Exhibit 99.2
AGREEMENT AND PLAN OF MERGER
AMONG
PETROCORP INCORPORATED,
PETROCORP ACQUISITION COMPANY
AND
SOUTHERN MINERAL CORPORATION
DATED AS OF DECEMBER 22, 2000
TABLE OF CONTENTS
ARTICLE I THE MERGER........................................................................................ 2
Section 1.1 The Merger................................................................................. 2
Section 1.2 Effective Time............................................................................. 2
Section 1.3 Effects of the Merger...................................................................... 2
Section 1.4 Charter and Bylaws, Directors.............................................................. 2
Section 1.5 Conversion of Securities................................................................... 3
Section 1.6 Company Common Stock Elections............................................................. 6
Section 1.7 Parent to Make Cash and Certificates Available, Transfer Taxes, Withholding................ 7
Section 1.8 Dividends, Fractional Shares, etc.......................................................... 8
Section 1.9 Closing.................................................................................... 10
Section 1.10 Transfer Taxes............................................................................. 10
Section 1.11 Guarantee.................................................................................. 10
Section 1.12 Dissenting Shares.......................................................................... 11
ARTICLE II REPRESENTATIONS AND WARRANTIES OF PARENT......................................................... 11
Section 2.1 Organization and Qualification............................................................. 11
Section 2.2 Capitalization............................................................................. 12
Section 2.3 Subsidiaries............................................................................... 12
Section 2.4 Authority Relative to this Agreement....................................................... 13
Section 2.5 Reports and Financial Statements........................................................... 14
Section 2.6 Absence of Certain Changes or Events....................................................... 14
Section 2.7 Litigation................................................................................. 15
Section 2.8 Compliance with All Applicable Laws........................................................ 15
Section 2.9 Employee Benefit Plans..................................................................... 15
Section 2.10 Parent Board Action........................................................................ 17
Section 2.11 Required Shareholder Vote or Consent....................................................... 17
Section 2.12 Taxes...................................................................................... 17
Section 2.13 No HSR Filing.............................................................................. 18
Section 2.14 Certain Agreements......................................................................... 18
Section 2.15 Compliance with Environmental Laws......................................................... 18
Section 2.16 Financial Advisor.......................................................................... 19
Section 2.17 Hedging.................................................................................... 19
Section 2.18 No Distribution of Parent Rights........................................................... 20
Section 2.19 Oil and Gas Operations..................................................................... 20
Section 2.20 Properties................................................................................. 20
Section 2.21 Oil and Gas Reserves....................................................................... 21
Section 2.22 Take-or-Pay Deliveries..................................................................... 21
Section 2.23 Representations and Warranties Regarding Merger Sub........................................ 22
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................................... 22
Section 3.1 Organization and Qualification............................................................. 22
Section 3.2 Capitalization............................................................................. 23
Section 3.3 Subsidiaries............................................................................... 23
Section 3.4 Authority Relative to this Agreement....................................................... 24
Section 3.5 Reports and Financial Statements........................................................... 25
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Section 3.6 Absence of Certain Changes or Events....................................................... 26
Section 3.7 Litigation................................................................................. 26
Section 3.8 Compliance with Applicable Laws............................................................ 26
Section 3.9 Employee Benefit Plans..................................................................... 26
Section 3.10 Company Board Action....................................................................... 28
Section 3.11 Required Shareholder Vote or Consent....................................................... 28
Section 3.12 Taxes...................................................................................... 28
Section 3.13 Certain Agreements......................................................................... 29
Section 3.14 Compliance with Environmental Laws......................................................... 29
Section 3.15 Financial Advisor.......................................................................... 30
Section 3.16 Hedging.................................................................................... 30
Section 3.17 Oil and Gas Operations..................................................................... 30
Section 3.18 Gas Imbalances............................................................................. 31
Section 3.19 Royalties.................................................................................. 31
Section 3.20 Properties................................................................................. 31
Section 3.21 Oil and Gas Reserves....................................................................... 32
Section 3.22 Take-or-Pay Deliveries..................................................................... 32
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS......................................................... 33
Section 4.1 Conduct of Business by Company Pending the Merger.......................................... 33
Section 4.2 Conduct of Business by Parent Pending the Merger........................................... 37
ARTICLE V ADDITIONAL AGREEMENTS.............................................................................. 40
Section 5.1 Access and Information..................................................................... 40
Section 5.2 Registration Statement/Proxy Statement..................................................... 40
Section 5.3 Compliance with the Securities Act......................................................... 41
Section 5.4 Stock Exchange Listing..................................................................... 41
Section 5.5 Employee Matters........................................................................... 41
Section 5.6 Indemnification............................................................................ 42
Section 5.7 Additional Agreements...................................................................... 43
Section 5.8 No Shop.................................................................................... 44
Section 5.9 Advice of Changes, SEC Filings............................................................. 45
Section 5.10 Confidentiality Agreement.................................................................. 45
Section 5.11 Special Meetings........................................................................... 45
Section 5.12 State Takeover Statutes.................................................................... 46
Section 5.13 Company Credit Agreements.................................................................. 46
Section 5.14 Expenses................................................................................... 46
Section 5.15 St. ▇▇▇▇ Shareholder Agreement............................................................. 46
Section 5.16 Available Funds............................................................................ 47
ARTICLE VI CONDITIONS PRECEDENT.............................................................................. 47
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger................................. 47
Section 6.2 Conditions to Obligation of Company to Effect the Merger................................... 48
Section 6.3 Conditions to Obligations of Parent to Effect the Merger................................... 48
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER................................................................ 49
Section 7.1 Termination................................................................................ 49
Section 7.2 Effect of Termination...................................................................... 50
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Section 7.3 Amendment.................................................................................. 51
Section 7.4 Waiver..................................................................................... 51
Section 7.5 Exclusive Remedy for Inaccuracy or Breach of Representation or Warranty.................... 51
ARTICLE VIII GENERAL PROVISIONS.............................................................................. 51
Section 8.1 Non-Survival of Representations and Warranties............................................. 51
Section 8.2 Disclosure Schedules....................................................................... 52
Section 8.3 Notices.................................................................................... 52
Section 8.4 Interpretation............................................................................. 53
Section 8.5 Counterparts............................................................................... 53
Section 8.6 Entire Agreement, No Third-Party Beneficiaries............................................. 53
Section 8.7 Governing Law.............................................................................. 53
Section 8.8 Shareholder Agreements..................................................................... 53
Section 8.9 Standstill................................................................................. 53
Section 8.10 Assignment................................................................................. 54
Section 8.11 Severability............................................................................... 54
Section 8.12 Enforcement of this Agreement.............................................................. 54
Exhibit A -- Merger Sub Certificate of Incorporation
Exhibit B -- Affiliate Letter
Exhibit C -- Form of St. ▇▇▇▇ Shareholder Agreement
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INDEX OF DEFINED TERMS
Term Section
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Affiliate......................................................... 5.3
Affiliate Letter.................................................. 5.3
Aggregate Merger Consideration.................................... 1.5(c)(ii)
Agreement......................................................... Preamble
Alternative Proposal.............................................. 5.8
AMEX.............................................................. 6.1(c)
Applicable Corporate Laws......................................... 1.1
Blue Sky.......................................................... 5.2
Cap............................................................... 5.6(a)
Cash Consideration................................................ 1.5(c)(i)
Cash-Out Option................................................... 1.5(h)
Certificate....................................................... 1.5(f)
Certificates of Merger............................................ 1.2
Closing........................................................... 1.9
Code.............................................................. Recitals
Commission........................................................ 2.5
Company........................................................... Preamble
Company Common Stock.............................................. Recitals
Company Credit Agreements......................................... 4.1(e)
Company Director Nominees......................................... 1.4(b)
Company Disclosure Schedule....................................... Article III
Company ERISA Affiliate........................................... 3.9
Company Employee Benefit Plans.................................... 3.9(a)
Company Employee Payments......................................... 3.9(d)
Company Financial Advisor Fees.................................... 3.15
Company Good and Marketable Title................................. 3.20(b)
Company's Knowledge............................................... 3.7
Company Material Adverse Effect................................... 3.1
Company Payout Balances........................................... 3.21
Company Permitted Encumbrances.................................... 4.1(e)
Company Permits................................................... 3.8
Company Preferred Stock........................................... 3.2
Company Principal Shareholders.................................... Recitals
Company Proxy Statement........................................... 5.2
Company Related Party............................................. 3.13(b)
Company Reserve Report............................................ 3.21
Company SEC Reports............................................... 3.5
Company Shareholder Agreements.................................... Recitals
Company Shareholder Approval...................................... 3.11
Company Special Meeting........................................... 5.11
Company Stock Plans............................................... 1.5(h)
Company Transaction Costs......................................... 1.5(d)
Confidentiality Agreement......................................... 5.10
Control........................................................... 8.4
Delaware Certificate of Merger.................................... 1.2
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DGCL.............................................................. 1.1
Effective Time.................................................... 1.2
Stock Election Mailing Date....................................... 1.6(c)
Environmental Laws................................................ 2.15(a)
ERISA............................................................. 2.9(a)
Exchange Act...................................................... 2.4
Exchange Agent.................................................... 1.6(b)
Exchange Fund..................................................... 1.7(a)
Exchange Ratio.................................................... 1.5(c)(ii)
Expenses Fee...................................................... 7.2(c)
Form of Stock Election............................................ 1.6(c)
Form S-4.......................................................... 5.2
Fractional Share.................................................. 1.8(c)
Fundamental Change................................................ 4.2
GAAP.............................................................. 4.1(e)
GCLN.............................................................. 1.1
Governmental Entity............................................... 2.4
Hydrocarbons...................................................... 2.1
Indemnified Parties............................................... 5.6(a)
Liens............................................................. 2.20(a)
Maximum Stock Election Number..................................... 1.5(e)
Merger............................................................ Recitals
Merger Consideration.............................................. 1.5(c)
Merger Sub........................................................ Preamble
Merger Sub Common Stock........................................... 1.5(a)(ii)
Multiemployer Plan................................................ 2.9(b)
Nevada Certificate of Merger...................................... 1.2
Non-Electing Share................................................ 1.6(a)
Option............................................................ 1.5(h)
Parent............................................................ Preamble
Parent Common Stock............................................... Recitals
Parent Credit Agreement........................................... 4.2(e)
Parent Disclosure Schedule........................................ Article II
Parent ERISA Affiliate............................................ 2.9(f)
Parent Employee Benefit Plans..................................... 2.9(a)
Parent Good and Marketable Title.................................. 2.20(b)
Parent Information Statement...................................... 5.2
Parent's Knowledge................................................ 2.7
Parent Material Adverse Effect.................................... 2.1
Parent Payout Balances............................................ 2.21
Parent Permitted Encumbrances..................................... 4.2(e)
Parent Permits.................................................... 2.8
Parent Preferred Stock............................................ 2.2
Parent Principal Shareholders..................................... Recitals
Parent Prospectus................................................. 5.12
Parent Related Party.............................................. 2.14(b)
Parent Reserve Reports............................................ 2.21
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Parent Rights..................................................... 2.2
Parent SEC Reports................................................ 2.5
Parent Shareholder Agreements..................................... Recitals
Parent Shareholder Approval....................................... 2.11
Parent Special Meeting............................................ 5.11(b)
Parent Stock Options.............................................. 2.2
Per Share Merger Consideration.................................... 1.5(c)(i)
Per Share Merger Consideration Adjustment......................... 1.5(d)
Person............................................................ 2.12(c)
Joint Proxy Statement/Prospectus.................................. 5.2
Securities Act.................................................... 2.4
Shareholder Agreements............................................ Recitals
St. ▇▇▇▇.......................................................... 5.15
St. ▇▇▇▇ Shareholder Agreement.................................... 5.15
Stock Consideration............................................... 1.5(c)(ii)
Stock Election.................................................... 1.6(a)
Stock Election Final Date......................................... 1.6(e)
Stock Election Percentage......................................... 1.5(e)
Stock Election Shareholders....................................... 1.5(e)
Subsidiary........................................................ 8.4
Substitute Option................................................. 1.5(h)
Superior Proposal................................................. 5.8
Surviving Corporation............................................. 1.1
Tax............................................................... 2.12
Tax Return........................................................ 2.12
TBCA.............................................................. 1.1
Transaction Documents............................................. 2.4
Transfer Taxes.................................................... 1.10
Warrant........................................................... 1.5(g)
vi
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER dated as of December 22, 2000 (as amended from
time to time, this "Agreement") is entered into by PetroCorp Incorporated, a
Texas corporation ("Parent"), PetroCorp Acquisition Company, a Delaware
corporation ("Merger Sub"), and Southern Mineral Corporation, a Nevada
corporation ("Company").
W I T N E S S E T H:
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and Company
have approved the merger of Company with and into Merger Sub (the "Merger") and
the other transactions contemplated by this Agreement, upon the terms and
subject to the conditions set forth herein, whereby, among other things, each
issued and outstanding share of common stock, par value $0.01 per share, of
Company ("Company Common Stock"), not owned by Parent, Company or their
respective Subsidiaries (as defined in Section 8.4), will be converted into the
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right to receive cash or, if properly elected by the holder of such share,
shares of common stock, par value $0.01 per share, of Parent ("Parent Common
Stock") or a combination of Parent Common Stock and cash;
WHEREAS, Parent and Company intend for the Merger to qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code");
WHEREAS, the respective Boards of Directors of each of Parent, Merger Sub and
Company have determined that the Merger is in furtherance of and consistent with
their respective long-term business strategies and is in the best interest of
their respective shareholders, and accordingly the Boards of Directors of
Parent, Merger Sub and Company have approved the Merger upon the terms and
subject to the conditions set forth herein;
WHEREAS, simultaneously with the execution and delivery of this Agreement
(except as described in Section 5.15), and as a condition and inducement to the
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willingness of Company to enter into this Agreement, Company and holders
("Parent Principal Shareholders") of the number of shares of Parent Common Stock
necessary under applicable law to approve the Merger and the transactions
contemplated hereby have entered, or (in the case of the St. ▇▇▇▇ Shareholder
Agreement (as defined in Section 5.15)) will enter, into shareholder agreements
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(including the St. ▇▇▇▇ Shareholder Agreement, the "Parent Shareholder
Agreements" and, together with the Company Shareholder Agreement, the
"Shareholder Agreements") pursuant to which they each agree to vote to adopt and
approve the Merger, this Agreement, and the transactions contemplated hereby,
and to take certain actions in furtherance of the Merger;
WHEREAS, simultaneously with the execution and delivery of this Agreement, and
as a condition and inducement to the willingness of Parent and Merger Sub to
enter into this Agreement, Parent and certain principal shareholders of Company
(the "Company Principal Shareholders") have entered into shareholder agreements
(the "Company Shareholder Agreements") pursuant to which the Company Principal
Shareholders will agree to vote to adopt and approve the Merger, this Agreement,
and the transactions contemplated hereby, and to take certain other actions in
furtherance of the Merger;
WHEREAS, prior to the execution and delivery of this Agreement, Parent, as sole
stockholder of Merger Sub, has executed a written consent adopting and approving
the
1
Merger, this Agreement, and the transactions contemplated hereby, and approving
certain other actions in furtherance of the Merger; and
WHEREAS, among other things, two individuals selected by the Board of Directors
of Company will become directors of Parent in connection with the transactions
contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises, representations, warranties
and agreements herein contained, the parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
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hereof, and in accordance with each of the Delaware General Corporation Law (the
"DGCL"), the General Corporation Law of Nevada (the "GCLN") and the Texas
Business Corporation Act (the "TBCA" and, together with the DGCL and the GCLN,
the "Applicable Corporate Laws"), Company will be merged with and into Merger
Sub at the Effective Time (as defined in Section 1.2). Following the Merger, the
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separate corporate existence of Company will cease in accordance with the GCLN,
and Merger Sub will continue as the surviving corporation (the "Surviving
Corporation"), and will succeed to and assume all the rights and obligations of
Company in accordance with the DGCL.
Section 1.2 Effective Time. The Merger will become effective when a
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Certificate of Merger (the "Delaware Certificate of Merger") executed in
accordance with the relevant provisions of the DGCL, is filed with the Secretary
of State of the State of Delaware, and a Certificate of Merger (the "Nevada
Certificate of Merger" and, together with the Delaware Certificate of Merger,
the "Certificates of Merger") executed in accordance with the GCLN is filed with
the Secretary of State of the State of Nevada, or such later time which the
parties hereto will have agreed upon and designated in the Certificates of
Merger as the effective time of the Merger. When used in this Agreement, the
term "Effective Time" will mean the first date and time at which both
Certificates of Merger have been duly filed, which the Parties agree will be
done simultaneously (as reasonably possible) for record or such later time
established by the Certificates of Merger. The filing of the Certificates of
Merger will be made on the date of the Closing (as defined in Section 1.9).
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Section 1.3 Effects of the Merger. The Merger will have the effects set
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forth in the applicable provisions of the Applicable Corporate Laws.
Section 1.4 Charter and Bylaws, Directors. (a) At the Effective Time, the
-----------------------------
Certificate of Incorporation of Merger Sub, as in effect immediately prior to
the Effective Time in the form attached as Exhibit A, will be the Certificate of
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Incorporation of the Surviving Corporation until thereafter changed or amended
as provided therein or by applicable law. At the Effective Time, the Bylaws of
Merger Sub, as in effect immediately prior to the Effective Time, will be the
Bylaws of the Surviving Corporation until thereafter changed or amended as
provided therein or in the Certificate of Incorporation of Merger Sub or by
applicable law.
2
(b) The directors of Merger Sub at the Effective Time will be the
directors of the Surviving Corporation until the earlier of their resignation or
removal or until their respective successors are duly elected and qualified, as
the case may be.
(c) Prior to the date of this Agreement, Parent's Board of Directors
has approved (i) an amendment to its Bylaws to be effective at or prior to the
Effective Time (A) increasing the number of directors on Parent's Board of
Directors to nine or more, (B) creating two vacancies on Parent's Board of
Directors as of and subsequent to the Effective Time for a term lasting until
the second annual meeting of the shareholders following the Effective Time, and
(C) which cannot be amended or otherwise modified or repealed except by a
unanimous vote of Parent's Board of Directors, and (ii) resolutions causing two
individuals which Company will select prior to the Effective Time (the "Company
Director Nominees") to become directors of Parent as of the Effective Time,
filling such vacancies. If at any time after Company's selection of the Company
Director Nominees (including after the Effective Time) any Company Director
Nominee is unable to serve as a director, the other, remaining Company Director
Nominee will nominate and elect a replacement director.
Section 1.5 Conversion of Securities. As of the Effective Time, by virtue
------------------------
of the Merger and without any action on the part of Parent, Merger Sub, Company
or the holders of any securities of Merger Sub:
(a) (i) Each issued and outstanding share of Parent Common Stock will
remain outstanding and will represent one validly issued, fully paid and
nonassessable share of Parent Common Stock.
(ii) Each issued and outstanding share of common stock, par value
$0.01, of Merger Sub ("Merger Sub Common Stock") will remain outstanding
and will represent one validly issued, fully paid and nonassessable share
of Merger Sub Common Stock.
(b) Each share of Company Common Stock held in the treasury of
Company and each share of Company Common Stock owned by Parent or any Subsidiary
of Parent will be canceled, and no cash, capital stock of Parent or Merger Sub,
or other consideration will be delivered in exchange therefor.
(c) Subject to Sections 1.5(b), 1.6, 1.7, 1.8 and 1.12, each issued
-------------- --- --- --- ----
and outstanding share of Company Common Stock not cancelled pursuant to Section
-------
1.5(b) will be converted into one of the following (as adjusted pursuant to this
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Article I, the "Merger Consideration"):
---------
(i) for each such share of Company Common Stock (other than
shares as to which a Stock Election (as defined in Section 1.6(a) has been
--------------
effectively made and not revoked or lost pursuant to Section 1.6), the
------------
right to receive an amount in cash, without interest (collectively, the
"Cash Consideration"), equal to $4.71, as may be adjusted pursuant to
Section 1.5(d) (as adjusted, the "Per Share Merger Consideration"); or
--------------
(ii) at the election of the holder thereof, for each such
share of Company Common Stock as to which a Stock Election has been
effectively made and not revoked or
3
lost, the right to receive a number of shares of Parent Common Stock equal
to the Exchange Ratio (collectively, the "Stock Consideration"; the
aggregate Cash Consideration and Stock Consideration issued to all of
Company's shareholders in connection with the Merger will be referred to as
the "Aggregate Merger Consideration"). The "Exchange Ratio" will equal the
Per Share Merger Consideration divided by 10.
(d) The Per Share Merger Consideration will be (i) increased by an
amount equal to the quotient of (A) the amount by which the Company Transaction
Costs are less than $2,300,000, divided by (B) 15,980,815; or (ii) decreased by
an amount equal to the quotient of (A) the amount by which the Company
Transaction Costs exceed $3,300,000, divided by (B) 15,980,815. "Company
Transaction Costs" means, to the extent relating to the Merger and incurred or
reasonably expected to be incurred (whether paid or payable) after the date of
this Agreement and up to the Effective Time, the sum of (i) Company Employee
Payments (as defined in Section 3.9(d)), (ii) Company Financial Advisor Fees (as
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defined in Section 3.15), and (iii) accounting, printing, registration and legal
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expenses. Within five calendar days after the Stock Election Mailing Date,
Company will deliver to Parent a schedule setting forth in reasonable detail
Company's estimated calculation of the Company Transaction Costs to be used in
the computation of the adjustment (the "Per Share Merger Consideration
Adjustment") to the Per Share Merger Consideration under this Section 1.5(d).
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Within five calendar days of its receipt of Company's calculation of the Per
Share Merger Consideration Adjustment, Parent may advise Company whether it has
any exceptions to such calculation. Unless Parent delivers to Company within
five calendar days after its receipt of Company's calculation of the Per Share
Merger Consideration Adjustment a letter describing in reasonable detail its
exceptions to Company's calculation of the Per Share Merger Consideration
Adjustment, Company's estimate of the Per Share Merger Consideration Adjustment
will be conclusive and binding. If Parent submits a letter detailing any
exceptions to the calculation of the Per Share Merger Consideration Adjustment,
then (i) for five days after the date Company receives such letter, Company and
Parent will use their reasonable best efforts to agree on the calculation of the
Per Share Merger Consideration Adjustment, and (ii) lacking such agreement, the
matter will be referred to a "Big 5" accounting firm mutually agreed upon by
Parent and Company, who will determine on an expedited basis prior to the Stock
Election Final Date the correct Per Share Merger Consideration Adjustment, which
determination will be conclusive and binding.
(e) If, and only if, the aggregate number of shares of Company Common
Stock as to which a Stock Election has been effectively made pursuant to Section
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1.6 (the "Stock Election Shares") would represent (but for the application of
---
this Section 1.5(e)) the right to receive more than 4,000,000 shares of Parent
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Common Stock (the "Maximum Stock Election Number"), then the Aggregate Merger
Consideration will be comprised of Stock Consideration equal to the Maximum
Stock Election Number and Cash Consideration in an amount equal to the balance
of the Aggregate Merger Consideration. In which case, the Stock Election Shares
will be converted into the right to receive the Cash Consideration or the Stock
Consideration in the following manner:
(i) the number of Stock Election Shares covered by each Stock
Election to be converted into Stock Consideration will be determined by
multiplying the number of Stock Election Shares covered by such Stock
Election by a fraction, (A) the numerator of
4
which is the Maximum Stock Election Number, and (B) the denominator of
which is the aggregate number of Stock Election Shares;
(ii) all Stock Election Shares not converted into Stock
Consideration in accordance with Section 1.5(e)(i) will be converted into
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the right to receive the Cash Consideration; and
(iii) Fractional Shares resulting from the application of
Section 1.5(e)(i) will be converted into Cash Consideration.
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(f) As a result of the Merger and without any action on the part of
the holder thereof, at the Effective Time, all shares of Company Common Stock
will, pursuant to Section 1.5(c), cease to be outstanding and the certificates
--------------
representing such shares will be canceled and retired and will cease to exist
and each holder of such shares of Company Common Stock will thereafter cease to
have any rights with respect to such shares of Company Common Stock, except the
right to receive, without interest, the Merger Consideration and cash for
fractional shares of Parent Common Stock in accordance with Section 1.5(c) upon
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the surrender of a certificate representing such shares of Company Common Stock
(a "Certificate").
(g) At the Effective Time, each warrant to purchase shares of Company
Common Stock that is outstanding immediately prior to the Effective Time (a
"Warrant") will remain outstanding and will become warrants to acquire Per Share
Merger Consideration on terms set forth in the Warrant. After the Effective
Time, each Warrant will represent the right to receive, upon exercise of such
Warrant, an amount of cash (without interest) equal to the product of (i) the
number of shares of Company Common Stock subject to such Warrant as of the
Effective Time, and (ii) (A) the Per Share Merger Consideration, minus (B) the
exercise price per share applicable under such Warrant. All references to
Company in Company's warrant agreements with respect to Warrants will be deemed
to refer to Parent and Merger Sub, and Parent and Merger Sub will assume the
obligations of the Company under such warrant agreements. The other terms of
each such Warrant and the applicable Company warrant agreement under which it
was issued will continue to apply.
(h) Each of Company's stock option plans listed in Section 1.5(h) of
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the Company Disclosure Schedule (collectively, the "Company Stock Plans"), and
each outstanding stock option held by any current or former employee, director
or consultant (an "Option"), (A) will be assumed by Parent at the Effective
Time, and each Option will vest and become immediately exercisable, and will be
deemed to be converted into an option to purchase a number of shares of Parent
Common Stock (a "Substitute Option") equal to the number of shares of Company
Common Stock subject to such Option multiplied by the Exchange Ratio (rounded to
the nearest whole share, with 0.5 shares being rounded up) or (B) at the option
of the holder of such Option exercisable by written notice to Company prior to
the Effective Time, will be cancelled immediately prior to the Effective Time in
exchange for a payment in cash as provided below (a "Cash-out Option"). The per
share exercise price for each Substitute Option will be the current exercise
price per share of Company Common Stock set forth in the original Option to
which it relates divided by the Exchange Ratio (rounded up to the nearest full
cent), and each Substitute Option otherwise will be subject to all of the other
terms and conditions of the original Option to which it relates. The cash
payment for each
5
Cash-out Option will be equal to the product of (x) the number of shares of
Company Common Stock subject to such Option, and (y) the excess of the Per Share
Merger Consideration over the exercise price per share of Company Common Stock
subject to such Option. Parent will provide to Company at the Effective Time
funds to make the payments provided in the preceding sentence. Prior to the
Effective Time, Company will take such additional actions as are necessary under
applicable law and the applicable agreements and Company Stock Plans to effect
the transactions contemplated by this paragraph.
Section 1.6 Company Common Stock Elections. Subject to Sections 1.5, 1.7
------------------------------ ------------ ---
and 1.8, each holder of shares of Company Common Stock (other than holders of
---
shares to be canceled as set forth in Section 1.5(b)) will have the right to
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submit a request specifying the number of shares of Company Common Stock which
such holder desires to have converted into the right to receive either Stock
Consideration or a combination of Stock Consideration and Cash Consideration in
accordance with the following procedures:
(a) Each holder of shares of Company Common Stock may specify in a
request made in accordance with the provisions of this Section 1.6 the number of
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such shares which such holder desires to have converted into the right to
receive Stock Consideration in the Merger (a "Stock Election"). Each share of
Company Common Stock as to which no Stock Election is in effect at the Stock
Election Final Date (as defined in Section 1.6(e)) or for which a Stock Election
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has been made but has been revoked or withdrawn or is otherwise no longer
effective will be called a "Non-Electing Share." Subject to Sections 1.7 and
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1.8, the Non-Electing Shares of each holder of shares of Company Common Stock
---
will be treated for purposes of this Agreement as if such shares were not
covered by a Stock Election and, accordingly, will be converted to the right to
receive Cash Consideration in accordance with Section 1.5(c)(i).
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(b) Parent will authorize Parent's Transfer Agent or such other
person as will be reasonably acceptable to Company to receive Stock Elections,
to act as exchange agent hereunder and to make, subject to approval by Parent
and Company (provided such approval is not unreasonably withheld, delayed or
denied), any computations required to be made to give effect to this Article I
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(the "Exchange Agent").
(c) Parent will prepare, for use by shareholders of Company in
surrendering Certificates, a form (the "Form of Stock Election") pursuant to
which each holder of Company Common Stock may make Stock Elections. As of a date
on which Parent and Company can mutually agree, which date is expected to be as
soon as practicable after the Company Shareholder Approval is obtained (the
"Stock Election Mailing Date"), the Form of Stock Election will be mailed to
shareholders of record of Company and record holders of Warrants.
(d) Company and Parent will use all reasonable efforts to make the
Form of Stock Election available to all persons who become shareholders of
record of Company and Parent during the period between the Stock Election
Mailing Date and the Stock Election Final Date.
(e) A Stock Election will have been properly made only if the
Exchange Agent will have received, by 5:00 p.m., New York City time, on the
twentieth day (or a later date which may
6
be determined prior to the Stock Election Mailing Date by mutual agreement of
Parent and Company) following the date of mailing of the Form of Stock Election
(such time on such day being referred to herein as the "Stock Election Final
Date"), a properly completed and signed Form of Stock Election. A holder of
Warrants that (i) receives a Form of Stock Election, (ii) exercises Warrants in
accordance with the applicable warrant agreement after receipt of such Form of
Stock Election but prior to the Stock Election Final Date, and (iii) otherwise
delivers such Form of Stock Election in accordance with this Section 1.6(e) with
--------------
respect to the shares of Company Common Stock issuable under such Warrant, will
have made a Stock Election with respect to such shares of Company Common Stock
issuable under such Warrant if, and only if, such shares are issued to such
holder on or prior to the Stock Election Final Date so that such holder is the
record holder of such shares on the Stock Election Final Date.
(f) Any holder of record of shares of Company Common Stock may at any
time prior to the Stock Election Final Date change such holder's Stock Election
by written notice received by the Exchange Agent at or prior to the Stock
Election Final Date, accompanied by a properly completed Form of Stock Election.
(g) Any holder of record of shares of Company Common Stock may at any
time prior to the Stock Election Final Date revoke such holder's Stock Election
by written notice received by the Exchange Agent at or prior to the Stock
Election Final Date or by withdrawal prior to the Stock Election Final Date of
such holder's Certificates previously deposited with the Exchange Agent. Any
revocation of a Stock Election may be withdrawn by notice of such withdrawal
delivered at or prior to the Stock Election Final Date. Any shareholder of
Company who will have deposited Certificates with the Exchange Agent will have
the right to withdraw such Certificates by written notice received by the
Exchange Agent at or prior to the Stock Election Final Date. Parent will obtain
from the Exchange Agent an agreement to return all Stock Elections and
accompanying Certificates to the shareholders submitting the same in the event
this Agreement will be terminated in accordance with its terms.
(h) Parent will have the right, subject to approval by Company
(provided such approval is not unreasonably withheld or delayed), to make rules,
not inconsistent with the terms of this Agreement, governing the validity of
Forms of Stock Election, the issuance and delivery of certificates for Parent
Common Stock into which shares of Company Common Stock are converted in the
Merger and the payment for shares of Company Common Stock converted into the
right to receive the Cash Consideration in the Merger.
Section 1.7 Parent to Make Cash and Certificates Available, Transfer
--------------------------------------------------------
Taxes, Withholding.
------------------
(a) As soon as practicable after the Effective Time, Parent will
deposit with the Exchange Agent, in trust for the holders of shares of Company
Common Stock and holders of Warrants, certificates for shares of Parent Common
Stock and cash representing the Aggregate Merger Consideration payable pursuant
to Sections 1.5, 1.6, and 1.8 (such certificates and cash, together with any
------------ --- ---
dividends or distributions with respect thereto, being hereinafter referred to
as the "Exchange Fund"). The Exchange Agent will invest any cash included in the
Exchange Fund as directed by Parent on a daily basis. Any interest or other
income resulting from such investments
7
will be paid to Parent. As soon as practicable after the Effective Time, the
Exchange Agent will distribute to each holder of shares of Company Common Stock
converted into the right to receive the Cash Consideration or the Stock
Consideration pursuant to Sections 1.5, 1.6, and 1.8, upon surrender to the
------------ --- ---
Exchange Agent (to the extent not previously surrendered with a Form of Stock
Election) of one or more Certificates for cancellation, a check for the amount
of cash to which such holder is entitled under such sections and/or certificates
representing the shares of Parent Common Stock to which such holder is entitled
under such sections. As soon as practicable after the Effective Time, the
Exchange Agent will mail to each holder of record of a Certificate or
Certificates whose shares were converted pursuant to this Article I (other than
---------
any holder who previously surrendered all its Certificates with a Stock Election
or pursuant to a guarantee of delivery delivered with a Stock Election) (A) a
letter of transmittal in form reasonably acceptable to Parent (which will
specify that delivery will be effected, and risk of loss and title to the
Certificates will pass, only upon actual delivery of the Certificates to the
Exchange Agent) and (B) instructions for use in effecting the surrender of the
Certificates.
(b) Upon surrender for cancellation to the Exchange Agent of a
Certificate, together with such letter of transmittal, duly executed, the holder
of such Certificate will be entitled to receive in exchange therefor a
certificate representing that number of whole shares of Parent Common Stock
issuable and/or the cash payable to such holder pursuant to Sections 1.5, 1.6
------------ ---
and 1.8 of this Agreement. Each share of Parent Common Stock into which a share
---
of Company Common Stock will be converted will be deemed to have been issued at
the Effective Time. If any certificate representing shares of Parent Common
Stock or cash or other property is to be issued or delivered in a name other
than that in which the Certificate surrendered in exchange therefor is
registered, it will be a condition of such exchange that the Certificate so
surrendered will be properly endorsed and otherwise in proper form for transfer
and that the Person requesting such exchange will pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of certificates for
such shares of Parent Common Stock in a name other than that of the registered
holder of the Certificate surrendered or will establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not applicable. Parent or
the Exchange Agent will be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of
shares of Company Common Stock such amounts as Parent or the Exchange Agent is
required to deduct and withhold with respect to the making of such payment under
the Code, or under any provision of state, local or foreign tax law. To the
extent that amounts are so withheld by Parent or the Exchange Agent, such
withheld amounts will be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Company Common Stock in respect of
which such deduction and withholding was made by Parent or the Exchange Agent.
Section 1.8 Dividends, Fractional Shares, etc.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared after the Effective Time on Parent
Common Stock will be paid with respect to any shares of Company Common Stock
represented by a Certificate, until such Certificate is surrendered for exchange
as provided herein. Subject to the effect of applicable laws, following
surrender of any such Certificate, there will be paid to the holder of
certificates of Parent Common Stock issued in exchange for such Certificate,
without interest, (i) at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore
8
payable with respect to such whole shares of Parent Common Stock and not paid,
less the amount of any withholding taxes that may be required thereon, and (ii)
at the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to surrender and a payment
date subsequent to surrender payable with respect to such whole shares of Parent
Common Stock, less the amount of any withholding taxes that may be required
thereon.
(b) At or after the Effective Time, there will be no transfer on the
stock transfer books of Company of the shares of Company Common Stock that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates representing any such shares are presented to the Surviving
Corporation, they will be canceled and exchanged for the Merger Consideration,
if any, deliverable in respect thereof pursuant to this Agreement.
(c) No fractional shares of Parent Common Stock will be issued
pursuant to the Merger. In lieu of the issuance of any fractional share of
Parent Common Stock pursuant to the Merger, cash adjustments will be paid to
holders in respect of any fractional share of Parent Common Stock that could
otherwise be issuable (each, a "Fractional Share"), and the amount of such cash
adjustment will be equal to the product of such fractional amount and the Per
Share Merger Consideration.
(d) Any portion of the Exchange Fund (including the proceeds of any
investments thereof and any shares of Parent Common Stock) that remains
unclaimed by the former shareholders of Company six months after the Effective
Time or for such longer time as Parent will determine will be delivered to
Parent. Any former shareholder of Company who has not theretofore complied with
this Article I will thereafter look only to the Surviving Corporation and Parent
---------
for payment of the applicable Merger Consideration, cash in lieu of fractional
shares and unpaid dividends and distributions on Parent Common Stock deliverable
in respect of each share of Company Common Stock such shareholder holds as
determined pursuant to this Agreement, in each case without any interest
thereon.
(e) To the fullest extent permitted by law, none of Parent, Company,
the Surviving Corporation, the Exchange Agent or any other Person will be liable
to any former holder of shares of Company Common Stock for any amount properly
delivered to a public official pursuant to applicable or unclaimed property,
escheat or similar laws.
(f) In the event that any Certificate will have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Parent the
posting by such person of a bond in such reasonable amount as Parent may direct
as indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost stolen or
destroyed Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of Parent
Common Stock, as provided in this Section 1.8, deliverable in respect thereof
-----------
pursuant to this Agreement.
(g) In the event of any change in the Parent Common Stock between the
date of this Agreement and the Effective Time by reason of any stock split,
stock dividend, subdivision, reclassification, combination, or exchange of
Parent Common Stock or the like, the Per Share
9
Merger Consideration, the Exchange Ratio and other terms set forth in this
Agreement will be appropriately adjusted.
Section 1.9 Closing. The closing of the Merger (the "Closing") and all
-------
actions contemplated by this Agreement to occur at the Closing will take place
at the offices of Parent, ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇, at
10:00 a.m., local time, on a date to be specified by the parties, which (subject
to fulfillment or waiver of the conditions set forth in Article VI) will be no
----------
later than the second business day following the day on which the last of the
conditions set forth in Article VI will have been fulfilled or waived, or at
----------
such other time and place as Parent and Company will agree.
Section 1.10 Transfer Taxes. Parent and Company will cooperate in the
--------------
preparation, execution and filing of all returns, applications or other
documents regarding any real property transfer, stamp, recording, documentary or
other taxes and any other fees and similar taxes which become payable in
connection with the Merger other than transfer or other taxes described in
Section 1.7(b) (collectively, "Transfer Taxes"). From and after the Effective
--------------
Time, Parent will pay or cause to be paid, without deduction or withholding from
any amounts payable to the holders of Company Stock, all Transfer Taxes.
Section 1.11 Guarantee. Parent hereby absolutely, unconditionally and
---------
irrevocably guarantees the performance by Merger Sub of all of its obligations
under this Agreement. The liability of Parent hereunder will be primary and not
as a surety, and will not be affected by:
(a) any amendment, modification of or supplement to this Agreement,
any other Transaction Document or any agreement or any other instrument or any
assignment or transfer of any rights or obligations thereunder;
(b) any release or waiver, by operation of law or otherwise, of the
performance or observance by Parent or Merger Sub or any Person of any express
or implied agreement, covenant, term, obligation or condition under any of the
Transaction Documents;
(c) any extension of the time for the payment of all or any portion
of any sums payable under any agreement or the extension of time for the
performance of any obligations under, arising out of or in connection with any
of the Transaction Documents;
(d) any failure, omission, delay or lack of diligence on the part of
Company, or any other Person, to enforce, assert or exercise, or any waiver of,
any right, privilege, power or remedy conferred on Company or any other
individual or entity by any of the Transaction Documents, or any action on the
part of Company or such other Person granting indulgence or extension of any
kind;
(e) any bankruptcy, insolvency, readjustment, composition,
liquidation, dissolution or similar proceeding with respect to Merger Sub;
10
(f) any merger, amalgamation or consolidation of Parent or of Merger
Sub into or with any other corporation or partnership or other entity or any
sale, lease or transfer of any or all of the assets of Parent or of Merger Sub
to any Person; or
(g) any failure on the part of Company for any reason to comply with
or perform any of the terms of the Transaction Documents.
Notwithstanding the foregoing, Parent will not be obligated to guarantee
Merger Sub's performance to the extent Parent has a defense to its performance
of its obligations hereunder if such defense (i) would arise if Merger Sub were
not a party to this Agreement and Company were merging into Parent, and (ii) did
not arise through any act or omission of Parent.
Parent hereby waives notice or demand of performance in the acceptance of
its obligations hereunder.
Section 1.12 Dissenting Shares. Company will give Parent prompt notice of
-----------------
any demands received by Company for appraisal of any shares of Company Common
Stock in accordance with the GCLN, and Parent will have the right to control all
negotiations and proceedings with respect to such demands except as required by
applicable law. Company will not, except with the prior written consent of
Parent which may be withheld in its sole discretion without any obligation to
provide an explanation for the exercise of that discretion, make any payment
with respect to, or settle or offer to settle, any such demands. Any such
demands will not be converted into a right to receive the Merger Consideration,
unless the shareholder making such demand fails to perfect or withdraws or
otherwise loses its right to appraisal or it is determined that such holder does
not have appraisal rights in accordance with the GCLN. If after the Effective
Time such shareholder fails to perfect or withdraws or loses its right to
appraisal, such shares of Company Common Stock will be treated as if they had
been converted as of the Effective Time into a right to receive the Cash
Consideration.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to Company as follows (such representations and
warranties (as well as other provisions of this Agreement) are qualified by the
matters identified on a disclosure schedule (the "Parent Disclosure Schedule")
delivered by Parent to Company prior to execution of this Agreement).
Section 2.1 Organization and Qualification. Parent is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Texas and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. Parent is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified has not had, and would not reasonably be expected to
have, alone or in the aggregate, a Parent Material Adverse Effect. For the
purposes of this Agreement, a "Parent Material Adverse Effect" means any state
of facts, event,
11
change or effect which, individually or in the aggregate, (a) has a material
adverse effect on the business, properties, assets, condition (financial or
otherwise), liabilities or results of operations of Parent and its Subsidiaries
taken as a whole, or (b) would prevent the consummation of the material
transactions contemplated hereby; provided that occurrences or events arising
--------
out of or resulting from the following will in each case be excluded from
consideration for purposes of the effect of an occurrence or event on Parent and
its Subsidiaries, taken as a whole: (i) changes in general economic conditions,
including general stock market conditions and interest rate changes, (ii)
changes in the energy industry, including changes in the prices of crude oil,
natural gas, natural gas liquids and other hydrocarbons produced from crude oil
or natural gas ("Hydrocarbons"), or (iii) the adverse determination of any
pending litigation disclosed in the Parent Disclosure Schedule. Complete and
correct copies as of the date of this Agreement of the Amended and Restated
Articles of Incorporation and Bylaws of Parent have been delivered to Company
prior to the date of this Agreement.
Section 2.2 Capitalization. The authorized capital stock of Parent consists
--------------
of 25,000,000 shares of Parent Common Stock, and 1,000,000 shares of preferred
stock, par value $.01 per share (the "Parent Preferred Stock"). As of the date
of this Agreement, (a) 8,703,719 shares of Parent Common Stock were validly
issued and outstanding, fully paid, and nonassessable, (b) no shares of Parent
Preferred Stock were issued and outstanding, (c) 1,515,157 shares of Parent
Common Stock were reserved for issuance pursuant to options ("Parent Stock
Options") to purchase Parent Common Stock, and (d) no shares of parent Common
Stock were reserved for issuance pursuant to warrants to purchase Parent Common
Stock. As of the date of this Agreement, there are no bonds, debentures, notes
or other indebtedness issued or outstanding having the right to vote with
Parent's shareholders, whether together or as a separate class, on any matters
on which Parent's shareholders may vote. As of the date of this Agreement,
except for Parent Stock Options and rights ("Parent Rights") issued pursuant to
the Shareholder Rights Agreement dated November 22, 1998, between Parent and
First Union National Bank, there are no options, warrants, calls, convertible
securities or other rights, agreements or commitments presently outstanding
obligating Parent to issue, deliver or sell shares of its capital stock, or
obligating Parent to grant, extend or enter into any such option, warrant, call
or other such right, agreement or commitment. All of the shares of Parent Common
Stock issuable in accordance with this Agreement in exchange for Company Common
Stock at the Effective Time in accordance with this Agreement will be, when so
issued, duly authorized, validly issued, fully paid, nonassessable and free of
preemptive rights and will be delivered free and clear of all liens, claims,
charges and encumbrances of any kind or nature whatsoever.
Section 2.3 Subsidiaries. Each Subsidiary of Parent is a corporation,
------------
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization (except where the
failure to be validly existing and in good standing would not be material to the
business of such Subsidiary) and has the corporate or similar power to carry on
its business as it is now being conducted or currently proposed to be conducted.
Each Subsidiary of Parent is duly qualified to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities makes such qualification
necessary except where the failure to be so qualified, when taken together with
all such failures, has not had, and would not reasonably be expected to have, a
Parent Material Adverse Effect. Section 2.3 of the Parent Disclosure Schedule
-----------
contains, with respect to each Subsidiary of
12
Parent its name and jurisdiction of organization and, with respect to each
Subsidiary that is not wholly owned, the percentage of outstanding capital stock
or equity capital owned by Parent or a Subsidiary. All the outstanding shares of
capital stock or equity capital of each Subsidiary of Parent are validly issued,
fully paid and nonassessable, and, to the extent owned by Parent or by a
Subsidiary of Parent, are owned free and clear of any liens, claims or
encumbrances. There are no existing options, warrants, calls, convertible
securities or other rights, agreements or commitments of any character relating
to the issued or unissued capital stock or other securities of any of the
Subsidiaries of Parent (other than preemptive rights or similar rights held by
Parent with respect to certain of its Subsidiaries). Except as set forth in
Parent's Annual Report on Form 10-K for the fiscal year ended December 31, 1999,
Parent does not directly or indirectly own any interest in any other
corporation, partnership, joint venture or other business association or entity
or have any obligation, commitment or undertaking to acquire any such interest,
other than business associations customary in the oil and gas industry
consisting of interests in oil and gas property subject to a joint operating
agreement.
Section 2.4 Authority Relative to this Agreement. Parent and each of its
------------------------------------
Subsidiaries has the corporate power to enter into this Agreement and each other
agreement and document executed and delivered in connection with the material
transactions contemplated hereby (together with this Agreement, the "Transaction
Documents") to which Parent is a party and to carry out its obligations
hereunder and thereunder. The execution and delivery of this Agreement and the
other Transaction Documents to which Parent is a party and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
Parent's Board of Directors and the Parent Principal Shareholders. Each
Transaction Document to which Parent is a party constitutes a valid and binding
obligation of Parent enforceable against Parent in accordance with its terms
except as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought. No other corporate proceedings on the part of Parent are necessary
after the date of this Agreement to authorize execution by Parent of the
Transaction Documents to which Parent is a party. Parent is not subject to or
obligated under (a) any charter, bylaw, indenture or other loan or credit
document provision, or (b) any other contract, license, franchise, permit,
order, decree, concession, lease, instrument or judgment, or any statute, law,
ordinance, rule or regulation applicable to Parent or any of its Subsidiaries,
or their respective properties or assets, which would be breached or violated,
or under which there would be a default (with or without notice or lapse of
time, or both), or under which there would arise a right of termination,
cancellation, modification or acceleration of any obligation, or any right to
payment or compensation, or the loss of a material benefit, by its executing and
carrying out the Transaction Documents to which Parent is a party other than, in
the case of clause (b) only, (i) any breaches, violations, defaults,
terminations, cancellations, modifications, accelerations, rights to payment or
compensation, or losses which, either alone or in the aggregate, have not had,
and would not reasonably be expected to have, a Parent Material Adverse Effect
and (ii) the laws and regulations referred to in the next sentence. Except as
required by the Securities Act of 1933, as amended (the "Securities Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), Canadian
Governmental Entities (including without limitation Canadian Governmental
Entities requiring filings under the Investment Canada Act) and the corporation,
securities or blue sky laws or regulations of the various states, no filing or
13
registration with, or authorization, consent or approval of, any court,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign (each, a "Governmental Entity"), is
necessary for the consummation by Parent of the Merger or the other transactions
contemplated by the Transaction Documents to which Parent is a party, other than
filings, registrations, authorizations, consents or approvals the failure to
make or obtain which has not had, and would not reasonably be expected to have,
a Parent Material Adverse Effect.
Section 2.5 Reports and Financial Statements. Parent has previously
--------------------------------
furnished Company with, or there has been made available to Company, true and
complete copies of its (a) Annual Reports on Form 10-K for the fiscal years
ended December 31, 1998 and December 31, 1999, as filed with the Securities and
Exchange Commission (the "Commission"), (b) Quarterly Reports on Form 10-Q for
the quarters ended March 31, June 30 and September 30, 1999 and 2000, as filed
with the Commission, (c) proxy statements related to all meetings of its
shareholders (whether annual or special) since December 31, 1998, and (d) all
other reports or registration statements filed by Parent with the Commission
since December 31, 1998, except for preliminary material (in the case of clauses
(c) and (d) above) and except for registration statements on Form S-8 relating
to employee benefit plans and annual reports on Form 11-K with respect to such
plans, which are all the documents that Parent was required to file with the
Commission since December 31, 1998 (the documents in clauses (a) through (d)
being referred to herein collectively as the "Parent SEC Reports"). All Parent
SEC Reports were properly and timely filed with the Commission and any
applicable securities exchange or market and its self regulatory organization.
As of their respective dates, the Parent SEC Reports complied as to form in all
material respects with the requirements of the Securities Act or the Exchange
Act, as the case may be, and the rules and regulations of the Commission
thereunder applicable to the Parent SEC Reports. As of their respective dates,
the Parent SEC Reports did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of Parent included in the Parent SEC
Reports comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the Commission with
respect thereto. The financial statements included in the Parent SEC Reports (i)
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto); (ii) present fairly, in all material respects, the financial
position of Parent and its Subsidiaries as of the dates thereof and the results
of their operations and cash flows for the periods then ended subject in the
case of the unaudited interim financial statements, to normal year-end
adjustments, any other adjustments described therein and the fact that certain
information and notes have been condensed or omitted in accordance with the
Exchange Act and the rules promulgated thereunder, and (iii) are in all material
respects in accordance with the books of account and records of Parent and its
Subsidiaries.
Section 2.6 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
the Parent SEC Reports, from September 30, 2000 until the date of this
Agreement, there has not been any transaction, commitment, dispute or other
event or condition (financial or otherwise) of any character (whether or not in
the ordinary course of business) which, alone or in the aggregate, has had, or
would reasonably be expected to have, a Parent Material Adverse Effect.
14
Section 2.7 Litigation. Except as disclosed in the Parent SEC Reports and
----------
as set forth in Section 2.7 of the Parent Disclosure Schedule, there is no suit,
-----------
action or proceeding to which Parent or any of its Subsidiaries is a party
pending or, to the actual knowledge of the individuals listed in Section 2.7 of
-----------
the Parent Disclosure Schedule ("Parent's Knowledge"), threatened against Parent
or any of its Subsidiaries which, alone or in the aggregate, has had or would
reasonably be expected to have, a Parent Material Adverse Effect, nor is there
any judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against Parent or any of its Subsidiaries which, alone or
in the aggregate, has had, or would reasonably be expected to have, a Parent
Material Adverse Effect.
Section 2.8 Compliance with All Applicable Laws. Parent and each of its
-----------------------------------
Subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business, except for such permits, licenses,
variances, exemptions, orders and approvals the failure to hold which, alone or
in the aggregate, has not had, and would not reasonably be expected to have, a
Parent Material Adverse Effect (the "Parent Permits"). Parent and each of its
Subsidiaries is in compliance with the terms of the Parent Permits, except for
any failure to comply which, alone or in the aggregate, has not had, and would
not reasonably be expected to have, a Parent Material Adverse Effect. Except as
disclosed in the Parent SEC Reports filed and delivered to Company prior to the
date of this Agreement, the businesses of Parent and its Subsidiaries are not
being conducted in violation of any law, ordinance or regulation of any
Governmental Entity, except for possible violations which, alone or in the
aggregate, have not had, and would not reasonably be expected to have, a Parent
Material Adverse Effect.
Section 2.9 Employee Benefit Plans. (a) Section 2.9(a) of the Parent
---------------------- --------------
Disclosure Schedule hereto sets forth a list of all "employee benefit plans," as
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and all other material employee benefit or compensation
arrangements, including, without limitation, any such arrangements providing
severance pay, sick leave, vacation pay, salary continuation for disability,
retirement benefits, deferred compensation, bonus pay, incentive pay, stock
options (including those held by directors, employees, and consultants),
hospitalization insurance, medical insurance, life insurance, scholarships or
tuition reimbursements, that are maintained by Parent, any Subsidiary of Parent
or any Parent ERISA Affiliate or to which Parent, any Subsidiary of Parent or
any Parent ERISA Affiliate is obligated to contribute thereunder for current or
former directors, employees, independent contractors, consultants and leased
employees of Parent, any Subsidiary of Parent or any Parent ERISA Affiliate (the
"Parent Employee Benefit Plans").
(b) None of the Parent Employee Benefit Plans is a "multiemployer
plan," as defined in Section 4001(a)(30 of ERISA (a "Multiemployer Plan") and
neither Parent nor any Parent ERISA Affiliate presently maintains or has
maintained such a plan.
(c) Except as provided in Part 6 of Subtitle B of Title I of ERISA,
Parent does not maintain or contribute to any plan or arrangement which provides
or has any liability to provide health or medical benefits to any employee or
former employee upon his retirement or termination of employment.
15
(d) Except as provided in the agreements and arrangements in Section
-------
2.9(d) of the Parent Disclosure Schedule, the execution of, and performance of
------
the transactions contemplated in, this Agreement and the other Transaction
Documents will not either alone or upon the occurrence of subsequent events,
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any employee. The only severance
agreements or severance policies applicable to Parent or its Subsidiaries in the
event of a change of control of Parent are the agreements and policies
specifically referred to in Section 2.9(d) of the Parent Disclosure Schedule.
--------------
Except as disclosed in Section 2.9(d) of the Parent Disclosure Schedule, no
--------------
payment or benefit which will or may be made by Parent, Company or any of their
Subsidiaries or affiliates with respect to any employee of Parent or any
Subsidiary of Parent will be characterized as an "excess parachute payment"
within the meaning of Section 280G(b)(1) of the Code.
(e) Each Parent Employee Benefit Plan that is intended to qualify
under Section 401 of the Code, and each trust maintained pursuant thereto, has
been determined to be exempt from federal income taxation under Section 501 of
the Code by the IRS, and, to Parent's knowledge, nothing has occurred with
respect to the operation or organization of any such Parent Employee Benefit
Plan that would cause the loss of such qualification or exemption or the
imposition of any material liability, penalty or tax under ERISA or the Code.
With respect to any Parent Employee Benefit Plan which is a "defined benefit
plan" within the meaning of Section 3(35) of ERISA, (i) Parent has not incurred
and is not reasonably likely to incur any liability under Title IV of ERISA
(other than for the payment of premiums, all of which have been paid when due),
(ii) Parent has not incurred any accumulated funding deficiency within the
meaning of Section 412 of the Code and has not applied for or obtained a waiver
of any minimum funding standard or an extension of any amortization period under
Section 412 of the Code, (iii) no "reportable event" (as such term is defined in
Section 4043 of ERISA but excluding any event for which the provision for 30-day
notice to the Pension Benefit Guaranty Corporation has been waived by
regulation) has occurred or is expected to occur and (iv) since December 31,
1996, no material adverse change in the financial condition of any such plan has
occurred.
(f) (i) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under any of
the Parent Employee Benefit Plans to any funds or trusts established thereunder
or in connection therewith have been made by the due date thereof, (ii) Parent
has complied in all material respects with any notice, reporting and
documentation requirements of ERISA and the Code, (iii) there are no pending
actions, claims or lawsuits which have been asserted, instituted or, to Parent's
knowledge, threatened, in connection with the Parent Employee Benefit Plans, and
(iv) the Parent Employee Benefit Plans have been maintained, in all material
respects, in accordance with their terms and with all provisions of ERISA and
the Code (including rules and regulations thereunder) and other applicable
federal and state laws and regulations.
For purposes of this Agreement, "Parent ERISA Affiliate" means any business
or entity which is a member of the same "controlled group of corporations,"
under "common control" or in an "affiliated service group" with Parent within
the meanings of Sections 414(b), (c) or (m) of the Code, or required to be
aggregated with Parent under Section 414(o) of the Code, or a
16
"Parent ERISA Affiliate" under "common control" with Parent within the meaning
of Section 4001(a)(14) of ERISA, or any regulations promulgated or proposed
under any of the foregoing Sections.
Section 2.10 Parent Board Action. The Board of Directors of Parent (at a
-------------------
meeting duly called and held) has by the requisite vote of directors present (a)
determined that the Merger is advisable and fair to and in the best interests of
Parent and its shareholders, and (b) approved the Merger, this Agreement and the
transactions contemplated by the Transaction Documents in accordance with the
TBCA, Parent's Amended and Restated Articles of Incorporation, and Parent's
Bylaws. The only corporate action necessary to effect the election of Company
Director Nominees to Parent's Board of Directors for a term to last until the
second annual meeting of shareholders after the Effective Time pursuant to
Section 1.4(c), is an amendment to Parent's Bylaws which can be effected by a
--------------
resolution of Parent's Board of Directors.
Section 2.11 Required Shareholder Vote or Consent. The only vote of the
------------------------------------
holders of any class or series of the Parent's capital stock necessary to
consummate the Merger and the other Transaction Documents is the approval and
adoption of the Merger, this Agreement and the other Transaction Documents by
the holders of the Parent Common Stock (the "Parent Shareholder Approval") at a
shareholder meeting in person or by proxy.
Section 2.12 Taxes.
-----
(a) The term "Tax" as used herein means any federal, state, local, or
foreign income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including taxes
under Code (S) 59A), customs duties, capital stock, franchise, profits,
withholding, social security (or similar), unemployment, disability, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind whatsoever,
including any interest, penalty, or addition thereto, whether disputed or not.
The term "Tax Return" as used herein means any return, declaration, report,
claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof. All citations to the Code, or the Treasury Regulations promulgated
thereunder, will include any amendments or any substitute or successor
provisions thereto.
(b) Each of Parent and its Subsidiaries has filed all material Tax
Returns required to be filed by any of them and has paid (or Company has paid on
its behalf), or has set up an adequate reserve for the payment of, all Taxes
required to be paid in respect of the periods covered by such Tax Returns. The
information contained in such Tax returns is true, complete and accurate in all
material respects. Neither Parent nor any Subsidiary of Parent is delinquent in
the payment of any material Tax, assessment or governmental charge. No material
deficiencies for any Taxes have been proposed, asserted or assessed against
Parent or any of its Subsidiaries that have not been finally settled or paid in
full, and no requests for waivers of the time to assess any such Tax are
pending. None of Parent and its Subsidiaries is obligated, or is reasonably
expected to be obligated, to make any payments, or is a party to any agreement
that on account of the transactions contemplated by this Agreement would
obligate it, or reasonably be expected to obligate it to make any payments that
will
17
not be deductible under Section 280G of the Code. Each of Parent and its
Subsidiaries has withheld and paid all material Taxes required to be withheld
and paid and has complied with all information and backup withholding
requirements, including maintaining all necessary records in connection with
amounts paid or owing to any employee, creditor, independent contractor or other
third party.
(c) Except as set forth in Section 2.12(c) of the Parent Disclosure
---------------
Schedule, none of Parent or its Subsidiaries has, since December 31, 1997, been
a member of an affiliated group, within the meaning of Code ss. 1504, filing a
consolidated income Tax Return other than a group the common parent of which is
Parent. None of Parent and its Subsidiaries has any material liability for the
Taxes of any Person other than Parent and its Subsidiaries (i) under Reg. (S)
1.1502-6 (or any similar provision of state, local, or foreign law), (ii) as a
transferee or successor, (iii) by contract, or (iv) otherwise. "Person" means an
individual, a partnership, a corporation, a limited liability company, an
association, a Joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity.
(d) To Parent's Knowledge, Parent has not taken any action which would
prevent the Merger from constituting a reorganization within the meaning of
Section 368(a) of the Code.
Section 2.13 No HSR Filing. No filing under the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust
-------------
Improvements Act of 1976 is required in connection with the Merger or any other
transactions contemplated hereby or in the Transaction Documents.
Section 2.14 Certain Agreements. (a) Neither Parent nor any of its
------------------
Subsidiaries is in default (or would be in default with notice or lapse of time,
or both) under any indenture, note, credit agreement, loan document lease,
license, concession or other agreement including, but not limited to, any Parent
Employee Benefit Plan, whether or not such default has been waived, which
default alone or in the aggregate with other such defaults, has had, or would
reasonably be expected to have, a Parent Material Adverse Effect.
(b) Section 2.14(b) of the Parent Disclosure Schedule describes all
---------------
contracts, agreements and transactions, involving consideration of more than
$300,000 for any individual contract, agreement or transaction or series of
related contracts, agreements or transactions, between Parent or any of its
Subsidiaries, on the one hand, and any Parent Related Party (as defined below),
on the other hand, which are currently in effect or which were in effect or were
consummated at any time on or after January 1, 1998 and sets forth all current
balances payable to or receivable from such Parent Related Party related thereto
as of the date of this Agreement. For the purpose of this Agreement, "Parent
Related Party" means (i) any officer or director of Parent or any of its
Subsidiaries and (ii) any spouse, former spouse, child, parent, parent of a
spouse, sibling or grandchild of any of the persons listed in clause (i), any
Affiliate of any of the persons listed in clauses (i) and (ii) (other than
Parent or any Subsidiary of Parent).
Section 2.15 Compliance with Environmental Laws. (a) The properties, assets
----------------------------------
and operations of Parent and its Subsidiaries and their predecessors are and
have been in compliance with all applicable federal, state, local, and foreign
laws, rules and regulations, orders, decrees, Common law, judgments, permits and
licenses relating to the protection, regulation and clean-up of the indoor and
outdoor environment and activities or conditions related thereto, including,
without limitation,
18
those relating to the generation, handling, disposal, transportation or release
of hazardous or toxic materials, substances, wastes, pollutants and contaminants
including, without limitation, asbestos, petroleum, radon and polychlorinated
biphenyls (collectively, "Environmental Laws"), except for any violations that
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Parent Material Adverse Effect. With respect to such
properties, assets and operations, including any previously owned, leased or
operated properties, assets or operations, there are no past, present or
reasonably anticipated future events, conditions, circumstances, activities,
practices, incidents, actions or plans of Parent or any of its Subsidiaries and
their predecessors that may interfere with or prevent compliance or continued
compliance with applicable Environmental Laws, other than any such interference
or prevention that, individually or in the aggregate, has not had, and would not
reasonably be expected to have, a Parent Material Adverse Effect.
(b) Parent and its Subsidiaries and their predecessors have not caused
or permitted any property, asset, operation, including any previously owned
property, asset or operation, to use, generate, manufacture, refine, transport,
treat, store, handle, dispose, transfer or process hazardous or toxic materials,
substances, wastes, pollutants or contaminants, except in material compliance
with all Environmental Laws, other than any such activity that, individually or
in the aggregate, has not had, and would not reasonably be expected to have, a
Parent Material Adverse Effect. Parent and its Subsidiaries have not reported to
any Governmental Entity any material violation of an Environmental Law or any
release, discharge or emission of any hazardous or toxic materials, substances,
wastes, pollutants or contaminants, other than any such violation, release,
discharge or emission that, individually or in the aggregate, has not had, and
would not reasonably be expected to have, a Parent Material Adverse Effect. To
Parent's Knowledge, there are no pending, threatened or asserted claims or
liabilities under ▇▇▇▇▇▇, ▇▇ ▇.▇.▇. (▇)▇▇▇▇ et seq., ▇▇▇▇, ▇▇ ▇.▇.▇. (▇)▇▇▇▇ et
seq., or equivalent state law provisions and no current or former property,
asset or operation of Parent or any Subsidiary of Parent is identified or
currently proposed for the National Priorities List at 40 CFR (S)300, Appendix
B, or the CERCLIS or equivalent state lists or hazardous substances release
sites.
Section 2.16 Financial Advisor. No brokerage, lender's or other fee or
-----------------
commission are due to any broker, finder or investment banker in connection with
the Merger or the transactions contemplated by Transaction Documents based upon
arrangements made by or on behalf of the Parent or any of its Subsidiaries.
Section 2.17 Hedging.
-------
(a) Parent does not, and each of its Subsidiaries does not, have any
outstanding obligations for the delivery of Hydrocarbons attributable to any of
the properties of Parent or any of its Subsidiaries in the future on account of
prepayment, advance payment, take-or-pay or similar obligations without then or
thereafter being entitled to receive full value therefor.
(b) Section 2.17(b) of the Parent Disclosure Schedule sets forth all
---------------
futures, hedge, swap, collar, put, call, floor, cap, option or other contracts
that are intended to benefit from, relate to or reduce or eliminate the risk of
fluctuations in the price of commodities, including Hydrocarbons or securities,
to which Parent or any of its Subsidiaries is bound.
19
Section 2.18 No Distribution of Parent Rights. Under the agreements
--------------------------------
governing Parent Rights, the Merger and other transactions contemplated by the
Transaction Documents will not cause a distribution of Parent Rights or cause
any Parent Rights to become exercisable.
Section 2.19 Oil and Gas Operations. Except as set forth in Section 2.19 of
---------------------- ------------
the Parent Disclosure Schedule:
(a) All ▇▇▇▇▇ included in the Parent Reserve Report (as defined in
Section 2.21) have been drilled and (if completed) completed, operated and
produced in accordance with generally accepted oil and gas field practices and
in compliance in all material respects with applicable oil and gas leases and
applicable laws, rules and regulations, except where any failure or violation
has not had, or would not be reasonably expected to have, a Parent Material
Adverse Effect; and
(b) Proceeds from the sale of Hydrocarbons produced from Parent's Oil
and Gas Interests are being received by Parent and its Subsidiaries in a timely
manner and are not being held in suspense for any reason (except in the ordinary
course of business).
Section 2.20 Properties.
----------
(a) Except for goods and other property sold, used or otherwise
disposed of since September 30, 2000 in the ordinary course of business, Parent
and its Subsidiaries have Parent Good and Marketable Title (as defined below),
for oil and gas purposes, in and to all oil and gas properties set forth in the
Parent Reserve Report as owned by Parent and its Subsidiaries, and defensible
title for oil and gas purposes to all other properties, interests in properties
and assets, real and personal, reflected on the balance sheet of Parent in its
Quarterly Report on Form 10-Q for the period ended September 30, 2000, as owned
by Parent and its Subsidiaries, free and clear of any liens, security interests,
charges, mortgages or other encumbrances of any kind (collectively "Liens"),
except: (i) Liens associated with obligations reflected in the Parent SEC
Reports or Section 2.20(a) of the Parent Disclosure Schedule; (ii) Liens for
---------------
current taxes not yet due and payable, (iii) materialman's, mechanic's,
repairman's, employee's, contractor's, operator's, and other similar liens,
charges or encumbrances arising in the ordinary course of business (A) if they
have not been perfected pursuant to law, (B) if perfected, they have not yet
become due and payable or payment is being withheld as provided by law, or (C)
if their validity is being contested in good faith by appropriate action, (iv)
all rights to consent by, required notices to, filings with, or other actions by
governmental entities in connection with the sale or conveyance of oil and gas
leases or interests if they are customarily obtained subsequent to the sale or
conveyance, and (v) such imperfections of title, easements and Liens which, to
Parent's Knowledge, have not had, or would not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect. All leases
and other agreements pursuant to which Parent or any of its Subsidiaries leases
or otherwise acquires or obtains operating rights affecting any real or personal
property are in good standing, valid and effective and all royalties, rentals
and other payments due by Parent to any lessor of any such oil and gas leases
have been paid, except in each case, as has not had, and would not reasonably be
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect. To Parent's Knowledge, all major items of operating equipment of Parent
and its Subsidiaries are in good operating condition and in a state of
reasonable maintenance and repair, ordinary wear and tear excepted, except as
has not had,
20
and would not reasonably be expected to have, individually or in the aggregate,
a Parent Material Adverse Effect.
(b) The term "Parent Good and Marketable Title," for purposes of this
Section 2.20(b), with respect to Parent and its Subsidiaries, means such title
---------------
that: (1) is deducible of record (from the records of the applicable parish or
county or (A) in the case of federal leases, from the records of the applicable
office of the Minerals Management Service or Bureau of Land Management, (B) in
the case of Indian leases, from the applicable office of the Bureau of Indian
Affairs, (C) in the case of state leases, from the records of the applicable
state land office) or is assignable to Parent or its Subsidiaries out of an
interest of record (as so defined) by reason of the performance by Parent or its
Subsidiaries of all operations required to earn an enforceable right to such
assignment; (2) is free from reasonable doubt to the end that a prudent
purchaser engaged in the business of the ownership, development and operation of
producing oil and gas properties with knowledge of all of the facts and their
legal bearing would be willing to accept and pay full value for the same and a
prudent lender would be willing to lend against it as collateral without
discount for title matters; (3) entitles Parent or its Subsidiaries to receive
not less than the interest set forth in the Parent Reserve Report with respect
to each proved property evaluated therein under the caption "Net Revenue
Interest" or "NRI" without reduction during the life of such property except as
stated in the Parent Reserve Report; (4) obligates Parent or its Subsidiaries to
pay costs and expenses relating to each such proved property in an amount not
greater than the interest set forth under the caption "Working Interest" or "WI"
in the Parent Reserve Report with respect to such property without increase over
the life of such property except as shown on the Parent Reserve Report; and (5)
does not restrict the ability of Parent or its Subsidiaries to utilize the
properties as currently intended.
Section 2.21 Oil and Gas Reserves. Parent has furnished Company with
--------------------
Parent's estimates of Parent's and its Subsidiaries' oil and gas reserves as of
January 1, 2000 in a report as described in Section 2.21 of the Parent
------------
Disclosure Schedule (the "Parent Reserve Report"). Except as has not had, and
would not reasonably be expected to have, a Parent Material Adverse Effect, the
factual, non-interpretive data on which the Parent Reserve Report was based for
purposes of estimating the oil and gas reserves set forth in the Parent Reserve
Report and in any supplement thereto or update thereof furnished to Parent was,
to Parent's Knowledge, accurate. To Parent's Knowledge, and based on the
information given to Company by third-party operators for all ▇▇▇▇▇ not operated
by Parent, the Parent Payout Balances (as defined below) for each of the ▇▇▇▇▇
as used in the Parent Reserve Report were accurate as of the dates to which
Parent had calculated them, except as has not had, and would not reasonably be
expected to have a Parent Material Adverse Effect. "Parent Payout Balances"
means the status, as of the dates of Parent's calculations, of the recovery by
Parent or a third party of a cost amount specified in the contract relating to a
well out of the revenue from such well where the net revenue interest of Parent
therein will be reduced or increased when such amount has been recovered.
Section 2.22 Take-or-Pay Deliveries. Except as has not had, and would not
----------------------
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect, there are no calls (exclusive of market calls) on
Parent's oil or gas production and Parent has no obligation to deliver oil or
gas pursuant to any take-or-pay, prepayment or similar arrangement without
receiving
21
full payment therefor. Section 2.22 of the Parent Disclosure Schedule sets forth
------------
Parent's estimates of its imbalances in gas production as of September 30, 2000.
Parent does not have any other imbalances in gas production that, individually
or in the aggregate, have had or would be reasonably likely to have a Parent
Material Adverse Effect.
Section 2.23 Representations and Warranties Regarding Merger Sub. Parent
---------------------------------------------------
and Merger Sub jointly and severally represent and warrant to Company as
follows:
(a) Merger Sub is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Merger Sub has not
engaged in any business since it was incorporated other than in connection with
its organization and the transactions contemplated by this Agreement.
(b) The authorized capital stock of Merger Sub consists of 1,000
shares of common stock, par value $1.00 per share, all of which are validly
issued and outstanding, fully paid and nonassessable and are directly owned by
Parent, free and clear of all liens, claims and encumbrances.
(c) Merger Sub has the corporate power to enter into this Agreement
and to carry out its obligations hereunder. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby and by
the Transaction Documents have been duly authorized by the Board of Directors
and by Parent as the sole shareholder of Merger Sub. This Agreement constitutes
a valid and binding obligation of Merger Sub enforceable against Merger Sub in
accordance with its terms except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors' rights
generally and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. No other corporate proceedings on the part
of Merger Sub are necessary to authorize this Agreement and the transactions
contemplated hereby. Except as required by the Securities Act, the Exchange Act
and the corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization; consent or approval
of, any Governmental Entity is necessary for the consummation by Merger Sub of
the Merger or the transactions contemplated by the Transaction Documents, other
than filings, registrations, authorizations, consents or approvals the failure
to make or obtain which would not prevent the consummation of the transactions
contemplated by the Transaction Documents.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Company represents and warrants to Parent as follows (such representations and
warranties (as well as other provisions of this Agreement) are qualified by the
matters identified on a disclosure schedule (the "Company Disclosure Schedule")
delivered by Company to Parent prior to execution of this Agreement) as
supplemented in accordance with Section 8.2:
-----------
Section 3.1 Organization and Qualification. Company is a corporation duly
------------------------------
organized, validly existing and in good standing under the laws of the State of
Nevada and has the corporate power to carry on its business as it is now being
conducted or currently proposed to be conducted. Company
22
is duly qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities make such qualification
necessary, except where the failure to be so qualified has not had, and would
not reasonably be expected to have, alone or in the aggregate, a Company
Material Adverse Effect. For the purposes of this Agreement, a "Company Material
Adverse Effect" means any state of facts, event, change or effect which,
individually or in the aggregate, (a) has a material adverse effect on the
business, properties, assets, condition (financial or otherwise), liabilities or
results of operations of Company and its Subsidiaries taken as a whole, or (b)
would prevent the consummation of the material transactions contemplated hereby;
provided that occurrences or events arising out of or resulting from the
--------
following will in each case be excluded from consideration for purposes of the
effect of an occurrence or event on Company and its Subsidiaries, taken as a
whole: (i) changes in general economic conditions, including general stock
market conditions and interest rate changes, (ii) changes in the energy
industry, including changes in the prices of Hydrocarbons, or (iii) the adverse
determination of any pending litigation disclosed in the Company Disclosure
Schedule. Complete and correct copies as of the date of this Agreement of the
Second Amended and Restated Articles of Incorporation and Amended and Restated
Bylaws of Company have been delivered to Parent prior to the date of this
Agreement.
Section 3.2 Capitalization. The authorized capital stock of Company
--------------
consists of 50,000,000 shares of Company Common Stock and 5,000,000 shares of
preferred stock, $.01 par value (the "Company Preferred Stock"). As of the date
of this Agreement, (a) 12,231,960 shares of Company Common Stock were validly
issued and outstanding, fully paid and nonassessable, (b) no shares of Company
Preferred Stock were issued and outstanding, (c) 330,393 shares of Company
Common Stock were reserved for issuance pursuant to Options, and (d) 3,838,071
shares were reserved for issuance pursuant to Warrants. As of the date of this
Agreement, there are no bonds, debentures, notes or other indebtedness issued or
outstanding having the right to vote with Company's shareholders, whether
together or as a separate class, on any matters on which Company's shareholders
may vote. As of the date of this Agreement, except for Options and Warrants,
there are no options, warrants, calls, convertible securities or other rights,
agreements or commitments presently outstanding obligating Company to issue,
deliver or sell shares of its capital stock or debt securities, or obligating
Company to grant, extend or enter into any such option, warrant, call or other
such right, agreement or commitment. After the Effective Time, except for
obligations in respect of the Options and Warrants, the Surviving Corporation
will have no obligation to issue, transfer or sell any shares of stock of
Company or the Surviving Corporation pursuant to any Company Employee Benefit
Plan.
Section 3.3 Subsidiaries. Each Subsidiary of Company is a corporation,
------------
partnership or other entity duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization (except where the
failure to be validly existing and in good standing would not be material to the
business of such Subsidiary of Company) and has the corporate or similar power
to carry on its business as it is now being conducted or currently proposed to
be conducted. Each Subsidiary of Company is duly qualified to do business, and
is in good standing, in each jurisdiction where the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so qualified, when taken
together with all such failures, has not had, and would not reasonably be
expected to have, a Company Material
23
Adverse Effect. Section 3.3 of the Company Disclosure Schedule contains, with
-----------
respect to each Subsidiary of Company, its name and jurisdiction of organization
and, with respect to each Subsidiary of Company that is not wholly owned, the
number of issued and outstanding shares of capital stock or equity capital and
the number of shares of capital stock or equity capital owned by Company or a
Subsidiary of Company. Except as set forth in Section 3.3 of the Company
-----------
Disclosure Schedule, all the outstanding shares of capital stock or equity
capital of each Subsidiary of Company are validly issued, fully paid and
nonassessable, and those owned by Company or by a Subsidiary of Company are
owned free and clear of any liens, claims or encumbrances. There are no existing
options, warrants, calls, convertible securities or other rights, agreements or
commitments of any character relating to the issued or unissued capital stock or
other securities of any of the Subsidiaries of Company (other than preemptive
rights or similar rights held by Company with respect to certain of such
Subsidiaries). Except as set forth in Section 3.3 of the Company Disclosure
-----------
Schedule, Company does not directly or indirectly own any interest in any other
corporation, partnership, joint venture or other business association or entity
or have any obligation, commitment or undertaking to acquire any such interest,
other than business associations customary in the oil and gas industry
consisting of interests in oil and gas property subject to a joint operating
agreement.
Section 3.4 Authority Relative to this Agreement. Company and each of its
------------------------------------
Subsidiaries has the corporate power to enter into this Agreement and each other
Transaction Document to which Company or any of its Subsidiaries is a party and
to carry out their obligations hereunder and thereunder. The execution and
delivery of the Transaction Documents to which Company or any of its
Subsidiaries is a party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by the Board of Directors of
Company. Each Transaction Document to which Company or any of its Subsidiaries
is a party constitutes a valid and binding obligation of Company or such
Subsidiary enforceable against Company or such Subsidiary in accordance with its
terms except as enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally and except
that the liability of equitable remedies, including specific performance, is
subject to the discretion of the court before which any proceeding therefor may
be brought. No other corporate proceedings on the part of Company or any of its
Subsidiaries are necessary to authorize the Transaction Documents to which
Company or any of its Subsidiaries is a party and, other than the Company
Shareholder Approval, no other corporate proceedings on the part of the Company
are necessary, the transactions contemplated hereby or thereby. Except as set
forth in Section 3.4 of the Company Disclosure Schedule, neither Company nor any
-----------
of its Subsidiaries is subject to or obligated under (a) any charter, bylaw,
indenture or other loan or credit document or (b) any other contract (other than
Options and Warrants), license, franchise, permit, order, decree, concession,
lease, instrument or judgment or any statute, law, ordinance, rule or regulation
applicable to Company or any of its Subsidiaries or their respective properties
or assets which would be breached or violated, or under which there would be a
default (with or without notice or lapse of time, or both), or under which there
would arise a right of termination, cancellation, modification or acceleration
of any obligation, or any right to payment or compensation, or the loss of a
material benefit, by its executing and carrying out the Transaction Documents to
which Company or any of
24
its Subsidiaries is a party, other than, in the case of clause (b) only, (i) any
breaches, violations, defaults, terminations, cancellations, modifications,
accelerations, rights to payment or compensation, or losses which, either alone
or in the aggregate, have not had, and would not reasonably be expected to have,
a Company Material Adverse Effect and (ii) the laws and regulations referred to
in the next sentence. Except as required by the Securities Act, the Exchange
Act, Canadian Governmental Entities (including without limitation Canadian
Governmental Entities requiring filings under the Investment Canada Act) and the
corporation, securities or blue sky laws or regulations of the various states,
no filing or registration with, or authorization, consent or approval of, any
Governmental Entity is necessary for the consummation by Company and its
Subsidiaries of the Merger or the other transactions contemplated by the
Transaction Documents to which Company or any of its Subsidiaries is a party,
other than filings, registrations, authorizations, consents or approvals the
failure to make or obtain which has not had, and would not reasonably be
expected to have, a Company Material Adverse Effect.
Section 3.5 Reports and Financial Statements. Company has previously
--------------------------------
furnished Parent with, or there has been made available to Parent, true and
complete copies of its (a) Annual Reports on Form 10-K for the fiscal years
ended December 31, 1998 and December 31, 1999 as filed with the Commission, (b)
Quarterly Report on Form 10-Q for the quarters ended March 31, June 30, and
September 30, 1999 and 2000, as filed with the Commission, (c) proxy statements
related to all meetings of its shareholders (whether annual or special) since
December 31, 1998 and (d) all other reports or registration statements filed by
Company with the Commission since December 31, 1998, except for preliminary
material (in the case of clauses (c) and (d) above) and except for registration
statements on Form S-8 relating to employee benefit plans and annual reports on
Form 11-K with respect to such plans, which are all the documents that Company
was required to file with the Commission since that date (the documents in
clauses (a) through (d) being referred to herein collectively as the "Company
SEC Reports"). As of their respective dates, the Company SEC Reports complied as
to form in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and the rules and regulations of the
Commission thereunder applicable to such Company SEC Reports. As of their
respective dates, the Company SEC Reports did not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited interim financial statements of
Company, included in the Company SEC Reports comply as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the Commission with respect thereto. The financial statements
included in the Company SEC Reports (i) have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis (except
as may be indicated therein or in the notes thereto), (ii) present fairly, in
all material respects, the financial position of Company, and its Subsidiaries,
as the case may be, as of the dates thereof and the results of their operations
and cash flows for the periods then ended subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments and any other
adjustments described therein and the fact that certain information and notes
have been condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder, and (iii) are in all material respects in accordance
with the books of account and records of Company and its Subsidiaries.
25
Section 3.6 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
the Company SEC Reports, from September 30, 2000 until the date of this
Agreement, there has not been any transaction, commitment, dispute or other
event or condition (financial or otherwise) of any character (whether or not in
the ordinary course of business) which, alone or in the aggregate, has had, or
would reasonably be expected to have, a Company Material Adverse Effect.
Section 3.7 Litigation. Except as disclosed in the Company SEC Reports and
----------
as set forth in Section 3.7 of the Company Disclosure Schedule, there is no
-----------
suit, action or proceeding to which Company or any Subsidiary of Company is a
party pending or, to the actual knowledge of a director of Company ("Company's
Knowledge"), threatened against Company or any of its Subsidiaries which, alone
or in the aggregate, has had or would reasonably be expected to have, a Company
Material Adverse Effect, nor is there any judgment, decree, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against Company or
any of its Subsidiaries which, alone or in the aggregate, has had, or would
reasonably be expected to have, any such Company Material Adverse Effect.
Section 3.8 Compliance with Applicable Laws. Company and each of its
-------------------------------
Subsidiaries holds all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Entities necessary or appropriate for the
operation of its respective business, except for such permits, licenses,
variances, exemptions, orders and approvals the failure to hold which, alone or
in the aggregate, has not had, and would not reasonably be expected to have a
Company Material Adverse Effect (the "Company Permits"). Company and each of its
Subsidiaries is in compliance in all material respects with the terms of Company
Permits. Except as disclosed in Company SEC Reports filed and delivered to
Parent prior to the date of this Agreement the businesses of Company and its
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity, except for possible violations which
alone or in the aggregate have not had, and would not reasonably be expected to
have, a Company Material Adverse Effect.
Section 3.9 Employee Benefit Plans. (a) Section 3.9(a) of the Company
---------------------- --------------
Disclosure Schedule hereto sets forth a list of all "employee benefit plans," as
defined in Section 3(3) of ERISA, and all other material employee benefit or
compensation arrangements, including, without limitation, any such arrangements
providing severance pay, sick leave, vacation pay, salary continuation for
disability, retirement benefits, deferred compensation, bonus pay, incentive
pay, stock options (including those held by directors, employees, and
consultants), hospitalization insurance, medical insurance, life insurance,
scholarships or tuition reimbursements, that are maintained by Company, any
Subsidiary of Company or any Company ERISA Affiliate or to which Company, any
Subsidiary of Company or any Company ERISA Affiliate is obligated to contribute
thereunder for current or former directors, employees, independent contractors,
consultants and leased employees of Company, any Subsidiary of Company or any
Company ERISA Affiliate (the "Company Employee Benefit Plans").
(b) None of the Company Employee Benefit Plans is a Multiemployer Plan
and neither Company nor any Company ERISA Affiliate presently maintains or has
maintained such a plan.
26
(c) Except as provided in Part 6 of Subtitle B of Title I of ERISA,
Company does not maintain or contribute to any plan or arrangement which
provides or has any liability to provide health or medical benefits to any
employee or former employee upon his retirement or termination of employment.
(d) In a letter dated December 21, 2000, the Company set forth to
Parent the aggregate amount of (i) retention and severance benefits to be paid
or payable to all employees of Company and its Subsidiaries in connection with
the Merger and the transactions contemplated hereby and the other Transaction
Documents, which amount is $798,437, and (ii) the aggregate amount of sales
bonus payments to be paid or payable to all employees of Company and its
Subsidiaries, which amount is $558,687 (the "Company Employee Payments"), The
execution of, and performance of the transactions contemplated in, this
Agreement and the other Transaction Documents will not either alone or upon the
occurrence of subsequent events, result in any payment (whether of severance pay
or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any
employee, other than Company Employee Payments and as provided in Options and
Warrants. The only severance agreements or severance policies applicable to
Company or its Subsidiaries in the event of a change of control of Company are
the agreements and policies specifically referred to in Section 3.9(d) of the
--------------
Company Disclosure Schedule or in the letter described in the first sentence of
this Section 3.9(d). Except as disclosed in Section 3.9(d) of the Company
-------------- --------------
Disclosure Schedule, no payment or benefit which will or may be made by Company,
Parent or any of their Subsidiaries or affiliates with respect to any employee
of Company or any Subsidiary of Company will be characterized as an "excess
parachute payment" within the meaning of Section 280G(b)(1) of the Code.
(e) Each Company Employee Benefit Plan that is intended to qualify
under Section 401 of the Code, and each trust maintained pursuant thereto, has
been determined to be exempt from federal income taxation under Section 501 of
the Code by the IRS, and, to Company's knowledge, nothing has occurred with
respect to the operation or organization of any such Company Employee Benefit
Plan that would cause the loss of such qualification or exemption or the
imposition of any material liability, penalty or tax under ERISA or the Code.
With respect to any Company Employee Benefit Plan or other employee benefit plan
which is a "defined benefit plan" within the meaning of Section 3(35) of ERISA,
(i) Company has not incurred and is not reasonably likely to incur any liability
under Title IV of ERISA (other than for the payment of premiums, all of which
have been paid when due), (ii) Company has not incurred any accumulated funding
deficiency within the meaning of Section 412 of the Code and has not applied for
or obtained a waiver of any minimum funding standard or an extension of any
amortization period under Section 412 of the Code, (iii) no "reportable event"
(as such term is defined in Section 4043 of ERISA but excluding any event for
which the provision for 30-day notice to the Pension Benefit Guaranty
Corporation has been waived by regulation) has occurred or is expected to occur
and (iv) since December 31, 1996, no material adverse change in the financial
condition of any such plan has occurred.
(f) (i) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under any of
the Company Employee Benefit Plans to any funds or trusts established thereunder
or in connection therewith have been made by the
27
due date thereof, (ii) Company has complied in all material respects with any
notice, reporting and documentation requirements of ERISA and the Code, (iii)
there are no pending actions, claims or lawsuits which have been asserted,
instituted or, to Company's knowledge, threatened, in connection with the
Company Employee Benefit Plans, and (iv) the Company Employee Benefit Plans have
been maintained, in all material respects, in accordance with their terms and
with all provisions of ERISA and the Code (including rules and regulations
thereunder) and other applicable federal and state laws and regulations.
For purposes of this Agreement, "Company ERISA Affiliate" means any business or
entity which is a member of the same "controlled group of corporations," under
"common control" or in an "affiliated service group" with Company within the
meanings of Sections 414(b), (c) or (m) of the Code, or required to be
aggregated with Company under Section 414(o) of the Code, or a "Company ERISA
Affiliate" under "common control" with Company within the meaning of Section
4001(a)(14) of ERISA, or any regulations promulgated or proposed under any of
the foregoing Sections.
Section 3.10 Company Board Action. The Board of Directors of Company (at a
--------------------
meeting duly called and held) has by the requisite vote of directors present (a)
determined that the Merger is advisable and fair to and in the best interests of
Company and its shareholders and (b) approved the Merger, this Agreement and the
transactions contemplated by the Transaction Documents in accordance with the
GCLN, Company's Second Amended and Restated Articles of Incorporation and
Company's Amended and Restated Bylaws.
Section 3.11 Required Shareholder Vote or Consent. The only vote of the
------------------------------------
holders of any class or series of the Company's capital stock necessary to
consummate the Merger and the other Transaction Documents is the approval and
adoption of the Merger, this Agreement and the other Transaction Documents by
the holders of a majority of the votes entitled to be cast by holders of the
Company Common Stock (the "Company Shareholder Approval").
Section 3.12 Taxes. (a) Each of Company and its Subsidiaries has filed all
-----
material Tax Returns required to be filed by any of them and has paid (or
Company has paid on its behalf), or has set up an adequate reserve for the
payment of, all Taxes required to be paid in respect of the periods covered by
such Tax Returns. The information contained in such Tax returns is true,
complete and accurate in all material respects. Neither Company nor any
Subsidiary of Company is delinquent in the payment of any material Tax,
assessment or governmental charge. No material deficiencies for any Taxes have
been proposed, asserted or assessed against Company or any of its Subsidiaries
that have not been finally settled or paid in full, and no requests for waivers
of the time to assess any such Tax are pending. None of Company and its
Subsidiaries is obligated, or is reasonably expected to be obligated, to make
any payments, or is a party to any agreement that on account of the transactions
contemplated by this Agreement would obligate it, or reasonably be expected to
obligate it to make any payments that will not be deductible under Section 280G
of the Code. Each of Company and its Subsidiaries has withheld and paid all
material Taxes required to be withheld and paid and has complied with all
information and backup withholding requirements, including maintaining all
necessary records in connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
28
(b) Except as set forth in Section 3.12(b) of the Company Disclosure
---------------
Schedule, none of Company or its Subsidiaries has, since December 31, 1997, been
a member of an affiliated group, within the meaning of Code (S) 1504, filing a
consolidated income Tax Return other than a group the common parent of which is
Company. None of Company and its Subsidiaries has any material liability for the
Taxes of any Person other than Company and its Subsidiaries (i) under Reg. (S)
1.1502-6 (or any similar provision of state, local, or foreign law), (ii) as a
transferee or successor, (iii) by contract, or (iv) otherwise.
(c) To Company's Knowledge, Company has not taken any action which
would prevent the Merger from constituting a reorganization within the meaning
of Section 368(a) of the Code.
Section 3.13 Certain Agreements. (a) Neither Company nor any of its
------------------
Subsidiaries is in default (or would be in default with notice or lapse of time,
or both) under any indenture, note, credit agreement, loan document lease,
license, concession or other agreement including, but not limited to, any
Company Employee Benefit Plan, whether or not such default has been waived,
which default alone or in the aggregate with other such defaults, has had, or
would reasonably be expected to have, a Company Material Adverse Effect.
(b) Section 3.13(b) of the Company Disclosure Schedule describes all
---------------
contracts, agreements and transactions, involving consideration of more than
$300,000 for any individual contract, agreement or transaction or series of
related contracts, agreements or transactions, between Company or any of its
Subsidiaries, on the one hand, and any Company Related Party (as defined below),
on the other hand, which are currently in effect or which were in effect or were
consummated at any time on or after January 1, 1998 and sets forth all current
balances payable to or receivable from such Company Related Party related
thereto as of the date of this Agreement. For the purpose of this Agreement,
"Company Related Party" means (i) any officer or director of Company or any of
its Subsidiaries and (ii) any spouse, former spouse, child, parent, parent of a
spouse, sibling or grandchild of any of the persons listed in clause (i), any
Affiliate of any of the persons listed in clauses (i) and (ii) (other than
Company or any Subsidiary of Company).
Section 3.14 Compliance with Environmental Laws. (a) The properties,
----------------------------------
assets and operations of Company and its Subsidiaries and their predecessors are
and have been in compliance with all Environmental Laws, except for any
violations that individually or in the aggregate, have not had, and would not
reasonably be expected to have, a Company Material Adverse Effect. With respect
to such properties, assets and operations, including any previously owned,
leased or operated properties, assets or operations, there are no past, present
or reasonably anticipated future events, conditions, circumstances, activities,
practices, incidents, actions or plans of Company or any of its Subsidiaries and
their predecessors that may interfere with or prevent compliance or continued
compliance with applicable Environmental Laws, other than any such interference
or prevention that, individually or in the aggregate, has not had, and would not
reasonably be expected to have, a Company Material Adverse Effect.
(b) Company and its Subsidiaries and their predecessors have not
caused or permitted any property, asset, operation, including any previously
owned property, asset or
29
operation, to use, generate, manufacture, refine, transport, treat, store,
handle, dispose, transfer or process hazardous or toxic materials, substances,
wastes, pollutants or contaminants, except in material compliance with all
Environmental Laws, other than any such activity that, individually or in the
aggregate, has not had, and would not reasonably be expected to have, a Company
Material Adverse Effect. Company and its Subsidiaries have not reported to any
Governmental Entity any material violation of an Environmental Law or any
release, discharge or emission of any hazardous or toxic materials, substances,
wastes, pollutants or contaminants, other than any such violation, release,
discharge or emission that, individually or in the aggregate, has not had, and
would not reasonably be expected to have, a Company Material Adverse Effect. To
Company's Knowledge, there are no pending, threatened or asserted claims or
liabilities under CERCLA, 42 U.S.C. (S) 9601 et seq., RCRA, 42 U.S.C. (S) 6901
et seq., or equivalent state law provisions and no current or former property,
asset or operation of Company or any Subsidiary of Company is identified or
currently proposed for the National Priorities List at 40 CFR (S) 300, Appendix
B, or the CERCLIS or equivalent state lists or hazardous substances release
sites.
Section 3.15 Financial Advisor. On the date of this Agreement, Company's
-----------------
Board of Directors received the written opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & Co. that, as
of the date of this Agreement and based upon and subject to the matters set
forth therein, the Merger Consideration was fair from a financial point of view
to the holders of Company Common Stock. Except for fees due to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇ &
Co. and to FirstEnergy Capital Corporation in connection with the transactions
contemplated by the Transaction Documents (the "Company Financial Advisor
Fees"), no brokerage, lender's or other fee or commission are due to any broker,
finder or investment banker in connection with the Merger or the transactions
contemplated by Transaction Documents based upon arrangements made by or on
behalf of the Company or any of its Subsidiaries.
Section 3.16 Hedging.
-------
(a) Company does not, and each of its Subsidiaries does not, have any
outstanding obligations for the delivery of Hydrocarbons attributable to any of
the properties of Company or any of its Subsidiaries in the future on account of
prepayment, advance payment, take-or-pay or similar obligations without then or
thereafter being entitled to receive full value therefor.
(b) Section 3.16(b) of the Company Disclosure Schedule sets forth all
---------------
futures, hedge, swap, collar, put, call, floor, cap, option or other contracts
that are intended to benefit from, relate to or reduce or eliminate the risk of
fluctuations in the price of commodities, including Hydrocarbons or securities,
to which Company or any of its Subsidiaries is bound.
Section 3.17 Oil and Gas Operations. Except as set forth in Section 3.17
---------------------- ------------
of the Company Disclosure Schedule:
(a) All ▇▇▇▇▇ included in the Company Reserve Report have been drilled
and (if completed) completed, operated and produced in accordance with generally
accepted oil and gas field practices and in compliance in all material respects
with applicable oil and gas leases and applicable laws, rules and regulations,
except where any failure or violation has not had, or would not reasonably be
expected to have a Company Material Adverse Effect; and
30
(b) Proceeds from the sale of Hydrocarbons produced from Company's
Oil and Gas Interests are being received by Company and its Subsidiaries in a
timely manner and are not being held in suspense for any reason (except in the
ordinary course of business).
Section 3.18 Gas Imbalances. Except as set forth in Section 3.18 of the
-------------- ------------
Company Disclosure Schedule, none of Company or its Subsidiaries has received
any material deficiency payment under any gas contract for which any Person has
a right to take deficiency gas from any of Company or its Subsidiaries, nor have
any of Company or its Subsidiaries received any material payment for production
which is subject to refund or recoupment out of future production.
Section 3.19 Royalties. To Company's Knowledge, as to ▇▇▇▇▇ not operated by
---------
Company or its Subsidiaries, and without qualification as to knowledge, as to
all ▇▇▇▇▇ operated by Company or its Subsidiaries, all royalties, overriding
royalties, compensatory royalties and other payments due from or in respect of
production with respect to Company's Oil and Gas Interests, have been or will
be, prior to the Effective Time, properly and correctly paid or provided for in
all material respects, except for those for which Company or its Subsidiaries
has a valid right to suspend.
Section 3.20 Properties.
----------
(a) Except for goods and other property sold, used or otherwise
disposed of since September 30, 2000 in the ordinary course of business, Company
and its Subsidiaries have Company Good and Marketable Title (as defined below),
for oil and gas purposes, in and to all oil and gas properties set forth in the
Company Reserve Report as owned by Company and its Subsidiaries, and defensible
title for oil and gas purposes to all other properties, interests in properties
and assets, real and personal, reflected on the balance sheet of the Company in
its Quarterly Report on Form 10-Q for the period ended September 30, 2000, as
owned by Company and its Subsidiaries, free and clear of any Liens, except: (i)
Liens associated with obligations reflected in the Company SEC Reports or
Section 3.20(a) of the Company Disclosure Schedule; (ii) Liens for current taxes
---------------
not yet due and payable, (iii) materialman's, mechanic's, repairman's,
employee's, contractor's, operator's, and other similar liens, charges or
encumbrances arising in the ordinary course of business (A) if they have not
been perfected pursuant to law, (B) if perfected, they have not yet become due
and payable or payment is being withheld as provided by law, or (C) if their
validity is being contested in good faith by appropriate action, (iv) all rights
to consent by, required notices to, filings with, or other actions by
governmental entities in connection with the sale or conveyance of oil and gas
leases or interests if they are customarily obtained subsequent to the sale or
conveyance, and (v) such imperfections of title, easements and Liens which, to
Company's Knowledge, have not had, or would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect. All leases
and other agreements pursuant to which Company or any of its Subsidiaries leases
or otherwise acquires or obtains operating rights affecting any real or personal
property are in good standing, valid and effective and all royalties, rentals
and other payments due by Company to any lessor of any such oil and gas leases
have been paid, except in each case, as has not had, and would not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect. All major items of operating equipment of Company and its Subsidiaries
are in good operating condition and in a state of reasonable maintenance and
repair, ordinary wear and tear
31
excepted, except as has not had, and would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
(b) The term "Company Good and Marketable Title" will, for purposes
of this Section 3.20(b), with respect to Company and its Subsidiaries, mean such
---------------
title that: (1) is deducible of record (from the records of the applicable
parish or county or (A) in the case of federal leases, from the records of the
applicable office of the Minerals Management Service or Bureau of Land
Management, (B) in the case of Indian leases, from the applicable office of the
Bureau of Indian Affairs, (C) in the case of state leases, from the records of
the applicable state land office) or is assignable to Company or its
Subsidiaries out of an interest of record (as so defined) by reason of the
performance by Company or its Subsidiaries of all operations required to earn an
enforceable right to such assignment; (2) is free from reasonable doubt to the
end that a prudent purchaser engaged in the business of the ownership,
development and operation of producing oil and gas properties with knowledge of
all of the facts and their legal bearing would be willing to accept and pay full
value for the same and a prudent lender would be willing to lend against it as
collateral without discount for title matters; (3) entitles Company or its
Subsidiaries to receive not less than the interest set forth in the Company
Reserve Report with respect to each proved property evaluated therein under the
caption "Net Revenue Interest" or "NRI" without reduction during the life of
such property except as stated in the Company Reserve Report; (4) obligates
Company or its Subsidiaries to pay costs and expenses relating to each such
proved property in an amount not greater than the interest set forth under the
caption "Working Interest" or "WI" in the Company Reserve Report with respect to
such property without increase over the life of such property except as shown on
the Company Reserve Report; and (5) does not restrict the ability of Company or
its Subsidiaries to utilize the properties as currently intended.
Section 3.21 Oil and Gas Reserves. Company has furnished Parent prior to
--------------------
the date of this Agreement with Company's estimates of Company's and its
Subsidiaries' oil and gas reserves as of July 1, 2000 (the "Company Reserve
Report"). Except as have not had, and would not reasonably be expected to have a
Company Material Adverse Effect, the factual, non-interpretive data on which the
Company Reserve Report was based for purposes of estimating the oil and gas
reserves set forth in the Company Reserve Report and in any supplement thereto
or update thereof furnished to Company was, to Company's Knowledge, accurate. To
Company's Knowledge, and based on the information given to Company by third-
party operators for all ▇▇▇▇▇ not operated by Company, the Company Payout
Balances (as defined below) for each of the ▇▇▇▇▇ as used in the Company Reserve
Report were accurate as of the dates to which Company had calculated them,
except as would not reasonably be expected to have a Company Material Adverse
Effect. "Company Payout Balances" means the status, as of the dates of Company's
calculations, of the recovery by Company or a third party of a cost amount
specified in the contract relating to a well out of the revenue from such well
where the net revenue interest of Company therein will be reduced or increased
when such amount has been recovered.
Section 3.22 Take-or-Pay Deliveries. Except as would not, individually or
----------------------
in the aggregate, reasonably be expected to have a Company Material Adverse
Effect, there are no calls (exclusive of market calls) on Company's oil or gas
production and Company has no obligation to deliver oil or gas pursuant to any
take-or-pay, prepayment or similar arrangement without receiving
32
full payment therefor. Section 3.22 of the Company Disclosure Schedule sets
------------
forth Company's estimates of its imbalances in gas production as of September
30, 2000. The Company does not have any other imbalances in gas production that,
individually or in the aggregate, have had or would be reasonably likely to have
a Company Material Adverse Effect.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business by Company Pending the Merger. Except as
-------------------------------------------------
contemplated by the Company Disclosure Schedule, this Agreement and the other
Transaction Documents, during the period from the date of this Agreement to the
Effective Time, Company will, and will cause each of its Subsidiaries to, (i)
carry on its business in the usual, regular and ordinary course in substantially
the same manner as heretofore conducted and, to the extent consistent therewith,
use all reasonable efforts to keep available the services of its current
officers and employees and preserve its relationships with customers, suppliers,
licensors, lessors and others having business dealings with it to the end that
its goodwill and ongoing business will be unimpaired at the Effective Time and
(ii) prepare and timely file all Tax Returns and amendments required to be filed
by any of Company and its Subsidiaries prior to the Effective Time, and pay all
Taxes relating to such Tax Returns before they will become delinquent. Except as
otherwise permitted or contemplated by this Agreement, the Transaction Documents
or the Company Disclosure Schedule, Company will not, and will not permit any of
its Subsidiaries to, without the prior consent (which will not be unreasonably
withheld, delayed or denied) of Parent:
(a) (i) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its capital
stock, or otherwise make any payments to its shareholders in their capacity as
such (other than dividends and other distributions by direct or indirect wholly
owned Subsidiaries), (ii) other than in the case of any direct or indirect
wholly owned Subsidiary of Company, split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock, or
(iii) purchase, redeem or otherwise acquire any shares of capital stock of
Company or any of its Subsidiaries or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities;
(b) issue, deliver, sell, pledge, dispose of or otherwise encumber
(other than the pledges or other encumbrances described in Section 4.1(e)) any
--------------
shares of its capital stock, any other voting securities or equity equivalent
(other than Options issued to employees of Company and its Subsidiaries in the
ordinary course of business) or any securities convertible into, or any rights,
warrants or options to acquire any such shares, voting securities, equity
equivalent or convertible securities, other than the issuance of shares of
Company Common Stock upon the exercise of Options (whether or not presently
exercisable) outstanding on the date of this Agreement or upon the exercise of
Warrants outstanding on the date of this Agreement, in each case in accordance
with their current terms;
33
(c) amend its Second Amended and Restated Articles of Incorporation or
Amended and Restated Bylaws or other comparable organizational documents;
(d) acquire or agree to acquire (i) by merging or consolidating with,
or by purchasing a substantial portion of the assets of or equity in, or by any
other manner, any business or any corporation, partnership, association or other
business organization or division thereof or (ii) any assets except in the
ordinary course of business and except, in the case of clauses (i) and (ii), for
transactions not exceeding $100,000 individually or $3,000,000 for all
transactions pursuant to clauses (i) and (ii) in the aggregate;
(e) except for Company Permitted Encumbrances, as required by
contracts and agreements set forth in exhibits to the Company SEC Reports, sell,
lease, license, mortgage otherwise encumber or subject to any lien, charge or
encumbrance or otherwise dispose of, or agree to sell, lease, license, mortgage,
or otherwise encumber or subject to any lien, charge or encumbrance or otherwise
dispose of, any of its assets, other than pursuant to transactions that are in
the ordinary course of business (including, without limitation, any sale
transfer or other disposition of interests in oil and gas leaseholds (including,
without limitation, by abandonment, farm-ins, farm-outs, leases, swaps and
subleases), hydrocarbons and other mineral products in the ordinary course of
business of the oil and gas operations conducted by Company or its Subsidiaries)
consistent with past practice and not material to Company and its Subsidiaries
taken as a whole. When used in this Agreement, the term "Company Permitted
Encumbrances" will include any liens, title defects, preferential rights or
other encumbrances upon any of the relevant individual's or entities' property,
assets or revenues, whether now owned or hereafter acquired, that are (i)
carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like
liens arising in the ordinary course of business which are not overdue for a
period of more than 60 days or which are being contested in good faith by
appropriate proceeding, (ii) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security legislation and
deposits securing liability to insurance carriers under insurance or self-
insurance arrangements, (iii) for taxes not yet due or which are being contested
in good faith by appropriate proceedings, provided that adequate reserves with
respect thereto are maintained on the books of Company or its Subsidiaries, as
the case may be, in conformity with United States generally accepted accounting
principles in effect on the date of this Agreement ("GAAP"), (iv) deposits to
secure the performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business,
(v) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are not
substantial in amount and which do not in any case materially detract from the
value of the property subject thereto or materially Interfere with the ordinary
conduct of the business of Company or such Subsidiary of Company, (vi) created
pursuant to construction, operating and maintenance agreements, space lease
agreements and other similar agreements, in each case having ordinary and
customary terms and entered into in the ordinary course of business by Company
and its Subsidiaries, (vii) created pursuant to or arising under the Credit
Agreement, dated August 23, 2000, between Company, SMC Ecuador, Inc., SMC
Production Co., BEC Energy, Inc. and Spruce Hills Production Company, Inc. and
Bank One, Texas National Association for Reducing Revolving Line of Credit up to
$30,000,000 and the documents related thereto, and the Credit Agreement, dated
August 29, 2000, between Neutrino Resources, Inc. and Bank One Canada for
34
U.S. $30,000,000 Revolving Reducing Credit Facility, and the documents related
thereto (collectively, as amended, the "Company Credit Agreements"), (viii) the
terms, conditions, restrictions, exceptions, reservations, limitations and other
matters contained in the agreements, instruments and other documents (including,
without limitation, division orders) which create or reserve to Company (or
otherwise govern) its interest in any oil and gas assets, provided that the same
do not reduce the net revenue interest of Company in the oil and gas asset
affected thereby, (ix) royalties, overriding royalties, reversionary interests,
production payments, net profits interests and similar burdens affecting any oil
and gas asset if the net cumulative effect of such burdens does not operate to
reduce the net revenue interest in the oil and gas asset affected thereby, (x)
preferential rights to purchase and required third party consents with respect
to which any necessary waivers or consents shall have been obtained or shall
have been requested to be obtained from the appropriate parties and the
appropriate time period for asserting such rights shall have expired without an
exercise of such rights, or preferential rights to purchase and required third
party consents which are not applicable to the transactions contemplated hereby,
(xi) liens for Taxes and assessments which are not yet delinquent or which are
being contested by Company in good faith, (xii) rights existing under applicable
law (including without limitation statutory liens) or operating agreements or
similar contracts to assert liens against the oil and gas assets, but not
including liens and other rights which have actually been asserted, unless
Company disputes in good faith the validity of such liens or the amount claimed
to be owed in connection therewith or such lien or other right is not
enforceable against the interest of Company, (xiii) conventional rights of
reassignment requiring less than thirty-two days notice to the holder of such
rights, (xiv) any of the following which do not materially and adversely affect
the oil and gas assets: easements, rights-of-way, servitudes, permits, coal-
mining leases, surface leases and other rights in respect to surface operations,
pipelines, logging, canals, ditches, reservoirs or the like; conditions,
covenants or other restrictions; easements of streets, alleys, highways,
pipelines, telephone lines, power lines, railways and other easements or rights-
of-way on, over or with respect of the oil and gas assets, (xv) any obligations
or duties affecting an oil and gas asset to any municipality or public authority
with respect to any franchise, grant, license or permit and all applicable laws,
rules and order of any governmental authority, (xvi) all rights to consent by,
required notices to, filings with or other action by governmental entities in
connection with the sale or conveyance of oil and gas leases, permits, or
interests therein, if the same are customarily obtained contemporaneously with
or subsequent to such sale or conveyance, and which would not be triggered by
the transactions contemplated hereby, (xvii) existing operating agreements, unit
agreements, gas purchase contracts and any and all other agreements which are
normal and customary in the oil and gas exploration, development, production or
extraction business or in the business of processing of gas and gas condensate
or production for the extraction of proper products therefrom, to the extent
that the same do not reduce the net revenue interest of Company in the oil and
gas asset affected thereby, (xviii) any other defect or imperfection in title
which would customarily be waived by a Person engaged in the exploration for oil
or gas and the operation of oil and/or gas properties in the regions where the
oil and gas assets are located, or which can be cured by the provision of the
forced pooling statutes of applicable law which are applicable to the affected
oil and gas assets and (xix) the matters described in Section 4.1(e) of the
--------------
Company Disclosure Schedule;
(f) incur any indebtedness for borrowed money, guarantee any such
indebtedness, issue or sell any debt securities or warrants or other rights to
acquire any debt securities, guarantee
35
any debt securities or make any loans, advances or capital contributions to, or
other investments in, any other Person, or enter into any arrangement having the
economic effect of any of the foregoing, other than the Company Credit
Agreements (the balance outstanding under which shall not exceed $18,500,000 as
of the Effective Time) and indebtedness incurred in the ordinary course of
business consistent with past practice which is prepayable at any time without
premium or penalty;
(g) alter (through merger, liquidation, reorganization, restructuring
or in any other fashion) the corporate structure or ownership of Company or any
Subsidiary of Company (unless an alteration to the corporate structure or
ownership of a Subsidiary does not cause such Subsidiary not to be wholly owned
by Company) other than as contemplated by the Transaction Documents;
(h) except as required under any collective bargaining agreement,
enter into or adopt any new, or amend any existing, severance plan, agreement or
arrangement or enter into any new or amend any existing Company Employee Benefit
Plan or employment or consulting agreement other than as required by law;
(i) increase the compensation payable or to become payable to its
officers or employees, except for Company Employee Payments;
(j) grant or award any stock options, restricted stock, performance
shares, stock appreciation rights or other equity-based incentive awards other
than grants and awards to directors for service in such capacity;
(k) take any action with respect to accounting policies or procedures
for Tax or accounting purposes (other than actions required to be taken by Tax
laws or generally accepted accounting principles) or make or change any election
with respect to Taxes (except that Company can elect to forgo the carryback of
net operating losses);
(l) except as disclosed in the Company Disclosure Schedule or for
capital expenditures (including any asset acquisition or drilling commitment) in
the ordinary course of business consistent with past practice or capital
expenditures to repair or replace casualty losses, make or agree to make any new
capital expenditure or expenditures in excess of $100,000 individually or
$3,000,000 in the aggregate;
(m) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or contemplated in the notes thereto) of
Company included in the Company SEC Reports or incurred in the ordinary course
of business consistent with past practice or as required by law;
(n) settle or compromise any material federal, state, local or foreign
Tax liability;
(o) enter into, amend, terminate or waive any provision of, any
agreement or arrangement with any Company Related Party or enter into any
transaction with any Company Related Party;
36
(p) take any action which would prevent the Merger from constituting a
reorganization within the meaning of Section 368(a) of the Code; or
(q) enter into any contract, agreement, commitment or arrangement to
do any of the foregoing.
Section 4.2 Conduct of Business by Parent Pending the Merger. Except as
------------------------------------------------
contemplated by the Parent Disclosure Schedule, this Agreement and the other
Transaction Documents, during the period from the date of this Agreement to the
Effective Time, Parent will, and will cause each of its Subsidiaries to, carry
on its business in the usual, regular and ordinary course in substantially the
same manner as heretofore conducted and, to the extent consistent therewith.
Except as otherwise permitted or contemplated by this Agreement, the Transaction
Documents or the Parent Disclosure Schedule, Parent will not, and will not
permit any of its Subsidiaries to, without the prior consent (which will not be
unreasonably withheld or delayed) of Company:
(a) (i) declare, set aside or pay any dividends on, or make any other
actual, constructive or deemed distributions in respect of, any of its capital
stock, or otherwise make any payments to its shareholders in their capacity as
such (other than dividends and other distributions by direct or indirect wholly
owned Subsidiaries), (ii) other than in the case of any direct or indirect
wholly owned Subsidiary of Parent, split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock, or
(iii) purchase, redeem or otherwise acquire any shares of capital stock of
Parent or any of its Subsidiaries or any other securities thereof or any rights,
warrants or options to acquire any such shares or other securities;
(b) issue, deliver, sell, pledge, dispose of or otherwise encumber a
substantial portion of its capital stock, any other voting securities or equity
equivalent (other than options issued to employees of Parent and its
Subsidiaries in the ordinary course of business) or any securities convertible
into, or any rights, warrants or options to acquire any such shares, voting
securities, equity equivalent or convertible securities, other than the issuance
of shares of Parent Common Stock upon the exercise of options (whether or not
presently exercisable) outstanding on the date of this Agreement or upon the
exercise of warrants outstanding on the date of this Agreement, in each case in
accordance with their current terms;
(c) amend its Amended and Restated Articles of Incorporation or Bylaws
or other comparable organizational documents;
(d) subject to Company approval, make an acquisition of the assets of
or equity in (whether by purchase, merger or otherwise) any business or any
corporation, partnership, association or other business organization or division
thereof, which is material to Parent and its Subsidiaries, taken as a whole;
(e) except for Parent Permitted Encumbrances, as required by contracts
and agreements set forth in exhibits to the Parent SEC Reports, or sell, lease,
license, mortgage, otherwise encumber or subject to any lien, charge or
encumbrance or otherwise dispose of, or agree to sell, lease, license, mortgage
or otherwise encumber or subject to any lien, charge or encumbrance
37
or otherwise dispose of, a significant portion of its assets, other than
pursuant to transactions that are in the ordinary course of business (including,
without limitation, any sale transfer or other disposition of interests in oil
and gas leaseholds (including, without limitation, by abandonment, farm-ins,
farm-outs, leases, swaps and subleases), hydrocarbons and other mineral products
in the ordinary course of business of the oil and gas operations conducted by
Parent or its Subsidiaries) consistent with past practice and not material to
Parent and its Subsidiaries taken as a whole. When used in this Agreement, the
term "Parent Permitted Encumbrances" will include any liens, title defects,
preferential rights or other encumbrances upon any of the relevant individual's
or entities' property, assets or revenues, whether now owned or hereafter
acquired, that are (i) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like liens arising in the ordinary course of business which
are not overdue for a period of more than 60 days or which are being contested
in good faith by appropriate proceeding, (ii) pledges or deposits in connection
with workers' compensation, unemployment insurance and other social security
legislation and deposits securing liability to insurance carriers under
insurance or self-insurance arrangements, (iii) for taxes not yet due or which
are being contested in good faith by appropriate proceedings, provided that
adequate reserves with respect thereto are maintained on the books of Parent or
its Subsidiaries, as the case may be, in conformity with GAAP, (iv) deposits to
secure the performance of bids, trade contracts (other than for borrowed money),
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business,
(v) easements, rights-of-way, restrictions and other similar encumbrances
incurred in the ordinary course of business which, in the aggregate, are not
substantial in amount and which do not in any case materially detract from the
value of the property subject thereto or materially Interfere with the ordinary
conduct of the business of Parent or such Subsidiary of Parent, (vi) created
pursuant to construction, operating and maintenance agreements, space lease
agreements and other similar agreements, in each case having ordinary and
customary terms and entered into in the ordinary course of business by Parent
and its Subsidiaries, (vii) the terms, conditions, restrictions, exceptions,
reservations, limitations and other matters contained in the agreements,
instruments and other documents (including, without limitation, division orders)
which create or reserve to Parent (or otherwise govern) its interest in any oil
and gas assets, provided that the same do not reduce the net revenue interest of
Parent in the oil and gas asset affected thereby, (viii) royalties, overriding
royalties, reversionary interests, production payments, net profits interests
and similar burdens affecting any oil and gas asset if the net cumulative effect
of such burdens does not operate to reduce the net revenue interest in the oil
and gas asset affected thereby, (ix) preferential rights to purchase and
required third party consents with respect to which any necessary waivers or
consents shall have been obtained or shall have been requested to be obtained
from the appropriate parties and the appropriate time period for asserting such
rights shall have expired without an exercise of such rights, or preferential
rights to purchase and required third party consents which are not applicable to
the transactions contemplated hereby, (x) liens for Taxes and assessments which
are not yet delinquent or which are being contested by Parent in good faith,
(xi) rights existing under applicable law (including without limitation
statutory liens) or operating agreements or similar contracts to assert liens
against the oil and gas assets, but not including liens and other rights which
have actually been asserted, unless Parent disputes in good faith the validity
of such liens or the amount claimed to be owed in connection therewith or such
lien or other right is not enforceable against the interest of Parent, (xii)
conventional rights of reassignment requiring less than thirty-two days notice
to the holder of such rights, (xiii) any of the following which do not
materially and adversely affect the oil
38
and gas assets: easements, rights-of-way, servitudes, permits, coal-mining
leases, surface leases and other rights in respect to surface operations,
pipelines, logging, canals, ditches, reservoirs or the like; conditions,
covenants or other restrictions; easements of streets, alleys, highways,
pipelines, telephone lines, power lines, railways and other easements or rights-
of-way on, over or with respect of the oil and gas assets, (xiv) any obligations
or duties affecting an oil and gas asset to any municipality or public authority
with respect to any franchise, grant, license or permit and all applicable laws,
rules and order of any governmental authority, (xv) all rights to consent by,
required notices to, filings with or other action by governmental entities in
connection with the sale or conveyance of oil and gas leases, permits, or
interests therein, if the same are customarily obtained contemporaneously with
or subsequent to such sale or conveyance, and which would not be triggered by
the transactions contemplated hereby, (xvi) existing operating agreements, unit
agreements, gas purchase contracts and any and all other agreements which are
normal and customary in the oil and gas exploration, development, production or
extraction business or in the business of processing of gas and gas condensate
or production for the extraction of proper products therefrom, to the extent
that the same do not reduce the net revenue interest of Company in the oil and
gas asset affected thereby, (xvii) any other defect or imperfection in title
which would customarily be waived by a Person engaged in the exploration for oil
or gas and the operation of oil and/or gas properties in the regions where the
oil and gas assets are located, or which can be cured by the provision of the
forced pooling statutes of applicable Law which are applicable to the affected
oil and gas assets, (xviii) created pursuant to or arising under the Credit
Agreement dated September 28, 2000 among Parent, PCC Energy Limited, PCC Energy
Corp., Toronto Dominion (Texas), Inc., The Toronto-Dominion Bank, TD Securities
(USA), Inc. and various lenders signatory thereto (collectively, as amended, the
"Parent Credit Agreement"), and (xix) the matters described in Section 4.2(e) of
--------------
the Parent Disclosure Schedule;
(f) except in connection with the transactions contemplated by the
Transaction Documents, incur any material indebtedness for borrowed money,
guarantee any such indebtedness, issue or sell any debt securities or warrants
or other rights to acquire any debt securities, guarantee any debt securities or
make any material loans, advances or capital contributions to, or other
investments in, any other Person, or enter into any arrangement having the
economic effect of any of the foregoing;
(g) alter (through merger, liquidation, reorganization, restructuring
or in any other fashion) the corporate structure or ownership of Parent or any
Subsidiary of Parent (unless an alteration to the corporate structure or
ownership of a Subsidiary does not cause such Subsidiary not to be wholly owned
by Parent) other than as contemplated by the Transaction Documents;
(h) enter into, amend, terminate or waive any provision of, any
agreement or arrangement with any Parent Related Party or enter into any
transaction with any Parent Related Party;
(i) take any action which would prevent the Merger from constituting a
reorganization within the meaning of Section 368(a) of the Code; or
39
(j) enter into any contract, agreement, commitment or arrangement to
do any of the foregoing.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Access and Information. (a) Company and the Subsidiaries of
----------------------
Company will afford to Parent and to Parent's accountants, counsel and other
representatives, and (b) Parent and the Subsidiaries of Parent will afford to
Company and Company's accountants, counsel and other representatives, reasonable
access during normal business hours (and at such other times as the parties may
mutually agree) throughout the period prior to the Effective Time to (i) all of
its properties, books, contracts, commitments and records, and, during such
period, will furnish promptly to Parent and the Company, respectively, a copy of
each report, schedule and other document filed or received by it pursuant to the
requirements of federal or state securities laws, and (ii) all other information
concerning its business, properties and personnel as Parent or Company may
reasonably request.
Section 5.2 Registration Statement/Proxy Statement. Parent and Company will
--------------------------------------
cooperate and promptly prepare, and Parent will file with the Commission as soon
as practicable, a Registration Statement on Form S-4 (the "Form S-4") under the
Securities Act, with respect to the Parent Common Stock issuable in the Merger
(the "Parent Prospectus"), a portion of which Registration Statement will also
serve as the joint proxy statement of Parent and Company (the "Joint Proxy
Statement" and, together with the Parent Prospectus, the "Joint Proxy
Statement/Prospectus") with respect to the Merger. The respective parties will
cause the Joint Proxy Statement/Prospectus and the Form S-4 to comply as to form
in all material respects with the applicable provisions of the Securities Act,
the Exchange Act and the rules and regulations thereunder. Parent will use all
reasonable efforts, and Company will cooperate with Parent, to have the Form S-4
declared effective by the Commission as promptly as practicable after the filing
thereof (including, without limitation, responding to any comments received from
the Commission with respect thereto) and to keep the Form S-4 effective as long
as is necessary to consummate the Merger and the transactions contemplated
thereby. Each of Parent and Company will, as promptly as practicable, provide to
the other copies of any written comments received from the Commission with
respect to the Joint Proxy Statement/Prospectus or the Form S-4 and advise the
other of any oral comments with respect to the Joint Proxy Statement/Prospectus
or the Form S-4 received from the Commission. Parent will use its best efforts
to obtain, prior to the Effective Time of the Form S-4, all necessary state
securities law or "Blue Sky" permits or approvals required to carry out the
transactions contemplated by this Agreement and will pay all expenses incident
thereto. Parent agrees that none of the information supplied or to be supplied
by Parent for inclusion or incorporation by reference in the Form S-4 or the
Joint Proxy Statement/Prospectus (i) in the case of the Joint Proxy
Statement/Prospectus and each amendment or supplement thereto, at the time of
mailing thereof, or (ii) in the case of the Parent Prospectus and each amendment
or supplement thereto, at the time it is filed or becomes effective, will
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Company
agrees that none of the information supplied or to be supplied
40
by Company for inclusion or incorporation by reference in the Form S-4 or the
Joint Proxy Statement/Prospectus (i) in the case of the Joint Proxy Statement
and each amendment or supplement thereto, at the time of mailing thereof, or,
(ii) in the case of the Parent Prospectus or any amendment or supplement
thereto, at the time it is filed or becomes effective, will contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. For purposes of the
foregoing, it is understood and agreed that information concerning or related to
Parent will be deemed to have been supplied by Parent and information concerning
or related to Company will be deemed to have been supplied by Company. No
amendment or supplement to the Joint Proxy Statement/Prospectus will be made by
Parent or Company without the approval (not to be unreasonably delayed, withheld
or denied) of the other party. Parent will advise Company, promptly after it
receives notice thereof, of the time when the Form S-4 has become effective or
any supplement or amendment has been filed, the issuance of any stop order, or
the suspension of the qualification of Parent Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction.
Section 5.3 Compliance with the Securities Act. At least 30 days prior to
----------------------------------
the Effective Time, Company will deliver to Parent a list of names and addresses
of those persons who were, in Company's reasonable judgment, at the date of this
Agreement, "affiliates" (each such person, an "Affiliate") of Company within the
meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act. Company will use commercially reasonable efforts to deliver or
cause to be delivered to Parent, prior to the Effective Time, from each of the
Affiliates of Company identified in the foregoing list, an Affiliate Letter in
the form attached hereto as Exhibit B (an "Affiliate Letter"), and Parent will
---------
duly execute the acknowledgments to any Affiliate Letters so delivered and
return a copy of the acknowledged Affiliate Letter to the delivering Affiliate.
Parent will be entitled to place legends as specified in such Affiliate Letters
on the certificates evidencing any Parent Common Stock to be received by such
Affiliates pursuant to the terms of the Agreement, and to issue appropriate stop
transfer instructions to the transfer agent for the Parent Common Stock,
consistent with the terms of such Affiliate Letters.
Section 5.4 Stock Exchange Listing. Parent will use its best efforts to
----------------------
list on the AMEX, upon official notice of issuance, the Parent Common Stock to
be issued pursuant to the Merger.
Section 5.5 Employee Matters. As of the Effective Time, the employees of
----------------
Company and each Subsidiary of Company listed in Section 5.5 of the Company
-----------
Disclosure Schedule will continue employment with the Surviving Corporation and
its Subsidiaries, respectively, in the same positions and at the same level of
wages and/or salary and without having incurred a termination of employment or
separation from service; provided, however, except as may be specifically
-------- -------
required by applicable law or any contract, neither the Surviving Corporation
and its Subsidiaries, on the one hand, nor any employee, on the other hand, will
be obligated to continue any employment relationship or any specific terms of
employment for any specific period of time. As of the Effective Time, Parent
will assume and become the sponsor of Company Employee Benefit Plans sponsored
by Company immediately prior to the Effective Time, and Parent will and will
cause its Subsidiaries to satisfy all obligations and liabilities under such
Company Employee Benefit Plans; provided, however, that, except as hereafter
provided or in Section 5.5 of the Company Disclosure Schedule,
-----------
41
nothing contained in this Agreement will limit or restrict Parent's or its
Subsidiaries' right on or after the Effective Time to amend, modify or terminate
any of Company Employee Benefit Plans. To the extent any employee benefit plan,
program or policy of Parent or their affiliates is made available to any person
who is an employee of Company or any of its Subsidiaries immediately prior to
the Effective Time: (i) service with Company and its Subsidiaries by any
employee prior to the Effective Time will be credited for eligibility and
vesting purposes and for purposes of qualifying for any additional benefits tied
to periods of service (such as higher rates of matching contributions and
eligibility for early retirement) under such plan, program or policy and (ii)
with respect to any welfare benefit plans to which such employees may become
eligible, Parent will cause such plans to provide credit for any co-payments or
deductibles by such employees and waive all pre-existing condition exclusions
and waiting periods, other than limitations or waiting periods that have not
been satisfied under any welfare plans maintained by the Company and its
Subsidiaries for their employees prior to the Effective Time. At the reasonable
request of Parent, Company will amend, modify or terminate any of Company
Employee Benefit Plans at or immediately prior to the Effective Time (whichever
the Parent may request) and will take such other steps as Parent may reasonably
request to facilitate the administration after the Effective Time of the
compensation and benefit plans, programs and arrangements of the Surviving
Corporation.
Section 5.6 Indemnification. (a) From and after the Effective Time, the
---------------
Surviving Corporation will indemnify, defend and hold harmless the officers,
directors and employees of Company and its Subsidiaries who were such at any
time prior to the Effective Time (the "Indemnified Parties") from and against
all losses, expenses, claims, damages or liabilities arising out of the
transactions contemplated by this Agreement to the fullest extent permitted or
required under applicable law, and the Indemnified Parties will be advanced
expenses subject to a customary reimbursement agreement. All rights to
indemnification existing in favor of the directors, officers or employees of
Company and its Subsidiaries as provided in Company's Second Amended and
Restated Articles of Incorporation or Amended and Restated Bylaws, as in effect
as of the date of this Agreement, with respect to matters occurring through the
Effective Time, will survive the Merger and will continue in full force and
effect thereafter. Parent will maintain in effect for not less than six years
after the Effective Time the current policies of directors' and officers'
liability insurance maintained by Company, and will cause the Surviving
Corporation to indemnify the Indemnified Parties, from and against all losses,
expenses, claims, damages or liabilities arising from or related to matters,
acts or omissions occurring on or prior to the Effective Time; provided,
--------
however, that Parent may substitute therefor policies of at least the same
-------
coverage (with carriers comparable to Company's existing carriers) containing
terms and conditions which are no less advantageous to the Indemnified Parties;
and provided, further, that Parent will not be required in order to maintain or
procure such coverage to pay an annual premium in excess of 200% of the current
annual premium paid by the Company for its existing coverage (the "Cap"); and
provided, further, that if equivalent coverage cannot be obtained, or can be
-------- -------
obtained only by paying an annual premium in excess of Cap, the Parent will only
be required to obtain as much coverage as can be obtained by paying an annual
premium equal to the Cap.
(b) In the event that any action, suit, proceeding or investigation
relating hereto or to the transactions contemplated by this Agreement is
commenced, whether before or after the
42
Effective Time, the parties hereto agree to cooperate and use their respective
reasonable efforts to vigorously defend against and respond thereto.
(c) Any Indemnified Party, upon learning of any claim, action, suit,
proceeding or investigation for which such party may seek indemnification under
this Section 5.6, will promptly notify Parent; provided that the failure to so
-----------
promptly notify will not impede, limit or prohibit an Indemnified Party from
recovering except to the extent a delay permanently prejudiced Parent's ability
to defend such claim, action, suit, proceeding or investigation. In case any
such action shall be brought against an Indemnified Party and it shall give
written notice to Parent of the commencement thereof, Parent shall be entitled
to participate therein and, to the extent that it may wish, to assume the
defense thereof with counsel reasonably satisfactory to such Indemnified Party.
If Parent elects to assume the defense of such action, the Indemnified Party
shall have the right to employ separate counsel at its own expense and to
participate in the defense thereof. If Parent elects not to assume (or fails to
assume) the defense of such action, the Indemnified Party shall be entitled to
assume the defense of such action with counsel of its own choice, at the expense
of Parent. If the action is asserted against both Parent and the Indemnified
Party and there is a conflict of interests which renders it inappropriate for
the same counsel to represent both Parent and the Indemnified Party, Parent
shall be responsible for paying for separate counsel for the Indemnified Party;
provided, however, that if there is more than one Indemnified Party, Parent
shall not be responsible for paying for more than one separate firm of attorneys
(and any local counsel) to represent the indemnified parties, regardless of the
number of indemnified parties. If Parent elects to assume the defense of such
action, (i) no compromise or settlement thereof may be effected by Parent
without the Indemnified Party's written consent (which shall not be unreasonably
withheld) and (ii) the Indemnified Party shall have no liability with respect to
any compromise or settlement thereof effected without its written consent (which
shall not be unreasonably withheld).
Section 5.7 Additional Agreements. (a) Subject to the terms and conditions
---------------------
herein provided, each of the parties hereto agrees diligently to use their best
efforts to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement and the other Transaction Documents as soon as reasonably
practical, including to (i) obtain all necessary waivers, consents and
approvals, (ii) effect all necessary registrations and filings, (iii) lift any
injunction to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), and (iv) otherwise promptly satisfy the conditions
set forth in Article VI. In addition, Parent agrees to cooperate with Company in
----------
obtaining (x) a legal opinion from Akin, Gump, Strauss, ▇▇▇▇▇ & ▇▇▇▇, LLP,
counsel to Company, reasonably satisfactory to Company, to be delivered in
connection with the filing of the Form S-4 concerning tax matters, and (y) the
legal opinion described in Section 6.2(c) from Akin, Gump, Strauss, ▇▇▇▇▇ &
--------------
▇▇▇▇, LLP. In connection with each of such opinions of Akin, Gump, Strauss,
▇▇▇▇▇ & ▇▇▇▇, LLP, Parent and Company shall each deliver a certificate executed
by an appropriate officer of Parent containing customary representations as to
current financial matters related to the treatment of the Merger as a tax-free
reorganization under Section 368(a) of the Code.
(b) Company will give prompt notice to Parent, and Parent or Merger
Sub will give prompt notice to Company, of:
43
(i) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection with
the transactions contemplated by this Agreement;
(ii) any notice or other communication from any Governmental
Entity in connection with the transactions contemplated by the Transaction
Documents; and
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to Company's or Parent's Knowledge, as applicable, threatened
against, relating to or involving or otherwise affecting it or any of its
Subsidiaries which, if pending on the date of this Agreement would have
been required to have been disclosed pursuant to Section 2.7, 2.8, 3.7 and
----------- --- ---
3.8 or which relate to the consummation of the transactions contemplated by
---
this Agreement.
(c) Parent and Merger Sub, on the one hand, and Company, on the other
hand, will consult with each other before issuing, and provide each other the
opportunity to review and comment upon, any press release or other public
statements with respect to the transactions contemplated by this Agreement and
the other Transaction Documents, including the Merger, and will not issue any
such press release or make any such public statement prior to such consultation.
(d) Parent agrees to cause its Board of Directors prior to the
Effective Time to approve in the form required by Rule 16b-3 under the Exchange
Act certain acquisitions of Parent Common Stock pursuant to the Merger, as
directed by Company and in form reasonably acceptable to Company.
(e) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement and the other
Transaction Documents, the proper officers and/or directors of Parent and
Company will use their reasonable best efforts to take all such necessary
action.
Section 5.8 No Shop. Company agrees (a) that neither it nor any of its
-------
Subsidiaries or affiliates will, and it will direct and use commercially
reasonable efforts to cause its officers, directors, employees, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by it or any of its Subsidiaries or affiliates) not to,
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders) with respect to a merger,
acquisition, consolidation or similar transaction involving, or any purchase of
all or any significant portion of the assets or equity securities covering all
or any significant portion of the assets of, Company and its Subsidiaries, taken
as a whole (any such proposal or offer being hereinafter referred to as an
"Alternative Proposal"), or engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
person relating to an Alternative Proposal, or release any third party from any
obligations under any existing standstill agreement or arrangement, or enter
into any agreement with respect to an Alternative Proposal, or otherwise
facilitate any effort or attempt to make or implement an Alternative Proposal;
(b) that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties with respect to any of
the foregoing, and it will take the necessary steps
44
to inform the individuals or entities referred to above of the obligations
undertaken in this Section 5.9; and (c) that it will notify Parent immediately
-----------
if any such inquiries or proposals are received by, any such information is
requested from, or any such negotiations or discussions are sought to be
initiated or continued with, it. Notwithstanding the foregoing, prior to the
Effective Time, Company may, directly or indirectly, furnish information and
access to, and may participate in discussions and negotiate with, any Person, if
(i) such person has submitted an unsolicited proposal to the Board of Directors
of Company relating to an Alternative Proposal, (ii) the Board of Directors of
Company believes that such Alternative Proposal is superior from a financial
point of view to the transactions contemplated by the Transaction Documents, and
(iii) the Board of Directors of Company determines in its good faith judgment
that it is required to take such action to comply with the Board of Directors'
fiduciary duty imposed by law (a "Superior Proposal"). Such Board of Directors
will provide a summary of any such proposal to Parent immediately after receipt
thereof and thereafter keep Parent promptly advised of any development with
respect thereto and any revision of the terms of such Superior Proposal.
Section 5.9 Advice of Changes, SEC Filings. Company will confer on a
------------------------------
regular basis with Parent on operational matters. Parent and Company will
promptly advise each other of any change or event that has had, or could
reasonably be expected to have, a Company Material Adverse Effect or a Parent
Material Adverse Effect, as the case may be. Company and Parent will promptly
provide each other (or their respective counsel) copies of all filings made by
such party with the SEC or any other Governmental Entity in connection with this
Agreement and the transactions contemplated hereby and other Transaction
Documents and the transactions contemplated thereby.
Section 5.10 Confidentiality Agreement. Each party will keep all
-------------------------
information received pursuant to this Agreement confidential in accordance with
the confidentiality provisions of the offer letter dated December 8, 2000
between Parent and Company, and the Confidentiality Agreement dated October 11,
1999 between Parent and Company (the "Confidentiality Agreement").
Notwithstanding any other provision of this Agreement or the Confidentiality
Agreement, the Confidentiality Agreement remains in full force and effect, is
not superseded or modified by this Agreement, and will only terminate upon the
Effective Time.
Section 5.11 Special Meetings.
----------------
(a) Company will, as promptly as reasonably practicable after the date
of this Agreement (i) take all steps reasonably necessary to call, give notice
of, convene and hold a special meeting of its shareholders (the "Company Special
Meeting") for the purpose of securing the Company Shareholder Approval, (ii)
distribute to its shareholders the Joint Proxy Statement/Prospectus in
accordance with applicable federal and state law and its articles of
incorporation and bylaws, which Joint Proxy Statement/Prospectus will contain
the recommendation of the Company Board of Directors that its shareholders
approve and adopt this Agreement and approve the Merger and other Transaction
Documents and transactions contemplated thereby, and (iii) subject to the
fiduciary duties of its directors, use all reasonable efforts to solicit from
its shareholders proxies in favor of, and to secure, the Company Shareholder
Approval, and (iv) cooperate and consult with Parent with respect to each of the
foregoing matters; provided, that this Section 5.11 will not prohibit the
------------
Company Board of Directors from failing to make or from
45
withdrawing or modifying its recommendation to the Company shareholders
hereunder if the Board of Directors of Company determines in good faith that
such action is necessary for such Board of Directors to comply with its
fiduciary duties to its shareholders under applicable law and provided further
that this Agreement will not be required to be submitted to the shareholders of
Company at the Company Special Meeting if this Agreement has been terminated
pursuant to Section 7.1 hereof.
-----------
(b) Parent will, as promptly as reasonably practicable after the date
of this Agreement (a) take all steps reasonably necessary to call, give notice
of, convene and hold a special meeting of its shareholders (the "Parent Special
Meeting") for the purpose of securing the Parent Shareholder Approval, (b)
distribute to its shareholders the Joint Proxy Statement/Prospectus in
accordance with applicable federal and state law and its articles of
incorporation and bylaws, which Joint Proxy Statement/Prospectus will contain
the recommendation of the Parent Board of Directors that its shareholders
approve and adopt this Agreement and approve the Merger and other Transaction
Documents and transactions contemplated thereby, (c) use all reasonable efforts
to solicit from its shareholders proxies in favor of, and to secure, the Parent
Shareholder Approval, and (d) cooperate and consult with Company with respect to
each of the foregoing matters; provided, that this Agreement will not be
required to be submitted to the shareholders of Parent at the Parent Special
Meeting if this Agreement has been terminated pursuant to Section 7.1 hereof.
-----------
Section 5.12 State Takeover Statutes. If any "fair price", "control share
-----------------------
acquisition", "moratorium" or other anti-takeover statute, or similar statute or
regulation will become applicable to the Merger, this Agreement, the other
Transaction Documents or any of the transactions contemplated hereby or thereby,
Company and Parent will use their commercially reasonable efforts to ensure that
the Merger and the other transactions contemplated hereby and by the Transaction
Documents, may be consummated as promptly as practicable on the terms
contemplated hereby and otherwise to minimize the effect of such statute or
regulation on the Merger and the other transactions contemplated hereby or
thereby.
Section 5.13 Company Credit Agreements. Parent agrees that at or
-------------------------
immediately subsequent to the Effective Time, it will, or will cause its
Subsidiaries to pay off the entire balance outstanding under the Company Credit
Agreements.
Section 5.14 Expenses. Except as provided to the contrary in Article VII,
-------- -----------
each party hereto will pay its own expenses incident to preparing for, entering
into and carrying out this Agreement and the consummation of the transactions
contemplated hereby, whether or not the Merger will be consummated, except that
the fee for filing the Joint Proxy Statement/Prospectus with the Commission and
the costs and expenses associated with printing and mailing the Joint Proxy
Statement/Prospectus and complying with any applicable state securities or "blue
sky" laws will be borne by Parent.
Section 5.15 St. ▇▇▇▇ Shareholder Agreement. Parent will use its best
------------------------------
efforts to have St. ▇▇▇▇ Fire and Marine Insurance Company ("St. ▇▇▇▇") execute
a shareholder agreement in the form of Exhibit C ("St. ▇▇▇▇ Shareholder
Agreement") hereto as promptly as possible after the date of this Agreement.
46
Section 5.16 Available Funds. Parent covenants that it will have at the
---------------
Closing immediately available funds and authorized Parent Common Stock available
for issuance sufficient to enable it to make payment of the Aggregate Merger
Consideration and effect the transactions contemplated by this Agreement and the
other Transaction Documents without encumbrance or delay and without causing
Parent to become insolvent or to declare insolvency.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger. The
----------------------------------------------------------
respective obligations of each party to effect the Merger will be subject to the
fulfillment at or prior to the Effective Time of the following conditions:
(a) The Form S-4 will have become effective in accordance with the
provisions of the Securities Act. No stop order suspending the effectiveness of
the Form S-4 will have been issued by the Commission and remain in effect and
all necessary approvals under state securities laws relating to the issuance or
trading of the Parent Common Stock to be issued to shareholders of Company in
connection with the Merger will have been obtained.
(b) No preliminary or permanent injunction or other order by any
federal or state court in the United States of competent jurisdiction which
prevents the consummation of the Merger will have been issued and remain in
effect (each party agreeing to use all commercially reasonable efforts to have
any such injunction lifted).
(c) The Parent Common Stock to be issued to Company shareholders in
connection with the Merger will have been approved for listing on the American
Stock Exchange ("AMEX"), subject only to official notice of issuance.
(d) (i) Stock Elections that would represent the right to receive no
less than 3,000,000 shares of Parent Common Stock have been effectively made
pursuant to Section 1.6, and (ii) Company will have received a legal opinion
-----------
from Akin, Gump, Strauss, ▇▇▇▇▇ & ▇▇▇▇, LLP dated as of the date of the
Effective Time, reasonably satisfactory to Company to the effect that on the
basis of certain facts, representations and assumptions set forth in such
opinions, the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code.
(e) Company Shareholder Approval. The holders of issued and
----------------------------
outstanding shares of Company Common Stocwill have duly approved the Merger.
(f) Parent Shareholder Approval. The holders of issued and
---------------------------
outstanding shares of Parent Common Stock will have duly approved the Merger.
47
Section 6.2 Conditions to Obligation of Company to Effect the Merger. The
--------------------------------------------------------
obligation of Company to effect the Merger will be subject to the fulfillment
(or waiver by Company) at or prior to the Effective Time of the following
additional conditions:
(a) Performance of Obligations, Representations and Warranties. (i)
----------------------------------------------------------
The representations and warranties of Parent contained herein (other than in
Section 2.6) will be true and correct in all respects (but without regard to any
-----------
materiality qualifications or references to a Parent Material Adverse Effect
contained in any specific representation or warranty) as of the Effective Time
except (a) for changes specifically permitted by the terms of this Agreement,
(b) that the accuracy of representations and warranties that by their terms
speak as of the date of this Agreement or some other date will be determined as
of such date and (c) where any such failure of the representations and
warranties in the aggregate to be true and correct in all respects would not
have a Parent Material Adverse Effect, and (ii) Parent will have performed in
all material respects all obligations and complied with all covenants required
by this Agreement to be performed or complied with by it prior to the Effective
Time, in the case of (i) and (ii) above except as contemplated or permitted by
this Agreement, and Company will have received certificates signed on behalf of
Parent by an executive officer of Parent to certifying as to both (i) and (ii)
above.
(b) Consents and Authorizations. All consents, waivers, approvals,
---------------------------
authorizations or orders required to be obtained, and all filings required to be
made for the consummation of the transactions contemplated by this Agreement
will have been obtained and made by Parent and Merger Sub, except for those
consents, waivers, approvals, authorizations, orders and filings the failure of
which to obtain would not and would not reasonably be expected to adversely
affect the Closing or have a Parent Material Adverse Effect.
(c) No Material Adverse Effect. From the date of this Agreement
--------------------------
through the Effective Time, there will not have occurred any change in the
financial condition, business or operations of Parent and its Subsidiaries, that
would constitute a Parent Material Adverse Effect.
Section 6.3 Conditions to Obligations of Parent to Effect the Merger. The
--------------------------------------------------------
obligations of Parent to effect the Merger will be subject to the fulfillment
(or waiver by Parent) at or prior to the Effective Time of the following
additional conditions:
(a) Performance of Obligations, Representations and Warranties. (i)
----------------------------------------------------------
The representations and warranties of Company contained herein (other than in
Section 3.6) will be true and correct in all respects (but without regard to any
-----------
materiality qualifications or references to a Company Material Adverse Effect
contained in any specific representation or warranty) as of the Effective Time
except (a) for changes specifically permitted by the terms of this Agreement,
(b) that the accuracy of representations and warranties that by their terms
speak as of the date of this Agreement or some other date will be determined as
of such date and (c) where any such failure of the representations and
warranties in the aggregate to be true and correct in all respects would not
have a Company Material Adverse Effect, and (ii) Company will have performed in
all material respects all obligations and complied with all covenants required
by this Agreement to be performed or complied with by it prior to the Effective
Time, in each case except as contemplated or permitted
48
by this Agreement, and Parent will have received certificates signed on behalf
of Company by an executive officer of Company to such effect.
(b) Consents and Authorizations. All consents, waivers, approvals,
---------------------------
authorizations or orders required to be obtained, and all filings required to be
made for the consummation of the transactions contemplated by this Agreement
will have been obtained and made by Company, except for those consents, waivers,
approvals, authorizations, orders and filings (x) relating to the Company Credit
Agreements or the Parent Credit Agreement, or (y) the failure of which to obtain
would not and would not reasonably be expected to adversely affect the Closing
or have a Company Material Adverse Effect.
(c) No Company Material Adverse Effect. From the date of this
----------------------------------
Agreement through the Effective Time, there will not have occurred any change in
the financial condition, business or operations of Company and its Subsidiaries,
that would constitute a Company Material Adverse Effect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Effective Time, whether before or after approval of any matters presented
in connection with the Merger by the shareholders of Company:
(a) by mutual written consent of Parent and Company;
(b) by either Company or Parent if there has been an inaccuracy or
breach of the representations, warranties, covenants or agreements on the part
of the other set forth in this Agreement which breach would result in the
condition set forth in Section 6.2(a), in the case of a breach by Parent or
--------------
Merger Sub, or Section 6.3(a), in the case of a breach by Company, not being
--------------
satisfied, and such breach has not been cured within ten business days following
receipt by the breaching party of notice of such breach from the non-breaching
party;
(c) by either Parent or Company if the Merger will not have been
consummated on or before May 31, 2001, unless the failure to consummate the
Merger is the result of an inaccuracy or breach of the representations,
warranties, covenants or agreements contained in this Agreement by the party
seeking to terminate this Agreement which has not been cured within ten business
days following receipt by the breaching party of notice of such inaccuracy or
breach from the non-breaching party;
(d) by Company, prior to the Effective Time, if the Board of
Directors of Company has received a Superior Proposal which the Board of
Directors has resolved to accept. Upon such termination, Parent, Merger Sub and
their respective Subsidiaries will be deemed to have waived any and all claims
Parent and its Subsidiaries may have at law or in equity against Company, its
Subsidiaries or their respective officers, directors or employees arising out of
or relating to this Agreement or the other Transaction Documents, except as
contemplated by Section 7.2(a);
--------------
49
(e) by either Company or Parent if (i) a statute, rule, regulation or
executive order will have been enacted, entered or promulgated prohibiting the
consummation of the Merger substantially on the terms contemplated hereby or
(ii) an order, decree, ruling or injunction will have been entered permanently
restraining, enjoining or otherwise prohibiting the consummation of the Merger
substantially on the terms contemplated hereby and such order, decree, ruling or
injunction will have become final and non-appealable; provided, that the party
seeking to terminate this Agreement pursuant to this Section 7.1(e) will have
--------------
used its reasonable best efforts to remove such injunction, order or decree;
(f) by either Company or Parent if the Company Shareholder Approval
will not have been obtained by reason of the failure to obtain the required vote
at a duly held meeting of shareholders or of any adjournment thereof;
(g) by Company if the St. ▇▇▇▇ Shareholder Agreement has not been
executed by St. ▇▇▇▇ on or prior to January 5, 2000; or
(h) by Parent, prior to the Effective Time, if the Board of Directors
of Company has received a Superior Proposal which the Board of Directors has
failed to reject within 30 days of the date of receipt of such Superior
Proposal. Upon such termination, Parent, Merger Sub and their respective
Subsidiaries will be deemed to have waived any and all claims Parent and its
Subsidiaries may have at law or in equity against Company, its Subsidiaries or
their respective officers, directors or employees arising out of or relating to
this Agreement or the other Transaction Documents.
Section 7.2 Effect of Termination. (a) In the event of termination of this
---------------------
Agreement by either Parent or Company as provided in Section 7.1, this Agreement
-----------
will forthwith become void and there will be no liability hereunder on the part
of Company, Parent or their respective officers or directors; provided, however,
that nothing contained in this Section 7.2 will relieve any party hereto from
-----------
any liability (i) for any willful breach of a representation or warranty
contained in this Agreement, (ii) for the breach of any covenant or agreement
contained in this Agreement or (iii) under Section 7.1(d), this Section 7.2 and
-------------- -----------
Article VIII.
------------
(b) If Company terminates this Agreement pursuant to Section 7.1(d),
--------------
forthwith upon such termination Company will pay Parent $2,350,000 in
immediately available funds.
(c) If either Company or Parent has willfully breached a
representation, warranty, covenant or agreement set forth in this Agreement that
results in the other party terminating this Agreement pursuant to Section
-------
7.1(b), then, in addition to any other remedies available to the non-breaching
------
party, the breaching party will promptly reimburse the non-breaching party for
all substantiated out-of-pocket costs and expenses incurred by the non-breaching
party in connection with this Agreement and the transactions contemplated hereby
and the other Transaction Documents, including, without limitation, costs and
expenses of accountants, attorneys and financial advisors (the "Expenses Fee").
Each of Parent and Company acknowledges that the agreements contained in this
Section 7.2(c) are an integral part of the transactions contemplated in this
--------------
Agreement, and that, without these agreements, Parent and Company would not
enter into this Agreement; accordingly, if the breaching party falls to promptly
pay the amount due pursuant to this Section 7.2(c), and, in order to obtain such
--------------
payment, the non-breaching party commences a suit which results
50
in a judgment for the Expenses Fee, the breaching party will pay to the non-
breaching party its costs and expenses (including attorney's fees) in connection
with such suit.
(d) If the Merger does not occur for any reason other than (i) a
breach by Company of its representations, warranties, covenants or agreements
set forth in this Agreement resulting in the condition set forth in Section
-------
6.3(a) not being satisfied, (ii) any of the conditions set forth in Sections
------ --------
6.1(e), 6.2(c), 6.3(b) and 6.3(c) not being satisfied, or (iii) a termination of
------ ------ ------ ------
this Agreement by Parent under Section 7.1(h), Parent will promptly pay $250,000
--------------
in immediately available funds to Company, which amount is intended to reimburse
Company for its costs and expenses incurred in connection with this Agreement
and the transactions contemplated by the Transaction Documents.
Section 7.3 Amendment. This Agreement may be amended by the parties hereto,
---------
by or pursuant to action taken by their respective Boards of Directors, at any
time before or after approval of the matters presented in connection with the
Merger by the shareholders of Company, Parent and Merger Sub, but, after any
such approval no amendment will be made which by law requires further approval
by such shareholders without such further approval. This Agreement may not be
amended except by an instrument in writing duly executed by each of the parties
hereto.
Section 7.4 Waiver. At any time prior to the Effective Time, any party
------
hereto may waive any of its rights under this Agreement or any applicable law
that may be legally waived, including, without limitation, waiving (i) any
failure to timely perform any of the obligations or other acts of the other
parties hereto, (ii) any inaccuracies in or breaches of the representations and
warranties contained herein or in any document delivered pursuant hereto and
(iii) compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver will be
valid only if set forth in an instrument in writing duly executed by such party.
The failure of any party to this Agreement to assert any of its rights under
this Agreement or otherwise will not constitute a waiver of such rights.
Section 7.5 Exclusive Remedy for Inaccuracy or Breach of Representation or
--------------------------------------------------------------
Warranty. Except as expressly provided in Section 7.2(a), (b), (c) and (d)
-------- -------------- --- --- ---
hereof, a party's sole and exclusive remedy with respect to the non-willful
inaccuracy or breach of any representation or warranty provided by the other
party will be to (i) elect not to close the Merger and the other transactions
contemplated by this Agreement to the extent permitted by Article VI and (ii)
----------
elect to terminate this Agreement to the extent permitted by Article VII.
-----------
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations and Warranties. Except to the
----------------------------------------------
extent expressly set forth in Articles II and III, the parties hereto have not
----------- ---
made and expressly negate and waive any representations or warranties (express,
implied, statutory or otherwise) with respect to this Agreement or the title,
condition or quality of any rights or assets of Parent or Company or any
Subsidiary of Parent or Company or the accuracy or completeness of any
information provided or obtained. The representations and warranties in this
Agreement or in any instrument delivered
51
pursuant to this Agreement will terminate at the Effective Time or, if sooner,
the termination of this Agreement.
Section 8.2 Disclosure Schedules. Each disclosure identified in the Parent
--------------------
Disclosure Schedule and the Company Disclosure Schedule or elsewhere in this
Agreement constitutes a disclosure by the disclosing party with respect to all
applicable Sections of this Agreement, regardless of any reference to a
particular Section or subsection. The Company agrees that it will provide
Parent, and Parent agrees that it will provide Company, with written supplements
to this Agreement disclosing any inaccuracies in representations and warranties
made by it in Article III.
Section 8.3 Notices. All notices and other communications' hereunder will
-------
be in writing and will be deemed given when delivered personally, one day after
being delivered to a nationally recognized overnight courier or when telecopied
(with a confirmatory copy sent by such overnight courier) to the parties at the
following addresses (or at such other address for a party as will be specified
by like notice):
(a) if to Parent or Merger Sub, to
PetroCorp Incorporated
▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: Chief Executive Officer
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy (which will not constitute notice) to:
▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇
One City Hall
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
(b) if to Company, to
Southern Mineral Corporation
▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: Chief Executive Officer
Facsimile No.: ▇▇▇-▇▇▇-▇▇▇▇
with a copy (which will not constitute notice) to:
Akin, Gump, Strauss, ▇▇▇▇▇ & ▇▇▇▇, LLP
1900 Pennzoil Place - South Tower
▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attention: J. ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇
Facsimile No.: (▇▇▇) ▇▇▇-▇▇▇▇
52
Section 8.4 Interpretation. When a reference is made in this Agreement to a
--------------
Section or Article, such reference will be to a Section or Article of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and will not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they will be
deemed to be followed by the words, of without limitation." As used in this
Agreement the word "Subsidiary" when used with respect to any relevant
individual or entity, means any other individual or entity that directly or
indirectly is controlled by such relevant individual or entity in question. As
used herein, the term "control" (including its derivatives and similar terms)
means the power to, directly or indirectly, direct or cause the direction of the
management and policies of such relevant individual or entity.
Section 8.5 Counterparts. This Agreement may be executed in counterparts,
------------
all of which will be considered one and the same agreement, and will become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
Section 8.6 Entire Agreement, No Third-Party Beneficiaries. This Agreement
----------------------------------------------
and the other written agreements executed by the parties in connection herewith,
including the Confidentiality Agreement, constitute the entire agreement and
supersede all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement and there are
no promises, undertakings, representations or warranties by Company or Parent
relative to the subject matter of this Agreement not expressly set forth or
referred to herein. This Agreement, except for the provisions of Sections
--------
1.4(c), 5.5 and 5.6, is not intended to confer upon any person other than the
------ --- ---
parties hereto any rights or remedies hereunder.
Section 8.7 Governing Law. EXCEPT TO THE EXTENT THE LAW OF ANOTHER
-------------
JURISDICTION IS REQUIRED TO BE APPLIED, THIS AGREEMENT WILL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF
LAWS THEREOF.
Section 8.8 Shareholder Agreements. The parties hereto acknowledge that,
----------------------
except as contemplated by Section 5.15, the Shareholder Agreements have been
------------
executed as of the date of this Agreement.
Section 8.9 Standstill. If (a) this Agreement is terminated by either
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Parent or Company in accordance with the terms of Section 7.1 and (b) such
-----------
termination was not related to a material breach by Company of any of its
representations, warranties, covenants or agreements set forth herein resulting
in a failure to satisfy the requirements of Section 6.3(a), neither Parent,
--------------
Merger Sub nor any Subsidiary of either of them will for a period of two years
following such expiration (i) acquire, offer to acquire or agree to acquire
directly or indirectly by purchase or otherwise any voting securities of
Company, (ii) make or in any way participate directly or indirectly, in any
"solicitation" of "proxies" to vote (in such terms as used in the proxy rules of
the Commission) or seek to advise or influence any person or entity with respect
to the voting of any voting securities of Company, (iii) form, join or in any
way participate in a "group" within the meaning of Section 13(d)(iv) of the
Exchange Act with respect to any voting securities of Company or (iv) otherwise
act alone or in
53
concert with others to seek to control or influence the management, Board of
Directors, or policies of Company.
Section 8.10 Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations hereunder will be assigned, transferred, disposed of or
otherwise alienated by either of the parties hereto (whether voluntarily or
involuntarily, with or without consideration, by operation of law or otherwise)
without the prior written consent of the other party (which consent may be
granted or withheld in such party's sole discretion). An attempted assignment,
transfer, disposition or alienation in violation of this Agreement will be null,
void and ineffective. Subject to the two preceding sentences, this Agreement
will be binding upon, inure to the benefit of, and be enforceable by, the
parties and their respective successors and assigns.
Section 8.11 Severability. If any term or other provision of this Agreement
------------
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other terms, conditions and provisions of this Agreement will
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties will
negotiate in good faith to modify this Agreement so as' to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated by this Agreement may be consummated as
originally contemplated to the fullest extent possible.
Section 8.12 Enforcement of this Agreement. The parties hereto agree that
-----------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific wording or were
otherwise breached. It is accordingly agreed that the parties hereto will be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, such remedy being in addition to
any other remedy to which any party is entitled at law or in equity.
[Remainder of page intentionally left blank.]
54
IN WITNESS WHEREOF, Parent, Merger Sub and Company have caused this Agreement to
be signed by their respective officers thereunto duly authorized all as of the
date first written in the preamble.
PETROCORP INCORPORATED
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
-----------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
Title: President and Chief Executive Officer
PETROCORP ACQUISITION COMPANY
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
-----------------------------------
Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
Title: President and Chief Executive Officer
SOUTHERN MINERAL CORPORATION
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
-----------------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇
Title: President and Chief Executive Officer
[Merger Agreement Signature Page]
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