N SRI 453053 v14
2013664-000033 05/03/2004
[EXECUTION COPY]
AGREEMENT
AND
PLAN OF MERGER
Among
Clayton Williams Energy, Inc. ("Parent"),
CWEI-SWR, Inc. ("Merger Sub")
And
Southwest Royalties, Inc. ("Company")
May 3, 2004
TABLE OF CONTENTS
ARTICLE 1 DEFINITIONS 1
1.1 DEFINED TERMS 1
1.2 REFERENCES AND TITLES 10
ARTICLE 2 THE MERGER 10
2.1 THE MERGER 10
2.2 EFFECT OF THE MERGER 10
2.3 GOVERNING INSTRUMENTS, DIRECTORS AND OFFICERS
OF THE SURVIVING CORPORATION. 10
2.4 EFFECT ON SECURITIES. 11
2.5 EXCHANGE OF CERTIFICATES/COMPANY
WARRANTS/SEVERANCE AND BONUS PAYMENTS. 12
2.6 CLOSING 14
2.7 EFFECTIVE TIME OF THE MERGER 14
2.8 TAKING OF NECESSARY ACTION; FURTHER ACTION 14
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY 14
3.1 ORGANIZATION 14
3.2 OTHER EQUITY INTERESTS 15
3.3 AUTHORITY AND ENFORCEABILITY 15
3.4 NO VIOLATIONS 16
3.5 CONSENTS AND APPROVALS 16
3.6 FINANCIAL STATEMENTS. 16
3.7 CAPITAL STRUCTURE. 17
3.8 NO UNDISCLOSED LIABILITIES 17
3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS 18
3.10 COMPLIANCE WITH LAWS, MATERIAL AGREEMENTS AND
PERMITS 18
3.11 LITIGATION 19
3.12 TAXES. 19
3.13 COMPANY MATERIAL AGREEMENTS 20
3.14 ERISA PLANS. 20
3.15 INSURANCE 20
3.16 TITLE TO ASSETS 21
3.17 COMPANY ENGINEERING REPORT 21
3.18 FINANCIAL AND COMMODITY HEDGING 22
3.19 ENVIRONMENTAL MATTERS 22
3.20 BOOKS AND RECORDS 23
3.21 BROKERS 24
3.22 VOTE REQUIRED 24
3.23 FAIRNESS OPINION 24
3.24 IMBALANCES 24
3.25 ADDITIONAL DRILLING OBLIGATIONS 24
3.26 WELLS TO BE PLUGGED AND ABANDONED 25
3.27 CURRENT FINANCIAL CONDITION 25
3.28 NO OTHER REPRESENTATIONS 25
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB 26
4.1 ORGANIZATION 26
4.2 AUTHORITY AND ENFORCEABILITY 26
4.3 NO VIOLATIONS 26
4.4 CONSENTS AND APPROVALS 27
4.5 INTERIM OPERATIONS OF MERGER SUB 27
4.6 FINANCING 27
4.7 NO ADVICE 28
ARTICLE 5 COVENANTS 28
5.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING
CLOSING 28
5.2 ACCESS TO ASSETS, PERSONNEL AND INFORMATION. 30
5.3 NO SOLICITATION. 31
5.4 STOCKHOLDER CONSENT 32
5.5 NOTICE OF CONSENT 32
5.6 ADDITIONAL ARRANGEMENTS 33
5.7 PUBLIC ANNOUNCEMENTS 33
5.8 PAYMENT OF EXPENSES 33
5.9 INDEMNIFICATION AND INSURANCE. 34
5.10 STOCKHOLDER LITIGATION 35
5.11 OPINION OF FINANCIAL ADVISOR 35
5.12 RESIGNATIONS OF OFFICERS AND DIRECTORS OF THE
COMPANY 35
5.13 WARRANT SURRENDER AGREEMENTS 35
5.14 COMPANY PURCHASE OF GENERAL PARTNER INTERESTS 35
5.15 SPIN-OFF OF ASSETS AND LIABILITIES 35
5.16 RELEASE BY STOCKHOLDERS 36
5.17 AUDITED FINANCIAL STATEMENTS 36
ARTICLE 6 CONDITIONS TO CLOSING 36
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO
EFFECT THE MERGER 36
6.2 CONDITIONS TO OBLIGATIONS OF PARENT AND
MERGER SUB 37
6.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY 38
ARTICLE 7 TERMINATION 38
7.1 TERMINATION RIGHTS 38
7.2 EFFECT OF TERMINATION 39
7.3 TERMINATION FEE PAYABLE BY THE COMPANY 40
7.4 TERMINATION FEE PAYABLE BY PARENT 40
ARTICLE 8 MISCELLANEOUS 40
8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES 40
8.2 AMENDMENT 40
8.3 NOTICES 40
8.4 COUNTERPARTS 42
8.5 SEVERABILITY 42
8.6 ENTIRE AGREEMENT; NO THIRD PARTY
BENEFICIARIES 42
8.7 APPLICABLE LAW 42
8.8 NO REMEDY IN CERTAIN CIRCUMSTANCES 42
8.9 ASSIGNMENT 42
8.10 WAIVERS 42
8.11 CONFIDENTIALITY AGREEMENT 43
8.12 INCORPORATION 43
8.13 SPECIFIC PERFORMANCE 43
SCHEDULES
Company Disclosure Schedule
EXHIBITS
A. Ryder Scott Company, L. P. Report
B. Confidentiality Agreement
C. *Form of Waiver of Claims and Covenant Not to Sue
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made
and entered into as of the 3rd day of May, 2004, by and among
Clayton Williams Energy, Inc., a Delaware corporation ("Parent");
CWEI-SWR, Inc., a Delaware corporation ("Merger Sub") and a
wholly-owned subsidiary of Parent; and Southwest Royalties, Inc.,
a Delaware corporation (the "Company").
RECITALS
A. Parent and the Company desire to effect a merger of
Merger Sub with and into the Company (the "Merger").
B. The board of directors of the Company has determined it
advisable and in the best interests of the Company's stockholders
to consummate the Merger, upon the terms and subject to the
conditions set forth herein.
C. The boards of directors of Parent and Merger Sub have
determined it advisable and in the best interests of Parent's and
Merger Sub's stockholders, respectively, to consummate the
Merger, upon the terms and subject to the conditions set forth
herein.
NOW, THEREFORE, for and in consideration of the Recitals and
the mutual covenants and agreements set forth in this Agreement,
the Parties hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Defined Terms. As used in this Agreement, each of the
following terms has the meaning given in this Section 1.1 or in
the Section referred to below:
"Affiliate" means, with respect to any Person, each other
Person that directly or indirectly (through one or more
intermediaries or otherwise) controls, is controlled by, or is
under common control with such Person. The term "control"
(including the terms "controlled by" and "under common control
with") means the possession, directly or indirectly, of the
actual power to direct or cause the direction of the management
policies of a Person, whether through the ownership of stock, by
contract, credit arrangement or otherwise.
"Agreement" means this Agreement and Plan of Merger, as
amended, supplemented and/or modified from time to time.
"Acquisition Proposal" has the meaning specified in Section
5.3(b).
"Audited Financial Statements" has the meaning set forth in
Section 5.17 but shall not include the Financial Statements of
H.H. Wommack Income Fund 1983-1, Southwest Royalties, Inc.,
Income Fund 1983-1, Southwest Royalties, Inc., Income Fund 1984-
1, Southwest Royalties, Inc., Income Fund 1985-1, and Southwest
Royalties, Inc., Income/Drilling Program 1987-1, L.P.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and any
successor federal and state statutes and any regulations
promulgated thereunder.
"CERCLIS" means the Comprehensive Environmental Response,
Compensation and Liability Information System List.
"Certificate of Merger" means the certificate of merger,
prepared and executed in accordance with the applicable
provisions of the DGCL, filed with the Secretary of State of the
State of Delaware to effect the Merger.
"Closing" means the closing of the Merger and the
consummation of the other transactions contemplated by this
Agreement.
"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the introductory
paragraph hereof.
"Company Capital Stock" means, collectively, the Company
Common Stock and the Company Class A Common Stock.
"Company Certificate" means a certificate representing
shares of either Company Class A Common Stock or Company Common
Stock.
"Company Class A Common Stock" means the Class A common
stock, par value $.01 per share, of the Company.
"Company Common Stock" means the common stock, par value
$.01 per share, of the Company.
"Company Disclosure Schedule" means the Company Disclosure
Schedule attached hereto and any documents listed on such Company
Disclosure Schedule and expressly incorporated therein by
reference.
"Company Engineering Report" means the reserve report
effective as of January 1, 2004, covering the Ownership Interests
and prepared by Ryder Scott Company, L.P., the Company's
independent petroleum engineering firm, as set forth in the data
books provided to Parent on or about March 30, 2004, a copy of
the summary pages of which is attached hereto as Exhibit A.
"Company Imbalances" has the meaning specified in Section
3.24.
"Company Indenture" means the Indenture of the Company,
dated October 15, 1997, as amended and supplemented, governing
the Unsecured Notes.
"Company Material Agreement(s)" means (a) the Company Senior
Secured Credit Facility, the Company Sub Debt Credit Agreement
and the Company Indenture; (b) any agreement involving a Hedging
Transaction to which the Company or any Material Subsidiary is a
party or by which any of their respective assets are bound; (c)
any agreement, contract, commitment or understanding, written or
oral, granting any Person registration, purchase or sale rights
with respect to any security of the Company or any Material
Subsidiary; (d) any employment, severance, retention or
termination agreement between the Company or any Material
Subsidiary, on the one hand, and any other Person, on the other;
(e) any agreements with investment bankers or financial advisors
to which the Company or any Material Subsidiary is a party; and
(f) any other individual agreement under which the Company or any
Material Subsidiary pays or may be or become obligated to pay or
receives or may receive an annual amount in excess of $100,000
and which is not cancelable by the Company or such Material
Subsidiary without penalty on 90 or fewer days' notice.
"Company Permits" has the meaning specified in Section 3.10.
"Company Plan" means any "employee benefit plan" (as such
term is defined in Section 3(3) of ERISA) established by the
Company or, with respect to any such plan that is subject to
Section 412 of the Code or Title IV of ERISA, any ERISA
Affiliate.
"Company Preferred Stock" means the preferred stock, par
value $1.00 per share, of the Company.
"Company Proposal" means the proposal to approve this
Agreement and the Merger.
"Company Representative" means any director, officer,
employee, agent, advisor (including legal, accounting and
financial advisors), Affiliate or other representative of the
Company.
"Company Senior Secured Credit Facility" means the Amended
and Restated Credit Agreement, dated September 15, 2003, among
the Company, as borrower, and Union Bank of California, N.A. and
the institutions named therein, as lenders (as amended and
supplemented).
"Company Stock Equivalents" means all rights, warrants
(including the Company Warrants), options, convertible securities
or indebtedness, exchangeable securities or other instruments, or
other rights that are outstanding and exercisable for or
convertible or exchangeable into, directly or indirectly, shares
of Company Common Stock at the time of issuance or upon the
passage of time or occurrence of some future event.
"Company Sub Debt Credit Agreement" means the $40,000,000
Senior Second Lien Secured Credit Agreement, dated September 15,
2003, among the Company, as borrower, Macquarie Americas Corp.,
and the lenders party thereto, as amended and supplemented.
"Company Warrants" means the warrants (issued and
outstanding immediately prior to the date hereof) to purchase, in
the aggregate, 63,474 shares of the Company Common Stock granted
to Macquarie Americas Corp., Union BanCal Equities, Inc. and
Harvard Private Capital Holdings, Inc.
"Company Working Capital" means the consolidated current
assets minus the consolidated current liabilities of the Company,
excluding (i) any portion of the Company's long-term debt that is
classified as current to the extent such current portion exceeds
that which is reflected in the Company's Financial Statements
solely as a result of the events of default that are described as
requiring the going concern qualification should such
qualification be contained in the opinion of the Company's
auditors on the Company's Audited Financial Statements, and (ii)
the effects of the Hedging Transactions, as determined in
accordance with GAAP.
"Confidentiality Agreement" means the letter agreement dated
March 28, 2004, between the Company and Parent relating to the
Company's furnishing of information to Parent in connection with
Parent's evaluation of the possibility of the Merger, which is
attached hereto as Exhibit B.
"DGCL" means the Delaware General Corporation Law, as
amended.
"Defensible Title" means such right, title and interest that
is (a) evidenced by an instrument or instruments filed of record
in accordance with the conveyance and recording laws of the
applicable jurisdiction to the extent necessary to prevail
against competing claims of bona fide purchasers for value
without notice, and (b) subject to Permitted Encumbrances, free
and clear of all Liens, claims, infringements, burdens and other
defects.
"Dissenting Stockholder" means a holder of Company Capital
Stock who has validly perfected appraisal rights under the DGCL.
"Effective Time" has the meaning specified in Section 2.7.
"Environmental Law" means any federal, state, local or
foreign statute, code, ordinance, rule, regulation, policy,
guideline, permit, consent, approval, license, judgment, order,
writ, decree, injunction or other authorization in effect on the
date hereof, at the Closing Date, or at a previous time
applicable to the operations of the Company: (a) relating to
emissions, discharges, releases or threatened releases of
Hazardous Materials into the natural environment, including into
ambient air, soil, sediments, land surface or subsurface,
buildings or facilities, surface water, groundwater, publicly-
owned treatment works, septic systems or land; (b) relating to
the generation, treatment, storage, disposal, use, handling,
manufacturing, recycling, transportation or shipment of Hazardous
Materials; or (c) otherwise relating to the pollution of the
environment, solid waste handling treatment or disposal,
operation or reclamation of oil and gas operations or mines,
reclamation or remediation activities, or protection of
environmentally sensitive areas.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"ERISA Affiliate" means any trade of business (whether or
not incorporated) under common control with the Company within
the meaning of Section 414(b) or (c) of the Code (and Sections
414(m) and (o) of the Code for purposes of provisions relating to
Section 412 of the Code).
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" has the meaning specified in Section
2.5(a).
"Exchange Fund" has the meaning specified in Section 2.5(a).
"Financial Statements" has the meaning specified in Section
3.6.
"GAAP" means generally accepted accounting principles, as
recognized by the U.S. Financial Accounting Standards Board (or
any generally recognized successor).
"Governmental Action" means any authorization, application,
approval, consent, exemption, filing, license, notice,
registration, permit or other requirement of, to or with any
Governmental Authority.
"Governmental Authority" means any national, state, county
or municipal government, domestic or foreign, any agency, board,
bureau, commission, court, department or other instrumentality of
any such government, or any arbitrator in any case that has
jurisdiction over the Company or the Parent Companies or any of
their respective properties or assets.
"Hazardous Material" means: (a) any "hazardous substance,"
as defined by CERCLA; (b) any "hazardous waste" or "solid waste,"
in either case as defined by the Resource Conservation and
Recovery Act, as amended, and any successor federal and state
statutes and any regulations promulgated thereunder, and any
foreign statutes and regulations modeled thereon; (c) any solid,
hazardous, dangerous or toxic chemical, material, waste or
substance, within the meaning of and regulated by any
Environmental Law; (d) any radioactive material, including any
naturally occurring radioactive material, and any source, special
or byproduct material as defined in 42 U.S.C. 2011 et seq. and
any amendments or authorizations thereof; (e) any asbestos-
containing materials in any form or condition; (f) any
polychlorinated biphenyls in any form or condition; or (g)
petroleum, petroleum hydrocarbons or any fraction or byproducts
thereof.
"Hedging Transaction" means any transaction (including an
agreement with respect thereto) involving the Company or any
Material Subsidiary which is a rate swap, basis swap, forward
rate transaction, commodity swap, commodity option, equity or
equity index swap, equity or equity index option, bond option,
interest rate option, forward exchange transaction, cap
transaction, floor transaction, collar transaction, forward
transaction, currency swap transaction, cross-currency rate swap
transaction, currency option or any other similar transaction
(including any option with respect to any of these transactions)
or any combination thereof, whether linked to one or more
interest rates, foreign currencies, commodity prices, equity
prices or other financial measures.
"Hydrocarbons" means oil, condensate, gas, casinghead gas
and other liquid or gaseous hydrocarbons and related minerals,
and all products produced therefrom.
"Lien" means any lien, voting agreement, voting trust, proxy
agreement, mortgage, security interest, pledge, deposit,
production payment, restriction, burden, encumbrance, rights of a
vendor under any title retention or conditional sale agreement,
or lease or other arrangement substantially equivalent thereto.
"Material Adverse Effect" means: (a) when used with respect
to the Company, a result or consequence that (i) would reasonably
be expected to materially adversely affect the condition
(financial or otherwise), results of operations or business of
the Company and the Material Subsidiaries, taken as a whole, or
the aggregate value of the assets of the Company and the Material
Subsidiaries, taken as a whole, (ii) would reasonably be expected
to materially impair the ability of the Company and the Material
Subsidiaries, taken as a whole, to own, hold, develop and operate
their respective assets, or (iii) would reasonably be expected to
impair the Company's ability to perform its obligations hereunder
or consummate the transactions contemplated hereby; and (b) when
used with respect to Parent, a result or consequence that (i)
would reasonably be expected to materially adversely affect the
condition (financial or otherwise), results of operations or
business of the Parent Companies (taken as a whole) or the
aggregate value of their assets, (ii) would reasonably be
expected to materially impair the ability of the Parent Companies
(taken as a whole) to own, hold, develop and operate their
assets, or (iii) would reasonably be expected to impair Parent's
or Merger Sub's ability to perform its respective obligations
hereunder or consummate the transactions contemplated hereby;
provided, however, that any change, effect, event, occurrence,
facts or development arising out of, resulting from or otherwise
relating to the transactions contemplated by this Agreement or
any announcement thereof shall not constitute a Material Adverse
Effect or be considered in determining whether a Material Adverse
Effect has occurred or will occur.
"Material Subsidiaries" means (a) Blue Heel Company, a
Delaware corporation and wholly-owned Subsidiary of the Company,
(b) each of the Partnerships as identified in Section 3.2 of the
Company Disclosure Schedule and (c) Tex-Hal Partners, Inc., a
Delaware corporation and wholly-owned Subsidiary of Southwest
Partners, L.P.
"Merger" has the meaning specified in the Recitals to this
Agreement.
"Merger Consideration" means cash consideration equal to
$45.01 per share to be paid in accordance with Article 2 hereof.
"Merger Sub" has the meaning specified in the introductory
paragraph of this Agreement.
"Merger Sub Common Stock" means the common stock, par value
$.01 per share, of Merger Sub.
"Notice of Consent" means notice of the approval of the
Company Proposal by the Stockholder Consent, which will be sent
to any holders of the Company Capital Stock that do not execute
such consent. Such notice must be approved by the Parent prior
to being sent to such holders and shall include a notice of
availability of appraisal rights under the DGCL.
"Oil and Gas Interest(s)" means: (a) direct and indirect
interests in and rights with respect to oil, gas, mineral and
related properties and assets of any kind and nature, direct or
indirect, including, without limitation, working, royalty and
overriding royalty interests, mineral interests, leasehold
interests, production payments, operating rights, net profits
interests, other non-working interests, contractual interests,
non-operating interests and rights in any pooled, unitized or
communitized acreage by virtue of such interest being a part
thereof; (b) interests in and rights with respect to Hydrocarbons
and other minerals or revenues therefrom and contracts and
agreements in connection therewith and claims and rights thereto
(including oil and gas leases, operating agreements, unitization,
communitization and pooling agreements and orders, division
orders, transfer orders, mineral deeds, royalty deeds, oil and
gas sales, hedging, exchange and processing contracts and
agreements and, in each case, interests thereunder), surface
interests, fee interests, reversionary interests, reservations
and concessions; (c) easements, rights-of-way, licenses, permits,
leases, and other interests associated with, appurtenant to, or
necessary for the operation of any of the foregoing; (d)
interests in oil, gas, water, disposal and injection wells,
equipment and machinery (including well equipment and machinery),
oil and gas production, gathering, transmission, compression,
treating, processing and storage facilities (including tanks,
tank batteries, pipelines and gathering systems), pumps, water
plants, electric plants, gasoline and gas processing plants,
refineries and other tangible or intangible, movable or
immovable, real or personal property and fixtures located on,
associated with, appurtenant to, or necessary for the operation
of any of the foregoing; and (e) all seismic, geological,
geophysical and engineering records, data, information, maps,
licenses and interpretations.
"Ownership Interests" means the ownership (net revenue and
working) interests of the Company in the Oil and Gas Interests of
the Company, as set forth in the Company Engineering Report.
"Parent" has the meaning specified in the introductory
paragraph of this Agreement.
"Parent Companies" means Parent and Merger Sub.
"Parent Representative" means any director, officer,
employee, agent, advisor (including legal, accounting and
financial advisors), Affiliate or other representative of any of
the Parent Companies.
"Parties" has the meaning specified in the Recitals to this
Agreement.
"Partnership PUDs" means any undeveloped Oil and Gas
Interest reflected in the Company Reserve Report, title to which
is vested in a Partnership but with respect to which the Company
has the right to drill, at the Company's election, pursuant and
subject to the terms of the Agreement of Limited Partnership of
the applicable Partnership.
"Partnerships" mean the limited partnerships in which the
Company serves as managing general partner, as identified in
Section 3.2 of the Company Disclosure Schedule.
"Permitted Encumbrances" means: (a) Liens for Taxes,
assessments or other governmental charges or levies if the same
shall not at the particular time in question be due or, if
delinquent, are being contested in good faith by appropriate
proceedings and if the Company shall have set aside on its books
such reserves (segregated to the extent required by sound
accounting practices) as may be required by or consistent with
GAAP and, whether reserves are set aside or not, are listed on
the applicable Disclosure Schedule; (b) Liens of carriers,
warehousemen, mechanics, laborers, materialmen, landlords,
vendors, workmen and operators arising by operation of law in the
ordinary course of business or by a written agreement existing as
of the date hereof and necessary or incident to the exploration,
development, operation and maintenance of Hydrocarbon properties
and related facilities and assets for sums not yet due or being
contested in good faith by appropriate proceedings, if the
Company shall have set aside on its books such reserves
(segregated to the extent required by sound accounting practices)
as may be required by or consistent with GAAP and, whether
reserves are set aside or not, are listed on the applicable
Disclosure Schedule, to the extent that such contests are in
existence as of the date hereof; (c) Liens incurred in the
ordinary course of business in connection with workers'
compensation, unemployment insurance and other social security
legislation (other than ERISA) which would not and will not,
individually or in the aggregate, result in a Material Adverse
Effect on the Company; (d) Liens incurred in the ordinary course
of business to secure the performance of bids, tenders, trade
contracts, leases, statutory obligations, surety and appeal
bonds, performance and repayment bonds and other obligations of a
like nature which would not and will not, individually or in the
aggregate, result in a Material Adverse Effect on the Company;
(e) Liens, easements, rights-of-way, restrictions, servitudes,
permits, conditions, covenants, exceptions, reservations and
other similar encumbrances incurred in the ordinary course of
business or existing on property and not materially impairing the
value of any of the assets of the Company or the operation or use
thereof, or interfering with the ordinary conduct of the
business of the Company, or rights to any of its assets; (f)
Liens arising pursuant to Section 9.343 of the Texas Business and
Commerce Code and all other similar Liens created or arising by
operation of law to secure a party's obligations as a purchaser
of oil and gas, (g) all rights to consent by, required notices
to, filings with, or other actions by Governmental Authorities to
the extent customarily obtained subsequent to closing; (h) farm-
out, carried working interest, joint operating, unitization,
royalty, overriding royalty, sales and similar agreements
relating to the exploration or development of, or production
from, Hydrocarbon properties entered into in the ordinary course
of business and not in violation of Section 5.1 hereof provided
the effect thereof of any of such agreements in existence as of
the date hereof on the working and net revenue interest of the
Company, has been properly reflected in its Ownership Interests;
(i) defects, irregularities or deficiencies in title that do not
materially interfere with the operation or use of the Oil and Gas
Interest(s) affected thereby or otherwise materially affect the
value thereof; (j) easements, rights-of-way or surface use
agreements that do not materially interfere with the operation or
use of the Oil and Gas Interest(s) affected thereby or otherwise
or materially affect the value thereof; (k) Liens arising under
or created pursuant to the Company Senior Secured Credit Facility
and the Company Sub Debt Credit Agreement; and (l) Liens
described in Section 3.16 of the Company Disclosure Schedule.
"Person" means any natural person, corporation, company,
limited or general partnership, joint stock company, joint
venture, association, limited liability company, trust, bank,
trust company, land trust, business trust or other entity or
organization, whether or not a Governmental Authority.
"Reserve Data Value" means the 10% discounted present value
(before tax) of the proved reserves contained in the Company's
Oil and Gas Interests as shown on the Company Engineering Report.
"Responsible Officer" means, with respect to any
corporation, the President, the Chief Executive Officer, the
Chief Operating Officer, the Chief Financial Officer, or any Vice
President or other member of executive management of such
corporation.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as
amended.
"Spin-Off Assets and Liabilities" means, collectively, (i)
7,500 Class B limited partner interests in Priority Power, L.P.,
which is equal to 7.5% of the equity ownership in Priority Power,
L.P.; (ii) 15% managing general partner interest and 1.7% limited
partner interest in Southwest Partners, II, L.P.; (iii) 15%
managing general partner interest and .2% limited partner
interest in Southwest Partners, III, L.P.; and (iv) contractual
rights to 85% of the proceeds from, and any and all liabilities
related to or associated with (including without limitation the
obligation to reimburse the Company for all expenses and overhead
attributable thereto), Nelson Brothers Management Services,
Inc., d/b/a Nelson Brothers, Inc. v. Southwest Royalties, Inc.,
Chevron U.S.A., Inc. aka ChevronTexaco, Inc., The Pittsburg and
Midway Mining Company, Inc.; CE Dellert and Ina Dellert, Linwood
Gilliam and Reba T. Gilliam, Gulf States Paper, CV-03-028, a
lawsuit related to certain Alabama mineral interests and
involving the Company.
"Stockholder Consent" means the written consent in lieu of a
special meeting executed by the holders of a majority of the
Company Capital Stock relating to the Company Proposal, the form
of which must be approved by Parent.
"Subsidiary" means, with respect to any Person, any
corporation or other organization, whether incorporated or
unincorporated, of which (a) such Person or any other Subsidiary
of such Person is a general partner or (b) at least a majority of
the securities or other interests having by their terms ordinary
voting power to elect a majority of the board of directors or
others performing similar functions with respect to such
corporation or other organization is, directly or indirectly,
owned or controlled by such Person or by any one or more of its
Subsidiaries, or by such Person and any one or more of its
Subsidiaries.
"Surviving Corporation" has the meaning specified in Section
2.2.
"Taxing Authority" means any and all federal, state or local
governmental or quasi-governmental agencies that have the power
to impose taxes upon the Company or any Subsidiary.
"Tax Returns" 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.
"Taxes" means taxes of any kind, levies or other like
assessments, customs, duties, imposts, charges or fees, including
income, gross receipts, ad valorem, value added, excise, real or
personal property, asset, sales, use, license, payroll,
transaction, capital, net worth and franchise taxes, estimated
taxes, withholding, employment, social security, workers'
compensation, utility, severance, production, unemployment
compensation, occupation, premium, windfall profits, transfer and
gains taxes and other governmental taxes imposed or payable to
the United States or any state, local or foreign governmental
subdivision or agency thereof, and in each instance such term
shall include any interest, penalties or additions to tax
attributable to any such tax, including penalties for the failure
to file any Tax Return or report.
"Third-Party Consent" means the consent or approval of any
Person other than any Governmental Authority.
"Unsecured Notes" means those 10.5% Senior Notes due 2004
issued by the Company pursuant to the Company Indenture.
"Warrant Surrender Agreement" has the meaning specified in
Section 2.5(f), and shall include notice of the Merger or
otherwise satisfy the requirements set forth in the Company
Warrants.
1.2 References and Titles. All references in this Agreement to
Exhibits, Schedules, Articles, Sections, subsections and other
subdivisions refer to the corresponding Exhibits, Schedules,
Articles, Sections, subsections and other subdivisions of or to
this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any Articles, Sections, subsections
or other subdivisions of this Agreement are for convenience only,
do not constitute any part of this Agreement, and shall be
disregarded in construing the language hereof. The words "this
Agreement," "herein," "hereby," "hereunder" and "hereof," and
words of similar import, refer to this Agreement as a whole and
not to any particular subdivision unless expressly so limited.
The words "this Article," "this Section" and "this subsection,"
and words of similar import, refer only to the Article, Section
or subsection hereof in which such words occur. The word "or" is
not exclusive, and the word "including" (in its various forms)
means including without limitation. Pronouns in masculine,
feminine or neuter genders shall be construed to state and
include any other gender, and words, terms and titles (including
terms defined herein) in the singular form shall be construed to
include the plural and vice versa, unless the context otherwise
requires.
As used in the representations and warranties contained in
this Agreement, the phrase "to the knowledge" of the representing
Party shall mean that Responsible Officers of such Party,
individually or collectively, either (a) know that the matter
being represented and warranted is true and accurate or (b) have
no reason, after reasonable inquiry, to believe that the matter
being represented and warranted is not true and accurate.
ARTICLE 2
THE MERGER
2.1 The Merger. Subject to the terms and conditions set forth in
this Agreement, at the Effective Time, Merger Sub shall be merged
with and into the Company in accordance with the provisions of
this Agreement.
2.2 Effect of the Merger. Upon the effectiveness of the Merger,
the separate existence of Merger Sub shall cease, and the
Company, as the surviving corporation in the Merger (the
"Surviving Corporation"), shall continue its corporate existence
under the laws of the State of Delaware. The Merger shall have
the effects specified in this Agreement and the DGCL.
2.3 Governing Instruments, Directors and Officers of the
Surviving Corporation.
(a) The certificate of incorporation of the Company, as in
effect immediately prior to the Effective Time, shall be the
certificate of incorporation of the Surviving Corporation until
duly amended in accordance with its terms and the DGCL.
(b) The bylaws of the Company, as in effect immediately prior to
the Effective Time, shall be the bylaws of the Surviving
Corporation until duly amended in accordance with their terms and
the DGCL.
(c) The directors and officers of Merger Sub at the Effective
Time shall be the directors and officers, respectively, of the
Surviving Corporation from the Effective Time until their
respective successors have been duly elected or appointed in
accordance with the certificate of incorporation and bylaws of
the Surviving Corporation and applicable law or until their
earlier death, resignation or removal.
2.4 Effect on Securities.
(a) Merger Sub Common Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder
thereof, each share of Merger Sub Common Stock issued and
outstanding immediately prior to the Effective Time shall remain
issued and outstanding and shall continue as one share of common
stock of the Surviving Corporation and each certificate
evidencing ownership of any such shares shall continue to
evidence ownership of the same number of shares of the capital
stock of the Surviving Corporation.
(b) Company Securities.
(i) Company Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of any holder
thereof, each share of the Company Capital Stock that is issued
and outstanding immediately prior to the Effective Time (other
than shares of Company Capital Stock held by Dissenting
Stockholders or by Parent or Merger Sub) shall be converted into
the right to receive the Merger Consideration. Each share of the
Company Capital Stock, when so converted, shall automatically be
canceled and retired, shall cease to exist and shall no longer be
outstanding; and the holder of any Company Certificate
representing any such shares shall cease to have any rights with
respect thereto, except the right to receive the Merger
Consideration to be issued in exchange therefore, upon the
surrender of such Company Certificate. All shares of Company
Capital Stock held by Parent or Merger Sub shall automatically be
canceled and retired and shall cease to exist as of the Effective
Time and no consideration shall be delivered or deliverable in
exchange therefore.
(ii) Company Warrants. From the date hereof until five days prior
to the Effective Time, each holder of a Company Warrant may elect
to exercise such Company Warrant pursuant to its respective terms
and receive shares of Company Common Stock, which shares would
then be converted into the right to receive the Merger
Consideration in accordance with Section 2.4(b)(i) hereof. At the
Effective Time, any Company Warrant not so exercised shall
thereupon terminate and each such Company Warrant holder shall be
entitled to receive an amount equal to the Merger Consideration
less the exercise price and applicable taxes, for each share of
Company Common Stock that the holder would have been entitled to
receive upon exercise of the Company Warrant if the Merger had
not been consummated.
(iii) Shares of Dissenting Stockholders. Any issued and
outstanding shares of Company Common Stock held by a Dissenting
Stockholder shall be converted into the right to receive such
consideration as may be determined to be due to such Dissenting
Stockholder pursuant to the DGCL; provided, however, shares of
Company Capital Stock outstanding at the Effective Time and held
by a Dissenting Stockholder who shall, after the Effective Time,
withdraw his, her or its demand for appraisal or lose his, her or
its right of appraisal as provided in the DGCL, and such shares
shall be deemed to be converted, as of the Effective Time, into
the right to receive the Merger Consideration, in accordance with
the procedures specified in this Article 2. Prior to the
Effective Time, the Company shall give Parent (A) prompt notice
of any written demands for appraisal, withdrawals of demands for
appraisal and any other instruments served pursuant to the DGCL
relating to appraisal rights received by the Company, and (B) the
opportunity to direct all negotiations and proceedings with
respect to demands for appraisal under the DGCL. Prior to the
Effective Time, the Company will not voluntarily make any payment
with respect to any demands for appraisal and will not, except
with the prior written consent of Parent, settle or offer to
settle any such demands.
2.5 Exchange of Certificates/Company Warrants/Severance and
Bonus Payments.
(a) Exchange Agent. Prior to the Effective Time, Parent shall
designate a bank or trust company, reasonably acceptable to the
Company, to act as Exchange Agent hereunder (the "Exchange
Agent"). On the Closing Date, Parent shall deliver, in trust, to
the Exchange Agent, for the benefit of the holders of Company
Capital Stock other than Dissenting Stockholders, for exchange in
accordance with this Section 2.5 through the Exchange Agent, cash
in the aggregate amount necessary to promptly make all cash
payments due under Section 2.4(i) in exchange for outstanding
shares of Company Capital Stock other than those held by
Dissenting Stockholders. The cash delivered to the Exchange Agent
pursuant to this Section 2.5 and comprising the Merger
Consideration shall be hereinafter referred to as the "Exchange
Fund." The Exchange Fund shall not be used for any other purpose;
provided, however, the Exchange Agent shall invest any cash
included in the Exchange Fund in one or more bank accounts or in
high-quality, short-term investments, as directed by Parent, on a
daily basis. Any interest and other income resulting from such
investments will be paid to Parent.
(b) Letters of Transmittal. As soon as practicable after the
Effective Time, but in no event more than five business days
thereafter, Parent shall cause the Exchange Agent to mail to each
holder of record immediately prior to the Effective Time of
Company Certificates (i) a customary form of letter of
transmittal, reasonably acceptable to the Company, specifying
that delivery shall be effected, and risk of loss and title to
the Company Certificates shall pass, only upon proper delivery of
the Company Certificates to the Exchange Agent, and (ii)
instructions for use in surrendering such Company Certificates in
exchange for the Merger Consideration. Upon surrender of a
Company Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, the
holder of such Company Certificate shall be entitled to promptly
receive in exchange therefor payment by check of an amount equal
to the product of the Merger Consideration multiplied by the
number of shares of Company Capital Stock formerly represented by
the surrendered Company Certificate, after giving effect to any
required tax withholding, and the Company Certificate so
surrendered shall forthwith be canceled. Until surrendered as
contemplated by this Section 2.5(b), each Company Certificate
shall be deemed from and after the Effective Time to represent
only the right to receive upon such surrender the Merger
Consideration. In no event shall the holder of any such
surrendered Company Certificate be entitled to receive interest
on any cash to be received in the Merger.
(c) Lost Certificate. If any Company Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such Company Certificate to be
lost, stolen or destroyed and, if required by Parent, the posting
by such Person of a bond, in such reasonable and customary amount
as Parent may direct, as indemnity against any claim that may be
made against it with respect to such Company Certificate, the
Exchange Agent will promptly issue in exchange for such lost,
stolen or destroyed Company Certificate the Merger Consideration.
(d) No Transfer. After the Effective Time, there shall be no
further registration of transfers on the Surviving Corporation's
stock transfer books of the shares of the Company Capital Stock
that were outstanding immediately prior to the Effective Time.
(e) Termination of Exchange Fund. Any portion of the Exchange
Fund held by the Exchange Agent in accordance with the terms of
this Section 2.5 that remains unclaimed by the former
stockholders of the Company for a period of 180 days following
the Effective Time shall be delivered to Parent. Thereafter, any
former stockholders of the Company who have not theretofore
complied with the provisions of this Section 2.5 shall look only
to Parent for payment of their claim for Merger Consideration
(all without interest).
(f) Warrant Surrender Agreements. Promptly, but no later than
two days, after the date of this Agreement, the Company shall
distribute a Warrant Surrender Agreement (a "Warrant Surrender
Agreement"), in the form approved by the Parent, to each holder
of an unexercised Company Warrant. After the Effective Time,
Parent shall cause the Surviving Corporation to pay the amount of
cash due to each holder of a Company Warrant under
Section 2.4(b)(ii), with such payment being made (i) on the
Closing Date as to each particular holder of Company Warrants who
has delivered to the Company an executed Warrant Surrender
Agreement and the Company Warrants held by such holder at least
five days prior to the Closing Date or (ii) if not made on the
Closing Date, thereafter within three business days after the
date that each particular holder of Company Warrants has
delivered to the Company an executed Warrant Surrender Agreement
and the Company Warrants held by such holder.
(g) Severance and Bonus Payments. At the Effective Time, the
Company or the Parent, at Parent's discretion, shall pay or
otherwise discharge or settle (subject to all applicable
withholding taxes and in accordance with and to the extent then
due and payable) all severance, bonus and other amounts as set
forth in the employment agreements and severance agreements
identified on Section 3.13 of the Company Disclosure Schedule.
(h) No Liability. None of Parent, the Surviving Corporation, the
Exchange Agent, or any other Person shall be liable to any former
holder of shares of Company Capital Stock or Company Warrants for
any amount properly delivered to any public official pursuant to
any applicable abandoned property, escheat, or similar law. Any
amounts remaining unclaimed by former holders of shares of
Company Capital Stock or Company Warrants after a period of three
years following the Effective Time (or such earlier date
immediately prior to the time at which such amounts would
otherwise escheat to or become property of any Governmental
Authority) shall, to the extent permitted by applicable law,
become the property of Parent free and clear of any claims or
interest of any such holders or their successors, assigns, or
personal representative previously entitled thereto.
2.6 Closing. Subject to the terms and conditions of this
Agreement, the Closing shall take place at the offices of Cotton,
Bledsoe, Tighe & Dawson, 500 W. Illinois, Suite 300, Midland,
Texas, at 10:00 a.m., local time, on the first business day after
the conditions set forth in Article 6 have been satisfied or
waived or on such other date and at such other time and place as
Parent and the Company shall agree.
2.7 Effective Time of the Merger. The Merger shall become
effective immediately when the Certificate of Merger is accepted
for filing by the Secretary of State of Delaware or at such time
thereafter as is provided in the Certificate of Merger (the
"Effective Time"). The Certificate of Merger shall be filed, and
the Effective Time shall occur, on the Closing Date; provided,
however, that the Certificate of Merger may be filed prior to the
Closing Date or prior to the Closing so long as it provides for
an Effective Time that occurs on the Closing Date immediately
after the Closing.
2.8 Taking of Necessary Action; Further Action. Each of Parent,
Merger Sub, and the Company shall use all reasonable efforts to
take all such actions as may be necessary or appropriate in order
to effectuate the Merger under the DGCL as promptly as
commercially practicable. If, at any time after the Effective
Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving
Corporation with full right, title and possession to all assets,
property, rights, privileges, powers and franchises of both
Merger Sub and the Company, the officers and directors of the
Surviving Corporation are fully authorized, in the name of the
Surviving Corporation or otherwise to take, and shall take, all
such lawful and necessary action.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company, as to itself and each of the Material
Subsidiaries, hereby represents and warrants to Parent and Merger
Sub as follows (such representations and warranties being deemed
to be made on a continuous basis until the Effective Time):
3.1 Organization. The Company: (a) is a corporation duly
organized, validly existing and in good standing under the laws
of Delaware; (b) has the requisite power and authority to own,
lease and operate its properties and to conduct its business as
it is presently being conducted; and (c) is duly qualified to do
business as a foreign corporation and is in good standing, in
each jurisdiction where the character of the properties owned or
leased by it or the nature of its activities makes such
qualification necessary (except where any failure to be so
qualified as a foreign corporation or to be in good standing
would not, individually or in the aggregate, have a Material
Adverse Effect on the Company). Section 3.1 of the Company
Disclosure Schedule contains a list of each direct corporate
Subsidiary of the Company and Section 3.2 of the Company
Disclosure Schedule contains a list of each Partnership and Tex-
Hal Partners, Inc., and accurate and complete copies of the
certificate of incorporation, bylaws, minute books, agreements of
limited partnership of the Partnership of the Company and each
Material Subsidiary have heretofore been delivered or made
available to Parent. Except as set forth in Sections 3.1 and 3.2
of the Company Disclosure Schedule, the Company has no
Subsidiaries. Each Material Subsidiary (a) is duly organized or
formed, validly existing and in good standing under the laws of
its state of organization or formation; (b) has the requisite
power and authority to own, lease and operate its properties and
to conduct its business as it is presently being conducted; and
(c) is duly qualified to do business as a foreign entity and is
in good standing, in each jurisdiction where the character of the
properties owned or leased by it or the nature of its activities
makes such qualification necessary (except where any failure to
be so qualified as a foreign entity or to be in good standing
would not, individually or in the aggregate, have a Material
Adverse Effect on the Company). All Subsidiaries listed in
Section 3.1 of the Company Disclosure Schedule which are not
Material Subsidiaries have no assets and no liabilities and have
never conducted any business activities.
3.2 Other Equity Interests. The Company does not own any equity
interest in any general or limited partnership, corporation,
limited liability company or other entity other than as set forth
in Sections 3.1 and 3.2 of the Company Disclosure Schedule (other
than joint venture, joint operating, other ownership arrangements
and tax partnerships usual and customary in the oil and gas
industry that, individually or in the aggregate, are not material
to the operations or business of the Company). The Company does
not have any liabilities (current, contingent or otherwise)
related to any of the equity interests or entities identified in
Section 3.2 of the Company Disclosure Schedule other than the
Material Subsidiaries.
3.3 Authority and Enforceability. The Company has the requisite
corporate power and authority to enter into and deliver this
Agreement and the other agreements and documents entered into by
the Company in connection with this Agreement and (with respect
to consummation of the transactions included in the Company
Proposal, subject to the valid approval of the Company Proposal
by the stockholders of the Company) to consummate the
transactions contemplated hereby. The execution and delivery of
this Agreement and (with respect to consummation of the
transactions included in the Company Proposal, subject to the
valid approval of the Company Proposal by the stockholders of the
Company) the consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate
action on the part of the Company, including approval by the
board of directors of the Company, and no other corporate
proceedings on the part of the Company are necessary to authorize
the execution or delivery of this Agreement or (with respect to
consummation of the transactions included in the Company
Proposal, subject to the valid approval of the Company Proposal
by the stockholders of Company) to consummate the transactions
contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and (with respect to
consummation of the transactions included in the Company
Proposal, subject to the valid approval of the Company Proposal
by the stockholders of Company, and assuming that this Agreement
constitutes valid and binding obligations of Parent, Merger Sub
and the other Persons party to the this Agreement (other than the
Company)), constitutes a valid and binding obligation of the
Company, enforceable against it in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors rights generally and by general
equitable principles.
3.4 No Violations. Except as set forth in Section 3.4 of the
Company Disclosure Schedule, the execution and delivery of this
Agreement does not, and the consummation of the transactions
contemplated hereby and compliance by the Company with the
provisions hereof will not, conflict with, result in any
violation of or default (with or without notice or lapse of time
or both) under, give rise to a right of termination, cancellation
or acceleration of any obligation or to the loss of a material
benefit under, or result in the creation of any Lien on any of
the properties or assets of the Company or any of the Material
Subsidiaries under, any provision of: (a) the certificate of
incorporation, bylaws, partnership agreement or any other
organizational documents of the Company or any of the Material
Subsidiaries; (b) any Company Material Agreement; or (c) assuming
the consents, approvals, authorizations, permits, filings and
notifications referred to in Section 3.5 are duly and timely
obtained or made, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or any of
the Material Subsidiaries or any of their properties or assets,
other than, in the case of clause (b) or (c) above, any such
conflict, violation, default, right, loss or Lien that,
individually or in the aggregate, would not have a Material
Adverse Effect on the Company.
3.5 Consents and Approvals. Except as set forth in Section
3.5(i) of the Company Disclosure Schedule, no consent, approval,
order or authorization of, registration, declaration or filing
with, or permit from, any Governmental Authority is required by
or with respect to the Company or any of the Material
Subsidiaries in connection with the execution and delivery of
this Agreement by the Company or the consummation by the Company
of the transactions contemplated hereby, except for the
following: (a) any such consent, approval, order, authorization,
registration, declaration, filing or permit which the failure to
obtain or make would not, individually or in the aggregate, have
a Material Adverse Effect on the Company; (b) the filing of the
Certificate of Merger with the Secretary of State of Delaware
pursuant to the provisions of the DGCL; and (c) such filings and
approvals as may be required by Environmental Laws as identified
in Section 3.5(ii) of the Company Disclosure Schedule. No Third-
Party Consent is required by or with respect to the Company or
any of the Material Subsidiaries in connection with the execution
and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (x) those identified
in Section 3.5(iii) of the Company Disclosure Schedule; (y) any
such Third-Party Consent which the failure to obtain would not,
individually or in the aggregate, have a Material Adverse Effect
on the Company; and (z) the valid approval of the Company
Proposal by the stockholders of the Company.
3.6 Financial Statements.
(a) Section 3.6(a) of the Company Disclosure Schedule includes
the unaudited financial statements of the Company and of each of
the Partnerships for the fiscal year ended December 31, 2003
(collectively, the "Financial Statements").
(b) The Financial Statements (including, in each case, any
related notes and schedules thereto) were prepared in accordance
with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto), and
fairly present in all material respects the financial position of
the Company or the Partnerships, as the case may be, as at the
respective dates thereof and the results of its operations and
cash flows and stockholder equity for the periods indicated.
Except as disclosed or reserved against on the balance sheet
included among the Financial Statements, or as set forth in
Section 3.6(b) of the Company Disclosure Schedule, the Company
and the Partnerships, as the case may be, do not have debts,
liabilities or obligations of any nature, whether accrued,
absolute, contingent or otherwise, whether due or to become due,
that individually or in the aggregate have or would have a
Material Adverse Effect on the Company or the Partnerships, as
the case may be.
3.7 Capital Structure.
(a) The authorized capital stock of the Company consists of
10,000,000 shares of Company Common Stock, 900,000 shares of
Company Class A Common Stock and 5,000,000 shares of Company
Preferred Stock.
(b) As of the date hereof, (i) there are issued and outstanding
306,000 shares of Company Common Stock and (ii) 900,000 shares of
Company Class A Common Stock. As of the date hereof, 63,474
shares of Company Common Stock are issuable upon exercise of
outstanding Company Warrants. As of the date hereof, there are no
shares of Company Preferred Stock issued and outstanding.
(c) Except as set forth in Section 3.7(b), there are outstanding
(i) no shares of capital stock or other voting securities of the
Company, (ii) no securities of the Company or any other Person
convertible into or exchangeable or exercisable for shares of
capital stock or other voting securities of the Company, and
(iii) no Company Stock Equivalents or other options issued or
outstanding or any other subscriptions, options, warrants, calls,
rights (including preemptive rights), commitments, understandings
or agreements to which the Company is a party or by which it is
bound obligating the Company to issue, deliver, sell, purchase,
redeem or acquire shares of capital stock or other voting
securities of the Company (or securities convertible into or
exchangeable or exercisable for shares of capital stock or other
voting securities of the Company) or obligating the Company to
grant, extend or enter into any such subscription, option,
warrant, call, right, commitment, understanding or agreement.
(d) Other than as set forth in Section 3.7(d) of the Company
Disclosure Schedule, there are no (a) stockholder agreements,
voting trusts or other agreements or understandings to which the
Company is a party or by which it is bound or (b) agreements or
understandings to which the Company is a party or by which it is
bound relating to registration rights or transfer of securities
of the Company.
3.8 No Undisclosed Liabilities. There are no liabilities of the
Company or the Material Subsidiaries of any kind whatsoever,
whether accrued, contingent, absolute, determined, determinable
or otherwise, that would, individually or in the aggregate, have
a Material Adverse Effect on the Company, other than (a)
liabilities adequately provided for in the Company Financial
Statements, (b) liabilities incurred in the ongoing and customary
oil and gas operations of the Company and the Material
Subsidiaries subsequent to December 31, 2003 which in the
aggregate do not have a Material Adverse Effect on the Company,
(c) liabilities under this Agreement, and (d) liabilities set
forth in Section 3.8 of the Company Disclosure Schedule.
3.9 Absence of Certain Changes or Events. Except as otherwise
set forth in Section 3.9 of the Company Disclosure Schedule or as
specifically contemplated by this Agreement, since December 31,
2003, (a) there has not occurred any Material Adverse Effect with
respect to the Company; (b) the Company and each Material
Subsidiary have conducted their respective businesses in all
material respects in the ordinary course consistent with past
practices; (c) there has not been any declaration, setting aside
or payment of any dividend or other distribution with respect to
any shares of capital stock of the Company or any repurchase,
redemption or other acquisition by the Company of any outstanding
shares of capital stock or other securities of, or other
ownership interests in, the Company and the Company has not
entered into any agreements related to any of the foregoing; (d)
there has not been any amendment of any term of any outstanding
security of the Company; (e) there has not been any change in
any method of accounting or accounting practice by the Company,
except for any such change required because of a concurrent
change in generally accepted accounting principles; and (f) the
Company and the Material Subsidiaries have not entered into or
modified, amended, breached or taken any action which may result
in a default under any Company Material Agreements.
3.10 Compliance with Laws, Material Agreements and Permits.
Neither the Company nor any Material Subsidiary is in violation
of, or in default under, and no event has occurred that (with
notice or the lapse of time or both) would constitute a violation
of or default under (a) its certificate of incorporation, bylaws,
partnership agreement, or other organizational documents, except
as shown in Section 3.10(i) of the Company Disclosure Schedule,
(b) any applicable law, rule, regulation, ordinance, order, writ,
decree or judgment of any Governmental Authority, except as shown
in Section 3.10(ii) of the Company Disclosure Schedule, or (c)
any Company Material Agreement, except (in the case of clause (b)
or (c) above) for any violation or default that would not,
individually or in the aggregate, have a Material Adverse Effect
on the Company. The Company and the Material Subsidiaries have
obtained and hold all permits, licenses, variances, exemptions,
orders, franchises, approvals and authorizations of all
Governmental Authorities necessary for the lawful conduct of
their business and the lawful ownership, use and operation of
their assets ("Company Permits"), except for Company Permits
which the failure to obtain or hold would not, individually or in
the aggregate, have a Material Adverse Effect on the Company.
None of the Company Permits will be adversely affected by the
consummation of the transactions contemplated under this
Agreement or requires any filing or consent in connection
therewith. The Company and the Material Subsidiaries are in
compliance with the terms of the Company Permits, except where
the failure to comply would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. Except
as set forth in Section 3.10(iii) of the Company Disclosure
Schedule, the Company has received no written notice of any
investigation or review by any Governmental Authority with
respect to the Company or any Material Subsidiary and to the
knowledge of the Company, no such investigation or review is
pending or threatened.
3.11 Litigation. Except as set forth in Section 3.11 of the
Company Disclosure Schedule: (a) no litigation, arbitration,
investigation or other proceeding of any Governmental Authority
is pending or, to the knowledge of the Company, threatened
against the Company or any Material Subsidiary, or any of their
respective assets which, if adversely determined, would,
individually or in the aggregate, have a Material Adverse Effect
on the Company; (b) neither the Company nor any Material
Subsidiary is subject to any outstanding injunction, judgment,
order, decree, settlement agreement, conciliation agreement,
letter of commitment, deficiency letter or ruling (other than
routine oil and gas field regulatory orders); and (c) the Company
is not subject to any settlement agreement, conciliation
agreement, letter of commitment, deficiency letter or consent
decree with any present or former employee of the Company or
applicant for employment with the Company, labor union or other
employee representative, or any Governmental Authority relating
to claims of unfair labor practices, employment discrimination,
or other claims with respect to employment and labor practices
and policies, and no Governmental Authority has issued a
judgment, order, decree, injunction, decision, award or finding
with respect to the employment and labor practices or policies of
the Company which has any present material effect (or could have
any future material effect) on the Company or the employment and
labor practices and policies of the Company. There is no
litigation, proceeding or investigation pending or, to the
knowledge of the Company, threatened against or affecting the
Company that questions the validity or enforceability of this
Agreement or any other document, instrument or agreement to be
executed and delivered by the Company in connection with the
transactions contemplated hereby. Section 3.11 of the Company
Disclosure Schedule contains an accurate and complete list of all
suits, actions and proceedings pending or, to the knowledge of
the Company, threatened against or affecting the Company or any
of the Material Subsidiaries as of the date hereof.
3.12 Taxes.
(a) The Company and each Material Subsidiary have filed or
sought appropriate extensions for all Tax Returns (federal, state
and local) required to be filed and have either paid all taxes
due (including interest and penalties) or provided adequate
reserves for those taxes. All such Tax Returns are complete and
accurate in all material respects. No assessments have been made
against the Company or any of the Material Subsidiaries by any
Taxing Authority nor has any penalty or deficiency been assessed
by any Taxing Authority. To the best of the Company's knowledge,
no federal or other tax return of the Company or any of the
Material Subsidiaries is presently being examined by the Internal
Revenue Service or any state or local Governmental Authority nor
are the results of any prior examination by the Internal Revenue
Service or any state or local Governmental Authority being
contested by the Company. No Tax Lien has been filed and, to the
knowledge of the Company, no claim is being asserted with respect
to any such Tax or other such governmental authority. Neither
the Company nor any Material Subsidiary is a party to or
obligated under any tax sharing or allocation agreement or any
similar agreement or arrangement. The Company is in compliance
in all material respects with all applicable Tax laws, rules and
regulations, including those related to the reporting,
withholding and payment of Taxes that are required to be withheld
under such laws, rules and regulations. Neither the Company nor
any Material Subsidiary is part of any affiliated, consolidated,
combined or similar group for Tax purposes other than with the
Company and the Material Subsidiaries.
(b) Section 3.12(b) of the Company Disclosure Schedule contains
a list of all Tax Returns filed by the Company and the Material
Subsidiaries with respect to any Taxes and all Tax audit reports,
work papers, statements of deficiencies, and closing or other
agreements with respect thereto with respect to Tax years 2000,
2001 and 2002, and the Company has provided or make available
copies of all such items to Parent.
3.13 Company Material Agreements. Except as set forth in Section
3.13 of the Company Disclosure Schedule, there are no Company
Material Agreements. Except as would not individually or in the
aggregate have a Material Adverse Effect on the Company, all of
the Company Material Agreements are in full force and effect and
binding upon the Company or a Material Subsidiary, and to the
knowledge of the Company, the other party or parties thereto, in
each case in accordance with its terms, other than any Company
Material Agreement which is by its terms no longer in force and
effect and except as enforceability may be limited by bankruptcy,
insolvency, moratorium or similar laws affecting or relating to
the enforcement of creditors' rights generally and is subject to
general principles of equity. Except to the extent any of the
following would not individually or in the aggregate have a
Material Adverse Effect and other than disclosed in Section
3.13(ii) of the Company Disclosure Schedule, (i) neither the
Company nor any Material Subsidiary is in default under any of
the Company Material Agreements, (ii) the Company's execution of
this Agreement and its performance hereunder will not result in
any such default and (iii) to the knowledge of the Company, no
other party or parties to the Company Material Agreements
(excluding any Material Subsidiary) is in default thereunder.
3.14 ERISA Plans.
(a) Section 3.14 of the Company Disclosure Schedule sets forth
an accurate and complete list of all Company Plans. The Company
is in compliance in all material respects with the applicable
provisions of ERISA. The Company has not at any time maintained,
contributed to, or incurred any liability with respect to any
plans or arrangements subject to ERISA except those identified in
Section 3.14 of the Company Disclosure Schedule.
(b) There are no pending or, to the best knowledge of the
Company, threatened claims, actions or lawsuits, or action by any
Governmental Authority, with respect to any Company Plan that
could reasonably be expected to have a Material Adverse Effect.
There has been no prohibited transaction or violation of the
fiduciary responsibility rules with respect to any Company Plan
that has resulted or could reasonably be expected to result in a
Material Adverse Effect.
(c) The transactions contemplated by this Agreement will not
give rise to any obligations on behalf of the Company under any
Company Plan, whether due to a change of control or otherwise,
except for the severance payments specified in Section 2.5(g) of
this Agreement and except for the incentive bonuses described in
Section 3.8 of the Company Disclosure Schedule.
3.15 Insurance. Set forth in Section 3.15(i) of the Company
Disclosure Schedule is an accurate listing of the Company's
insurance schedule of directors' and officers' liability
insurance (including the cost thereof), primary and excess
casualty insurance policies providing coverage for bodily injury
and property damage to third parties, including any products
liability and completed operations coverage, and workers
compensation, in effect as of the date hereof. The Company
maintains insurance with reputable insurers (or pursuant to
prudent self-insurance programs) in such amounts and covering
such risks as are in accordance with normal industry practice for
companies engaged in businesses similar to that of the Company
and owning properties in the same general area in which the
Company conducts its business. The Company may terminate each of
its insurance policies or binders at or after the Closing and
will incur no penalties or other material costs in doing so. None
of such insurance coverage was obtained through the use of false
or misleading information or the failure to provide the insurer
with all information requested in order to evaluate the
liabilities and risks insured. There is no material default with
respect to any provision contained in any such policy or binder,
and the Company has not failed to give any notice or present any
claim under any such policy or binder in due and timely fashion.
There are no billed but unpaid premiums past due under any such
policy or binder. Except as set forth in Section 3.15 of the
Company Disclosure Schedule: (a) there are no outstanding claims
under any such policies or binders and, to the knowledge of the
Company, there has not occurred any event that might reasonably
form the basis of any claim against or relating to the Company or
any of the Material Subsidiaries not covered by any of such
policies or binders; (b) no notice of cancellation or non-renewal
of any such policies or binders has been received; and (c) there
are no performance bonds outstanding with respect to the Company
or any of the Material Subsidiaries.
3.16 Title to Assets. Except as set forth in Section 3.16 of the
Company Disclosure Schedule, (i) the Company and each Material
Subsidiary has Defensible Title to all of its respective Oil and
Gas Interests and (ii) the consummation of the transactions
contemplated by this Agreement will not materially adversely
affect such title. Except as would not, individually or in the
aggregate, have a Material Adverse Effect on the Company, each
Oil and Gas Interest included or reflected in the Ownership
Interests entitles the Company to receive (assuming, in the case
of Partnership PUDs, the actual drilling thereof by the Company
on terms permitted by the applicable Agreement of Limited
Partnership and in accordance with historical practice) not less
than the undivided interest set forth in (or derived from) the
Ownership Interests of all Hydrocarbons produced, saved and sold
from or attributable to such Oil and Gas Interest, and the
portion of the costs and expenses of operation and development of
such Oil and Gas Interest that is borne or to be borne by the
Company (assuming the case of the Partnership PUDs, the actual
drilling thereof by the Company on terms permitted by the
applicable Agreement of Limited Partnership and in accordance
with historical practice) is not greater than the undivided
interest set forth in (or derived from) the Ownership Interests.
Except for Permitted Encumbrances, the Company and each Material
Subsidiary has good, marketable and defensible Title to its
assets (other than the Oil and Gas Interests). All leases
pursuant to which the Company or any of the Material Subsidiaries
leases any real property assets (excluding for this purpose Oil
and Gas Interests) are in full force and effect, and the Company
has not received any notice of default under any such lease.
3.17 Company Engineering Report. All historical information and
data, including lease operating expenses, product pricing and
production volume information supplied to Ryder Scott Company,
L.P. by or on behalf of the Company in connection with the
preparation of the Company Engineering Report was (at the time
supplied or as modified or amended prior to the issuance of the
Company Engineering Report) true and correct in all material
respects.
3.18 Financial and Commodity Hedging. Other than the Hedging
Transactions identified in Section 3.13 of the Company Disclosure
Schedule, the Company and the Material Subsidiaries have no
currently outstanding Hydrocarbon or financial hedging positions
(including fixed price controls, collars, swaps, caps, hedges or
puts). Each of the Hedging Transactions identified in Section
3.13 of the Company Disclosure Schedule is in effect in
accordance with its terms. There are no current collateral
deficiencies, requests for collateral or demands for payment
under or with respect to any of the Hedging Transactions.
3.19 Environmental Matters. Except as set forth in Section 3.19
of the Company Disclosure Schedule:
(a) The Company and each Material Subsidiary has conducted its
business and operated its assets, and is conducting its business
and operating its assets, in compliance with all Environmental
Laws;
(b) Neither the Company nor any Material Subsidiary has been
notified by any Governmental Authority or other third party that
any of the operations or assets of the Company is the subject of
any investigation or inquiry by any Governmental Authority or
other third party evaluating whether any remedial action is
needed to respond to a release or threatened release of any
Hazardous Material or to the improper storage or disposal
(including storage or disposal at offsite locations) of any
Hazardous Material;
(c) Neither the Company nor, to the Company's knowledge, any
other Person has filed any notice under any federal, state or
local law indicating that (i) the Company or any Material
Subsidiary is responsible for the improper release into the
environment, or the improper storage or disposal, of any
Hazardous Material, or (ii) any Hazardous Material is improperly
stored or disposed of upon any property of the Company or any
Material Subsidiary or any property formerly owned, leased or
operated by the Company or any Material Subsidiary;
(d) Neither the Company nor any Material Subsidiary has any
material contingent liability in connection with (i) the release
or threatened release into the environment at, beneath or on any
property now or previously owned, leased or operated by the
Company or any such Material Subsidiary, or (ii) the storage or
disposal of any Hazardous Material;
(e) Neither the Company nor any Material Subsidiary has received
any claim, complaint, notice, inquiry or request for information
involving any matter which remains unresolved as of the date
hereof with respect to any alleged violation of any Environmental
Law or regarding potential liability under any Environmental Law
relating to or in connection with operations or conditions of any
facilities or property (including off-site storage or disposal of
any Hazardous Material from such facilities or property)
currently or formerly owned, leased or operated by the Company or
any Material Subsidiary;
(f) No property now or previously owned, leased or operated by
the Company or any Material Subsidiary is listed on the National
Priorities List pursuant to CERCLA or on the CERCLIS or on any
other federal or state list as sites requiring investigation or
cleanup;
(g) All underground storage tanks and solid waste storage,
treatment and/or disposal facilities owned or operated by the
Company or any Material Subsidiary are used and operated in
compliance with Environmental Laws;
(h) Neither the Company nor any Material Subsidiary is
transporting, has not transported, is not arranging or has not
arranged for the transportation of any Hazardous Material to any
location which is listed on the National Priorities List pursuant
to CERCLA, on the CERCLIS or on any similar federal or state list
or which is the subject of federal, state or local enforcement
actions or other investigations that may lead to material claims
against the Company or any Material Subsidiary for removal or
remedial work, contribution for removal or remedial work, damage
to natural resources or personal injury, including claims under
CERCLA;
(i) The Company and the Material Subsidiaries have obtained all
permits, licenses, approvals and other authorizations that are
required with respect to the operation of the their respective
properties and assets under the Environmental Laws and are in
compliance with all terms and conditions of such required
permits, licenses, approvals and authorizations;
(j) To the Company's knowledge, there are no polychlorinated
biphenyls or asbestos located in, at, on or under any facility or
real property owned, leased or operated by the Company or any
Material Subsidiary that require removal, decontamination or
abatement pursuant to Environmental Laws;
(k) There are no past or present events, conditions,
circumstances, activities, practices, incidents or actions that
could reasonably be expected to interfere with or prevent
material compliance by the Company or any Material Subsidiary
with any Environmental Law, or that could reasonably be expected
to give rise to any liability under the Environmental Laws;
(l) No Lien has been recorded against any property, facility or
assets currently owned by the Company or any Material Subsidiary
under any Environmental Law; and
(m) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will
not affect the validity or require the transfer of any material
permits, licenses or approvals held by the Company or any
Material Subsidiary under any Environmental Law, and will not
require any notification, disclosure, registration, reporting,
filing, investigation or remediation under any Environmental law.
3.20 Books and Records. All books, records and files of the
Company (including those pertaining to the Oil and Gas Interests
of the Company or any Material Subsidiary, wells and other
assets, those pertaining to the production, gathering,
transportation and sale of Hydrocarbons, and corporate,
accounting, financial and employee records): (a) have been
prepared, assembled and maintained in accordance with policies
and procedures usually and customarily employed by companies in
the oil and gas industry of a size similar to the Company; and
(b) fairly and accurately reflect the ownership, use, enjoyment
and operation by the Company and the Material Subsidiaries of
their respective assets. The Company maintains a system of
internal accounting controls sufficient to provide reasonable
assurance that: (x) transactions are accurately and promptly
recorded; (y) transactions are executed in accordance with
management's specific or general authorization; and (z) access to
its books, records and assets is permitted only in accordance
with management's general or specific authorization.
3.21 Brokers. Except as disclosed in Section 3.21 of the Company
Disclosure Schedule, no broker, finder, investment banker or
other Person is or will be, in connection with the transactions
contemplated by this Agreement, entitled to any brokerage,
finder's or other fee or compensation based on any arrangement or
agreement made by or on behalf of the Company and for which the
Surviving Corporation or the Company will have any obligation or
liability.
3.22 Vote Required. The affirmative vote or consent of the
holders of a majority of the outstanding shares of Company Common
Stock and Company Class A Common Stock, voting together as a
single class, is the only vote or approval of the holders of any
class or series of Company capital stock or other voting
securities necessary to approve this Agreement, the Merger and
the transactions contemplated hereby. The execution and delivery
of the Stockholders Consent will satisfy such required approval.
3.23 Fairness Opinion. The Special Committee of the Board of
Directors of the Company has received the written opinion of
Petrie Parkman & Co., Inc. to the effect that the Merger is fair
to the stockholders of the Company from a financial point of
view, and as of the date of this Agreement such opinion has not
been withdrawn, revoked or modified. In connection with this
Agreement and the transactions contemplated herein, the entire
amount of fees due and payable to Petrie Parkman & Co., Inc.
shall not exceed $2.1 million, and the entire amount of
reimbursable expenses due and payable shall not exceed $75,000.
3.24 Imbalances. Section 3.24 of the Company Disclosure Schedule
sets forth as of December 31, 2003 all of the Hydrocarbon
pipeline, transportation, processing and wellhead imbalances of
the Company and the Material Subsidiaries (the "Company
Imbalances"). Between December 31, 2003 and the Closing, the
amounts of the Company Imbalances set forth in Section 3.24 of
the Company Disclosure Schedule shall not have materially changed
in order to constitute a Material Adverse Effect with respect to
the Company. Except for Hydrocarbon balancing agreements
containing customary provisions, the Company and the Material
Subsidiaries are not obligated, by virtue of a prepayment
arrangement, a "take or pay" arrangement, a production payment or
any other arrangement, to deliver Hydrocarbons produced from the
Oil and Gas Interests of the Company or any Material Subsidiary
at some future time without then or thereafter receiving full
payment therefor.
3.25 Additional Drilling Obligations. Except as disclosed in
Section 3.25 of the Company Disclosure Schedule, there are no
current obligations or assessments of the Company or any Material
Subsidiary (other than implied obligations under oil and gas
leases concerning protection from drainage and further
development that are customary in the oil and gas industry and
any such obligations, the failure to comply with which would not
have a Material Adverse Effect on the Company) that require the
drilling of additional wells or other material development
operations (including re-entry of existing wells) in order to
earn or to continue to hold all or any portion of the Oil and Gas
Interests of the Company and the Material Subsidiaries, and, to
the knowledge of the Company, neither the Company nor any
Material Subsidiary has ever been advised by any lessor of any
requirements or demands to drill additional wells on any of the
Oil and Gas Interests (whether pursuant to any implied covenant
to protect from drainage, further development, or otherwise),
which requirements or demands have not been resolved.
3.26 Wells to be Plugged and Abandoned. Except where none of the
following, individually or in the aggregate, would have Material
Adverse Effect on the Company, as to wells operated by the
Company, and to the knowledge of the Company, as to wells
operated by third parties, there are no wells that: (i) other
than as set forth in Section 3.26(i) of the Company Disclosure
Schedule, the Company is currently obligated by law or contract
to plug and abandon; (ii) other than as set forth in Section
3.26(ii) of the Company Disclosure Schedule, are subject to
exceptions to a requirement to plug and abandon issued by a
Governmental Authority; or (iii) have been plugged and abandoned
in a manner that does not comply in all material respects with
applicable law.
3.27 Current Financial Condition. The principal amount owed
under the Company Senior Secured Credit Facility shall not exceed
$73,208,033 as of the Effective Time. Other than any reduction
thereto that is attributable to the payment or incurrence of (i)
fees of attorneys and accountants owed by the Company related to
the Merger and incident to and in connection with the sale of the
Company and of the financial advisors and counsel to the Special
Committee of the Board of Directors of the Company (not to exceed
$3,500,000 in the aggregate); (ii) severance, bonus and other
amounts under any agreement or plan described in Section 3.8 of
the Company Disclosure Schedule (not to exceed $5,000,000 in the
aggregate); and (iii) cash to be contributed to the wholly-owned
Subsidiary of the Company in connection with the transfer of the
Spin-Off Assets (not to exceed $500,000 in the aggregate), the
Company Working Capital as of December 31, 2003 shall not have
been materially reduced from such date to the Effective Time.
3.28 No Other Representations. EXCEPT AS AND TO THE EXTENT SET
FORTH IN THIS ARTICLE 3, THE COMPANY MAKES NO REPRESENTATIONS OR
WARRANTIES WHATSOEVER TO PARENT AND MERGER SUB AND HEREBY
DISCLAIMS ALL LIABILITY AND RESPONSIBILITY FOR ANY
REPRESENTATION, WARRANTY, STATEMENT OR INFORMATION MADE,
COMMUNICATED, OR FURNISHED (ORALLY OR IN WRITING) TO PARENT OR
MERGER SUB OR THEIR RESPECTIVE REPRESENTATIVES (INCLUDING,
WITHOUT LIMITATION, ANY PROPERTY RECORD AND OPINION, INFORMATION,
PROJECTION, OR ADVICE THAT MAY HAVE BEEN OR MAY BE PROVIDED TO
PARENT OR MERGER SUB BY ANY DIRECTOR, OFFICER, EMPLOYEE, AGENT,
CONSULTANT, OR REPRESENTATIVE OF THE COMPANY OR ANY AFFILIATE
THEREOF). SPECIFICALLY, AS PART OF (BUT NOT A LIMITATION OF) THE
FOREGOING, PARENT OR MERGER SUB ACKNOWLEDGE THAT NEITHER COMPANY
NOR ANY OTHER PERSON HAS MADE, AND THE COMPANY HEREBY EXPRESSLY
DISCLAIMS, ANY REPRESENTATION OR WARRANTY (EXPRESS, IMPLIED,
UNDER COMMON LAW, BY STATUTE OR OTHERWISE) RELATING TO
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR CONFORMITY
TO MODEL OR SAMPLES OF MATERIALS, THE VALUE OF, OR ASSIGNABILITY
OF, THE RIGHT TO OPERATE ANY OF THE ASSETS, THE EXTENT OF OIL,
GAS AND/OR OTHER MINERAL RESERVES, THE RECOVERABILITY OF OR THE
COST OF ANTICIPATED PRICES AT WHICH PRODUCTION HAS BEEN OR WILL
BE SOLD AND THE ABILITY TO SELL OIL OR GAS PRODUCTION FROM THE
COMPANY'S OIL AND GAS INTERESTS. BY ITS ACTIONS IN CLOSING THE
TRANSACTIONS CONTEMPLATED HEREBY, PARENT AND MERGER SUB
ACKNOWLEDGE (OR SHALL BE DEEMED TO HAVE ACKNOWLEDGED) THAT THEY
HAVE BEEN PROVIDED ACCESS TO ALL COMPANY ASSETS AND TO ALL
RECORDS, PROPERTY RECORDS AND OTHER FILES, INFORMATION AND DATA
TO WHICH THEY REQUESTED ACCESS, ALL IN ACCORDANCE WITH THE
PROVISIONS OF THIS AGREEMENT, THAT THEY HAVE BEEN PROVIDED THE
RIGHT TO SATISFY THEMSELVES AS TO THE PHYSICAL AND ENVIRONMENTAL
CONDITION OF THE ASSETS, BOTH SURFACE AND SUBSURFACE, AND THAT
PARENT AND MERGER SUB SHALL ACCEPT ALL OF THE SAME IN THEIR "AS
IS, WHERE IS" CONDITION.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby jointly and severally represent
and warrant to the Company as follows (such representations and
warranties being deemed to be made on a continuous basis until
the Effective Time):
4.1 Organization. Each of the Parent Companies: (a) is a
corporation duly organized, validly existing and in good standing
under the laws of its state of incorporation or formation; (b)
has the requisite power and authority to own, lease and operate
its properties and to conduct its business as it is presently
being conducted; and (c) is duly qualified to do business as a
foreign corporation, and is in good standing, in each
jurisdiction where the character of the properties owned or
leased by it or the nature of its activities makes such
qualification necessary (except where any failure to be so
qualified as a foreign corporation or to be in good standing
would not, individually or in the aggregate, have a Material
Adverse Effect on Parent). Accurate and complete copies of the
certificate of incorporation, bylaws, minute books and/or other
organizational documents of each of the Parent Companies have
heretofore been delivered to the Company.
4.2 Authority and Enforceability. Each of Parent and Merger Sub
has the requisite corporate power and authority to enter into and
deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate
action on the part of Parent and Merger Sub, including approval
by the board of directors of Parent and the board of directors
and the sole stockholder of Merger Sub, and no other corporate
proceedings on the part of Parent or Merger Sub are necessary to
authorize the execution or delivery of this Agreement or to
consummate the transactions contemplated hereby. This Agreement
has been duly and validly executed and delivered by Parent and
Merger Sub and constitutes valid and binding obligations of each
of Parent and Merger Sub, enforceable against each of them in
accordance with their terms.
4.3 No Violations. The execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated
hereby and compliance by Parent and Merger Sub with the
provisions hereof will not, conflict with, result in any
violation of or default (with or without notice or lapse of time
or both) under, give rise to a right of termination, cancellation
or acceleration of any obligation or to the loss of a material
benefit under, or result in the creation of any Lien on any of
the properties or assets of Parent or Merger Sub under, any
provision of (a) the certificate of incorporation, bylaws or any
other organizational documents of any of the Parent Companies,
(b) any loan or credit agreement, note, bond, mortgage,
indenture, lease, permit, concession, franchise, license or other
agreement or instrument applicable to Parent or Merger Sub, or
(c) assuming the consents, approvals, authorizations, permits,
filings and notifications referred to in Section 4.4 are duly and
timely obtained or made, any judgment, order, decree, statute,
law, ordinance, rule or regulation applicable to any of the
Parent Companies or any of their respective properties or assets,
other than, in the case of clause (b) or (c) above, any such
conflict, violation, default, right, loss or Lien that,
individually or in the aggregate, would not have a Material
Adverse Effect on Parent.
4.4 Consents and Approvals. No consent, approval, order or
authorization of, registration, declaration or filing with, or
permit from, any Governmental Authority is required by or with
respect to any Parent Company in connection with the execution
and delivery of this Agreement by Parent and Merger Sub or the
consummation by Parent and Merger Sub of the transactions
contemplated hereby, except for the following: (a) any such
consent, approval, order, authorization, registration,
declaration, filing or permit which the failure to obtain or make
would not, individually or in the aggregate, have a Material
Adverse Effect on Parent; (b) the filing of the Certificate of
Merger with the Secretary of State of Delaware pursuant to the
provisions of the DGCL; and (c) such filings and approvals as may
be required by any applicable state takeover laws or
Environmental Laws. No Third-Party Consent is required by or with
respect to any of the Parent Companies in connection with the
execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby and thereby, except for any
such Third-Party Consent which has been or will be obtained prior
to Closing or which the failure to obtain would not, individually
or in the aggregate, have a Material Adverse Effect on Parent.
4.5 Interim Operations of Merger Sub. Merger Sub was formed
solely for the purpose of engaging in the transactions
contemplated by this Agreement and has not engaged in any
business or activity (or conducted any operations) of any kind,
entered into any agreement or arrangement with any person or
entity, or incurred, directly or indirectly, any liabilities or
obligations, except in connection with its incorporation, the
negotiation of this Agreement, the Merger and the transactions
contemplated hereby.
4.6 Financing. Parent and Merger Sub have cash on hand or
committed financing sufficient (a) to deliver the Merger
Consideration as detailed in Article 2 herein, and to consummate
the transactions contemplated by this Agreement, including
without limitation, to make all other payments of fees and
expenses contemplated hereunder, and (b) to refinance or prepay
in full all indebtedness under the Company Senior Secured Credit
Facility and the Company Sub Debt Credit Agreement. Parent has
delivered to the Company a true and correct copy of the
commitment letter of Bank One, NA dated April 30, 2004 related to
the financing of Parent's obligations hereunder, the financing
commitment under which is currently in full force and effect.
4.7 No Advice. Parent and Merger Sub have relied only on the
advice of their own professional advisers with respect to the tax
and other economic considerations related to this Agreement and
the transactions contemplated hereby, and Parent and Merger Sub
expressly acknowledge that none of the Company, any Subsidiary of
Company or any of their respective Affiliates or advisors has
provided Parent or Merger Sub with investment advice of any kind
in connection with this Agreement or the transactions
contemplated hereby.
ARTICLE 5
COVENANTS
5.1 Conduct of Business by the Company Pending Closing. The
Company (in its own capacity and in its capacity as managing
general partner or sole stockholder on behalf of the Material
Subsidiaries) covenants and agrees with Parent that, from the
date of this Agreement until the Effective Time, the Company and
each Material Subsidiary will conduct its business only in the
ordinary and usual course consistent with past practices.
Notwithstanding the preceding sentence, the Company covenants and
agrees with Parent that, except as specifically contemplated in
this Agreement, from the date of this Agreement until the
Effective Time, without the prior written consent of Parent:
(a) Neither the Company nor any Material Subsidiary will: (i)
amend its certificate of incorporation, bylaws, partnership
agreement or other organizational documents; (ii) split, combine
or reclassify any of its outstanding capital stock; (iii)
declare, set aside or pay any dividends or other distributions
(whether payable in cash, property or securities) with respect to
its capital stock; (iv) issue, sell or agree to issue or sell any
securities or other equity interests, including its capital stock
(including shares of capital stock held as treasury shares), any
rights, options or warrants to acquire its capital stock, or
securities convertible into or exchangeable or exercisable for
its capital stock (other than shares of Company Common Stock
issued pursuant to the exercise of any Company Warrant
outstanding on the date of this Agreement); (v) purchase, cancel,
retire, redeem or otherwise acquire any of its outstanding
capital stock or other securities or other equity interest; (vi)
merge or consolidate with, or transfer all or substantially all
of its assets to, any other Person; (vii) liquidate, wind-up or
dissolve (or suffer any liquidation or dissolution); or (viii)
enter into any contract, agreement, commitment or arrangement
with respect to any of the foregoing; provided, however, that
nothing herein shall prohibit the Company from paying or
prepaying any indebtedness under the Company Senior Credit
Facility and the Company Sub Debt Credit Agreement.
(b) Neither the Company nor any Material Subsidiary will: (i)
acquire any corporation, partnership or other business entity or
any interest therein; (ii) sell, lease or sublease, transfer,
farm out or otherwise dispose of or mortgage, pledge or otherwise
encumber any Oil and Gas Interests of the Company (including for
this purpose any Partnership PUD) that were assigned a Reserve
Data Value in excess of $200,000 in the aggregate (except that
this clause shall not apply to the sale of Hydrocarbons in the
ordinary course of business pursuant to existing arrangements and
contracts or to encumbrances under the Company Senior Credit
Facility and the Company Sub Debt Credit Agreement); (iii)
acquire Oil and Gas Interests or other assets that have a value
at the time of such acquisition in excess of $200,000 in the
aggregate; (iv) enter into any hedging or derivative contracts
(financial, commodity or otherwise) other than the Hedging
Transactions set forth in Section 3.13 of the Company Disclosure
Schedule; (v) sell, transfer or otherwise dispose of or mortgage,
pledge or otherwise encumber any securities of any other Person;
(vi) make any loans, advances or capital contributions to, or
investments in, any Person (other than the capital contribution
of $500,000 to be paid and the Spin-Off Assets to be transferred
to the wholly-owned Subsidiary of the Company, as described in
Sections 5.15 and 6.2(g)); (vii) agree with any Person to limit
or otherwise restrict in any manner the ability of the Company or
any Material Subsidiary to compete or otherwise conduct its
business, or waive any limitations or restrictions on the ability
of such Person to compete with the Company or any Material
Subsidiary; or (viii) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing.
(c) Neither the Company nor any Material Subsidiary will: (i)
incur any indebtedness for borrowed money; (ii) incur any cost or
expense for geophysical items including acquisition, processing,
reprocessing or interpretation; (iii) incur any other obligation
or liability (other than liabilities incurred in the ordinary
course of business consistent with past practices); (iv) make a
capital expenditure or series of related capital expenditures in
excess of $100,000, except in connection with those authorities
for expenditures set forth in Section 5.1(c) of the Company
Disclosure Schedule; (v) assume, endorse (other than endorsements
of negotiable instruments in the ordinary course of business),
guarantee or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the liabilities or
obligations of any other Person; or (vi) enter into any contract,
agreement, commitment or arrangement with respect to any of the
foregoing.
(d) The Company will operate, maintain and otherwise deal with
the Oil and Gas Interests of the Company and each Material
Subsidiary in accordance with good and prudent oil and gas field
practices and in accordance with all applicable oil and gas
leases and other contracts and agreements and all applicable
laws, rules and regulations.
(e) The Company will not resign, transfer or otherwise
voluntarily relinquish any right it has as of the date of this
Agreement, as operator of any Oil and Gas Interest of the
Company, and in each case in which a third party operator resigns
or is removed as operator of any Oil and Gas Interest of the
Company or any Material Subsidiary, the Company or Material
Subsidiary will vote for the Company as the successor operator.
(f) Neither the Company nor any Material Subsidiary will: (i)
enter into, or otherwise become liable or obligated under or
pursuant to, (1) any employee benefit, pension or other plan
(whether or not subject to ERISA), (2) any other stock option,
stock purchase, incentive or deferred compensation plan or
arrangement or other fringe benefit plan, (3) any consulting,
employment, severance, bonus, termination or similar agreement
with any Person, or (4) any amendment or extension of any such
plan, arrangement or agreement; (ii) except for payments made
pursuant to any existing Company Plan or any other plan,
agreement or arrangement described in Section 3.14(a) of the
Company Disclosure Schedule, grant, or otherwise become liable
for or obligated to pay, any severance or termination payment,
bonus or increase in compensation or benefits to, or forgive any
indebtedness of, any employee or consultant of the Company; (iii)
enter into or amend any Company Material Agreements or (iv) enter
into any contract, agreement, commitment or arrangement to do any
of the foregoing.
(g) Neither the Company nor any Material Subsidiary will create,
incur, assume or permit to exist any Lien on any of its assets,
except for Permitted Encumbrances.
(h) The Company and each Material Subsidiary will: (i) keep and
maintain accurate books, records and accounts; (ii) maintain in
full force and effect the policies or binders of insurance
described in Section 3.15(i); (iii) pay all Taxes, assessments
and other governmental charges imposed upon any of its assets or
with respect to its franchises, business, income or assets before
any penalty or interest accrues thereon; provided, however, the
Company will not file any Tax returns; (iv) pay all claims and
expenses (including claims and expenses for labor, services,
materials and supplies) when they become due and payable in
accordance with their terms; and (v) comply in all material
respects with the requirements of all applicable laws, rules,
regulations and orders of any Governmental Authority, file with
the SEC an annual report on Form 10-K for the fiscal year ended
December 31, 2003 on behalf of each Partnership required to file
such report if such report has not been filed as of the date
hereof, obtain or take all Governmental Actions necessary in the
operation of its business, and comply with and enforce the
provisions of all Company Material Agreements, including paying
when due all indebtedness, payables, rentals, royalties, expenses
and other liabilities relating to its business or assets.
(i) The Company and each Material Subsidiary will at all times
preserve and keep in full force and effect its corporate or
partnership existence and rights and franchises material to its
performance under this Agreement.
(j) The Company and each Material Subsidiary shall carry on its
businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and shall
use all commercially reasonable efforts to preserve intact its
present business organizations, keep available the services of
its current officers and employees (provided, however, that the
Company will not hire any additional employees) and endeavor to
preserve its relationships with customers, suppliers and others
having business dealings with it to the end that its goodwill and
ongoing business shall not be impaired in any material respect at
the Effective Time.
(k) Neither the Company nor any Material Subsidiary will engage
in any line of business in which it is not engaged as of the date
hereof.
(l) Neither the Company nor any Material Subsidiary will enter
into, or otherwise be a party to, any agreement or understanding
relating to the voting, registration or transfer of any shares of
its capital stock or other securities.
5.2 Access to Assets, Personnel and Information.
(a) From the date hereof until the Effective Time, the Company
shall: (i) afford to Parent and the Parent Representatives, at
Parent's sole risk and expense, reasonable access to any of the
assets, books and records, contracts, employees, representatives,
agents and facilities of the Company and each Material
Subsidiary; (ii) provide to Parent all information which pertains
to matters requiring Parent's approval under Section 5.1 and
cooperate with Parent to institute procedures and practices to
facilitate the joint approval by Parent and the Company of such
matters; (iii) upon request, furnish promptly to Parent (at
Parent's expense) a copy of any file, book, record, contract,
permit, correspondence, or other written information, document or
data concerning the Company and each Material Subsidiary (or any
of their assets) that is within the possession or control of the
Company; and (iv) consent to its independent auditors and Ryder
Scott Company, L.P. to make available their respective work
papers to Parent and the Parent Representatives to the extent
permitted by the applicable professional standards.
(b) Parent and the Parent Representatives shall, at Parent's
sole risk and expense, have the right to make an environmental
and physical assessment of the assets of the Company and the
Material Subsidiaries and, in connection therewith, shall have
the right to enter and inspect such assets and all buildings and
improvements thereon, conduct soil and water tests and borings
and generally conduct such tests, examinations, investigations
and studies as Parent deems necessary, desirable or appropriate
for the preparation of engineering or other reports relating to
such assets, their condition and the presence of Hazardous
Materials and compliance with Environmental Laws. The Company
shall be provided not less than 24 hours' prior notice of such
activities, and the Company Representatives shall have the right
to witness all such tests and investigations. Parent shall (and
shall cause the Parent Representatives to) keep any data or
information acquired by any such examinations and the results of
any analyses of such data and information strictly confidential
and will not (and will cause the Parent Representatives not to)
disclose any of such data, information or results to any Person
unless otherwise required by law or regulation and then only
after written notice to the Company of the determination of the
need for disclosure. Parent shall indemnify, defend and hold the
Company and the Company Representatives harmless from and against
any and all claims to the extent arising out of or as a result of
the activities of Parent and the Parent Representatives on the
assets of the Company in connection with conducting such
environmental and physical assessment, even if as a result of the
Company's sole or concurrent negligence, except to the extent of
and limited by the gross negligence or willful misconduct of the
Company or any Company Representative.
(c) The Company will (and will cause the Company Representatives
to) fully cooperate in all reasonable respects with Parent and
the Parent Representatives in connection with Parent's
examinations, evaluations and investigations described in this
Section 5.2.
(d) Parent will not (and will cause Merger Sub and the Parent
Representatives not to) use any information obtained pursuant to
this Section 5.2 for any purpose unrelated to the consummation of
the transactions contemplated by this Agreement.
5.3 No Solicitation.
(a) From and after the date hereof, the Company will not, and
will not authorize or permit any of the Company Representatives
to, directly or indirectly, solicit or encourage (including by
way of providing information) any prospective acquiror or the
invitation or submission of any inquiries, proposals or offers or
any other efforts or attempts that constitute, or may reasonably
be expected to lead to, any Acquisition Proposal (as hereinafter
defined) from any Person or engage in any discussions or
negotiations with respect thereto or otherwise cooperate with or
assist or participate in, or facilitate any such proposal;
provided, however, that notwithstanding any other provision of
this Agreement, that, consistent with the fiduciary obligations
of the Company's directors under applicable law, the Company may
participate in any unsolicited discussions or negotiations
regarding, and may furnish to any Person information (including
the amount of the Merger Consideration, but no other information
related to the terms of the Merger Agreement that are not
otherwise publicly available unless the Company's directors,
after consultation with counsel, conclude that their fiduciary
duties require disclosure of such other information) or take such
other action as it may deem appropriate with respect to, any of
the foregoing; provided, further, that nothing in this Section
5.3 shall prevent the Company from taking any position necessary
in order to comply with the filing and disclosure requirements of
Schedule 14D-9, if applicable, and provided that prior to
entering into such discussions or negotiations or providing any
such information the Company shall enter into a customary
confidentiality agreement with such Person containing terms no
more favorable to such Person than contained in the
Confidentiality Agreement. The Company shall immediately cease
and cause to be terminated any existing solicitation, initiation,
encouragement, activity, discussion or negotiation with any
parties conducted heretofore by the Company or any of the
Company's Representatives with respect to any Acquisition
Proposal. The Company will promptly notify in writing Parent of
any receipt by the Company or any of the Company Representatives
of a request from a third party for information concerning the
Company and its business, properties and assets or the receipt of
any Acquisition Proposal, including the identity of the person or
group requesting such information or making such Acquisition
Proposal, and the material terms and conditions of any
Acquisition Proposal.
(b) As used in this agreement, "Acquisition Proposal" means any
proposal or offer, other than a proposal or offer by Parent or
any of its Affiliates or any Affiliate of the Company, for, or
that could be reasonably expected to lead to, a tender or
exchange offer, a merger, consolidation or other business
combination involving the Company or any proposal to acquire in
any manner a substantial equity interest in, or any substantial
portion of the assets of, the Company.
(c) Nothing in this Section 5.3 shall permit the Company to
terminate this Agreement except as specifically provided in
Section 7.1.
5.4 Stockholder Consent. The Company shall take all action
necessary in accordance with applicable law and its certificate
of incorporation and bylaws to prepare and cause to be
disseminated to all Company stockholders of record the proposed
Stockholder Consent as promptly as practicable (but not later
than three days) after the date hereof for the purpose of
approving the Company Proposal. Subject to the fiduciary duties
of the Board of Directors of the Company and Section 5.3, the
Company will (through its Board of Directors) recommend to its
stockholders approval of the Company Proposal and not rescind or
modify such recommendation and shall use its reasonable best
efforts to obtain as promptly as practicable approval and
adoption of the Company Proposal by its stockholders. If,
however, the Board of Directors of the Company rescinds or
modifies such recommendation pursuant to the first clause of the
immediately preceding sentence, the Company Proposal shall
nevertheless be submitted to the Company's stockholders.
5.5 Notice of Consent. Upon execution and delivery to the
Company of the Stockholder Consent by the holders of a majority
of the outstanding shares of Company Capital Stock, the Company
shall immediately provide a copy of each counterpart of the
executed Stockholder Consent to Parent and, at the written
direction of Parent shall, within 24 hours of the Company's
receipt of Parent's instructions, either (a) file the Certificate
of Merger in accordance with the DGCL assuming that all other
conditions to Closing under Sections 6.1 and 6.3 are satisfied,
or waived by the Company; or (b) cause the Notice to Stockholders
to be mailed to the holders of record of the Company Capital
Stock who did not execute the Stockholder Consent (with a record
date for such notice being the date the Stockholder Consent is
delivered to the Company). Such instruction shall be given in
Parent's sole discretion unless the Stockholder Consent shall
have been executed by holders of 95% or more of the outstanding
shares of Company Capital Stock, in which case Parent shall
instruct, assuming all other conditions set forth in Sections 6.1
or 6.2 are satisfied or waived, the Company to act in accordance
with clause (a) of the preceding sentence; provided, that, if all
such conditions set forth in Sections 6.1 or 6.2 are satisfied or
waived but the funds contemplated by the financing commitment
described in Section 4.6 are not available to Parent, then Parent
may extend the date by which it must give such instruction to the
date when such funds are available, but in no event later than
May 21, 2004. In the event Parent directs the Company to file
the Certificate of Merger under (a) above, the Parent will cause
the Notice to Stockholders to be mailed within 10 days after the
Effective Time and in accordance with the DGCL to the holders of
record of the Company Capital Stock as of the Effective Time who
did not execute the Stockholder Consent.
5.6 Additional Arrangements. Subject to the terms and conditions
herein provided, each of the Company and Parent shall take, or
cause to be taken, all action and shall do, or cause to be done,
all things necessary, appropriate or desirable under any
applicable laws and regulations or under applicable governing
agreements to consummate and make effective the transactions
contemplated by this Agreement, including using all reasonable
efforts to obtain all necessary waivers, consents and approvals
and effecting all necessary registrations and filings. Each of
the Company and Parent shall take, or cause to be taken, all
action or shall do, or cause to be done, all things necessary,
appropriate or desirable to cause the covenants and conditions
applicable to the transactions contemplated hereby to be
performed or satisfied as soon as practicable. In addition, if
any Governmental Authority shall have issued any order, decree,
ruling or injunction, or taken any other action that would have
the effect of restraining, enjoining or otherwise prohibiting or
preventing the consummation of the transactions contemplated
hereby, each of the Company and Parent shall use its reasonable
best efforts to have such order, decree, ruling or injunction or
other action declared ineffective as soon as practicable.
5.7 Public Announcements. Prior to the Closing, the Company and
Parent will consult with each other before issuing any press
release or otherwise making any public statement with respect to
the transactions contemplated by this Agreement and shall not
issue any such press release or make any such public statement
prior to obtaining the approval of the other Party, which
approval shall not be unreasonably withheld; provided, however,
that such approval shall not be required where such release or
announcement is required by applicable law; and provided further,
that either the Company or Parent may respond to inquiries by the
press or others regarding the transactions contemplated by this
Agreement, so long as such responses are consistent with such
Party's previously issued press releases.
5.8 Payment of Expenses. Each Party shall 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 shall be consummated. The
Company shall bear and pay the costs and expenses associated with
mailing the Notice to Stockholders.
5.9 Indemnification and Insurance.
(a) For six years after the Effective Time, Parent shall
indemnify, defend and hold harmless to the fullest extent
permitted by law the present and former officers and directors of
the Company or any Material Subsidiary against all losses,
claims, damages, fines, penalties and liability in respect of
acts or omissions occurring at or prior to the Effective Time
including amounts paid in settlement or compromise with the
approval of Parent (not to be unreasonably withheld or delayed);
provided, however, in the event any claim or claims are made or
asserted within such six year period, all rights to
indemnification in respect of any such claim or claims shall
continue until the disposition thereof; and provided further,
however, no officer or director of the Company will be entitled
to any indemnification from Parent with respect to any action or
matter (i) related to an action taken deliberately which, if
known by Parent, would have resulted in the representations and
warranties set forth in Article 3 of the Agreement to have been
false or misleading to the extent that the condition described in
Section 6.2(a), other than the provision thereof related to the
certificate signed by a Responsible Officer of the Company, would
not have been satisfied, as determined by final nonappealable
judgment of a court of competent jurisdiction (it being
understood that the payment of expenses incurred by a director or
officer in advance of the final disposition of the proceeding
shall be paid by Parent, but only upon receipt of an undertaking
by the director or officer to repay all amounts advanced if it
should be ultimately determined that the director of officer is
not entitled to be indemnified under Section 5.9(a)) and (ii)
asserted by any Person owning Company Capital Stock or any equity
owner in any Material Subsidiary immediately prior to the
Effective Time. Notwithstanding the foregoing, Parent and Merger
Sub agree that all rights to indemnification, exculpation and
advancement now existing in favor of any current or former
officers or directors of the Company or any Material Subsidiary,
as provided in the Company's or such Material Subsidiary's
respective charter, bylaws or partnership agreement (or similar
organizational documents) shall survive the Merger as obligations
of the Surviving Corporation or applicable Material Subsidiary
and shall continue in full force and effect in accordance with
their terms and without amendment thereof.
(b) From and after the Effective Time, Parent shall cause to be
maintained in effect for not less than six years from the
Effective Time the current policies of the directors' and
officers' liability insurance maintained by the Company;
provided, however, that: (i) Parent may substitute therefor
policies of at least the same coverage containing terms and
conditions which are no less advantageous; (ii) such substitution
shall not result in gaps or lapses in coverage with respect to
matters occurring prior to the Effective Time; and (iii) Parent
shall not be required to pay an annual premium in excess of 200%
of the last annual premium paid by the Company prior to the date
hereof and if Parent is unable to obtain the insurance required
by this Section 5.9(b) it shall obtain as much comparable
insurance as possible for an annual premium equal to such maximum
amount.
(c) Following the Merger, if the Parent or any of its successors
or assigns (i) consolidates with or merges into any other Person
and shall not be the continuing or surviving corporation or
entity of such consolidation or merger, or (ii) transfers or
conveys all or substantially all of its properties and assets to
any Person or Persons, then, and in each such case, proper
provision shall be made so that the successors and assigns of
Parent and any of their successors and assigns, assume the
obligations of the Parties, Parent and the Surviving Corporation
set forth in this Section 5.9.
(d) This Section 5.9 shall survive the consummation of the
Merger at the Effective Time, is intended to benefit the
Surviving Corporation and the current and former officers and
directors of the Company or any Material Subsidiary and their
respective heirs and representatives (each of whom may enforce
the provisions of this Section 5.9) and shall be binding on the
successors and assigns of Parent and the Surviving Corporation.
5.10 Stockholder Litigation. The Company shall give Parent the
reasonable opportunity to participate in the defense or
settlement of any stockholder litigation against the Company
and/or its directors relating to the transactions contemplated by
this Agreement, and no such settlement shall be agreed to without
Parent's written consent, which shall not be unreasonably
withheld or delayed.
5.11 Opinion of Financial Advisor. A true, correct and complete
copy of the written opinion delivered by Petrie Parkman & Co. as
set forth in Section 3.21, which opinion shall be included in the
Notice to Stockholders, has been delivered to Parent by the
Company.
5.12 Resignations of Officers and Directors of the Company. As
requested by Parent, prior to the Closing Date, the Company shall
obtain written resignations from each of its officers and
directors and from each of the officers and directors of any
corporate Subsidiaries under which such persons shall resign as
an officer and/or director of the Company or such corporate
Subsidiary, as the case may be, effective as of the Effective
Time.
5.13 Warrant Surrender Agreements. The Company shall use its
reasonable best efforts to cause each holder of a Company Warrant
to execute a Warrant Surrender Agreement prior to the Effective
Time.
5.14 Company Purchase of General Partner Interests. Prior to the
Effective Time, either (i) the Company or a Material Subsidiary
shall purchase from H. H. Wommack, III or his Affiliates all of
the general partner interests in the Partnerships owned by Mr.
Wommack or his Affiliates for a purchase price not to exceed
$150,000, in the aggregate, and upon such other terms and
conditions as are agreed to by the Company and Mr. Wommack and
subject to the prior approval of the Parent or (ii) Parent and
Mr. Wommack shall mutually agree upon the rights and obligations
of Mr. Wommack as a continuing general partner in the
Partnerships in which he currently serves as general partner,
which agreement will include Mr. Wommack having no management
role as a general partner and being indemnified by Parent for
continuing to serve in such capacity.
5.15 Spin-Off of Assets and Liabilities. Prior to the Effective
Time, the Company shall transfer the Spin-Off Assets and
Liabilities to a wholly-owned Subsidiary of the Company and
distribute the securities of such Subsidiary to the stockholders
of the Company. The Company shall not retain or be subject to
any liabilities related to the Spin-Off Assets and Liabilities
and such Subsidiary shall expressly assume, and indemnify the
Company from, such liabilities. The other terms and conditions
of the transfer of the Spin-Off Assets and Liabilities shall be
those agreed to by the Company and the Subsidiary and subject to
the prior approval of the Parent.
5.16 Release by Stockholders. Prior to the Effective Time, the
Company shall use all reasonable commercial efforts to obtain
from each beneficial owner of shares of the Company's Capital
Stock a full, final and unconditional release of each current and
former director or officer of the Company or any Subsidiary of
the Company releasing such directors and officers from any and
all liabilities and claims, known or unknown, with respect to
acts or omissions of such Persons taken or failed to have been
taken prior to the Effective Time. The form of such release
shall be in the form attached hereto as Exhibit C.
5.17 Audited Financial Statements. Prior to the Effective Time,
the Company shall deliver to Parent, for itself and on behalf of
the Partnerships, the audited financial statements of the Company
and the Partnerships for the fiscal year ended December 31, 2003
(collectively, the "Audited Financial Statements") which Audited
Financial Statements shall, on delivery, become a part of Section
3.6(a) of the Company Disclosure Schedule and shall be subject to
the representations and warranties contained in Section 3.6(b).
The Company shall use its best efforts to deliver the Audited
Financial Statements to the Parent as soon as practicable, but
shall in any event deliver them no later than May 14, 2004.
ARTICLE 6
CONDITIONS TO CLOSING
6.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each Party to effect the Merger
shall be subject to the satisfaction, at or prior to the Closing
Date, of the following conditions, any or all of which may be
waived in whole or in part by both Parent and the Company:
(a) Stockholder Approval. The Stockholder Consent shall have
been executed or the Company Proposal shall have otherwise been
duly and validly approved and adopted by a vote of a majority of
the outstanding shares of Company Common Stock and Company Class
A Common Stock, voting together as a single class.
(b) Other Approvals. All consents, approvals, permits and
authorizations required to be obtained prior to the Effective
Time from any Governmental Authority in connection with the
execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by the Company, Parent and
Merger Sub shall have been made or obtained (as the case may be),
except where the failure to obtain such consents, approvals,
permits and authorizations would not be reasonably likely to
result in a Material Adverse Effect on Parent or the Company or
to materially adversely affect the consummation of the Merger.
(c) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other order issued
by any court of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Merger shall be
in effect; provided, however, that, prior to invoking this
condition, the invoking Party shall have complied fully with its
obligations under Section 5.10 and, in addition, shall use all
reasonable best efforts to have any such decree, ruling,
injunction or order vacated.
6.2 Conditions to Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to effect the Merger are
subject to the satisfaction of the following conditions, any or
all of which may be waived in whole or in part by Parent and
Merger Sub:
(a) Representations and Warranties. The representations and
warranties of the Company set forth in this Agreement shall be
true and correct in all material respects (provided (i) that any
representation or warranty contained herein that is qualified by
a materiality standard or a Material Adverse Effect qualification
shall not be further qualified hereby, and (ii) the
representation and warranty set forth in Section 3.27 shall be
true without reference to any materiality qualifier except as
expressly provided therein) as of the Closing Date (except to the
extent such representation or warranty speaks as of an earlier
date), and Parent shall have received a certificate signed by a
Responsible Officer of the Company to such effect.
(b) Performance of Covenants and Agreements by the Company. The
Company shall have performed in all material respects all
covenants and agreements required to be performed by it under
this Agreement at or prior to the Closing Date, and Parent shall
have received a certificate signed by a Responsible Officer of
the Company to such effect.
(c) No Material Adverse Effect. Since December 31, 2003, there
shall not have occurred a Material Adverse Effect with respect to
the Company.
(d) Dissenters' Rights. The aggregate number of shares of
Company Capital Stock, which are entitled to vote on the Company
proposal and are held of record by a Person or Persons who
exercise their appraisal right under the DGCL to dissent from the
proposed Merger, shall not exceed five percent (5%) of the total
number of issued and outstanding shares of Company Capital Stock
held of record and entitled to vote on the proposed Merger.
(e) Resignations of Officers and Directors of the Company and
Certain Subsidiaries. Parent shall have received the written
resignations contemplated by Section 5.13.
(f) Sale of General Partner Interests. Either (i) H.H. Wommack,
III shall have sold to a Material Subsidiary of the Company his
general partner interests in the Partnerships in which he serves
as general partner in accordance with Section 5.14 of this
Agreement, and Parent shall have received an opinion from counsel
to the Company acceptable to Parent, or (ii) Parent and Mr.
Wommack shall mutually agree upon the rights and obligations of
Mr. Wommack as a continuing general partner in the Partnerships
in which he currently serves as general partner, which agreement
will include Mr. Wommack having no management role as a general
partner and being indemnified by Parent for continuing to serve
in such capacity.
(g) Spin-Off of Assets and Liabilities. The Company shall have
transferred the Spin-Off Assets and Liabilities from the Company
to a wholly-owned Subsidiary and distributed the securities of
such Subsidiary to the Company's stockholders in accordance with
Section 5.15 of this Agreement.
(h) Release by Stockholders. The beneficial owners of all of
the outstanding Company Capital Stock shall have validly executed
and delivered the release referred to in Section 5.16.
(i) Audited Financial Statements. Parent shall have received
the Audited Financial Statements, and the Audited Financial
Statements for the Company shall not be materially different from
the Financial Statements of the Company; provided, however,
that Parent recognizes the Company will receive a going concern
opinion from its auditors and that all of its long-term debt will
be classified as current.
6.3 Conditions to Obligations of the Company. The obligations of
the Company to effect the Merger are subject to the satisfaction
of the following conditions, any or all of which may be waived in
whole or in part by the Company:
(a) Representations and Warranties. The representations and
warranties of Parent and Merger Sub set forth in this Agreement
shall be true and correct in all material respects (provided that
any representation or warranty contained herein that is qualified
by a materiality standard or a Material Adverse Effect
qualification shall not be further qualified hereby) as of the
Closing Date (except to the extent such representation or
warranty speaks as of an earlier date), and the Company shall
have received a certificate signed by a Responsible Officer of
Parent to such effect.
(b) Performance of Covenants and Agreements by Parent and Merger
Sub. Parent and Merger Sub shall have performed in all material
respects all covenants and agreements required to be performed by
them under this Agreement at or prior to the Closing Date, and
the Company shall have received a certificate signed by a
Responsible Officer of Parent to such effect.
ARTICLE 7
TERMINATION
7.1 Termination Rights. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time,
whether before or after approval of the Company Proposal by the
stockholders of the Company:
(a) By mutual written consent of Parent and the Company;
(b) By either the Company or Parent if: (i) the Merger has not
been consummated by May 21, 2004 (provided, however, that the
right to terminate this Agreement pursuant to this clause (i)
shall not be available to any Party whose breach of any
representation or warranty or failure to perform any covenant or
agreement under this Agreement has been the cause of or resulted
in the failure of the Merger to occur on or before such date); or
(ii) any Governmental Authority shall have issued an order,
decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Merger and
such order, decree, ruling or other action shall have become
final and nonappealable (provided, however, that the right to
terminate this Agreement pursuant to this clause (ii) shall not
be available to any Party until such Party has used all
reasonable best efforts to remove such injunction, order or
decree).
(c) By Parent if: (i) there has been a material breach of the
representations and warranties made by the Company in Article 3
(provided, however, that any representation or warranty contained
therein that is qualified by a materiality standard or a Material
Adverse Effect qualification shall not be further qualified
hereby, and provided, further, that Parent shall not be entitled
to terminate this Agreement pursuant to this clause (i) unless
Parent has given the Company notice of such breach and the
Company has failed to cure such breach within 10 days following
such notice, but in any event not later than May 21, 2004), and
the condition described in Section 6.2(a), other than the
provision thereof relating to the certificate signed by a
Responsible Officer of the Company, would not be satisfied if the
Closing were to occur on the day on which Parent gives the
Company notice of such termination; (ii) the Company has failed
to comply in any material respect with any of its covenants or
agreements contained in this Agreement and such failure has not
been, or cannot be, cured within 10 days after notice and demand
for cure thereof, but in any event not later than May 21, 2004;
or (iii) the Company Proposal shall have not been approved by the
execution of the Stockholder Consent or requisite vote at a duly
called meeting within 20 days of the date of this Agreement.
(d) By the Company if: (i) there has been a material breach of
the representations and warranties made by Parent and Merger Sub
in Article 4 (provided, however, that any representation or
warranty contained therein that is qualified by a materiality
standard or a Material Adverse Effect qualification shall not be
further qualified hereby, and provided, further, that the Company
shall not be entitled to terminate this Agreement pursuant to
this clause (i) unless the Company has given Parent notice of
such breach and Parent has failed to cure such breach within 10
days following such notice, but in any event not later than
May 21, 2004), and the condition described in Section 6.3(a),
other than the provision thereof relating to the certificate
signed by a Responsible Officer of Parent, would not be satisfied
if the Closing were to occur on the day on which the Company
gives Parent notice of such termination; (ii) Parent or Merger
Sub has failed to comply in any material respect with any of its
respective covenants or agreements contained in this Agreement,
and, in either such case, such failure has not been, or cannot
be, cured within 10 days after notice and demand for cure
thereof, but in any event not later than May 21, 2004; or (iii)
the Company Proposal shall not have been approved by the
execution of the Stockholder Consent or by requisite vote taken
at a duly called meeting within 20 days of the date of this
Agreement; provided, however, that the Company shall not be
entitled to terminate this Agreement pursuant to this clause
(iii) if the Company shall not have complied with its obligations
set forth in Section 5.4.
7.2 Effect of Termination. If this Agreement is terminated by
either the Company or Parent pursuant to the provisions of
Section 7.1, this Agreement shall forthwith become void except
for, and there shall be no further obligation on the part of any
party hereto or its respective Affiliates, directors, officers or
stockholders except that, the provisions of Sections 5.2 (but
only to the extent of the confidentiality and indemnification
provisions contained therein), 5.8, 7.3, Article 8 and the
Confidentiality Agreement shall survive any such termination and
shall continue pursuant to their terms; provided, however, that
subject to Section 7.4, a termination of this Agreement shall not
relieve any Party hereto from any liability for damages incurred
as a result of a breach by such Party of its representations,
warranties, covenants, agreements or other obligations hereunder
occurring prior to such termination.
7.3 Termination Fee Payable by the Company. If this Agreement is
terminated pursuant to clause (iii) of Section 7.1(c) or clause
(iii) of Section 7.1(d) and the Board of Directors shall have
rescinded or modified its recommendation to the Company
stockholders to approve the Company Proposal, the Company shall
promptly, but in no event later than one business day after
termination of this Agreement, pay to Parent an amount equal to
$5,000,000 in same day funds and upon making such payment the
Company shall be fully released and discharged from any liability
or obligation resulting from or under this Agreement.
7.4 Termination Fee Payable by Parent. If following execution
and delivery of the Stockholder Consent, or other valid approval
of the Company Proposal pursuant to Section 6.1(a), and in each
case each condition to Parent's and Merger Sub's obligations set
forth in Section 6.2 is satisfied, Parent fails to provide to the
Exchange Agent all of the cash comprising the Merger
Consideration as contemplated by Section 2.5(a) on or before
May 21, 2004 solely because the funds contemplated by the
financing commitment referred to in Section 4.6 are not available
to Parent (except if such nonavailability is due to the
conditions set forth in such commitment relating to the
assumption by Bank One, N.A. of the Company's obligations under
the Company's Hedging Transactions on terms acceptable to Parent)
and this Agreement is terminated by the Company pursuant to
Section 7.1(b)(i), Parent shall promptly, but in no event later
than one day after termination of this Agreement, pay to the
Company an amount equal to $5,000,000 in same day funds and upon
making such payment, notwithstanding Sections 7.2 and 8.13,
Parent shall be fully released and discharged from any liability
or obligation resulting from or under this Agreement.
ARTICLE 8
MISCELLANEOUS
8.1 Nonsurvival of Representations and Warranties. None of the
representations or warranties contained in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive
the consummation of the Merger.
8.2 Amendment. This Agreement may be amended by the Parties at
any time before or after approval of the Company Proposal by the
stockholders of the Company; provided, however, that, after any
such approval, no amendment shall be made that by law requires
further approval by such stockholders without such further
approval. This Agreement may not be amended except by a written
instrument signed by an authorized representative of each of the
Parties.
8.3 Notices. Any notice or other communication required or
permitted hereunder shall be in writing and either delivered
personally (effective upon delivery), by facsimile transmission
(effective on the next day after transmission), by recognized
overnight delivery service (effective on the next day after
delivery to the service), or by registered or certified mail,
postage prepaid and return receipt requested (effective on the
fifth business day after the date of mailing), at the following
addresses or facsimile transmission numbers (or at such other
address(es) or facsimile transmission number(s) for a Party as
shall be specified by like notice):
If to Parent or Merger Sub, to:
Clayton Williams Energy, Inc.
6 Desta Drive, Suite 6100
Midland, Texas 79705
Attn: L. Paul Latham
Telephone: (432) 688-3212
Telecopier: (432) 688-3247
with copies to:
Cotton, Bledsoe, Tighe & Dawson, P.C.
500 W. Illinois, Suite 300
Midland, Texas 79701
Attn: Richard T. McMillan, Esq.
Telephone: (432) 684-5782
Telecopier: (432) 682-3672
If to the Company, to:
Southwest Royalties, Inc.
407 North Big Spring
Suite 300
Midland, Texas 79701
Attn: Bill E. Coggin
Telephone: (432) 686-9927
Telecopier: (432) 688-0191
with a copy to:
Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.
211 Commerce Street, Suite 1000
Nashville, Tennessee 37201
Attn: Tonya Mitchem Grindon, Esq.
Telephone: (615) 726-5607
Telecopier: (615) 744-5607
and:
Akin Gump Strauss Hauer & Feld LLP
1111 Louisiana, Suite 4400
Houston, Texas 77002
Attn: James L. Rice III, Esq.
Telephone: (713) 220-8116
Telecopier: (713) 236-0822
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more
counterparts have been signed by each of the Parties and
delivered to the other Parties, it being understood that all
Parties need not sign the same counterpart.
8.5 Severability. Any term or provision of this Agreement that
is invalid or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the
remaining terms and provisions of this Agreement or affecting the
validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, such provision
shall be interpreted to be only so broad as is enforceable.
8.6 Entire Agreement; No Third Party Beneficiaries. This
Agreement (together with the Confidentiality Agreement, each
exhibit hereto, and the Company Disclosure Schedule) (a)
constitutes the entire agreement and supersedes all other prior
agreements and understandings, both written and oral, among the
Parties with respect to the subject matter hereof and thereof;
and (b) except as provided in ARTICLE 2 and Section 5.9, is
solely for the benefit of the Parties and their respective
successors, legal representatives and assigns and does not confer
on any other Person any rights or remedies hereunder.
8.7 Applicable Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the
laws of the State of Delaware regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws
thereof.
8.8 No Remedy in Certain Circumstances. Each Party agrees that,
should any court or other competent authority hold any provision
of this Agreement or part hereof to be null, void or
unenforceable, or order any Party to take any action inconsistent
herewith or not to take an action consistent herewith or required
hereby, the validity, legality and enforceability of the
remaining provisions and obligations contained or set forth
herein shall not in any way be affected or impaired thereby,
unless the foregoing inconsistent action or the failure to take
any action constitutes a material breach of this Agreement or
makes this Agreement impossible to perform, in which case this
Agreement shall terminate pursuant to Article 7.
8.9 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of
the Parties (whether by operation of law or otherwise) without
the prior written consent of the other Parties. Subject to the
preceding sentence, this Agreement will be binding upon, inure to
the benefit of and be enforceable by the Parties and their
respective successors and assigns.
8.10 Waivers. At any time prior to the Effective Time, the
Parties may, to the extent legally allowed (a) extend the time
for the performance of any of the obligations or other acts of
the other Parties, (b) waive any inaccuracies in the
representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive performance of
any of the covenants or agreements, or satisfaction of any of the
conditions, contained herein. Any agreement on the part of a
Party to any such extension or waiver shall be valid only if set
forth in a written instrument signed by an authorized
representative of such Party. Except as provided in this
Agreement, no action taken pursuant to this Agreement, including
any investigation by or on behalf of any Party, shall be deemed
to constitute a waiver by the Party taking such action of
compliance with any representations, warranties, covenants or
agreements contained in this Agreement. The waiver by any Party
of a breach of any provision hereof shall not operate or be
construed as a waiver of any prior or subsequent breach of the
same or any other provisions hereof.
8.11 Confidentiality Agreement. The Confidentiality Agreement
shall remain in full force and effect following the execution of
this Agreement; provided, however, that any standstill provisions
contained therein are hereby waived to the extent necessary for
the Parties to consummate the Merger in accordance with the terms
of this Agreement.
8.12 Incorporation. Exhibits and Schedules referred to herein are
attached hereto and by this reference incorporated herein for all
purposes.
8.13 Specific Performance. The parties recognize that in the
event any party should refuse to perform under the provisions of
this Agreement, monetary damages alone will not be adequate.
Except as provided in Sections 7.3 and 7.4, the non-breaching
party(ies) shall therefore be entitled, in addition to any other
remedies which may be available, including money damages, to
obtain specific performance of the terms of this Agreement. In
the event of any action to enforce this Agreement specifically,
each party hereby waives the defense that there is an adequate
remedy at law.
IN WITNESS WHEREOF, the Parties have caused this Agreement
to be executed by their duly authorized representatives, on the
date first written above.
CLAYTON WILLIAMS ENERGY, INC.
By:
Name:
Title:
CWEI-SWR, INC.
By:
Name:
Title:
SOUTHWEST ROYALTIES, INC.
By:
H.H. Wommack, III
President and Chief Executive
Officer