, a reasonable error in determining the amount of elective deferrals (within the meaning of section 402(g) (3) of the Code) that may be made with respect to any individual under the limits of section 415 of the Code, or under other limited facts and circumstances which the Commissioner finds justified, such Excess Amount shall be disposed of as follows: (1) Any Employee Contributions (including earnings and losses thereon) shall be returned to the Participant, to the extent chat the return would reduce the Excess Amount. This distribution shall be made as soon as 49 administratively feasible after the Excess Amount is determined. Employee Contributions so returned shall be disregarded for purposes of the Actual Contribution Percentage Test. 50 (2) If, after the application of subparagraph (1) , an Excess Amount still exists, (excluding Elective Deferral Contributions) such Excess Amount shall be held unallocated in a suspense account for the Limitation Year and allocated and reallocated in the next Limitation Year to all Participants in the Plan. The excess amount must be used to reduce Employer Contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for all of the Participants in the Plan. For purposes of this subparagraph, the Excess Amount may not be distributed to Participants or former Participants. (3) If, after the application of subparagraph (2) an Excess Amount still exists, then the Participant's Elective Deferral Contributions (including earnings and losses thereon) allocated for the Limitation Year shall be returned to the Participant to the extent that an Excess Amount exists. This distribution shall be made as soon as administratively feasible after the Excess Amount is determined. Any Elective Deferral Contributions returned under this paragraph shall be disregarded for purposes of the Actual Deferral Percentage Test. (4) Alternatively, if after the application subparagraph (1) an Excess Amount still exists, the Plan Administrator may elect to dispose of the Excess Amount by applying the procedure in subparagraph (3) before applying the procedure in subparagraph (2) if the Plan Administrator makes this election, the Plan Administrator must apply it uniformly to all Participants in a Limitation Year. (5) If a suspense account is in existence at any time during a Limitation Year pursuant to this section, it will not participate in the allocation (of investment gains or losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts before any Employer Contributions or Employee Contributions which would constitute Annual Additions any be made to the Plan for that Limitation Year. 5.3 LIMITATIONS ON ALLOCATIONS. If the Employer maintains one or more defined contribution plans in addition to this Plan: (A) The amount of Annual Additions which may be allocated under this Plan on a Participant's behalf for a Limitation Year, shall not exceed the lesser of: (1) The Maximum Permissible Amount, reduced by the sum of any Annual Additions allocated to the Participant's 51 Account for the same Limitation Year under this Plan and such other defined contribution plan; or (2) Any other limitation contained in this Plan. Prior to the determination of the Participant's actual Compensation for the Limitation Year, the amounts referred to in Subsection (1) above may be determined on the basis of the Participant's estimated annual Compensation for such Limitation Year. Such estimated annual Compensation-shall be determined for all Participants similarly situated. Any contribution made by the Employer based on estimated annual Compensation shall be reduced by any Excess Amounts carried over from prior years, if applicable. (B) As soon as is administratively feasible after the end of the Limitation Year, the amounts referred to in Section 5.3 (A) shall be determined on the basis of the Participant's actual Compensation for such Limitation Year. (C) If amounts are contributed to a Participant's Account under this Plan on an allocation date which does not coincide with the allocation date(s) for all such other plans, and if a Participant's Annual Additions under this Plan and all such other plans result in an Excess Amount, such Excess Amount shall be deemed to have derived from those contributions last allocated. (D) If an Excess Amount was allocated to a Participant: on an allocation date of this Plan which coincides with an allocation date of another plan, the Excess Amount attributable to this Plan will be the product of (1) and (2) below: (1) The total Excess Amount allocated as of such date (including any amount which would have been allocated but for the limitations of internal Revenue Code section 415). (2) The ratio of (1) the amount allocated to the Participant as of such date under this Plan, divided by (2) the total amount allocated as of such date under all qualified defined contribution plans (determined without regard to the limitations of Internal Revenue Code section 415). (E) Any Excess Amounts attributed to this Plan shall be disposed of as provided in Section 5.2 (D). 5.4 LIMITATIONS ON ALLOCATIONS. If the Employer maintains a defined benefit plan in addition to this Plan: (A) If an individual is a Participant at any time in both this Plan and a defined benefit plan maintained by the Employer, 52 the sum of the Defined Benefit Plan Fraction and the Defined Contribution plan Fraction for any year may not exceed 1.O. in the event that the sum of the Defined Contribution Plan Fraction and the Defined Benefit Plan Fraction exceeds 1.0, the Defined Contribution Plan Fraction will be reduced until the sum of the Defined Contribution Plan Fraction and the Defined Benefit Plan Fraction does not exceed 1.O. If an individual was a Participant in this Plan or in any other defined contribution plan maintained by the Employer which was in existence on July 1, 1982, the numerator of the Defined Contribution Plan Fraction will be adjusted if the sum of the Defined Contribution Plan Fraction and the Defined Benefit Plan Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the Fractions over 1.0 times (2) the denominator of the Defined Contribution Plan Fraction, will be permanently subtracted from the numerator of the Defined Contribution Plan Fraction. The adjustment is calculated using the Fractions as they would be computed as of the later of the end of the last Limitation Year beginning before January 1, 1983 or June 30, 1983. This adjustment also will be made if at the end of the last Limitation Year beginning before January 1, 1984 the sum of the Fractions exceeds 1.0 because of accruals or additions that were made before the limitations of this Article became effective to any plans of the Employer in existence on July 1, 1982. In addition, if an individual was a Participant in this Plan or in any other defined contribution plan maintained by the Employer which was in existence on May 6, 1986, the numerator of the Defined Contribution Plan Fraction will be adjusted if the Employer's defined benefit plan was also in existence on May 6, 1986 and the sum of the Defined Contribution Plan Fraction and the Defined Benefit Plan Fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the Fractions over 1.0 times (2) the denominator of the Defined Contribution Plan Fraction, will be permanently subtracted from the numerator of the Defined Contribution Plan Fraction. This adjustment is calculated using the Fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987. In the event that a Participant's accrued benefit as of December 31, 1986 under the defined benefit plan exceeds the defined benefit dollar limitation set forth in Internal Revenue Code section 415(b) (1) , the amount of that accrued benefit shall be used in both the numerator and the denominator of the Defined Benefit Plan Fraction in making this adjustment. For purposes of this Section 5.4, all defined benefit plans of the Employer, whether or not terminated, will be treated as one defined benefit plan and all defined contribution 53 plans of the Employer, whether or not terminated, will be one defined contribution plan. (B) The Defined Benefit Plan Fraction for any year is a fraction, the numerator of which is the Participant's Projected Annual Benefit under the defined benefit plan (determined as of the close of the Limitation Year), and the denominator of which is the lesser of (1) or (2) below: (1) 1.25 times the dollar limitation in effect under Internal Revenue Code section 415(b) (1) (A) on the last day of the Limitation Year; or (2) 1.4 times the amount which may be taken into account under Internal Revenue Code section 415(b) (l) (B) with respect to such Participant for the Limitation year. Notwithstanding the above, if the Participant was a participant in one or more defined benefit plans maintained by the Employer which were in existence on July 1, 1982, the denominator of the Defined Benefit Plan Fraction will not be less than 125% of the sum of the annual benefits under such plans which the Participant had accrued as of the later of the end of the last Limitation Year beginning before January 1, 1983 or June 30, 1983. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Internal Revenue Code section 415 as in effect at the end of the 1982 Limitation Year. (C) A Participant's Projected Annual Benefit is equal to the annual benefit to which the Participant would be entitled under the terms of the defined benefit plan based upon the following assumptions: (1) The Participant will continue employment until reaching Normal Retirement Age as determined under the terms of the plan (or current age, if that is later); (2) The Participant's Compensation for the Limitation Year under consideration will remain the same until the date the Participant attains the age described in sub-division (1) of this subparagraph; and (3) All other relevant factors used to determine benefits under the plan for the Limitation Year under consideration will remain constant for all future Limitation Years. (D) The Defined Contribution Plan Fraction for any Limitation Year is a fraction, the numerator of which is the sum of the Annual Additions to the Participant's Accounts in such Limitation Year and for all prior Limitation Years, and the denominator of which is the lesser of (1) or (2) below for such Limitation Year and for all prior Limitation Years of 54 such Participant's employment (assuming for this purpose, that Internal Revenue Code section 415(c) had been in effect during such prior Limitation Years): (1) 1.25 times the dollar limitation in effect under Internal Revenue Code section 415(c) (1) (A) on the last day of the Limitation Year; or (2) 1.4 times the amount which may be taken into account under Internal Revenue Code section 415(c) (1) (B) with respect to such Participant for the Limitation Year. For the purposes of determining these Limitations on Allocations, any non-deductible employee contributions made under a defined benefit plan will be considered to be a separate defined contribution plan and will be considered to be part of the Annual Additions for the appropriate Limitation Year. Annual Additions for any Limitation Year beginning before January 1, 1987 shall not be recomputed to treat all Employee Contributions as Annual Additions. (E) Notwithstanding the foregoing, at the election of the Plan Administrator, in computing the Defined Contribution Plan Fraction with respect to any Plan Year ending after December 31, 1982, the denominator shall be an amount equal to the product of: (1) The denominator of the Defined Contribution Plan Fraction, computed in accordance with the rules in effect for the Plan Year ending in 1982; and (2) the transition fraction, which is a fraction: (a) the numerator of which is the lesser of: (i) $51,875, or (ii) 1.4 times 25% of the Compensation of the Participant for the Plan Year ending in 1981, and (b) the denominator of which is the lesser of: (i) $41,500, or (ii) 25% of the Compensation of the Participant for the Plan Year ending in 1981. 55 ARTICLE VI DISTRIBUTION OF BENEFITS 6.1 DISTRIBUTIONS IN GENERAL. Distributions from the Plan shall be made in the form of at single stun payment. The portion of a Participant's Vested Interest invested in whole shares of Company Stock shall be distributed in the form of such stock. The remainder of the Participant's Vested Interest (including fractional shares of Company Stock) shall be distributed in cash. Distributions and withdrawals from the Plan shall be made on the basis of the balance of the Participant's Account as of the valuation date prescribed in Section 13.8 preceding the event giving rise to the distribution or withdrawal, plus the amount of any subsequently, credited contributions. All distributions are subject to the provisions of Article VIII, Joint and Survivor Requirements. 6.2 TIMING OF DISTRIBUTIONS. if the value of a Participant's Vested interest exceeds (or at the time of any prior distribution exceeded) $3,500 and is immediately distributable (as defined in Section 8.5), the Participant must consent to the distribution before it is made. Instead of consenting to a distribution, the Participant may rake a written election to defer the distribution for a specified period of time ending no later than the Participant's Normal Retirement Age. Such election to defer shall be irrevocable. If the Participant does not consent to a distribution (Dr if no election to defer is made by the end of the second Plan Year following the Plan Year of the Participant's Termination of Employment pursuant to income Tax Regulation 1.411(a)-ll, all benefits shall be deferred to, and distribution shall be made as of the Participant's Normal Retirement Age. A Participant whose actual retirement date is on or after his Normal Retirement Age may not elect to defer distribution of his benefit beyond the date of his actual retirement. If the value of a Participant's Vested interest is $3,500 or less at the time it becomes payable, the distribution shall be made as soon as practicable following such Participant's Termination of Employment. Such a distribution may not be deferred. Unless the Participant elects otherwise, the payment of benefits under this Plan to the Participant shall begin not later than the 60th day after the close of the Plan Year in which the later of (a) or (b), below, occurs: (A) the date on which the Participant attains his Normal Retirement Age or age 62, if later; or 56 (B) the date on which the Participant terminates his Service (including Termination of Employment, death or Disability) with the Employer. Notwithstanding the foregoing, the failure of a Participant and spouse, if required, to consent to a distribution while a benefit is immediately distributable within the meaning of Section 8.5 shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy the above paragraph. 6.3 DISTRIBUTION LIMITATION. Elective Deferral Contributions, Qualified Nonelective Contributions and Qualified Matching Contributions, and income allocable to each, are not distributable to a Participant or a Beneficiary, in accordance with such Participant's or Beneficiary's election, (earlier than upon the Participant's Termination of Employment, death, or disability. Such amounts may also be distributed upon: (A) Termination of the Plan without the establishment or maintenance of a successor plan. For purposes of this paragraph, a successor plan is any other defined contribution plan maintained by the same employer. However, if fewer than two percent of the Employees who are eligible under the Plan at the time of its termination are or were eligible under another defined contribution plan at any time during the 24 month period beginning 12 months before the time of the termination, the other plan is not a successor plan. The term "defined contribution plan" means a plan that is a defined contribution plan as defined in section 414(i) of the Code, but does not include an employee stock ownership plan as defined in section 4975(e) or 409 of the Code or a simplified employee pension as defined in section 408(k) of the Code. A plan is a successor plan only if it exists at the time the Plan is terminated or within the period ending 12 months after distribution of all assets from the Plan. After March 31, 1988, a distribution may be made under this paragraph only if it is a lump sum distribution. The term "lump sum distribution" has the same meaning provided in section 402(e) (4) of the Code, without regard to subparagraphs (A)(i) through (iv), (B), and (H) of that section. (B) The disposition by the Employer to an unrelated corporation of substantially all the assets (within the meaning of section 409(b) (2) of the Code) used in the trade or business of the Employer if the Employer continues to maintain this Plan after the disposition. However, a distribution may be made under this paragraph only to an Employee who continues employment with the corporation acquiring such assets. 57 In addition, this requirement is satisfied only if the purchaser does not maintain the Plan after the disposition. A purchaser maintains the plan of the seller if it adopts the plan or otherwise becomes an employer whose employees accrue benefits under the Plan. A purchaser also maintains the Plan if the Plan is merged or consolidated with, or any assets or liabilities are transferred from the Plan to a plan maintained by the purchaser in a transaction subject to section 414 (1) (1) of the Code. A purchaser is not treated as maintaining the Plan merely because the Plan that it maintains accepts rollover contributions of amounts distributed by the Plan. For purposes of this paragraph, the sale of "substantially all" the assets used in a trade or business means the sale of at least 85 percent of the assets. After March 31, 1988, a distribution may be made under this paragraph only if it is a lump sum distribution. The term "lump sum distribution" has the same meaning provided in section 402(e) (4) of the Code, without regard to subparagraphs (A)(i) through (iv), (B), and (H) of that section. (C) The disposition by the Employer to an unrelated entity or individual of the Employer's interest in a subsidiary (within the meaning of section 409(d) (3) of the Code) if the Employer continues to maintain this Plan. However, a distribution may be made under this paragraph only to an Employee who continues employment with such subsidiary. In addition, this requirement is satisfied only if the purchaser does not maintain the Plan after the disposition. A purchaser maintains the plan of the seller if it adopts the plan or otherwise becomes an employer whose employees accrue benefits under the Plan. A purchaser also maintains the Plan if the Plan is merged or consolidated with, or any assets or liabilities are transferred from the Plan to a plan maintained by the purchaser in a transaction subject to section 414(1) (1) of the Code. A purchaser is not treated as maintaining the Plan merely because the Plan that it maintains accepts rollover contributions of amounts distributed by the Plan. After March 31, 1988, a distribution may be made under this paragraph only, if it is a lump sum distribution. The term "lump sum distribution" has the same meaning provided in section 402(e) (4) of the Code, without regard to subparagraphs (A)(i) through (iv), (B), and (H) of that section. (D) In the case of Elective Deferral Contributions only, the attainment of age 59-1/2, as described in Section 10.1 of the Plan. 58 (E) In the case of Elective Deferral Contributions only, the hardship of the Participant, as described in Section 10.2 of the Plan. 6.4 COMMENCEMENT OF DISTRIBUTIONS. Notwithstanding the provisions of the preceding Timing of Distributions Section, distribution to a Participant will commence no later than the date determined in accordance with the provisions of this Section. Distribution to a Participant must be made no later than the first day of April following the calendar year in which he attains age 70-1/2 unless the Participant attains age 70-1/2 before January 1, 1988 and was not a 5% owner in the Plan Year ending in the year in which the Participant attained age 66-1/2 or any later Plan Year. Distribution to such Participant must be made no later than the first day of April following the calendar year in which the Participant's Termination of Employment occurs. 6.5 DISTRIBUTION REQUIREMENTS. (A) Except as otherwise provided in Article VIII, the requirements of this Section shall apply on any distribution of a Participant's Accrued Benefit. (B) Limits on Settlement Options. Distributions will be made in a lump-sum. 6.6 NON-TRANSFERABLE. The Participant's right to any payments, benefits and refunds is not transferable and shall be free from the claims of all creditors to the fullest extent permitted by law. 6.7 DEATH DISTRIBUTION PROVISIONS. if a Participant dies prior to his commencement of benefits, his entire interest will be distributed no later than five years after such Participant's death. 6.8 ALTERNATE PAYEE SPECIAL DISTRIBUTION. Distributions pursuant to Section 16.8 may be made without regard to the age or employment status of the Participant. 59 ARTICLE VI-A DIRECT ROLLOVERS 6A.1 This Article applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a Distributee's election under this Article, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover, except as otherwise provided by the Employer's administrative procedures as permitted by regulations. In addition, a Distributee's election of a Direct Rollover shall be subject to the following requirements: (A) If the Distributee elects to have only a portion of an Eligible Rollover Distribution paid to an Eligible Retirement Plan in a Direct Rollover, that portion must be equal to at least $500. (B) If the entire amount of a Distributee's Eligible Rollover Distribution is $500 or less, the distribution may not be divided. Instead, the entire amount must either be paid to the Distributee or to an Eligible Retirement Plan in a Direct Rollover. (C) A Distributee may not elect a Direct Rollover if the Distributee's Eligible Rollover Distributions during a year are reasonably expected by the Plan Administrator to total less than $200 (or any lower minimum amount specified by the Plan Administrator). (D) A Distributee may not elect a Direct Rollover of an Offset Amount. (E) A Distributee's election to make or not make a Direct Rollover with respect to one payment in a series of periodic payments shall apply to all subsequent payments in the series, except that a Distributee shall be permitted at any time to change, with respect to subsequent payments in the series of periodic payments, a previous election to make or not make a Direct Rollover. A change of election shall be accomplished by the Distributee notifying the Plan Administrator of the change. Such notice must be in the form and manner prescribed by the Plan Administrator. 6A.2 Definitions. (A) Direct Rollover: A Direct Rollover is a payment by the plan to the Eligible Retirement Plan specified by the Distributee. (B) Distributee: A Distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's 60 spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are Distributees with regard to the interest of the spouse or former spouse. (C) Eligible Retirement Plan: An Eligible Retirement Plan is an individual retirement account described in section 408(a) of the code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the Distributee's Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or an individual retirement annuity. (D) Eligible Rollover Distribution: An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401 (a) (9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (E) Offset Amount: An Offset Amount is the amount by which a Participant' s Account is reduced to repay a loan from the Plan (including the enforcement of the Plan's security interest in the Participant's Account). 61 ARTICLE VII RETIREMENT BENEFITS 7.1 NORMAL RETIREMENT. An Active Participant who attains his Normal Retirement Age shall have a Vesting Percentage of 100%. If a Participant retires from the active Service of the Employer on his Normal Retirement Date, he shall be entitled to receive a distribution of the entire value of his Participant's Account. 7.2 EARLY RETIREMENT. A Participant who retires from the Service of the Employer on his Early Retirement Date shall have a Vesting Percentage of 100% and shall be entitled to receive a distribution of the entire value of his Participant's Account. 7.3 LATE RETIREMENT. A Participant may continue in the Service of the Employer after his Normal Retirement Age, and in such event he shall retire on his Late Retirement Date. Such Participant shall continue as a Participant under this Plan until such Late Retirement Date. The Participant shall have a Vesting Percentage of 100% and shall be entitled to receive a distribution of the entire value of his Participant's Account. 7.4 DISABILITY RETIREMENT. A Participant who retires from the Service of the Employer on account of Disability shall have a Vesting Percentage of 100% and shall be entitled to receive a distribution of the entire value of his Participant's Account. 62 ARTICLE VIII JOINT AND SURVIVOR REQUIREMENTS 8.1 GENERAL. The provisions of this Article shall take precedence over any conflicting provision in this Plan. 8.2 SPECIAL RULE FOR PROFIT SHARING PLANS. This Plan meets the following two conditions: (1) the Participant cannot elect payments in the form of a life annuity, and (2) on the death of the Participant, the Participant's vested interest will be paid to the Participant's surviving spouse, but if there is no surviving spouse, or, if the surviving spouse has already consented in a manner conforming to a Qualified Election, then to the Participant's designated Beneficiary. In addition, with the exception of Rollover Contributions as permitted under the terms of Article IV, assets which are not attributable to contributions made under !:he terms of this Plan may not be held hereunder and therefore this Plan will not be a direct or indirect transferee of a defined benefit plan, money purchase pension plan (including a target benefit plan), stock bonus, or profit sharing plan which would otherwise provide for a life Annuity form of payment to the Participant. 8.3 QUALIFIED ELECTION. A Participant may designate a Beneficiary other than his spouse if the spouse consents in a manner conforming to a Qualified Election. The waiver must be in writing and must be consented to by the Participant's spouse. The spouse's consent to a waiver must be in writing, must acknowledge the financial effect of the waiver, and must be witnessed by a member of the Administrative Committee or notary public. If the spouse's consent specifically acknowledges a nonspouse Beneficiary designated by the Participant and does not grant the Participant the right to make future changes to this designation without spousal consent, then the Participant may not subsequently designate another nonspouse Beneficiary without the further written consent of the spouse. Alternatively, the spouse's consent may expressly allow the Participant to change his-designation of a nonspouse Beneficiary without additional spousal consent. Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of the Administrative Committee that such written consent may not be obtained because there is no spouse or the spouse cannot be located, a waiver will be deemed a Qualified Election. Any consent necessary under this provision will be valid only with respect to the spouse who signs the consent, or in the event of a deemed Qualified Election, The designated spouse. Additionally, a revocation of a prior waiver may be made by a Participant without the consent of The spouse at any time before the commencement of benefits. The number of revocations shall not be limited. 8.4 SPOUSE (SURVIVING SPOUSE). A former spouse may be treated as the 63 spouse or surviving spouse to the extent provided under a Qualified Domestic Relations Order as described in Internal Revenue Code section 414(p). 8.5 CONSENT REQUIREMENTS. The Participant's consent shall not be required to the extent that a distribution is required to satisfy section 401(a) (9) or section 415 of the Code. An account balance is immediately distributable if any part of the account balance could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained, if not deceased) the later of the Normal Retirement Date or age 62. 64 ARTICLE IX TERMINATION OF EMPLOYMENT 9.1 DISTRIBUTION. As of a Participant's Termination of Employment, he shall be entitled to receive a distribution of his entire Vested Interest. Such distribution shall be further subject to the terms and conditions of Article VI. If at the time of his Termination of Employment the Participant is not 100% vested and does not take a distribution from the portion of his Vested interest that is attributable to employer contributions, the non-vested portion of his Participant's Account shall be placed in a separate account and will become a Forfeiture upon the date such terminated Participant incurs five consecutive One-Year Breaks in Service. If at the time of his Termination of Employment the Participant is not 100% vested and does take a distribution from the portion of his Vested Interest that is attributable to employer contributions, or if the Participant is 0% vested, the non-vested portion of his Participant's Account shall be placed in a separate account and will become a Forfeiture immediately. If a terminated Participant, whose separate account became a Forfeiture in accordance with the terms of the preceding paragraph, is later rehired by the Employer and re-enrolls in the Plan before incurring five consecutive One-Year Breaks in Service, then the amount of the Forfeiture shall be restored by the Employer. In addition, such rehired Participant shall be entitled to repay the distribution that was made at his Termination of Employment attributable to employer contributions. Such repayment must be made before the Participant has incurred five consecutive One-Year Breaks in Service following the date he received the distribution or five years after the Participant is re-employed by the Employer, whichever date is earlier. If at the time of his previous Termination of Employment the Participant was more than 0% vested, a Forfeiture shall be restored by the Employer for the Participant pursuant to the foregoing provisions of this Section 9.1 only if the Participant first repays the entire portion of his distribution attributable to employer contributions. Until the time a re-employed Participant repays the distribution made at his Termination of Employment in accordance with the preceding terms of this Section, or if the Participant does not repay such distribution or had not, taken a distribution, the Participant's vested or nonforfeitable portion of the separate account established in accordance with this Section shall, an any relevant time, be equal to an amount ("X") determined by the following formula: 65 X = P {AB + (R x D) - (R x D) For the purposes of applying this formula: P = The Participant's Vesting Percentage at the relevant time. AB = The account balance at the relevant time. R = The ratio of the account balance at the relevant time to the account balance after the distribution. D = The amount of the distribution. 9.2 NO FURTHER RIGHTS OR INTEREST. A Participant shall have no further interest in or any rights to any portion of his Participant's Account that becomes a Forfeiture due to his Termination of Employment once the Participant incurs five consecutive One-Year Breaks in Service in accordance with Article II. 9.3 APPLICATION OF FORFEITURES. Any Forfeiture arising in accordance with the provisions of Section 9.1 shall be used by the Employer to reduce and in lieu of the contributions made by the Employer next due under Article IV, or to pay Plan expenses, at the earliest opportunity after such Forfeiture becomes available. The provisions of the preceding sentence notwithstanding, in the event that a former Participant is rehired by the Employer and the Employer is required by the provisions of Section 9.1 of this Plan to restore the amount of a separate account that had been created upon such Participant's prior Termination of Employment and later forfeited, Forfeitures, if any, will first be used to restore such separate account to its value as of such Participant's prior Termination of Employment date. in the event that the available Forfeitures are not sufficient to make such restoration, the Employer will make an additional contribution sufficient to make such restoration. 66 ARTICLE X WITHDRAWALS 10.1 WITHDRAWAL AFTER AGE 59-1/2. A Participant who has attained age 59-1/2, may elect to withdraw from his Participant's Account as of any June 30 or December 31, an amount which is equal to any whole percentage (not exceeding 100%) of his Vested interest in his Participant's Account attributable to: * Elective Deferral Contributions, including earnings 10.2 WITHDRAWAL FOR SERIOUS FINANCIAL HARDSHIP. In the event a Participant suffers a Serious Financial Hardship, to meet such need such Participant may withdraw a portion of his Vested interest attributable to the following and in the following order: * Participant Contributions, excluding earnings * Employee Contributions, including earnings * Earnings on Participant Contributions * If such Participant has the number of Years of Service required to have a Vesting Percentage of 100%, Matching Contributions, including earnings, and Nonelective Contributions, including earnings * Elective Deferral Contributions, excluding earnings accrued after December 31, 1988, provided that the withdrawal is necessary to satisfy an immediate and heavy financial need in accordance with the following provisions: (A) The following are the only financial needs considered immediate and heavy for purposes of this section: (1) Expenses for medical care described in section 213(d) of the Code previously incurred by the Employee, the Employee's spouse, or any dependents of the Employee (as defined in section 152 of the Code) or necessary for these persons to obtain medical care described in section 213(d) of the Code; (2) Payment of tuition and related educational fees for the next 12 months of post-secondary, education for :he Employee, his or her spouse, children, or dependents (as defined in section 152 of the Code); (3) Costs directly related to the purchase of a principal residence for the Employee (excluding mortgage payments); or 67 (4) Payments necessary to prevent the eviction of the Employee from the Employee's principal residence or foreclosure on the mortgage on that residence. (B) A withdrawal will be considered as necessary to satisfy an immediate and heavy financial need of the Employee only if all of the following requirements are satisfied: (1) The hardship withdrawal is not in excess of the amount of the immediate and heavy financial need of the Employee. The amount of an immediate and heavy financial need may include the amounts necessary to apply any federal, state, or local income taxes or penalties reasonably anticipated to result from the distribution. (2) The Employee had obtained all distributions, other than hardship withdrawals, and all nontaxable (at the time of the loan) loans currently available under all plans maintained by the Employer. (3) The Employee is suspended from making Elective Deferral Contributions and Employee Contributions to the Plan for at least 12 months after receipt of the hardship withdrawal. In addition, the Employee must be prohibited under the terms of the plan or an otherwise enforceable agreement from making Elective Deferral Contributions and Employee Contributions to all other plans maintained by the Employer for at least 12 months after receipt of the hardship withdrawal. For this purpose, the phrase ,all other plans of the Employer means all qualified and nonqualified plans of deferred compensation maintained by the Employer. The phrase includes a stock option, stock purchase, or similar plan, or a cash or deferred arrangement that is part of a cafeteria plan within the meaning of section 125 of the Code. However, it does not include the mandatory employee contribution part of a defined benefit plan. It also does not include a health or welfare benefit plan, including one that is part of a cafeteria plan within the meaning of section 125 of the Code. (4) The Employee may not make Elective Deferral Contributions no the Plan for the Employee's taxable year immediately following the taxable year of the hardship withdrawal in excess of the applicable limit under section 402(g) of the Code for such taxable year less the amount of such Employee's Elective Deferral Contributions for the taxable year of the hardship withdrawal. In addition, all other plans maintained by the Employer must limit the Employee's Elective Deferral Contributions for the next taxable year to the applicable limit under section 402 (g) of the Code for 68 that year minus the Employee's Elective Deferral Contributions for the year of the hardship withdrawal. (C) The distributable amount is equal to the Employee's total Elective Deferral Contribution as of the date of withdrawal, reduced by the amount of previous withdrawals of Elective Deferral Contributions on account of hardship. The Employee's total Elective Deferral Contributions shall be increased by income allocable to Elective Deferral Contributions. in the case of income allocable to Elective Deferral Contributions, the distributable amount may only include amounts that were credited to the Employee's Account as of December 31, 1988. 10.3 WITHDRAWAL OF EMPLOYEE CONTRIBUTIONS. A Participant may elect to withdraw from his Participant's Account, as of any June 30 or December 31, an amount equal to any whole percentage (not exceeding 100%) of his Vested Interest in his Participant's Account attributable to the value of his Employee Contributions, including earnings. 10.4 WITHDRAWAL OF PARTICIPANT CONTRIBUTIONS. A Participant may elect to withdraw from his Participant's Account, as of any June 30 or December 31, an amount equal to any whole percentage (not exceeding 100%) of his Vested Interest in his Participant's Account attributable to the value of his Participant Contributions, including earnings. Any partial withdrawal from a Participant's Account attributable to the value of his Participant Contributions shall be made first from the Participant Contributions and then from any earnings on such contributions. 10.5 NOTIFICATION. The Participant shall notify the Administrator in writing of his election to make a withdrawal under the preceding provisions of this Article X. Any such election shall be effective as of the date specified in such notice, which date must be at least 15 days after such notice is filed. Payment of the withdrawal shall be subject to the terms and conditions of Article VI. 10.6 NON-REPAYMENT. Withdrawals made in accordance with this Article X may not be repaid. 10.7 SUSPENSION OF CONTRIBUTIONS. if a Participant makes a withdrawal under the preceding provisions of this Article X no Employee Contributions or Elective Deferral Contributions shall be made by or on behalf of such Participant until the January 1 or July 1 coinciding with or next following the end of a period of 12 months commencing on the effective date of such withdrawal. 69 ARTICLE X-A LOANS 10A.1 LOANS TO PARTICIPANTS. The Plan Administrator may make a bonafide loan to a Participant, in an amount which, when added to the outstanding balance of all other loans to the Participant from all qualified plans of the Employer, does not exceed the least of: (1) $50,000 reduced by the excess of the Participant's highest outstanding loan balance during the 12 months preceding the date on which the loan is made over the outstanding loan balance on the date the new loan is made, (2) 50% of the Participant's Vested interest in his Participant's Account, or (3) the portion of the Participant's Vested interest not invested in Company Stock. The loan shall be made under such terms, security interest, and conditions as the' Plan Administrator deems appropriate, provided; however, that all loans granted hereunder: (A) are available to all Participants and Beneficiaries, who are parties in interest pursuant to section 3 (14) of ERISA, on a reasonably equivalent basis; (B) are not made available to Highly Compensated Employees on a basis greater than the basis made available to other Employees; (C) bear a reasonable rate of interest; (D) are adequately secured; (E) are made in accordance with and subject to all of the provisions of this Article. Any loan made to a Participant shall be allocated as an investment of such Participant's Account.. 10A.2 LOAN PROCEDURES. The Plan Administrator shall establish a written set of procedures, set forth in the summary plan description, by which all loans will be administered. Such rules, which are incorporated herein by reference, will include, but not be limited to, the following: (A) the person or persons authorized to administer the loan program, identified by name or position; (B) the loan application procedure; (C) the basis for approving or denying loans; (D) any limits on the types of loans permitted; (E) the procedure for determining a "reasonable" interest rate; 70 (F) acceptable collateral; (G) default conditions; and (H) steps which will be taken to preserve Plan assets in the event of default. 71 ARTICLE XI FIDUCIARY DUTIES AND RESPONSIBILITIES 11.1 GENERAL FIDUCIARY STANDARD OF CONDUCT. Each Fiduciary of the Plan shall discharge his duties hereunder solely in the interest of the Participants and their Beneficiaries and for the exclusive purpose of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan. Each Fiduciary shall act with the care, skill, prudence and diligence under the circumstances that a prudent man acting in a like capacity and familiar with such matters would use in conducting an enterprise of like character and with like aims, in accordance with the documents and instruments governing this Plan, insofar as such documents and instruments are consistent with this standard. 11.2 SERVICE IN MULTIPLE CAPACITIES. Any Person or group of persons may serve in more than one Fiduciary capacity with respect to this Plan. 11.3 LIMITATIONS ON FIDUCIARY LIABILITY. Nothing in this Plan shall be construed to prevent any Fiduciary from receiving any benefit to which he may be entitled as a Participant or Beneficiary in this Plan, so long as the benefit is computed and paid on a basis which is consistent with the terms of this Plan as applied to all other Participants and Beneficiaries. Nor shall this Plan be interpreted to prevent any Fiduciary from receiving any reasonable compensation for services rendered, or for the reimbursement of expenses properly and actually incurred in the performance of his duties with the Plan; except that no Person so serving who already receives full-time pay from-an Employer shall receive compensation from this Plan, except for reimbursement of expenses properly and actually incurred. 11.4 INVESTMENT MANAGER. When an Investment Manager has been appointed he is required to acknowledge in writing that he has undertaken a Fiduciary responsibility with respect to the Plan. 72 ARTICLE XII THE ADMINISTRATOR 12.1 DESIGNATION OF ADMINISTRATIVE COMMITTEE. An Administrative Committee composed of at least three individuals appointed by the Plan Sponsor shall act on behalf of the Administrator to administer the Plan. Each member of the Administrative Committee so appointed shall serve in such office until his death, resignation-or removal by the Plan Sponsor. The Plan Sponsor may remove any member of the Administrative Committee at any time by giving written notice thereof to the members of the Administrative Committee. Vacancies shall likewise be filled from time to time by the Plan Sponsor. The members of the Administrative Committee shall receive no remuneration from the Plan for their services as Administrative Committee members. 12.2 DUTIES AND AUTHORITY. The Administrator shall administer the Plan in a nondiscriminatory manner for the exclusive benefit of Participants and their Beneficiaries. The Administrator shall perform all such duties as are necessary to operate, administer, and manage the Plan in accordance with the terms thereof, including but not limited to the following: (A) To determine all questions relating to a Participant's coverage under the Plan; (B) To maintain all necessary records for the administration of the Plan; (C) To compute and authorize the payment of retirement income and other benefit payments to eligible Participants and Beneficiaries; (D) To interpret and construe the provisions of the Plan and to make regulations which are not inconsistent with the terms thereof; and (E) To advise or assist Participants regarding any rights, benefits, or elections available under the Plan. The Administrator shall take all such actions as are necessary to operate, administer, and manage the Plan as a retirement program which is at all times in full compliance with any law or regulation affecting this Plan. The Administrator may allocate certain specified duties of plan administration co an individual or group of individuals who, with respect to such duties, shall have all reasonable powers necessary or appropriate to accomplish them. 12.3 EXPENSES AND COMPENSATION. All expenses of administration may be paid out of the Trust fund unless paid by the Employer in the sole discretion of the Plan Sponsor. Such expenses shall include 73 any expenses incident to the functioning of the Administrator, including, but not limited to, fees of accountants, counsel, and other specialists and their agents, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust fund. However, the Employer may reimburse the Trust fund for any administration expense incurred. Any administration expense paid to the Trust fund as a reimbursement shall not be considered an employer contribution. 12.4 INFORMATION FROM EMPLOYER. To enable the Administrator to perform his functions, the Employer shall supply full and timely information to the Administrator on all matters relating to this Plan as the Administrator may require. 12.5 ADMINISTRATIVE COMMITTEE; MULTIPLE SIGNATURES. in the event that more than one person has been duly nominated to serve on the Administrative Committee and has signified in writing the acceptance of such designation, the signatures of one or more persons may be accepted by an interested party as conclusive evidence that the Administrative Committee has duly authorized the action therein set forth and as representing the will of and binding upon the whole Administrative Committee. No person receiving such documents or written instructions and acting in good faith and in reliance thereon shall be obliged to ascertain the validity of such action under the terms of this Plan and Trust. The Administrative Committee shall act by a majority of its members at the time in office and such action may be taken either by a vote at a meeting or in writing without a meeting. 12.6 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. Any member of the Administrative Committee, may resign at any time by delivering to the Plan Sponsor a written notice of resignation, to take effect at a date specified therein, which shall not be less than 30 days after the delivery thereof, unless such notice shall be waived. A member of the Administrative Committee may be removed with or without cause by the Plan Sponsor by delivery of written notice of removal, to take effect at a date specified therein, which shall be not less than 30 days after delivery thereof, unless such notice shall be waived. The Plan Sponsor, upon receipt of or giving notice of the resignation or removal of a member of the Administrative Committee, shall promptly designate a successor member who must signify acceptance of this position in writing. In the event no Administrative Committee is serving, the Administrator will function as the Administrative Committee until a new Administrative Committee has been appointed and has accepted such appointment. 12.7 INVESTMENT MANAGER. The Administrative Committee may appoint, in writing, an investment Manager or Managers to whom is delegated the authority to manage, acquire, invest or dispose of all or any part of the Trust assets. With regard to the assets entrusted to 74 his care, the Investment Manager shall provide written instructions and directions to the Trustee, who shall in turn be entitled to rely upon such written direction. This appointment and delegation shall be evidenced by a signed written agreement. 12.8 DELEGATION OF DUTIES. The Administrator shall have the power, to the extent permitted by law, to delegate the performance-of such Fiduciary and non-Fiduciary duties, responsibilities and functions as the Administrator shall deem advisable for the proper management and administration of the Plan in the best interests of the Participants and their Beneficiaries. 12.9 INDEMNITY OF ADMINISTRATIVE COMMITTEE. The Employer shall indemnify and hold harmless each member of the Administrative Committee against any claim, cost, expense (including attorneys' fees), judgment or liability (including any sum paid in settlement of a claim with the approval of the Plan Sponsor) arising out of any act or omission to act as a member of the Administrative Committee appointed under the Plan, except in the case of willful misconduct. 75 ARTICLE XIII PARTICIPANTS' RIGHTS 13.1 GENERAL RIGHTS OF PARTICIPANTS AND BENEFICIARIES. The Plan is established and the Trust assets are held for the exclusive purpose of providing benefits for such employees and their Beneficiaries as have qualified to participate under the terms of the Plan. 13.2 FILING A CLAIM FOR BENEFITS. A Participant or Beneficiary or the Employer acting in his behalf, shall notify the Administrator of a claim of benefits under the Plan. Such request shall be in writing to the Administrator and shall set forth the basis of such claim and shall authorize the Administrator to conduct such examinations as may be necessary to determine the validity of the claim and to take such steps as may be necessary to facilitate the payment of any benefits to which the Participant or Beneficiary may be entitled under the terms of the Plan. A decision by the Administrator shall be made promptly and not later than 90 days after the Administrator's receipt of the claim of benefits under the Plan, unless special circumstances require an extension of the time for processing, in which case a decision shall be rendered as soon as possible, but not later than 180 days after the initial receipt of the claim of benefits. 13.3 DENIAL OF CLAIM. Whenever a claim for benefits by any Participant or Beneficiary has been denied it, a Plan Administrator, a written notice, prepared in a manner calculated to be understood by the Participant, must be provided, setting forth (1) the specific reasons for the denial; (2) the specific reference to pertinent Plan provisions on which the denial is based; (3) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) an explanation of the Plan's claim review procedure. 13.4 REMEDIES AVAILABLE TO PARTICIPANTS. A Participant or Beneficiary may (1) request a review by a Named Fiduciary, other than the Administrator, upon written application to the Plan; (2) review pertinent Plan documents; and (3) submit issues and comments in writing to a Named Fiduciary. A Participant or Beneficiary shall have 60 days after receipt by the claimant of written notification of a denial of a claim to request review of a denied claim. A decision by a Named Fiduciary shall be made promptly and not later than 60 days after the Named Fiduciary's receipt of a request for review, unless special circumstances require an extension of the time for processing in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of a request for review. The decision on review by a Named Fiduciary shall be in writing and shall include specific reasons for the decision, written in a manner calculated 76 to be understood by the claimant, and specific references to the pertinent Plan provisions on which the decision is based. A Participant or Beneficiary shall be entitled, either in his own name or in conjunction with any other interested parties, to bring such actions in law or equity or to undertake such administrative actions or to seek such relief as may be necessary or appropriate to compel the disclosure of any required information, to enforce or protect his rights, to recover present benefits due to him or to clarify his rights to future benefits under the Plan. 13.5 LIMITATION OF RIGHTS. Participation hereunder shall not grant any Participant the right to be retained in the Service of the Employer or any other rights or interest in the Plan or Trust fund other than those specifically herein set forth. 13.6 PARTICIPANT CONTRIBUTIONS. Each Participant, regardless of his length of Service with the Employer, shall be fully vested (100%) at all times in any portion of his Participant's Account attributable to the following: * Employee Contributions * Participant Contributions * Rollover Contributions. 13.7 MERGERS OR TRANSFERS. in the case of any merger or consolidation with or transfer of assets or liabilities to any other qualified plan after September 2, 1974, the following conditions must be met: (A) The sum of the account balances in each plan shall equal the fair market value (determined as of the date of the merger or transfer as if the plans had then terminated) of the entire plan assets. (B) The assets of each plan shall be combined to form the assets of the plan as merged (or transferred). (C) Immediately after the merger (or transfer), each Participant in the plan merged (or transferred) shall have an account balance equal to the sum of the account balances the Participant had in the plans immediately prior to the merger (or transfer). (D) Immediately after the merger (or transfer) each Participant in the plan merged (or transferred) shall be entitled to the same optional benefit forms was entitled to immediately prior to the merger (or transfer). In the case of any merger or consolidation with or transfer of assets or liabilities to any defined benefit plan after September 2, 1974, one of the plans before such merger, consolidation, or transfer shall be converted into the other type of plan and 77 either the rules described above, applicable to the merger of two defined contribution plans, or the rules applicable to the merger of two defined benefit plans, as appropriate, shall be applied. 13.8 PARTICIPANT'S ACCOUNT AND VALUATION. A. Participant's Account shall be maintained on behalf of each Participant until such account is distributed in accordance with the terms of this Plan. As of the last day of each calendar month, each Participant's Account shall be adjusted for any earnings, gains, losses, contributions, withdrawals, loans, and expenses, attributable to such Plan Year, in order to obtain a new valuation of the Participant's Account. The Trustee with respect to Company Stock previously credited to a Participant's Account shall be credited to that account upon receipt by the Trustee. As of each valuation date prescribed above, the portion of each Participant's Account invested in Company Stock shall be credited with its proportionate share of the Company Stock (including fractional shares) purchased for the Trust during the valuation period then ended and charged with its proportionate share of the average cost of such Company Stock. The Trustee shall not be required to allocate or designate particular certificates for Company Stock to the respective Accounts but shall hold the certificates for all Company Stock in trust for the appropriate Accounts in proportion to their respective interests. in order to facilitate distributions from the Plan, the Administrator in its discretion may direct the Trustee at the end of any valuation period to purchase from or sell to any Account, at a price equal to the average cost of Company Stock purchased by the Trust during the valuation period then ended, such Company Stock or fractional shares thereof as may be necessary to make distributions. All Company Stock held in trust for the Plan shall be voted by the Trustee only when and as directed by the Administrative Committee. 13.9 INVESTMENT OF CONTRIBUTIONS. Each Participant shall have the exclusive authority to direct the investment of the following: * Elective Deferral Contributions * Employee Contributions * Rollover Contributions * Cash dividends received by the Trustee after the Effective Date with respect to Company Stock attributable to the investment of Elective Deferral Contributions, Employee Contributions, Participant Contributions and Rollover Contributions made to the Plan as of a date prior to the Effective Date. The Participant shall elect, by written notice to the Plan Administrator, to have a specified percentage invested in one or more investment fund(s) designated by the Administrative Committee, as long as the designated percentage for each fund is 78 a whole number, and the sum of the percentages allocated is equal to 100%. Such Investment Fund(s) shall not include Company Stock. Four times during a Plan Year, on January 1, April 1, July 1 and October 1, and on August 1, 1992, the Participant may change the amount of the contributions pursuant to the above paragraph to be invested in a particular investment fund, subject to the rules of the investment funds in which the Participant's Account is invested or is to be invested. The Plan Administrator shall provide each Participant with a form which the Participant may use to select among the investment funds designated by the Administrative Committee. All Employer Contributions allocated to Participants' Accounts (other than Elective Deferral Contributions) for Plan Years ending before January 1, 1993 and all cash dividends and other amounts attributable to such contributions shall be used by the Trustee as soon as practicable to purchase Company Stock from the Plan Sponsor at fair market value or in the open market. The preceding sentence to the contrary notwithstanding, unless the Board of Directors directs otherwise, (i) no Employer Contributions for Plan Years commencing after December 31, 1992 and no cash dividends or other amounts attributable to Employer Contributions and paid after December 31, 1992 shall be invested in Company Stock, and (ii) all such contributions, dividends and other amounts may be in-,rested by the Trustee in short term investments. 13.10 TRANSFERS BETWEEN INVESTMENT FUNDS. A Participant may designate the amount of the contributions pursuant to Section 13.9 above to be transferred between the investment funds designated by he Administrative Committee four times during the Plan Year, on January 1, April 1, July I and October 1, and on August 1, 1992. However, any Company Stock allocated to a Participant's Account shall not be subject to transfer to an investment fund. Notwithstanding the above, the transfer of amounts between investment funds shall be subject to the rules of the investment funds in which the Participant's Account is invested or is to be invested. 79 ARTICLE XIV AMENDMENT OR TERMINATION OF THE PLAN 14.1 AMENDMENT OF PLAN. The Plan Sponsor shall have the right from time to time to modify or amend, in whole or in part, any or all provisions of the Plan, provided that a Board of Directors, resolution pursuant to such modification or amendment shall first be adopted and provided further that the modification or amendment is signed by the Plan Sponsor and the Trustee. Upon any such modification or amendment the Administrator and the Trustee shall be furnished a copy thereof. No amendment shall deprive any Participant or Beneficiary of any Vested Interest hereunder. Any Participant having not less than three Years of Service shall be permitted to elect, in writing, to have his Vesting Percentage computed under the Plan without regard to such amendment. The period during which the election must be made by the Participant shall begin no later than the date the Plan Amendment is adopted and end no later than after the latest of the following dates: (A) The date which is 60 days after the day the amendment is adopted; or (B) The date which is 60 days after the day the amendment becomes effective; or (C) The date which is 60 days after the day the Participant is issued written notice of the amendment by the Employer or Administrator. Such written election by a Participant shall be made to the Administrator. No amendment to the Plan shall decrease a Participant's Account balance or eliminate an optional form of distribution. Notwithstanding the preceding sentence, a Participant's Account balance may be reduced T:C) the extent permitted under internal Revenue Code section 412(c)(8). Furthermore, no amendment to the Plan shall have he effect of decreasing a Participant's Vested interest determined without regard to such amendment as of the later of the date such amendment is adopted or the date it becomes effective. 14.2 CONDITIONS OF AMENDMENT. The Plan Sponsor shall not make any amendment which would cause the Plan to lose its status as a qualified plan within the meaning of section 401(a) of the Code. 14.3 TERMINATION OF THE PLAN. The Plan Sponsor intends to continue the Plan indefinitely for the benefit of its Employees, but reserves the right to terminate the Plan at any time by resolution of its Board of Directors. Upon such termination, 80 the liability of the Employer to make contributions hereunder shall terminate. 14.4 FULL VESTING. Upon the termination or partial termination of the Plan, or upon complete discontinuance of Employer contributions, the rights of all affected Participants in and to the amounts credited to each such Participant's Account shall be 10()% vested and nonforfeitable. 14.5 DISTRIBUTIONS UPON PLAN TERMINATION. If this Plan is terminated and the Employer does not maintain or establish another defined contribution plan, pursuant to Code section 401 (k) (10) (A) (i), each Participant shall receive a total distribution, in the form of a lump-sum distribution as defined in Code section 401 (k) (10) (B) (ii) , of his Participant's Account in, accordance with the terms and conditions of Article VI. However, if this Plan is terminated and the Employer does maintain or establish another defined contribution plan as discussed in the above paragraph, or if the Plan is only partially terminated, each Participant shall receive a total distribution of his Participant's Account, excluding any amounts attributable to Elective Deferral Contributions and contributions made by the Employer designated as 401(k) contributions in accordance with the terms and conditions of Article VI. In such a situation, any amounts in a Participant's Account attributable to Elective Deferral Contributions and contributions made by the Employer designated as 401(k) contributions may be distributed only upon the occurrence of an event described in Article VI. No Participant consent will be required for a distribution where no successor plan exists. However, if the Employer does maintain a successor plan, Participant consent is required for a distribution exceeding $3,500. The Participant's Account will be transferred to such successor plan if the required consents are not received. 14.6 APPLICATION OF FORFEITURES. Upon the termination of the Plan, any Forfeitures which have not been applied as of such termination to reduce the contribution made by the Employer shall be credited on a pro rata basis to the Participant's Account of the then Active Participants in the same manner as the last contribution made by the Employer under the Plan. 14.7 SUBSEQUENT UNFAVORABLE DETERMINATION. if the Plan Sponsor is notified subsequent to initial favorable qualification that the Plan is no longer qualified within the meaning of section 401(a) of the internal Revenue Code, or that the Trust is no longer entitled to exemption under the provisions of section 501 (a), and if the Plan Sponsor shall fail within a reasonable time to make any necessary changes in order that the Plan and/or Trust shall so qualify, the Participants' Accounts shall be fully vested and nonforfeitable and shall be disposed of as if the Plan had terminated, in the manner set forth in this Article XIV. 81 82 ARTICLE XV MISCELLANEOUS 15.1 NON-REVERSION. This Plan has been established by the Employer for the exclusive benefit of the Participants and their Beneficiaries. Except as otherwise provided in Sections 15.7 and 15.8, under no circumstances shall any funds contributed hereunder, at any time, revert to or be used by the Employer, nor shall any such funds or assets of any kind be used other than for the benefit of the Participants or their Beneficiaries. 15.2 GENDER AND NUMBER. When necessary to the meaning hereof, and except when otherwise indicated by the context, either the masculine or the neuter pronoun shall be deemed to include the masculine, the feminine, and the neuter, and the singular shall be deemed to include the plural. 15.3 REFERENCE TO THE CODE AND ERISA. Any reference to any section of the Internal Revenue Code, ERISA or to any other statute or law shall be deemed to include any successor law of similar import. 15.4 GOVERNING LAW. The Plan and Trust shall be governed and construed in accordance with the laws of the State of Texas except where superseded by law. 15.5 COMPLIANCE WITH THE CODE AND ERISA. This Plan is intended to comply with all requirements for qualification under the internal Revenue Code and ERISA, and if any provision hereof is subject to more than one interpretation or any term used herein is subject to more than one construction, such ambiguity shall be resolved in favor of that interpretation or construction which is consistent with the Plan being so qualified. If any provision of the Plan is held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions, and this Plan shall be construed and enforced as if such provision had not been included. 15.6 ON-ALIENATION. It is a condition of the Plan, and all rights of each Participant shall be subject thereto, that no right or interest of any Participant in the Plan shall be assignable or transferable in whole or in part, either directly or by operation of law or otherwise, including, but without limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no right or interest of any Participant in the Plan shall be liable for or subject to any obligation or liability of such Participant. The preceding sentence shall not preclude :he enforcement of a federal tax levy made pursuant to section 6331 of the Code or the collection by the United States on a judgement resulting from an unpaid tax assessment. 15.7 CONTRIBUTION RECAPTURE. Notwithstanding any other provisions of this Plan, (1) in the case of a contribution which is made by an Employer by a mistake of fact, Section 15.1 shall not prohibit the return of such contribution to the Employer within one year 83 after the payment of the contribution, and (2) if a contribution is conditioned upon the deductibility of the contribution under section 404 of the Code, then, to the extent the deduction is disallowed, Section 15.1 shall not prohibit the return to the Employer of such contribution (to the extent disallowed) within one year after the disallowance of the deduction. The amount which may be returned to the Employer is the excess of (1) the amount contributed over (2) the amount that would have been contributed had there not occurred a mistake of fact or a mistake in determining the deduction. Earnings attributable to the excess contribution may not be returned to the Employer, but losses attributable thereto must reduce the amount to be so returned. Furthermore, if the withdrawal of the amount attributable to the mistaken contribution would cause the balance of the individual account of any Participant to be reduced to less than the balance which would have been in the account had the mistaken amount not been contributed, then the amount to be returned to the Employer would have to be limited so as to avoid such reduction. 15.8 QUALIFIED DOMESTIC RELATIONS ORDERS. Notwithstanding any other provisions of this Plan, the Participant's Account may be segregated and distributed pursuant to a Qualified Domestic Relations order within the meaning of Code section 414 (p). The Plan Administrator shall establish procedures for determining if a Domestic Relations Order is qualified within the meaning of section 414(p). 84 ARTICLE XVI TOP HEAVY PROVISIONS 16.1 DEFINITIONS. The following definitions are atypical terms used only in this Article XVI. (A) Compensation. The term Compensation, whenever used in this Article XVI, means Compensation as defined in Article V of the Plan, but includes the amount of any elective contributions made by the Employer on the Employee's behalf to a cafeteria plan established in accordance with the provisions of Code section 125, a qualified cash or deferred arrangement in accordance with the provisions of Code section 402(a)(8) , a simplified employee pension plan in accordance with the provisions of Code section 402(h), or a tax sheltered annuity plan maintained in accordance with the provisions of Code section 403(b). (B) Key Employee. The term Key Employee means any Employee or former Employee (including deceased Employees) of the Employer who at any time during the Plan Year or the four preceding Plan Years was: (1) An officer of the Employer, but in no event if there are more than 500 Employees, shall more than 50 Employees be considered Key Employees. If there are less than 500 Employees, in no event shall the greater of three Employees or 10% of all Employees, be taken into account under this Subsection as Key Employees. The number of officers is limited by the terms of the preceding sentence, the Employees with the highest Compensation will be considered to be officers. In no event shall an officer whose annual Compensation is less than 50% of the dollar limitation in effect under Code section 415(b)(1)(A) as adjusted from time to time, be a Key Employee for any such Plan Year. In making a determination under this Subsection, Employees who have not completed six months of Service by the end of the applicable Plan Year, Employees who normally work less than 17-1/2 hours per week, Employees who normally work less than six months during a year, Employees who have not attained 21, and nonresident aliens who receive no earned income from U.S. sources, shall be excluded. Also excluded under the above paragraph are Employees who are covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement. Such Employees will be excluded only if retirement benefits were the subject of good faith bargaining, 90% 85 of the Employees of the Employer are covered by the agreement, and the Plan covers only Employees who are not covered by the agreement. (2) One of the 10 Employees who has annual Compensation greater than the amount in effect under Code section 415(c)(1)(A) and who owns (or is considered to own within the meaning of Code section 318, as modified by Code section 416(i)(1)(B)(iii)) both more than 1/2% interest and the largest interest in the Employer. If two or more Employees own equal interests in the Employer, the ranking of ownership share will be in descending order of such Employees' Compensation. if the Employer is other than a corporation, the term "interest" as used herein shall refer to capital or profits interest. (3) An Employee who owns (or is considered no own within the meaning of Code section 318, as modified by Code section 416(i)(1)(B)(iii)) more than 5% of the outstanding stock of the Employer or stock possessing more than 5% of the total combined voting power of all stock of the Employer. If the Employer is other than a corporation, an Employee who owns, or is considered to own, more than 5% of the capital or profits interest in the Employer. The determination of 5% ownership shall be made separately for each member of a controlled group of corporations (as defined in Code section 414(b)), or of a group of trades or businesses (whether or not incorporated) that are under common control (as defined in Code section 414(c)), or of an affiliated service group (as defined in Code section 414(m)). (4) An Employee who owns (or is considered to own within the meaning of Code section 318, as modified by Code section 416 (i) (1) (B) (iii) ) more than 1% of the outstanding stock of the Employer or stock possessing more than 1% of the total combined voting power of all stock of the Employer, and whose annual Compensation is more than $150,000. If the Employer is other than a corporation, an Employee who owns, or is considered to own, more than 1% of the capital or profits interest in the Employer, and whose annual Compensation is more than $150,000. For the purposes of paragraphs (2), (3) and (4) above, if an Employee's ownership interest changes during a given Plan Year, his ownership interest for that Plan Year is the largest interest owned at any time during the Plan Year. The Beneficiary of any deceased Employee who was a Key Employee shall be considered a Key Employee for the same period as the deceased Employee would have been so considered. 86 (C) Non-Key Employee. The term Non-Key Employee means any Employee or former Employee of the Employer who is not a Key Employee. The Beneficiary of any deceased Employee who is a Non-Key Employee shall be considered a Non-Key Employee for the same period as the deceased Employee would have been so considered. (D) Determination Date. The term Determination Date means, with respect to a Plan Year, the last day of the preceding Plan Year, or, in the case of the first Plan Year of a plan, the last day of the first Plan Year. (E) Valuation Date. The term Valuation Date means, with respect to a Plan Year, the last day of the preceding Plan Year and is the date on which Account Balances are valued for the purpose of determining the Plan's Top Heavy status. (F) Account Balance. The term Account Balance means the value of the Participant's Account standing to the credit of a Participant, a former Participant, or the Beneficiary of a former Participant, as the case may be, as of the Valuation Date. Such Account Balance shall include any contributions due as of the Determination Date and all distributions made to the Participant (or former Participant or Beneficiary, as the case may be) during the Plan Year or the preceding four Plan Years, except for distributions of Related Rollovers. However, the Account Balance shall not include any deductible Employee Contributions made pursuant to Code section 219 or Unrelated Rollovers made to the Plan after December 31, 1983. A Related Rollover is a Rollover Contribution or Transfer that either was not initiated by the Employee or was made to a plan maintained by the same Employer. An Unrelated Rollover is a Rollover Contribution or Transfer that was initiated by the Employee and was made from a plan maintained by one employer to a plan maintained by another employer. For purposes of this Subsection (F), the term Employer shall include all employers that are required to be aggregated in accordance with Code sections 414(b), (c) or (m). (G) Required Aggregation Group. The term Required Aggregation Group means all of the plans of the Employer which cover a Key Employee, including any such plan maintained by the Employer pursuant to the terms of a collective bargaining agreement, and each other plan of the Employer which enables any plan in which a Key Employee participates to satisfy the requirements of Code sections 401(a)(4) or 410. (H) Permissive Aggregation Group. The term Permissive Aggregation Group means all of the plans of the Employer which are included in the Required Aggregation Group plus 87 any plans of the Employer which provide comparable benefits to the benefits provided by the Plans in the Required Aggregation Group and are not included in the Required Aggregation Group, but which satisfy the requirements of Code sections 401(a)(4) and 410 when considered together with the Required Aggregation Group, including any plan maintained by the Employer pursuant to a collective bargaining agreement which does not include a Key Employee. (I) Top Heavy Plan. The Plan is Top Heavy if it meets the requirements of Section 16.2. (J) Super Top Heavy Plan. The Plan is Super Top Heavy if it meets the requirements of Section 16.3. (K) Terminated Plan. A plan shall be considered to be a Terminated Plan if it: (1) has been formally terminated; (2) has ceased crediting service for benefit accruals and vesting; or (3) has been or is distributing all plan assets to Participants (or Beneficiaries) as soon as administratively possible. With the exception of the Minimum Employer Contribution Requirements and the Minimum, Vesting Requirements, the Top Heavy provisions of this Article XVI will apply to any Terminated Plan which was maintained at any time during the five years ending on the Determination Daze. (L) Frozen Plan. A plan shall be considered to be a Frozen Plan if all benefit accruals have ceased but all assets have not been distributed to Participants or Beneficiaries. The Top Heavy provisions of this Article XVI will apply to any such Frozen Plan. 16.2 TOP HEAVY PLAN STATUS. This Plan shall be determined to be Top Heavy if, as of the Determination Date, the aggregate. of the Account Balances of Key Employees exceeds 60% of the aggregate of the Account Balances of all Employees covered by the Plan. The determination of whether the Plan is Top Heavy shall be made after aggregating all plans in the Required Aggregation Group, and after aggregating any other plans which are in the Permissive Aggregation Group, if such permissive aggregation thereby eliminates the Top Heavy status of any plan within such Required Aggregation Group. In determining whether this Plan is Top Heavy, the Account Balance of a former Key Employee to is now a Non-Key Employee will be disregarded. Likewise, for Plan Years beginning after December 31, 1984, the Account Balance of any Employee who has 88 not performed an Hour of Service during the five-year period ending on the Determination Date will be excluded. 16.3 SUPER TOP HEAVY PLAN STATUS. This Plan shall be determined to be Super Top Heavy if, as of the Determination Date, the Plan would meet the test specified in Section 16.2 above, if 90% were substituted for 60% in each place where it appears. The Plan may be permissively aggregated in order to avoid being Super Top Heavy. 16.4 TOP HEAVY-REQUIREMENTS. Notwithstanding anything in the Plan to the contrary, if the Plan is Top Heavy with respect to any Plan Year beginning after December 31, 1983, then the Plan shall meet the following requirements for such Plan Year: (A) Compensation Limit. The annual Compensation of each Participant taken into account under the Plan shall not exceed $200,000; however, such dollar limitation shall be adjusted to take into account any adjustments made by the Secretary of the Treasury or his delegate pursuant to Code section 416(d)(2). (B) Minimum Employer Contribution Requirements. A Minimum Employer Contribution of 3% of each Eligible Employee's Compensation will be made on behalf of each Eligible Employee in the Plan. If the actual Employer Contribution made or required to be made for Key Employees is less than 3%, the Minimum Employer Contribution required hereunder shall not exceed the percentage contribution made for the Key Employee for whom the percentage of Employer Contributions and Forfeitures relative to the first $200,000 of Compensation is the highest for the Plan Year after taking into account contributions or benefits under ocher qualified plans in the Plan's Required Aggregation Group. However, if a Participant in this Plan is also a participant in a defined benefit plan maintained by the Employer, such Participant shall receive the Top Heavy minimum benefit under the defined benefit plan in lieu of the Minimum Employer Contribution described herein. Such minimum benefit will be equal to the Participant's average yearly Compensation during his five highest-paid consecutive years, multiplied by the lesser of 2% per Year of Service or 20%. Compensation periods and Years of Service to be taken into account in the calculation of this benefit shall be subject to any limitations set forth in the defined benefit plan. For any Limitation Year in which this Plan is Top Heavy but not Super Top Heavy, the Minimum Employer Contribution shall be increased to 4% of each Eligible Employee's Compensation in order to preserve the use of the factor 1.25 in the denominators of the fractions described in Section 5.4(B)(1) and Section 5.4(D)(1). A Participant who receives the Top Heavy minimum benefit in lieu of the Minimum Employer Contribution shall receive an increased 89 minimum benefit equal to the Participant's average yearly Compensation during his 5 highest-paid consecutive years, multiplied by the lesser of 3% per Year of Service or 20% plus 1 percentage point (to a maximum of 10 percentage points) for each year that this Plan is maintained. Compensation periods and Years of Service to be taken into account in the calculation of this increased minimum benefit shall be subject to any limitations set forth in the defined benefit plan. For any Limitation Year in which this Plan is Super Top Heavy, the factor of 1.25 in the denominators of the fractions described in Sections 5.4(B)(1) and 5.4(D)(1) shall be reduced to 1.0. The Minimum Employer Contribution payable in such years shall be 3% of each Eligible. Employee's Compensation and the defined benefit Top Heavy minimum benefit shall be average Compensation multiplied by the lesser of 2% per Year of Service or 20%. Eligible Employees are all Non-Key Employees who are Participants in the Plan as of the last day of the Plan Year regardless of whether they had completed 1,000 Hours of Service during the Plan Year. Also included are Non-Key Employees who would have been Participants as of the last day of the Plan Year except: * The Employee's Compensation was below a required minimum level & semi or * The Employee chose not to make Elective Deferral Contributions when he was eligible to do so. Elective Deferral Contributions and Matching Contributions made for Key Employees shall be taken into account as Employer Contributions allocated to such Key Employees when determining whether a lower Minimum Employer Contribution is permissible for purposes of this section. However, Elective Deferral Contributions made by Non-Key Employees shall not be used towards satisfying the Minimum Employer Contribution required to be allocated to Non-Key Employees pursuant to this section. Matching Contributions made on behalf of Non-Key Employees may, at the option of the Employer, be used to satisfy the Minimum Employer Contribution requirement. However, for Plan Years beginning after December 31, 1988, to the extent that Matching Contributions are used for this purpose, they shall not be used to satisfy the Actual Contribution Percentage Test. (C) Minimum Vesting Requirements. The vesting provisions set forth in the definition of Vesting Percentage in Article I shall continue to apply whether or not the Plan is a Top Heavy Plan. Such vesting provisions satisfy the requirements of section 416(b) of the Code, as applicable to Top Heavy Plans. 90 ARTICLE XVII TRUST AGREEMENT 17.1 TRUST AND TRUSTEE. All of the contributions paid to the Trustee pursuant to the Plan, together with the income therefrom and the increments thereof, shall be held in trust by the Trustee under the terms and provisions of the separate trust agreement executed December 30, 1985, and as amended from time to time thereafter, between the Trustee and the Employer, a copy of which is incorporated herein by this reference for all purposes, establishing a Trust fund known as the Endevco, Inc. Employee Savings Trust for the exclusive benefit of the Participants and their Beneficiaries in accordance with the Plan. IN WITNESS WHEREOF, this amendment and restatement of the Plan has been executed this ________________day of ______________ 1994, to be effective as of July 1, 1991. Endevco, Inc. By:___________________________________________________ Title:________________________________________________ 91 EX-10.22 5 9TH AMND TO TERM LOAN EXHIBIT 10.22 [UNION BANK LETTERHEAD] April 26, 1993 Dubach Gas Company c/o Endevco, Inc. 8080 North Central Expressway Dallas, Texas 75206 Attention: Mr. Jack W. Young Executive Vice President Re: Ninth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement Gentlemen: We refer to the Amended and Restated Term Loan and Revolving Credit Agreement made as of July 26, 1991, as amended by the First Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of August 28, 1991, the Second Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 23, 1992, the Third Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1992, the Fourth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 22, 1992, the Fifth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of November 30, 1992, the Sixth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated January 29, 1993, the Seventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated February 22, 1993 and the Eighth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated March 22, 1993 (said Agreement, as so amended, herein called the "CREDIT AGREEMENT"), between Dubach Gas Company (the "COMPANY") and Union Bank (the "BANK"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. The Company and the Bank hereby agree that, effective as of the date first written above, the definition of "Working Capital Dubach Gas Company April 26, 1993 Page 2 Termination Date" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'WORKING CAPITAL TERMINATION DATE' means May 31, 1993 or any subsequent date to which the Bank may agree, in its sole discretion, to extend the Working Capital Commitment." On and after the effective date of this letter amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof" or words of like import referring to the Credit Agreement, and each reference in any Note, Security Document or other agreement or instrument to "the Credit Agreement," "thereunder," "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this letter amendment. The Credit Agreement, as amended by this letter amendment, is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. This letter amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter amendment. If you agree to the terms and provisions hereof, please evidence your agreement by executing and returning three counterparts of this letter amendment to the Bank. This letter amendment shall become effective as of the date first written above when and if the Bank receives (1) a fee of $10,416.75 and (2) consents hereto, in form and substance satisfactory to the Bank, executed by Endevco, Inc. and M-K-P Operating Company, as subordinated creditors. The Bank's execution of this letter amendment does not constitute, and shall not be deemed to be, a release or waiver of Dubach Gas Company April 26, 1993 Page 3 any Default or Event of Default that now exists or that hereafter may exist, and the Bank reserves all of its rights and remedies with respect to any such Defaults and Events of Default. Very truly yours, UNION BANK By: ________________________ Walter M. Roth Vice President By: ________________________ Name: ______________________ Title: _____________________ Agreed to on April 27, 1993: DUBACH GAS COMPANY By: ________________________ Jack W. Young Executive Vice President EX-10.23 6 10TH AMND TO TERM LOAN EXHIBIT 10.23 TENTH AMENDMENT TO AMENDED AND RESTATED TERM LOAN AND REVOLVING CREDIT AGREEMENT This Amendment, dated as of May 24, 1993, is entered into by DUBACH GAS COMPANY, a Texas corporation (the "COMPANY"), and UNION BANK, a California banking corporation (the "BANK"). RECITALS A. The Company and the Bank have entered into an Amended and Restated Term Loan and Revolving Credit Agreement dated as of July 26, 1991, as amended by a First Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of August 28, 1991, a Second Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 23, 1992, a Third Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1992, a Fourth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 22, 1992, a Fifth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of November 30, 1992, a Sixth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated January 29, 1993, a Seventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated February 22, 1993, an Eighth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated March 22, 1993 and a Ninth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated April 26, 1993 (said Loan and Credit Agreement, as so amended, herein called the "CREDIT AGREEMENT"). Terms defined in the Credit Agreement and not otherwise defined herein have the same respective meanings when used herein, and the rules of interpretation set forth in Section 1.3 of the Credit Agreement are incorporated herein by reference. B. The Company and the Bank have agreed to further amend the Credit Agreement as hereinafter set forth. SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. The Credit Agreement is, effective as of the date hereof and subject to satisfaction of the conditions precedent set forth in Section 2, hereby amended as follows: (a) Section 1.1 of the Credit Agreement is amended by deleting the definitions of "Alternate Borrowing Base" and "Alternate Borrowing Base Certificate." (b) The definition of "Borrowing Base" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'BORROWING BASE' means the sum of (a) 100% of (i) all cash held in bank accounts pledged to the Bank pursuant to the Security Agreement and (ii) all Cash Equivalents held in the custody of, or otherwise controlled by, the Bank; (b) 95% of Eligible Accounts that are backed by letters of credit from banks acceptable to the Bank; (c) 85% of Eligible Accounts other than Eligible Accounts described in (b) above; (d) 80% of pre-sold Eligible Inventory, valued at the lower of cost and market value; and (e) 70% of Eligible Inventory, valued at the lower of cost and market value, other than Eligible Inventory described in (d) above; PROVIDED, HOWEVER, that the sum of the amounts determined pursuant to (d) and (e) above shall not exceed $4,000,000 for the purpose of calculating the Borrowing Base." (c) The definition of "Working Capital Termination Date" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'WORKING CAPITAL TERMINATION DATE' means June 30, 1993 or any subsequent date to which the Bank may agree, in its sole discretion, to extend the Working Capital Commitment." (d) Section 3.4 of the Credit Agreement is amended in full to read as follows: "Section 3.4 BORROWING BASE FEE. Notwithstanding Section 2.10(c), if the Company fails to prepay and/or pledge any amount required to be prepaid and/or pledged pursuant to the first sentence of Section 2.14, the Company shall pay a fee to the Bank on such amount from the date such amount is due until such amount is paid in full, at the rate PER ANNUM equal at all times to the sum of the Reference Rate in effect from time to time plus 2% PER ANNUM, payable on demand; PROVIDED, HOWEVER, that any fee charged pursuant to this section shall be for a minimum of 7 days. The acceptance by the Bank of any fees paid pursuant to this section shall not be deemed to be a waiver of, or to affect in any other way, the Bank's right to exercise, at any time in its sole discretion, all of its rights and remedies under this Agreement and the other Operative Agreements, including to declare an Event of Default, to deny further extensions of credit under this Agreement, to terminate the Commitment, to collect interest at the Default Rate, to accelerate the Company's obligations under this Agreement and the other Operative Agreements and/or to foreclose upon the collateral provided to the Bank under the Security Documents. Any decision by the Bank to refrain temporarily from exercising any of the above-mentioned rights and remedies 2 shall not constitute or be deemed to be a waiver of any of such rights and remedies." (e) Section 7.1(j) of the Credit Agreement is amended in full to read as follows: "(j) not later than Tuesday of every other week, commencing on May 25, 1993, a Borrowing Base Certificate covering the 14-day period ended on the previous Thursday and, promptly upon request by the Bank from time to time, additional Borrowing Base Certificates covering such periods as the Bank may request in its sole discretion; PROVIDED, HOWEVER, that, without any request by the Bank, the Company shall automatically deliver to the Bank, not later than the Tuesday after the Company has delivered a Borrowing Base Certificate showing that the Company is obligated to prepay Working Capital Loans and/or pledge cash collateral pursuant to the first sentence of Section 2.14, a Borrowing Base Certificate covering the 7-day period ended on the previous Thursday;". (f) Exhibit B to the Credit Agreement is amended in full by substituting therefor Exhibit B hereto. (g) Exhibit C to the Credit Agreement is deleted in its entirety. SECTION 2. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective as of the date first set forth above when the Bank has received a fee of $10,416.75 and all of the following documents, in form and substance satisfactory to the Bank: (a) a consent of Endevco and MKP with respect to this Amendment; (b) resolutions of the Board of Directors of the Company evidencing approval of this Amendment and the matters contemplated hereby, certified by the Secretary or an Assistant Secretary of the Company to be correct and complete and in full force and effect; (c) a certificate of the Secretary or an Assistant Secretary of the Company certifying the names, titles and true signatures of the officers of the Company authorized to sign this Amendment; (d) an amendment to the standstill agreement among Endevco and its creditors evidencing an extension of such agreement to at least June 30, 1993, certified by the Executive Vice President of the Company to be correct and complete and in full force and effect; and 3 (e) such other documents, instruments and opinions as the Bank may reasonably request. SECTION 3. REPRESENTATIONS AND WARRANTIES OF COMPANY. The Company represents and warrants as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Texas, is in good standing as a foreign corporation under the laws of the State of Louisiana and has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, this Amendment and the other Operative Agreements, as amended hereby. (b) The execution, delivery and performance by the Company of this Amendment and the other Operative Agreements, as amended hereby, have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the stockholders of the Company, (ii) violate any provision of any Governmental Rule currently in effect having applicability to the Company or of the charter documents or bylaws of the Company, (iii) result in a breach of or constitute a default under any indenture, any loan or credit agreement or any other agreement, lease or instrument to which the Company is a party or by which it or its properties may be bound or affected or (iv) result in, or require, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by the Company (other than in favor of the Bank); and the Company is not in default under any such Governmental Rule or any such indenture, agreement, lease or instrument. (c) No Governmental Action is required for the valid execution, delivery or performance by the Company of this Amendment or any other Operative Agreement, as amended hereby. (d) This Amendment and each other Operative Agreement, as amended hereby, constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms. (e) There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any of the properties of the Company before any Governmental Person or arbitrator that, if determined adversely to the Company, would be likely to have a material adverse effect on the financial condition, properties or operations of the Company. (f) The Security Documents constitute valid and perfected first-priority Liens on the Collateral covered 4 thereby, enforceable against all third parties in all jurisdictions, and secure the payment of all obligations of the Company under the Operative Agreements, as amended hereby; and the execution, delivery and performance of this Amendment do not adversely affect the Liens of the Security Documents. (g) The audited balance sheet of the Company as of December 31, 1992 and the related statements of income and retained earnings of the Company for the fiscal year then ended, and the unaudited balance sheet of the Company as of March 31, 1993 and the related statements of income and retained earnings and changes in financial position for the fiscal quarter then ended, copies of all of which have been furnished to the Bank, fairly present the financial condition of the Company as of such dates and the results of the operations of the Company for the fiscal periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied, and since March 31, 1993 there has been no material adverse change in such condition or operations. (h) No Default or Event of Default has occurred and is continuing or would be caused by the execution of this Amendment. SECTION 4. REFERENCE TO AND EFFECT ON OPERATIVE AGREEMENTS. (a) On and after the date hereof, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, and each reference in the other Operative Agreements to the "Credit Agreement," "thereunder," "thereof," "therein" or words of like import, shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended in accordance with this Amendment, the Credit Agreement and the other Operative Agreements shall remain in full force and effect and are hereby ratified and confirmed. Without limiting the generality of the foregoing, the Security Documents and all collateral described therein do and shall continue to secure the payment of all obligations of the Company under the Credit Agreement, as amended hereby, and under the other Operative Agreements. (c) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Bank under any of the Operative Agreements or constitute a waiver of any provision of any of the Operative Agreements. 5 SECTION 5. COSTS, EXPENSES AND TAXES. The Company agrees to pay on demand all costs and expenses of the Bank in connection with the preparation of this Amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees and out-of-pocket expenses of counsel for the Bank with respect thereto. In addition, the Company shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution of this Amendment and the other instruments and documents to be delivered hereunder, and the Company agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes, fees, costs or expenses. SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. DUBACH GAS COMPANY By: ________________________ Jack W. Young Executive Vice President UNION BANK By: ________________________ Walter M. Roth Vice President By: ________________________ Name: ______________________ Title: _____________________ 6 EX-10.24 7 11TH AMND TO TERM LOAN EXHIBIT 10.24 [UNION BANK LETTERHEAD] June 21, 1993 Dubach Gas Company c/o Endevco, Inc. 8080 North Central Expressway Dallas, Texas 75206 Attention: Mr. Jack W. Young Executive Vice President Re: Eleventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement Gentlemen: We refer to the Amended and Restated Term Loan and Revolving Credit Agreement made as of July 26, 1991, as amended by the First Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of August 28, 1991, the Second Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 23, 1992, the Third Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1992, the Fourth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 22, 1992, the Fifth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of November 30, 1992, the Sixth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated January 29, 1993, the Seventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated February 22, 1993 and the Eighth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated March 22, 1993, the Ninth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated April 26, 1993 and the Tenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of May 24, 1993 (said Agreement, as so amended, herein called the "CREDIT AGREEMENT"), between Dubach Gas Company (the "COMPANY") and Union Bank (the "BANK"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. Dubach Gas Company June 21, 1993 Page 2 The Company and the Bank hereby agree that, effective as of the date first written above (except as provided in paragraphs 1 and 3 below) and subject to satisfaction of the conditions precedent set forth below, the Credit Agreement is amended as follows: 1. Effective on July 1, 1993, the definitions of "Letter of Credit Commitment," "Working Capital Commitment" and "Working Capital Loan Commitment" in Section 1.1 of the Credit Agreement are amended by deleting the figure "$25,000,000" wherever it appears therein and substituting the figure $21,000,000" in each case. 2. The definition of "Working Capital Termination Date" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'WORKING CAPITAL TERMINATION DATE' means July 31, 1993 or any subsequent date to which the Bank may agree, in its sole discretion, to extend the Working Capital Commitment." 3. Effective on July 1, 1993, Section 2.14 of the Credit Agreement is amended by deleting the figure "$25,000,000" therein and substituting the figure "$21,000,000." 4. Exhibit B to the Credit Agreement is deleted and replaced by Exhibit B hereto. On and after the effective date of this letter amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Credit Agreement, and each reference in the other Operative Agreements to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this letter amendment. The Credit Agreement, as amended by this letter amendment, is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. This letter amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which Dubach Gas Company June 21, 1993 Page 3 taken together shall constitute one and the same letter amendment. If you agree to the terms and provisions hereof, please evidence your agreement by executing and returning three counterparts of this letter amendment to the Bank. This letter amendment shall become effective as of the date first written above (except as provided in paragraph 1 and 3 above) when and if the Bank receives (1) a fee of $10,416.75 and (2) consents hereto, in form and substance satisfactory to the Bank, executed by Endevco, Inc. and M-K-P Operating Company, as subordinated creditors. The Bank's execution of this letter amendment does not constitute, and shall not be deemed to be, a release or waiver of any Default or Event of Default that now exists or that hereafter may exist, and the Bank reserves all of its rights and remedies with respect to any such Defaults and Events of Default. Very truly yours, UNION BANK By: ________________________ Walter M. Roth Vice President By: ________________________ Name: ______________________ Title: _____________________ Dubach Gas Company June 21, 1993 Page 4 Agreed to on June 21, 1993: DUBACH GAS COMPANY By: ________________________ Jack W. Young Executive Vice President EX-10.25 8 12TH AMND TO TERM LOAN EXHIBIT 10.25 [UNION BANK LETTERHEAD] July 19, 1993 Dubach Gas Company c/o Endevco, Inc. 8080 North Central Expressway Dallas, Texas 75206 Attention: Mr. Jack W. Young Executive Vice President Re: Twelfth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement Gentlemen: We refer to the Amended and Restated Term Loan and Revolving Credit Agreement made as of July 26, 1991, as amended by the First Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of August 28, 1991, the Second Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 23, 1992, the Third Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1992, the Fourth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 22, 1992, the Fifth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of November 30, 1992, the Sixth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated January 29, 1993, the Seventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated February 22, 1993, the Eighth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated March 22, 1993, the Ninth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated April 26, 1993, the Tenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of May 24, 1993 and the Eleventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated June 21, 1993 (said Agreement, as so amended, herein called the "CREDIT AGREEMENT"), between Dubach Gas Company (the "COMPANY") and Union Bank (the "BANK"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. Dubach Gas Company July 19, 1993 Page 2 The Company and the Bank hereby agree that, effective as of August 1, 1993 (except as provided in paragraph 2 below) and subject to satisfaction of the conditions precedent set forth below, the Credit Agreement is amended as follows: 1. The definitions of "Letter of Credit Commitment," "Working Capital Commitment" and "Working Capital Loan Commitment" in Section 1.1 of the Credit Agreement are amended by deleting the figure "$21,000,000" wherever it appears therein and substituting the figure "$19,000,000" in each case. 2. Effective as of the date first written above, the definition of "Working Capital Termination Date" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'WORKING CAPITAL TERMINATION DATE' means August 31, 1993 or any subsequent date to which the Bank may agree, in its sole discretion, to extend the Working Capital Commitment." 3. Section 2.14 of the Credit Agreement is amended by deleting the figure "$21,000,000" therein and substituting the figure "$19,000,000." 4. Exhibit B to the Credit Agreement is deleted and replaced by Exhibit B hereto. On and after the effective date of this letter amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Credit Agreement, and each reference in the other Operative Agreements to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this letter amendment. The Credit Agreement, as amended by this letter amendment, is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. This letter amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter amendment. Dubach Gas Company July 19, 1993 Page 3 If you agree to the terms and provisions hereof, please evidence your agreement by executing and returning three counterparts of this letter amendment to the Bank. This letter amendment shall become effective as of August 1, 1993 (except as provided in paragraph 2 above) when and if the Bank receives (1) a fee of $8,750 and (2) consents hereto, in form and substance satisfactory to the Bank, executed by Endevco, Inc. and M-K-P Operating Company, as subordinated creditors. The Bank's execution of this letter amendment does not constitute, and shall not be deemed to be, a release or waiver of any Default or Event of Default that now exists or that hereafter may exist, and the Bank reserves all of its rights and remedies with respect to any such Defaults and Events of Default. Very truly yours, UNION BANK By: ________________________ Walter M. Roth Vice President By: ________________________ Name: ______________________ Title: _____________________ Agreed to on July 19, 1993: DUBACH GAS COMPANY By: ________________________ Jack W. Young Executive Vice President EX-10.26 9 13TH AMND TO TERM LOAN EXHIBIT 10.26 [UNION BANK LETTERHEAD] August 23, 1993 Dubach Gas Company c/o Endevco, Inc. 8080 North Central Expressway Dallas, Texas 75206 Attention: Mr. Jack W. Young Executive Vice President Re: Thirteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement Gentlemen: We refer to the Amended and Restated Term Loan and Revolving Credit Agreement made as of July 26, 1991, as amended by the First Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of August 28, 1991, the Second Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 23, 1992, the Third Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1992, the Fourth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 22, 1992, the Fifth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of November 30, 1992, the Sixth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated January 29, 1993, the Seventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated February 22, 1993, the Eighth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated March 22, 1993, the Ninth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated April 26, 1993, the Tenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of May 24, 1993, the Eleventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated June 21, 1993 and the Twelfth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 19, 1993 (said Agreement, as so amended, herein called the "CREDIT AGREEMENT"), between Dubach Gas Company (the "COMPANY") and Union Bank (the "BANK"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. Dubach Gas Company August 23, 1993 Page 2 The Company and the Bank hereby agree that, effective as of September 1, 1993 (except as provided in paragraph 2 below) and subject to satisfaction of the conditions precedent set forth below, the Credit Agreement is amended as follows: 1. The definitions of "Letter of Credit Commitment," "Working Capital Commitment" and "Working Capital Loan Commitment" in Section 1.1 of the Credit Agreement are amended by deleting the figure "$19,000,000" wherever it appears therein and substituting the figure "$16,000,000" in each case. 2. Effective as of the date first written above, the definition of "Working Capital Termination Date" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'WORKING CAPITAL TERMINATION DATE' means September 30, 1993 or any subsequent date to which the Bank may agree, in its sole discretion, to extend the Working Capital Commitment." 3. Section 2.14 of the Credit Agreement is amended by deleting the figure "$19,000,000" therein and substituting the figure "$16,000,000." 4. Exhibit B to the Credit Agreement is deleted and replaced by Exhibit B hereto. On and after the effective date of this letter amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Credit Agreement, and each reference in the other Operative Agreements to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this letter amendment. The Credit Agreement, as amended by this letter amendment, is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. This letter amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter amendment. Dubach Gas Company August 23, 1993 Page 3 If you agree to the terms and provisions hereof, please evidence your agreement by executing and returning three counterparts of this letter amendment to the Bank. This letter amendment shall become effective as of September 1, 1993 (except as provided in paragraph 2 above) when and if the Bank receives (1) a fee of $7,917 and (2) consents hereto, in form and substance satisfactory to the Bank, executed by Endevco, Inc. and M-K-P Operating Company, as subordinated creditors. The Bank's execution of this letter amendment does not constitute, and shall not be deemed to be, a release or waiver of any Default or Event of Default that now exists or that hereafter may exist, and the Bank reserves all of its rights and remedies with respect to any such Defaults and Events of Default. Very truly yours, UNION BANK By: ________________________ Walter M. Roth Vice President By: ________________________ Name: ______________________ Title: _____________________ Agreed to on August 23, 1993: DUBACH GAS COMPANY By: ________________________ Jack W. Young Executive Vice President EX-10.27 10 14TH AMND TO TERM LOAN EXHIBIT 10.27 [UNION BANK LETTERHEAD] September 21, 1993 Dubach Gas Company c/o Endevco, Inc. 8080 North Central Expressway Dallas, Texas 75206 Attention: Mr. Jack W. Young Executive Vice President Re: Fourteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement Gentlemen: We refer to the Amended and Restated Term Loan and Revolving Credit Agreement made as of July 26, 1991, as amended by the First Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of August 28, 1991, the Second Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 23, 1992, the Third Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1992, the Fourth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 22, 1992, the Fifth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of November 30, 1992, the Sixth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated January 29, 1993, the Seventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated February 22, 1993, the Eighth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated March 22, 1993, the Ninth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated April 26, 1993, the Tenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of May 24, 1993, the Eleventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated June 21, 1993, the Twelfth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 19, 1993 and the Thirteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated August 23, 1993 (said Agreement, as so amended, herein called the "CREDIT AGREEMENT"), between Dubach Gas Company (the "COMPANY") and Union Bank (the "BANK"). Unless otherwise defined Dubach Gas Company September 31, 1993 Page 2 herein, terms defined in the Credit Agreement are used herein as therein defined. The Borrower has informed the Bank that certain contracts for the sale of natural gas by the Borrower's affiliate Endevco Oil & Gas Company may be assigned or otherwise transferred to the Borrower and that, therefore, an expected further reduction of the Borrower's working capital needs has not occurred. Accordingly, the Borrower has requested that the Commitment not be further reduced at this time, and the Bank has agreed to the Borrower's request. The Company and the Bank wish, however, to make certain other changes to the Credit Agreement, and, accordingly, they hereby agree that, effective as of the date first written above and subject to satisfaction of the conditions precedent set forth below, the Credit Agreement is amended as follows: 1. The definitions of "Alternate Borrowing Base" and "Borrowing Base" in Section 1.1 of the Credit Agreement are amended by deleting the figure $4,000,000" wherever it appears theein and subtituting the figure "$3,000,000" in each case. 2. Effective as of the date first written above, the definition of "Working Capital Termination Date" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'WORKING CAPITAL TERMINATION DATE' means October 31, 1993 or any subsequent date to which the Bank may agree, in its sole discretion, to extend the Working Capital Commitment." 3. Exhibit B to the Credit Agreement is deleted and replaced by Exhibit B hereto. On and after the effective date of this letter amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Credit Agreement, and each reference in the other Operative Agreements to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this letter amendment. The Credit Agreement, as amended by this letter amendment, is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. Dubach Gas Company September 31, 1993 Page 3 This letter amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter amendment. If you agree to the terms and provisions hereof, please evidence your agreement by executing and returning three counterparts of this letter amendment to the Bank. This letter amendment shall become effective as of the date first written above when and if the Bank receives (1) a fee of $6,667 and (2) consents hereto, in form and substance satisfactory to the Bank, executed by Endevco, Inc. and M-K-P Operating Company, as subordinated creditors. The Bank's execution of this letter amendment does not constitute, and shall not be deemed to be, a release or waiver of any Default or Event of Default that now exists or that hereafter may exist, and the Bank reserves all of its rights and remedies with respect to any such Defaults and Events of Default. Very truly yours, UNION BANK By: ________________________ Walter M. Roth Vice President By: ________________________ Name: ______________________ Title: _____________________ Dubach Gas Company September 31, 1993 Page 4 Agreed to on September 21, 1993: DUBACH GAS COMPANY By: ________________________ Jack W. Young Executive Vice President EX-10.28 11 15TH AMND TO TERM LOAN EXHIBIT 10.28 [UNION BANK LETTERHEAD] October 28, 1993 Dubach Gas Company c/o Endevco, Inc. 8080 North Central Expressway Dallas, Texas 75206 Attention: Mr. Jack W. Young Executive Vice President Re: Fifteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement Gentlemen: We refer to the Amended and Restated Term Loan and Revolving Credit Agreement made as of July 26, 1991, as amended by the First Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of August 28, 1991, the Second Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 23, 1992, the Third Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1992, the Fourth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 22, 1992, the Fifth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of November 30, 1992, the Sixth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated January 29, 1993, the Seventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated February 22, 1993, the Eighth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated March 22, 1993, the Ninth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated April 26, 1993, the Tenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of May 24, 1993, the Eleventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated June 21, 1993, the Twelfth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 19, 1993, the Thirteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated August 23, 1993 and the Fourteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1993 (said Agreement, as so amended, herein called the Dubach Gas Company October 28, 1993 Page 2 "CREDIT AGREEMENT"), between Dubach Gas Company (the "COMPANY") and Union Bank (the "BANK"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. 1. The Company and the Bank hereby agree that, effective as of the date first written above and subject to satisfaction of the conditions precedent set forth below, the Credit Agreement is amended as follows: (a) The definitions of "Letter of Credit Commitment," "Working Capital Commitment" and "Working Capital Loan Commitment" in Section 1.1 of the Credit Agreement are amended by deleting the figure "$16,000,000" wherever it appears therein and substituting the figure "$13,000,000" in each case. (b) Section 1.1 of the Credit Agreement is amended by adding the following new definition in appropriate alphabetical order: "'EFFECTIVE DATE' means the date on which Endevco's plan of reorganization in Case No. 93-40806A in the United States Bankruptcy Court for the Eastern District of Texas, Sherman Division, becomes effective." (c) The definition of "Working Capital Loan Commitment" in Section 1.1 of the Credit Agreement is amended by adding the following new proviso at the end thereof: "; and FURTHER PROVIDED, HOWEVER, that the Working Capital Loan Commitment shall automatically terminate on the Effective Date." (d) The definition of "Working Capital Termination Date" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'WORKING CAPITAL TERMINATION DATE' means December 31, 1993 or any subsequent date to which the Bank may agree, in its sole discretion, to extend the Working Capital Commitment." (e) Section 2.1(c) of the Credit Agreement is amended by deleting the words "Working Capital Termination Date" therein Dubach Gas Company October 28, 1993 Page 3 and substituting the words "Effective Date." (f) Section 2.3 of the Credit Agreement is amended by (i) deleting the words "Term Loan Termination Date" in Section 2.3(a) and substituting the words "Effective Date," (ii) deleting the words "Term Loan Termination Date" in Section 2.3(b) and substituting the date "November 29, 1993" and (iii) deleting the words "Working Capital Termination Date" in Section 2.3(c) and substituting the words "Effective Date." (g) Section 2.14 of the Credit Agreement is amended by deleting the figure "$16,000,000" therein and substituting the figure "$13,000,000." (h) Section 8.1 of the Credit Agreement is amended by deleting the word "or" at the end of subsection (j), adding the word "or" at the end of subsection (k) and adding the following new subsection (l): "(l) Endevco does not deliver to the Bank on the Effective Date a guaranty of the Company's obligations under this Agreement and the other Operative Agreements, in form and substance satisfactory to the Bank;". (i) Exhibit B to the Credit Agreement is deleted and replaced by Exhibit B-1 hereto. 2. The Company and the Bank hereby agree that, effective as of the date first written above and subject to satisfaction of the conditions precedent set forth below, the Notes are amended by (a) deleting the words "Term Loan Termination Date" in the first sentence of the Acquisition Loan Note and substituting the words "Effective Date," (b) deleting the words "Term Loan Termination Date" in the first sentence of the Debt Reserve Loan Note and substituting the date "November 29, 1993" and (c) deleting the words "Working Capital Termination Date" in the first sentence of the Working Capital Loan Note and substituting the words "Effective Date." Upon the effectiveness of this paragraph 2, the Bank shall be authorized to endorse the following legend (using the appropriate bracketed words) on each of the Notes: "Pursuant to the Fifteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 28, 1993 between the Company and the Bank, the Dubach Gas Company October 28, 1993 Page 4 maturity date of this Note has been changed to [the 'Effective Date,' as defined in said Amendment] [November 29, 1993]." 3. The Company and the Bank hereby agree that, effective as of the Effective Date (as defined in paragraph 1(b) above), without any further action by the Company or the Bank, the Credit Agreement shall be amended as follows: (a) The definitions of "Letter of Credit Commitment" and "Working Capital Commitment" in Section 1.1 of the Credit Agreement shall be amended by deleting the figure "$13,000,000" wherever it appears therein and substituting the figure "$10,000,000" in each case. (b) Section 2.14 of the Credit Agreement shall be amended by deleting the figure "$13,000,000" therein and substituting the figure "$10,000,000." (c) Exhibit B to the Credit Agreement shall be deleted and replaced by Exhibit B-2 hereto. On and after the effective date of this letter amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Credit Agreement, and each reference in the other Operative Agreements to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this letter amendment. The Credit Agreement, as amended by this letter amendment, is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. This letter amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter amendment. If you agree to the terms and provisions hereof, please evidence your agreement by executing and returning three counterparts of this letter amendment to the Bank. This letter amendment shall become effective as of the date first written above when and if the Bank receives (1) a fee of $9,583; Dubach Gas Company October 28, 1993 Page 5 (2) consents hereto, in form and substance satisfactory to the Bank, executed by Endevco and M-K-P Operating Company, as subordinated creditors; and (3) a written agreement of Ray Davis, in form and substance satisfactory to the Bank, to cause Endevco to deliver to the Bank on the Effective Date a guaranty of the Company's obligations under the Credit Agreement and the other Operative Agreements, in form and substance satisfactory to the Bank. The Bank's execution of this letter amendment does not constitute, and shall not be deemed to be, a release or waiver of any Default or Event of Default that now exists or that hereafter may exist, and the Bank reserves all of its rights and remedies with respect to any such Defaults and Events of Default. Very truly yours, UNION BANK By: ________________________ Walter M. Roth Vice President By: ________________________ Name: ______________________ Title: _____________________ Agreed to as of October 28, 1993: DUBACH GAS COMPANY By: ________________________ Jack W. Young Executive Vice President EX-10.29 12 16TH AMND TO TERM LOAN EXHIBIT 10.29 [UNION BANK LETTERHEAD] December 21, 1993 Dubach Gas Company c/o Cornerstone Natural Gas, Inc. 8080 North Central Expressway Dallas, Texas 75206 Attention: Mr. Jack W. Young Executive Vice President Re: Sixteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement Gentlemen: We refer to the Amended and Restated Term Loan and Revolving Credit Agreement made as of July 26, 1991, as amended by the First Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of August 28, 1991, the Second Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 23, 1992, the Third Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1992, the Fourth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 22, 1992, the Fifth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of November 30, 1992, the Sixth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated January 29, 1993, the Seventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated February 22, 1993, the Eighth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated March 22, 1993, the Ninth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated April 26, 1993, the Tenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated as of May 24, 1993, the Eleventh Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated June 21, 1993, the Twelfth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated July 19, 1993, the Thirteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated August 23, 1993, the Fourteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated September 21, 1993 and the Fifteenth Amendment to Amended and Restated Term Loan and Revolving Credit Agreement dated October 28, 1993 (said Agreement, as so amended, herein called the "CREDIT AGREEMENT"), Dubach Gas Company December 21, 1993 Page 2 between Dubach Gas Company (the "COMPANY") and Union Bank (the "BANK"). Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. The Company and the Bank hereby agree that, effective as of the date first written above and subject to satisfaction of the conditions precedent set forth below, the Credit Agreement is amended as follows: 1. The definition of "Working Capital Termination Date" in Section 1.1 of the Credit Agreement is amended in full to read as follows: "'WORKING CAPITAL TERMINATION DATE' means February 28, 1994 or any subsequent date to which the Bank may agree, in its sole discretion, to extend the Working Capital Commitment." 2. Section 7.14 of the Credit Agreement is amended in full to read as follows: "Section 7.14 RESTRICTED PAYMENTS. The Company shall not make, pay, prepay, declare or provide any sum for Restricted Payments, including (a) any repayment to Cornerstone Natural Gas, Inc. (formerly known as "Endevco, Inc."; herein called "Cornerstone") or any other Affiliate of the Company of any loan, advance or other extension of credit to the Company by Cornerstone or such Affiliate and (b) any payment of any other amount owed by the Company to Cornerstone or any other Affiliate of the Company; PROVIDED, HOWEVER, that the Company may make any payments to Endevco Natural Gas required by the Operating Agreement." On and after the effective date of this letter amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import referring to the Credit Agreement, and each reference in the other Operative Agreements to "the Credit Agreement," "thereunder," "thereof," "therein" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended by this letter amendment. The Credit Agreement, as amended by this letter amendment, is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. Dubach Gas Company December 21, 1993 Page 3 This letter amendment may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which counterparts shall be an original and all of which taken together shall constitute one and the same letter amendment. If you agree to the terms and provisions hereof, please evidence your agreement by executing and returning three counterparts of this letter amendment to the Bank. This letter amendment shall become effective as of the date first written above when and if the Bank receives (1) a fee of $50,000; (2) a consent hereto, in form and substance satisfactory to the Bank, executed by Cornerstone Natural Gas, Inc., as guarantor and subordinated creditor; and (3) an amendment to the Intercreditor Amendment dated as of November 2, 1993 between the Bank and Bank of Oklahoma, National Association ("BOK"), in form and substance satisfactory to the Bank, duly executed by BOK. The Bank's execution of this letter amendment does not constitute, and shall not be deemed to be, a release or waiver of any Default or Event of Default that now exists or that hereafter may exist, and the Bank reserves all of its rights and remedies with respect to any such Defaults and Events of Default. Very truly yours, UNION BANK By: ________________________ Walter M. Roth Vice President By: ________________________ Name: ______________________ Title: _____________________ Dubach Gas Company December 21, 1993 Page 4 Agreed to as of December 21, 1993: DUBACH GAS COMPANY By: ________________________ Name: ______________________ Title: _____________________ EX-10.39 13 LETTER AGREEMENT Exhibit 10.39 ENERGY TRANSFER CORPORATION March 23, 1994 Cornerstone Natural Gas, Inc. 8080 N. Central Expressway, Suite 1200 Dallas, Texas 75206 Re: OPERATING AGREEMENT OF THE OLETHA GAS GATHERING SYSTEM LOCATED IN LIMESTONE COUNTY, TEXAS Gentlemen: This letter will outline the Agreement between Cornerstone Natural Gas, Inc., a Delaware corporation ("Cornerstone"), and Energy Transfer Corporation, a Texas corporation ("ETC"), on the management and operations of the Oletha Gas Gathering System ("System"). SCOPE: The scope of the day-to-day operations of the System shall include: 1) Measurement, calibration, and integration of all charts on the meters that are located at or near the wellhead of the wells connected to the System, in a manner that is customary to and consistent with industry standards, including the frequency of changing charts and the calibration of meters. 2) Lone Star Master Meter interconnect shall be maintained by Cornerstone. 3) Marketing of the gas shall be done by Cornerstone as well as gas control. Cornerstone shall not be liable for any imbalances that it causes whether or not it could have prevented it. Cornerstone will make its best effort to prevent any gas control penalties incurred for under or over deliveries of gas, but shall have no risk. ETC will approve or disapprove the marketing of the gas. 4) Scope does not include gas accounting, except gas imbalancing and invoicing. 5) Scope includes oversight of operation of Compression or Dehydration or other such equipment, or clearing of right-of-way but not the physical or mechanical operation. TERM: The term of this Agreement shall be one (1) year from June 1, 1993, and shall continue in effect month-to-month thereafter. Either party shall have thirty (30) days to give notice to cancel this Agreement at any time. P.O. BOX 1494, LONGVIEW TEXAS 75606 Cornerstone-Oletha Agreement March 23, 1994 Page two of two FEE: The fee shall be $5,000.00 a month for the services outlined in the Scope; Cornerstone shall bill ETC at the end of the month. HOOK-UPS/ADDITIONAL WELLS: Cornerstone will provide the necessary engineering and supervision for hooking up additional wells or meter taps. INSURANCE: ETC acknowledges that it is responsible for providing the necessary and customary property and casualty insurance on the System which Cornerstone may, but is not obligated to, request. REGULATORY MATTERS: ETC acknowledges that it is responsible for all filings and reporting, both Federal and State, regarding the operation of this System. Sincerely Yours, ENERGY TRANSFER CORPORATION, GENERAL PARTNER Kelcy L. Warren President & Chief Executive Officer Accepted and Agreed this 23rd day of March 1994 but effective as of June 1, 1993: CORNERSTONE NATURAL GAS, INC. By:_____________________________________ Name:__________________________________ Title:___________________________________ P.O. BOX 1494, LONGVIEW TEXAS 75606 EX-10.42 14 WARRANTS Exhibit 10.42 ________________________________________________________________________________ ________________________________________________________________________________ WARRANT CORNERSTONE NATURAL GAS, INC. (formerly Endevco, Inc.) a Delaware Corporation (the "Company") To Purchase Shares of the Company's Common Stock granted to ___________________ November 2, 1993 ________________________________________________________________________________ ________________________________________________________________________________ TABLE OF CONTENTS ARTICLE I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 EXERCISE OF WARRANT . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 MANNER OF EXERCISE. . . . . . . . . . . . . . . . . . . . . . 2 1.2 WHEN EXERCISE EFFECTIVE . . . . . . . . . . . . . . . . . . . 2 1.3 DELIVERY OF STOCK CERTIFICATES, ETC. . . . . . . . . . . . . 2 (a) CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . 2 (b) WARRANT. . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 COMPANY TO REAFFIRM OBLIGATIONS . . . . . . . . . . . . . . . 3 ARTICLE II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE . . . . . . . . . . . 3 2.1 GENERAL; WARRANT PRICE. . . . . . . . . . . . . . . . . . . . 3 2.2 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK . . . . . . . . 3 2.3 EXTRAORDINARY DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . 4 2.4 TREATMENT OF OPTIONS AND CONVERTIBLE SECURITIES . . . . . . . 4 2.5 TREATMENT OF STOCK DIVIDENDS, STOCK SPLITS, ETC.. . . . . . . 5 2.6 COMPUTATION OF CONSIDERATION. . . . . . . . . . . . . . . . . 5 (a) SHARES ACTUALLY ISSUED. . . . . . . . . . . . . . . . . . 5 (b) SHARES DEEMED ISSUED . . . . . . . . . . . . . . . . . . 6 (c) STOCK DIVIDENDS, ETC.. . . . . . . . . . . . . . . . . . 7 (d) SERVICES . . . . . . . . . . . . . . . . . . . . . . . . 7 2.7 ADJUSTMENTS FOR COMBINATIONS, ETC . . . . . . . . . . . . . . 7 2.8 DILUTION IN CASE OF OTHER SECURITIES. . . . . . . . . . . . . 7 2.9 APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . . . . 7 (a) VALUE BASED ON DIVIDENDS . . . . . . . . . . . . . . . . 7 (b) VALUE BASED ON LIQUIDATING DISTRIBUTIONS . . . . . . . . 7 (c) VALUE BASED ON DIVIDENDS AND LIQUIDATING DISTRI- BUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 8 (d) OTHER PROFITS. . . . . . . . . . . . . . . . . . . . . . 8 Section 2.10 MINIMUM ADJUSTMENT OF WARRANT PRICE . . . . . . . . . . . 8 ARTICLE III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 CONSOLIDATION, MERGER, ETC. . . . . . . . . . . . . . . . . . . . . . . 8 3.1 CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION, ETC. . 8 3.2 ASSUMPTION OF OBLIGATIONS . . . . . . . . . . . . . . . . . . 10 ARTICLE IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 OTHER PROVISIONS CONCERNING DILUTION. . . . . . . . . . . . . . . . . . 10 4.1 OTHER DILUTIVE EVENTS . . . . . . . . . . . . . . . . . . . . 10 4.2 NO DILUTION OR IMPAIRMENT . . . . . . . . . . . . . . . . . . 11 4.3 ACCOUNTANT'S AND COMPANY'S REPORT AS TO ADJUSTMENTS . . . . . 11 4.4 NOTICES OF CORPORATE ACTION . . . . . . . . . . . . . . . . . 12 i 4.5 AVAILABILITY OF INFORMATION . . . . . . . . . . . . . . . . . 13 4.6 RESERVATION OF STOCK, ETC . . . . . . . . . . . . . . . . . . 13 ARTICLE V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 RESTRICTIONS ON TRANSFER. . . . . . . . . . . . . . . . . . . . . . . . 13 5.1 RESTRICTIVE LEGENDS . . . . . . . . . . . . . . . . . . . . . 13 5.2 NOTICE OF PROPOSED TRANSFER; OPINIONS OF COUNSEL . . . . . . 14 5.3 TERMINATION OF RESTRICTIONS . . . . . . . . . . . . . . . . . 14 ARTICLE VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 OWNERSHIP, TRANSFER AND SUBSTITUTION OF WARRANTS. . . . . . . . . . . . 14 6.1 OWNERSHIP OF WARRANTS . . . . . . . . . . . . . . . . . . . . 14 6.2 OFFICE, TRANSFER AND EXCHANGE OF WARRANTS . . . . . . . . . . 14 (a) OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . . 14 (b) NEW WARRANT . . . . . . . . . . . . . . . . . . . . . . . 15 6.3 REPLACEMENT OF WARRANTS . . . . . . . . . . . . . . . . . . . 15 ARTICLE VII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.1 REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.2 NO RIGHTS OR LIABILITIES AS STOCKHOLDER . . . . . . . . . . . 19 8.3 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 8.4 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 19 8.5 EXPIRATION. . . . . . . . . . . . . . . . . . . . . . . . . . 19 ii This Warrant and any Shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, and may not be transferred, sold or otherwise disposed of in the absence of such registration or an exemption therefrom under such Act. This Warrant and such Shares may be transferred only in compliance with the conditions specified in this Warrant, a copy of which is available from the Company to holders of this Warrant. CORNERSTONE NATURAL GAS, INC. (formerly Endevco, Inc.) Warrant No. W-5 November 2, 1993 Cornerstone Natural Gas, Inc. (formerly Endevco, Inc.), (the "Company"), a Delaware corporation, for value received, hereby certifies that ________________, or registered assigns, is entitled to purchase from the Company ______________________________________ duly authorized, validly issued, fully paid and nonassessable shares of Common Stock, $0.10 par value (the "Common Stock") at any time or from time to time prior to 5:00 p.m., Houston time, on the Expiration Date, all subject to terms, conditions and adjustments set forth in this Warrant. This is one of the Warrants (the "Warrant") (such term to include any warrants issued in substitution therefor) originally issued pursuant to the Stock Purchase Agreement. The Warrants originally so issued evidence the right to purchase an aggregate of _______________________________________ shares of Common Stock subject to adjustment as provided herein. Certain capitalized terms used in this Warrant are defined in Article VII; unless otherwise specified, references to an "Exhibit" mean one of the exhibits attached to this Warrant, references to an "Article" mean one of the articles in this Warrant, and references to a "Section" mean one of the sections of this Warrant. ARTICLE I EXERCISE OF WARRANT Section 1.1 MANNER OF EXERCISE. This Warrant may be exercised by the holder hereof, in whole or in part, during normal business hours on any Business Day, by surrender of this Warrant to the Company at its office maintained pursuant to subdivision (a) of Suction 6.2, accompanied by a subscription in substantially the form attached to this Warrant (or a reasonable facsimile thereof) duly executed by such holder and accompanied by payment, in cash or by certified or official bank check payable to the order of the Company in the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect to any adjustment thereof) designated in such subscription by (b) the Initial Price, and such holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) determined as provided in Articles II through IV. Section 1.2 WHEN EXERCISE EFFECTIVE. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered to the Company as provided in Section 1.1, and at such time the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock (or Other Securities) shall be issuable upon such exercise as provided in Section 1.3 shall be deemed to have become the holder or holders of record thereof. Section 1.3 DELIVERY OF STOCK CERTIFICATES, ETC. As soon as practicable after each exercise of this Warrant, in whole or in part, and in any event within five Business Days thereafter, the Company, at its expense (including the payment by it of any applicable issue taxes), will cause to be issued in the name of and delivered to the holder hereof, subject to Article V, as such holder (upon payment by such holder of any applicable transfer taxes) may direct, the following: (a) CERTIFICATES. A certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the Market Price per share on the Business Day next preceding the date of such exercise. (b) WARRANT. In case such exercise is in part only, unless this Warrant has expired, a new Warrant or Warrants of like tenor dated the date hereof, calling in the aggregate on the face or faces thereof for the number of shares of Common 2 Stock equal (without giving effect to any adjustment thereof) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder upon such exercise as provided in Section 1.1. Section 1.4 COMPANY TO REAFFIRM OBLIGATIONS. The Company will, at the time of each exercise of this Warrant, upon the request of the holder hereof, acknowledge in writing its continuing obligation to afford to such holder all rights of the Common Stock or Other Securities issued upon such exercise to which such holder shall continue to be entitled after such exercise in accordance with the terms of this Warrant; provided, that if the holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such rights to such holder. ARTICLE II ADJUSTMENT OF COMMON STOCK ISSUABLE UPON EXERCISE Section 2.1 GENERAL; WARRANT PRICE. The number of shares of Common Stock which the holder of this Warrant shall be entitled to receive upon each exercise hereof shall be determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this Article II) be issuable upon such exercise, as designated by the holder hereof pursuant to Section 1.1, by a fraction (the "Dilution Factor") (a) the numerator of which is the Initial Price and (b) the denominator of which is the Warrant Price in effect at the effective time of such exercise (as provided in Section 1.2). The "Warrant Price" shall initially be the Initial Price, shall be adjusted and readjusted from time to time as provided in this Article II and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this Article II. Section 2.2 ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case the Company at any time or from time to time after the date hereof shall issue or sell Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to section 2.4 or 2.5) without consideration or for a consideration per share less than the Dilutive Basis, then, and in each such case, such Warrant Price shall be reduced, concurrently with such issue or sale, to the lower of the prices (calculated to the nearest cent) determined as follows: (a) by multiplying the Warrant Price then in existence by a fraction, the numerator of which shall be (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale plus (ii) the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of such Additional Shares of Common Stock so issued or sold would purchase at the Current Market Price, and 3 the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issue or sale, provided that, for the purposes of this Section 2.2, (i) immediately after any Additional Shares of Common Stock are deemed to have been issued pursuant to Section 2.4 or 2.5, such Additional Shares of Common Stock shall be deemed to be outstanding, and (ii) treasury shares shall not be deemed to be outstand- ing; and (b) by dividing (i) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issuance or sale multiplied times the then effective Warrant Price plus (2) the total consideration, if any, received and deemed received by the company upon such issue or sale, by (ii) the total number of shares of Common Stock outstanding and deemed outstanding immediately after such issue or sale. Section 2.3 EXTRAORDINARY DIVIDENDS AND DISTRIBUTIONS. If the Company at any time or from time to time after the date hereof shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or Other Securities or property or options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement) on the Common Stock, other than (a) a dividend payable in Additional Shares of Common Stock or (b) a dividend payable in cash or other property and declared out of the earned surplus of the Company as at the date thereof as increased by any credits (other than credits resulting from a revaluation of property) and decreased by any debits made thereto, then, and in each such case, the Warrant Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of any class of securities entitled to receive such dividend or distribution shall be reduced, effective as of the close of business on such record date, to a price (calculated to the nearest cent) determined by multiplying such Warrant Price by a fraction: (a) the numerator of which shall be the Current Market Price in effect on such record date or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading, less the amount of such dividend or distribution (as determined in good faith by the Board of Directors of the Company) applicable to one share of Common Stock, and (b) the denominator of which shall be the Current Market Price on such record date, or if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading. 4 Section 2.4 TREATMENT OF OPTIONS AND CONVERTIBLE SECURITIES. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities entitled to receive, any Options or Convertible Securities, then, and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options thereof or, the conversion or exchange of such Convertible Securities, or, in the case of Appreciation Rights, the number computed in accordance with Section 2.9, shall be deemed to be the number of Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading); provided that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 2.6) of such shares would be less than the Dilutive Basis in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), as the case may be; and provided, further, that no further adjustment of the Warrant Price shall be made upon the subsequent issue or sale of Convertible Securities or Additional Shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities. Section 2.5 TREATMENT OF STOCK DIVIDENDS, STOCK SPLITS, ETC. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (a) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (b) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. Section 2.6 COMPUTATION OF CONSIDERATION. For the purpose of Article II, the following shall be used to determine the consideration received or deemed received by the Company: 5 (a) SHARES ACTUALLY ISSUED. The consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration, (i) insofar as it consists of cash, be computed at the net amount of cash received by the Company, without deducting any expenses paid or incurred by the Company or any commissions or compensations paid or concessions or discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale, (ii) insofar as it consists of property (including securities) other than cash, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company, and (iii) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (i) and (ii) above, applicable to such Additional Shares of Common Stock, all as determined in good faith by the Board of Directors of the Company. (b) SHARES DEEMED ISSUED. Additional Shares of Common Stock deemed to have been issued pursuant to Section 2.4 relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing, (i) the total amount, if any, received and receivable by the Company as consideration for the issue, sale, grant, or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case comprising such consideration as provided in the foregoing subdivision (a), By (ii) the maximum number of Additional Shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein 6 for a subsequent adjustment of such number to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (c) STOCK DIVIDENDS, ETC. Additional Shares of Common Stock issued or deemed to have been issued pursuant to Section 2.5, relating to stock dividends, stock splits, etc., shall be deemed to have been issued for no consideration. (d) SERVICES. Additional Shares of Common Stock issued or sold or deemed issued or sold in exchange for services or the promise of future services shall be deemed to have been issued for no consideration. Section 2.7 ADJUSTMENTS FOR COMBINATIONS, ETC. In case the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Warrant Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. Section 2.8 DILUTION IN CASE OF OTHER SECURITIES. In case any Other Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of the Company (or any issuer of Other Securities or any other Person referred to in Article III) or to subscription, purchase or other acquisition pursuant to any options issued or granted by the Company (or any such other issuer or Person) for a consideration such as to dilute, on a basis consistent with the standards established in the other provisions of this Article II, the purchase rights granted by this Warrant, then, and in each such case, the computations, adjustments and readjustments provided for in this Article II with respect to the Warrant Price shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the exercise of the Warrants, so as to protect the holders of the Warrants against the effect of such dilution. Section 2.9 APPRECIATION RIGHTS. If the Company issues or sells Appreciation Rights, a number of Additional Shares of Common Stock shall be deemed issued for purposes of this Article II and shall be computed as follows: (a) VALUE BASED ON DIVIDENDS. If the Appreciation Rights entitle the holder thereof to distributions or payments based on or determined with reference to dividends paid or payable on Common Stock, the number of Additional Shares of Common Stock deemed issued will be the number of shares of Common Stock that would be required to be issued such that the holder thereof 7 would receive distribution payments equal to those paid or payable with respect to such Appreciation Rights. (b) VALUE BASED ON LIQUIDATING DISTRIBUTIONS. If the Appreciation Rights entitle the holder thereof to distributions or payments based on or determined with reference to liquidation distributions paid or payable on, or consideration received, in connection with the sale, exchange or transfer of Common Stock, the number of Additional Shares of Common Stock deemed issued will be the number of shares of Common Stock that would be required to be issued such that the holder thereof would receive distributions or payments equal to those paid or payable with respect to such Appreciation rights. (c) VALUE BASED ON DIVIDENDS AND LIQUIDATING DISTRIBUTIONS. If the Appreciation Rights entitle the holder thereof to distributions based on or determined with reference to either dividends paid or payable on Common Stock and liquidating distributions paid or payable or on consolidation received in connection with the sale, exchange or transfer of Common Stock, the number of Additional Shares of Common Stock deemed issued will be the greater of the amount computed under (a) or (b) above. (d) OTHER PROFITS. If the Appreciation Rights entitle the holder thereof to distributions based on or determined with reference to any other measure of profit of the Company, the number of Additional Shares of Common Stock deemed issued will be the value of the Appreciation Right, as determined in the good faith judgment of the Board of Directors, divided by the Current Market Price of the Common Stock on the date of issuance of the Appreciation Right. Section 2.10 MINIMUM ADJUSTMENT OF WARRANT PRICE. If the amount of any adjustment or readjustment of the Warrant Price required pursuant to this Article II would be less than 1% of the Warrant Price in effect at the time such adjustment or readjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment or readjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate at least 1% of such Warrant Price; provided that, upon the exercise of this Warrant, all adjustments and readjustments carried forward and not theretofore made up to and including the date of such exercise shall, with respect to the portion of this Warrant then exercised, be made to the nearest .01 of a cent. ARTICLE III CONSOLIDATION, MERGER, ETC. 8 Section 3.1 CONSOLIDATION, MERGER, SALE OF ASSETS, REORGANIZATION, ETC. (a) In case at any time the Company shall be a party to any transaction (including, without limitation, a merger, consolidation, sale of all or substantially all the Company's assets, liquidation, or recapitalization of the Common Stock) in which the previously outstanding Common Stock shall be changed into or exchanged for different securities of the Company or common stock or other securities of another corporation or interests in a noncorporate entity or other property (including cash) or any combination of any of the foregoing or in which the Common Stock ceases to be a publicly traded security either listed on the New York Stock Exchange or the American Stock Exchange or quoted by the NASDAQ National Market System or any successor thereto or comparable system (each such transaction being herein called the "Transaction", the date of consummation of the Transaction being herein called the "Consummation Date", the Company (in the case of a recapitalization of the Common Stock or any other such transaction in which the Company retains substantially all of its assets and survives as a corporation) or such other corporation or entity (in each other case) being herein called the "Acquiring Company"), then, as a condition of the consummation of the Transaction, lawful and adequate provisions shall be made so that the holder of this Warrant, upon the exercise thereof at any time on or after the Consummation Date, shall be entitled to receive, and this Warrant shall thereafter represent the right to receive, in lieu of the Common Stock issuable upon such exercise prior to the Consummation Date, the highest amount of securities or other property to which such holder would actually have been entitled as a shareholder upon the consummation of the Transaction if such holder had exercised this Warrant immediately prior thereto (subject to adjustments from and after the Consummation Date as nearly equivalent as possible to the adjustments provided for in Article II of this Warrant). (b) Notwithstanding the provisions of Section 3.1(a) hereof, if the Common Stock is to be converted or changed into, in whole or in part, securities of the Acquiring Company or any affiliate thereof and the issuer of such securities does not meet the following requirements: (i) it is a solvent corporation organized under the laws of any state of the United States of America having its common stock listed on the New York Stock Exchange or the American Stock Exchange or quoted by the NASDAQ National Market System or any successor thereto or comparable system, and such common stock continues to meet such requirements for such listing or quotation, and 9 (ii) it is required to file, and in each of its three fiscal years immediately preceding the Consummation Date has filed, reports with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, then, at the election of the holder of this Warrant pursuant to notice given to the Company on or before the later of (1) the 30th day following the Consummation Date, and (2) the 60th day following the date of delivery or mailing to such holder of the last proxy statement relating to the vote on the Transaction by the holders of the Common Stock, the holder of this Warrant shall be entitled to receive, within 30 days after such election or the Consummation Date, whichever is later, in full satisfaction of the exercise rights and all other rights afforded to such holder under this Warrant, an amount equal to the fair market value of such exercise rights as determined by an independent investment banker (with an established national reputation as a valuer of equity securities) selected by the Company, such fair market value to be determined with regard to all material relevant factors but without regard to the effects on such value of the Transaction. In the event that the holder of this Warrant elects to receive payment under this Section 3.1(b), the Company shall obtain, and deliver to the holder of this Warrant a copy of the determination of an independent investment banker (selected by the Company and reasonably satisfactory to the holder of this Warrant) necessary for the valuation under this Section 3.1(b) within 30 days after the Consummation Date of the Transaction in question. Section 3.2 ASSUMPTION OF OBLIGATIONS. Notwithstanding anything contained in this Warrant to the contrary, the Company will not effect any of the transactions described in paragraph 3.1(a) unless, prior to the consummation thereof, each Person (other than the Company) which may be required to deliver any stock, securities, cash or property upon the exercise of this warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the holder of this Warrant, (a) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company under this Warrant), and (b) the obligation to deliver to such holder such shares of stock, securities, cash or property as, in accordance with the foregoing provisions of this Article III, such holder may be entitled to receive. ARTICLE IV OTHER PROVISIONS CONCERNING DILUTION 10 Section 4.1 OTHER DILUTIVE EVENTS. In case any event shall occur as to which the provisions of Article II or III are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles of such sections, then, in each such case, the Company shall appoint a firm of independent certified public accountants of recognized national standing (which may be the regular auditors of the Company), which shall give their opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in Articles II and III, necessary to preserve, without dilution, the purchase rights represented by this Warrant. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the holder of this Warrant and shall make the adjustments described therein. Section 4.2 NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its certificate of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not permit the par value of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable thereof or upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock on the exercise of the Warrant from time to time outstanding, and (c) will not take any action which results in any adjustment of the Warrant Price if the total number of shares of Common Stock (or Other Securities) issuable after the action upon the exercise of the Warrant would exceed the total number of shares of Common Stock (or Other Securities) then authorized by the Company's certificate of incorporation and available for the purpose of issuance upon such exercise. Section 4.3 ACCOUNTANT'S AND COMPANY'S REPORT AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of this Warrant, the Company at its expense will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and cause independent certified public accountants of recognized national standing (which may be the regular auditors of the Company) selected by the Company to verify such computation (other than any computation of the fair value of property as determined in good faith by the Board of Directors of the Company) and prepare a report setting forth such adjustment or readjustment and showing in reasonable detail the method of calculation thereof and the facts upon which such adjustment or readjustment is based, 11 including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock issued or sold or deemed to have been issued, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Warrant Price in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by Article II) on account thereof. The Company shall also prepare and certify a report stating that any computation of the fair value of property by the Board of Directors was done in good faith by the Board as required herein. The Company will forthwith mail a copy of each such report to each holder of a Warrant and will, upon the written request at any time of any holder of a Warrant, furnish to such holder a like report setting forth the Warrant Price at the time in effect and showing in reasonable detail the manner in which it was calculated. The Company will also keep copies of all such reports at its office maintained pursuant to subdivision (a) of Section 6.2 and will cause the same to be available for inspection at such office during normal business hours by any holder of a Warrant or any prospective purchaser of a Warrant designated by the holder thereof. Section 4.4 NOTICES OF CORPORATE ACTION. In the event that any of the following occurs, (a) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a regular periodic dividend payable in cash out of earned surplus in an amount not exceeding the amount of the immediately preceding cash dividend for such period) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger involving the Company and any other Person or any transfer of all or substantially all the assets of the company to any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will mail to each holder of a Warrant a notice specifying (i) the date or expected date as of which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be 12 entitled to exchange their shares of Common Stock (or Other Securities) for the securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least 20 days prior to the date therein specified. Section 4.5 AVAILABILITY OF INFORMATION. The Company will cooperate with each holder of any Warrant or Restricted Security in supplying such information as may be reasonably requested by such holder to complete and file any information reporting forms presently or hereafter required by the Commission to report such holders beneficial ownership of Common Stock or Other Securities or as a condition to the availability of an exemption from the provisions of the Securities Act for the sale of any Restricted Securities. Section 4.6 RESERVATION OF STOCK, ETC. The Company will at all times reserve and keep available, solely for issuance and delivery upon exercise of the Warrants, the number of shares of Common Stock (or Other Securities) from time to time issuable upon exercise of the Warrant. All shares of Common Stock (or other Securities) issuable upon exercise of the Warrant shall be duly authorized and, when issued upon such exercise, shall be validly issued and, in the case of shares, fully paid and non-assessable with no liability on the part of the holders thereof. ARTICLE V RESTRICTIONS ON TRANSFER Section 5.1 RESTRICTIVE LEGENDS. Except as otherwise permitted by this Article V, each Warrant (including each Warrant issued upon the transfer of any Warrant) shall be stamped or otherwise imprinted with a legend in substantially the following form: "This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, and may not be transferred, sold or otherwise disposed of in the absence of such registration or an exemption therefrom under such Act. This Warrant and such Shares may be transferred only in compliance with the conditions specified in this Warrant." Except as otherwise permitted by this Article V, each certificate for Common Stock (or Other Securities) issued upon the exercise of any Warrant, and each certificate issued upon the transfer of any such Common Stock (or Other Securities), shall be stamped or otherwise imprinted with a legend in substantially the following form: 13 "The shares represented by this certificate have not been registered under the Securities Act of 1933 and may not be transferred in the absence of such registration or an exemption therefrom under such Act." Section 5.2 NOTICE OF PROPOSED TRANSFER; OPINIONS OF COUNSEL. Prior to any transfer of any Restricted Securities which are not registered under an effective registration statement under the Securities Act, the holder thereof, will give written notice to the Company of such holders intention to effect such transfer and to comply in all other respects with this Section 5.2. Each such notice (a) shall describe the manner and circumstances of the proposed transfer and (b) shall include an opinion of legal counsel addressed to the Company, in form and substance reasonably satisfactory to the Company, to the effect that such transfer does not violate the Securities Act of 1933 and applicable state securities laws. Section 5.3 TERMINATION OF RESTRICTIONS. The restrictions imposed by this Article V upon the transferability of Restricted Securities shall cease and terminate as to any particular Restricted Securities when such securities shall have been sold pursuant to an effective registration statement under the Securities Act or otherwise become freely transferable by the holder thereof. Whenever such restrictions shall cease and terminate as to any Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense (other than applicable transfer taxes, if any), new certificates representing the securities not bearing the applicable legends required by Section 5.1. ARTICLE VI OWNERSHIP, TRANSFER AND SUBSTITUTION OF WARRANTS Section 6.1 OWNERSHIP OF WARRANTS. The Company may treat the person in whose name any Warrant is registered on the register kept at the office of the Company maintained pursuant to subdivision (a) of Section 6.2 as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, except that, if and when any Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes, notwithstanding any notice to the contrary. Subject to Article V, a Warrant, if properly assigned, may be exercised by a new holder without a new Warrant first having been issued. Section 6.2 OFFICE, TRANSFER AND EXCHANGE OF WARRANTS. (a) OFFICE. The Company will maintain an office in where notices, presentations and demands in respect of this Warrant may be made upon it. Such office shall be maintained at until 14 such time as the Company shall notify each holder of the Warrant of any change of location of such office. (b) NEW WARRANT. Upon the surrender of any Warrant, properly endorsed, for registration of transfer or for exchange at the office of the Company maintained pursuant to subdivision (a) of this Section 6.2, the Company at its expense will (subject to compliance with Article V, if applicable) execute and deliver to or upon the order of the holder thereof a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. Section 6.3 REPLACEMENT OF WARRANTS. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant held by a Person other than Purchaser or any institutional investor, upon delivery of indemnity reasonably satisfactory to the Company in form and amount or, in the case of any such mutilation, upon surrender of such Warrant for cancellation at the office of the Company maintained pursuant to subdivision (a) of Section 6.2 the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. ARTICLE VII DEFINITIONS As used herein, unless the context otherwise requires, the following terms have the following respective meanings: ADDITIONAL SHARES OF COMMON STOCK: All shares (including treasury shares) of Common Stock issued or sold (or pursuant to Section 2.4, 2.5 or 2.9, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than (a) shares issued upon the exercise of the Warrant, (b) such additional number of shares as may become issuable upon the exercise of any of the securities referred to in the foregoing clause (a) by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities as in effect on the date hereof, but only if and to the extent that such adjustments are required as the result of the original issuance of the Warrants, and 15 (c) such additional number of shares as may become issuable upon the exercise of any of the securities referred to in the foregoing clause (a) by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities as in effect on the date hereof, in order to reflect any subdivision or combination of Common Stock, by reclassification or otherwise, or any dividend on Common Stock payable in Common Stock; and (d) shares of Common Stock issued pursuant to the options listed on Schedule 2(d) of the Stock Purchase Agreement. APPRECIATION RIGHTS: All stock appreciation rights, net profits interests or other rights entitling the holder or owner thereof to receive payments based upon or determined with reference to the distributions to holders of Common Stock or the profits of the Company. BUSINESS DAY: Any day other than a Saturday or a Sunday or a day on which commercial banking institutions in the States of Texas or New York are authorized by law to be closed. Any reference to "days" (unless Business Days are specified) shall mean calendar days. COMMISSION: The Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. COMMON STOCK: As defined in the introduction to this Warrant, such term to include (i) any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, (ii) all other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference and (iii) all stock appreciation rights, phantom stock and similar contract rights the holders-of which are entitled to payments based on or determined by reference to the value of the Common Stock, dividends payable with respect to Common Stock, or liquidating distributions payable with respect to Common Stock. COMPANY: As defined in the introduction to this Warrant, such term to include any corporation which shall succeed to or assume the obligations of the Company hereunder in compliance with Article III. CONVERTIBLE SECURITIES: Any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. 16 CURRENT MARKET PRICE: On any date specified herein, the average daily Market Price during the period of the most recent 20 days, ending on such date, on which the national securities exchanges were open for trading, except that if no Common Stock is then listed or admitted to trading on any national securities exchange or quoted in the over-the-counter market, the Current Market Price shall be the Market Price on such date. DILUTION FACTOR: As defined in Section 2.1. DILUTIVE BASIS: With respect to any issuance or sale or any deemed issuance or sale of Additional Shares of Common Stock from and after the date hereof, the greater of (i) the current Market Price on the day immediately before issuance or deemed issuance and (ii) the Warrant Price on the day before issuance or deemed issuance. EXCHANGE ACT: The Securities Exchange Act of 1934, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. EXPIRATION DATE: November 2, 1997, unless extended as provided in Section 8.5. GAAP: Generally accepted accounting principles set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and in statements by the Financial Accounting Standards Board or in such other statement by such other entity as may be approved by a significant segment of the accounting profession; and the requirement that such principles be applied on a consistent basis shall mean that the accounting principles observed in a current period are comparable in all material respects to those applied in a preceding period. INITIAL PRICE: $0.78 per share. MARKET PRICE: On any date specified herein, the amount per share of the Common Stock, equal to (a) the last sale price of such Common Stock, regular way, on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Common Stock is then listed or admitted to trading, or (b) if such Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security by the NASD, the last trading price of the Common Stock on such date, or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the closing bid and asked prices of the Common Stock on such date as shown by the NASD automated quotation system, or (d) if such Common Stock is not then listed or admitted to trading on any national exchange or 17 quoted in the over-the-counter market, the fair value thereof determined in good faith by the Board of Directors of the Company as of a date which is within 20 days of the date as of which the determination is to be made. NASD: The National Association of Securities Dealers, Inc. OPTIONS: Rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities. OTHER SECURITIES: Any stock (other than Common Stock) and other securities of the Company or any other Person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received upon the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or other securities pursuant to Article III or otherwise. PERSON: Any corporation, association, partnership, joint venture, trust, estate, organization, business, individual, government or political subdivision thereof or governmental agency. RESTRICTED SECURITIES: All of the following: (a) any Warrants bearing the applicable legend or legends referred to in Section 5.1, (b) any shares of Common Stock (or Other Securities) which have been issued upon the exercise of Warrants and which are evidenced by a certificate or certificates bearing the applicable legend or legends referred to in such section and (c) unless the context otherwise requires, any shares of Common Stock (or Other Securities) which are at the time issuable upon the exercise of Warrants and which, when so issued, will be evidenced by a certificate or certificates bearing the applicable legend or legends referred to in such section. SECURITIES ACT: The Securities Act of 1933, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. STOCK PURCHASE AGREEMENT: That certain First Amended Stock Purchase Agreement dated May 28, 1993, by both the Company and Ray Davis, Trustee. SUBSIDIARY: With respect to any Person, any corporation with respect to which more than 50% of the outstanding shares of stock of each class having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) is at the time owned, directly or indirectly, by such Person or by one or more subsidiaries of such Person. 18 TRANSFER: Any sale, assignment, pledge or other disposition of any security, or of any interest therein, which could constitute a "sale" as that term is defined in section 2(3) of the Securities Act. WARRANT PRICE: As defined in Section 2.1 of this Warrant. ARTICLE VIII MISCELLANEOUS Section 8.1 REMEDIES. The Company stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. Section 8.2 NO RIGHTS OR LIABILITIES AS STOCKHOLDER. The holder of this Warrant and all subsequent holders thereof hereby agree that except to the extent set forth herein, no provision of this Warrant shall be construed as conferring upon the holder hereof any rights as a stockholder of the Company or as imposing any obligation on such holder to purchase any securities or as imposing any liabilities on such holder as a stockholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company. Section 8.3 NOTICES. All notices and other communications under this Warrant shall be in writing and shall be mailed by registered or certified mail, return receipt requested, addressed (a) if to any holder of any Warrant, to the registered address of such holder as set forth in the register kept at the principal office of the Company, or (b) if the Company, to the attention of its President at its office maintained pursuant to subdivision (a) of Section 6.2, provided that the exercise of any Warrant shall be effective in the manner provided in Article I. Section 8.4 MISCELLANEOUS. (a) This Warrant may be amended, waived, discharged or terminated, and the Company may take any action herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, Action or omission to act, of the holder or holders of Warrants entitling such holders to purchase 51% or more by number of shares of the total number of shares of Common Stock issuable under all Warrants at the time outstanding. 19 (b) This warrant shall be construed and enforced in accordance with the laws of the State of Texas. (c) The section headings in this Warrant are for purposes of convenience only and shall not constitute a part hereof. Section 8.5 EXPIRATION. The Company will give the holder of this Warrant not less than six weeks nor more than five months prior notice of the expiration of the right to exercise this Warrant. The right to exercise this Warrant shall expire at 5:00 p.m., Houston, Texas time, on the Expiration Date. If the Company shall fail to give such notice as aforesaid, the Expiration Date shall be automatically extended until the date six weeks after the date on which the Company shall give the holder hereof notice of the expiration of the right to exercise this Warrant. In addition, if pursuant to Section 8.2 and 8.5 of the Warrant Purchase Agreement, the Company has become obligated to purchase this Warrant (or any portion thereof) but has not purchased this Warrant f or any reason, including the provisions of Section 8.3 or 8.9 of the Warrant Purchase Agreement or if the closing has not occurred as contemplated by Section 8.2 or 8.5 of the Warrant Purchase Agreement, the Expiration Date shall automatically be extended (i) until the Company purchases the Warrant or (ii) until Purchaser withdraws its right and option to cause the purchase (in which event, the Expiration Date will be extended an additional 30 days) of all of the Warrant. The Company shall notify Purchaser of any such extension of the Expiration Date, but failure to deliver such notice will not effect the extension. CORNERSTONE NATURAL GAS, INC. (formerly Endevco, Inc.) By: ______________________________ Robert L. Cavnar, Senior Vice President 20 FORM OF SUBSCRIPTION To: Cornerstone Natural Gas, Inc. (formerly Endevco, Inc.) The undersigned registered holder of the within Warrant hereby irrevocably exercises such Warrant for, and purchases * shares of Common Stock of Cornerstone Natural Gas, Inc. (formerly Endeveco, Inc.), and herewith makes payment of $ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to , whose address is . Dated: (Signature must conform in all respects to name of holder as specified on the face or Warrant) (Street Address) (City) (State) (Zip Code) *Insert the number of shares called for on the face of this Warrant (or, in the case of a partial exercise, the portion thereof as to which this Warrant is being exercised), in either case without making any adjustment for Additional Shares of Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of this Warrant, may be delivered upon exercise. In the case of a partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of the Warrant, to the holder surrendering the Warrant. 21 FORM OF ASSIGNMENT [To be executed only upon transfer of Warrant] For value received, the undersigned registered holder of the within Warrant hereby sells, assigns and transfers unto the right represented by such Warrant to purchase shares of Common Stock of to which such Warrant relates, and appoints Attorney to make such transfer on the books of maintained for such purpose, with full power of substitution in the premises. Dated: (Signature must conform in all respects to name of holder as specified on the face or Warrant) ________________________________ (Street Address) ________________________________ (City) (State) (Zip Code) Signed in the presence of: __________________________ 22 SCHEDULE OF STOCK WARRANTS
NUMBER OF NAME WARRANTS ---- -------- Ben H. Cook 512,821 Ray C. Davis 769,231 Kelly J. Jameson 256,410 Clarency Mayer 256,410 Kelcy L. Warren 769,231
EX-10.43 15 PROM/PREF NOTES EXHIBIT 10.43 PROMISSORY NOTE $___________ Houston, Texas November 2, 1993 FOR VALUE RECEIVED, the undersigned, Cornerstone Natural Gas, Inc. (formerly known as Endevco, Inc.), a Delaware corporation (the "Maker"), whose principal place of business is at 8080 North Central Expressway, Twelfth Floor, Dallas, Texas 75206, promises to pay to the order of __________________________ ("Payee"), at _____________________________________ _______ (or such other address as Payee may designate to Maker in writing), in lawful money of the United States of America, and in installments as hereinafter provided, the principal amount of [pro rata portion of $2,500,000] Dollars ($_________) together with interest on the part of said principal amount from time to time remaining unpaid hereunder from the date hereof until maturity at the rate per annum equal to the Base Rate (as hereinafter defined). 1. PAST DUE AMOUNTS. All past due principal and interest on this Promissory Note shall bear interest from maturity thereof until paid at a per annum rate equal to the lesser of (a) the maximum lawful non-usurious rate of interest (if any) which under Applicable Law (as hereinafter defined) Payee is permitted to charge Maker on this Promissory Note from time to time and (b) a per annum rate of 3% plus the Base Rate from time to time in effect. Accrued interest on past due principal and interest shall be payable on demand. 2. PAYMENTS OF PRINCIPAL AND INTEREST. The outstanding principal of this Promissory Note shall be payable in installments as follows: (a) [pro rata portion of $500,000] shall be due and payable on or before the last Business Day of the 13th month after the date of this Promissory Note; (b) [pro rata portion of $500,000] shall be due and payable on or before the last Business Day of the 25th month after the date of this Promissory Note; (c) [pro rata portion of $750,000] shall be due and payable on or before the last Business Day of the 37th month after the date of this Promissory Note; and (d) [pro rata portion of $750,000] shall be due and payable on the last Business Day of the 49th month after the date of this Promissory Note (the "Maturity Date"). Accrued, unpaid interest on this Promissory Note shall be payable quarterly, commencing on December 31, 1993, and on each March 31, June 30, September 30 and December 31 thereafter, and at the maturity hereof (however such maturity may occur). The entire principal balance hereof then unpaid and all accrued, unpaid interest hereon shall be due and payable on the Maturity Date. All payments on this Promissory Note shall be applied first to accrued, unpaid interest and the balance, if any, applied to the principal of this Promissory Note. 3. PREPAYMENTS. Maker shall have the right and privilege of prepaying all or any part of this Promissory Note at any time without notice or penalty. PAGE 1 OF 10 4. CORNERSTONE NOTES. This Promissory Note is one of a series of Promissory Notes totalling $2,500,000.00 in aggregate principal amount (collectively, the "Cornerstone Notes"), issued pursuant to Section 3.9 of that certain Debtors' First Amended Joint Plan of Reorganization dated August 30, 1993, as the same may be amended from time to time (the "Plan"), filed by Maker, ANGIC, Inc. f/k/a Cornerstone Natural Gas Company, Mississippi Fuel Company and Endevco Taft Company with the United States Bankruptcy Court, Eastern District of Texas, Sherman Division. 5. DEFINITIONS. The following definitions shall apply to terms used in this Promissory Note: "APPLICABLE LAW" means that law in effect from time to time and applicable to this Promissory Note which lawfully permits the charging and collection of the highest permissible lawful, non-usurious rate of interest on this Promissory Note, including laws of the State of Texas, and to the extent controlling, laws of the United States of America. It is intended that Article 1.04, Title 79, Revised Civil Statutes of Texas, 1925, as amended (Article 5069-1.04, as amended, Vernon's Texas Civil Statutes) shall be included in laws of the State of Texas in determining Applicable Law; and for the purpose of applying said Article 1.04 to this Promissory Note, the interest ceiling applicable to this Promissory Note under said Article 1.04 shall be the indicated rate ceiling from time to time in effect. "BASE RATE" means (a) for the period from the date of this Promissory Note to the last Business Day of the 25th month after the date of this Promissory Note, a rate per annum equal to ten percent (10%) compounded quarterly, and (b) thereafter, a rate per annum equal to fifteen percent (15%) compounded quarterly. "BUSINESS DAY" means a day of the year that is not a Saturday, Sunday or a day banks are authorized or required by law to close in Houston, Texas or New York, New York. "SUBSIDIARY" means any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation is directly or indirectly owned by Maker. 6. SECURITY. This Promissory Note is secured by all security agreements, collateral assignments, guarantees, deeds of trust, mortgages and lien instruments, if any, executed by Maker in favor of the holder hereof or any of the other Cornerstone Notes, or executed by any other party with respect to this Promissory Note or any of the other Cornerstone Notes as security for this Promissory Note or any of the other Cornerstone Notes, including those executed simultaneously herewith, those heretofore executed and PAGE 2 OF 10 those hereafter executed, including without limitation, the Stock Pledge Agreement executed by Maker dated of even date herewith, the Subsidiary Guarantee executed by Endevco Pipeline Company (the "Guarantor Subsidiary") dated of even date herewith, the Assignment, Pledge and Security Agreement executed by the Guarantor Subsidiary dated of even date herewith, the Subsidiary Guarantee executed by Pentex Petroleum, Inc. ("Pentex") executed of even date herewith, the Stock Pledge Agreement executed by Pentex of even date herewith and the mortgage and security documents relating to the Excelsior Gathering System (as defined in the Plan) (all such agreements, documents and instruments referred to herein as the "Security Documents"). 7. EVENTS OF DEFAULT. If any of the following events (an "Event of Default") shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise): (i) Maker defaults in the payment or prepayment of any principal of this Promissory Note or any of the other Cornerstone Notes when the same shall become due, either by the terms hereof or thereof or as otherwise provided in this Promissory Note or any of the other Cornerstone Notes; or (ii) Maker defaults in the payment of any interest on this Promissory Note or any of the other Cornerstone Notes for more than five days after the date due; or (iii) Maker or any of its Subsidiaries defaults as a result of the occurrence of an acceleration of any indebtedness for borrowed money in excess of $100,000 or if there shall exist a default by Maker or any of its Subsidiaries and such default, after notice or lapse of time, would be grounds for acceleration of the indebtedness by the lender with respect to any indebtedness for borrowed money in excess of $100,000, which default shall not have been waived or remedied by the lender within 90 days thereafter; PROVIDED HOWEVER, in the case of any default that is determined in the discretion of the lender, the event shall not be considered a default until notice of such default is provided by the lender; or (iv) Maker or any of its Subsidiaries defaults in the performance or observance of any agreement, obligation, term or condition contained in this Promissory Note, any of the other Cornerstone Notes or any of the Security Documents and such default shall not have been remedied within 30 days after the earlier of (a) written notice thereof shall have been given by or on behalf of the holder hereof or any holder of the other Cornerstone Notes to Maker or (b) the date that the chief executive officer or chief financial officer of Maker had actual knowledge of such condition; or (v) a default exists under any of the Security Documents; or PAGE 3 0F 10 (vi) Maker, the Mountain Creek Joint Venture, a Texas general partnership ("Mountain Creek"), or any Subsidiary of Maker shall (a) be generally not paying its debts as they become due, (b) file, or consent by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, (c) make an assignment for the benefit of its creditors, (d) consent to the appointment of a custodian, receiver, trustee or other officer with similar powers of itself or of any substantial part of its property, (e) be adjudicated insolvent or be liquidated or (f) take corporate action for the purpose of any of the foregoing; or (vii) a court or governmental authority of competent jurisdiction shall enter an order appointing, without consent by Maker, Mountain Creek or any Subsidiary of Maker, a custodian, receiver, trustee or other officer with similar powers with respect to any of them or with respect to any substantial part of any of their property, or if an order for relief shall be entered in any case or proceeding for liquidation or reorganization or otherwise to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of Maker, Mountain Creek or any Subsidiary of Maker, or if any petition for any such relief shall be filed against Maker, Mountain Creek or any Subsidiary of Maker and such petition shall not be dismissed within 60 days; or (viii)a final judgment shall be rendered against Maker, Mountain Creek or any Subsidiary of Maker for the payment of money in excess of the sum of $50,000, plus the applicable amount, if any, of insurance as to which the insurer of Maker, Mountain Creek or any Subsidiary of Maker has admitted coverage, and such judgment shall not be discharged or execution thereon stayed pending appeal, within 60 days after entry thereof, or, in the event of such a stay, such judgment shall not be discharged within 60 days after such stay expires; (ix) except as disclosed to the Payee in writing prior to the execution of this Promissory Note, there has been any material loss or damage to the assets or business of Mountain Creek from June 30, 1993, to the date hereof; or (x) any material representation or warranty made by or on behalf of Maker or the Guarantor Subsidiary in this Promissory Note, any of the other Cornerstone Notes or any of the Security Documents or in any certificate or other writing furnished in connection with or pursuant to such PAGE 4 OF 10 documents shall be false or misleading or breached in any material respect on the date as of which made; then (X) upon the occurrence of any Event of Default described in clause (vi) or (vii) of this paragraph 7 with respect to Maker, the unpaid principal amount of and the accrued interest on this Promissory Note shall automatically become immediately due and payable, without demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of intent to accelerate or other notice or other requirements of any kind, all of which are hereby expressly waived by Maker, or (Y) upon the occurrence of any other Event of Default, the holder or holders of at least 25% of the unpaid principal amount of the Cornerstone Notes at the time outstanding may, by written notice to Maker, declare all of the Cornerstone Notes to be, and the same shall, without demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of intent to accelerate or other notice or other requirements of any kind, all of which are hereby expressly waived by Maker, forthwith become due and payable, together with accrued interest thereon which shall be deemed matured; PROVIDED that, during the existence of an Event of Default described in clause (i) or (ii) of this paragraph 7, the holder of this Promissory Note may, by written notice to Maker, declare this Promissory Note to be, and the same shall, without demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of acceleration or other notice or other requirements of any kind, all of which are hereby expressly waived by Maker, forthwith become due and payable, together with accrued interest hereon which shall be deemed matured. If any holder of any of the other Cornerstone Notes shall exercise the similar option specified in the proviso to the preceding sentence and contained in such other Cornerstone Note, the holder of this Promissory Note may, by written notice to Maker, declare the principal of this Promissory Note to be, and the same shall, without demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of acceleration or other notice or other requirements of any kind, all of which are hereby expressly waived by Maker, forthwith become due and payable, together with accrued interest hereon which shall be deemed matured. Nevertheless, if at any time after acceleration of the maturity of this Promissory Note or any of the other Cornerstone Notes, Maker shall pay all arrears of interest and all payments on account of the principal which shalL have become due otherwise than by acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rate specified in such Cornerstone Notes) and all Events of Default (other than non-payment of principal of and accrued interest on such Cornerstone Notes due and payable solely by virtue of acceleration) shall be remedied or waived, then the holder or holders of at least two-thirds of the unpaid principal amount of the Cornerstone Notes at the time outstanding, by written notice to Maker, may (but in no event shall be obligated to) rescind and annul the acceleration and its consequences; but such action shall not affect any subsequent Event of Default or impair any right consequent thereon. 8. REMEDIES. If any Event of Default shall have occurred and be continuing, the holder of this Promissory Note may proceed to protect and enforce its rights under this Promissory Note by exercising such remedies as are available to such holder in respect PAGE 5 OF 10 thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any agreement contained in this Promissory Note or in aid of the exercise of any power granted in this Promissory Note. No remedy is intended to be exclusive and each remedy shall be cumulative. 9. PAYMENT OF FEES AND EXPENSES. Maker hereby agrees to pay all expenses relating to this Promissory Note, the other Cornerstone Notes and the Security Documents (except for legal fees incurred in the preparation and review of this Promissory Note and the Security Documents executed concurrently with this Promissory Note), including but not limited to: (i) the cost of reproducing this Promissory Note, the other Cornerstone Notes and the Security Documents; (ii) all filing of the Security Documents; (iii) the fees and expenses of Payee, including reasonable fees and disbursements of counsel, relating to any waiver or amendment of any provision or term of this Promissory Note, the other Cornerstone Notes or the Security Documents or to any consent required by this Promissory Note, the other Cornerstone Notes or the Security Documents; (iv) such amounts, to the extent lawful, as shall be sufficient to pay the costs and expenses of collection or of otherwise enforcing any of the rights of the holder hereof, including reasonable counsel fees and expenses; and (v) the cost of delivering to Payee's home office, insured to Payee's satisfaction, this Promissory Note duly executed by Maker. 10. WAIVERS. Maker and all sureties, endorsers and guarantors of this Promissory Note waive demand, presentment for payment, notice of non-payment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notice (except such notice as provided in this Promissory Note), filing of suit and diligence in collecting this Promissory Note or enforcing any of the security herefor, and agree to any substitution, exchange or release of any of such security or the release of any party primarily or secondarily liable hereon and further agree that it will not be necessary for any holder hereof, to enforce payment by Maker of this Promissory Note, to first institute suit or exhaust its remedies against any others liable herefor, or to enforce its rights against any security herefor, and consent to any extensions or postponements of time of payment of this Promissory Note or any other indulgences with respect hereto, without notice thereof to Maker. 11. REPRESENTATIONS AND WARRANTIES. Maker hereby represents and warrants that: PAGE 6 OF 10 (i) Maker is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as currently proposed to be conducted and to enter into this Promissory Note. (ii) Each of this Promissory Note, the other Cornerstone Notes and the Security Documents to which Maker is a party has been duly authorized by all necessary corporate action on the part of Maker, has been duly executed and delivered by Maker, and constitutes the legal, valid and binding obligation of Maker, enforceable against Maker in accordance with its terms, except as such enforceability may be limited by general principles of equity and by applicable bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally. (iii) Each of the Subsidiary Guaranty and the Security Documents to which the Guarantor Subsidiary is a party has been duly authorized by all necessary corporate action on the part of the Guarantor Subsidiary, has been duly executed and delivered by the Guarantor Subsidiary, and constitutes the legal, valid and binding obligation of the Guarantor Subsidiary, enforceable against the Guarantor Subsidiary in accordance with its terms, except as such enforceability may be limited by general principles of equity and by applicable bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally. (iv) Other than consents already obtained as of the date of this Promissory Note, no consent, approval or authorization of or registration, qualification, designation, declaration or filing with any governmental authority (Federal, state or otherwise) or any other person on the part of Maker, any of its Subsidiaries or Mountain Creek is required in connection with the execution and delivery of this Promissory Note, the other Cornerstone Notes, the Security Documents or the consummation of any transaction contemplated hereby. (v) Other than the security interests being granted pursuant to the Security Documents and pursuant to the junior liens granted to the Bank of Oklahoma, National Association, and referred to therein, Maker owns all of the issued and outstanding shares of capital stock of each Subsidiary (except Cengaz Company, which is greater than 50 percent owned by Maker), and such shares are owned, beneficially and of record, by Maker free of any mortgage, pledge, lien, security interest, charge, encumbrance or title retention agreement and are validly issued and outstanding and fully paid and nonassessable. PAGE 7 OF 10 (vi) Maker, Mountain Creek and the Subsidiaries of Maker have good and indefeasible title to all their respective real properties and good and indefeasible title to all of their other respective material properties and assets, and none of such properties or assets is subject to any mortgage, pledge, lien, security interest, lease, charge or encumbrance (including conditional sale agreements and leases in the nature thereof and other title retention agreements) other than (a) liens for current taxes not yet due and payable, (b) mechanics', materialmens', workmens', repairmens', operators', warehousemens', carriers' and similar liens incident to current construction or operations or arising in the ordinary course of business for charges which are not delinquent, (c) those liens set forth in the disclosure letter delivered by Maker to the Payees of the Cornerstone Notes on the date hereof and (d) such encumbrances and imperfections of title, if any, as are not substantial in character, amount or extent and do not materially interfere with the present or proposed use of any of such properties. Maker and the Subsidiaries enjoy peaceful and undisturbed possession under all material leases under which they are currently operating as lessee, and all such leases are valid and subsisting and are in full force and effect with no material default existing under any thereof. (vii) Maker, Mountain Creek and the Subsidiaries of Maker are each in compliance with the representations and warranties made in Sections 7.7 and 7.16 of that certain Revolving Credit and Term Loan Agreement date of even date hereof among the Borrowers (as defined therein) and Bank of Oklahoma, National Association as if such representations and warranties were made by it herein. (viii)Since January 1, 1993, there have been no amendments, modifications or changes to the terms of any material agreements of or relating to Mountain Creek or the Excelsior Gathering System and copies of all material agreements relating to Mountain Creek and the Excelsior Gathering System have been previously provided to Payee. 12. COVENANTS. Maker covenants and agrees that from the date of this Promissory Note and so long as any amount is outstanding under this Promissory Note, Maker will duly perform and observe each and all of the covenants and agreements set forth below: (i) Maker shall not, directly or indirectly, declare any dividend on any class of its stock or make any other distribution on account of any class of its stock, without the prior approval of the holders of at least two-thirds in principal amount of the Cornerstone Notes; PROVIDED that Maker shall be permitted, without obtaining such approval, to issue (i) shares of its capital stock pursuant to the exercise of the option granted to the Purchasers named in the First Amended Stock Purchase Agreement between Maker and Ray PAGE 8 OF 10 Davis, Trustee, dated May 28, 1993, as amended, modified or supplemented and (ii) stock options to management of Maker or stock if such options are exercised. (ii) Maker shall not redeem, purchase or otherwise acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire, directly or indirectly, any shares of Maker's capital stock or any of the Subsidiaries, without the prior approval of the holders of at least two-thirds in principal amount of the Cornerstone Notes. (iii) Maker shall promptly and duly execute and deliver to the holder hereof such further documents and take, and cause its Subsidiaries to take, such further action that may be required under applicable law, or as the holder hereof may, from time to time reasonably request, in order to more effectively carry out and accomplish the intent and purpose of this Promissory Note, the other Cornerstone Notes and the Security Documents, and to establish and protect the rights and remedies created or intended to be created in favor of the holder hereof hereunder or thereunder. (iv) Maker shall use its best efforts to cause the Guarantor Subsidiary to keep and maintain its interest in Mountain Creek and the material assets of Mountain Creek and the Excelsior Gathering System and shall not permit the Guarantor Subsidiary to sell, assign, transfer, exchange or otherwise dispose of its interest in any of such assets. 13. USURY. It is the intent of Payee and Maker in the execution and performance of this Promissory Note to remain in strict compliance with Applicable Law from time to time in effect. In furtherance thereof, Payee and Maker stipulate and agree that none of the terms and provisions contained in this Promissory Note or any document securing or otherwise relating to this Promissory Note shall ever be construed to create a contract to pay for the use, forbearance or detention of money with interest at a rate or in an amount in excess of the maximum rate or amount of interest permitted to be charged under Applicable Law. For purposes of this Promissory Note, "interest" shall include the aggregate of all charges which constitute interest under Applicable Law that are contracted for, taken, charged, reserved, received or paid under this Promissory Note. Maker shall never be required to pay unearned interest and shall never be required to pay interest at a rate or in an amount in excess of the maximum rate or amount of interest that may be lawfully charged under Applicable Law, and the provisions of this paragraph 13 shall control over all other provisions of this Promissory Note, and of any other instrument pertaining to or securing this Promissory Note, which may be in actual or apparent conflict herewith. If this Promissory Note is prepaid, or if the maturity of this Promissory Note is accelerated for any reason, or if under any other contingency the effective rate or amount of interest which would otherwise be payable under this Promissory Note would exceed the maximum rate or amount of interest Payee or any other holder of this Promissory Note is allowed by PAGE 9 OF 10 Applicable Law to charge, contract for, take, reserve or receive, or in the event Payee or any other holder of this Promissory Note shall charge, contract for, take, reserve or receive monies that are deemed to constitute interest which would, in the absence of this provision, increase the effective rate or amount of interest payable under this Promissory Note to a rate or amount in excess of that permitted to be charged, contracted for, taken, reserved or received under Applicable Law then in effect, then the principal amount of this Promissory Note or the amount of interest which would otherwise be payable under this Promissory Note or both shall be reduced to the amount allowed under Applicable Law as now or hereinafter construed by courts having jurisdiction, and all such monies so charged, contracted for, taken, reserved or received that are deemed to constitute interest in excess of the maximum rate or amount of interest permitted by Applicable Law shall immediately be returned to or credited to the account of Maker upon such determination. Payee and Maker further stipulate and agree that, without limitation of the foregoing, all calculations of the rate or amount of interest contracted for, charged, taken, reserved or received under this Promissory Note which are made for the purpose of determining whether such rate or amount exceeds the maximum rate, shall be made, to the extent not prohibited by Applicable Law, by amortizing, prorating, allocating and spreading during the period of the full stated term of this Promissory Note, all interest at any time contracted for, charged, taken, reserved or received from Maker or otherwise by Payee or any other holder of this Promissory Note. 14. GOVERNING LAW. This Promissory Note shall be construed in accordance with and governed by the internal laws of the State of Texas and, to the extent applicable, the federal laws of the United States of America. 15. HEADINGS. The paragraph headings contained herein are inserted for convenience only and shall not be construed or interpreted as a part of this Promissory Note. CORNERSTONE NATURAL GAS, INC. (FORMERLY KNOWN AS ENDEVCO, INC.) By: __________________________________ Name: ________________________________ Title: _______________________________ PAGE 10 OF 10
SCHEDULE OF PREFERRED NOTES Preferred Shareholder # of Note Principal Principal Shares Amount Pmt 1&2 Pmt 3&4 The Travelers Indemnity Company 81,500 1,018,750 203,750 305,625 The Travelers Corporation 5,000 62,500 12,500 18,750 The Travelers Indemnity Company of Rhode Island 10,000 125,000 25,000 37,500 The Prospect Company 3,500 43,750 8,750 13,125 Phoenix Home Life Mutual Insurance Company 70,000 875,000 175,000 262,500 Sun Bank, N.A., Trustee for Riverside Memorial Park Merchandise 600 7,500 1,500 2,250 Sun Bank, N.A., Trustee for Palm Beach Memorial Park Merchandise 400 5,000 1,000 1,500 Sun Bank, N.A., Trustee for Hillcrest Palm Beach Memorial Park Merchandise 200 2,500 500 750 Sun Bank, N.A., Trustee for Hillcrest Memorial Gardens, Inc., Vero Beach Merchandise 200 2,500 500 750 Sun Bank, N.A., Trustee for Town & Country Funeral Home (Palm Beach) 500 6,250 1,250 1,875 Sun Bank, N.A., Trustee for Town & Country Funeral Home, Inc. (Jacksonville) 200 2,500 500 750 Sun Bank, N.A., Trustee for TNCS 1988 2,000 25,000 5,000 7,500 Sun Bank, N.A., Trustee for TNCS 1987 3,400 42,500 8,500 12,750 Sun Bank, N.A., Trustee for Guardian Plans, Inc. 1988 100 1,250 250 375 Sun Bank, N.A., Trustee for Guardian Plans, Inc. 1984 800 10,000 2,000 3,000 Sun Bank, N.A., Trustee for Guardian Plans, Inc. 1979 1,300 16,250 3,250 4,875 Sun Bank, N.A., Trustee for Feaster Memorial Homes, Inc. 300 3,750 750 1,125 Odyssey Partners L.P. 20,000 250,000 50,000 75,000
EX-10.45 16 JNT VENTURE AGREEMENT EXHIBIT 10.45 JOINT VENTURE AGREEMENT THIS JOINT VENTURE AGREEMENT (hereinafter referred to as the "Agreement") dated as of the 28th day of October, 1993, is entered into by and among Cornerstone Natural Gas, Inc., a Delaware corporation ("Cornerstone"), and Merit Natural Gas Company, a Texas corporation ("Merit"). W I T N E S S E T H: I. DEFINITIONS As used herein, the following terms shall have the following meanings: "BUDGET" means that term as defined in Section 4.2. "BUDGET YEAR" means 12 months beginning December 1 of each year. "CAPITAL ACCOUNT" means the individual Capital Account maintained for each Joint Venturer on the books of account of the Joint Venture, in a manner which is in accordance with Treasury Regulations Section 1.704-1(b)(2)(iv), and the following: (a) A Joint Venturer's Capital Account shall be credited with (i) the amount of cash and the value of any property contributed to the Joint Venture, (ii) such Joint Venturer's allocable share of profits, and (iii) the amount of any Joint Venture liabilities that are expressly assumed by such Joint Venturer or that are secured by any Joint Venture property distributed to such Joint Venturer; and (b) A Joint Venturer's Capital Account shall be debited with (i) the amount of cash and the value of any Joint Venture property distributed to such Joint Venturer pursuant to any provision of this Agreement, (ii) such Joint Venturer's allocable share of losses, and (iii) the amount of any liabilities of such Joint Venturer that are expressly assumed by the Joint Venture or that are secured by any property contributed by such Joint Venturer to the Joint Venture. "DISPOSITION" means any transfer, pledge, mortgage, granting of a security interest or other encumbrance or any other disposition of all or any portion of an Interest (hereinafter defined), whether voluntary or involuntary. "INTEREST" means the entire percentage ownership, both legal and beneficial interest of a Joint Venturer in the Joint Venture at any particular time, including the right of such Joint Venturer to any and all benefits to which a Joint Venturer may be entitled as provided in this Agreement, together with the obligations of such Joint Venturer to comply with all the terms and provisions of this Agreement, but excluding any rights as a creditor of the Joint Venture. "JOINT VENTURERS" means Cornerstone and Merit and their permitted successors and assigns. "JOINT VENTURE" means the Joint Venture hereby formed, and as said Joint Venture may from time to time be constituted, amended and, if necessary, reconstituted. "PERSON" means an individual, firm, corporation, partnership, trust or other legal entity. "POLICY COMMITTEE" means that term as defined in Section 4.1. "PRO RATA SHARE" means a percentage for each Joint Venturer equal to its percentage ownership. "TUPA" means the Texas Uniform Partnership Act, Art. 6132b of the Civil Statutes of the State of Texas, as adopted and from time to time amended. II. GENERAL 2.1 FORMATION. The Joint Venturers hereby join in and form the Joint Venture. Except as expressly provided for herein to the contrary, the rights and obligations of the Joint Venturers and the administration and termination of the Joint Venture shall be governed by the TUPA. Each Joint Venturer's Interest in the Joint Venture shall be personal property for all purposes. All real property owned by the Joint Venture shall be deemed owned by the Joint Venture as an entity, and no Joint Venturer shall have any individual ownership rights in such property. Business will commence on December 1, 1993, or as soon thereafter as is practical. 2.2 NAME. The name of the Joint Venture is Cornerstone/Merit Joint Venture. 2.3 ASSUMED NAME CERTIFICATE. The Joint Venturers shall execute and file of record an appropriate assumed name certificate reflecting that they are doing business under the name of the Joint Venture and any other names under which the Joint Venture shall do business during the continuation of the Joint Venture. 2.4 PRINCIPAL OFFICE. The principal office of the Joint Venture shall be located at 8080 North Central Expressway, 12th Floor, Dallas, Texas 75206, such location or locations as may be decided upon by the Joint Venturers. - 2 - 2.5 PURPOSE. The purpose of the Joint Venture is to develop business opportunities for Cornerstone and Merit consistent with their lines of business or appropriate expansions thereof. 2.6 AUTHORITY. To carry out its purpose and not in limitation thereof, the Joint Venture is empowered and authorized to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of its purpose, and for the protection and benefit of the Joint Venture, in accordance with and subject to the limitations in this Agreement and in accordance with the TUPA. III. CONTRIBUTIONS TO CAPITAL; LOANS BY 3.1 INITIAL CAPITAL CONTRIBUTION. Each Joint Venturer shall initially contribute for working capital (the "Initial Contribution") its Pro Rata Share to the Joint Venture in cash or Office Contribution (as hereafter defined) an amount equal to 1/6th of the expenses to be incurred by the Joint Venture pursuant to the Budget for the first fiscal year. 3.2 OFFICE CONTRIBUTION. Cornerstone shall provide for the Joint Venture an office located at 8080 North Central Expressway, 12th Floor, Dallas, Texas 75206, and Cornerstone will be compensated for providing such office and other services. In addition to providing an office, Cornerstone will also provide the Joint Venture use of its office equipment and secretarial services (collectively the "Office Contribution"). The Office Contribution does not include third party expenses such as long distance calls or expenses other than the use of the office equipment, space made available and secretarial services. The Joint Venturers agree that the initial value of the Office Contribution is $12,000.00 per year (the "Initial Value"). Cornerstone will receive credit for the Office Contribution by deducting 1/6th of the Initial Value from its obligation to make the Initial Contribution, and thereafter the remaining balance in the initial Budget Year and each subsequent year will be credited against contribution in equal increments so that a full credit is received by Cornerstone each year. The value of the Office Contribution will be reviewed yearly and appropriately adjusted by the Policy Committee. 3.3 JOINT VENTURER'S INTEREST. The initial share of Cornerstone's Interest in the Joint Venture shall be 60 percent and the initial share of Merit's Interest in the Joint Venture shall be 40 percent. 3.4 MONTHLY CONTRIBUTIONS. At the beginning of each month, each Joint Venturer shall be obligated to contribute to the Joint Venture each Joint Venturer's Pro Rata Share of the required working capital so that the Joint Venture may pay its current obligations timely. Cornerstone will bill monthly for such - 3 - contribution, but the required contribution cannot exceed the Budget without prior approval of the Policy Committee. 3.5 JOINT VENTURER LOANS. The Joint Venture shall be authorized to borrow money, including, if necessary, from any Joint Venturer or any related Person for authorized Joint Venture purposes to the extent deemed required. The amount of any loan made to the Joint Venture by a Joint Venturer shall not be considered an increase in such Joint Venturer's Capital Account or otherwise a contribution to the Joint Venture, nor shall the making of such loan affect the Interests. No Joint Venturer shall be obligated to make any loans to the Joint Venture. No loan will be made without the consent of the Policy Committee. 3.6 RETURN OR WITHDRAWAL OF CAPITAL CONTRIBUTIONS; DISTRIBUTIONS. Except as otherwise expressly provided in this Agreement, none of the Joint Venturers shall be entitled to demand a refund or return of any capital contributions or to withdraw any part of its Capital Account nor to receive any distribution from the Joint Venture. No Joint Venturer shall be personally liable for the return of the capital contributions of the other Joint Venturer, or any portion thereof, it being expressly understood that any such return shall be made solely from Joint Venture assets. No Joint Venturer shall have the right to demand or receive property other than cash for its Interest. IV. OVERALL MANAGEMENT AND CONTROL 4.1 POLICY COMMITTEE. The policies of the Joint Venture shall be determined by a Policy Committee, which shall be vested with the control and direction of the affairs of the Joint Venture and shall be organized and function as set forth below: (a) The Policy Committee shall consist of four persons, two of whom shall be appointed by Cornerstone and two of whom shall be appointed by Merit. The initial members designated by Cornerstone are Kelcy Warren and Ray Davis; and the initial members designated by Merit are Wayne Packard and Ted Collins. Kelcy Warren shall serve as chairman of the Policy Committee (the "Chairman") until such time as his successor shall be designated by the Policy Committee. Each member of the Policy Committee shall be vested by the Joint Venturer appointing him with the authority to vote and act at meetings of the Policy Committee. If one of the respective members named above dies, resigns, is removed by the Joint Venturer appointing him, or becomes incapacitated or otherwise unable or unwilling to perform and discharge his duties as a member of the Policy Committee, the Joint Venturer which appointed him shall name and appoint a successor member by written notice, signed by an - 4 - appropriate representative of such Joint Venturer and delivered to the other Joint Venturers. (b) Any matter which is proper for consideration by the Policy Committee may be considered and acted upon at a meeting held for that purpose. A meeting of the Policy Committee can be called by the Chairman any time, and a meeting shall be called by him upon request of any Joint Venturer. The Chairman shall give each member notice at least 48 hours in advance of each meeting. Any member of the Policy Committee who will not be present at a meeting may vote on any items to be considered at such meeting by telephone communication, through the Chairman, by mail, facsimile or telegram, addressed to the Chairman, or by proxy, and if such vote has not been received by the Chairman prior to the meeting, the Chairman shall poll such absent member by telephone or other means and his vote shall be recorded in the minutes of the meeting. The vote of each member present on any question submitted to the meeting shall also be recorded in the minutes. The presence of all voting members of the Policy Committee (either actually or constructively in the manner provided above) shall be necessary to constitute a quorum of the Policy Committee. Except as otherwise provided herein, all actions taken by the Policy Committee shall require the affirmative vote of at least a majority of the members thereof. All meetings of the Policy Committee shall be held in such places as have been agreed upon by the members thereof. Minutes shall be kept of all meetings of the Policy Committee and all actions taken by the Policy Committee by written communications without a meeting. (c) The Policy Committee may take action without an assembled meeting by communications between the Chairman and the other members. Any matter or matters may be submitted by the Chairman by giving each member notice by mail, facsimile, telegram or telephone (confirmed in writing as soon thereafter as practical). Each member may communicate his vote thereon to the Chairman by mail, facsimile, telegram or telephone (confirmed in writing as soon thereafter as practical). All actions so taken by the Policy Committee without an assembled meeting shall require the affirmative vote of all members thereof. (d) The members of the Policy Committee shall serve without compensation, but each member shall be entitled to reimbursement from the Joint Venture of all third party expenses actually and reasonably incurred in connection with the performance of his duties. (e) No member of the Policy Committee shall be liable for any act or omission of any other member thereof, nor for any act or omission on his own part, excepting his own willful - 5 - misconduct or gross negligence. Each Joint Venturer shall indemnify and hold harmless each member of the Policy Committee designated by it against any and all expenses and liabilities arising out of his membership except only expenses and liabilities arising out of such member's own willful misconduct or gross negligence. 4.2 BUDGET. Sixty days prior to the beginning of each fiscal year, the Policy Committee shall prepare a Budget for the upcoming fiscal year for all the reasonable and necessary expenses to be incurred by the Joint Venture. The expenses of the Joint Venture shall not exceed the Budget without the express written consent of the Policy Committee. If the Policy Committee cannot agree on a Budget or does not approve expenses in excess of the Budget pursuant to this Section, the Joint Venture will terminate pursuant to Article IX. 4.3 LIABILITY. None of the Joint Venturers shall be liable to the Joint Venture or any other Joint Venturer for any act or omission performed or omitted pursuant to any authority granted to it by this Agreement, other than for its material breach of any of its material obligations under this Agreement, fraud, bad faith, willful malfeasance or gross negligence. No Joint Venturer shall have any obligation to loan, advance or contribute any amounts to the Joint Venture (whether any deficit exists or otherwise) other than its obligations to pay capital contributions as called for in Article III. The Joint Venture shall and hereby does indemnify and save harmless each Joint Venturer, and their agents and employees, as the case may be, from any loss, damage, claim or liability, including, but not limited to, reasonable attorneys' fees and expenses, incurred by it by reason of any act performed on behalf of the Joint Venture or in furtherance of the Joint Venture's interests other than breach of any material obligation under this Agreement, fraud, bad faith, willful malfeasance or gross negligence. V. WAYNE PACKARD 5.1 EMPLOYMENT AGREEMENT. The Joint Venture shall enter into an employment agreement with Wayne Packard in such form and substance as approved by the Policy Committee. 5.2 FUTURE JOINT VENTURES. (a) If the Joint Venture discovers, develops, finds or is the recipient of a proposed business transaction (a "J.V. Proposal"), each Joint Venturer shall have the right to participate pro rata in any such J.V. Proposal. The Joint Venture will give prompt notice (the "Initial Notice") to the Joint Venturers of any J.V. Proposal within five (5) business -6- days after the terms are sufficiently established so that an informed investment decision can be made. (b) If a Joint Venturer wishes to exercise its right to participate in a J.V. Proposal, such Joint Venturer must give written notice to the other Joint Venturer within 30 days after receipt of the Initial Notice. If a Joint Venturer does not accept such J.V. Proposal by giving written notice within the 30 days after receipt of the Initial Notice to the other Joint Venturer, such Joint Venturer will be deemed to have rejected the right to participate in such J.V. Proposal. (c) If all Joint Venturers elect to participate in the J.V. Proposal they will have a right to participate based on their Pro Rata Share, unless a specific written agreement by the parties provides to the contrary. (d) If either Joint Venturer decides not to participate in any such J.V. Proposal, the other Joint Venturer shall be able to participate in the J.V. Proposal if such Joint Venturer has timely given its written notice of acceptance. (e) Each Joint Venturer may sell, assign or dispose of all or a portion of their Pro Rata Share of such J.V. Proposal without the consent of the other Joint Venturer. (f) Each J.V. Proposal that is accepted shall be pursuant to a separate joint venture agreement, in such form as the participants agree. VI. DISTRIBUTIONS AND ALLOCATIONS 6.1 DISTRIBUTIONS. Cash available for distribution shall be distributed in accordance with each Joint Venturer's Pro Rata Share and in accordance with procedures established by the Policy Committee. 6.2 ALLOCATIONS. In general, all items of income, loss, gain, deductions and credit shall be allocated in accordance with each Joint Venturer's Pro Rata Share. 6.3 CONTRIBUTED PROPERTY. In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Joint Venture shall, solely for tax purposes, be allocated among the Joint Venturers so as to take account of any variation between the adjusted basis of such property to the Joint Venture for federal income tax purposes and its initial book value. In the event the book value of any Joint Venture property is adjusted, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any -7- variation between the adjusted basis of such asset for federal income tax purposes and such book value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Joint Venturers in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this subsection (c) are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Joint Venturer's Capital Account or share of profits, losses, other items, or distributions pursuant to any provision of this Agreement. VII. JOINT VENTURE ACCOUNTING 7.1 METHOD OF ACCOUNTING. The Joint Venture accounts, books and records shall be kept by the method of accounting as chosen by the Policy Committee. 7.2 FISCAL YEAR AND BUDGET YEAR. The fiscal year of the Joint Venture shall be the calendar year, but for purposes of the Budget Year, it will be a 12 month period beginning December 1 of each year. 7.3 CAPITAL ACCOUNTS. A Capital Account shall be established for each Joint Venturer. 7.4 INTEREST. No interest shall be paid to any Joint Venturer on its capital contributions. 7.5 BANK ACCOUNTS. The Joint Venture shall maintain such bank accounts and at such financial institutions as the Policy Committee shall determine. Checks shall be drawn for Joint Venture purposes only. All money received by the Joint Venture shall be deposited in such account or accounts. 7.6 JOINT VENTURE RECORDS. (a) The Policy Committee shall maintain, or cause to be maintained, at the expense of the Joint Venture, complete and accurate records and books of account of all transactions, matters and things relating to the Joint Venture's business as are usually entered into books of account kept by persons engaged in a business of a like character. (b) All of such records and books of account, together with all other documents and files of the Joint Venture, and all correspondence shall, at all times, be kept at the main office of the Joint Venture (to which the Joint Venturers shall have reasonable access), and all such records, books of account, documents and files shall be the exclusive property of the Joint Venture. In the event of the termination of the -8- Joint Venture Interest of any Joint Venturer, all such records, books of account, documents and files shall remain in the exclusive possession of the Joint Venture. At any time, and from time to time, while the Joint Venture continues and until its complete liquidation (but only during reasonable business hours), each Joint Venturer may fully examine, inspect, make copies of and audit the Joint Venture's books, records, accounts and assets, including, but not limited to, bank balances, or cause an audit to be made by any competent accountant or other professional employed by it at its expense. Upon the complete liquidation of the Joint Venture, the Joint Venture's records, books of account, documents and files shall be maintained in such manner and for such period as the Joint Venturers shall determine, and all Joint Venturers shall have access to same during reasonable business hours with at least one business day's notice. 7.7 ELECTION. Unless such election already has been made and is in effect, or unless the Joint Venture is precluded from doing so, the Policy Committee, at the request of the successor in interest of a Joint Venturer, and at the request of a substitute Joint Venturer, shall file on behalf of the Joint Venture an election under Section 754 of the Code, as provided for in Sections 734 and 743 thereof. If such an election is filed, the Joint Venture will be required to provide additional accounting or tax information with respect to any adjustment to basis for any Joint Venturer, provided such information is reasonably within the Joint Venture's knowledge. 7.8 TAX RETURNS. The Policy Committee shall cause to be prepared all tax returns which the Joint Venture is required to file, and shall file such returns within the time prescribed by law (including extensions) for the filing of each such return. 7.9 TAX MATTERS JOINT VENTURER. Cornerstone is hereby designated as the Tax Matters Joint Venturer for the Joint Venture for purposes of Section 6231(l)(7) of the Internal Revenue Code of 1986, as amended, with respect to operations conducted by the Joint Venturer during the period that Cornerstone is a Joint Venturer. The Tax Matters Joint Venturer shall comply with the requirements of Sections 6221 through 6232, of the Internal Revenue Code of 1986, as amended. VIII. TRANSFERS OF INTERESTS 8.1 DISPOSITIONS. No Joint Venturer may sell, assign, give, devise, pledge, encumber or in any other manner transfer all or any portion of its Joint Venture Interest unless such Joint Venturer shall have first received the prior written consent of each other Joint Venturer, which consent may be withheld in the absolute and total discretion of each Joint Venturer. -9- 8.2 INVOLUNTARY DISPOSITION. Prior to or upon any involuntary Disposition of a Joint Venturer's Interest, whether by bankruptcy or otherwise, and as far in advance as is practicable prior to declaring bankruptcy under the U.S. Bankruptcy Code, such Joint Venturer shall immediately send notice thereof to the other Joint Venturer, disclosing in full the nature and details of such event. Such threatened, imminent or actual involuntary Disposition or declaration of bankruptcy shall constitute the granting to the other Joint Venturers of an option to purchase the Interest of such Joint Venturer, which option must be exercised no later than 60 days from the delivery of notice thereof. The other Joint Venturer shall have the right to cause the Joint Venture to be dissolved and liquidated. IX. DISSOLUTION 9.1 DISSOLUTION. The Joint Venture shall be dissolved upon the first of the following to happen: (a) The withdrawal, dissolution, bankruptcy or termination of any Joint Venturer; (b) Upon 30 days' written notice to the other Joint Venturer; (c) The failure of the Policy Committee to agree to a Budget or approve expenses in excess of the Budget; (d) There being only one Joint Venturer; (e) A decree of a court; (f) The occurrence of any other circumstance which, by law, would require that the Joint Venture be dissolved; or (g) In any event, the date 50 years from the effective date hereof. 9.2 LIQUIDATION. Upon such dissolution, an accounting shall be made of the account of the Joint Venture, of each Joint Venturer and of the Joint Venture's assets, liabilities and operations from the date of the last previous accounting to the date of such dissolution. Upon any such dissolution not followed by a reconstitution, the Policy Committee or such person as shall be designated by the Joint Venturers shall act as Liquidating Trustee and immediately proceed to terminate and liquidate the business of the Joint Venture. The assets shall be applied to the following purposes in the following order: -10- (a) To pay or provide for all amounts owing by the Joint Venture to creditors other than Joint Venturers and for expenses of winding up; (b) To pay or provide for all amounts owing by the Joint Venture to Joint Venturers other than for capital and profits; (c) To the Joint Venturers, in amounts equal to the positive balances, if any, remaining in their respective Capital Accounts; and (d) To the Joint Venturers in proportion to the Joint Venturer's respective Interests, as those have changed from time to time pursuant to this Agreement or otherwise. 9.3 J.V. PROPOSALS. If at the time of the dissolution of the Joint Venture there is any J.V. Proposal being worked on by Wayne Packard and if the Joint Venture has rights to such J.V. Proposal when finally developed, such J.V. Proposal or J.V. Proposals shall be made available to each Joint Venturer and shall be subject to the same provisions as provided by Section 5.2 of this Agreement. 9.4 RECONSTITUTION. Notwithstanding anything to the contrary contained in or inferred from the above, if upon the dissolution of the Joint Venture at least two of the Joint Venturers elect to reconstitute the Joint Venture, same shall not be liquidated but rather shall be reconstituted and shall continue in accordance with the terms, provisions and conditions of this Agreement; provided, however, that those Joint Venturers who do not become a member of the reconstituted Joint Venture shall be entitled to receive from the Joint Venture an amount equal to the fair market value of their respective Joint Venture Interests. Immediately following such reconstitution, the Interests of the withdrawing Joint Venturers shall be allocated among the remaining Joint Venturers in accordance with the ratio that the Interests of the remaining Joint Venturers bear to each other. 9.5 NEGATIVE CAPITAL ACCOUNTS. If, after the application of the assets of the Joint Venture under Paragraph 9.2(b), and the allocation to the Joint Venturers of all items of income, loss, gain, deduction and credit under Section 6.2, any Joint Venturer has a negative Capital Account, such negative Capital Account shall not be an asset of the Joint Venture or a liability of a Joint Venturer. The foregoing shall not affect the liability of the Joint Venturers as general partners of the Joint Venture for the recourse liabilities of the Joint Venture nor the right of one of the Joint Venturers to contribution from the other in the event it pays more than its pro rata share of any liability or lends to the Joint Venture an amount necessary to pay any such liabilities. - 11 - 9.6 DISTRIBUTIONS-IN-KIND. In the event all or part of the Joint Venture assets are distributed in kind at the time of liquidation, for purposes of determining the balance in any Joint Venturer's Capital Account, any such Joint Venture asset shall be deemed sold by the Joint Venture for the amount of such asset's fair market value, and any gain or loss realized on such deemed sale shall be properly charged to the Capital Accounts of the Joint Venturers. 9.7 CONTINUING OBLIGATION. Except as provided in this Agreement, no dissolution of the Joint Venture shall release or relieve any of the Joint Venturers, or any of their respective successors or assigns, from any previous breach or default of, or from any obligations theretofore incurred or accrued under, any of the provisions of this Agreement nor, except to the extent otherwise expressly provided herein, shall any Joint Venturer, or any of her or its respective successors or assigns, be relieved from its respective obligations hereunder, and all such obligations and all breaches and defaults relating to such obligations shall survive despite such dissolution. X. MISCELLANEOUS 10.1 RECIPIENT OF DISTRIBUTIONS AND PAYMENTS. All distributions and payments of cash or property to be made pursuant to the provisions of this Agreement shall be made directly to the parties who are entitled thereto at their respective addresses indicated in the records of the Joint Venture or at such other address as shall have been set forth in a notice sent pursuant to the provisions of Section 10.2 hereof. 10.2 COMMUNICATIONS. Except as otherwise expressly provided in this Agreement, any election, approval, consent, objection, request, waiver, notice or other document required or permitted to be made or given pursuant to any provision of this Agreement, shall be deemed duly made or given, as the case may be, if in writing, signed by or on behalf of the person making or giving the same, and shall be deemed completed when either (a) personally delivered (with receipt acknowledged by the recipient), or (b) sent by electronic facsimile, provided a copy of such document is sent to such party the same day by one of the other methods set forth herein, or (c) deposited for delivery by Federal Express or other similar overnight courier service; addressed to the Person or Persons to whom such election, approval, consent, objection, request, waiver, notice or other document is to be made or given at their respective addresses, as follows: 1. in the case of the Joint Venturers, at the addresses indicated in the records of the Joint Venture; - 12 - 2. in the case of the Joint Venture, notice to all Joint Venturers shall be sufficient to constitute notice to the Joint Venture. Any party hereto shall have the right to change its address hereunder by sending notice to all other parties hereto pursuant to this Section. 10.3 ENTIRE AGREEMENT; APPLICABLE LAW; EFFECT. This Agreement contains the entire agreement by and among the parties with respect to the ownership and operation of the Joint Venture. This Agreement shall be construed, enforced and governed in conformity with the laws of the State of Texas and the TUPA, without giving effect to principles of conflicts of law, and shall be binding upon the parties hereto, their successors, heirs, devisees, permitted assigns, legal representatives, executors and administrators, but shall not be deemed for the benefit of creditors or any other Persons. 10.4 MODIFICATION; WAIVER OR TERMINATION. Except as otherwise expressly provided in this Agreement, no modification, waiver or termination of this Agreement, or any part hereof, shall be effective unless made in writing signed by the party or parties sought to be bound thereby, and no failure to pursue or elect any remedy shall constitute a waiver of any default under or breach of any provision of this Agreement, nor shall any waiver of any default under or breach of any provision of this Agreement be deemed to be a waiver of any other subsequent similar or different default under or breach of such or any other provision or of any election or remedies available in connection therewith. Receipt by any party of any money or other consideration due under this Agreement, with or without knowledge of any breach of default, shall not constitute a waiver of such breach or default of any provision of this Agreement. 10.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts and, notwithstanding that all of the parties did not execute the same counterpart, each of such counterparts shall, for all purposes, be deemed to be an original, and all of such counterparts shall constitute one and the same instrument binding on all of the parties hereto. 10.6 SEPARABILITY. Each provision of this Agreement shall be considered separable and if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, such invalidity shall not impair the operation of or affect those portions of this Agreement which are valid. 10.7 ARTICLE AND SECTION HEADINGS. Article and section titles or captions contained in this Agreement are inserted only as a matter of convenience and for reference, and shall not be construed - 13 - in any way to define, limit, extend or describe the scope of any of the provisions hereof. 10.8 WORD MEANINGS. The words such as "herein," "hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, unless the context otherwise requires. 10.9 SURVIVAL OF COVENANTS, ETC. The covenants and other statements set forth in this Agreement shall survive execution and delivery hereof and making of the capital contributions provided for herein. All of the same shall be deemed to be independently material and to have been relied upon by the party or parties to whom made. 10.10 FURTHER ACTIONS. Each of the Joint Venturers shall hereafter execute and deliver such further instruments and do such further acts and things as may be required or useful to carry out the intent and purpose of this Agreement and as are not inconsistent with the provisions hereof. XI. RIGHT TO COMPETE 11.1 RIGHT TO COMPETE. Neither Joint Venturer shall be prevented or limited in any way from originating or participating in business opportunities or projects on its own even if such business opportunity or project would have been an appropriate business opportunity or project of this Joint Venture or will compete with this Joint Venture. It is understood that each Joint Venturer has the right to compete with the other and with this Joint Venture, except no Joint Venturer may use knowledge or information developed by the Joint Venture to compete with the Joint Venture by utilizing such information. Executed as of the 28th day of October, 1993. CORNERSTONE NATURAL GAS, INC. By: ___________________________ Name:___________________________ Title:__________________________ - 14 - MERIT NATURAL GAS COMPANY By: ___________________________ Name:___________________________ Title:__________________________ - 15 - EX-10.46 17 INTERCREDITOR/SUB AGRMNTS EXHIBIT 10.46 AMENDED AND RESTATED INTERCREDITOR AGREEMENT This AMENDED AND RESTATED INTERCREDITOR AGREEMENT (the "Agreement") dated effective as of December 31, 1993, is entered into between Union Bank, a California banking corporation ("Union") and Bank of Oklahoma, National Association ("BOK"). W I T N E S S E T H: WHEREAS, Union and Dubach Gas Company, a Texas corporation ("Dubach") entered into a certain Amended and Restated Term Loan and Revolving Credit Agreement dated as of July 26, 1991, as previously amended and as further amended and modified effective as of November 2, 1993 and as of December 21, 1993 (collectively, the "Union Credit Agreement"), pursuant to which Union eliminated its Acquisition Loan and its Working Capital Loans credit facilities to Dubach and modified its $400,000 Debt Reserve Loan and modified and extended its revolving credit facility to Dubach in the reduced maximum amount of $10,000,000 for the limited purpose of issuance of letters of credit by Union on Dubach's account on or before February 28, 1994 in connection with Dubach's refining and refinery operations and certain gas marketing operations with expiration dates no later than March 31, 1994 and which Union revolving credit facility is guaranteed by Dubach's corporate parent, Cornerstone Natural Gas, Inc., formerly known as Endevco, Inc., a Delaware corporation ("Cornerstone"); WHEREAS, the Debt Reserve Loan matured on November 29, 1993 and the revolving credit facility extended by Union to Dubach pursuant to the Union Credit Agreement matures no later than March 31, 1994 and until such expiration date, the contingent liabilities of Union under all letters of credit issued to Dubach pursuant to the Union Credit Agreement will be secured by (i) all of Dubach's Accounts, Contracts, Contract Rights, Inventory and General Intangibles and (ii) Dubach banking accounts with Union, all commercial paper purchased by Dubach and issued by Union commercial Funding Corporation and Dubach's account number 0100136050 with BancOne, Dallas, Texas (the types of collateral described in clauses (i) and (ii) , including all proceeds thereof, being collectively referred to herein as the "Dubach Soft Collateral"); WHEREAS, Dubach entered into that certain Revolving credit and Term Loan Agreement with BOK effective as of November 2, 1993 (the "BOK Credit Agreement") pursuant to which BOK has extended to Dubach, Cornerstone and other corporate subsidiaries of Cornerstone therein described and defined (collectively, the "Borrowers") a certain $5,800,000 term credit facility and a $6,000,000 revolving line of credit secured, INTER ALIA, by the Dubach Soft Collateral and certain other types and items of Collateral as that term is described and defined in the Security Agreement and Assignment from the Borrowers (including Dubach) to BOK dated as of even date with the BOK Credit Agreement and certain other Security Instruments described and defined in the BOK Credit Agreement; WHEREAS, until the union revolving line of credit established pursuant to the Union Credit Agreement automatically and irrevocably matures on March 31, 1994 or is otherwise previously terminated AND all security interests and pledges in favor of Union pertaining to any assets of Dubach (including the Dubach Soft Collateral) have been fully discharged and released or terminated of record, BOK will exclude all of Dubach's Accounts, Contracts, Contract Rights, Inventory and General Intangibles (including all proceeds thereof) from the borrowing base utilized by the Borrowers in connection with the revolving line of credit established by BOK pursuant to the BOK Credit Agreement; and WHEREAS, from the effective date hereof through and including March 31, 1994, Union and BOK desire to execute this Agreement in order to provide for certain rights, relative priorities and the manner of enforcing the respective liens and security interests of Union and BOK in the Dubach assets constituting Collateral now or hereafter securing the indebtedness of Dubach (and insofar as the BOK Credit Agreement is concerned, the other Borrowers therein described and defined) arising under the Union Credit Agreement and the BOK Credit Agreement. THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Union and BOK hereby agree as follows: 1. Insofar as the Union Credit Agreement is concerned, Union hereby represents to and covenants and agrees with BOK as follows: a. Union may from time to time issue letters of credit for the account of Dubach (but in no event will any such letters of credit be issued by Union after February 28, 1994) only in connection with Dubach's refining and refinery plant operations and gas marketing operations. Union will not issue any letters of credit for or on behalf of Dubach except only those issued pursuant to the Union Credit Agreement and in no event shall Union issue any letters of credit for the account of Dubach in connection with or arising out of Dubach's natural gas processing, treating or fractionation business or plant operations (except for gas marketing operations). b. In no event will the outstanding amount of letters of credit issued by Union to Dubach pursuant to the Union Credit Agreement exceed $10,000,000 at any time nor will any letters of credit issued by Union on Dubach's account have expiration or expiry dates later than March 31, 1994. Union will not extend or renew any letters of credit now or hereafter issued under the Union Credit Agreement to any expiry or expiration date subsequent to March 31, 1994. 2 c. The Acquisition Loan and the Working Capital Loans to Dubach under the Union Credit Agreement have been fully paid and discharged and Union neither has nor claims any mortgage liens, security interests, pledges or other collateral interest in any property, assets or accounts of Dubach other than the Dubach Soft Collateral. d. Upon receipt of good funds evidencing payment in full of its Acquisition Loan and the Working Capital Loans to Dubach, Union will promptly release and/or terminate in recordable form of all of its mortgage liens and security interests in all of Dubach's assets constituting collateral for the Union Credit Agreement except only for the Dubach Soft Collateral. Union agrees to provide BOK with copies of all such releases or termination statements and will provide such further documents or evidence as may be reasonably requested by BOK as further assurance of Union's full and complete release of all of the Dubach assets as collateral for Union's liabilities and indebtedness established pursuant to the Union Credit Agreement except only for the Dubach Soft Collateral. In no event shall Union claim or assert any security interest or mortgage lien in or encumbrance against any of Dubach's equipment, real estate, leases, fixtures, rights-of-way or other hard assets, including (without limitation) those used or useful in or pertaining to Dubach's natural gas processing, treating and fractionating plants, pipeline systems and refinery and refining plants or operations. 2. Union and BOK acknowledge and agree that regardless of any priority otherwise available to either thereof by applicable law based upon time of filing or otherwise insofar as applicable law is concerned, the liens of Union and BOK in the Dubach Soft Collateral (including all proceeds thereof) shall be determined, governed and administered solely in accordance with the terms and provisions hereof, particularly paragraph 3 below. 3. Union agrees that regardless of any priority otherwise available to Union by law insofar as any or all of the Dubach Soft Collateral is concerned, other than its first priority security interest in the Dubach Soft Collateral used, arising out of and/or generated in connection with Dubach's refinery, refining plant and/or gas marketing operations, all of Union's liens thereagainst shall be junior and fully subordinate for all purposes to the security interests and mortgage liens granted to BOK under the BOK Credit Agreement and the Security Instruments therein defined and described. Union shall retain its first priority security interest in the Dubach Soft Collateral used, arising out of and/or generated in connection with Dubach's refining, refinery plant and/or gas marketing operations. 4. Upon the occurrence of a Default or Event of Default by Dubach under the Union Credit Agreement or any one or more of the Borrowers under the BOK Credit Agreement, both Union and BOK 3 represent to and acknowledge and stipulate with the other party hereto that they will diligently and jointly examine the books and records of Dubach in order to delineate between (i) Dubach Soft Collateral as to which BOK shall be entitled to absolute and first priority over Union in all respects pursuant to paragraph 3 hereof above and (ii) Dubach Soft Collateral as to which Union shall have absolute and first priority over BOK in all respects pursuant to paragraph 3 hereof above. 5. Each party hereto agrees that it shall provide the other party hereto with a copy of all notices related to defaults that it is required to give to Dubach (or Cornerstone as Dubach's agent insofar as the BOK Credit Agreement is concerned) in accordance with such party's Credit Agreement or any of the Security Instruments pertaining thereto. Any notice that either party delivers hereunder shall be personally delivered, deposited in the United States mail, postage prepaid, certified mail, or by overnight courier of recognized national standing, addressed as follows: Union Bank Energy Capital Services 445 South Figueroa Street Los Angeles, California 90071 Bank of Oklahoma, National Association Bank of Oklahoma Tower one Williams Center Energy Department - 8th Floor Tulsa, Oklahoma 74192 6. This Agreement shall inure to the benefit of, and be binding on, Union and BOK and their respective successors and assigns. In the event that either party hereto shall at any time transfer or assign its right, title and interest under any Security Agreement or Security Instrument or to any Collateral after any such transfer, each party hereto hereby agrees to give prior written notice of the terms of this Agreement to any such transferee or assignee. 7. Nothing contained herein shall be construed so as to require (other than the consent required to be obtained by Dubach pursuant to the BOK Credit Agreement) the consent of Union to any amendment, supplement, extension or modification of the BOK Credit Agreement or the increase, renewal or extension of any obligation of Dubach thereunder or under any BOK Security Instrument now or at any time hereafter. 8. This Agreement may be executed in one or more counterparts, each of which shall constitute an original but when taken together shall constitute but one agreement. 4 9. This Agreement may be amended or modified by a writing duly executed by each of the parties hereto. 10. Each term not otherwise defined herein shall have the meaning ascribed thereto in the applicable Uniform Commercial code. 11. This Agreement shall be governed by the substantive laws (other than conflict laws) of the State of Oklahoma. 12. This Amended and Restated Intercreditor Agreement supersedes and replaces that certain Intercreditor Agreement dated as of November 2, 1993 between Union and BOK. IN WITNESS WHEREOF, the undersigned have executed this Agreement by their duly authorized officers as of the date and year first above written. UNION BANK By: ______________________________ Walter M. Roth, Vice President By: ______________________________ (Title) "Union" BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: ____________________________ Jack Brannon, Vice President "BOK" The undersigned acknowledges receipt of a fully executed counterpart of the foregoing Amended and Restated Intercreditor Agreement between Union and BOK and consents and agrees to the terms and provisions thereof. Dubach Gas Company By: _____________________ Robert L. Cavnar, Senior Vice President 5 EX-10.47 18 SUG AGREEMENT EXHIBIT 10.47 SUBORDINATION AGREEMENT TO: Premier Bank 130 DeSiard Street Monroe, Louisiana 71201 Attention: Daniel M. Van, Vice President Gentlemen: WHEREAS, Dubach Gas Company, a Texas corporation (together with its successors and assigns, collectively referred to herein as "Dubach"), has requested that Premier Bank ("Premier") extend a letter of credit facility to Dubach for the issuance of letters of credit during the period from February 28, 1994 through March 4, 1994 in connection with Dubach's refining and refinery operations and certain gas marketing operations (which such letters of credit will have an expiration date no later than April 30, 1994) in an aggregate outstanding principal amount not in excess of $2,600,000 (the "Letter of Credit Facility"), to be evidenced by the promissory note, the security agreement and the financing statement between Dubach and Premier, dated as of even date herewith (collectively the "Letter of Credit Documents"); WHEREAS, Dubach has advised Premier of the terms and provisions of that certain Amended and Restated Intercreditor Agreement between Union Bank, a California banking corporation ("Union") and Bank of Oklahoma, National Association ("BOK"), dated as of December 31, 1993 (the "Intercreditor Agreement"), a true, correct and complete copy of which Intercreditor Agreement has been provided to Premier; WHEREAS, in order to induce Premier to extend the Letter of Credit Facility to Dubach and enter into the Letter of Credit Documents, Premier has required that BOK agree to subordinate the priority of its security interest in the Dubach Soft Collateral as more particularly described and defined in the Intercreditor Agreement, to the extent used, arising out of and/or generated in connection with Dubach's refinery, refining plant and/or gas marketing operations, to the security interests of Premier in the Dubach Soft Collateral as security for Premier's contingent obligations and liabilities under Letters of Credit issued thereby for the account of Dubach under the Letter of Credit Facility, which such subordination, as hereinafter set forth, shall be limited to the LESSER of the aggregate outstanding amount of letters of credit issued by Premier under the Letter of Credit Facility or $2,600,000; and WHEREAS, Premier has required that BOK enter into this Subordination Agreement as a condition to the closing of the Letter of Credit Documents and provision of the Letter of Credit Facility to Dubach; NOW, THEREFORE, to induce Premier to enter into the Letter of Credit Documents, to consummate the transaction provided for therein and to agree to make the Letter of Credit Facility available to Dubach and for other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, BOK agrees, covenants and stipulates as follows: 1. Subject to the limitations herein provided, BOK subordinates its security interests in the Dubach Soft Collateral used, arising out of and/or generated in connection with Dubach's refinery, refining plant and/or gas marketing operations to the security interests therein of Premier notwithstanding the prior filing of Financing Statements in favor of BOK, as secured party, pertaining to such Dubach Soft Collateral. The purpose and effect of this Subordination Agreement shall be to subordinate BOK's foregoing security interest to the security interest in favor of Premier, in accordance with the terms, provisions and limitations hereof with the same force, effect and legal significance as if the Premier Financing Statements pertaining to the Dubach Soft Collateral used, arising out of and/or operated in connection with Dubach's refinery, refining plant and/or gas marketing operations had been filed prior to the BOK Financing Statements pertaining thereto. 2. The subordination by BOK insofar as the Dubach Soft Collateral is concerned shall be limited in all respects to a maximum outstanding amount not in excess of the LESSER of (i) the aggregate outstanding amount of Letters of Credit issued by Premier pursuant to the Letter of Credit Facility or (ii) $2,600,000. By virtue of its acceptance hereof, Premier covenants and agrees with BOK that all letters of credit issued by Premier for the account of Dubach shall be to sellers (as beneficiaries) of crude oil purchased by Dubach for March 1994 crude oil purchases by Dubach for use in Dubach's refining and refining plant operations. Such letters of credit shall be issued no later than March 4, 1994, and shall have expiry or expiration dates no later than April 30, 1994. Premier will not extend or renew any letters of credit issued under the Letter of Credit Facility to any expiry or expiration date subsequent to April 30, 1994. 3. Premier recognizes, acknowledges and stipulates to the terms and provisions of the Intercreditor Agreement, including (without limitation), the prior and senior position of Union in and to the Dubach Soft Collateral as therein set forth and provided. Premier further acknowledges, stipulates and agrees that its priority security interest in the Dubach Soft Collateral used, arising out of and/or generated in connection with Dubach's refinery, refining plant and/or gas marketing operations shall be limited to such Dubach Soft Collateral in all respects and in no event shall Premier claim or assert any security interest or mortgage lien in or encumbrance against any of Dubach's equipment, real estate, leases, fixtures, rights of way or other hard assets, including (without limitation) those used or useful in or pertain- - 2 - ing to Dubach's natural gas processing, treating and fractionating plants, pipeline systems and refinery and refining plants or operations. BOK shall retain its first priority security interest in all Dubach Soft Collateral OTHER THAN such Dubach Soft Collateral used, arising out of and/or generated in connection with Dubach's refining, refinery plant and/or gas marketing operations. 4. Each party hereto agrees that it shall provide the other party hereto with a copy of all notices related to defaults that it is required to give to Dubach (or Cornerstone as Dubach's agent insofar as the BOK Credit Agreement defined in the Intercreditor Agreement is concerned) in accordance with such party's credit agreement or any of the Security Instruments pertaining thereto. Any notice that either party delivers hereunder shall be personally delivered, deposited in the United States mail, postage prepaid, certified mail, or by overnight courier of recognized national standing, addressed as follows: Premier Bank 130 DeSiard Street Monroe, Louisiana 71201 Attention: Daniel M. Van, Vice President Bank of Oklahoma, National Association Bank of Oklahoma Tower One Williams Center Energy Department - 8th Floor Tulsa, Oklahoma 74192 5. Upon the occurrence of a default or event of default by Dubach under the Letter of Credit Documents or one or more of the Borrowers under the BOK Credit Agreement (as defined and described in the Intercreditor Agreement), both Premier and BOK represent to and acknowledge and stipulate to the other party that they will diligently and jointly examine the books and records of Dubach in order to delineate between the (i) Dubach Soft Collateral as to which BOK shall be entitled to absolute priority over Premier in all respects pursuant to paragraph 3 hereinabove, and (ii) Dubach Soft Collateral as to which Premier shall hold absolute first priority over BOK in all respects pursuant to paragraph 3 hereinabove. 6. This Agreement shall inure to the benefit of, and be binding on, Premier and BOK and their respective successors and assigns. In the event that either party hereto shall at any time transfer or assign its right, title and interest under any Security Agreement or Security Instrument or to any Collateral after any such transfer, each party hereto hereby agrees to give prior written notice of the terms of this Agreement to any such transferee or assignee. - 3 - 7. Nothing contained herein shall be construed so as to require (other than the consent required to be obtained by Dubach pursuant to the BOK Credit Agreement) the consent of Premier to any amendment, supplement, extension or modification of the BOK Credit Agreement or the increase, renewal or extension of any obligation of Dubach thereunder or under any BOK Security Instrument now or at any time hereafter. 8. This Agreement is subject to the terms and provisions of the Intercreditor Agreement. All terms used but not defined herein shall have the meanings assigned thereto in the Intercreditor Agreement. 9. This Agreement may be executed in one or more counterparts, each of which shall constitute an original but when taken together shall constitute but one agreement. 10. This Agreement may be amended or modified by a writing duly executed by each of the parties hereto. 11. Each term not otherwise defined herein shall have the meaning ascribed thereto in the applicable Uniform Commercial Code. 12. This Agreement shall be governed by the substantive laws (other than conflict laws) of the State of Oklahoma. IN WITNESS WHEREOF, this Subordination Agreement has been made and entered into effective as of February 28, 1994, by the undersigned. BANK OF OKLAHOMA, NATIONAL ASSOCIATION By: ----------------------------- Gary R. Christopher Senior Vice President "BOK" PREMIER BANK By: ----------------------------- Daniel M. Van, Vice President "Premier" - 4 - The undersigned hereby acknowledges receipt of a copy of the foregoing Subordination Agreement, waives notice of acceptance thereof by Premier Bank, and agrees to be bound by the terms and provisions thereof and to do every other act and thing necessary or appropriate to carry out the terms and provisions of the foregoing Subordination Agreement. Dated as of the 28th day of February, 1994. Dubach Gas Company By ---------------------------- Robert L. Cavnar, Senior Vice President "Dubach" - 5 - EX-10.48 19 CONSULTING AGREEMENT EXHIBIT 10.48 CONSULTING AGREEMENT CONSULTING AGREEMENT (this "Agreement"), dated June 4, 1993, between ENDEVCO, INC., a Delaware corporation (the "Company"), and JAMES W. BRYANT, an individual residing in Dallas, Texas (the "Consultant"). WHEREAS, the Consultant is resigning as Vice Chairman of the Board and from the Office of the Chief Executive of the Company; and WHEREAS, the Company desires to have the continued benefit of the Consultant's knowledge and experience as a business consultant to the Company and considers such arrangement a vital element to protecting and enhancing the best interests of the Company and its stockholders; and WHEREAS, the Consultant is willing to consult to the Company, on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the Company and the Consultant hereby agree as follows: 1. CONSULTING SERVICES. The Company agrees to employ the Consultant, and the Consultant agrees to enter the employ of the Company, as a business consultant to the Company, for the period set forth in Paragraph 2, with the duties set forth in Paragraph 3, and upon the other terms and conditions herein provided. 2. EFFECTIVE DATE AND TERM. The employment of the Consultant by the Company as provided in Paragraph 1 shall be for a three-year term commencing on the effective date of the Plan of Reorganization of the Company (the "Effective Date"), unless further extended as herein provided (the "Consulting Period"). On the second and each subsequent anniversary of the Effective Date, the Consulting Period shall be automatically extended for an additional year unless, before such anniversary, the Company gives the Consultant written notice that it elects to terminate this Agreement at the end of the Consulting Period then in effect. The Consulting Period may be terminated earlier in accordance with the provisions of Paragraph 5. 3. DUTIES. (a) During the Consulting Period, the Consultant shall serve as a business consultant to the Company for the purpose of rendering to it services expected of a senior executive officer of the Company as it may reasonably request from time to time in connection with matters with respect to which the Consultant has special knowledge and expertise. These matters will include, but not be limited to, the following special projects of the Company: (i) gas liquid processing plant expansions and relocations and (ii) the coal bed methane project in Czechoslovakia. In his capacity as a business consultant hereunder, the Consultant shall report only to the Chairman, Chief Executive Officer and the Chief Operating Officer of the Company. The duties of Consultant shall be limited to duties comparable to those customarily assigned to senior executives of the Company. During the 2 Consulting Period, the Consultant shall be available to devote 40 hours per week to his duties under this Agreement, except for usual, ordinary, and customary periods of vacation and absence due to illness or other disability. If, at the request of the Company, the Consultant performs services hereunder in any one week for more than 40 hours, the Consultant shall be credited with 1 1/2 hours of vacation time for each extra hour of work performed in excess of 40 hours per week. (b) The Consultant shall be based in Dallas, Texas and shall not be required to render the consulting services required by this Agreement other than at locations in Dallas, Texas, subject, however, to such reasonable travel as the performance of such services may require. (c) It is specifically understood by the parties hereto that the Consultant shall retain the right to pursue other business or businesses and engage in other activities, whether or not in the same industries in which the Company is active, so long as such businesses or activities do not interfere with the Consultant's proper performance of the consulting services required by this Agreement. To the extent necessary to comply with his obligations under Paragraph 4(d) below, the Consultant will not compete with the Company during the Consulting Period. (d)(i) During the Consulting Period, the Consultant shall have among his duties the development of new business opportunities for the Company in the Company's line of business ("Business Opportunities"), including but not limited to (A) finding profitable utilization for equipment that is not being utilized (excluding any projects originated by the Company), and (B) finding new projects in the area of business conducted by the Company such as providing gas to plants, acquiring new pipelines or gathering systems or providing processing to pipelines or gathering systems. A Business Opportunity shall be a "Compensated Business Opportunity" if it is originated by the Consultant and not by employees, agents or representatives of the Company. (ii) The Consultant shall present each potential Compensated Business Opportunity in writing to the Chief Executive Officer of the Company. Unless the Company notifies the Consultant within ten (10) days after receipt of such written presentation that it does not agree that such opportunity was originated by the Consultant, such opportunity shall be considered a Compensated Business Opportunity. (iii) All Compensated Business Opportunities must be first offered to the Company. The receipt by the Company of the written presentation referred to in Paragraph 4(d)(ii) shall constitute an offer by the Consultant to permit the Company to accept the Compensated Business Opportunity. For a reasonable period of time after receipt of such offer (not to exceed sixty (60) days), the Company shall have the right to accept such offer by giving a written notice of acceptance to the Consultant prior to the expiration of such period. Such offer may not be accepted for less than 100% of the available opportunity. If the Company elects not to pursue a Compensated Business Opportunity, then the Consultant may pursue such 3 opportunity himself or may offer it to third parties. If the terms of the Compensated Business Opportunity change so that the terms are materially better than those offered to the Company at the time the Company rejected such offer, then the Consultant must reoffer such Compensated Business Opportunity to the Company. (iv) If the Company elects to implement a Compensated Business Opportunity, then the Consultant will be paid the special bonus described on Exhibit A hereof at the time the Compensated Business Opportunity is completed and fully operational. If the Company accepts a Compensated Business Opportunity and thereafter fails to pursue such opportunity with reasonable diligence, the Consultant may pursue such opportunity himself or may offer it to third parties. If the Consultant believes that the Company has failed to pursue such opportunity with reasonable diligence, he will so notify the Company and may thereafter pursue such opportunity only after the Company has released the opportunity to the Consultant in writing, which release shall not be unreasonably withheld, or the Company's lack of reasonable diligence in pursuing such opportunity has been determined by arbitration pursuant to Paragraph 13 below. (v) If the Company accepts a Compensated Business Opportunity, the Consultant will nevertheless be entitled to participate and invest in such Compensated Business Opportunity, himself or with other parties, to the extent of 40% of the available interest if (A) the Consultant agrees to manage the project and (B) all or part of the Consulting Fee will be paid from the project revenues after the project is completed and fully operational. If the management of the project will not require the Consultant's full time services or if the project cannot reasonably bear the entire Consulting Fee, then the portion of the Consulting Fee to be borne by the project shall be as mutually agreed by the Company and the Consultant. (vi) If the Company determines that the development of a Compensated Business Opportunity by the Company requires a joint venture or equity partner (a debt financing with equity kickers or warrants shall not be considered an equity partner or joint venture), the Company will notify the Consultant and the Consultant may seek to locate an investor for such project. If (A) the Consultant is able to locate an equity partner or joint venture partner for such Compensated Business Opportunity who agrees to provide such financing on terms better than the terms offered to the Company by other parties prior to the time that the Company has agreed to pursue such Compensated Business Opportunity with another party and (B) the terms offered by such person are otherwise satisfactory to the Company, then the Company will agree to enter into a joint venture, partnership or other arrangement with such person. The Consultant will be entitled to receive whatever compensation such person is willing to pay him for presenting such opportunity to it but will not be entitled to any additional compensation from the Company. 4. COMPENSATION AND RELATED MATTERS. (a) CONSULTING FEE. During the Consulting Period, the Company shall pay to the Consultant for his services hereunder a consulting fee ("Consulting Fee") at the rate of not 4 less than $200,000 per year, payable in installments (in as nearly equal amounts as is practicable) in accordance with the general payroll practices of the Company in effect at the time such payment is made, but in no event less frequently than monthly, or as otherwise mutually agreed upon. The Consulting Fee shall also be subject to such increases as may be determined from time to time by the Board of Directors of the Company. Once established at an increased specified rate, the Consulting Fee shall not thereafter be reduced. (b) EXPENSES. During the Consulting Period, the Consultant shall be entitled to receive prompt reimbursement for all reasonable travel, entertainment and other expenses (including business class air fare for any international travel) paid or incurred by the Consultant in performing the consulting services required by this Agreement. (c) VACATIONS. During the Consulting Period, the Consultant shall be entitled to reasonable periods of vacation, which shall be four weeks (plus any increase because of work in excess of 40 hours per week) during each 12-month period commencing on the date of this Agreement. The Consultant agrees to utilize his vacation at such time or times as are (i) consistent with the proper performance of his duties hereunder and (ii) mutually convenient for the Company and the Consultant. (d) OFFICE AND SUPPORT SERVICES. During the Consulting Period, the Company shall provide to the Consultant, at the Company's sole cost, a private office of a size with furnishings and other appointments, and personal secretarial and other support staff assistance (including document preparation, file storage, copying and telecopying transmission), first floor, covered parking, and other office amenities, at the Company's principal executive offices in Dallas, Texas, commensurate with those provided by the Company to the Consultant as of the date of this Agreement. Such office shall be furnished with the furniture and other appointments located at the Consultant's present office. At any time during the Consulting Period, the Company may request the Consultant to office at a location separate from the Company's principal executive offices in Dallas, Texas. If so requested by the Company, the Consultant shall relocate his office to a location of his choice, provided the Company pays to the Consultant a moving allowance of $25,000. The Consultant shall also have the right to purchase any furniture or decorations in his office that are not owned by him for a cost equal to their book value. Commencing one year following such relocation, the Company shall pay to the Consultant an office expense allowance of $1,000 per month during the remainder of the Consulting Period. The office expense allowance shall be paid on the first day of each calendar month in advance. (e) WELFARE BENEFIT PLANS. The Company shall make all arrangements necessary to permit the Consultant and his dependents who currently participate therein to continue to be covered during the Consulting Period by all welfare benefit plans of the Company in which he or they currently participate, including, without limitation, medical/health/hospitalization, life insurance, accidental death and dismemberment insurance, and disability insurance plans, and to participate during the Consulting Period in any and all welfare benefit plans provided by the Company to its employees generally following the date hereof, including any increase in benefits provided by existing plans, in each case at the same cost to the Consultant as he would have incurred had he remained 5 an employee of the Company; provided that the foregoing benefits shall not include payment of premiums on any of the Consultant's life insurance policies that are in addition to the types of policies that are offered to the senior executives of the Company. In the event that for any reason the Company is unable to provide the foregoing welfare benefit plan coverage, it shall promptly reimburse the Consultant for any excess costs incurred by him in obtaining individual insurance policies providing reasonably similar coverage. (f) INDEMNIFICATION. In addition to any other indemnity rights the Consultant may have, the Consultant shall be entitled and continue to be entitled, during the Consulting Period and thereafter without limitation of time, as a matter of separate contract, but without duplication of payment, to mandatory indemnification and advancement of expenses to the full extent such indemnification and advancement of expenses may be made to directors and officers of the Company as of the date of this Agreement under the Company's certificate of incorporation and bylaws as in effect as of the date of this Agreement and under Section 145 of the Delaware General Corporation Law (the "DGCL") as in effect as of the date of this Agreement (except that subsection (d) of Section 145 of the DGCL, Section 8.03 of the Company's bylaws and the phrase "in accordance with Section 8.03 hereof" in Section 8.05(a) of the Company's bylaws shall not apply for purposes of this Agreement), regardless of any amendments thereto or repeal thereof or any adoption of new or superseding bylaws or statutory provisions which may hereafter occur. The Company shall indemnify and hold harmless the Consultant from and against all costs and expenses reasonably incurred by him in securing such indemnification and in enforcing his rights under this Paragraph 4(f). The provisions of this Paragraph 4(f) shall continue in effect notwithstanding termination of the Consultant's employment hereunder for any reason. 5. TERMINATION OF CONSULTING SERVICES. (a) DEATH. The Consultant's employment as a consultant hereunder shall terminate automatically upon his death. (b) DISABILITY. If the Disability (as defined below) of the Consultant occurs during the Consulting Period, the Company may notify the Consultant of the Company's intention to terminate the Consultant's employment as a consultant hereunder for Disability. In such event, the Consultant's employment as a consultant hereunder shall terminate effective on the 30th day following the date such notice of termination is given to the Consultant, provided that the Consultant shall not have returned to the full-time performance of his duties hereunder during such 30-day period. For purposes of this Agreement, the "Disability" of the Consultant shall be deemed to have occurred in the event of the full-time absence of Consultant from his duties hereunder for 180 consecutive days as a result of his physical or mental incapacity. (c) TERMINATION BY COMPANY. The Company may terminate the Consultant's employment as a consultant hereunder for Cause (as defined below). For purposes of this Agreement, "Cause" shall mean either of the following: (i) acts of dishonesty by the Consultant that constitute a felony under the laws of the State of Texas and that result or are intended to result, directly or indirectly, in gain to or personal enrichment of the 6 Consultant at the expense of the Company; (ii) the willful and continued failure by the Consultant to substantially perform his duties hereunder (other than any such failure resulting from the Consultant's physical or mental incapacity) or to substantially follow the directions of the Board of Directors, the Chairman, the Chief Executive Officer or the Chief Operating Officer (as long as such directions are consistent with this Agreement) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Consultant has not substantially performed his duties or has not substantially followed such directions; (iii) conviction of a felony involving moral turpitude; (iv) habitual insobriety or failure to perform duties due to alcoholism or drug addiction; or (v) misappropriation of Company funds. Notwithstanding the foregoing, the Consultant shall not be deemed to have been terminated for Cause without (i) reasonable notice to the Consultant setting forth the reasons for the Company's intention to terminate his employment as a consultant hereunder for Cause, (ii) an opportunity for the Consultant, together with his counsel, to be heard before the Board of Directors of the Company, and (iii) delivery to the Consultant of a Notice of Termination (as defined below) from the Company satisfying the requirements of this Agreement, which notice shall be accompanied by a resolution duly adopted by a majority of the directors of the Company then in office finding that, in the good faith opinion of such directors, the Consultant was guilty of conduct which constitutes Cause hereunder and specifying the particulars thereof in reasonable detail. (d) TERMINATION BY CONSULTANT. The Consultant may terminate his employment as a consultant hereunder at any time during the Consulting Period for any reason. For purposes of this Agreement, "Good Reason" shall mean any of the following (without the Consultant's express written consent): (i) the assignment to the Consultant by the Company of any duties materially inconsistent with the Consultant's duties as provided herein or a change in the reporting responsibilities of the Consultant as provided herein; (ii) a reduction by the Company of the Consultant's Consulting Fee as then in effect pursuant to the provisions hereof or the failure of the Company to pay such Consulting Fee to the Consultant at the time and in the manner specified in Paragraph 4(a); or (iii) any failure by the Company to otherwise comply with any material provision of this Agreement. (e) NOTICE OF TERMINATION. Any termination of the Consultant's employment as a consultant hereunder by the Company or by the Consultant (other than a termination pursuant to Paragraph 5(a)) shall be communicated by a Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which (i) indicates the specific termination provision in this Agreement relied upon and (ii) in the case of a termination for Disability, Cause, or Good Reason, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Consultant's employment under the provision so indicated. Consultant shall give the 7 Company 30 days' prior written notice of any termination by Consultant and, in the case of a termination for Good Reason, the Consultant may only terminate this Agreement if the Company has failed to cure the circumstances claimed to constitute Good Reason within such 30-day period. 6. OBLIGATIONS OF COMPANY UPON TERMINATION OF CONSULTING SERVICES. (a) If the Consultant's employment as a consultant hereunder is terminated by reason of the Consultant's death or Disability or for Cause or by the Consultant other than for Good Reason, the Company shall thereafter have no further obligations to the Consultant under this Agreement, except as provided in Paragraphs 4(f), 11, and 14. (b) If the Consultant's employment as a consultant hereunder is terminated by the Company other than for Cause or Disability or is terminated by the Consultant for Good Reason, the Company shall, until the end of the Consulting Period then in effect, continue to be obligated to (i) make the payments of the Consulting Fee (at the rate in effect hereunder at the time of termination) specified in Paragraph 4(a), (ii) provide the welfare benefit plan coverage provided for in Paragraph 4(e), (iii) provide the moving allowance and office expense allowance described in Paragraph 4(d), (iv) provide the indemnification and reimbursement of expenses described in Paragraph 4(f) and (v) comply with any obligations covered by Paragraphs 11 and 14. (c) Notwithstanding any provision of this Agreement to the contrary, the Company's obligation to allow the Consultant to seek third party financing for Compensated Business Opportunities, and the Consultant's obligation to offer any business opportunities to the Company, shall terminate upon any termination of this Agreement pursuant to either Section 6(a) or (b) above. 7. COMPLIANCE WITH OTHER AGREEMENTS. (a) The Company represents and warrants to the Consultant that the execution, delivery, and performance by the Company of this Agreement have been duly authorized by all necessary corporate action of the Company and do not and will not conflict with or result in a violation of any provision of, or constitute a default under, any contract, agreement, instrument, or obligation to which the Company is a party or by which it is bound. (b) The Consultant represents and warrants to the Company that the execution, delivery, and performance by the Consultant of this Agreement do not and will not conflict with or result in a violation of any provision of, or constitute a default under, any contract, agreement, instrument, or obligation to which the Consultant is a party or by which he is bound. 8. CONFIDENTIALITY. During the Consulting Period and for a period of one year thereafter, the Consultant shall hold in strict confidence and shall not, directly or indirectly, disclose or reveal to any person, or use for his own personal benefit or for the benefit of anyone else, any trade secrets, confidential dealings, or other confidential or proprietary 8 information of any kind, nature, or description (whether or not acquired, learned, obtained, or developed by the Consultant alone or in conjunction with others) belonging to or concerning the Company or any of its subsidiaries, or any of their customers or clients or others with whom they now or hereafter have a business relationship, except (i) with the prior written consent of the Company duly authorized by its Board of Directors, (ii) in the course of the proper performance of the Consultant's duties hereunder, or (iii) as required by applicable law or legal process. The terms "trade secrets, confidential dealings, or other confidential or proprietary information" shall not include information that is or becomes (i) known to the public other than by improper disclosure by Consultant or (ii) available to the Consultant from sources other than the Company. The provisions of this Paragraph 8 shall continue in effect notwithstanding termination of the Consultant's employment hereunder for any reason. The Consultant shall not compete with the Company during the Consulting Period of this agreement except as herein provided. 9. INDEPENDENT CONTRACTOR. It is expressly recognized by the parties that the Consultant is not an employee of the Company and that the relationship of the Consultant to the Company is that of an independent contractor. Without limiting the scope of the immediately preceding sentence, the Consultant shall be responsible for any and all federal, state, and local income and self-employment and similar taxes. 10. MITIGATION. The Consultant shall not be required to mitigate the amount of any payment or other benefit provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or other benefit provided for under this Agreement be reduced by any compensation earned by the Consultant as a result of employment by another employer during or after the Consulting Period or otherwise; provided that any portion of the Consulting Fee that is actually paid from project revenues as contemplated by Paragraph 3(d)(v) hereof shall reduce the amounts otherwise payable by the Company hereunder. 11. NO EFFECT ON OTHER CONTRACTUAL RIGHTS. The provisions of this Agreement, and any payment or other benefit provided for hereunder, shall not reduce any amounts otherwise payable to the Consultant, or in any way diminish the Consultant's rights, whether existing now or hereafter, under any other contract or agreement of the Company providing benefits to the Consultant. 12. ATTORNEYS' FEES AND COSTS. In the event there is any litigation between the parties hereto with respect to this Agreement, the prevailing party in such litigation shall be entitled to recover all attorneys' fees and costs incurred by such party in connection with such litigation. 13. ARBITRATION. Any dispute, controversy, or claim arising out of or relating to this Agreement, or the validity, interpretation, enforceability, or breach thereof, which is not settled by agreement between the parties, shall be settled by arbitration in Dallas, Texas, in accordance with the Commercial Arbitration Rules of the American Arbitration Association or any successor organization (the "Association") then in effect. The decision of the arbitrator(s) shall be final and binding on the parties. A judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction, or application 9 may be made to such court for judicial acceptance of the award and an order of enforcement, as the case may be. The expenses of such arbitration, including the fee, if any, of the arbitrator(s), shall be divided between the parties on an equal basis unless otherwise specified in the arbitrators' award. Each party shall pay the fees and expenses of its own witnesses and counsel, unless the arbitrator(s) shall specify otherwise in the award. 14. SURVIVAL. Neither the expiration or the termination of the term of the Consultant's employment as a consultant hereunder shall impair the rights or obligations of either party hereto which shall have accrued hereunder prior to such expiration or termination. 15. NOTICES. All notices, requests, demands, and other communications required or permitted to be given or made hereunder by either party hereto shall be in writing and shall be deemed to have been duly given or made (i) when delivered personally or (ii) when deposited in the United States mail, first class registered or certified mail, postage prepaid, return receipt requested, to the party for which intended at the following addresses (or at such other addresses as shall be specified by the parties by like notice, except that notices of change of address shall be effective only upon receipt): If to the Company, at: 8080 North Central Expressway Suite 1200, Lock Box 47 Dallas, Texas 75206 Attention: Chairman of the Board If to the Consultant, at: 8080 North Central Expressway Suite 1200, Lock Box 47 Dallas, Texas 75206 16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto concerning the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to such subject matter. This Agreement specifically supersedes any prior agreements between the parties, including without limitation the agreement known as the Conflict of Interest Agreement signed by all Company employees annually. 17. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors, and assigns; provided, however, that: (i) the Consultant shall not assign or otherwise transfer this Agreement or any of his rights or obligations hereunder without the prior written consent of the Company (except that any rights that the Consultant may have hereunder at the time 10 of his death may be transferred by will or pursuant to the laws of descent and distribution); and (ii) the Company shall not assign or otherwise transfer this Agreement or any of its rights or obligations hereunder without the prior written consent of the Consultant. Notwithstanding the foregoing, however, if the Company merges or consolidates with or into another corporation, or transfers or sells all or substantially all its assets to a third party, the Company may assign this Agreement to the party which is the successor to its business and assets without the consent of the Consultant, provided the Company remains liable hereunder (if the Company survives such transaction) and such assignee assumes or becomes legally bound to perform all obligations of the Company hereunder. 18. AMENDMENT. This Agreement may not be modified or amended in any respect except by an instrument in writing signed by the party against whom such modification or amendment is sought to be enforced. 19. WAIVER. Any term or condition of this Agreement may be waived at any time by the party hereto which is entitled to have the benefit thereof, but such waiver shall only be effective if evidenced by a writing signed by such party, and a waiver on one occasion shall not be deemed to be a waiver of the same or any other type of breach on a future occasion. No failure or delay by a party hereto in exercising any right or power hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right or power. 20. SEVERABILITY. If any provision of this Agreement is held to be unenforceable, (a) this Agreement shall be considered divisible, (b) such provision shall be deemed inoperative to the extent it is deemed unenforceable, and (c) in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law. 21. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officer, and the Consultant has executed this Agreement, as of the date first set forth above. ENDEVCO, INC. By: Name: Title: "COMPANY" JAMES W. BRYANT "CONSULTANT" 11 EXHIBIT A Consultant's special bonus shall be an amount equal to: (i) 5% of the first $1,000,000 of the Company Investment, plus (ii) 4% of the amount of the Company Investment in excess of $1,000,000 but not in excess of $2,000,000, plus (iii) 3% of the amount of the Company Investment in excess of $2,000,000 but not in excess of $3,000,000, plus (iv) 2% of the amount of the Company Investment in excess of $3,000,000 but not in excess of $4,000,000, plus (v) 1% of the amount of the Company Investment in excess of $4,000,000. "Company Investment" shall mean the total cash consideration and the total value of other consideration paid by the Company to third parties (but excluding salaries, travel, overhead expenses and expenses paid to outside advisors or consultants, including without limitation legal, accounting and engineering expenses) with respect to a Compensated Business Opportunity (as defined in Paragraph 3(d) of this Agreement). EX-22.1 20 SUBSIDIARIES LIST EXHIBIT 22.1 CORNERSTONE NATURAL GAS, INC. SCHEDULE OF CORPORATE ENTITIES STATE OF INCORPORATION ------------- Cornerstone Natural Gas, Inc. Delaware Wholly-Owned Subsidiaries of Cornerstone Natural Gas, Inc.: Cornerstone Gas Resources, Inc. Delaware Cornerstone Gas Processing, Inc. Delaware Cornerstone Gas Gathering Company Delaware Cornerstone Pipeline Company Delaware Dubach Gas Company Texas Endevco Producing Company Delaware Pentex Petroleum, Inc. Texas Wholly-Owned Subsidiaries of Pentex Petroleum, Inc. 1. Endevco Taft Company Delaware 2. Endevco Three Rivers Delaware Pentex Pipeline Company Texas EX-23.1 21 CONSENT OF E&Y EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-4637) pertaining to the Cornerstone Natural Gas, Inc. Employee Savings Plan, of our report dated March 7, 1994, with respect to the consolidated financial statements and schedules of Cornerstone Natural Gas, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1993. ERNST & YOUNG Dallas, Texas March 23, 1994 -43- -----END PRIVACY-ENHANCED MESSAGE-----