EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
dated
July 27, 1999
among
ST. MARY LAND & EXPLORATION COMPANY,
ST. MARY ACQUISITION CORPORATION,
KING RANCH, INC.
and
KING RANCH ENERGY, INC.
TABLE OF CONTENTS
Page
RECITALS ......................................................................1
ARTICLE I
THE MERGER.............................................2
Section 1.1 The Merger.............................................2
Section 1.2 Closing................................................2
Section 1.3 Effective Time.........................................2
Section 1.4 Effects of the Merger..................................2
Section 1.5 Certificate of Incorporation...........................2
Section 1.6 Bylaws.................................................3
Section 1.7 Directors of Surviving Corporation.....................3
Section 1.8 Officers of Surviving Corporation......................3
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES; CASH SETTLEMENT.................................3
Section 2.1 Effect on Capital Stock................................3
(a) Conversion of KRE Common Stock....................3
(b) Capital Stock of Merger Sub.......................3
Section 2.2 Exchange of Certificates...............................4
(a) Exchange at Closing...............................4
(b) No Further Ownership Rights in KRE Capital Stock..4
(c) Further Assurances................................4
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................................4
Section 3.1 Representations and Warranties of KRI..................4
(a) Organization and Standing of KRI..................4
(b) Authority; No Conflicts...........................4
(c) Ownership and Distribution of KRE Common Stock....5
(d) Finders or Advisors...............................5
Section 3.2 Representations and Warranties of KRI and KRE..........5
(a) Organization and Standing of KRE..................6
(b) Authority; No Conflicts...........................6
(c) Capitalization of KRE and Indebtedness for
Borrowed Moneys...................................7
(d) KRE Financial Statements..........................7
(e) Present Status....................................7
i
(f) Litigation........................................7
(g) Compliance With the Law and Other Instruments.....8
(h) Title to Properties and Assets....................8
(i) Oil and Gas Leases and Wells......................8
(j) Records...........................................9
(k) Absence of Certain Changes or Events..............9
(l) Taxes.............................................9
(m) Environmental Matters.............................9
(n) KRE Benefit Plans................................10
(o) Year 2000 Matters................................14
(p) Confidentiality Agreements.......................14
(q) Vote Required....................................14
(r) Fairness Opinion. ..............................14
(s) Full Disclosure..................................14
Section 3.3 Representations and Warranties by St. Mary............14
(a) Organization and Standing of St. Mary............15
(b) Authority; No Conflicts..........................15
(c) Capitalization of St. Mary and Indebtedness
for Borrowed Moneys..............................16
(d) St. Mary SEC Reports and Financial Statements....16
(e) Present Status...................................17
(f) Litigation.......................................17
(g) Compliance With the Law and Other Instruments....17
(h) Title to Properties and Assets...................18
(i) Oil and Gas Leases and Wells.....................18
(j) Records..........................................18
(k) Absence of Certain Changes or Events.............18
(l) Taxes............................................19
(m) Environmental Matters............................19
(n) St. Mary Benefit Plans...........................20
(o) Year 2000 Matters................................22
(p) Finders and Advisors.............................23
(q) Vote Required....................................23
(r) Fairness Opinion.................................23
(s) Full Disclosure..................................23
Section 3.4 Representations and Warranties of St. Mary and
Merger Sub............................................23
(a) Organization and Standing of Merger Sub..........23
(b) Authority........................................23
(c) Non-Contravention................................24
(d) No Business Activities by Merger Sub.............24
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS................................24
Section 4.1 Covenants of KRI and KRE..............................24
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(a) Ordinary Course..................................24
(b) Dividends; Changes in Share Capital..............25
(c) Issuance of Securities...........................25
(d) Governing Documents..............................25
(e) No Acquisitions..................................25
(f) No Dispositions..................................26
(g) Investments; Indebtedness........................26
(h) Tax-Free Qualification...........................26
(i) Compensation.....................................26
(j) Accounting Methods; Income Tax Elections.........26
(k) Preservation of Property.........................26
Section 4.2 Covenants of St. Mary.................................27
(a) Ordinary Course..................................27
(b) Dividends; Changes in Share Capital..............27
(c) Issuance of Securities...........................27
(d) Governing Documents..............................28
(e) Tax-Free Qualification...........................28
Section 4.3 Advice of Changes; Governmental Filings..........28
ARTICLE V
ADDITIONAL AGREEMENTS....................................................29
Section 5.1 Preparation of Proxies and Registration Statement;
Meeting of St. Mary Shareholders......................29
Section 5.2 Confidentiality - Access to Information...............30
Section 5.3 Commercially Reasonable Efforts.......................30
Section 5.4 Public Announcements..................................31
Section 5.5 Restrictions on Transfer of St. Mary Common Stock.....31
Section 5.6 Representation on St. Mary Board of Directors.........32
Section 5.7 Expenses..............................................33
Section 5.8 King Ranch Trademark and Brand........................33
Section 5.9 KRE Employee Severance Payments.......................33
Section 5.10 368(a) Reorganization.................................33
Section 5.11 355 Distribution......................................34
Section 5.12 Continuity of Business................................34
Section 5.13 Indemnification of Officers and Directors.............34
Section 5.14 Retained Litigation...................................34
Section 5.15 Stockholder's Representative..........................34
Section 5.16 Voting Commitments....................................34
Section 5.17 No Solicitation.......................................35
Section 5.18 Seismic Data..........................................35
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ARTICLE VI
INDEMNIFICATION..........................................................36
Section 6.1 Indemnification by KRI................................36
Section 6.2 Indemnification by St. Mary...........................36
Section 6.3 Notice and Defense of Third-Party Claims..............36
Section 6.4 Limitation of Liability...............................37
Section 6.5 Exclusivity...........................................39
Section 6.6 Waiver of Consequential Damages.......................39
ARTICLE VII
CONDITIONS TO CLOSING....................................................39
Section 7.1 Conditions to Each Party's Obligation to Effect
the Merger............................................39
(a) Shareholder Approvals............................39
(b) No Injunctions, Restraints or Illegality.........39
(c) Effectiveness of the Form S-4....................39
(d) Nasdaq Listing...................................39
(e) Consummation of the Distribution.................39
Section 7.2 Additional Conditions to Obligations of St. Mary
and Merger Sub........................................40
(a) Representations and Warranties...................40
(b) Performance of Obligations of KRI and KRE........40
(c) Settlement for KRI-KRE Intercompany Balances.....40
(d) Certificate of Officers..........................40
(e) Opinion of Financial Advisor.....................40
(f) Opinion of Counsel..............................40
(g) Non-Exercise of Appraisal Rights.................40
(h) Eugene Island Block 341..........................41
(i) Affiliate Restrictions...........................41
Section 7.3 Additional Conditions to Obligations of KRE and the
Shareholders of KRE...................................41
(a) Representations and Warranties...................41
(b) Performance of Obligations of St. Mary and Merger
Sub..............................................41
(c) Settlement of KRI-KRE Intercompany Balances......42
(d) Certificate of Officers..........................42
(e) Opinion of Financial Advisor.....................42
(f) Opinion of Counsel...............................42
(g) Tax Certificate..................................42
(h) Tax Opinion......................................42
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ARTICLE VIII
TERMINATION AND AMENDMENT................................................42
Section 8.1 Termination...........................................42
Section 8.2 Effect of Termination.................................44
Section 8.3 Amendment.............................................45
Section 8.4 Extension; Waiver.....................................45
ARTICLE IX
ARBITRATION..............................................................46
Section 9.1 Mediation.............................................46
Section 9.2 Arbitration...........................................46
Section 9.3 Costs; Enforcement....................................47
ARTICLE X
MISCELLANEOUS............................................................48
Section 10.1 Nature of Representations and Warranties; Survival....48
Section 10.2 Counterparts and Facsimile Signatures.................48
Section 10.3 Assignment............................................48
Section 10.4 Representative of KRH, KRM and KRE....................48
Section 10.5 Entire Agreement......................................48
Section 10.6 Governing Law.........................................48
Section 10.7 Severability..........................................49
Section 10.8 Notices...............................................49
Section 10.9 Attorney Fees.........................................50
Section 10.10 Certain Definitions...................................50
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SCHEDULES/EXHIBITS
3.1 KRI Disclosure Schedule
3.1(b)(iii) Consents
3.2 KRE Disclosure Schedule
3.2(b)(ii) No Conflicts
3.2(b)(iii) Consents
3.2(e) Present Status
3.2(f) Litigation
3.2(h) Title to Properties and Assets
3.2(k) Absence of Certain Changes or Events
3.2(l) Taxes
3.2(m) Environmental Matters
3.2(n) KRE Benefit Plans
3.2(n)(vii) Severance or Other Compensation
3.2(o) Year 2000 Matters
3.3 St. Mary Disclosure Schedule
3.3(a) St. Mary Subsidiaries
3.3(c) Additional Options
3.3(f) Litigation
3.3(h) Title to Properties and Assets
3.3(n) St. Mary Benefit Plans
4.1(a)(ii) KRE Capital Expenditures Over $500,000
4.2(a)(ii) St. Mary Capital Expenditures Over $1,000,000
5.5(b)(ii) Thomas E. Congdon Letter Regarding Congdon Group
5.9 KRE Employee Severance Payments
7.3(g) Form of Tax Certificate
vi
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into
this 27th day of July, 1999 among St. Mary Land & Exploration Company, a
Delaware corporation ("St. Mary"), St. Mary Acquisition Corporation, a Colorado
corporation and newly formed first-tier wholly owned subsidiary of St. Mary
("Merger Sub"), King Ranch, Inc., a Texas corporation ("KRI"), and King Ranch
Energy, Inc., a Delaware corporation and a wholly owned third-tier subsidiary of
KRI ("KRE").
RECITALS
WHEREAS, the respective Boards of Directors of St. Mary, Merger Sub,
KRI and KRE have each determined that the merger of Merger Sub with and into KRE
(the "Merger") is advisable and is in their best interests and in the best
interests of their respective shareholders, and such Boards of Directors have
approved such Merger, upon the terms and subject to the conditions set forth in
this Agreement;
WHEREAS, St. Mary desires to avoid the concentration of the ownership
of the St. Mary Common Stock in a single shareholder, and therefore, to induce
St. Mary to enter into this Agreement and consummate the transactions described
herein, immediately prior to the Merger all of the shares of common stock of KRE
shall be distributed (A) by King Ranch Minerals, Inc., a Delaware corporation
("KRM"), the sole shareholder of KRE and a wholly owned subsidiary of King Ranch
Holdings, Inc., a Delaware corporation ("KRH") and a wholly owned subsidiary of
KRI, to KRH, (B) by KRH to KRI, and (C) by KRI pro rata to the shareholders of
KRI (the "Spin-Off") (all of the foregoing, together with the Spin-Off,
collectively referred to as the "Distributions");
WHEREAS, as a result of the Distributions, the shareholders of KRI will
receive all of the common stock of KRE while maintaining their current ownership
of KRI;
WHEREAS, pursuant to the terms of this Agreement, upon consummation of
the Merger, St. Mary will issue to the shareholders of KRE, with respect to
their ownership of all of the shares of common stock of KRE, shares of common
stock, par value $.01 per share, of St. Mary ("St. Mary Common Stock") as set
forth in Section 2.1 hereof;
WHEREAS, St. Mary, Merger Sub, KRI and KRE desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated hereby and also to set forth various conditions to the
transactions contemplated hereby; and
WHEREAS, for federal income tax purposes it is intended that the Merger
qualify as a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder, and St. Mary, Merger Sub, KRE and the shareholders of
KRI as the subsequent shareholders of KRE intend, by approving resolutions
authorizing this Agreement, to adopt this Agreement as a plan of reorganization
within the meaning of Section 368(a) of the Code and the regulations promulgated
thereunder.
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NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the
-----------
conditions set forth in this Agreement, and in accordance with the corporate
laws of Delaware and Colorado, Merger Sub shall be merged with and into KRE
at the Effective Time (as defined in Section 1.3). Following the Merger, the
separate corporate existence of Merger Sub shall cease and KRE shall continue
as the surviving corporation (the "Surviving Corporation") under the name
St. Mary Energy Company and shall succeed to and assume all the rights and
obligations of Merger Sub in accordance with the corporate laws of Delaware and
Colorado.
Section 1.2 Closing. The closing of the Merger (the "Closing") will
--------
take place at 2:00 p.m. Denver, Colorado time on the first business day after
the satisfaction or waiver (subject to applicable law) of the conditions set
forth in Article VII of this Agreement (the "Closing Date"), at the offices of
Ballard Spahr Andrews & Ingersoll, 1225 17th Street, Suite 2300, Denver,
Colorado, unless another date or place is agreed to in writing by the parties
hereto. The parties agree to use all reasonable efforts to close the Merger as
soon as practicable, subject to Article VII hereof.
Section 1.3 Effective Time. Immediately following the Closing, the
----------------
parties shall execute and file a certificate of merger or other appropriate
documents (in any such case, the "Certificate of Merger") in accordance with the
relevant provisions of the corporate laws of Delaware and Colorado and shall
make all other filings or recordings required under the corporate laws of
Delaware and Colorado. The Merger shall become effective at such time as the
Certificate of Merger is duly filed with the Delaware Secretary of State and the
Colorado Secretary of State, or at such subsequent time as the parties shall
agree, which subsequent time shall be specified in the Certificate of Merger
(the time the Merger becomes effective being hereinafter referred to as the
"Effective Time").
Section 1.4 Effects of the Merger. At and after the Effective Time,
----------------------
the Merger shall have the effects set forth in the corporate laws of Delaware
and Colorado. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges,
powers and franchises of KRE and Merger Sub shall be vested in the Surviving
Corporation, and, except for the indemnification obligations of KRI set forth
in Article VI hereof all debts, liabilities and duties of KRE and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
Section 1.5 Certificate of Incorporation. At the Effective Time,
-----------------------------
the certificate of incorporation of the Surviving Corporation shall be amended
in accordance with the corporate laws of Delaware such that the certificate of
incorporation of the Surviving Corporation shall consist of the provisions of
the articles of incorporation of Merger Sub, except that Article I of the
certificate
2
of incorporation of the Surviving Corporation shall be amended to read in its
entirety as follows: "The name of the corporation shall be St. Mary Energy
Company."
Section 1.6 Bylaws. The bylaws of Merger Sub as in effect at the
-------
Effective Time shall be the bylaws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
Section 1.7 Directors of Surviving Corporation. The directors of
-----------------------------------
Merger Sub immediately prior to the Effective Time shall be the directors
of the surviving Corporation, until the earlier of their resignation or
removal or until their respective successors are duly elected and qualified,
as the case may be.
Section 1.8 Officers of Surviving Corporation. The officers of Merger
-----------------------------------
Sub immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES; CASH SETTLEMENT
Section 2.1 Effect on Capital Stock. At the Effective Time, by
------------------------
virtue of the Merger:
(a) Conversion of KRE Common Stock. The total number of shares
-------------------------------
of KRE Common Stock issued and outstanding immediately prior to the Effective
Time shall be automatically converted into a total of 2,666,252 shares of
St. Mary Common Stock (the "St. Mary Share Issuance"). Certificates
representing the shares of St. Mary Common Stock to be issued hereby shall
be delivered pro rata to the shareholders of KRE at the Closing in exchange
for their surrender of all KRE Common Stock certificates. At the Effective
Time, all such shares of KRE Common Stock shall cease to be outstanding and
shall automatically be canceled and retired and shall cease to exist, and KRM,
KRH, KRI and the shareholders of KRI shall thereafter cease to have any rights
with respect to such shares of KRE Common Stock.
(b) Capital Stock of Merger Sub. Each share of common stock,
-----------------------------
par value $.01 per share, of Merger Sub issued and outstanding immediately
prior to the Effective Time shall be automatically converted into and
become one fully paid and nonassessable share of common stock, par value $.01
per share, of the Surviving Corporation.
3
Section 2.2 Exchange of Certificates.
-------------------------
(a) Exchange at Closing. At the Closing, St. Mary shall
----------------------
deliver pro rata to the shareholders of KRE certificates aggregating
the number of shares of St. Mary Common Stock set forth in Section
2.1(a) and the shareholders of KRE shall surrender to St. Mary all
certificates representing all issued and outstanding shares of KRE
Common Stock.
(b) No Further Ownership Rights in KRE Capital Stock. All
-----------------------------------------------------
shares of St. Mary Common Stock issued upon the surrender of KRE Common
Stock certificates in accordance with the terms of this Article II
shall be deemed to have been issued and paid in full satisfaction of
all rights pertaining to the shares of KRE Common Stock theretofore
represented by such certificates.
(c) Further Assurances. If at any time after the Effective
--------------------
Time, any further assignments or assurances in law or any other things
are necessary or desirable to vest or to perfect or confirm of record
in the Surviving Corporation the title to any property or rights of
either KRE or Merger Sub, or otherwise to carry out the purposes and
provisions of this Agreement, the officers and directors of the
Surviving Corporation are hereby authorized and empowered, in the name
of and on behalf of KRE and Merger Sub, to execute and deliver any and
all things necessary or proper to vest or perfect or confirm title to
such property or rights in the Surviving Corporation, and otherwise to
carry out the purposes and provisions of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of KRI. Except as set forth
--------------------------------------
in the KRI Disclosure Schedule attached to this Agreement as Schedule 3.1 (each
section of which qualifies the correspondingly numbered representation and
warranty to the extent specified therein), KRI represents and warrants to St.
Mary as follows:
(a) Organization and Standing of KRI. KRI is a corporation
----------------------------------
duly organized and validly existing and in good standing under the laws
of the State of Texas. KRI has all requisite corporate power and
authority to enter into this Agreement and to carry out and perform the
terms and provisions of this Agreement.
(b) Authority; No Conflicts.
------------------------
(i) The execution, delivery and performance of this
Agreement have been duly authorized by all requisite corporate
action on the part of KRI and KRE. This Agreement has been
executed and delivered by KRI and KRE and constitutes valid
and binding obligations of KRI and KRE enforceable in
accordance with its terms
4
(except as limited by bankruptcy, insolvency, or other laws
affecting the enforcement of creditors' rights).
(ii) The execution and delivery of this Agreement by
KRI and KRE does not, and the consummation of the Merger
pursuant to this Agreement and the other transactions
contemplated hereby will not, conflict with or result in any
violation of, or constitute a default (with or without notice
or lapse of time, or both) under, any provision of the
certificate of incorporation or bylaws of KRI or KRE.
(iii) No consent, approval, order or authorization
of, or registration, declaration or filing with, any national,
state, municipal or local government, any instrumentality,
subdivision, court, administrative agency or commission or
other authority thereof, or any quasi-governmental or private
body exercising any regulatory, taxing or other governmental
or quasi-governmental authority (a "Governmental Entity"), is
required by or is necessary with respect to KRI or KRE in
connection with their execution and delivery of this Agreement
or the consummation of the Merger and the other transactions
contemplated thereby, except for those required under or in
relation to (A) the Securities Act of 1933, as amended (the
"Securities Act"), (B) the corporate laws of Delaware and
Colorado with respect to the filing of the Certificate of
Merger with the Delaware Secretary of State and Articles of
Merger with the Colorado Secretary of State, (C) the rules and
regulations of Nasdaq, and (D) such consents, approvals,
orders, authorizations, registrations, declarations and
filings the failure of which to make or obtain would not have
a Material Adverse Effect on any party hereto. Consents,
approvals, orders, authorizations, registrations, declarations
and filings required under or in relation to any of the
foregoing clauses (A) through (D) are hereinafter referred to
as the "Required Consents."
(c) Ownership and Distribution of KRE Common Stock. KRM owns
------------------------------------------------
all of the issued and outstanding shares of KRE Common Stock free and
clear of any lien, encumbrance or adverse claim. The Boards of
Directors of KRM, KRH and KRI have duly authorized the Distributions.
(d) Finders or Advisors. Except for Nesbitt Burns Securities
--------------------
Inc. ("Nesbitt Burns"), a copy of whose engagement agreement with KRI
has been provided to St. Mary, there is no investment banker, broker,
finder or other intermediary which has been retained by or is
authorized to act on behalf of KRI, KRH, KRM, KRE or the shareholders
of KRI who might be entitled to any fee or commission in connection
with the transactions contemplated by this Agreement.
Section 3.2 Representations and Warranties of KRI and KRE. Except as
-----------------------------------------------
set forth in the KRE Disclosure Schedule attached to this Agreement as Schedule
3.2 (the "KRE Disclosure Schedule") (each section of which qualifies the
correspondingly numbered representation and warranty to the extent specified
therein), KRI and KRE represent and warrant to St. Mary as follows:
5
(a) Organization and Standing of KRE. KRE and each of its
------------------------------------
Subsidiaries is a corporation duly organized and validly existing and
in good standing under the laws of its jurisdiction of incorporation or
organization, has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being
conducted and is duly qualified to do business and in good standing in
each jurisdiction in which the nature of its business or the ownership
or leasing of its properties makes such qualification necessary other
than in such jurisdictions where the failure to so qualify would not,
either individually or in the aggregate, have a Material Adverse Effect
on KRE. KRE is duly qualified to enter into this Agreement and to carry
out and perform the terms and provisions of this Agreement. Except with
respect to the KRE Subsidiaries set forth on the KRE Disclosure
Schedule, KRE has no direct or indirect interest, either by way of
stock ownership or otherwise, in any other firm, corporation,
association or business. The copies of the certificate of incorporation
and bylaws of KRE which were previously furnished to St. Mary are true,
complete and correct copies of such documents as in effect on the date
of this Agreement.
(b) Authority; No Conflicts.
------------------------
(i) The execution, delivery and performance of this
Agreement have been duly authorized by all requisite corporate
action on the part of KRE subject to the Required KRE Vote (as
defined below). This Agreement has been executed and delivered
by KRE and constitutes a valid and binding obligation of KRE
enforceable in accordance with its terms (except as limited by
bankruptcy, insolvency, or other laws affecting the
enforcement of creditors' rights).
(ii) The execution and delivery of this Agreement by
KRE does not, and the consummation of the Merger by KRE and
the other transactions contemplated hereby will not, conflict
with, or result in a violation pursuant to: (A) any provision
of the certificate of incorporation or bylaws of KRE, or (B)
any loan or credit agreement, note, mortgage, bond, indenture,
lease, benefit plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to KRE or any Subsidiary of KRE or any of their
properties or assets, except as would not have a Material
Adverse Effect on to KRE, subject to obtaining the consents,
approvals, orders, authorizations, registrations, declarations
and filings referred to in paragraph (iii) below.
(iii) No consent, approval, order or authorization
of, or registration, declaration or filing with, any
Governmental Entity is required by or with respect to KRE or
its Subsidiaries in connection with the execution and delivery
of this Agreement by KRE or the consummation of the Merger and
the other transactions contemplated thereby, except for (A)
the Required Consents, (B) such consents, approvals, orders,
authorizations, registrations and declarations by Governmental
Entities (including, without limitation, the Minerals
Management Service, the Bureau of Land Management and all
other federal and state regulatory entities having
6
jurisdiction) in connection with the transfer, sale or
conveyance of oil and gas leases or interests therein if the
same are customarily obtained by a purchaser subsequent to
such sale or conveyance, and (C) such consents, approvals,
orders, authorizations, registrations, declarations and
filings the failure of which to make or obtain would not have
a Material Adverse Effect on KRE or its Subsidiaries.
(iv) Except as set forth in the KRE Disclosure
Schedule, all material contracts of KRE shall remain in full
force and effect following, and notwithstanding the
consummation of, the Merger.
(c) Capitalization of KRE and Indebtedness for Borrowed
---------------------------------------------------------
Moneys. KRE is duly and lawfully authorized by its certificate of
-------
incorporation, to issue 1,000 shares of KRE Common Stock, of which as
of the date hereof there are issued and outstanding 1,000 shares. All
outstanding shares of KRE Common Stock have been issued to and are held
by KRM. KRE has no treasury stock and no other authorized series or
class of stock. All the outstanding shares of KRE Common Stock have
been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights. Neither KRE nor any of its
Subsidiaries is obligated to issue any additional capital stock or
voting securities as a result of any options, warrants, rights,
conversion rights, obligations upon default, subscription agreements or
other obligations of any kind. KRE is not presently liable on account
of any indebtedness for borrowed moneys, except as reflected in the KRE
Financial Statements (as hereinafter defined) or the KRE Disclosure
Schedule.
(d) KRE Financial Statements. KRE has furnished to St. Mary
---------------------------
its audited balance sheets as of December 31, 1996, 1997 and 1998, its
audited statements of income and retained earnings and cash flows for
each of the three years ended December 31, 1998, its unaudited balance
sheet as of May 31, 1999, and its unaudited statements of income and
cash flows for the five months ended May 31, 1999 (collectively, the
"KRE Financial Statements"). All of the KRE Financial Statements
present fairly, in all material respects, the financial position of KRE
as of the respective balance sheet dates and the results of its
operations and cash flows for the respective periods therein specified.
The KRE Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a
consistent basis.
(e) Present Status. Except as otherwise disclosed in the KRE
---------------
Disclosure Schedule, from May 31, 1999 to the date of this Agreement,
KRE and its Subsidiaries have not incurred any liabilities that are of
a nature that would be required to be disclosed on a consolidated
balance sheet of KRE and its Subsidiaries or the notes thereto prepared
in accordance with GAAP, other than liabilities incurred in the
ordinary course of business of KRE and which do not have a Material
Adverse Effect on KRE.
(f) Litigation. Except as disclosed in the KRE Financial
-----------
Statements or Schedule 3.2(f) hereto, there are no legal actions,
suits, arbitrations or other legal or administrative proceedings
pending or, to the Knowledge of KRI or KRE, threatened against KRE or
any
7
Subsidiary of KRE which would reasonably be expected to have a Material
Adverse Effect on KRE and its Subsidiaries. In addition, neither KRI
nor KRE is aware of any facts which to the best of its Knowledge would
reasonably be expected to result in any action, suit, arbitration or
other proceeding which would reasonably be expected to have a Material
Adverse Effect on KRE and its Subsidiaries. Neither KRE nor any of its
Subsidiaries is in default of any judgment, order or decree of any
court or, in any material respect of, any requirements of a government
agency or instrumentality, except as set forth in the KRE Financial
Statements or on the KRE Disclosure Schedule.
(g) Compliance With the Law and Other Instruments. To the best
----------------------------------------------
of KRE's and KRI's Knowledge, the business operations of KRE and its
Subsidiaries have been and are being conducted in compliance in all
material respects with all applicable laws, rules, and regulations of
all authorities. Neither KRE nor any of its Subsidiaries are in
violation of, or in default under, any term or provision of its
certificate of incorporation or its bylaws or in any material respect
of any lien, mortgage, lease, agreement, instrument, order, judgment or
decree, except those violations, defaults and restrictions which do
not, individually or in the aggregate, have a Material Adverse Effect
on KRE and its Subsidiaries, or which do not prohibit KRE from entering
into this Agreement.
(h) Title to Properties and Assets. Except as set forth on
-----------------------------------
Schedule 3.2(h) hereto, each of KRE and its Subsidiaries has good and
defensible title to the leasehold or well interests set forth in the
Ryder Scott Company reports as of January 1, 1999, dated April 9, 1999
and as of January 1, 1999 dated May 21, 1999 (the "Ryder Scott
Reports") and the Netherland Sewell and Associates, Inc. report as of
January 1, 1999, dated April 9, 1999 (the "Netherland Sewell Report"),
and as to all of its material properties and assets, including without
limitation those reflected in the KRE Financial Statements and those
used or located on property controlled by KRE or any of its
Subsidiaries in its business (except assets leased or sold in the
ordinary course of business), subject to no mortgage, pledge, lien,
charge, security interest, encumbrance or restriction except those
which (a) are disclosed in the KRE Financial Statements or the KRE
Disclosure Schedule; or (b) do not have a Material Adverse Effect on
KRE and its Subsidiaries, taken together.
(i) Oil and Gas Leases and Wells. KRE has furnished to St.
------------------------------
Mary lists of all oil and gas leases and wells in which either KRE or
its Subsidiaries own or claim any type of right or interest, whether
legal, equitable, or beneficial (the "KRE Leases and Wells Lists"), and
the KRE Leases and Wells Lists are accurate and complete in all
material respects. All leases listed on the KRE Leases and Wells Lists
are valid and in full force and effect, and all rentals, royalties,
shut-in payments, minimum royalties, and other payments due thereunder
have been timely and properly made. Except as specifically set forth on
the KRE Leases and Wells Lists, KRE and its Subsidiaries enjoy and are
in peaceful and undisturbed possession under each lease and for each
well so listed. Neither KRE nor any of its Subsidiaries has received
any notice of, and there does not exist, any default, event, occurrence
or act which, with the giving of notice or lapse of time or both, would
become a default under any such lease, and neither KRE nor any of its
Subsidiaries has violated any of the terms or conditions
8
under any such lease in any material respect. To the Knowledge of KRI
and KRE, such real property and the wells, pipelines, gathering lines
and facilities, processing facilities, flow lines, tanks, pumps,
production platforms, equipment and any and all other buildings,
fixtures, equipment and other property attached or appurtenant thereto
or situated thereon are in good operating condition and repair, in
compliance in all material respects with all applicable laws and are
adequate and suitable for the purposes for which they are presently
being used, except for such matters which in the aggregate, would not
have a Material Adverse Effect on KRE and its Subsidiaries, taken
together.
(j) Records. To the best of KRI's and KRE's Knowledge, the
--------
books of account and other records of KRE and its Subsidiaries are
complete and correct in all material respects, and there have been no
material transactions involving the business of KRE and its
Subsidiaries which properly should have been set forth in such records,
other than those set forth therein.
(k) Absence of Certain Changes or Events. Except as set forth
-------------------------------------
in Schedule 3.2(k) hereto, since May 31, 1999, (i) there has not been
any material adverse change in, or event or condition which has had a
Material Adverse Effect on, the condition (financial or otherwise),
properties, assets, liabilities or, to the best of KRI's and KRE's
Knowledge, the business of KRE and its Subsidiaries, taken together,
(other than any change or circumstance relating to the economy or
securities markets in general or to the oil and gas industry in general
and not specifically relating to KRE) and (ii) KRE has not declared or
paid any dividend or made any other distribution in respect of any of
its capital stock or repurchased or redeemed or otherwise acquired any
shares of its capital stock or obligated itself to do any of the
foregoing.
(l) Taxes. To the Knowledge of KRI and KRE, except as set
------
forth in Schedule 3.2(l) hereto, KRE and KRE's Subsidiaries have duly
filed all federal, state, county, local and foreign income, franchise,
excise, real and personal property and other tax returns and reports
(including, but not limited to, those relating to social security,
withholding, unemployment insurance and occupation (sales) and use
taxes) required to have been filed up to the date hereof. To the
Knowledge of KRI and KRE, all of the foregoing returns are true and
correct in all material respects and KRE and KRE's Subsidiaries have
paid or provided for all taxes, interest and penalties shown on such
returns or reports as being due. To the Knowledge of KRI and KRE, KRE
and KRE's Subsidiaries have no liability for any amount of taxes,
interest or penalties of any nature whatsoever, except for those taxes
which may have arisen up to the Closing Date in the ordinary course of
business and are properly accrued on the books of KRI, KRE and KRE's
Subsidiaries as of the Closing Date.
(m) Environmental Matters. Neither KRI nor KRE is aware of any
----------------------
actions, proceedings or investigations pending or, to the best of KRI's
and KRE's Knowledge, threatened before any federal, state or foreign
environmental regulatory body or before any federal, state or foreign
court alleging material noncompliance by KRE or any of its Subsidiaries
with CERCLA or any other laws or regulations regulating the discharge
of
9
materials into the environment ("Environmental Laws"). To the best of
KRI's and KRE's Knowledge: (i) there is no reasonable basis for the
institution of any material action, proceeding or investigation against
KRE or any of its Subsidiaries for violation of any Environmental Law;
(ii) neither KRE nor any of its Subsidiaries is responsible under any
Environmental Law for any release by any person at or in the vicinity
of real property of any hazardous substance (as defined by CERCLA)
caused by the spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping or disposing of any
such hazardous substance into the environment, other than routine
incidental releases associated with normal operations the remediation
of which is required under the Environmental Laws and the cost of which
will not be material to KRE; (iii) neither KRE nor any of its
Subsidiaries is responsible for any costs of any remedial action
required by virtue of any release of any hazardous substance, pollutant
or contaminant into the environment, other than routine incidental
releases associated with normal operations the remediation of which is
required under the Environmental Laws and the cost of which will not be
material to KRE; (iv) KRE and its Subsidiaries are in compliance in all
material respects with all applicable Environmental Laws; and (v) no
real property used, owned, managed or controlled by KRE or any of its
Subsidiaries contains any toxic or hazardous substance including,
without limitation, any asbestos, PCBs or petroleum products or
byproducts in any form, the presence, location or condition of which
violates any Environmental Law in any material respect.
(n) KRE Benefit Plans.
------------------
(i) Attached hereto as Schedule 3.2(n) is a list
identifying each Benefit Plan of KRE or any of its
Subsidiaries or in which they participate. For purposes of
this Agreement, the term "Benefit Plan" means, with respect to
any Person (as defined in Section 7.5), any employee benefit
plan (within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")),
written or oral employment or consulting agreement, severance
pay plan or agreement, employee relations policy (or practice,
agreement or arrangement), agreements with respect to leased
or temporary employees, vacation plan or arrangement, sick pay
plan, stock purchase plan, stock option plan, fringe benefit
plan, incentive plan, bonus plan, cafeteria or flexible
spending account plan and any deferred compensation agreement,
(or plan, program, or arrangement) covering any present or
former employee of such Person or a Subsidiary of such Person
and which is, or at any time was, sponsored or maintained by
(or to which contributions are, were, or at any time were
required to have been, made by such Person or a Subsidiary of
such Person).
(ii) With respect to each KRE Benefit Plan, there has
been delivered to St. Mary, (i) copies of each such KRE
Benefit Plan (including all trust agreements, insurance or
annuity contracts, descriptions, general notices to employees
or beneficiaries and any other material documents or
instruments relating thereto); (ii) the most recent audited
(if required or otherwise available) or unaudited financial
10
statement with respect to each such KRE Benefit Plan; (iii)
copies of the most recent determination letters with respect
to any such KRE Benefit Plan which is an employee pension
benefit plan (as such term is defined under ERISA) intended to
qualify under the Internal Revenue Code of 1986 (the "Code") ;
and (iv) copies of the most recent actuarial reports, if any,
of each such KRE Benefit Plan.
(iii) With respect to each KRE Benefit Plan:
(A) each such KRE Benefit Plan which is an
employee pension benefit plan intended to qualify
under the Code so qualifies and has received a
favorable determination letter as to its
qualification under the Code, and no event has
occurred that will or could reasonably be expected to
give rise to disqualification or loss of tax-exempt
status of any such plan or related trust;
(B) KRE has complied in all material
respects with all provisions of ERISA and no act or
omission by KRE in connection with any KRE Benefit
Plan has occurred that will or could reasonably be
expected to give rise to liability for a breach of
fiduciary responsibilities under ERISA or to any
fines or penalties under ERISA;
(C) all insurance and annuity premiums, if
any, required for all periods up to and including the
Closing have been or will be paid;
(D) no KRE Benefit Plan provides for any
post-retirement life, medical, dental or other
welfare benefits (whether or not insured) for any
current or former employee except as required under
the Code or ERISA or applicable state or local Law;
(E) all contributions required to have been
made by law or under the terms of any contract,
agreement or KRE Benefit Plan for all complete and
partial periods up to and including the Closing have
been made or will be made;
(F) the transactions contemplated by this
Agreement will not be the direct or indirect cause of
any amount paid or payable from such KRE Benefit Plan
being classified as an excess parachute payment under
the Code;
(G) there are no matters pending before the
United States Internal Revenue Service, the United
States Department of Labor or the Pension Benefit
Guaranty Corporation ("PBGC");
(H) there have been no claims or notice of
claims filed under any fiduciary liability insurance
policy covering any KRE Benefit Plan;
11
(I) each and every such KRE Benefit Plan
which is a group health plan (as such term is defined
under the Code or ERISA) complies in all material
respects, and in each and every case has complied in
all material respects, with the applicable
requirements of the Code, ERISA, the applicable
requirements of the Health Insurance Portability and
Accountability Act of 1996, and all other federal,
state or local Laws or ordinances requiring the
provision or continuance of health or medical
benefits;
(J) each and every KRE Benefit Plan which is
a cafeteria plan or flexible spending account plan
complies in all material respects, and in each and
every case has complied in all material respects,
with the applicable requirements of the Code and all
other applicable federal, state, or local Laws or
ordinances; and
(K) each and every KRE Benefit Plan which is
a dependent care assistance program complies in all
material respects, and in each and every case has
complied in all material respects, with the
applicable requirements of the Code and all other
applicable federal, state or local Laws or
ordinances.
(iv) With respect to any employee benefit plan
(within the meaning of ERISA), stock purchase plan, stock
option plan, fringe benefit plan, bonus plan or any deferred
compensation agreement, plan or program (whether or not any
such plan, program, or agreement is currently in effect):
(A) there are no actions, suits, or claims
(other than routine claims for benefits in the
ordinary course) pending or, to the best Knowledge of
KRE threatened, and to the best Knowledge of KRE
there are no facts which could give rise to any such
actions, suits, or claims (other than routine claims
for benefits in the ordinary course), which could
subject KRE to any material liability;
(B) KRE has not engaged in a prohibited
transaction, as such term is defined in the Code
which would subject KRE to any taxes, penalties or
other liabilities resulting from prohibited
transactions under the Code or under ERISA; and
(C) KRE is not subject to (1) any liability,
lien or other encumbrance under any agreement
imposing secondary liability on KRE as a seller of
the assets of a business under ERISA or the Code, (2)
contingent liability under ERISA to the PBGC or to
any plan, participant, or other person or (3) a lien
or other encumbrance under ERISA.
(v) (A) KRE is not subject to any legal, contractual,
equitable, or other obligation to continue any KRE Benefit
Plan of any nature, including, without
12
limitation any KRE Benefit Plan or any other pension, profit
sharing, welfare, or post-retirement welfare plan, or any
stock option, stock or cash award, non-qualified deferred
compensation or executive compensation plan, policy or
practice (or to continue participation in any such benefit
plan, policy or practice) on or after the Closing;
(B) KRE may, in any manner, and without the
consent of any employee, beneficiary or other person,
terminate, modify or amend any such KRE Benefit Plan
(or its participation in such KRE Benefit Plan or any
other plan, program or practice) effective as of any
date on or after the Closing; and
(C) no representations or communications
(directly or indirectly, orally, in writing or
otherwise) with respect to participation, eligibility
for benefits, vesting, benefit accrual coverage or
other material terms of any KRE Benefit Plan have
been made prior to the Closing to any employee,
beneficiary or other person other than those which
are in accordance with the terms and provisions of
each such KRE Benefit Plan as in effect immediately
prior to the Closing.
(vi) KRE has at no time participated in a
multi-employer pension plan defined under Section 3(37) of
ERISA.
(vii) With respect to each and every KRE Benefit Plan
subject to ERISA: (A) no such KRE Benefit Plan or related
trust has been terminated or partially terminated; (B) no
liability to the PBGC has been or is expected to be incurred
with respect to such KRE Benefit Plan; (C) the PBGC has not
instituted and to the best Knowledge of KRE is not expected to
institute any proceedings to terminate such KRE Benefit Plan;
(D) there has been no reportable event (within the meaning of
ERISA); (E) there exists no condition or set of circumstances
that presents a material risk of the termination of such KRE
Benefit Plan by the PBGC; (F) no accumulated funding
deficiency (as defined under ERISA and the Code), whether or
not waived, exists with respect to such KRE Benefit Plan; and
(G) the current value of all vested accrued benefits under
each such KRE Benefit Plan did not as of the last day of the
most recently ended fiscal year of each KRE Benefit Plan, and
will not as of the Closing, exceed the current value of the
assets of each such KRE Benefit Plan allocable to such vested
accrued benefits determined by KRE Benefit Plans' actuary on
an ongoing basis.
(viii) Except as set forth on Schedule 3.2(n)(viii)
hereto, no director or officer or other employee of KRE or any
of its Subsidiaries will become entitled to any retirement,
severance or similar benefit or enhanced or accelerated
benefit (including any acceleration of vesting or lapse of
repurchase rights or obligations with respect to any employee
stock option or other benefit under any stock option plan or
13
compensation plan or arrangement of KRE) solely as a result of
the transactions contemplated by this Agreement.
(o) Year 2000 Matters. Except as set forth on Schedule 3.2(o)
------------------
hereto, the computer software operated by KRE and each of its
Subsidiaries is capable of providing or is being adapted to provide
uninterrupted millennium functionality to record, store, process and
present calendar dates falling on or after January 1, 2000 in
substantially the same manner and with the same functionality as such
software records, stores, processes and presents such calendar dates
falling on or before December 31, 1999. The costs of the adaptations
referred to in the prior sentence will not be material to KRE and its
Subsidiaries. To the Knowledge of KRI and KRE, neither KRE nor any of
its Subsidiaries has relationships with third parties the failure of
whose systems to be Year 2000 compliant will be material to KRE.
(p) Confidentiality Agreements. All current employees of KRE
----------------------------
and its Subsidiaries have executed the KRE Information Resources User
Acknowledgment and have received a copy of the KRE Information
Resources Use and Protection Policy.
(q) Vote Required. The affirmative vote of the holders of the
--------------
majority of the outstanding shares of KRE Common Stock at a duly held
meeting of such holders (the "Required KRE Vote") to approve the Merger
is the only vote of the shareholders of KRE, KRH, KRM or KRI required,
other than the votes of the Boards of Directors of KRM, KRH and KRI to
approve the Merger.
(r) Fairness Opinion. KRI has received from Nesbitt Burns,
------------------
KRI's financial advisor with respect to the transactions contemplated
by this Agreement, an opinion to the effect that the consideration to
be received by the KRI shareholders in the Merger is fair to the KRI
shareholders from a financial point of view.
(s) Full Disclosure. To the best of KRI's and KRE's Knowledge,
----------------
this Agreement and any Schedules, certificates and the KRE Leases and
Wells Lists delivered by KRI and KRE in connection herewith or with the
transactions contemplated hereby, taken as a whole, neither contain any
untrue statement of a material fact nor omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading. To the best of KRI's and KRE's Knowledge, there
are no facts or circumstances relating to KRE or any Subsidiary of KRE
that will have, or would be reasonably likely to have, a Material
Adverse Effect on St. Mary following the Closing Date, other than any
facts or circumstances (A) disclosed in this Agreement or any schedule,
exhibit or other document delivered in connection herewith, or (B)
previously disclosed to St. Mary by KRI or KRE.
Section 3.3 Representations and Warranties by St. Mary. Except as set
-------------------------------------------
forth in the St. Mary Disclosure Schedule attached to this Agreement as Schedule
3.3 (the "St. Mary Disclosure Schedule") (each section of which qualifies the
correspondingly numbered representation and warranty or covenant
14
to the extent specified therein), St. Mary hereby represents and warrants to KRI
as follows:
(a) Organization and Standing of St. Mary. St. Mary and each
---------------------------------------
of its Subsidiaries is a corporation duly organized and validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization, has all requisite power and authority to
own, lease and operate its properties and to carry on its business as
now being conducted, and is duly qualified to do business and is in
good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties make such qualification
necessary other than in jurisdictions where the failure to so qualify
would not, either individually or in the aggregate, have a Material
Adverse Effect on St. Mary. Except with respect to the St. Mary
Subsidiaries set forth on the St. Mary Disclosure Schedule, St. Mary
has no direct or indirect interest, either by way of stock ownership or
otherwise, in any other firm, corporation, association, or business.
The copies of the certificate of incorporation and bylaws of St. Mary
which were previously furnished to KRI and KRE are true, complete and
correct copies of such documents as in effect on the date of this
Agreement.
(b) Authority; No Conflicts.
------------------------
(i) The execution, delivery and performance of this
Agreement have been duly authorized by all requisite corporate
action on the part of St. Mary, subject to the Required St.
Mary Vote (as defined below). This Agreement has been executed
and delivered by St. Mary and constitutes a valid and binding
obligation of St. Mary enforceable in accordance with its
terms (except as limited by bankruptcy, insolvency, or other
laws affecting the enforcement of creditors' rights).
(ii) The execution and delivery of this Agreement by
St. Mary does, and the consummation by St. Mary of the Merger
and the other transactions contemplated hereby will not,
conflict with or result in a violation pursuant to: (A) any
provision of the certificate of incorporation or bylaws of St.
Mary, (B) any loan or credit agreement, note, mortgage, bond,
indenture, lease, benefit plan or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to St. Mary or any Subsidiary of St. Mary or any of
its properties or assets, except as would not have a Material
Adverse Effect on St. Mary, subject to obtaining the consents,
approvals, orders, authorizations, registrations, declarations
and filings referred to in paragraph (iii) below.
(iii) No consent, approval, order or authorization
of, or registration, declaration or filing with, a
Governmental Entity is required by or with respect to St. Mary
or its Subsidiaries in connection with the execution and
delivery of this Agreement by St. Mary or the consummation of
the Merger and the other transactions contemplated hereby,
except for the Required Consents and such consents, approvals,
orders, authorizations, registrations, declarations and
filings the failure of which to make or obtain would not have
15
a Material Adverse Effect on St. Mary or its Subsidiaries.
(c) Capitalization of St. Mary and Indebtedness for Borrowed
---------------------------------------------------------
Moneys. St. Mary is duly and lawfully authorized by its certificate of
-------
incorporation to issue 50,000,000 shares of St. Mary Common Stock, of
which as of the date hereof there are 11,276,938 shares issued and
outstanding and 182,800 shares held by St. Mary as treasury stock. St.
Mary has no other authorized series or class of stock. All the
outstanding shares of St. Mary Common Stock have been duly authorized
and validly issued and are fully paid and nonassessable and free of
preemptive rights. All of the shares of St. Mary Common Stock to be
issued upon consummation of the Merger will be, at the time of
issuance, duly authorized and validly issued, and will be fully paid
and nonassessable and free of preemptive rights. St. Mary has a Stock
Option Plan and an Incentive Stock Option Plan (collectively, the "St.
Mary Option Plans") which provide for the issuance of up to an
aggregate of 1,650,000 shares of St. Mary Common Stock pursuant to the
exercise of options granted under the St. Mary Option Plans. As of the
date hereof, options representing in the aggregate the right to
purchase 684,322 shares of St. Mary Common Stock have been granted
under the St. Mary Option Plans and remain outstanding. St. Mary has an
Employee Stock Purchase Plan for the purchase of up to 500,000 shares
of St. Mary Common Stock, under which 24,821 shares of St. Mary Common
Stock have been purchased through the date hereof. Except with respect
to the foregoing and to this Agreement, and except as set forth on
Schedule 3.3(c), neither St. Mary nor any of its Subsidiaries is
obligated to issue any additional capital stock or voting securities as
a result of any options, warrants, rights, conversion rights,
obligations upon default, subscription agreement or other obligation of
any kind. St. Mary is not presently liable on account of any
indebtedness for borrowed moneys, except as reflected in the St.
Mary Financial Statements (as hereinafter defined).
(d) St. Mary SEC Reports and Financial Statements.
----------------------------------------------
(i) St. Mary has filed all required reports,
schedules, forms, statements and other documents required to
be filed with the SEC (collectively, including all exhibits
thereto, the "St. Mary SEC Reports"). No Subsidiary of St.
Mary is required to file any form, report or other document
with the SEC. None of the St. Mary SEC Reports, as of their
respective dates (and, if amended or superseded by filings
prior to the date of this Agreement or the Closing Date, then
on the date of such filing), contained any untrue statement of
a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were
made, not misleading. Each of the financial statements
(including the related notes) included in the St. Mary SEC
Reports presents fairly, in all material respects, the
consolidated financial position and consolidated results of
operations and cash flows of St. Mary and its Subsidiaries as
of the respective dates or for the respective periods set
forth therein, all in accordance with GAAP consistently
applied during the periods involved except as otherwise noted
therein. All of such St. Mary SEC Reports, as of their
respective
16
dates (and as of the date of any amendment to the respective
St. Mary SEC Report), complied as to form in all material
respects with the applicable requirements of the Securities
Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations promulgated
thereunder.
(ii) St. Mary has furnished to KRM and KRI its
audited balance sheets as of December 31, 1996, 1997 and 1998,
its audited statements of operations and statements of cash
flows for each of the three years ended December 31, 1998, its
unaudited balance sheet as of May 31, 1999, and its unaudited
income statement and statement of cash flows for the five
months ended May 31, 1999 and 1998 (collectively, the "St.
Mary Financial Statements"). All of the St. Mary Financial
Statements present fairly, in all material respects, the
financial position of St. Mary as of the respective balance
sheet dates, and the results of its operations and cash flows
for the respective periods therein specified. The St. Mary
Financial Statements were prepared in accordance with GAAP
(except in the case of unaudited interim financial statements,
as permitted by the rules and regulations of the SEC) applied
on a consistent basis.
(e) Present Status. Except as otherwise disclosed in the St.
---------------
Mary Disclosure Schedule, from May 31, 1999 to the date of this
Agreement, St. Mary and its Subsidiaries have not incurred any
liabilities that are of a nature that would be required to be disclosed
on a consolidated balance sheet of St. Mary and its Subsidiaries or the
notes thereto prepared in accordance with GAAP, other than liabilities
incurred in the ordinary course of business of St. Mary and which do
not have a Material Adverse Effect on St. Mary.
(f) Litigation. Except as disclosed in the St. Mary Financial
-----------
Statements, the St. Mary Disclosure Schedule or Schedule 3.3(f) hereto,
there are no legal actions, suits, arbitrations, or other legal or
administrative proceedings pending or, to the Knowledge of St. Mary,
threatened against St. Mary or any Subsidiary of St. Mary which would
reasonably be expected to have a Material Adverse Effect on St. Mary
and its Subsidiaries. In addition, St. Mary is not aware of any facts
which to the best of its Knowledge would reasonably be expected to
result in any action, suit, arbitration or other proceeding which would
reasonably be expected to have a Material Adverse Effect on St. Mary
and its Subsidiaries. Neither St. Mary nor any of its Subsidiaries is
in default of any judgment, order or decree of any court or, in any
material respect of, any requirements of a government agency or
instrumentality.
(g) Compliance With the Law and Other Instruments. To the best
----------------------------------------------
of St. Mary's Knowledge, the business operations of St. Mary have been
and are being conducted in compliance in all material respects with all
applicable laws, rules, and regulations of all authorities. St. Mary is
not in violation of, or in default under, any term or provision of its
certificate of incorporation or its bylaws or in any material respect
of any lien, mortgage, lease, agreement, instrument, order, judgment or
decree, except those violations, defaults and restrictions which do
not, individually and in the aggregate, have a Material Adverse Effect
17
on St. Mary and its Subsidiaries,or which do not prohibit St. Mary from
entering into this Agreement.
(h) Title to Properties and Assets. Except as set forth on
----------------------------------
Schedule 3.3(h) hereto, St. Mary and its Subsidiaries have good and
defensible title to all of its material properties and assets,
including without limitation those reflected in the St. Mary Financial
Statements and those used or located on property controlled by St. Mary
or any of its Subsidiaries in its business (except assets leased or
sold in the ordinary course of business), subject to no mortgage,
pledge, lien, charge, security interest, encumbrance or restriction
except those which (a) are disclosed in the St. Mary Financial
Statements; or (b) do not have a Material Adverse Effect on St. Mary
and its Subsidiaries, taken together.
(i) Oil and Gas Leases and Wells. St. Mary has furnished to
-----------------------------
KRI lists of all oil and gas leases and wells in which St. Mary owns or
claims any type of right or interest whether legal, equitable, or
beneficial (the "St. Mary Leases and Wells Lists") and the St. Mary
Leases and Wells Lists are accurate and complete in all material
respects. All leases listed on the St. Mary Leases and Wells Lists are
valid and in full force and effect, and all rentals, royalties, shut-in
payments, minimum royalties, and other payments due thereunder have
been timely and properly made. Except as specifically set forth on the
St. Mary Leases and Wells Lists, St. Mary enjoys and is in peaceful and
undisturbed possession under each lease and for each well so listed.
St. Mary has not received any notice of, and there does not exist, any
default, event, occurrence or act which, with the giving of notice or
lapse of time or both, would become a default under any such lease, and
St. Mary has not violated any of the terms or conditions under any such
lease in any material respect. To the Knowledge of St. Mary, such real
property and the wells, pipelines, gathering lines and facilities,
processing facilities, flow lines, tanks, pumps, production platforms,
equipment and any and all other buildings, fixtures, equipment and
other property attached or appurtenant or situated thereon are in good
operating condition and repair, in compliance in all material respects
with all applicable laws and are adequate and suitable for the purposes
for which they are presently being used, except for such matters which
in the aggregate, would not have a Material Adverse Effect on St. Mary.
(j) Records. To the best of St. Mary's Knowledge, the books
--------
and other records of St. Mary and its Subsidiaries are complete and
correct in all material respects, and there have been no material
transactions involving the business of St. Mary and its Subsidiaries
which properly should have been set forth in such records, other than
those set forth therein.
(k) Absence of Certain Changes or Events. Since May 31, 1999,
-------------------------------------
(i) there has not been any material adverse change in, or event or
condition which has had a Material Adverse Effect on, the condition
(financial or otherwise), properties, assets, liabilities or, to the
best of St. Mary's Knowledge, the business of St. Mary and its
Subsidiaries, taken together (other than any change or circumstance
relating to the economy or securities markets in general or to the oil
and gas industry in general and not specifically relating to St. Mary),
and (ii) except for its $0.05 per share St. Mary Common Stock dividend
per quarter, St. Mary has not
18
declared or paid any dividend or made any other distribution in respect
of any of its capital stock, and except for the purchase of 182,800
shares of St. Mary Common Stock under its open market share repurchase
program, St. Mary has not repurchased or redeemed or otherwise acquired
any shares of its capital stock or obligated itself to do any of the
foregoing.
(l) Taxes. To the Knowledge of St. Mary, St. Mary and its
------
Subsidiaries have duly filed all federal, state, county, local and
foreign income, franchise, excise, real and personal property and other
tax returns and reports (including, but not limited to, those relating
to social security, withholding, unemployment insurance, and occupation
(sales) and use taxes) required to have been filed by St. Mary and its
Subsidiaries up to the date hereof. To the Knowledge of St. Mary, all
of the foregoing returns are true and correct in all material respects
and St. Mary and its Subsidiaries have paid or provided for all taxes,
interest and penalties shown on such returns or reports as being due.
To the Knowledge of St. Mary, St. Mary and its Subsidiaries have no
liability for any amount of taxes, interest or penalties of any nature
whatsoever, except for those taxes which may have arisen up to the
Closing Date in the ordinary course of business and are properly
accrued on the books of St. Mary and its Subsidiaries as of the Closing
Date.
(m) Environmental Matters. St. Mary is not aware of any
-----------------------
actions, proceedings or investigations pending or, to the best of St.
Mary's Knowledge, threatened before any federal, state or foreign
environmental regulatory body or before any federal, state or foreign
court alleging material noncompliance by St. Mary or any of its
Subsidiaries with any Environmental Laws. To the best of St. Mary's
Knowledge: (i) there is no reasonable basis for the institution of any
material action, proceeding or investigation against St. Mary or any of
its Subsidiaries for violation of any Environmental Law; (ii) neither
St. Mary nor any of its Subsidiaries is responsible under any
Environmental Law for any release by any person at or in the vicinity
of real property of any hazardous substance (as defined by CERCLA)
caused by the spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping or disposing of any
such hazardous substance into the environment, other than routine
incidental releases associated with normal operations the remediation
of which is required under the Environmental Laws and the cost of which
will not be material to St. Mary; (iii) neither St. Mary nor any of its
Subsidiaries is responsible for any costs of any remedial action
required by virtue of any release of any hazardous substance, pollutant
or contaminant into the environment, other than routine incidental
releases associated with normal operations the remediation of which is
required under the Environmental Laws and the cost of which will not be
material to St. Mary; (iv) St. Mary and its Subsidiaries are in
compliance in all material respects with all applicable Environmental
Laws; and (v) no real property used, owned, managed or controlled by
St. Mary or any of its Subsidiaries contains any toxic or hazardous
substance including, without limitation, any asbestos, PCBs or
petroleum products or byproducts in any form, the presence, location or
condition of which violates any Environmental Law in any material
respect.
19
(n) St. Mary Benefit Plans.
-------------------------
(i) Attached hereto as Schedule 3.3(n) is a list
identifying each Benefit Plan of St. Mary or any of its
Subsidiaries.
(ii) With respect to each St. Mary Benefit Plan,
there has been delivered to KRM and KRI, (i) copies of each
such St. Mary Benefit Plan (including all trust agreements,
insurance or annuity contracts, descriptions, general notices
to employees or beneficiaries and any other material documents
or instruments relating thereto); (ii) the most recent audited
(if required or otherwise available) or unaudited financial
statement with respect to each such St. Mary Benefit Plan;
(iii) copies of the most recent determination letters with
respect to any such St. Mary Benefit Plan which is an employee
pension benefit plan (as such term is defined under ERISA)
intended to qualify under the Code; and (iv) copies of the
most recent actuarial reports, if any, of each such St. Mary
Benefit Plan.
(iii) With respect to each St. Mary Benefit Plan:
(A) each such St. Mary Benefit Plan which is
an employee pension benefit plan intended to qualify
under the Code so qualifies and has received a
favorable determination letter as to its
qualification under the Code, and no event has
occurred that will or could reasonably be expected to
give rise to disqualification or loss of tax-exempt
status of any such plan or related trust;
(B) St. Mary has complied in all material
respects with all provisions of ERISA and no act or
omission by St. Mary in connection with any St. Mary
Benefit Plan has occurred that will or could
reasonably be expected to give rise to liability for
a breach of fiduciary responsibilities under ERISA or
to any fines or penalties under ERISA;
(C) all insurance and annuity premiums, if
any, required for all periods up to and including the
Closing have been or will be paid;
(D) no St. Mary Benefit Plan provides for
any post-retirement life, dental or other welfare
benefits (whether or not insured) for any current or
former employee except as required under the Code or
ERISA or applicable state or local Law;
(E) all contributions required to have been
made by law or under the terms of any contract,
agreement or St. Mary Benefit Plan for all complete
and partial periods up to and including the Closing
have been made or will be made;
20
(F) the transactions contemplated by this
Agreement will not be the direct or indirect cause of
any amount paid or payable from such St. Mary Benefit
Plan being classified as an excess parachute payment
under the Code;
(G) there are no matters pending before the
United States Internal Revenue Service, the United
States Department of Labor or the PBGC;
(H) there have been no claims or notice of
claims filed under any fiduciary liability insurance
policy covering any St. Mary Benefit Plan;
(I) each and every such St. Mary Benefit
Plan which is a group health plan (as such term is
defined under the Code or ERISA), complies in all
material respects, and in each and every case has
complied in all material respects, with the
applicable requirements of the Code, ERISA, the
applicable requirements of the Health Insurance
Portability and Accountability Act of 1996, and all
other federal, state or local Laws or ordinances
requiring the provision or continuance of health or
medical benefits;
(J) each and every St. Mary Benefit Plan
which is a cafeteria plan or flexible spending
account plan complies in all material respects, and
in each and every case has complied in all material
respects, with the applicable requirements of the
Code and all other applicable federal, state, or
local Laws or ordinances; and
(K) each and every St. Mary Benefit Plan
which is a dependent care assistance program complies
in all material respects, and in each and every case
has complied in all material respects, with the
applicable requirements of the Code and all other
applicable federal, state or local Laws or
ordinances.
(iv) With respect to any employee benefit plan
(within the meaning of ERISA), stock purchase plan, stock
option plan, fringe benefit plan, bonus plan or any deferred
compensation agreement, plan or program (whether or not any
such plan, program, or agreement is currently in effect):
(A) there are no actions, suits, or claims
(other than routine claims for benefits in the
ordinary course) pending or, to the best Knowledge of
St. Mary threatened, and to the best Knowledge of St.
Mary there are no facts which could give rise to any
such actions, suits, or claims (other than routine
claims for benefits in the ordinary course), which
could subject St. Mary to any material liability;
(B) St. Mary has not engaged in a prohibited
transaction, as such term is defined in the Code
which would subject St. Mary to any taxes,
21
penalties or other liabilities resulting from
prohibited transactions under the Code or under
ERISA; and
(C) St. Mary is not subject to (1) any
liability, lien or other encumbrance under any
agreement imposing secondary liability on St. Mary as
a seller of the assets of a business under ERISA or
the Code, (2) contingent liability under ERISA to the
PBGC or to any plan, participant, or other person or
(3) a lien or other encumbrance under ERISA.
(v) St. Mary has at no time participated in a
multi-employer pension plan defined under Section 3(37) of
ERISA.
(vi) With respect to each and every St. Mary Benefit
Plan subject to ERISA: (A) no such St. Mary Benefit Plan or
related trust has been terminated or partially terminated; (B)
no liability to the PBGC has been or is expected to be
incurred with respect to such St. Mary Benefit Plan; (C) the
PBGC has not instituted and to the best Knowledge of St. Mary
is not expected to institute any proceedings to terminate such
St. Mary Benefit Plan; (D) there has been no reportable event
(within the meaning of ERISA); (E) there exists no condition
or set of circumstances that presents a material risk of the
termination of such St. Mary Benefit Plan by the PBGC; (F) no
accumulated funding deficiency (as defined under ERISA and the
Code), whether or not waived, exists with respect to such St.
Mary Benefit Plan; and (G) the current value of all vested
accrued benefits under each such St. Mary Benefit Plan did not
as of the last day of the most recently ended fiscal year of
each St. Mary Benefit Plan, and will not as of the Closing,
exceed the current value of the assets of each such St. Mary
Benefit Plan allocable to such vested accrued benefits
determined by St. Mary Benefit Plans' actuary on an ongoing
basis.
(vii) No director or officer or other employee of St.
Mary or any of its Subsidiaries will become entitled to any
retirement, severance or similar benefit or enhanced or
accelerated benefit (including any acceleration of vesting or
lapse of repurchase rights or obligations with respect to any
employee stock option or other benefit under any stock option
plan or compensation plan or arrangement of St. Mary) solely
as a result of the transactions contemplated by this
Agreement.
(o) Year 2000 Matters. The computer software operated by St.
------------------
Mary is capable of providing or is being adapted to provide
uninterrupted millennium functionality to record, store, process and
present calendar dates falling on or after January 1, 2000 in
substantially the same manner and with the same functionality as such
software records, stores, processes and presents such calendar dates
falling on or before December 31, 1999. The costs of the adaptations
referred to in the prior sentence will not be material to St. Mary and
its Subsidiaries. To the Knowledge of St. Mary, neither St. Mary nor
any of its Subsidiaries has relationships with third parties the
failure of whose systems to be Year 2000 compliant will be material to
St. Mary.
22
(p) Finders and Advisors. Except for Deutsche Bank Securities
---------------------
Inc. a copy of whose engagement agreement with St. Mary has been
provided to KRM and KRI, there is no investment banker, broker, finder
or other intermediary which has been retained by or is authorized to
act on behalf of St. Mary or any of its Subsidiaries who might be
entitled to any fee or commission in connection with the transactions
contemplated by this Agreement.
(q) Vote Required. The affirmative vote of the holders of
---------------
shares of St. Mary Common Stock representing a majority of the total
shares represented at a duly held meeting of the holders of outstanding
shares of St. Mary Common Stock (the "Required St. Mary Vote") to
approve the St. Mary Share Issuance pursuant to the terms of this
Agreement is the only vote of the holders of St. Mary capital stock
necessary for the Merger.
(r) Fairness Opinion. St. Mary has received from Deutsche Bank
-----------------
Securities Inc., St. Mary's financial advisor with respect to the
transactions contemplated by this Agreement, an opinion to the effect
that the consideration to be paid by St. Mary in the Merger is fair to
St. Mary from a financial point of view.
(s) Full Disclosure. To the best of St. Mary's Knowledge, this
----------------
Agreement, and any Schedules, certificates and other St. Mary Leases
and Wells Lists delivered by St. Mary in connection herewith or with
the transactions contemplated hereby, taken as a whole, neither
contain any untrue statement of a material fact nor omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which
they were made, not misleading. To the best of St. Mary's Knowledge,
there are no facts or circumstances relating to St. Mary or any
Subsidiary of St. Mary that will have, or would be reasonably likely
to have, a Material Adverse Effect on St. Mary following the Closing
Date, other than any facts or circumstances (A) disclosed in this
Agreement or any schedule, exhibit or other document delivered in
connection herewith, or (B) previously disclosed to KRI or KRE by St.
Mary.
Section 3.4 Representations and Warranties of St. Mary and Merger Sub.
----------------------------------------------------------
St. Mary and Merger Sub represent and warrant to KRI and KRE as follows:
(a) Organization and Standing of Merger Sub. Merger Sub is a
-----------------------------------------
corporation duly incorporated, validly existing and in good standing
under the laws of the State of Colorado. Merger Sub is a first-tier
wholly owned subsidiary of St. Mary.
(b) Authority. Merger Sub has all requisite corporate power
----------
and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery and
performance by Merger Sub of this Agreement and the consummation by
Merger Sub of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Merger Sub.
This Agreement has been duly executed and delivered by Merger Sub and
constitutes a valid and binding agreement of Merger Sub, enforceable
against it in accordance with its terms, except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to or affecting creditors generally.
23
(c) Non-Contravention. The execution, delivery and performance
------------------
by Merger Sub of this Agreement and the consummation by Merger Sub of
transactions contemplated hereby do not and will not contravene or
conflict with the certificate of incorporation or bylaws of Merger Sub.
(d) No Business Activities by Merger Sub. Merger Sub has not
--------------------------------------
conducted any activities other than in connection with the organization
of Merger Sub, the negotiation and execution of this Agreement and the
consummation of the transactions contemplated hereby.
Merger Sub has no subsidiaries.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Covenants of KRI and KRE. During the period from the date
-------------------------
of this Agreement and continuing until the Effective Time, KRI and KRE agree
that (except as expressly contemplated or permitted by this Agreement or as
otherwise indicated on the KRE Disclosure Schedule or as required by a
Governmental Entity of competent jurisdiction or to the extent that St.
Mary shall otherwise consent in writing):
(a) Ordinary Course.
----------------
(i) KRE and its Subsidiaries shall carry on their
respective businesses in the usual, regular and ordinary
course in all material respects, in substantially the same
manner as heretofore conducted, and shall use all reasonable
efforts to preserve intact their present lines of business,
maintain their rights and franchises and preserve their
relationships with customers, suppliers and other having
business dealings with them to the end that their ongoing
businesses shall not be impaired in any material respect at
the Effective Time; provided, however, that no action by KRE
or its Subsidiaries with respect to matters specifically
addressed by any other provision of this Section 4.1 shall be
deemed a breach of this Section 4.1(a)(i) unless such action
would constitute a breach of one or more of such other
provisions.
(ii) KRI or KRE shall promptly give St. Mary notice
of what it reasonably believes to be any material occurrence
in the business of KRE or any of its Subsidiaries. KRE shall
not, and shall not permit any of its Subsidiaries to, incur or
commit to any capital or other expenditure, whether or not in
the ordinary course of business, in excess (as to KRE and its
Subsidiaries) of $500,000 without the prior written consent of
St. Mary, except for capital or other expenditures set forth
on Schedule 4.1(a)(ii) attached to this Agreement.
(iii) Notwithstanding the provisions of Section
4.1(a)(i), the parties agree and acknowledge that from the
date hereof through the Closing Date, KRE will substantially
reduce (and possibly eliminate) its drilling, exploration,
development
24
and related activities, provided that such reduction (or
elimination) does not constitute, or result in, a material
breach by KRE of a written commitment, contract or agreement
in effect as of the date hereof or otherwise does not result
in a penalty which would have a Material Adverse Effect on
KRE. The parties further agree and acknowledge that any such
reduction (or elimination) will not constitute a violation of
the obligations of KRI and KRE hereunder. In the event that
KRE elects not to pursue a material drilling, exploration,
development or related opportunity presented to KRE by a third
party from the date hereof through the Closing Date, KRE shall
give St. Mary written notice thereof, and St. Mary shall have
the right to pursue such opportunity for its own benefit and
at its own cost and expense. KRE will use its commercially
reasonable efforts to assist St. Mary in exercising the right
to pursue any such opportunity.
(b) Dividends; Changes in Share Capital. KRE shall not (i)
--------------------------------------
declare or pay any dividends on or make other distributions in respect
of any of its capital stock, (ii) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for,
shares of its capital stock, except for any such transaction by a
wholly owned Subsidiary of KRE which remains a wholly owned Subsidiary
after consummation of such transactions, or (iii) repurchase, redeem
or otherwise acquire any shares of its capital stock or any securities
convertible into or exercisable for any shares of its capital stock;
provided, however, that KRE may increase its authorized capital stock
and take such other action as necessary to insure that the
distribution of KRE stock to shareholders of KRI is on a one for one
basis; and provided, further, that this provision shall not prohibit
intercompany transactions in the ordinary course of business
consistent with past practice.
(c) Issuance of Securities. KRE shall not, and shall not
-------------------------
permit any of its Subsidiaries to, issue, deliver or sell, or authorize
or propose the issuance, delivery or sale of, any shares of its capital
stock of any class, any voting securities or any securities convertible
into or exercisable for, or any rights, warrants or options to acquire,
any such shares or voting securities, or enter into any agreement with
respect to any of the foregoing, other than issuances by a wholly owned
Subsidiary of KRE of capital stock to such Subsidiary's parent.
(d) Governing Documents. Except to the extent required to
---------------------
comply with obligations hereunder or required by law, KRE and its
Subsidiaries shall not amend in any material respect or propose to so
amend their respective certificates of incorporation, bylaws or other
governing documents.
(e) No Acquisitions. KRE shall not, and shall not permit any
-----------------
of its Subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in
or a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire or agree to
acquire any assets (other than the acquisition of assets used in the
operations of the business of KRE and its Subsidiaries in the ordinary
25
course subject to Section 4.1(a)(ii)); provided, however, that the
foregoing shall not prohibit (y) internal reorganizations or
consolidations involving existing Subsidiaries of KRE, or (z) the
creation of new Subsidiaries of KRE organized to conduct or continue
activities otherwise permitted by this Agreement.
(f) No Dispositions. Other than (i) internal reorganizations
----------------
or consolidations involving existing Subsidiaries of KRE, or (ii) in
the ordinary course of business, KRE shall not, and shall not permit
any Subsidiary of KRE to, sell, lease, encumber or otherwise dispose
of, or agree to sell, lease, encumber or otherwise dispose of, any of
its assets (including capital stock of Subsidiaries of KRE) which are
material individually or in the aggregate to KRE.
(g) Investments; Indebtedness. Subject to the provisions of
---------------------------
Section 7.2(c) and 7.3(c), KRE shall not, and shall not permit any of
its Subsidiaries to, (i) make any loans, advances or capital
contributions to, or investments in, any other Person, (ii) pay,
discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than
payments, discharges or satisfactions incurred or committed to in the
ordinary course of business consistent with past practice, or (iii),
subject to Section 4.1(a)(ii), create, incur, assume or suffer to exist
any indebtedness, issuances of debt securities, guarantees, loans or
advances not in existence as of the date of this Agreement other than
the incurring of accounts payable and accrued expenses, extensions of
credit, advances of funds and intercompany transactions in the ordinary
course of business consistent with past practices.
(h) Tax-Free Qualification. KRI and KRE shall not, and shall
-----------------------
not permit any of KRI's or KRE's Subsidiaries to, take any action that
would reasonably be expected to prevent or impede the Merger from
qualifying as a reorganization under Section 368 of the Code.
(i) Compensation. Except as contemplated in Section 5.9
-------------
hereof, KRE shall not, and shall not permit any of its Subsidiaries to,
increase the amount of compensation of any executive officer or other
senior employee, make any increase in, or commitment to increase, any
employee benefits, adopt or make any commitment to adopt any additional
employee benefit plan or make any contribution, other than regularly
scheduled contributions, to any KRE Benefit Plan.
(j) Accounting Methods; Income Tax Elections. Except as
---------------------------------------------
required by a Governmental Entity, KRE shall not change its methods of
accounting in effect at December 31, 1998, except as required by
changes in GAAP as concurred in by KRE's independent auditors. KRE
shall not (i) change its fiscal year or (ii) make any material tax
election.
(k) Preservation of Property. KRE shall take such reasonable
-------------------------
actions and institute such reasonable procedures as St. Mary may from
time to time specify for assuring that the
26
property of KRE, including but not limited to its equipment and
records, is preserved for the benefit of St. Mary upon the completion
of the Merger, and all reasonable costs associated with such actions
and procedures shall be borne by KRI.
Section 4.2 Covenants of St. Mary. During the period from the date of
----------------------
this Agreement and continuing until the Effective Time, St. Mary agrees as to
itself and its Subsidiaries that (except as expressly contemplated or permitted
by this Agreement or as otherwise indicated on the St. Mary Disclosure Schedule
or as required by a Governmental Entity of competent jurisdiction or to the
extent that KRM, KRI and KRE shall otherwise consent in writing):
(a) Ordinary Course.
----------------
(i) St. Mary and its Subsidiaries shall carry on
their respective business in the usual, regular and ordinary
course in all material respects, in substantially the same
manner as heretofore conducted, and shall use all reasonable
efforts to preserve intact their present lines of business,
maintain their rights and franchises and preserve their
relationships with customers, suppliers and others having
business dealings with them to the end that their ongoing
businesses shall not be impaired in any material respect at
the Effective Time; provided, however, that no action by St.
Mary or its Subsidiaries with respect to matters specifically
addressed by any other provisions of this Section 4.2 shall be
deemed a breach of this Section 4.2(a)(i) unless such action
would constitute a breach of one or more of such other
provisions.
(ii) St. Mary shall promptly give KRE notice of what
it reasonably believes to be any material occurrence in the
business of St. Mary or any of its Subsidiaries. St. Mary
shall not, and shall not permit any of its Subsidiaries to,
incur or commit to any capital or other expenditure, whether
or not in the ordinary course of business, in excess of
$1,000,000 without the prior written consent of KRE, which
consent shall not be unreasonably withheld or delayed, except
for capital or other expenditures set forth on Schedule
4.2(a)(ii) attached to this Agreement.
(b) Dividends; Changes in Share Capital. St. Mary shall not
--------------------------------------
(i) declare or pay any dividends on or make other distributions in
respect of any of its capital stock, except for a dividend not to
exceed $0.05 per share of St. Mary Common Stock per quarter, (ii)
split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for, shares of its capital stock,
except for any such transaction by a wholly owned Subsidiary of St.
Mary which remains a wholly owned Subsidiary after consummation of such
transaction, or (iii) except under its current open market St. Mary
Common Stock share repurchase program (which shall not be expanded or
altered), repurchase, redeem or otherwise acquire any shares of its
capital stock or any securities convertible into or exercisable for any
shares or its capital stock.
(c) Issuance of Securities. St. Mary shall not, and shall not
-----------------------
permit any of its Subsidiaries to, issue, deliver or sell, or authorize
or propose the issuance, delivery or sale
27
of, any shares of its capital stock of any class or any securities
convertible into or exercisable for, or any rights, warrants or options
to acquire, any such shares, or enter into any agreement with respect
to any of the foregoing, other than (i) the issuance of St. Mary Common
Stock upon the exercise of stock options pursuant to the St. Mary
Option Plans or pursuant to the St. Mary Employee Stock Purchase Plan,
(ii) issuances by a wholly owned Subsidiary of St. Mary of capital
stock to such Subsidiary's parent or another wholly owned Subsidiary of
St. Mary, (iii) issuances of equity-related awards pursuant to St. Mary
Benefit Plans consistent with past practices, and (iv) issuances in
respect of any acquisitions, mergers, share exchanges, consolidations,
business combinations or similar transactions by St. Mary or its
Subsidiaries which issuances shall not exceed in the aggregate 550,000
shares.
(d) Governing Documents. Except to the extent required to
---------------------
comply with their respective obligations hereunder, required by law or
required by the rules and regulations of Nasdaq, St. Mary and its
Subsidiaries shall not amend in any material respect, or propose to so
amend their respective certificates of incorporation, bylaws or other
governing documents.
(e) Tax-Free Qualification. St. Mary shall not, and shall not
-----------------------
permit any of its Subsidiaries to, take any action that would
reasonably be expected to (i) prevent or impede the Merger from
qualifying as a reorganization under Section 368 of the Code, or (ii)
prevent the Spin-Off from qualifying as a distribution in which Section
355(e) applies or prevent such distribution from not being taxable to
the shareholders of KRI.
Section 4.3 Advice of Changes; Governmental Filings. Each party shall
----------------------------------------
(a)confer on a regular and frequent basis with the other and (b)promptly report
to the other parties on material operational matters or any event or
circumstance which (alone or together with other such matters) may have a
Material Adverse Effect on such party. KRE and St. Mary shall file all reports
required to be filed by each of them with the SEC and all other Governmental
Entities between the date of this Agreement and the Effective Time and shall
deliver to the other party copies of all such reports promptly after the same
are filed. Each of KRE and St. Mary shall have the right to review in advance,
and will consult with the other with respect to, all the information relating to
the other party and each of their respective Subsidiaries which appears in any
filings, announcements or publications made with, or written materials submitted
to, any third party or any Governmental Entity in connection with the
transactions contemplated by this Agreement. In exercising the foregoing right,
each of the parties hereto agrees to act reasonably and as promptly as necessary
with respect to such materials. Each party agrees that, to the extent
practicable and as timely as practicable, it will consult with, and provide all
appropriate and necessary assistance to, the other party with respect to the
obtaining of all permits, consents, approvals and authorizations of all third
parties and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and each party will keep the other
party apprised of the status of matters relating to completion of the
transactions contemplated hereby.
28
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Preparation of Proxies and Registration Statement; Meeting
----------------------------------------------------------
of St. Mary Shareholders.
- -------------------------
(a) As promptly as practicable following the execution of this
Agreement, St. Mary shall, in cooperation with KRI and KRE, prepare and
file with the SEC materials which shall constitute the proxy statements
and the registration statement on Form S-4 with respect to the approval
of the Merger by the shareholders of KRI and the St. Mary Share
Issuance by the shareholders of St. Mary (such proxy statements and
registration statement being hereinafter together referred to as the
"Form S-4"). St. Mary shall cause the Form S-4 to comply as to form in
all material respects with the applicable provisions of the Securities
Act and the rules and regulations thereunder. St. Mary shall, as
promptly as practicable after receipt thereof, provide copies to KRI
and KRE of any written comments received from the SEC with respect to
the Form S-4 and advise KRI and KRE of any oral comments with respect
to the Form S-4 received from the SEC. St. Mary agrees that none of the
information supplied or to be supplied by St. Mary for inclusion or
incorporation by reference in the Form S-4 and each amendment or
supplement thereto, at the time of mailing thereof and at the time of
the St. Mary Shareholders Meeting and the KRE Shareholders Meeting (as
defined below), will contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. KRI and KRE agree that none
of the information supplied or to be supplied by KRI or KRE for
inclusion in the Form S-4 and each amendment or supplement thereto, at
the time of mailing thereof and at the times of the St. Mary and KRE
Shareholders Meetings, will contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. For purposes of the
foregoing, it is understood and agreed that information concerning or
related to St. Mary and the St. Mary shareholders meeting will be
deemed to have been supplied by St. Mary and information concerning or
related to KRI and KRE, and the KRE Shareholders Meeting, shall be
deemed to have been supplied by KRI. St. Mary will provide KRI and KRE
with a reasonable opportunity to review and comment on any amendment or
supplement to the Form S-4 prior to filing such with the SEC, and will
provide KRI and KRE with a copy of all such filings made with the SEC.
No amendment or supplement for inclusion in the Form S-4 shall be made
without the approval of KRI and KRE, which approvals shall not be
unreasonably withheld or delayed.
(b) St. Mary shall, as promptly as practicable following the
date on which the Form S-4 is declared effective by the SEC, duly call,
give notice of, convene and hold a special meeting of its shareholders
(the "St. Mary Shareholders Meeting") for the purpose of obtaining the
Required St. Mary Vote, shall take all lawful action to solicit the
approval of the St. Mary Share Issuance by the Required St. Mary Vote
and the Board of Directors of St.
29
Mary shall, subject to its fiduciary duties, recommend approval of the
St. Mary Share Issuance by the shareholders of St. Mary.
(c) KRE shall, as promptly as practicable following the date
on which the Form S-4 is declared effective by the SEC, duly call, give
notice of, convene and hold a special meeting of those persons who will
be its shareholders ("KRE Shareholders") following the Distributions
(the "KRE Shareholders Meeting") for the purpose of obtaining the
Required KRE Vote, shall take all lawful action to solicit the approval
of the Merger by the Required KRE Vote and the Boards of Directors of
KRI and KRE shall, subject to their fiduciary duties, recommend
approval of the Merger by the shareholders of KRE.
Section 5.2 Confidentiality - Access to Information. Notwithstanding
------------------------------------------
anything contained in this Agreement to the contrary, all of the parties hereto
agree and acknowledge that they are bound by those certain confidentiality
agreements between KRI and St. Mary dated February 25, 1999, and April 21, 1999
(the "Confidentiality Agreements"), which remain in full force and effect and
shall also govern the information disclosed pursuant to this Agreement. Upon
reasonable notice, and subject to the Confidentiality Agreements, each party
shall (and shall cause its subsidiaries to) afford to the officers, employees,
accountants, counsel, financial advisors and other representatives of the other
party reasonable access during normal business hours, during the period prior to
the Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, such party shall (and shall cause its
subsidiaries to) furnish promptly to the other party (a) a copy of each report,
schedule and other document filed, published, announced or received by it during
such period pursuant to the requirements of federal or state securities laws, as
applicable (other than documents which such party is not permitted to disclose
under applicable law), and (b) consistent with its legal obligations, all other
information concerning its business, properties and personnel as such other
party may reasonably request. The parties shall hold any such information which
is non-public in confidence in accordance with the Confidentiality Agreements.
Any investigation by St. Mary, KRI or KRE shall not affect the representations
and warranties of KRI and KRE or of St. Mary, as the case may be.
Section 5.3 Commercially Reasonable Efforts.
--------------------------------
(a) Subject to the terms and conditions of this Agreement,
each party will use its commercially reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and
regulations to consummate the Merger and the other transactions
contemplated by this Agreement as soon as practicable after the date
hereof.
(b) In furtherance and not in limitation of the covenants of
the parties contained in Section 5.3(a), if any administrative or
judicial action or proceeding, including any proceeding by a private
party, is instituted (or threatened to be instituted) challenging any
transaction contemplated by this Agreement, each of the parties shall
cooperate in all respects with each other and use its respective
commercially reasonable efforts to contest and resist any such action
or proceeding and to have vacated, lifted, reversed or overturned any
30
decree, judgment, injunction or other order, whether temporary,
preliminary or permanent, that is in effect and that prohibits,
prevents or restricts consummation of the transactions contemplated by
this Agreement.
Section 5.4 Public Announcements. St. Mary shall consult with KRI and
----------------------
KRE before issuing any press release or otherwise making any public statements
with respect to the transactions contemplated by this Agreement, and shall not
issue any such press release or make any such public statement, including a
public statement required by applicable law or by obligations pursuant to St.
Mary's listing agreement with Nasdaq, prior to such consultation and approval,
which approval shall not be unreasonably withheld or delayed. Neither KRI nor
KRE nor any Subsidiary of KRI shall issue any press release or otherwise make
any public statements with respect to the transactions contemplated by this
Agreement without the prior approval of St. Mary, which approval shall not be
unreasonably withheld or delayed.
Section 5.5 Restrictions on Transfer of St. Mary Common Stock.
--------------------------------------------------
(a) The KRE Shareholders shall not make any disposition by
sale, pledge or any other transfer of all or any portion of the shares
of St. Mary Common Stock acquired by them pursuant to this Agreement
for a period of two years from the Closing Date. The certificates
representing the shares of St. Mary Common Stock to be issued to the
KRE Shareholders pursuant to this Agreement shall be stamped or
otherwise imprinted with a legend substantially similar to the
following:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
THE TERMS AND CONDITIONS OF AN AGREEMENT AND PLAN OF MERGER
WHICH PLACES CERTAIN RESTRICTIONS ON THE TRANSFER OF THE
SHARES REPRESENTED HEREBY. A COPY OF SUCH AGREEMENT AND PLAN
OF MERGER IS AVAILABLE AT THE COMPANY'S PRINCIPAL EXECUTIVE
OFFICES.
(b) Notwithstanding the foregoing, the above-referenced
transfer restrictions shall not apply to the following transactions or
under the following circumstances:
(i) The KRE Shareholders may transfer the shares of
St. Mary Common Stock acquired under this Agreement pursuant
to the laws of descent and distribution and for customary
estate planning purposes, and such shares shall continue to be
bound by the restrictions set forth in this Section 5.5 for
the remainder of the restricted period, as evidenced by the
above-referenced legend;
(ii) Subject to the provisions of Rule 145 under the
Securities Act of 1933, as amended (the "Securities Act"), if
any of Thomas E. Congdon, his spouse or a descendant of his,
or any trust or other entity controlled directly or indirectly
by any of them, or the MMC 1961 Trust, the TEC 1966 Trust or
Greenhouse Associates
31
(together the "Congdon Group"), shall after the Closing Date
sell any of their shares of St. Mary Common Stock (other than
to another member of the Congdon Group), St. Mary shall give
prompt notice thereof to the former shareholders of KRE, and
each former shareholder of KRE may sell a percentage of his,
her or its aggregate shares of St. Mary Common Stock equal to
the percentage of shares owned by the Congdon Group which are
so sold. The number of shares of St. Mary Common Stock owned
by the Congdon Group on the date of this Agreement is
1,288,870. Attached hereto as Exhibit 5.5 is a letter of
Thomas E. Congdon setting forth that the members of the
Congdon Group have no current intention to sell any of their
shares of St. Mary Common Stock. Without limiting the
generality of the foregoing, in the event of a tender offer
made to the shareholders of St. Mary which is subject to
Regulation 14D of the Securities Exchange Act of 1934 (a
"Tender Offer"), and which is not approved by the Board of
Directors of St. Mary, and in the event that the Congdon Group
sells shares of St. Mary Common Stock pursuant to such Tender
Offer, each former shareholder of KRE may sell pursuant to
such Tender Offer a percentage of his, her or its aggregate
shares of St. Mary Common Stock equal to the percentage of
shares owned by the Congdon Group which are so sold.
(iii) In the event of an Acquisition of St. Mary (as
hereinafter defined), the restrictions on the sale, pledge or
other transfer of shares of St. Mary Common Stock described in
Section 5.5(a) above shall terminate and any shares of capital
stock of the acquirer (or an affiliate of the aquirer)
received by the former shareholders of KRE in the Acquisition
of St. Mary shall not be subject to such restrictions. For
purposes of this Agreement, the term "Acquisition of St. Mary"
means the occurrence of any of the following events: (i) St.
Mary shall not be the surviving entity in any merger (other
than a merger with a subsidiary of St. Mary), share exchange,
consolidation or other reorganization (or survives only as a
subsidiary of an entity other than an Affiliate of St. Mary);
or (ii) St. Mary sells, leases or exchanges all or
substantially all of its assets to any other person or entity
(other than a wholly owned subsidiary of St. Mary). In the
event of a Tender Offer which is approved by the Board of
Directors of St. Mary pursuant to a plan intended to result in
a subsequent Acquisition of St. Mary, the former shareholders
of KRE may participate in such Tender Offer to the extent of
up to all of his, her or its aggregate shares of St. Mary
Common Stock.
Section 5.6 Representation on St. Mary Board of Directors. At the
----------------------------------------------
Effective Time, St. Mary shall cause the Board of Directors of St. Mary to
consist of not more than eleven directors, nine of whom shall be the Directors
of St. Mary immediately prior to the Effective Time and two of whom shall be
Jack Hunt and William Gardiner (the "KRE Board Designees"). Thereafter until
two years after the Closing Date, or until such time as the former shareholders
of KRE own no shares of St. Mary Common Stock, St. Mary shall utilize
commercially reasonable efforts at the time of each annual meeting of the
shareholders of St. Mary to cause the KRE Board Designees to be elected to the
St. Mary Board of Directors. In the event one or both of the KRE Board
Designees are unwilling or unable to serve on the Board of Directors of St. Mary
for any reason during the foregoing period, the first alternate to replace a
32
KRE Board Designee shall be John Alexander and the second alternate KRE
Board Designee shall be James Clement.
Section 5.7 Expenses. St. Mary shall be responsible for all of its own
---------
expenses, including but not limited to legal, accounting and other professional
fees and the fees of Deutsche Bank Securities Inc. incurred with respect to this
Agreement and the transactions provided for herein. Without limiting the
generality of the foregoing, St. Mary shall also be responsible for all costs
and registration fees associated with the preparation and filing of the Form
S-4. KRI shall be responsible for all the expenses of KRI and KRE, including but
not limited to legal, accounting and other professional fees and the fees of
Nesbitt Burns, incurred by them with respect to this Agreement and the
transactions provided for herein including the preparation of the Form S-4
except that St. Mary shall pay up to $12,000 of the fees of Deloitte & Touche
LLP incurred on behalf of KRI and KRE in connection with the Form S-4.
Section 5.8 King Ranch Trademark and Brand. As soon as practicable
---------------------------------
following the Effective Date, St. Mary and its Subsidiaries, shall not utilize
the names "King Ranch," "King Ranch Energy," "King Ranch Oil & Gas," "Running W"
or any confusingly similar derivation thereof in connection with their
businesses and they shall within such period utilize their commercially
reasonable efforts to remove such names, or logos which include such names, from
any stationery, purchase orders, equipment or machinery owned by them. Effective
January 1, 1999, KRE will not be liable for any fees associated with the use of
the "King Ranch" trademark or brand.
Section 5.9 KRE Employee Severance Payments. KRI shall reimburse KRE or
--------------------------------
St. Mary for severance payments to (i) KRE employees to whom St. Mary does not
offer continued employment and who remain employed by KRE until the Closing Date
or until such earlier date as agreed upon by KRE and St. Mary and (ii) KRE
employees whose employment is continued by St. Mary after the Closing Date for a
transition period not in excess of six months. Notwithstanding anything to the
contrary contained in the foregoing, (A) the severance payment reimbursement
liability of KRI for KRE employees described above shall be based, in St. Mary's
discretion, upon not more than two weeks for each full year of prior employment
by KRE except for those employees who are entitled to severance payments
computed in accordance with existing agreements with them, as described on
Schedule 5.9 hereto, provided that the severance payment to any such employee
shall not be less than thirty days salary, (B) the aggregate liability of KRI
under this Section 5.9 shall not exceed $850,000, and any excess shall be paid
by St. Mary and (C) the payment of severance may be conditioned upon an
employee's agreement to a customary confidentiality covenant with respect to
KRE's confidential information.
Section 5.10 368(a) Reorganization. St. Mary, Merger Sub, KRI and KRE
-----------------------
shall each use commercially reasonable efforts to cause the business combination
to be effected by the Merger to be treated as a reorganization within the
meaning of Section 368(a) of the Code. From and after the date of this Agreement
and after the Effective Time, each party shall use its commercially reasonable
efforts to cause the Merger to qualify, and shall not knowingly take any actions
or cause any actions to be taken which could prevent the Merger from qualifying,
as a reorganization under the provisions of Section 368(a) of the Code.
33
Section 5.11 355 Distribution. St. Mary, Merger Sub, KRI and KRE shall
-----------------
each use commercially reasonable efforts to cause the Spin-Off to qualify as a
distribution in which Section 355(e) of the Code applies and to prevent such
distribution from being taxable to the shareholders of KRI. From and after the
date of this Agreement and after the Effective Time, each party shall use its
commercially reasonable efforts to cause the Spin-Off to qualify, and shall not
knowingly take any actions or cause any actions to be taken which are reasonably
likely to prevent the Spin-Off from qualifying as a distribution to which
Section 355(e) of the Code applies.
Section 5.12 Continuity of Business. Following the Merger, St. Mary
------------------------
intends to cause Merger Sub to continue to a significant extent the historic
business of KRE or to use a significant portion of the historic business assets
of KRE in a business in substantially the same manner as such business was
conducted prior to Closing.
Section 5.13 Indemnification of Officers and Directors. The
----------------------------------------------------
indemnification obligations set forth in KRE's Certificate of Incorporation and
KRE's Bylaws shall survive the Merger, and shall not be amended, repealed or
otherwise modified for a period of two years after the Effective Time in any
manner that would adversely affect the rights thereunder of the individuals who
on or prior to the Effective Time were directors, officers, employees or agents
of KRE.
Section 5.14 Retained Litigation. KRI shall retain all liability
---------------------
associated with, and responsibility for the defense of and the costs thereof,
the Pi Energy Corporation litigation described in Note 6 of the Notes to the KRE
Financial Statements as of December 31, 1998, and any other litigation or
threatened litigation set forth on Schedule 3.2(f) hereto (the "Retained
Litigation"). Notwithstanding the foregoing, St. Mary shall be obligated to use
its commercially reasonable efforts to cooperate with KRI in connection with the
defense of the Retained Litigation, including, without limitation, providing KRI
access to St. Mary's documents and/or employees, which obligation shall survive
the Closing.
Section 5.15 Stockholder's Representative. KRI shall act as the agent
------------------------------
and attorney-in-fact with full power and authority in connection with the
administration of this Agreement on behalf of the KRE shareholders, including
the prosecution of indemnification claims against St. Mary. This appointment
shall be coupled with an interest and shall be irrevocable and binding in all
respects upon St. Mary and the KRE shareholders and their successors and
assigns, and heirs and devisees.
Section 5.16 Voting Commitments. KRI shall obtain from Stephen Kleberg,
-------------------
John Alexander and James Clement, members of the KRI Board of Directors and
substantial shareholders of KRI, commitments to (i) vote the shares of stock of
KRE which they will receive in the Distributions in favor of the Merger and (ii)
subject to their fiduciary obligations as Directors, recommend to the members of
their immediate families who are shareholders of KRI that they vote the shares
of KRE stock which they will receive in the Distributions in favor of the
Merger.
34
Section 5.17 No Solicitation.
----------------
(a) KRI and KRE shall immediately cease and cause to be
terminated all existing discussions and negotiations, if any, with any
parties conducted heretofore with respect to any Acquisition Proposal.
As used in this Section 5.17, "Acquisition Proposal" means any tender
offer or exchange offer by a non-affiliated third party for fifty
percent or more of the outstanding shares of KRE common stock or any
proposal or offer by a non-affiliated third party for a merger,
consolidation, amalgamation or other business combination involving KRE
or any equity securities (or securities convertible into equity
securities) of KRE, or any proposal or offer by a non-affiliated third
party to acquire in any manner a fifty percent or greater equity or
beneficial interest in, or a material amount of the assets or value of,
KRE, other than pursuant to the transactions contemplated by this
Agreement.
(b) Unless and until this Agreement shall have been
terminated, KRI and KRE shall not permit any of their officers,
directors, employees, agents, financial advisors, counsel or other
representatives (collectively, the "Representatives") to, directly or
indirectly, (i) solicit, initiate or take any action with the intent of
facilitating the making of, any offer or proposal that constitutes or
that is reasonably likely to lead to any Acquisition Proposal, (ii)
participate in any discussions or negotiations regarding any
Acquisition Proposal or (iii) furnish to any Person (other than St.
Mary or any Affiliate or Representative of KRI) any nonpublic
information or nonpublic data outside the ordinary course of conducting
KRE's business; provided, however, that to the extent required by their
fiduciary duties under applicable law and after consultation with and
based upon the advice of outside legal counsel, KRI's or KRE's Board of
Directors and officers may in response to a Person who initiates
communication with KRI or KRE, without there having occurred any action
prohibited by clause (i) of this sentence, take such actions as would
otherwise be prohibited by clauses (ii) and (iii). KRI shall notify St.
Mary of any such inquiries, offers or proposals (including the identity
of the Person making any inquiry, offer or proposal) as promptly as
possible and in any event within 24 hours after receipt thereof or the
occurrence of such events, as appropriate, and shall give St. Mary ten
days' advance notice of any agreement to be entered into with, or any
information or data to be furnished to, any Person in connection with
any such inquiry, offer or proposal.
Section 5.18 Seismic Data. The parties agree that neither KRI nor KRE
--------------
is making any representation or warranty regarding the continued access of St.
Mary or the Surviving Corporation following the consummation of the Merger to
any of the seismic data under the seismic licenses to which KRE or any
Subsidiary of KRE is a party. Furthermore, the parties agree that (A) certain of
such seismic data and licenses are not transferrable to St. Mary or the
Surviving Corporation upon consummation of the Merger, and (B) certain of the
seismic data and licenses will transfer to St. Mary or the Surviving Corporation
only upon the payment of a transfer fee or other penalty. Neither KRI nor KRE
shall have any liability to St. Mary or Surviving Corporation in the event that
any such seismic data or licenses are not transferrable, or in the event that
the consummation of the Merger triggers the payment of a transfer fee or other
penalty.
35
ARTICLE VI
INDEMNIFICATION
Section 6.1 Indemnification by KRI. KRI agrees to and shall defend,
------------------------
indemnify and hold harmless St. Mary, the Surviving Corporation, and each of
their subsidiaries, stockholders, affiliates, officers, directors, employees,
counsel, agents, successors, assigns and legal representatives (St. Mary and all
such other Persons are collectively referred to as the "St. Mary Indemnified
Persons") from and against, and shall reimburse the St. Mary Indemnified Persons
for, each and every Loss paid, imposed on or incurred by the St. Mary
Indemnified Persons, directly or indirectly, relating to, resulting from or
arising out of (i) any inaccuracy in any representation or warranty of KRI or
KRE under this Agreement, or the KRI or KRE Disclosure or other Schedules hereto
or any agreement or certificate delivered or to be delivered by KRI or KRE
pursuant hereto, (ii) any claim by a third party against St. Mary Indemnified
Persons arising out of an act or omission of KRI or KRE occurring before the
Closing Date, or (iii) the Retained Litigation. The indemnification obligations
set forth herein shall be that of KRI, and the shareholders of KRI shall have
absolutely no liability or obligation hereunder.
Section 6.2 Indemnification by St. Mary. St. Mary agrees to and shall
-----------------------------
defend, indemnify and hold harmless KRI and each of KRI's respective
subsidiaries, stockholders, affiliates, officers, directors, employees, counsel,
agents, successors, assigns and legal representatives (KRI and all such other
Persons are collectively referred to as the "KRI Indemnified Persons") from and
against, and shall reimburse the KRI Indemnified Persons for, each and every
Loss paid, imposed on or incurred by the KRI Indemnified Persons, directly or
indirectly, relating to, resulting from or arising out of (i) any inaccuracy in
any representation or warranty of St. Mary or Merger Sub under this Agreement,
or the St. Mary Disclosure Schedule hereto or any agreement or certificate
delivered or to be delivered by St. Mary pursuant hereto, or (ii) any claim by a
third party against KRI Indemnified Persons arising out of an act or omission of
St. Mary or KRE occurring after the Closing Date.
Section 6.3 Notice and Defense of Third-Party Claims. If any Proceeding
-----------------------------------------
shall be brought or asserted under this Article against an indemnified party or
any successor thereto (the "Indemnified Person") in respect of which indemnity
may be sought under this Article from an indemnifying Person or any successor
thereto (the "Indemnifying Person"), the Indemnified Person shall give prompt
written notice of such Proceeding to the Indemnifying Person who shall assume
the defense thereof, including the employment of counsel reasonably satisfactory
to the Indemnified Person and the payment of all expenses; provided, that any
delay or failure to so notify the Indemnifying Person shall relieve the
Indemnifying Person of its obligations hereunder only to the extent, if at all,
that it is prejudiced by reason of such delay or failure. In no event shall any
Indemnified Person be required to make any expenditure or bring any cause of
action to enforce the Indemnifying Person's obligations and liability under and
pursuant to the indemnifications set forth in this Article. In addition, actual
or threatened action by a Governmental Entity or other entity is not a condition
or prerequisite to the Indemnifying Person's obligations under this Article. The
Indemnified Person shall have the right to employ separate counsel in any of the
foregoing Proceedings and to participate
36
in the defense thereof, but the fees and expenses of such counsel shall be at
the expense of the Indemnified Person unless the Indemnified Person shall in
good faith determine that there exist actual or potential conflicts of interest
which make representation by the same counsel inappropriate, as evidenced by the
written opinion of outside counsel to the Indemnified Person. The Indemnified
Person's right to participate in the defense or response to any Proceeding
should not be deemed to limit or otherwise modify its obligations under this
Article. In the event that the Indemnifying Person, within 15 days after notice
of any such Proceeding, fails to assume the defense thereof, the Indemnified
Person shall have the right to undertake the defense, compromise or settlement
of such Proceeding for the account of the Indemnifying Person, subject to the
right of the Indemnifying Person to assume the defense of such Proceeding with
counsel reasonably satisfactory to the Indemnified Person at any time prior to
the settlement, compromise or final determination thereof. Anything in this
Article to the contrary notwithstanding, the Indemnifying Person shall not,
without the Indemnified Person's prior written consent, which consent shall not
be unreasonably withheld, settle or compromise any Proceeding or consent to the
entry of any judgment with respect to any Proceeding; provided, however, that
the Indemnifying Person may, without the Indemnified Person's prior written
consent, settle or compromise any such Proceeding or consent to entry of any
judgment with respect to any such Proceeding that requires solely the payment of
money damages by the Indemnifying Person and that includes as an unconditional
term thereof the release by the claimant or the plaintiff of the Indemnified
Person from all liability in respect of such Proceeding.
Section 6.4 Limitation of Liability.
------------------------
(a) Survival. An Indemnifying Person shall have no liability
under this Article unless notice of a claim for indemnity, or notice of
facts as to which an indemnifiable Loss is expected to be incurred,
shall have been given within one year after the Closing Date, except
that (i) an Indemnified Person may give notice of and may make a claim
for indemnification for any indemnifiable Loss which results from any
claim by any third party at any time within two years after the Closing
Date, (ii) an Indemnified Person may give notice of and may make a
claim relating to the payment of federal or state taxes (including with
respect to matters set forth on Schedule 3.2(l)), or compliance with or
obligations under ERISA at any time prior to ninety days after the
expiration of the appropriate statute of limitation, if any, with
respect thereto, and (iii) St. Mary's Indemnified Persons may give
notice of and may make a claim relating to the Retained Litigation at
any time.
(b) Limitation on KRI Liability. In addition to the other
limitations set forth in Section 6.4 (a) and (d), the liability of KRI
to St. Mary's Indemnified Persons shall be subject to the following
limitations:
(i) No St. Mary Indemnified Person shall be entitled
to indemnification from KRI pursuant to Section 6.1 hereof,
except for single Losses in excess of $100,000 (for which the
full Loss shall be indemnified and not solely the amount of
the Loss in excess of $100,000), unless and until the
aggregate of all Losses (excluding single Losses in excess of
$100,000 which have been indemnified) for which
indemnification would (but for the limitation of this
sentence) be required to
37
be paid by KRI hereunder exceeds $600,000 (the "KRI Loss
Threshold") after which the St. Mary Indemnified Persons shall
be entitled to recover for all Losses and for which
indemnification is required to be paid hereunder (including
such $600,000).
(ii) In no event shall the aggregate liability of KRI
hereunder exceed $25,000,000 ("KRI Loss Ceiling"). KRI shall
have no further obligations under this Article VI of this
Agreement at the earlier of the time when KRI has paid or is
required to pay to St. Mary's Indemnified Persons an amount
equal to the KRI Loss Ceiling.
(iii) Notwithstanding anything in this Section 6.4(b)
to the contrary, amounts paid by KRI in connection with the
Retained Litigation, including attorneys' fees, court costs,
settlements or judgements shall not be used in calculating the
KRI Loss Threshold, shall not be limited by the KRI Loss
Ceiling and shall be due from KRI irrespective of the
provisions of paragraphs (i) and (ii) above.
(c) Limitation on St. Mary Liability. In addition to the other
limitations set forth in Section 6.4(a) and (d), the liability of St.
Mary to KRI's Indemnified Persons shall be subject to the following
limitations:
(i) No KRI Indemnified Person shall be entitled to
indemnification from St. Mary pursuant to Section 6.2 hereof,
except for single Losses in excess of $100,000 (for which the
full Loss shall be indemnified and not solely the amount of
the Loss in excess of $100,000), unless and until the
aggregate of all Losses (excluding single Losses in excess of
$100,000 which have been indemnified) for which
indemnification would (but for the limitation of this
sentence) be required to be paid by St. Mary hereunder exceeds
$600,000 (the "St. Mary Loss Threshold") after which the KRI
Indemnified Persons shall be entitled to recover for all
Losses and for which indemnification is required to be paid
hereunder (including such $600,000).
(ii) In no event shall the aggregate liability of St.
Mary hereunder exceed $25,000,000 ("St. Mary Loss Ceiling").
St. Mary shall have no further obligations under this Article
VI of this Agreement at the earlier of the time when St. Mary
has paid or is required to pay to KRI an amount equal to the
St. Mary's Loss Ceiling.
(d) Tax Benefits; Insurance Recoveries. In calculating the
amount of any Loss for which any Indemnifying Person is liable under
this Article, there shall be taken into consideration (i) the value of
any federal or state income tax benefits and (ii) the amount of any
insurance recoveries, net of any amounts which are in effect
self-insured, whether through deductibles, co-payments, retention
amounts, retroactive premium adjustments or other similar adjustments,
the Indemnified Person in fact receives as a direct consequence of the
circumstances to which the Loss related or from which the Loss resulted
or arose.
38
Section 6.5 Exclusivity. After the Effective Time, the provisions of
------------
this Article shall be the exclusive basis for the assertion of claims by or
imposition of liability on the parties hereto arising under or as a result of
this Agreement; provided, however, nothing herein shall preclude any party
hereto from asserting a claim for equitable non-monetary remedies.
Section 6.6 Waiver of Consequential Damages. With respect to any and
----------------------------------
all Losses for which indemnification may be available hereunder, each party
hereby expressly waives any consequential and punitive damages with respect to a
claim against the other party hereto; provided, however, that this waiver shall
not apply to the extent such consequential or punitive damages are awarded in a
Proceeding brought or asserted by a third party against an Indemnified Person.
ARTICLE VII
CONDITIONS TO CLOSING
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.
-----------------------------------------------------------
Except as may be waived in writing by the Parties, all of the obligations of the
Parties under this Agreement are subject to the fulfillment, prior to or at the
Closing, of each of the following conditions:
(a) Shareholder Approvals. St. Mary shall have obtained the
-----------------------
Required St. Mary Vote in connection with the approval of the St. Mary
Share Issuance by the shareholders of St. Mary and KRI shall have
obtained the Required KRE Vote in connection with the approval of the
Merger by the shareholders of KRE.
(b) No Injunctions, Restraints or Illegality. No laws shall
------------------------------------------
have been adopted or promulgated, and no temporary restraining order,
preliminary or permanent injunction or other order issued by a court or
other governmental entity of competent jurisdiction shall be in effect,
having the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger, provided however, that the provisions of
this Section 7.1(b) shall not be available to any party whose failure
to fulfill its obligations pursuant to Section 5.3 shall have been the
cause of, or shall have resulted in, such order or injunction.
(c) Effectiveness of the Form S-4. The Form S-4 shall have
-------------------------------
been declared effective by the SEC and shall have become effective in
all states where required.
(d) Nasdaq Listing. The shares of St. Mary Common Stock to be
---------------
issued pursuant to this Agreement shall have been approved upon
official notice of issuance for quotation on Nasdaq.
(e) Consummation of the Distribution. The shares of KRE shall
---------------------------------
have been distributed to the KRI shareholders in accordance with the
Distributions.
39
Section 7.2 Additional Conditions to Obligations of St. Mary and Merger Sub.
----------------------------------------------------------------
The obligations of St. Mary and Merger Sub to effect the Merger are subject to
the satisfaction of, or waiver by St. Mary, on or prior to the Closing Date of
the following conditions:
(a) Representations and Warranties. The representations and
--------------------------------
warranties of KRI and KRE set forth in Sections 3.1 and 3.2 shall be
true and correct in all material respects as of the Closing Date and as
if made on the Closing Date subject to any changes contemplated by this
Agreement.
(b) Performance of Obligations of KRI and KRE. KRI and KRE
---------------------------------------------
shall have performed or complied in all material respects with all
agreements and covenants required to be performed by it under this
Agreement at or prior to the Closing Date.
(c) Settlement for KRI-KRE Intercompany Balances. KRI shall
----------------------------------------------
have paid to KRE an amount equal to the amount, if any, of intercompany
transactions subsequent to May 31, 1999 and up to the Closing Date
between KRE (together with any KRE Subsidiary) and KRI (together with
any other Subsidiary of KRI), net of any intercompany transactions
between KRI (together with any other Subsidiary of KRI) and KRE
(together with any KRE Subsidiary) subsequent to that date. No interest
shall have accrued from and after December 31, 1998 on any outstanding
obligations between KRE or any KRE Subsidiary and KRI or any other KRI
Subsidiary. KRI shall provide evidence of the cancellation of any
obligation of KRE to repay KRI, or any other Subsidiary of KRI, for (i)
the funds advanced by KRI to KRE for the acquisition by KRE of the
Flour Bluff properties, and (ii) any indebtedness of KRE to KRI or any
other Subsidiary of KRI existing on May 31, 1999.
(d) Certificate of Officers. KRI shall have delivered to St.
------------------------
Mary certificates dated as of the Closing Date, executed in their
respective corporate names by, and verified by, the oath of its chief
executive officer and chief financial officer certifying to the
fulfillment of the conditions specified in subsections (a) and (b) of
this Section 7.2.
(e) Opinion of Financial Advisor. The opinion referred to in
------------------------------
Section 3.3(r) shall not have been withdrawn by Deutsche Bank
Securities Inc.
(f) Opinion of Counsel. St. Mary shall have received a
---------------------
customary opinion of Locke Liddell & Sapp LLP, counsel to KRE and KRI,
in a form approved by St. Mary, which approval shall not be
unreasonably withheld or delayed.
(g) Non-Exercise of Appraisal Rights. In connection with the
----------------------------------
Required KRE Vote, the holders of no more than five percent of the
outstanding shares of common stock of KRE shall have exercised the
rights of dissenting shareholders under Section 262 of the Delaware
General Corporation Law ("Dissenting Shares"); provided, however, that
if more than five percent, but less than ten percent, of the shares of
KRE common shares are Dissenting Shares ("Excess Shares"), KRI shall
have the right, but not the obligation, to assume the liability for any
Excess Payment (as hereinafter defined). In the event that KRI assumes
the liability for
40
any Excess Payment, this condition shall be deemed satisfied. The term
"Excess Payment" is the amount by which St. Mary's per share liability
for Excess Shares (as adjusted by the exchange ratio into shares of St.
Mary Common Stock) exceeds$19.76 per share of St. Mary Common Stock.
(h) Eugene Island Block 341. With respect to the Eugene Island
------------------------
Block 341 oil and gas property, KRE shall have obtained in a form
substantially similar to that previously provided to St. Mary the
assignment of interest contemplated by that certain Participation
Agreement dated February 17, 1998 between NCX Company, Inc. ("NCX") and
KRE, which assignment shall be subject to a contract operations
agreement between NCX and Chevron U.S.A. Production Company
("Chevron"), a throughput agreement between NCX and Chevron, and an
operating agreement between NCX and KRE. If such assignment is not
obtained, KRI shall indemnify St. Mary in accordance with the
provisions of Article VI hereof to the extent that St. Mary is unable
to recover currently non-producing reserves solely due to a lack of
rights or interests in such reserves, and this condition to closing
shall be deemed satisfied thereby. The liability for such indemnity
obligation shall be the values used by St. Mary in the net asset value
determination for KRE in connection with the Merger on a case-by-case
basis as to each currently non-producing interval covered by such
assignment. Such indemnification obligation of KRI shall remain in full
force and effect for a period of five years after the Closing Date or
until any earlier obtaining of such assignment. If there exists any
conflict between this provision and any other provision contained in
this Agreement, the provisions set forth in this Section shall control.
Notwithstanding the foregoing, no indemnification shall apply if such
reserves are not recoverable for any reason other than as specified
herein.
(i) Affiliate Restrictions. KRI shall have notified, in
------------------------
writing, persons who are affiliates of KRI or KRE within the meaning of
the Securities Act (i) of the application to them of Rule 145 under the
Securities Act with respect to St. Mary Common Stock to be issued to
them pursuant to this Agreement and (ii) that the certificates of St.
Mary Common Stock issued to such persons will bear an additional
restrictive legend with respect to the foregoing.
Section 7.3 Additional Conditions to Obligations of KRE and the
---------------------------------------------------------
Shareholders of KRE. The obligations of the shareholders of KRE and KRE to
- ---------------------
effect the Merger are subject to the satisfaction of, or waiver by KRI on or
prior to the Closing Date of the following conditions:
(a) Representations and Warranties. The representations and
--------------------------------
warranties of St. Mary and Merger Sub set forth in Section 3.3 and
Section 3.4 shall be true and correct in all respects as of the Closing
Date and as if made on the Closing Date, subject to any changes
contemplated by this Agreement.
(b) Performance of Obligations of St. Mary and Merger Sub. St.
------------------------------------------------------
Mary and Merger Sub shall have performed or complied in all material
respects with all agreements and
41
covenants required to be performed by them under this Agreement at or
prior to the Closing Date.
(c) Settlement of KRI-KRE Intercompany Balances. KRE shall
----------------------------------------------
have paid KRI an amount equal to the amount, if any, of intercompany
transactions subsequent to May 31, 1999 and up to the Closing Date
between KRI (together with any other Subsidiary of KRI) and KRE
(together with any KRE Subsidiary), net of any intercompany
transactions between KRE (together with any KRE Subsidiary) and KRI
(together with any other Subsidiary of KRI) subsequent to that date,
exclusive of funds advanced by KRI to KRE for the acquisition by KRE of
the Flour Bluff properties.
(d) Certificate of Officers. St. Mary shall have delivered to
------------------------
KRI a certificate dated as of the Closing Date, executed in its
corporate name by, and verified by, the oath of its chief executive
officer and vice president of finance certifying to the fulfillment of
the conditions specified in subsections (a) and (b) of this Section
7.3.
(e) Opinion of Financial Advisor. The opinion referred to in
------------------------------
Section 3.2(r) shall not have been withdrawn by Nesbitt Burns.
(f) Opinion of Counsel. KRI shall have received a customary
-------------------
opinion of Ballard Spahr Andrews & Ingersoll, LLP, counsel to St. Mary,
in a form approved by KRI, which approval shall not be unreasonably
withheld or delayed.
(g) Tax Certificate. Counsel to KRI shall have received a tax
----------------
certificate from St. Mary in the form attached hereto as Exhibit
7.3(g).
(h) Tax Opinion. KRI shall have received the opinions of Locke
------------
Liddell & Sapp LLP and Ernst & Young LLP that (i) the Merger qualifies
as a reorganization under Section 368(a) of the Code, and (ii) the
Spin-Off qualifies as a tax-free distribution to the shareholders of
KRI under Section 355 of the Code.
ARTICLE VIII
TERMINATION AND AMENDMENT
Section 8.1 Termination. This Agreement may be terminated at any time
------------
prior to the Effective Time by action taken or authorized by the Board of
Directors of the terminating party or parties, whether before or after approval
of the St. Mary Share Issuance by the shareholders of St. Mary and approval of
the Merger by the shareholders of KRE, as follows:
(a) by mutual written consent of St. Mary, KRI and KRE, by
action of their respective Boards of Directors;
42
(b) by KRE or by St. Mary if the Effective Time shall not have
occurred on or before November 30, 1999 (the "Termination Date");
provided, however, that the right to terminate this Agreement under
this Section 8.1(b) shall not be available to any party whose failure
to fulfill any obligation under this Agreement (including without
limitation Section 5.3) has to any material extent been the cause of,
or resulted in, the failure of the Effective Time to occur on or before
the Termination Date;
(c) by KRE or by St. Mary if any Governmental Entity (i) shall
have issued an order, decree or ruling or taken any other action (which
the parties shall have used their commercially reasonable efforts to
resist, resolve or lift, as applicable, in accordance with Section 5.3)
permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree,
ruling or other action shall have become final and nonappealable or
(ii) shall have failed to issue an order, decree or ruling or to take
any other action (which order, decree, ruling or other action the
parties shall have used their commercially reasonable efforts to
obtain, in accordance with Section 5.3), in each case of (i) and (ii)
which is necessary to fulfill the conditions set forth in subsections
7.1(b) and 7.1(c) as applicable, and such denial of a request to issue
such order, decree, ruling or take such other action shall have become
final and nonappealable; provided however, that the right to terminate
this Agreement under this Section 8.1(c) shall not be available to any
party whose failure to comply with Section 5.3 has to any material
extent been the cause of such action or inaction;
(d) by KRE or by St. Mary if (i) the approval by the
shareholders of St. Mary required for the St. Mary Share Issuance to
consummate the Merger shall not have been obtained by reason of the
failure to obtain the Required St. Mary Vote, upon the taking of such
vote at a duly held meeting of the shareholders of St. Mary or at any
reconvened meeting after any adjournment or postponement thereof, or
(ii) the approval by the shareholders of KRE required for the Merger
shall not have been obtained by reason of the failure to obtain the
Required KRE Vote, upon the taking of such vote at a duly held meeting
of the shareholders of KRE or at any reconvened meeting after any
adjournment or postponement thereof;
(e) by St. Mary if there has been a material breach of a
representation, warranty, covenant or agreement contained in this
Agreement on the part of KRI or KRE, and as a result of such breach the
conditions precedent set forth in Section 7.1 or Section 7.2, as the
case may be, would not then be satisfied; provided, however, that if
such breach is curable by KRI or KRE through the exercise of
commercially reasonable efforts within the earlier of (i) thirty days
from the receipt of written notice of breach by KRI from St. Mary or
(ii) November 30, 1999, then for so long as KRI continues to exercise
such commercially reasonable efforts, St. Mary may not terminate this
Agreement under this Section 8.1(e) unless the breach is not cured in
full within such time period; and
(f) by KRI if there has been a material breach of a
representation, warranty, covenant or agreement contained in this
Agreement on the part of St. Mary, and as a result of such
43
breach the conditions precedent set forth in Section 7.1 or Section
7.3, as the case may be, would not then be satisfied; provided,
however, that if such breach is curable by St. Mary through the
exercise of commercially reasonable efforts within the earlier of (i)
thirty days from receipt of written notice of breach by St. Mary from
KRI or (ii) November 30, 1999, then for so long as St. Mary continues
to exercise such commercially reasonable efforts, KRI may not terminate
this Agreement under this Section 8.1(f) unless the breach is not cured
in full within such time period.
Section 8.2 Effect of Termination.
----------------------
(a) In the event of termination of this Agreement by KRE or by
St. Mary as provided in Section 8.1, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part
of St. Mary or KRI or their respective subsidiaries, affiliates,
employees, officers, directors or counsel, except with respect to the
first sentence of Section 5.2, Section 5.7 and this Section 8.2.
(b) If St. Mary shall terminate this Agreement pursuant to
Section 8.1(e) hereof, St. Mary may elect (i) to require KRI to pay to
it the sum of $1,000,000 (the "Termination Fee"), or (ii) in lieu of
the Termination Fee, to exercise its legal right to assert a claim for
all available legal monetary and equitable non-monetary remedies
against KRI and KRE with respect to such breach. If St. Mary shall
terminate this Agreement pursuant to Section 8.1(e) hereof, and on or
before December 31, 1999 there is a proposal reflected by a written
document (an "Alternative Acquisition Proposal") for an Alternative
Transaction (as hereinafter defined), KRI shall be obligated to pay to
St. Mary an additional sum of $2,000,000 (the "Alternative Transaction
Fee") upon the closing of such Alternative Transaction. An "Alternative
Transaction" shall mean a merger, a tender offer or exchange offer for
substantially all or the outstanding capital stock of KRE, or a sale of
substantially all of the assets of KRE to one or more non-affiliated
purchasers but shall not mean a liquidation or dissolution of KRE which
is not a part of one of the foregoing transactions. KRI acknowledges
that St. Mary will have incurred significant costs and will have
invested significant amounts of time and resources investigating and
negotiating the acquisition of KRE, and agrees that the Termination Fee
and the Alternative Transaction Fee constitute, if applicable,
reasonable liquidated damages in light of the anticipated or actual
harm to St. Mary that would be caused by a termination subject to this
Section 8.2(b). KRI and KRE further acknowledge that St. Mary may
suffer irreparable harm as a result of entering into this Agreement,
and in the event St. Mary shall be entitled to terminate this Agreement
pursuant to Section 8.1(e) hereof, but elects not to so terminate, St.
Mary shall have the right to seek specific enforcement of this
Agreement.
(c) If KRI shall terminate this Agreement pursuant to Section
8.1(e) hereof, KRI may elect (i) to require St. Mary to pay to it the
Termination Fee, or (ii) in lieu of the Termination Fee, to exercise
its legal right to assert a claim for all available legal monetary and
equitable non-monetary remedies against St. Mary with respect to such
breach. St. Mary acknowledges that KRI will have incurred significant
costs and will have invested significant
44
amounts of time and resources investigating and negotiating the
acquisition of KRE, and agrees that the Termination Fee, if applicable,
constitutes reasonable liquidated damages in light of the anticipated
or actual harm to KRI that would be caused by a termination subject to
this Section 8.2(b). St. Mary further acknowledges that KRE may suffer
irreparable harm through the loss of personnel and/or business
opportunities as a result of entering into this Agreement, and in the
event KRE shall be entitled to terminate this Agreement pursuant to
Section 8.1(f) hereof, but elects not to so terminate, KRI and KRE
shall have the right to seek specific enforcement of this Agreement.
(d) Notwithstanding the provisions of paragraphs (a) and (b)
above, if this Agreement is terminated because of a failure to obtain
the Required St. Mary Vote or the Required KRE Vote, a Termination Fee
shall not be payable. However, if this Agreement is terminated because
of a failure to obtain the Required KRE Vote, and on or before December
31, 1999 there is an Alternative Acquisition Proposal, an Alternative
Transaction Fee shall be payable as set forth in paragraph (b) above
upon the closing of such Alternative Transaction, and in that event the
Alternative Transaction Fee payable upon the closing of such
Alternative Transaction shall be $3,000,000.
(e) Any payment required to be made pursuant to Sections
8.2(b) and (c) shall be made by wire transfer not later than ten
business days after first due.
Section 8.3 Amendment. This Agreement may be amended by the parties
----------
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after approval of the St. Mary Share Issuance by the
shareholders of St. Mary and the approval of the Merger by the shareholders of
KRI, but, after any such approval, no amendment shall be made which by law or in
accordance with the rules of Nasdaq requires further approval by such
shareholders without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 8.4 Extension; Waiver. At any time prior to the Effective Time,
------------------
the parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of all parties hereto. The
failure of any party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of those rights.
45
ARTICLE IX
ARBITRATION
Section 9.1 Mediation. The parties hereto agree that if any claim,
----------
action, dispute or controversy of any kind arises out of or relates to this
Agreement or concerns any aspect of performance by any party under the terms of
this Agreement, prior to seeking any other remedies, including arbitration or
litigation, the aggrieved party shall give written notice to the other party
describing the disputed issue. Within ten days after the receipt of such a
notice, the parties shall mutually appoint a single mediator to assist in the
resolution of the dispute. If the parties cannot agree upon a mediator, either
KRI or St. Mary shall have the right to apply to the American Arbitration
Association ("AAA") for a single mediator to be appointed to mediate the dispute
in accordance with the rules applicable to AAA sponsored proceedings and, upon
the appointment of such a mediator by AAA, such mediator shall be deemed to be
accepted by the parties hereto. Within twenty days after the appointment of a
mediator, either by the parties hereto or, if necessary, by AAA, the parties
shall meet one or more times with such mediator in an effort to resolve the
matters in dispute. If after such meeting or meetings any aspect of the dispute
remains unresolved for a period of an additional ten days, the parties shall be
obligated to submit the dispute to arbitration in accordance with the provisions
of Section 9.2 immediately below. Any meeting or meetings with the mediator
appointed pursuant to this Article IX shall be conducted in Denver, Colorado.
The costs and expenses of the mediator shall be borne equally by KRI and St.
Mary.
Section 9.2 Arbitration.
------------
(a) Any claim, action, dispute or controversy of my kind
arising out of or relating to this Agreement or concerning any aspect
of performance by any party under the terms of this Agreement that is
not resolved by the mediation process set forth in Section 9.1 above
("Dispute") shall be resolved by mandatory and binding arbitration
administered by the AAA pursuant to the Federal Arbitration Act (Title
9 of the United States Code) in accordance with this Agreement and the
then-applicable Commercial Arbitration Rules of the AAA. The parties
acknowledge and agree that the transactions evidenced and contemplated
hereby involve "commerce" as contemplated in Section 2 of the Federal
Arbitration Act. To the extent that any inconsistency exists between
this Agreement and the foregoing statutes or rules, this Agreement
shall control. Judgment upon the award rendered by the arbitrator
acting pursuant to this Agreement may be entered in, and enforced by,
any court having jurisdiction absent manifest disregard by such
arbitrator of applicable law; provided, however, that the arbitrator
shall not amend, supplement or reform in any manner any of the rights
or obligations of any party hereunder or the enforceability of any of
the terms of this Agreement. Any arbitration proceedings under this
Agreement shall be conducted in Denver, Colorado, before a single
arbitrator being a member of the State Bar of Colorado for over ten
years and having recognized expertise in the field or fields of the
matter(s) in dispute.
(b) After first exhausting the mediation process set forth in
Section 9.1 upon the request by written notice delivered in accordance
with the terms hereof, whether made before
46
or after the institution of any legal proceeding, but prior to the
expiration of the statutory time period within which a party must
respond upon receipt of valid service of process in order to avoid a
default judgment, any Dispute shall be resolved by mandatory and
binding arbitration in accordance with the terms of this Agreement.
Within ten days after a party's receipt of such notice, each of the
parties shall select one qualified arbitrator. The two arbitrators
selected by the parties shall then mutually select a third arbitrator
(the "Third Arbitrator"), and the Third Arbitrator shall resolve the
Dispute in accordance with this Agreement and the applicable AAA rules.
If a replacement arbitrator is necessary for any reason, such
replacement arbitrator shall be appointed by the Third Arbitrator or,
alternatively, if the Third Arbitrator is to be replaced, mutually by
the two arbitrators selected by the parties.
(c) All statutes of limitation that would otherwise be
applicable shall apply to my arbitration proceeding. Any
attorney-client privilege and other protection against disclosure of
privileged or confidential information including, without limitation,
any protection afforded the work-product of any attorney, that could
otherwise be claimed by any party shall be available to, and may be
claimed by, any such party in any mediation or arbitration proceeding.
No party waives my attorney-client privilege or any other protection
against disclosure of privileged or confidential information by reason
of anything contained in, or done pursuant to, the mediation or
arbitration provisions of this Agreement.
(d) The arbitration shall be conducted and concluded as soon
as reasonably practicable, based on a schedule established by the Third
Arbitrator. Any arbitration award shall be based on and accompanied by
findings of fact and conclusions of law, shall be conclusive as to the
facts so found and shall be confirmable by my court having jurisdiction
over the Dispute, provided that such award, findings and conclusions
are not in manifest disregard of applicable law. The Third Arbitrator
shall have no authority to award punitive damages or any other damages
not measured by the prevailing party's actual damages, and may not, in
my event, make any ruling, finding or award that does not conform to
the terms and conditions of this Agreement.
(e) In order for an arbitration award to be conclusive,
binding and enforceable under this Agreement, the arbitration must
follow the procedures set forth in the portions of this Agreement
relating to such arbitration and any award or determination shall not
be in manifest disregard of applicable law. The obligation to mediate
or arbitrate my Dispute shall be binding upon the successors and
assigns of each of the parties hereto.
(f) Notwithstanding anything to the contrary contained in this
Article IX, the obligation of the parties hereto to mediate and
arbitrate shall not apply to any dispute in which injunctive or other
equitable relief is sought.
Section 9.3 Costs; Enforcement. Each party shall bear its own expenses,
-------------------
including, without limitation, expenses of counsel incident to any mediation or
arbitration. The expenses of the Third Arbitrator and the AAA shall be born
equally by KRI and St. Mary. The Third Arbitrator shall have the power and
47
authority to award expenses to the prevailing party if the Third Arbitrator
elects to do so. A party may bring summary proceedings (including, without
limitation, a plea in abatement or motion to stay further proceedings) in court
to compel mediation or arbitration of any Dispute in accordance with this
Agreement.
ARTICLE X
MISCELLANEOUS
Section 10.1 Nature of Representations and Warranties; Survival. The
-----------------------------------------------------
representations and warranties of the parties under this Agreement shall survive
for a period of one year from the Closing Date; provided, however, that (i) the
representations and warranties shall survive for a period of two years from the
Closing Date to the extent that any inaccuracy in any representation or warranty
results in or involves a claim by any third party and (ii) the representations
and warranties made with respect to taxes and benefit plans shall survive until
ninety days after the expiration of the appropriate statue of limitation, if
any, with respect thereto. Further, the Confidentiality Agreements (defined in
Section 5.2) and the obligations with respect to the Retained Litigation (as
defined in Section 5.13), shall survive the Closing and remain in full force and
effect without a time limitation.
Section 10.2 Counterparts and Facsimile Signatures. In order to
-----------------------------------------
facilitate the execution of this Agreement, the same may be executed in any
number of counterparts and signature pages may be delivered by telefax, with
original executed signature pages to be furnished promptly thereafter.
Section 10.3 Assignment. Neither this Agreement nor any right created
-----------
hereby shall be assignable by KRI, KRE or St. Mary without the prior written
consent of the other parties. Nothing in this Agreement, express or implied, is
intended to confer upon any person, other than the parties hereby and their
respective successors, assigns, heirs, executors, administrators, or personal
representatives, any rights or remedies under or by reason of this Agreement.
Section 10.4 Representative of KRH, KRM and KRE. Any executive officer
------------------------------------
of KRI is hereby authorized to execute any document or take any other action on
behalf of KRH, KRM or KRE.
Section 10.5 Entire Agreement. This Agreement, the schedules hereto,
------------------
and the other documents delivered pursuant hereby constitute the full and entire
understanding and agreement between the parties with regard to the subject
hereof and no party shall be liable or bound to any other in any manner by any
representations, warranties, covenants or agreements except as specifically set
forth herein. All prior agreements and understandings are superseded by this
Agreement and the schedules hereto.
Section 10.6 Governing Law. This Agreement shall be governed by the
--------------
laws of the State of New York, except that the Delaware General Corporation Law
shall govern as to matters of
48
corporate law pertaining to St. Mary and KRE, the corporate laws of Texas shall
govern as to the matters of corporate law pertaining to KRI and the corporate
laws of Colorado shall govern as to matters of corporate law pertaining to
Merger Sub. Subject to the alternative dispute resolution provisions set forth
in Article IX, any action brought to enforce this Agreement or any term thereof
shall be brought in a court of competent jurisdiction in Denver, Colorado and
each party hereto affirmatively agrees to submit to the jurisdiction in that
city and state.
Section 10.7 Severability. In case any provision of this Agreement
-------------
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 10.8 Notices. Any notice, communication, request, reply or
--------
advice, hereinafter severally and collectively called "notice," in this
Agreement provided or permitted to be given, made or accepted by either party to
the other must be in writing and may be given by personal delivery or U.S. mail
or confirmed telefax. If given by mail, such notice must be sent by registered
or certified mail, postage prepaid, mailed to the party at the respective
address set forth below, and shall be effective only if and when received by the
party to be notified. For purposes of notice, the addresses of the parties
shall, until changed as hereinafter provided, be as follows:
(a) If to St. Mary and/or Merger Sub:
St. Mary Land & Exploration Company
Attn: Mr. Mark A. Hellerstein
President and Chief Executive Officer
1776 Lincoln Street, Suite 1100
Denver, CO 80203-1080
Telefax: (303) 861-0934
With a copy to:
Milam Randolph Pharo, Esq.
Vice President Land & Legal
St. Mary Land & Exploration Company
1776 Lincoln Street, Suite 1100
Denver, CO 80203-1080
Telefax: (303) 863-1040
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(b) If to KRH, KRM, KRI and/or KRE:
King Ranch Inc.
Attn: Mr. Jack Hunt, President
1415 Louisiana, Suite 2300
Houston, TX 77002
Telefax: (713) 752-0101
With a copy to:
Greg Hill, Esq.
Locke Liddell & Sapp LLP
3400 Chase Tower
600 Travis
Houston, Texas 77002
Telefax: (713) 223-3717
or at such other address or telefax number as any party may have advised the
others in writing.
Section 10.9 Attorney Fees. Except as otherwise provided herein, in
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the event any party hereto institutes a proceeding against any other party
hereto for a claim arising out of or to enforce this Agreement, the parties
agree that the judge or arbitrator in any such proceeding shall be entitled to
determine the extent to which any party shall pay the reasonable attorneys' fees
incurred by the other party in connection with such proceeding, which
determination shall take into consideration the outcome of such Proceeding and
such other factors as the judge may determine to be equitable in the
circumstances.
Section 10.10 Certain Definitions.
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(a) "Affiliate" means, with respect to any Person, any other
Person that directly, or indirectly through one or-more intermediaries,
controls or is controlled by or is under common control with, such
Person; as used in this definition, "control" means the possession,
directly or indirectly, of the power to direct or cause the direction
of the management and policies of a Person, whether through ownership
of voting securities, by contract, or otherwise.
(b) "Knowledge" means (i) with respect to KRI and KRE, the
actual conscious knowledge of Jack Hunt, William Gardiner, Tom Fiorito,
William Silk, Brian Romere, Sonny Bryant, Dwight Bowles and Dennis
Haydel and (ii) with respect to St. Mary or Merger Sub, the actual
conscious knowledge of Thomas E. Congdon, Mark Hellerstein, Ronald
Boone, Douglas York, Milam Randolph Pharo, Richard Norris and Gary
Wilkering.
(c) "Loss" means any loss, damage, injury, diminution in
value, liability, claim, demand, proceeding, judgment, punitive damage,
fine, penalty, tax, cost or expense
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(including reasonable costs of investigation and the fees,
disbursements and expenses of attorneys, accountants and other
professionals incurred in proceedings, investigations or disputes
involving third parties, including governmental agencies).
(d) "Material Adverse Effect" means, with respect to KRE or
St. Mary, or any of their respective Subsidiaries, any adverse change,
circumstance or effect that, individually or in the aggregate with all
other adverse changes, circumstances and effects, or is reasonably
likely to be materially adverse to the business, properties, assets,
financial conditions or results or such operations of such entity and
its Subsidiaries, taken as a whole, other than any change, circumstance
or effect relating to the economy or securities markets in general, the
price or oil or natural gas, or the industries in which KRE or St. Mary
operates and are not specifically relating to KRE or St. Mary.
(e) "Person" means an individual, corporation, limited
liability company, partnership, association, trust, unincorporated
organization, other entity or group (as defined in the Exchange Act).
(f) "Proceeding" means any action, arbitration, audit,
hearing, investigation, litigation, or suit (whether civil, criminal,
administrative, investigative, or informal) commenced, brought,
conducted, or heard by or before, or otherwise involving, any
Governmental Entity or arbitrator.
(g) "Subsidiary" when used with respect to any party means any
corporation or other organization, whether incorporated or
unincorporated, (i) of which such party or any other Subsidiary of such
party is a general partner (excluding partnerships, the general
partnership interests of which held by such party or any Subsidiary of
such party do not have a majority of the voting interests in such
partnership) or (ii) at least a majority of the securities or other
interests of which 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 party or by any one
or more or its Subsidiaries, or by such party and one or more of its
Subsidiaries.
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IN WITNESS WHEREOF, this Agreement is hereby duly executed by each
party hereto as of the date first written above.
ST. MARY:
ST. MARY LAND & EXPLORATION COMPANY,
a Delaware corporation
By: /S/ MARK A HELLERSTEIN
------------------------------------
Mark A. Hellerstein, President and
Chief Executive Officer
MERGER SUB:
ST. MARY ACQUISITION CORPORATION,
a Colorado corporation
By: /S/ MARK A. HELLERSTEIN
--------------------------------
Mark A. Hellerstein, President
KRI:
KING RANCH INC.,
a Texas corporation
By: /S/ JACK HUNT
-----------------------
Jack Hunt, President
KRE:
KING RANCH ENERGY, INC.,
a Delaware corporation
By: /S/ WILLIAM GARDINER
-------------------------------------
William Gardiner, Vice President
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