EXHIBIT 10.9
STOCK PURCHASE AGREEMENT
BY AND AMONG
CORTEZ OIL & GAS, INC.,
HRM RESOURCES, INC.,
THE SECURITYHOLDERS
OF
CORTEZ OIL & GAS, INC.
AND
ENCORE ACQUISITION COMPANY
TABLE OF CONTENTS
Page
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ARTICLE 1
DEFINITIONS
1.1 Defined Terms...................................................................... 1
1.2 References and Titles.............................................................. 13
ARTICLE 2
THE PURCHASE
2.1 Purchase and Sale.................................................................. 14
2.2 Time and Date of Closing........................................................... 15
2.3 Closing Obligations................................................................ 15
2.4 Adjustments to Aggregate Purchase Price for Breaches of Representations and
Warranties......................................................................... 16
2.5 Additional Adjustments to Preliminary Aggregate Purchase Price..................... 19
2.6 Excluded Assets.................................................................... 20
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE SECURITYHOLDERS
3.1 Authority.......................................................................... 21
3.2 No Violations...................................................................... 21
3.3 Consents and Approvals............................................................. 22
3.4 Ownership of Securities............................................................ 22
3.5 Brokers............................................................................ 22
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
4.1 Organization....................................................................... 22
4.2 Authority and Enforceability....................................................... 23
4.3 No Violations...................................................................... 23
4.4 Consents and Approvals............................................................. 23
4.5 Financial Statements............................................................... 23
4.6 Capital Structure.................................................................. 24
4.7 Material Agreements................................................................ 25
4.8 Investments and Indebtedness....................................................... 25
4.9 Employment Matters; Independent Contractors........................................ 26
4.10 Employee Benefit Plans............................................................. 26
4.11 Litigation......................................................................... 28
4.12 Taxes and Tax Returns.............................................................. 28
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4.13 Title to and Sufficiency of Assets................................................. 29
4.14 Compliance with Laws and Permits................................................... 29
4.15 Proprietary Rights................................................................. 30
4.16 Environmental Matters.............................................................. 30
4.17 Insurance.......................................................................... 31
4.18 Governmental Regulation............................................................ 32
4.19 Brokers............................................................................ 32
4.20 Oil and Gas Operations............................................................. 32
4.21 Gas Imbalances..................................................................... 33
4.22 Royalties and Rentals.............................................................. 33
4.23 Payout Balances.................................................................... 33
4.24 Prepayments........................................................................ 33
4.25 Capital Expenditures............................................................... 33
4.26 Financial and Product Hedging Contracts............................................ 33
4.27 Books and Records.................................................................. 33
4.28 Reserve Report..................................................................... 34
4.29 Powers of Attorney, Authorized Signatories, Registered Agents...................... 34
4.30 Absence of Certain Changes or Events............................................... 34
4.31 Related Party Transactions......................................................... 36
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
5.1 Organization....................................................................... 37
5.2 Authority and Enforceability....................................................... 37
5.3 No Violations...................................................................... 37
5.4 Consents and Approvals............................................................. 38
5.5 Litigation......................................................................... 38
5.6 Funding............................................................................ 38
5.7 Brokers............................................................................ 38
ARTICLE 6
COVENANTS
6.1 Conduct of Business by the Company Pending Closing................................. 38
6.2 Access to Assets, Personnel and Information........................................ 41
6.3 Environmental Studies.............................................................. 42
6.4 Third Party Consents............................................................... 42
6.5 Public Announcements; Confidentiality.............................................. 43
6.6 Notification of Certain Matters.................................................... 43
6.7 No Negotiations.................................................................... 44
6.8 Access to Information.............................................................. 44
6.9 Investigation and Agreement by Buyer; No Other Representations or Warranties....... 44
6.10 Indemnification.................................................................... 45
6.11 Indemnification of Officers and Directors.......................................... 46
6.12 Compliance with Furst Ranch Exploration Agreement.................................. 46
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ARTICLE 7
CONDITIONS
7.1 Conditions to Each Party's Obligation.............................................. 46
7.2 Conditions to Obligation of Buyer.................................................. 47
7.3 Conditions to Obligations of the Company and the Securityholders................... 47
ARTICLE 8
TERMINATION
8.1 Termination........................................................................ 48
8.2 Effect of Termination.............................................................. 49
8.3 Return of Documentation............................................................ 49
ARTICLE 9
LIMITATIONS ON COMPETITION
9.1 Prohibited Activities.............................................................. 49
9.2 Injunctions and Restraining Orders................................................. 50
9.3 Restraint.......................................................................... 50
9.4 Severability; Reformation.......................................................... 50
9.5 Independent Covenant............................................................... 50
9.6 Materiality........................................................................ 51
ARTICLE 10
MISCELLANEOUS
10.1 Survival of Representations and Warranties......................................... 51
10.2 Amendment and Modification......................................................... 51
10.3 Notices ........................................................................... 51
10.4 Counterparts....................................................................... 52
10.5 Severability....................................................................... 53
10.6 Attorneys' Fees.................................................................... 53
10.7 Time............................................................................... 53
10.8 Parties in Interest................................................................ 53
10.9 Entire Agreement................................................................... 53
10.10 Applicable Law..................................................................... 53
10.11 Assignment......................................................................... 53
10.12 Waivers ........................................................................... 53
10.13 Confidentiality Agreement.......................................................... 54
10.14 Incorporation...................................................................... 54
10.15 Cooperation After Closing.......................................................... 54
10.16 Rules of Construction.............................................................. 54
10.17 Expenses and Obligations........................................................... 55
10.18 Release ........................................................................... 55
10.19 Appointment of Attorney-in-Fact.................................................... 56
10.20 Arbitration........................................................................ 57
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SCHEDULE A STOCKHOLDERS
SCHEDULE B OPTIONHOLDERS
SCHEDULE C-1 CLOSING AGGREGATE PURCHASE PRICE CALCULATION
SCHEDULE C-2 PRELIMINARY AGGREGATE PURCHASE PRICE CALCULATION
EXHIBIT 2.3(a)(ii) FORM OF OPTION SURRENDER AGREEMENT
EXHIBIT 2.3(a)(iii) FORM OF OPINION OF SELLER'S COUNSEL
EXHIBIT 2.3(a)(vi) FORM OF TERMINATION AGREEMENT
EXHIBIT 2.3(a)(xi) FORM OF RELEASE AGREEMENT
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of March 2,
2004, is made by and among Cortez Oil & Gas, Inc., a Delaware corporation (the
"Company"), the securityholders of the Company identified on Schedule A and
Schedule B hereto, Encore Acquisition Company, a Delaware corporation ("Buyer"),
and HRM Resources Inc., a Delaware corporation ("HRM") (solely with respect to
its obligations under Sections 2.1(g), 2.6, 6.1(a)(vi) and (xvi), 6.5(b) and
6.10(b)).
PRELIMINARY STATEMENTS
A. The stockholders identified on Schedule A hereto
(collectively, the "Stockholders"), own all of the outstanding shares of capital
stock of the Company.
B. The optionholders identified on Schedule B hereto
(collectively, the "Optionholders" and, together with the Stockholders, the
"Securityholders") hold all of the outstanding options of the Company.
C. The Stockholders desire to sell to Buyer, and Buyer desires to
purchase from the Stockholders, 2,914 shares (the "Shares") of common stock, par
value $0.01 per share (the "Common Stock"), representing all of the issued and
outstanding shares of capital stock of the Company, upon the terms and subject
to the conditions set forth herein.
D. The Optionholders desire to surrender, and Buyer desires for
the Optionholders to surrender, options to purchase 61 shares of Common Stock
(the "Options"), representing all of the issued and outstanding options to
purchase capital stock of the Company, upon the terms and subject to the
conditions set forth herein.
E. The Company, the Securityholders and Buyer desire to make
certain representations, warranties, covenants and agreements in connection with
the foregoing.
AGREEMENTS
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
upon the terms and subject to the conditions hereinafter set forth, the parties
hereto, intending to be legally bound, hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, each of the
following terms has the meaning given in this Section 1.1 or in the Sections
referred to below:
"AAA" means the American Arbitration Association.
"Affiliate" means, with respect to any Person, each other Person that
directly or indirectly (through one or more intermediaries or otherwise)
controls, is controlled by, or is under common
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control with such Person. A Person shall be deemed to control another Person if
such Person possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of such other Person, whether through
the ownership of voting securities, by contract or otherwise.
"Aggregate Defect Threshold" has the meaning set forth in Section
2.4(b)(i).
"Agreement" means this Stock Purchase Agreement, as amended,
supplemented or modified from time to time.
"Allocated Values" means the allocation of values for the Ownership
Interests as set forth on Schedule 1.1-A of the Company Disclosure Schedule.
"Applicable Laws" means all laws (including common law), statutes,
rules, regulations, ordinances, judgments, orders, decrees, injunctions and
writs of any Governmental Authority having jurisdiction over the business or
operations of the Company and its Subsidiaries, as may be in effect on the date
of this Agreement or the Closing Date.
"Arbitration Notice" has the meaning specified in Section 10.20.
"Bank Credit Agreement" means the Credit Agreement, dated as of
December 12, 2000 between the Company, as borrower, and Fleet National Bank, as
Administrative Agent (as amended and supplemented as of the date hereof).
"Borrowed Funds" has the meaning set forth in Section 2.1(g).
"Business Day" means any day other than (i) Saturday, Sunday or federal
holiday or (ii) a day on which commercial banks in Fort Worth, Texas are
authorized or required to be closed.
"Buyer" has the meaning specified in the first paragraph of this
Agreement.
"Buyer Damages" has the meaning specified in Section 6.10(a).
"Buyer Indemnitees" has the meaning specified in Section 6.10(a).
"Buyer Representative" means any director, officer, employee, agent,
advisor (including legal, accounting and financial advisors) or other
representative of Buyer.
"Capital Budget (2004)" means the capital budget of the Company and its
Subsidiaries for oil and gas drilling and exploitation projects to be undertaken
in calendar year 2004, a copy of which is included in Schedule 1.1-B of the
Company Disclosure Schedule.
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or any successor statutes and any
regulations promulgated thereunder.
"CERCLIS" means the Comprehensive Environmental Response, Compensation
and Liability Information System List.
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"Closing" means the closing and consummation of the transactions
contemplated by this Agreement.
"Closing Aggregate Purchase Price" means, with respect to a
Securityholder, the amount calculated as of the Closing and set forth under the
caption "Closing Aggregate Purchase Price" in the Closing Aggregate Purchase
Price Calculation Schedule.
"Closing Aggregate Purchase Price Calculation Schedule" means a
calculation schedule delivered at Closing evidencing the Closing Aggregate
Purchase Price and the calculation of its relevant components in the form
attached hereto as Schedule C-1.
"Closing Date" means the date on which the Closing occurs.
"Code" means the United States Internal Revenue Code of 1986, as
amended. All references to the Code, U.S. Treasury regulations or other
governmental pronouncements shall be deemed to include references to any
applicable successor regulations or amending pronouncement.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Company" has the meaning specified in the first paragraph of this
Agreement.
"Company Advisor" means Richardson Barr & Co., Natural Gas Partners V,
L.P. and any other agent, consultant or advisor to the Company with respect to
the transactions contemplated by this Agreement.
"Company Disclosure Schedule" shall mean that certain disclosure
document of even date with this Agreement from the Company to Buyer delivered
concurrently with the execution and delivery of this Agreement.
"Company Employee Benefit Plans" has the meaning set forth in Section
4.10(a).
"Company Financial Statements" means (i) the audited consolidated
financial statements of the Company and its consolidated Subsidiaries (including
the related notes) as of December 31, 2000, 2001 and 2002 and for the period
from inception to December 31, 2000 and for the years ended December 31, 2001
and 2002 and (ii) the unaudited consolidated financial statements of the Company
and its consolidated Subsidiaries for the twelve months ended December 31, 2003.
"Company Legal Costs" means the fees, expense reimbursements and any
and all other amounts due to Vinson & Elkins L.L.P. or any other outside counsel
engaged by the Company or any of its Subsidiaries relating to its services after
December 31, 2003 in connection with the negotiation, execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby.
"Company Permits" has the meaning set forth in Section 4.14.
"Company Privileged Information" has the meaning set forth in Section
6.2(b).
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"Company Transaction Costs" means (i) the fees, expense reimbursements
and any and all other amounts that would be due Company Advisors assuming the
transactions contemplated under this Agreement, plus (ii) all amounts paid or
payable to the officers and employees of HRM from and after December 31, 2003
for release and bonus payment amounts pursuant to Section 2.1(g).
"Confidential Information" has the meaning set forth in Section 6.5.
"Confidentiality Agreement" means the letter agreement dated October 3,
2003, between the Company and Buyer relating to the Company's furnishing of
information to Buyer in connection with Buyer's evaluation of the possibility of
acquiring the Company.
"Debt" means, for any Person, without duplication, (a) all obligations
of such Person for borrowed money, (b) all obligations of such Person evidenced
by bonds, debentures, notes or other similar instruments, (c) all Guarantees of
such Person, (d) the unfunded or unreimbursed portion of all letters of credit
issued for the account of such Person, (e) the present value of all obligations
in respect of leases that are capitalized on the books and records of such
Person, (f) any obligation of such Person representing the deferred purchase
price of property or services purchased by such Person other than trade payables
incurred in the ordinary course of business, (g) any indebtedness for borrowed
money secured by a Lien on the assets of such Person whether or not such
indebtedness, liability or obligation is otherwise non-recourse to such Person;
but specifically excluding any deferred tax items and amounts related to the
fair value of hedging arrangements; notwithstanding the foregoing, "Debt" shall
not include (i) letters of credit and performance or surety bonds listed on
Schedule 4.17 of the Company Disclosure Schedule to the extent that such are not
drawn upon, (ii) any letters of credit or performance or surety bonds, to the
extent that such are not drawn upon, that were issued in replacement of any of
the letters of credit or performance or surety bonds listed on Schedule 4.17 of
the Company Disclosure Schedule and (iii) any letters of credit or performance
or surety bonds that come into existence after the date of this Agreement to the
extent that such are not drawn upon.
"Debt Amount" means the total principal, interest, fees and other
expenses, if any, unpaid and outstanding on all loans under the Bank Credit
Agreement; notwithstanding the foregoing, "Debt Amount" shall not include (i)
letters of credit and performance or surety bonds listed on Schedule 4.17 of the
Company Disclosure Schedule to the extent that such are not drawn upon, (ii) any
letters of credit or performance or surety bonds, to the extent that such are
not drawn upon, that were issued in replacement of any of the letters of credit
or performance or surety bonds listed on Schedule 4.17 of the Company Disclosure
Schedule and (iii) any letters of credit or performance or surety bonds that
come into existence after the date of this Agreement to the extent that such are
not drawn upon.
"December 31 Balance Sheet" means the final unaudited consolidated
balance sheet of the Company and its Subsidiaries as of 11:59 p.m., central
time, on December 31, 2003, as prepared by the Company in accordance with GAAP
and the terms of this Agreement and as agreed to by Buyer.
"Defect Notice" has the meaning set forth in Section 2.4(a).
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"Defensible Title" means such right, title and interest that is (a)
with respect to Ownership Interests of record, evidenced by an instrument or
instruments filed of record in accordance with the conveyance and recording laws
of the applicable jurisdiction to the extent necessary to give the Company and
Buyer, through its ownership of the Common Stock, the right as against all third
parties to directly or indirectly enjoy the benefits of ownership and possession
of the Ownership Interests, (b) with respect to Ownership Interests not yet
earned under a farmout agreement, described in and subject to a farmout
agreement containing terms and provisions reasonably consistent with terms and
provisions used in the domestic oil and gas business and under which there is
exists no material default by the Company or a Subsidiary thereof, and (c)
subject to Permitted Encumbrances, free and clear of all Liens.
"Enbridge" means Enbridge Gathering (North Texas) L.P.
"Environmental and Regulatory Assessment" shall mean one or more
on-site inspections of the Operated Properties (or part thereof) together with
review of pertinent records in the possession of the Company or any of its
Subsidiaries relating to the environmental condition and regulatory compliance
of the Operated Properties, it being understood that Buyer or Buyer's
Representatives may conduct a Phase I environmental analysis (as contemplated by
the most recent version of ASTM 1527E) of the Operated Properties to evaluate
the environmental condition of the Operated Properties. "Environmental and
Regulatory Assessment" shall also include such further inspections, including
invasive or intrusive samplings or studies, as may be conducted in accordance
with Section 6.3.
"Environmental Law" means any law, ordinance or regulation of any
Governmental Authority (including common law), as well as any order, decree,
permit, judgment or injunction issued, promulgated, approved, or entered
thereunder, relating to the environment, Hazardous Materials (including the use,
handling, transportation, production, disposal, discharge or storage thereof or
the exposure thereto), or the environmental conditions on, under, or about any
real property owned, leased or operated at any time by the Company or any of its
Subsidiaries, including soil, groundwater, and indoor and ambient air conditions
or the reporting or remediation of environmental contamination. Environmental
Laws include the Clean Air Act, as amended, the Federal Water Pollution Control
Act, as amended, the Rivers and Harbors Act of 1899, as amended, the Safe
Drinking Water Act, as amended, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), as amended, the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), as amended, the Resource
Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Hazardous and
Solid Waste Amendments Act of 1984, as amended, the Toxic Substances Control
Act, as amended, the Hazardous Materials Transportation Act, as amended, and any
other federal, state and local law whose purpose is to conserve or protect human
health, the environment, wildlife or natural resources, in each case as in
effect on the date of this Agreement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time and the regulations promulgated thereunder.
"ERISA Affiliate" means any entity that is or ever was required to be
aggregated with the Company or any of its Subsidiaries pursuant to section
414(b), 414(c), 414(m) or 414(o) of the Code or Section 4001 of ERISA.
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"Excluded Assets" has the meaning specified in Section 2.6.
"Final Aggregate Option Exercise Price" means, with respect to an
Optionholder, the exercise price payable by an Optionholder upon exercise of
such Optionholder's options as of the Closing Date.
"Final Company Legal Costs" means the Company Legal Costs as of and
through the Closing Date.
"Final Company Transaction Costs" means Company Transaction Costs as of
and through the Closing Date.
"Final Debt Amount" means the Debt Amount reflected on the December 31
Balance Sheet.
"Final Note Payoff Amount" means, with respect to a Securityholder, the
total of all principal and interest due the Company or its Subsidiaries from
such Securityholder under the Notes as of the Closing Date.
"Final Working Capital" means the Working Capital as calculated in the
Closing Aggregate Purchase Price Calculation Schedule and which is reflected on
the December 31 Balance Sheet.
"Furst Ranch Exploration Agreement" means The Exploration Agreement,
dated effective as of October 1, 2002, between Cortez Operating Company and Old
WR Ranch I L.P., et al., as amended.
"Furst Ranch Oil and Gas Lease" means the Oil and Gas Lease, dated
effective as of October 1, 2002, between Cortez Operating Company and Old WR
Ranch I L.P., et al., as amended.
"GAAP" means generally accepted accounting principles in the United
States.
"Governmental Authority" means any national, state, county or municipal
government, domestic or foreign, any agency, board, bureau, commission, court,
department or other instrumentality of any such government, or any arbitrator in
any case that has jurisdiction over the Company, any of its Subsidiaries, Buyer,
any Securityholder or any of their respective properties or assets.
"Guaranty" by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing any Debt or other obligation
of any other Person; provided that, the term "Guaranty" shall not include
endorsements for collection or deposit in the ordinary course of business. For
purposes of this Agreement, the amount of any Guaranty shall be the maximum
amount that the guarantor could be legally required to pay under such Guaranty.
"Hazardous Material" means (a) any "hazardous substance," as defined by
CERCLA, (b) any "hazardous waste," as defined by the Resource Conservation and
Recovery Act, as amended, and as in effect on the date of this Agreement, (c)
any chemical, material, waste or substance, in
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any form or condition, the use, transportation, production, handling, storage,
treatment, disposal or discharge of which, or the exposure thereto, is
prohibited or regulated by any Applicable Law, (d) any radioactive material,
including any naturally occurring radioactive material, and any source, special
or byproduct material as defined in 42 U.S.C. 2011 et seq. and any amendments or
authorizations thereof and as in effect on the date of this Agreement, (e) any
asbestos-containing materials in any form or condition, (f) any polychlorinated
biphenyls in any form or condition, and (g) Hydrocarbons and their derivatives.
"HRM" has the meaning specified in the first paragraph of this
Agreement.
"HRM 401(k) Plan" means the 401(k) retirement plan of HRM currently in
effect for the benefit of its employees, pursuant to which HRM automatically
contributes 3% of each employee's cash compensation to the plan.
"HRM Asset Transfer" has the meaning set forth in Section 2.6.
"HRM Transfer" has the meaning set forth in Section 2.6.
"Hydrocarbons" means oil, condensate, gas, casinghead gas and other
liquid or gaseous hydrocarbons.
"Investment" in any Person means any investment, whether by means of
securities purchase (whether by direct purchase from such Person or from an
existing holder of securities of such Person), loan, advance, extension of
credit, capital contribution or otherwise, in or to such Person, the Guaranty of
any Debt or other obligation of such Person, or the subordination of any claim
against such Person to other Debt or other obligation of such Person; provided
that, "Investments" shall not include advances made to employees of such Person
for reasonable travel, entertainment and similar expenses incurred in the
ordinary course of business.
"Lien" means any lien, mortgage, security interest, pledge, deposit,
restriction, burden, encumbrance, defect in title, rights of a vendor under any
title retention or conditional sale agreement, or lease or other arrangement
substantially equivalent thereto, but does not include any production payment
obligation.
"Material Adverse Effect" means (a) when used with respect to the
Company, a material and adverse effect on the business, assets, financial
condition or results of operations of the Company and its Subsidiaries taken as
a whole; provided, however, that no change, effect or circumstance shall be
deemed (either alone or in combination) to constitute, nor shall be taken into
account in determining whether there has been or may be, a Material Adverse
Effect to the extent that it arises out of, or relates to, (i) a general
deterioration in the economy or in the industries in which the Company or any
Subsidiary thereof operates, (ii) the outbreak or escalation of hostilities
involving the United States, the declaration by the United States of a national
emergency or war or the occurrence of any other calamity or crisis, including an
act of terrorism, (iii) any change after the date of this Agreement in any laws,
statutes, rules, regulations, ordinances, judgments, orders, decrees or the
interpretation thereof, (iv) actions taken by Buyer or any of its Affiliates, or
(v) compliance with the terms of, or the taking of any action required by, this
Agreement, and (b) when used with respect to Buyer, a result or consequence that
would materially adversely affect Buyer's ability to perform their respective
7
obligations hereunder or consummate the transactions contemplated hereby or
prevent or materially delay the performance of this Agreement.
"Material Agreement" means any written or oral agreement, contract,
lease, easement, license, commitment, or understanding to which the Company or
any of its Subsidiaries is a party, by which the Company or any of its
Subsidiaries is directly or indirectly bound, or to which any assets of the
Company or any of its Subsidiaries may be subject, (a) pursuant to which the
Company or any of its Subsidiaries acquires any material portion of the raw
materials, supplies or services used or consumed by the Company or any of its
Subsidiaries in the operation of its business (unless such raw materials,
supplies or services are readily available to the Company or any of its
Subsidiaries from other sources on comparable terms), (b) pursuant to which the
Company or any of its Subsidiaries derives any material part of its revenues,
(c) containing any restriction on the Company or any of its Affiliates from
competing in any line of business or with any Person in any geographical area;
(d) involving (A) the acquisition, merger or purchase of all or substantially
all the assets or business of a third party, (B) the sale of assets other than
sales of produced Hydrocarbons or tangible equipment or inventory in the
ordinary course of business, (C) the purchase of any real property or oil and
gas properties or (D) the grant to any person of any preferential right to
purchase any material asset or assets of the Company; (e) containing any "change
in control" or similar provision pursuant to which the execution and delivery of
this Agreement, or the consummation of the transactions contemplated hereby
would give rise to any right (including any right of termination, cancellation,
acceleration or vesting) or benefit; (f) including any mortgage or other grant
of security interests, guarantee or note, relating to the borrowing of money;
(g) any provision which would prohibit or materially delay the consummation of
the transactions contemplated hereby; (h) not entered into in the ordinary
course of business involving in excess of $100,000; (i) containing covenants
purporting to limit the freedom of the Company or any of its Subsidiaries to
hire an individual or group of individuals; (j) relating to any outstanding
commitment for capital expenditures in excess of $100,000; (k) requiring
contingent payments by the Company or any of its Subsidiaries in connection with
the purchase of oil and gas properties; (l) involving confidentiality or
standstill agreements with any Person (the effectiveness of which extends beyond
the date that is six months following the date hereof) that restrict the Company
or any of its Subsidiaries in the use of any information or the taking of any
actions by the Company or its Subsidiaries entered into in connection with the
consideration by the Company or any of its Subsidiaries of any acquisition of
equity interests or assets; (m) in favor of directors or officers that provide
rights to indemnification; (n) with respect to oil, gas and mineral leases and
joint operating agreements, those oil, gas and mineral leases and joint
operating agreements representing the top 90% of such leases and agreements
ranked by Allocated Value and (o) that is material to the Company or any of its
Subsidiaries, other than those that are covered by clauses (a) through (n)
above.
"Note" or collectively, the "Notes" means those three promissory notes
dated as of April 1, 2002, executed by certain officers of the Company in favor
of the Company, the collective principal amount of which is $6,079,878 and each
of which shall be paid off by such officers at Closing.
"Notice Date" means the later of (a) thirty (30) days after Buyer
receives the initial December 31 Balance Sheet proposed by the Company and (b)
April 16, 2004.
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"Office Lease" means that certain Office Lease Agreement dated October
24, 2001, between Brangus, Ltd., as Landlord, and Cortez Oil & Gas, Inc., as
Tenant, as amended from time to time.
"Oil and Gas Interest(s)" means (a) direct and indirect interests in
and rights with respect to oil, gas, mineral and related properties and assets
of any kind and nature, direct or indirect, including working, royalty and
overriding royalty interests, production payments, operating rights, net profits
interests, other non-working interests and non-operating interests, (b)
interests in and rights with respect to Hydrocarbons and other minerals or
revenues therefrom and contracts in connection therewith and claims and rights
thereto (including oil and gas leases, operating agreements, unitization and
pooling agreements and orders, division orders, transfer orders, mineral deeds,
royalty deeds, oil and gas sales, exchange and processing contracts and
agreements and, in each case, interests thereunder), surface interests, fee
interests, reversionary interests, reservations and concessions, (c) easements,
rights of way, licenses, permits, leases, and other interests associated with,
appurtenant to, or necessary for the operation of any of the foregoing, and (d)
interests in equipment and machinery (including well equipment and machinery),
oil and gas production, gathering, transmission, compression, treating,
processing and storage facilities (including tanks, tank batteries, pipelines
and gathering systems), pumps, water plants, electric plants, gasoline and gas
processing plants, refineries and other tangible personal property and fixtures
associated with, appurtenant to, or necessary for the operation of any of the
foregoing, regardless of location. References in this Agreement to the "Oil and
Gas Interests of the Company" or "the Company's Oil and Gas Interests" mean the
collective Oil and Gas Interests of the Company or its Subsidiaries.
"Operated Properties" means each Ownership Interest (a) that is subject
to a joint operating agreement pursuant to which the Company or any of its
Subsidiaries is designated as an operator thereunder and (b) to the extent not
described in subclause (a), with respect to which the Company or any of its
Subsidiaries is designated as an operator under a regulatory permit.
"Optionholder" and "Optionholders" have the meaning set forth in the
preliminary statements.
"Options" means the collective reference to all options to purchase
shares of capital stock of the Company.
"Option Surrender Agreement" means the form of Agreement set forth in
Exhibit 2.3(a)(ii) hereto.
"Ownership Interests" means the collective ownership interests of the
Company and its Subsidiaries in the Oil and Gas Interests, as set forth in
Schedule 1.1-C of the Company Disclosure Schedule.
"Payout Balance(s)" means the status, as of the dates of the Company's
calculations, of the recovery by the Company or a third party of a cost amount
specified in the contract relating to a well included in the Ownership Interests
out of the revenue from such well where the working interest or the net revenue
interest of the Company therein will be adjusted when such amount has been
recovered.
9
"Permitted Encumbrances" means (a) Liens for Taxes, assessments or
other governmental charges or levies if the same shall not at the particular
time in question be due and delinquent or (if foreclosure, distraint, sale or
other similar proceedings shall not have been commenced or, if commenced, shall
have been stayed) are being contested in good faith by appropriate proceedings
and if the Company shall have set aside on its books such reserves (segregated
to the extent required by GAAP) as may be required by or consistent with GAAP,
(b) Liens of carriers, warehousemen, mechanics, laborers, materialmen,
landlords, vendors, workmen and operators arising by operation of law in the
ordinary course of business or by a written agreement existing as of the date
hereof and necessary or incident to the exploration, development, operation and
maintenance of Hydrocarbon properties and related facilities and assets for sums
not yet due or being contested in good faith by appropriate proceedings, if the
Company shall have set aside on its books such reserves (segregated to the
extent required by GAAP) as may be required by or consistent with GAAP, (c)
Liens incurred in the ordinary course of business to secure the performance of
bids, tenders, trade contracts, leases, statutory obligations, surety and appeal
bonds, performance and repayment bonds and other obligations of a like nature
for sums not yet due or being contested in good faith by appropriate
proceedings, if the Company shall have set aside on its books such reserves
(segregated to the extent required by GAAP) as may be required by or consistent
with GAAP, (d) Liens, easements, rights-of-way, restrictions, servitudes,
permits, conditions, covenants, exceptions, reservations and other similar
encumbrances incurred in the ordinary course of business or existing on property
(i) not reducing the Company's and its Subsidiaries collective net revenue
interest in any Oil and Gas Interest below the applicable Ownership Interest,
and (ii) not materially impairing the value of such property or interfering with
the ordinary conduct of the business of the Company and its Subsidiaries with
respect to such property or rights to any of their respective assets, (e) Liens
arising pursuant to Section 9.319 of the Texas Business and Commerce Code and
all other similar Liens created or arising by operation of law to secure a
party's rights as a purchaser of oil and gas for sums not yet due or being
contested in good faith by appropriate proceedings, if the Company shall have
set aside on its books such reserves (segregated to the extent required by GAAP)
as may be required by or consistent with GAAP, (f) all rights to consent by,
required notices to, filings with, or other actions by Governmental Authorities
to the extent customarily obtained subsequent to closing (g) farmout, carried
working interest, joint operating, unitization, royalty, overriding royalty,
sales and similar agreements relating to the exploration or development of, or
production from, Hydrocarbon properties entered into in the ordinary course of
business, provided the effect thereof on the collective working and net revenue
interest, royalties and overriding royalties of the Company and its Subsidiaries
has been properly reflected in the Ownership Interests, (h) any defects,
irregularities or deficiencies in title to the Oil and Gas Interests that do not
adversely affect the value of any individual asset of the Company or its
Subsidiaries, (i) preferential rights to purchase and Third-Party Consents (to
the extent not triggered by the consummation of the transaction contemplated
herein or any prior transaction, event or circumstance), (j) Liens arising under
or created pursuant to the Bank Credit Agreement, and (k) other Liens described
in Schedule 1.1-D of the Company Disclosure Schedule.
"Person" means any natural person, corporation, company, limited or
general partnership, joint stock company, joint venture, association, limited
liability company, trust, bank, trust company, land trust, business trust or
other entity or organization, or Governmental Authority.
10
"Pre-Acquisition Claims" has the meaning set forth in Section 10.18.
"Pre-Acquisition Matters" has the meaning set forth in Section 10.18.
"Preliminary Aggregate Option Exercise Price" means, with respect to an
Optionholder, the exercise price payable by an Optionholder upon exercise of
such Optionholder's options as of March 31, 2004, which amount is set forth
opposite such Optionholder's name under the caption "Preliminary Aggregate
Option Exercise Price" on Schedule C-2 hereto.
"Preliminary Aggregate Purchase Price" means, with respect to a
Securityholder, the amount set forth opposite such Securityholder's name under
the caption "Preliminary Aggregate Purchase Price" on Schedules C-1 and C-2
hereto.
"Preliminary Balance Sheet" means the unaudited consolidated balance
sheet for the twelve months ending December 31, 2003 and that is included in the
Company Financial Statements.
"Preliminary Company Legal Costs" means the Company Legal Costs
estimated to be incurred as of March 31, 2004, which amount is estimated to be
$250,000.
"Preliminary Company Transaction Costs" means the Company Transaction
Costs as of March 31, 2004, which amount is acknowledged and agreed to be
$2,750,000.
"Preliminary Debt Amount" means $37,343,328.
"Preliminary Note Payoff Amount" means, with respect to a
Securityholder, the total of all principal and interest due the Company from
such Securityholder under the Notes as if the transactions contemplated under
this Agreement closed on March 31, 2004, which amount is set forth opposite such
Securityholder's name under the caption "Preliminary Note Payoff Amount" on
Schedule C-2 hereto.
"Preliminary Working Capital" means $3,852,909.
"Product Hedging Contract" means any agreement providing for options,
swaps, floors, caps, collars, forward sales or forward purchases involving
commodities or commodity prices, or indexes based on any of the foregoing and
any other similar agreement or arrangement to which the Company or any of its
Subsidiaries is a party or by which any of them may be bound.
"Product Hedging Termination Costs" means (i) the aggregate cost to the
Company and its Subsidiaries associated with the termination of all Product
Hedging Contracts, less (ii) the lesser of (A) 40% of such costs and (B)
$500,000.
"Release Agreements" has the meaning set forth in Section 2.3(a)(xi).
"Released Parties" has the meaning set forth in Section 10.18.
"Relevant Geographic Area" has the meaning set forth in Section 9.1(a).
11
"Rep and Warranty Defect" has the meaning set forth in Section 2.4(a).
"Reserve Report" means the Company reserve report dated effective as of
September 1, 2003 as audited by William M. Cobb & Associates, Inc. (the output
pages for each category of reserves are attached as part of Schedule 1.1-E of
the Company Disclosure Schedule).
"Restricted Group" means, collectively, C. Randall Hill, R. Cory
Richards and David C. Myers.
"Restricted Party" means HRM and each Securityholder, other than
Natural Gas Partners V, L.P.
"Restricted Period" has the meaning set forth in Section 9.1.
"Restricted Properties" has the meaning set forth in Section 9.1.
"Seal Agreement" means that certain Retirement Agreement dated as of
May 31, 1989 between Cortez Operating Company and William G. Seal.
"Securityholders" means the Stockholders and the Optionholders,
collectively.
"Securityholder Representative" has the meaning set forth in Section
10.19.
"Stockholder" and "Stockholders" have the meaning set forth in the
preliminary statements.
"Subsidiary" of any Person means another Person, an amount of the
voting securities, other voting ownership or voting partnership interests of
which is sufficient to elect at least a majority of its board of directors or
other governing body (or, if there are no such voting interests, 50% or more of
the equity interests of which) is owned directly or indirectly by such Person.
"Tag-Along Rights" has the meaning set forth in Section 6.12.
"Tax Partnership" means any entity that was treated before 2003 or is
to be treated in 2003 as a partnership for federal income tax purposes
(including any entity that has made an election to be excluded from all or some
of the provisions of subchapter K of the Code) in which the Company directly or
indirectly through another Person owns any interest.
"Tax Returns" means any return, report, statement, information return
or other document (including any related or supporting information) filed or
required to be filed with any Governmental Authority in connection with the
determination, assessment, collection or administration of any Taxes or the
administration of any laws, regulations or administrative requirements relating
to any Taxes.
"Taxes" means taxes of any kind, levies or other like assessments,
customs, duties, imposts, charges or fees, including income, gross receipts, ad
valorem, value added, excise, real or personal property, asset, sales, use,
federal royalty, license, payroll, transaction, capital, net
12
worth and franchise taxes, estimated taxes, withholding, employment, social
security, workers compensation, utility, severance, production, unemployment
compensation, occupation, premium, windfall profits, transfer and gains taxes or
other governmental taxes imposed or payable to the United States or any state,
local or foreign governmental subdivision or agency thereof, and in each
instance such term shall include any interest, penalties or additions to tax
attributable to any such Tax, including penalties for the failure to file any
Tax Return or report.
"Termination Date" has the meaning set forth in Section 8.1.
"Third-Party Consent" means all authorizations, consents, permits,
orders or approvals of, or declarations, registrations or filings with, or
expirations of waiting periods imposed by, any Person other than the Company,
any Subsidiary thereof or Buyer.
"Total Preliminary Aggregate Purchase Price" means, with respect to all
Securityholders, the sum of each Securityholder's Preliminary Aggregate Purchase
Price as set forth on Schedules C-1 and C-2 hereto.
"Underproduction Amount" has the meaning set forth in Section
2.4(b)(v).
"Working Capital" means the Company's and its Subsidiaries'
consolidated, aggregate cash, cash equivalents, accounts receivable and other
current assets, less the Company's and its Subsidiaries' consolidated, aggregate
accounts payable and other current liabilities (including liabilities for
accrued taxes but excluding deferred taxes), in each case calculated in
accordance with GAAP and the terms of this Agreement; provided, however, that
Working Capital shall not include (i) any assets or liabilities arising under,
or relating to, Product Hedging Contracts, or (ii) any liabilities in respect of
the Debt Amount. In calculating Working Capital, no reserves reflected on the
Preliminary Balance Sheet shall be increased, reduced or eliminated except in
the case of a reduction or elimination by reason of a payment, settlement or
credit in the ordinary course of business and consistent with past practices.
1.2 REFERENCES AND TITLES.
(a) All references in this Agreement to Exhibits,
Schedules, Articles, Sections, clauses, subsections and other subdivisions refer
to the corresponding Exhibits, Schedules, Articles, Sections, clauses,
subsections and other subdivisions of or to this Agreement unless expressly
provided otherwise. Titles appearing at the beginning of any Articles, Sections,
clauses, subsections or other subdivisions of this Agreement are for convenience
only, do not constitute any part of this Agreement, and shall be disregarded in
construing the language hereof. The words "this Agreement," "herein," "hereby,"
"hereunder" and "hereof," and words of similar import, refer to this Agreement
as a whole and not to any particular subdivision unless expressly so limited.
The words "this Article," "this Section" and "this subsection," and words of
similar import, refer only to the Article, Section or subsection hereof in which
such words occur. The word "or" is not exclusive, and the word "including" (in
its various forms) means including without limitation. Pronouns in masculine,
feminine or neuter genders shall be construed to state and include any other
gender, and words, terms and titles (including terms defined herein) in the
singular form shall be construed to include the plural and vice versa, unless
13
the context otherwise requires. In the event of any conflict between GAAP and
the terms of this Agreement, the terms of this Agreement shall govern.
(b) As used in or when referring to representations and
warranties contained in this Agreement, the phrase "to the knowledge" (in its
various forms) of the representing party shall mean the actual knowledge, after
due investigation, of the directors and officers of the representing party.
(c) All amounts payable hereunder shall be paid in United
States Dollars.
ARTICLE 2
THE PURCHASE
2.1 PURCHASE AND SALE. At the Closing and subject to the terms and
conditions set forth in this Agreement:
(a) each Stockholder shall sell and transfer to Buyer,
and Buyer shall purchase from each Stockholder, the number of Shares set forth
opposite such Stockholder's name on Schedule A hereto;
(b) each Optionholder shall deliver, and the Company
shall accept, a duly executed Option Surrender Agreement with respect to Options
to purchase the number of shares of Common Stock set forth opposite such
Optionholder's name on Schedule B hereto;
(c) in exchange for the Shares and the surrender of
Options as described above, Buyer shall pay to each Securityholder the
Preliminary Aggregate Purchase Price, as such consideration may be adjusted
pursuant to the terms of Sections 2.4 and 2.5 to arrive at the Closing Aggregate
Purchase Price;
(d) Buyer shall pay to Fleet National Bank, as
Administrative Agent under the Bank Credit Agreement, all outstanding
indebtedness under the Bank Credit Agreement by wire transfer of immediately
available funds to an account designated by Fleet National Bank in writing;
(e) Buyer shall pay the Final Company Transaction Costs
that are not otherwise paid pursuant to Section 2.1(g) to each recipient thereof
listed on Schedule 2.1(e) of the Company Disclosure Schedule by wire transfer of
immediately available funds to an account designated by such recipient in
writing;
(f) Buyer shall pay the Final Company Legal Costs, to the
extent outstanding, to Vinson & Elkins L.L.P. and any such other law firm, as
applicable, by wire transfer of immediately available funds to an account
designated by Vinson & Elkins L.L.P. or such other law firm, as the case may be,
in writing; and
(g) immediately prior to the Closing and prior to
effecting the HRM Transfer, the Company shall (i) utilize its cash on hand
and/or borrow under and pursuant to the Bank Credit Agreement an amount equal to
$2,000,000 (the "Borrowed Funds") and (ii) cause such
14
Borrowed Funds to be contributed to HRM. At the Closing, HRM shall use the
Borrowed Funds to pay all amounts due and owing at the Closing under the Release
Agreements.
2.2 TIME AND DATE OF CLOSING. Unless this Agreement shall have
been terminated and the transactions herein contemplated shall have been
abandoned pursuant to Article 8, and subject to the satisfaction or waiver of
the conditions set forth in Article 7 (other than conditions the fulfillment of
which is to occur at the Closing), the Closing shall take place at 9:00 a.m.,
local time, on April 21, 2004, at the offices of Vinson & Elkins L.L.P., Dallas,
Texas, unless another date, time or place is mutually agreed to in writing by
Buyer and the Company. If any of the conditions (other than conditions the
fulfillment of which is to occur at the Closing) set forth in Article 7 are not
satisfied or waived at the time the Closing is to occur pursuant to this Section
2.2, then the Closing shall occur on a date that is the third Business Day after
the satisfaction or waiver of all such conditions.
2.3 CLOSING OBLIGATIONS.
(a) Subject to the terms and conditions hereof, at the
Closing, the Company and the Securityholders, as applicable, will deliver to
Buyer:
(i) certificates representing the Shares,
accompanied by stock powers duly endorsed in blank or accompanied by duly
executed instruments of transfer;
(ii) an Option Surrender Agreement executed on
behalf of each Optionholder, dated the Closing Date in the form of Exhibit
2.3(a)(ii) hereto;
(iii) an opinion of Vinson & Elkins L.L.P., dated
the Closing Date, in the form of Exhibit 2.3(a)(iii) hereto;
(iv) written resignations of the officers and
directors of the Company and its Subsidiaries;
(v) evidence reasonably satisfactory to Buyer of
the termination of those certain Confidentiality and Non-Compete Agreements,
dated March 10, 2000, with each officer of the Company;
(vi) an executed termination agreement,
substantially in the form attached hereto as Exhibit 2.3(a)(vi), relating to (A)
the termination of that certain Advisory Services and Indemnification Agreement,
dated March 10, 2000, between the Company and Natural Gas Partners V, L.P.
(except with respect to the indemnity provisions contained therein which shall
remain in full force and effect), and (B) evidence reasonably satisfactory to
Buyer of the payment by the Company of all amounts due under such agreement;
(vii) evidence reasonably satisfactory to Buyer of
the termination of that certain Voting and Shareholders Agreement, dated March
10, 2000, between the Company and the other parties thereto;
15
(viii) evidence reasonably satisfactory to Buyer of
the termination of that certain Registration Rights Agreement, dated March 10,
2000, between the Company and the other parties thereto;
(ix) evidence reasonably satisfactory to Buyer
that (A) HRM is no longer a subsidiary or otherwise affiliated with the Company,
(B) HRM has assumed all rights, obligations and liabilities with respect to the
Excluded Assets and (C) the Company has been fully and unconditionally released
from all obligations and liabilities with respect to the Excluded Assets;
(x) evidence reasonably satisfactory to Buyer
that the Company has been fully and unconditionally released from all
obligations and liabilities with respect to the Office Lease;
(xi) a release executed by each individual who is
an employee of HRM as of the date hereof, in the form attached hereto as Exhibit
2.3(a)(xi) (collectively, the "Release Agreements");
(xii) evidence reasonably satisfactory to Buyer
that all rights, obligations and liabilities of the Company and any of its
Subsidiaries under all Product Hedging Contracts have expired or been terminated
and that the Company and its Subsidiaries have fully performed all of their
respective obligations thereunder;
(xiii) one or more statements (in form and
substance reasonably satisfactory to Buyer) that satisfies Buyer's obligations
under Treasury Regulation section 1.1445-2(b)(2);
(xiv) one or more agreements in form and substance
reasonably satisfactory to Buyer evidencing the termination of all intercompany
agreements and arrangements between or involving the Company and HRM; and
(xv) all other documents, instruments,
certificates or other items required to be delivered at the Closing by the
Company pursuant to this Agreement.
(b) Subject to the terms and conditions hereof, at the
Closing, Buyer will deliver to the Securityholders or other Persons designated
in this Agreement, as applicable:
(i) such Securityholder's allocable share of the
Closing Aggregate Purchase Price; and
(ii) all other payments, documents, instruments,
certificates or other items required to be delivered at the Closing by Buyer
pursuant to this Agreement.
2.4 ADJUSTMENTS TO AGGREGATE PURCHASE PRICE FOR BREACHES OF
REPRESENTATIONS AND WARRANTIES.
(a) Buyer may conduct, at its sole cost, such
examinations and investigations (including title examinations and
investigations), as it may in its sole discretion choose to
16
conduct to determine if any violations of the representations or warranties in
Article 3 and Article 4 exist. In order to be entitled to assert the existence
of any violation of a representation or warranty in Article 3 or Article 4 under
this Section 2.4, Buyer must deliver to the Company and the Securityholder
Representative on or before the Notice Date a written notice (the "Defect
Notice") specifying each defect that it asserts constitutes a violation of the
representations set forth in Article 3 or Article 4 (a "Rep and Warranty
Defect"), a description of each such Rep and Warranty Defect, the amount of the
adjustment to the Total Preliminary Aggregate Purchase Price that it asserts
based on such defect and its method of calculating such adjustment. If such
Defect Notice is not timely submitted, Buyer will be deemed to have waived all
rights under this Section 2.4.
(b) Upon timely delivery of the Defect Notice, Buyer and
the Securityholders shall in good faith negotiate the validity of the claim and
the amount of any adjustment to the Total Preliminary Aggregate Purchase Price
using the following criteria:
(i) No adjustment will be made to the Total
Preliminary Aggregate Purchase Price under this Section 2.4 except to the extent
that the net total of all adjustments exceeds $1,250,000 in the aggregate (the
"Aggregate Defect Threshold"); by way of example, if the net total of all
adjustments under this Section 2.4 equals $1,300,000, then an adjustment of
$50,000 shall, subject to subsection (c) of this Section 2.4, be made to the
Total Preliminary Aggregate Purchase Price. The amount of any adjustment for a
Rep and Warranty Defect shall be determined without giving effect to the
knowledge qualifications contained in Article 3 and Article 4 and without giving
effect to the materiality qualifications contained in Section 3.2; Section 4.1;
Section 4.3 (but giving effect to the use of the term "Material Agreements"
therein); Section 4.9; Sections 4.10(c) and (d); Section 4.13(b); Section 4.14;
Sections 4.16(a), (b), (c), (e) and (g); Section 4.17; Section 4.20; Section
4.22; Section 4.23; Section 4.28; and Sections 4.30(f), (g), (k) (but giving
effect to the use of the term "Material Agreements" therein and to materiality
qualifications in subclause (iv) thereof), (l) and (m). In addition, the amount
of any adjustment for a Rep and Warranty Defect with respect to Section 4.16
shall be determined without giving effect to any disclosures made on Schedule
4.16 of the Company Disclosure Schedule; provided, however, that effect shall be
given to disclosures on Schedule 4.16 of the Company Disclosure Schedule of past
environmental matters that have been remediated in accordance with applicable
Environmental Law.
(ii) If the requested adjustment is based on the
Company owning a net revenue interest as to a particular Ownership Interest less
than that shown in the Schedule 1.1-C of the Company Disclosure Schedule, then a
downward adjustment shall be calculated by multiplying the Allocated Value set
forth for such Ownership Interest by a fraction (A) the numerator of which is an
amount equal to the net revenue interest shown on Schedule 1.1-C of the Company
Disclosure Schedule for such Ownership Interest less the decimal share to which
the Company would be entitled as a result of its Ownership Interest which is
unaffected by such Rep and Warranty Defect and (B) the denominator of which is
the net revenue interest shown on Schedule 1.1-C of the Company Disclosure
Schedule for such Ownership Interest. Any downward adjustments requested by
Buyer may be offset by upward adjustments if it is determined that the Company's
net revenue interest for all or part of any Ownership Interests is greater than
that shown in Schedule 1.1-C of the Company Disclosure Schedule.
17
(iii) If the requested adjustment is based on the
Company owning a working interest as to a particular Ownership Interest that is
larger than the working interest shown in Schedule 1.1-C of the Company
Disclosure Schedule, but without a proportionate increase in the Company's net
revenue interest as to such Ownership Interest, then the adjustment is
calculated by (x) determining the effective net revenue interest that results
from such larger working interest, (y) determining what the net revenue interest
would be using such effective net revenue interest and the working interest
shown in Schedule 1.1-C of the Company Disclosure Schedule and (z) then
calculating the adjustment in the manner set forth in clause (ii) preceding
(including the effect of any offsets due to upward adjustments). By way of
example, with respect to an Ownership Interest with an Allocated Value of
$1,000,000, if the Company owns a 60% working interest instead of a 50% working
interest and a 45% net revenue interest instead of a 40% net revenue interest,
then the downward adjustment of $62,500.00 to the Total Preliminary Aggregate
Purchase Price (assuming the Aggregate Defect Threshold had been exceeded) would
be calculated as follows:
(w) Ownership Interest: 50% WI, 40% NRI, 80% Effective NRI
(x) Defect Interest: 60% WI, 45% NRI, 75% Effective NRI
(y) Adjustment Percentage: (.80 - .75)/.80 = .0625
(z) Downward Adjustment: .0625 x $1,000,000 = $62,500.00
(iv) If the requested adjustment is based on a
Lien or other monetary charge upon a particular Ownership Interest that is
liquidated in amount, then the adjustment is the amount necessary to remove such
Lien or other monetary charge from the affected Ownership Interest.
(v) In respect of the representation and
warranty contained in Section 4.21, if the Company's net gas underproduced
position as to its Ownership Interests is equal to or greater than 100,000 Mcf,
then no adjustment shall be made to the Total Preliminary Aggregate Purchase
Price. If the Company's net gas underproduced position as to its Ownership
Interests is less than 100,000 Mcf (such amount shall be referred to as the
"Underproduction Amount"), then the Total Preliminary Aggregate Purchase Price
shall be adjusted by the amount equal to the product derived from multiplying
$1.50 by the sum of 100,000 minus the Underproduction Amount.
(vi) If the requested adjustment is based on a
violation of a representation or warranty that is not adjusted pursuant to
clauses (ii), (iii), (iv) or (v) of this Section 2.4(b), then the Parties shall
negotiate in good faith regarding the validity of the claim and the amount of
any adjustment to the Total Preliminary Aggregate Purchase Price.
(vii) No fact, circumstance or condition of the
title to an Ownership Interest shall be considered to effect a reduction in the
value of the Ownership Interest, unless due consideration has been given to (x)
the length of time that such Ownership Interest has been producing Hydrocarbon
substances and has been credited to and accounted for by the Company
18
and its predecessors in title, if any, and (y) whether any such fact,
circumstance or condition is of the type that can generally be expected to be
encountered in the area involved and is usually and customarily acceptable to
(and thus not considered to create an adverse effect on value by) reasonable and
prudent operators, interest owners and purchasers engaged in the business of the
ownership, development and operation of oil and gas properties.
(c) As an alternative to adjusting the Total Preliminary
Aggregate Purchase Price, the Company may elect to cure all or certain of the
asserted Rep and Warranty Defects, provided that such cure period shall only
extend until the fifth calendar day after the Notice Date.
(d) If Buyer and the Company are unable to reach
agreement within five (5) calendar days after the Notice Date as to the validity
of claims and amounts for adjustments to the Total Preliminary Aggregate
Purchase Price, or as to the sufficiency of any cure pursuant to Section 2.4(c),
then such disagreement shall be resolved by binding arbitration in accordance
with Section 10.20.
(e) Any adjustment made to the Total Preliminary
Aggregate Purchase Price pursuant to this Section 2.4 shall only be enforceable
when evidenced by (i) an amendment to this Agreement executed by Buyer and the
Securityholders acting through the Securityholder Representative or (ii) by
arbitrative order rendered in accordance with Section 10.20. With respect to
determining the adjustment under this Section 2.4 to the Closing Aggregate
Purchase Price payable to a Securityholder, the amount of any such adjustment
shall be allocated on a pro rata basis to all Securityholders based on the
number set forth with respect to each Securityholder under the column entitled
"Number of Shares Owned and Subject to Options" in Schedule C-1.
2.5 ADDITIONAL ADJUSTMENTS TO PRELIMINARY AGGREGATE PURCHASE
PRICE.
(a) To arrive at the Closing Aggregate Purchase Price
payable to a Securityholder, the Preliminary Aggregate Purchase Price payable to
such Securityholder shall be adjusted (in addition to any adjustments made as a
result of Rep and Warranty Defects) as follows:
(i) upward or downward by (A) taking the
positive or negative difference between Final Working Capital and Preliminary
Working Capital and dividing the amount by 2,975 and (B) multiplying the result
under the preceding clause (A) by the sum of (x) number of Shares owned by the
Securityholder as set forth on Schedule A and (y) the number of shares of Common
Stock issuable upon exercise of Options held by the Securityholder as set forth
on Schedule B;
(ii) upward or downward by (A) taking the
positive or negative difference between the Preliminary Debt Amount and the
Final Debt Amount and dividing the amount by 2,975, and (B) multiplying the
result under the preceding clause (A) by the sum of (x) number of Shares owned
by the Securityholder as set forth on Schedule A and (y) the number of shares of
Common Stock issuable upon exercise of Options held by the Securityholder as set
forth on Schedule B;
19
(iii) upward or downward by (A) taking the
positive or negative difference between the Preliminary Company Transaction
Costs and Final Company Transaction Costs and dividing the amount by 2,975, and
(B) multiplying the result under the preceding clause (A) by the sum of (x) the
number of Shares owned by the Securityholder as set forth on Schedule A and (y)
the number of shares of Common Stock issuable upon exercise of Options held by
the Securityholder as set forth on Schedule B;
(iv) upward or downward by (A) taking the
positive or negative difference between the Preliminary Company Legal Costs and
the Final Company Legal Costs and dividing the amount by 2,975, and (B)
multiplying the result under the preceding clause (A) by the sum of (x) the
number of Shares owned by the Securityholder as set forth on Schedule A and (y)
the number of shares of Common Stock issuable upon exercise of Options held by
the Securityholder as set forth on Schedule B;
(v) if applicable, upward or downward by taking
the positive or negative difference between the Preliminary Note Payoff Amount
and Final Note Payoff Amount;
(vi) if applicable, upward or downward by taking
the positive or negative difference between the Preliminary Aggregate Option
Exercise Price and Final Aggregate Option Exercise Price; and
(vii) downward by (A) the quotient obtained by
dividing Product Hedging Termination Costs by 2,975, multiplied by (B) the sum
of (x) the number of Shares owned by the Securityholder as set forth on Schedule
A and (y) the number of shares of Common Stock issuable upon exercise of Options
held by the Securityholder as set forth on Schedule B.
(b) The calculations required by Section 2.5(a) shall be
evidenced on the Closing Aggregate Purchase Price Calculation Schedule and
agreed to by Buyer and the Securityholder Representative. The provisions of
Section 2.4 and Section 2.5(a) shall apply in such a manner as not to give
duplicative effect to any item of adjustment.
(c) To facilitate the calculation of the Closing
Aggregate Purchase Price payable to each Securityholder, the Securityholder
Representative and Buyer shall agree, on or before the Notice Date, upon the
December 31 Balance Sheet, along with copies of the back up schedules of all
components of the adjustments contemplated by this Section 2.5 (including an
estimated payoff schedule from the Company's lenders under the Bank Credit
Agreement). The Securityholder Representative and Buyer shall work in good faith
from and after the delivery of these items to prepare the Closing Aggregate
Purchase Price Calculation Schedule and deliver an agreed upon final version
thereof which shall be executed and delivered by the Securityholders and Buyer
at Closing. If Buyer and the Securityholder Representative are unable to agree
on the December 31 Balance Sheet by the Notice Date, any such disagreement shall
be resolved by binding arbitration in accordance with Section 10.20.
2.6 EXCLUDED ASSETS. (a) At the Closing, the Company shall sell
and transfer to one or more members of the Restricted Group all of the
outstanding equity securities of HRM for an
20
aggregate purchase price of $10,000 (the "HRM Transfer"). Prior to the HRM
Transfer, HRM shall transfer to the Company the assets designated for such
transfer on Schedule 2.6 of the Company Disclosure Schedule (the "HRM Asset
Transfer"). At the time of the HRM Transfer, all of the assets and properties of
HRM shall consist entirely of the items designated as "Excluded Assets" on
Schedule 2.6 of the Company Disclosure Schedule (the "Excluded Assets"), and the
Excluded Assets shall not include any seismic, geological, engineering or
technical data, licenses, devices and data relating to field reporting or any
other property or information (other than generic land or technical information)
relating to or necessary for the conduct of the Company's or its Subsidiaries'
oil and gas business, it being acknowledged that all such data, property and
information (other than generic land or technical information) are assets of the
Company and its Subsidiaries. Notwithstanding any provisions contained herein to
the contrary, none of the representations, warranties or covenants (other than
those contained in Sections 2.1(g), 2.6, 4.10, 6.1(a)(vi) and (xvi), 6.5(b) and
6.10(b) and any other provisions specifically referencing the inclusion of HRM)
set forth in this Agreement nor any of the other provisions of this Agreement
shall be applicable to HRM or the Excluded Assets and no breach of this
Agreement or adjustment to the Preliminary Aggregate Purchase Price or the
Closing Aggregate Purchase Price may be asserted as a result of the liabilities
or obligations of HRM, the HRM Transfer or the transfer of the Excluded Assets.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE SECURITYHOLDERS
REPRESENTATIONS AND WARRANTIES OF THE SECURITYHOLDERS. Each
Securityholder, severally and not jointly, represents and warrants to Buyer as
follows:
3.1 AUTHORITY. The Securityholder has the requisite legal capacity
to execute and deliver this Agreement and to consummate the transactions
contemplated herein. This Agreement has been duly executed and delivered by the
Securityholder and, assuming that this Agreement constitutes the valid and
binding agreement of the other parties hereto, constitutes the valid and binding
obligations of the Securityholder, enforceable against the Securityholder in
accordance with its terms and conditions, except that the enforcement hereof may
be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect relating
to creditors' rights generally and (ii) general principles of equity (regardless
of whether enforceability is considered in a proceeding at law or in equity).
3.2 NO VIOLATIONS. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby and compliance
by the Securityholder with the provisions hereof will not, conflict with, result
in any violation of or default (with or without notice or lapse of time or both)
under, give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the creation
of any Lien on any of the properties or assets of the Securityholder under any
provision of (a) any loan or credit agreement, note, bond, mortgage, indenture,
license, contract, agreement or other instrument or obligation to which the
Securityholder is a party or by which any of its properties or assets is bound
or affected, or (b) assuming the consents, approvals, authorizations or permits
and filings or notifications referred to in Section 4.4 are duly and timely
obtained or
21
made, any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Securityholder or its properties or assets.
3.3 CONSENTS AND APPROVALS. No Third-Party Consent is required to
be obtained or made by the Securityholder in connection with the execution,
delivery and performance by the Securityholder of this Agreement or the
consummation by the Securityholder of the transactions contemplated herein.
3.4 OWNERSHIP OF SECURITIES.
(a) The Securityholder is the sole record and beneficial
owner of the number of Shares set forth opposite such Securityholder's name on
Schedule A hereto. At the Closing, Buyer will acquire record and beneficial
ownership of the Securityholder's Shares free and clear of all Liens (including,
in the case any Securityholder that is an individual, any claims of spouses
under applicable community property laws), except those Liens that may arise as
a result of (i) any actions taken by or on behalf of Buyer and its Affiliates or
(ii) applicable securities laws.
(b) The Securityholder is the grantee of the Options, if
any, set forth opposite such Securityholder's name on Schedule B hereto.
(c) Except for the Shares and Options, if any, owned by
Securityholder and listed in Schedule A and Schedule B hereto, the
Securityholder does not own any shares of capital stock or other securities of
the Company or any options, warrants, equity securities, calls, rights or other
securities convertible into or exchangeable or exercisable for shares of capital
stock or other equity securities of the Company.
3.5 BROKERS. The Securityholder is not a party to any agreement or
other arrangement (whether written or oral) with a broker, finder, investment
banker or other Person who is or will be, as a result of the Closing of the
transactions contemplated by this Agreement, entitled to any brokerage, finder's
or other fee or compensation, other than the fees owed by the Company and
contemplated to be included in the Company Transaction Costs, and for which
Buyer, the Company or any of its Subsidiaries will have any obligation or
liability.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Buyer as follows:
4.1 ORGANIZATION. Each of the Company and its Subsidiaries (a) is
a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation, (b) has the requisite power and
authority to own, lease and operate its properties and to conduct its business
as it is presently being conducted, and (c) is duly qualified to do business as
a foreign corporation and is in good standing, in each jurisdiction where the
character of the properties owned or leased by it or the nature of its
activities makes such qualification necessary (except where the failure to be so
qualified or to be in good standing would not be reasonably likely to have a
Material Adverse Effect on the Company). The Company has furnished to Buyer
copies of the articles of incorporation and by-laws of the Company and each
22
of its Subsidiaries, and such copies are accurate and complete. The Company has
no Subsidiaries other than as set forth on Schedule 4.1 of the Company
Disclosure Schedule. Except as set forth on Schedule 4.1 of the Company
Disclosure Schedule, the Company does not own, directly or indirectly (including
through ownership in a Subsidiary or other Person), nor is it a party to any
agreement or other instrument to acquire, any shares of capital stock,
partnership interests, limited liability company interests, voting rights or
other securities in any other Person.
4.2 AUTHORITY AND ENFORCEABILITY. The Company has the requisite
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated herein. The execution and delivery of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated herein have been duly authorized by all necessary corporate action
on the part of the Company. This Agreement has been duly executed and delivered
by the Company and, assuming that this Agreement constitutes the valid and
binding agreement of the other parties hereto, constitutes the valid and binding
obligations of the Company, enforceable against the Company in accordance with
its terms and conditions, except that the enforcement hereof may be limited by
(a) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws now or hereafter in effect relating to
creditors' rights generally and (b) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in equity).
4.3 NO VIOLATIONS. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby and compliance
by the Company with the provisions hereof will not, conflict with, result in any
violation of or default (with or without notice or lapse of time or both) under,
give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the creation
of any Lien on any of the properties or assets of the Company or any Subsidiary
thereof under any provision of (a) such entity's articles of incorporation or
by-laws or comparable organizational documents, (b) any Material Agreement, (c)
any loan or credit agreement, note, bond, mortgage, indenture, license,
contract, agreement or other instrument or obligation not described in subclause
(b) to which the Company or any of its Subsidiaries is a party or by which any
of its or their properties or assets is bound or affected, except for such
conflicts, violations, defaults, rights, losses or Liens as are not material to
the business of the Company and its Subsidiaries, taken as a whole or (d)
assuming the consents, approvals, authorizations or permits and filings or
notifications referred to in Section 4.4 are duly and timely obtained or made,
any Applicable Law, in each case other than as set forth on Schedule 4.3 of the
Company Disclosure Schedule.
4.4 CONSENTS AND APPROVALS. No Third-Party Consent is required to
be obtained or made by the Company or any of its Subsidiaries in connection with
the execution, delivery and performance by the Company of this Agreement or the
consummation by the Company of the transactions contemplated herein, except for
such Third-Party Consents, the failure of which to be obtained would not result
in a loss of an Ownership Interest.
4.5 FINANCIAL STATEMENTS.
(a) The Company Financial Statements were, and at the
Closing (except with respect to FASB Rule 143) the December 31 Balance Sheet
will have been, prepared in
23
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto and the unaudited interim
financial statements are not accompanied by notes or other textual disclosure
required by GAAP) and fairly present in all material respects the consolidated
financial position of the Company and its consolidated Subsidiaries as of their
respective dates and the consolidated results of operations and the consolidated
cash flows of the Company and its consolidated Subsidiaries for the periods
presented therein. No financial statements of any Person other than the Company
and the Subsidiaries included in the Company Financial Statements are required
by GAAP to be included in the consolidated financial statements of the Company.
(b) Except as set forth in the Company Financial
Statements or the December 31 Balance Sheet, the Company and its Subsidiaries
have no liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) required by GAAP to be set forth in a financial
statement or in the notes thereto except liabilities, obligations or
contingencies that (i) are accrued or reserved against in the December 31
Balance Sheet, (ii) were incurred after December 31, 2003 in the ordinary course
of business and consistent with past practices (other than such liabilities
arising from breach of contract, breach of warranty, tort, infringement or
violation of any Applicable Law), or (iii) constitute Company Legal Fees or
Company Transaction Costs.
4.6 CAPITAL STRUCTURE.
(a) The authorized capital stock of the Company consists
of 3,500 shares of Common Stock, par value $.01 per share.
(b) There are issued and outstanding (i) 2,914 shares of
Common Stock, and (ii) the Options relating to 61 shares of Common Stock. No
shares of Common Stock are held by the Company as treasury stock. Schedule A and
Schedule B set forth the name and number of shares of Common Stock or Options,
respectively, beneficially owned or held of record by any Person.
(c) Except as set forth in or pursuant to Section 4.6(b),
there are issued and outstanding or reserved for issuance (i) no shares of
capital stock or other voting or equity securities of the Company, (ii) no
securities of the Company or any other Person convertible into or exchangeable
or exercisable for shares of capital stock or other voting or equity securities
of the Company and (iii) no subscriptions, options, warrants, calls, rights
(including preemptive rights), commitments, understandings or agreements to
which the Company is a party or by which it is bound obligating the Company to
issue, deliver, sell, purchase, redeem or acquire shares of capital stock or
other voting or equity securities of the Company (or securities convertible into
or exchangeable or exercisable for shares of capital stock or other voting or
equity securities of the Company) or obligating the Company to grant, extend or
enter into any such subscription, option, warrant, call, right, commitment,
understanding or agreement.
(d) All outstanding equity securities of the Company are
validly issued, fully paid and nonassessable and not subject to or issued in
violation of any preemptive rights or similar rights of any past or present
stockholder of the Company.
24
(e) Except as otherwise set forth on Schedule 4.6(e) of
the Company Disclosure Schedule, at the Closing there will be no stockholder
agreement, voting trust or other agreement or understanding to which the Company
or any of its Subsidiaries is a party or by which any of them is bound relating
to the voting of any shares of the capital stock of the Company or any of its
Subsidiaries.
(f) There are no outstanding or authorized stock
appreciation, phantom stock, profit participation, or similar rights with
respect to the Company or any of its Subsidiaries.
(g) The authorized capital stock and the issued and
outstanding capital stock of each Subsidiary of the Company is listed on
Schedule 4.6(g) of the Company Disclosure Schedule. Except as set forth on
Schedule 4.6(g) of the Company Disclosure Schedule and as contemplated by the
HRM Transfer, the Company directly or indirectly is the beneficial and record
owner of all issued and outstanding equity securities of each such Subsidiary,
and such ownership is free and clear of all Liens other than Liens under the
Bank Credit Agreement. All outstanding equity securities of each such Subsidiary
have been duly authorized and validly issued and are fully paid and
nonassessable and not subject to or issued in violation of any preemptive or
similar rights of any past or present stockholder of such Subsidiary. There are
issued and outstanding or reserved for issuance (i) no shares of capital stock
or other voting or equity securities of any Subsidiary of the Company, (ii) no
securities of any Subsidiary of the Company or any other Person convertible into
or exchangeable or exerciseable for shares of capital stock or other voting or
equity securities of any Subsidiary of the Company and (iii) no subscriptions,
options, warrants, calls, rights (including preemptive rights), commitments,
understandings or agreements to which any Subsidiary of the Company is a party
or by which any of them is bound obligating any such Subsidiary to issue,
deliver, sell, purchase, redeem or acquire shares of capital stock or other
voting or equity securities of such Subsidiary (or securities convertible into
or exchangeable or exercisable for shares of capital stock or other voting or
equity securities of such Subsidiary) or obligating any such Subsidiary to
grant, extend or enter into any such subscription, option, warrant, call, right,
commitment, understanding or agreement.
4.7 MATERIAL AGREEMENTS. Schedule 4.7 of the Company Disclosure
Schedule sets forth as of the date of this Agreement all Material Agreements to
which either the Company or any of its Subsidiaries is a party or by which any
of them are otherwise bound. Neither the Company nor any of its Subsidiaries is
in breach or default under any such Material Agreement, except as set forth on
Schedule 4.7 of the Company Disclosure Schedule. To the Company's knowledge, no
other party to a Material Agreement is in breach or default under a Material
Agreement, nor has there occurred any event or events that with the lapse of
time or the giving of notice or both would constitute a breach or default by the
Company or any Subsidiary or any other party under the terms of any Material
Agreement, in either case except as set forth on Schedule 4.7 of the Company
Disclosure Schedule.
4.8 INVESTMENTS AND INDEBTEDNESS. Except as set forth on Schedule
4.8 of the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has any outstanding Investments that are not disclosed in the
Company Financial Statements. As of the date of this Agreement, the total amount
of indebtedness outstanding under the Bank Credit Agreement is $ 37,337,247.
25
4.9 EMPLOYMENT MATTERS; INDEPENDENT CONTRACTORS. Except as set
forth on Schedule 4.9 of the Company Disclosure Schedule and except for
individuals that are solely employed by HRM and for related liabilities for
which HRM will be solely responsible as of the Closing Date, (i) neither the
Company nor any Subsidiary employs any employees, (ii) all employment-related
obligations related to any former employees of the Company or any Subsidiary
have been satisfied in full and (iii) there are no employment-related
contingencies which could result in imposition of any liability on the Company
or any of its Subsidiaries. Schedule 4.9 of the Company Disclosure Schedule
lists the name of each independent contractor and temporary or leased worker of
any of the Company and its Subsidiaries and the agreements or commitments to
which any of them are bound with respect thereto, specifying in each case which
entity is a party thereto. Except as set forth on Schedule 4.9 of the Company
Disclosure Schedule, neither the Company nor any Subsidiary thereof is a party
to or obligated under any consulting or other arrangement entered into or
maintained for the benefit of its current or former temporary or leased workers
or independent contractors. The Company has made available to Buyer a true and
correct copy of each written arrangement described on Schedule 4.9 of the
Company Disclosure Schedule. Neither the Company nor any Subsidiary thereof is
or has been a party to or obligated under any collective bargaining agreement.
Each of the Company and its Subsidiaries is and has been in material compliance
with all Applicable Laws relating to the employment of labor, including all such
Applicable Laws relating to wages, hours, collective bargaining, discrimination,
civil rights, safety and health and workers' compensation.
4.10 EMPLOYEE BENEFIT PLANS.
(a) Schedule 4.10(a) of the Company Disclosure Schedule
sets forth a complete and accurate list of all "employee benefit plans," as
defined in Section 3(3) of ERISA, as well as severance pay, sick leave, vacation
pay, salary continuation for disability, compensation agreements, retirement,
deferred compensation, profit-sharing, pension, bonus, long-term incentive,
stock option, stock purchase, hospitalization, medical insurance, life
insurance, fringe benefit and scholarship programs, practices or arrangements
not subject to ERISA maintained by the Company or its Subsidiaries or to which
the Company or its Subsidiaries contributes or is obligated to contribute (the
"Company Employee Benefit Plans"). Except for the Company Employee Benefit
Plans, neither the Company nor its Subsidiaries maintain, or has any fixed or
contingent liability with respect to, any employee benefit plan that is subject
to ERISA. The list of Company Employee Benefit Plans identifies the type of each
such plan, whether it is maintained outside the jurisdiction of the United
States and whether any Company Employee Benefit Plan holds any equity interest
in the Company or any of its Subsidiaries. Except as set forth on Schedule
4.10(a) of the Company Disclosure Schedule, neither the Company nor any
Subsidiary thereof is subject to any legal, contractual, equitable or other
obligation (nor have they any formal plan or commitment, whether legally binding
or not) to enter into any form of compensation or employment agreement or to
establish any employee benefit plan of any nature, including any pension, profit
sharing, welfare, post-retirement welfare, stock option, stock or cash award,
non-qualified deferred compensation or executive compensation plan, policy or
practice or to modify or change any existing Company Employee Benefit Plan.
Except as set forth on Schedule 4.10(a) of the Company Disclosure Schedule, each
and every Company Employee Benefit Plan is solely an obligation of HRM, and
neither the Company nor any of its other Subsidiaries has or will have any fixed
or contingent liability with respect to any Company Employee Benefit Plan.
26
(b) To the Company's knowledge, since 1994 neither the
Company, its Subsidiaries nor any ERISA Affiliate has maintained or been
obligated to contribute to an employee benefit plan that (i) is subject to Title
IV of ERISA or the minimum funding requirements of Section 412 of the Code or
Section 302 of ERISA, (ii) is a plan of the type described in Section 4063 of
ERISA or Section 413(c) of the Code, or (iii) is a "multiemployer plan" (as
defined in Section 3(37) of ERISA).
(c) There is and has been no material violation of ERISA
with respect to any Company Employee Benefit Plan. Except for the Seal
Agreement, with respect to the Company Employee Benefit Plans, there exists no
condition or set of circumstances in connection with the Company or any of its
Subsidiaries that would result in any liability to the Company or any of its
Subsidiaries other than HRM. Except for the Seal Agreement, with respect to the
Company Employee Benefit Plans, individually and in the aggregate, there are no
unfunded benefit obligations which have not been accounted for in accordance
with GAAP on the financial statements of the Company and its Subsidiaries. The
Company has made the required top hat plan informational filing with the
Department of Labor with respect to the Seal Agreement, and has made the
corresponding filings and payment necessary to satisfy the requirements of the
Department of Labor's Delinquent Filer Voluntary Compliance Program with respect
to such top hat filing.
(d) The Company Employee Benefit Plans have been
maintained, in all material respects, in accordance with their terms and in
accordance with all Applicable Laws, and neither the Company, its Subsidiaries
nor any "party in interest" or "disqualified person" with respect to the Company
Employee Benefit Plans, has engaged in any "prohibited transaction" within the
meaning of Section 4975 of the Code or Section 406 of ERISA that would subject
the Company or any Subsidiary thereof, any officer of the Company or any of such
plans or any trust to any Tax or penalty on prohibited transactions imposed by
Section 4975 of the Code or any penalties or remedies imposed by ERISA. Each
Company Employee Benefit Plan intended to be qualified under Section 401 of the
Code has been the subject of a favorable determination letter with respect to
such qualified status and has been maintained in material compliance with, and
currently complies in all material respects with, all qualification requirements
of the Code in form and operation. All liabilities associated with any Company
Employee Benefit Plan which was intended to qualify under Section 401(a) of the
Code that has been terminated within the last six years have been satisfied in
full.
(e) Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby (either alone or in
combination with any other event) (i) will result in any payment becoming due,
increase the amount of any payment, or accelerate the timing or vesting of any
payment to any current or former employee or independent contractor or group of
employees or independent contractors of the Company or any Subsidiary, other
than such payments or benefits which are solely the responsibility of HRM, or
(ii) is reasonably expected to result in the imposition of any excise tax under
Section 4999 of the Code or the denial of any deduction under Section 280G of
the Code.
(f) There are no pending or, to the Company's knowledge,
threatened claims against the assets of any of the Company Employee Benefit
Plans or the trusts established to hold the assets of those plans or the
fiduciaries of such plans. To the Company's knowledge, no
27
Company Employee Benefit Plan is subject to ongoing audit, investigation or
other administrative proceeding of the Internal Revenue Service, the Department
of Labor or any other Governmental Authority, and no Company Employee Benefit
Plan is the subject of any pending application for administrative relief under
any voluntary compliance program of the Internal Revenue Service, the Department
of Labor or any other Governmental Authority.
(g) Except for the Seal Agreement, to the Company's
knowledge neither the Company nor any Subsidiary maintains or has ever
maintained any welfare benefit plan which provides for retiree medical
liabilities or continuing benefits or coverage for any participant or any
beneficiary of any participant after such participant termination of employment
except as may be required by COBRA. No plan or arrangement listed as an
exception to the representations in this Section 4.10(g) provides
post-employment welfare benefit coverage of any kind as of the date of this
Agreement (or will provide any such coverage as of any time thereafter) other
than post-employment coverage as required by COBRA.
(h) To the Company's knowledge, neither the Company nor
any of its Subsidiaries has maintained, established, or ever participated in, a
multiple employer welfare benefit arrangement within the meaning of Section
3(40)(A) of ERISA.
4.11 LITIGATION. Except as set forth on Schedule 4.11 of the
Company Disclosure Schedule, there is (a) no claim, action, suit, inquiry,
judicial or administrative proceeding, grievance or arbitration pending or, to
the knowledge of the Company, threatened against the Company or any of its
Subsidiaries or involving any of their respective properties or assets by or
before any arbitrator or Governmental Authority; (b) no order, judgment,
injunction or decree of any Governmental Authority outstanding against the
Company or any of its Subsidiaries or any of their respective properties or
assets; and (c) no investigation or review relating to the Company or any of its
Subsidiaries or involving any of their respective properties or assets pending
or, to the knowledge of the Company, threatened by or before any arbitrator or
any Governmental Authority.
4.12 TAXES AND TAX RETURNS. Except as set forth on Schedule 4.12 of
the Company Disclosure Schedule:
(a) All Tax Returns which are required to be filed by or
with respect to the Company, any Subsidiary thereof or any Tax Partnership have
been timely filed. All Taxes which are due and for which the Company, any
Subsidiary of the Company or any Tax Partnership is liable under Applicable Laws
have been paid. All withholding Tax requirements imposed on or with respect to
the Company, any Subsidiary thereof or any Tax Partnership have been satisfied
in full. No penalty, interest, other charge or Tax is payable by the Company,
any Subsidiary of the Company, or any Tax Partnership by reason of the late
filing of any Tax Return or late payment of any Tax. The accruals for Taxes in
the December 31 Balance Sheet are sufficient to pay all Taxes for which the
Company, any Subsidiary of the Company or any Tax Partnership is liable and that
have accrued through the end of 2003 (including income Taxes for 2003 income)
and have not been paid at that time.
(b) There is not in force (i) any extension of time with
respect to the due date for the filing of any Tax Return by the Company, any
Subsidiary of the Company or any Tax
28
Partnership or (ii) any waiver or agreement for any extension of time for the
assessment against or payment of any Tax by the Company, any Subsidiary of the
Company, or any Tax Partnership.
(c) There is no claim pending against the Company, any
Subsidiary thereof or any Tax Partnership for the payment of any Tax. No
assessment of any Tax has been made against the Company, any Subsidiary of the
Company or any Tax Partnership that has not been paid. No deficiency has been
proposed and no adjustment has been asserted with respect to any Tax Return of
the Company, any Subsidiary of the Company or any Tax Partnership.
(d) There is in effect no Tax sharing agreement to which
the Company, any Subsidiary of the Company or any Tax Partnership is a party.
There is in effect no agreement that requires that any payment be made by the
Company, any Subsidiary thereof or any Tax Partnership to or for the benefit of
a person upon whom Tax is imposed by reason of the amount of such Tax.
(e) No payment that is made by reason of the transactions
contemplated by this Agreement will not be deductible by reason of Section 280G
of the Code.
(f) None of the Company, any of its Subsidiaries
(excluding HRM) or any Tax Partnership will be required to pay any Taxes greater
than $10,000 in the aggregate by reason of the HRM Transfer, the HRM Asset
Transfer or any transfer of the Excluded Assets to HRM. None of the Company, any
of its Subsidiaries (including HRM) or any Tax Partnership will be required to
pay any Tax by reason of the sale of the Shares and surrender of the Options
provided for in this Agreement.
4.13 TITLE TO AND SUFFICIENCY OF ASSETS.
(a) Except as set forth on Schedule 4.13 of the Company
Disclosure Schedule, the Company has Defensible Title to all Oil and Gas
Interests included or reflected in the Ownership Interests. Each Oil and Gas
Interest included or reflected in the Ownership Interests entitles the Company
or its Subsidiaries to receive throughout the duration of the productive life of
such Oil and Gas Interest (after satisfaction of all royalties, overriding
royalties, nonparticipating royalties, net profits interests or other similar
burdens on or measured by production of Hydrocarbons) not less than the
undivided interest set forth in (or derived from) the Ownership Interests of all
Hydrocarbons produced, saved and sold from or attributable to such Oil and Gas
Interest, and the portion of the costs and expenses of operation and development
of such Oil and Gas Interest that is borne or to be borne by the Company and its
Subsidiaries throughout the duration of the productive life of such Oil and Gas
Interest is not greater than the undivided interest set forth in the Ownership
Interests.
(b) All material operating equipment of the Company and
its Subsidiaries is in good operating condition and in a state of reasonable
maintenance and repair, ordinary wear and tear excepted, and suitable for the
purposes for which such equipment was constructed, obtained or being used.
4.14 COMPLIANCE WITH LAWS AND PERMITS. The Company and each of its
Subsidiaries are, and their businesses and operations have been conducted, in
material compliance with all
29
Applicable Laws. Neither the Company nor any of its Subsidiaries has received
written notice of any actual, alleged or potential violation of any Applicable
Law that has not otherwise been cured to the satisfaction of the Governmental
Authority issuing such notice. Except as set forth on Schedule 4.14 of the
Company Disclosure Schedule, the Company and its Subsidiaries hold and have in
full force and effect all permits, licenses, variances, exemptions, orders,
franchises and approvals of all Governmental Authorities necessary for the
lawful conduct of their respective businesses and the ownership and operation of
their respective assets (the "Company Permits"). Except as set forth on Schedule
4.14 of the Company Disclosure Schedule, the Company and its Subsidiaries are,
and their businesses and operations have been conducted, in material compliance
with the terms of the Company Permits. To the knowledge of the Company, no event
has occurred or circumstance exists that would reasonably be expected to
constitute or result in the revocation, withdrawal, suspension, cancellation,
modification or termination of any Company Permits or to result in any fine or
other enforcement action. All applications required to have been filed for the
renewal of any Company Permits that expire on or prior to the Closing Date have
been timely filed with the appropriate Governmental Authorities. Schedule 4.14
of the Company Disclosure Schedule lists each Company Permit that, to the
Company's knowledge, expires within 120 days of the date of this Agreement.
4.15 PROPRIETARY RIGHTS. The Company and its Subsidiaries have
ownership of, or valid licenses to use, all trademarks, copyrights, patents and
other proprietary rights and intellectual property used in their respective
business. To the knowledge of the Company, the operation of the respective
business of the Company and its Subsidiaries does not infringe any patent,
copyright, trademark or other proprietary rights of others, and, the Company has
not received any notice from any third party of any such alleged infringement by
the Company or its Subsidiaries. The Company has taken reasonable steps to
establish and preserve the respective ownership rights of the Company and its
Subsidiaries in all patents, copyrights, trademarks, trade secrets and other
proprietary rights. To the knowledge of the Company, no other Person is
interfering with, infringing upon, misappropriating or otherwise coming into
conflict with any intellectual property of the Company or any of its
Subsidiaries.
4.16 ENVIRONMENTAL MATTERS. The sole representations and warranties
of the Company with respect to compliance with Environmental Laws and other
environmental matters are set forth in this Section 4.16. In the event that
representations or warranties of the Company in other Sections of this Agreement
or related transaction documents could be construed to relate to compliance with
Environmental Laws or other environmental matters, such representations and
warranties shall be construed to exclude all environmental matters. Except as
set forth on Schedule 4.16 of the Company Disclosure Schedule:
(a) To the knowledge of the Company, the Company and its
Subsidiaries have, at all times in the past, conducted and are conducting their
respective businesses and operating their respective assets, and the condition
of all facilities and properties formerly or currently owned, leased or operated
by the Company and its Subsidiaries has at all times in the past been, and
currently is, in material compliance with all Environmental Laws;
(b) The Company has not been notified by any Governmental
Authority or other third party that any of the former or present operations or
assets of the Company and its Subsidiaries is the subject of any investigation
or inquiry by any Governmental Authority or
30
other third party evaluating whether any material investigative or remedial
action is needed to respond to a release or threatened release of any Hazardous
Material or to the improper storage or disposal (including storage or disposal
at offsite locations) of any Hazardous Material;
(c) To the knowledge of the Company, neither the Company
nor its Subsidiaries has any material contingent liability in connection with
(i) the release or threatened release of any Hazardous Material into the
environment at, beneath or on any property formerly or currently owned, leased
or operated by the Company or any of its Subsidiaries or (ii) the storage or
disposal of any Hazardous Material;
(d) To the knowledge of the Company, no property now or
previously owned, leased or operated by the Company or its Subsidiaries is
listed on the National Priorities List pursuant to CERCLA or on the CERCLIS or
on any other federal or state list as sites requiring environmental
investigation or cleanup;
(e) To the knowledge of the Company, neither the Company
nor its Subsidiaries has transported or has arranged for the transportation of
any Hazardous Material to any location which is (i) listed on the National
Priorities List pursuant to CERCLA, on the CERCLIS, or on any similar federal or
state list or which is the subject of federal, state or local enforcement
actions or other investigations that may lead to material claims against the
Company or its Subsidiaries for remedial work, damage to natural resources or
personal injury, including claims under CERCLA or (ii) subject to a claim that
may lead to material claims against the Company or any of its Subsidiaries for
remediation work, damage to natural resources or personal injury, including
claims under CERCLA;
(f) There are no sites, locations or operations at which
the Company or its Subsidiaries is currently undertaking any remedial or
response action relating to the disposal or release of Hazardous Materials,
which remedial or response action is required by Environmental Laws; and
(g) To the knowledge of the Company, all underground or
above ground storage tanks and Hazardous Material waste disposal facilities
owned or operated by the Company or its Subsidiaries are used and operated in
material compliance with Environmental Laws.
4.17 INSURANCE. The Company and its Subsidiaries own and are
beneficiaries under insurance policies underwritten by reputable insurers that,
as to risks insured, coverages and related limits and deductibles, are customary
in the industry in which the Company and its Subsidiaries operate. Schedule 4.17
of the Company Disclosure Schedule sets forth a list of all such insurance
policies. All material premiums due with respect to all insurance policies have
been paid and, to the knowledge of the Company, all such policies are in full
force and effect. There is no claim in excess of $250,000 by the Company or any
of its Subsidiaries pending under any of the Company's insurance policies as to
which coverage has been questioned, denied or disputed by the underwriters of
such policies or bonds. Neither the Company nor any of its Subsidiaries has
received any notice, which remains outstanding, of cancellation or termination
with respect to any material insurance policy.
31
4.18 GOVERNMENTAL REGULATION. Neither the Company nor its
Subsidiaries is subject to regulation under the Public Utility Holding Company
Act of 1935, the Investment Company Act of 1940 or any state public utilities
laws.
4.19 BROKERS. Except as set forth on Schedule 4.19 of the Company
Disclosure Schedule, no broker, finder, investment banker or other Person is or
will be, in connection with the transactions contemplated by this Agreement,
entitled to any brokerage, finder's or other fee or compensation based on any
arrangement or agreement made by or on behalf of the Company or any of its
Subsidiaries and for which Buyer, the Company or any of its Subsidiaries will
have any obligation or liability.
4.20 OIL AND GAS OPERATIONS.
(a) Schedule 4.20 of the Company Disclosure Schedule sets
forth all preferential rights (including any calls upon, options to purchase,
rights of first or last refusal or offer or similar rights) to purchase the
Ownership Interests and any such preferential rights to purchase production from
any such Ownership Interests, other than such rights with respect to oil, gas
and mineral leases and joint operating agreements representing the bottom 10% of
such leases and agreements ranked by Allocated Value. Except as otherwise set
forth on Schedule 4.20 of the Company Disclosure Schedule, to the knowledge of
the Company, all wells included in the Ownership Interests have been drilled and
(if completed) completed, operated and produced in accordance with generally
accepted oil and gas field practices and in compliance in all material respects
with applicable oil and gas leases, pooling and unit agreements, and Applicable
Laws. Except as otherwise set forth on Schedule 4.20 of the Company Disclosure
Schedule, to the knowledge of the Company, in respect of the Ownership
Interests:
(i) There are no wells that the Company or a
Subsidiary thereof is currently obligated by Applicable Law or contract to plug
and abandon;
(ii) There are no wells that are subject to
exceptions to a requirement to plug and abandon issued by a Governmental
Authority having jurisdiction over the applicable lease; and
(iii) Proceeds from the sale of Hydrocarbons
attributable to the Ownership Interests are being received by the Company or a
Subsidiary thereof in a timely manner and are not being held in suspense for any
reason (except for amounts held in suspense in the ordinary course of business).
(b) Except as set forth on Schedule 4.20 of the Company
Disclosure Schedule, there are no obligations of the Company or any of its
Subsidiaries (other than implied obligations under leases concerning protection
from drainage and further development that are customary in the oil and gas
industry) that require the drilling of additional wells or other material
development operations in order to earn or to continue to hold all or any
portion of the Ownership Interests, and neither the Company nor any of its
Subsidiaries have been advised by a lessor of any requirements or demands to
drill additional wells on any of the real property relating to the Ownership
Interests, which requirements or demands have not been resolved.
32
4.21 GAS IMBALANCES. To the knowledge of the Company, except as is
reflected on Schedule 4.21 of the Company Disclosure Schedule, as of December
31, 2003, (a) there are no production, transportation or processing imbalances
existing with respect to the Ownership Interests, and (b) neither the Company
nor any Subsidiary thereof has received any deficiency payments under gas
contracts for which any party has a right to take deficiency gas from the
Ownership Interests without further payment. As of the date of this Agreement,
it is estimated that the Company's net gas underproduced position as to its
Ownership Interests is at least 100,000 Mcf.
4.22 ROYALTIES AND RENTALS. Except as set forth on Schedule 4.22 of
the Company Disclosure Schedule, all royalties, overriding royalties,
compensatory royalties, rentals and other payments due and payable from or in
respect of production of Hydrocarbons from the Ownership Interests have been or
will be, prior to the Closing, properly and correctly paid or provided for in
all material respects.
4.23 PAYOUT BALANCES. The Payout Balance for each well included in
the Ownership Interest that is operated by the Company and has a payout
consequence is properly reflected in all material respects in the Reserve Report
and on Schedule 4.23 of the Company Disclosure Schedule as of the respective
dates shown thereon. To the knowledge of the Company, based on information given
to the Company by third-party operators for each well not operated by the
Company, the payout consequence for any such well is properly reflected in all
material respects in the Reserve Report and on Schedule 4.23 of the Company
Disclosure Schedule as of the respective dates shown thereon.
4.24 PREPAYMENTS. Except as reflected on Schedule 4.24 of the
Company Disclosure Schedule, no prepayment for Hydrocarbon sales has been
received by the Company for Hydrocarbons which have not been delivered.
4.25 CAPITAL EXPENDITURES. Except as set forth on Schedule 4.25 of
the Company Disclosure Schedule, as of the date of this Agreement, the presently
approved face amount of any currently outstanding and effective authorities for
expenditure with respect to the Ownership Interests would not require the
Company to make or incur after the Closing capital expenditures under the terms
of any such authority for expenditure in excess of $100,000 or $1.0 million in
the aggregate for all such authorities for expenditures.
4.26 FINANCIAL AND PRODUCT HEDGING CONTRACTS. Schedule 4.26 of the
Company Disclosure Schedule accurately summarizes in all material respects the
outstanding hedging positions under all outstanding Product Hedging Contracts
and financial hedging positions of the Company (including fixed price controls,
collars, swaps, caps, hedges and puts) as of the date reflected on Schedule 4.26
of the Company Disclosure Schedule.
4.27 BOOKS AND RECORDS. All books, records and files of the Company
and its Subsidiaries (including those pertaining to the Ownership Interests),
all of which have been made available to Buyer, have been prepared, assembled
and maintained in accordance with usual and customary policies and procedures.
The books, records and accounts of the Company and its Subsidiaries accurately
and fairly reflect in reasonable detail the transactions and dispositions of the
assets of the Company and it Subsidiaries. The Company and its Subsidiaries have
devised
33
and maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary (a) to permit preparation of financial statements in conformity
with generally accepted accounting principles or any other criteria applicable
to such statements and (b) to maintain accountability for assets; (iii) access
to assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences. The minute books of the Company and its Subsidiaries
contain accurate and complete records of all meetings held of, and corporate
action taken by, the stockholders, Boards of Directors and committees of the
Boards of Directors of each of the Company and its Subsidiaries, and no meeting
or other corporate action by any of the stockholders, Boards of Directors or
committees of the Boards of Directors of the Company or its Subsidiaries has
been held or taken for which minutes or written consents have not been prepared
and are not contained in such minute books.
4.28 RESERVE REPORT. Except as set forth on Schedule 4.28 of the
Company Disclosure Schedule: (a) to the knowledge of the Company, the estimates
of recoverable reserves attributable to the Ownership Interests which are set
forth in the Reserve Report have been prepared in accordance with generally
accepted petroleum engineering and evaluation principles as set forth in the
Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve
Information promulgated by the Society of Petroleum Engineers, and (b) the
factual information underlying the estimates of reserves in the Reserve Report
(including production, volumes, sales prices for production, contractual pricing
provisions under oil or gas sales or marketing contracts under hedging
arrangements, costs of operations and development, and working interest and net
revenue information relating to the Ownership Interests) was true and correct in
all material respects on the date of the Reserve Report; provided, however the
foregoing representation and warranty is expressly subject to the following
exceptions: (i) the reserves included in the Reserve Report are estimates only
and should not be construed as exact quantities, (ii) such reserves may or may
not be recovered and, if recovered, the revenues therefrom and the costs related
thereto could be more or less than the estimated amounts, (iii) the sales rates,
prices received for the reserves, and costs incurred in recovering such reserves
may vary from assumptions included in such report due to governmental policies
and uncertainties of supply and demand, and (iv) estimates of such reserves may
increase or decrease as a result of future operations.
4.29 POWERS OF ATTORNEY, AUTHORIZED SIGNATORIES, REGISTERED AGENTS.
Schedule 4.29 of the Company Disclosure Schedule lists (a) the names and
addresses of all Persons holding powers of attorney on behalf of the Company or
any of its Subsidiaries, (b) the names of all banks and other financial
institutions in which the Company or any of its Subsidiaries currently has one
or more bank accounts or safe deposit boxes, along with the account numbers and
the names of all persons authorized to draw on such accounts or to have access
to such safe deposit boxes, and (c) all registered agents of the Company and its
Subsidiaries by jurisdiction.
4.30 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth on
Schedule 4.30 of the Company Disclosure Schedule, since December 31, 2003, each
of the Company and its Subsidiaries have conducted their business only in the
ordinary course of business, and there has not been:
34
(a) any event, change, effect or development that,
individually or in the aggregate, has had or would reasonably be expected to
have a Material Adverse Effect on the Company;
(b) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock, property or otherwise)
with respect to any capital stock of the Company or any of its Subsidiaries
(other than dividends or distributions by a Subsidiary to the Company) or any
repurchase, redemption or other acquisition or offer to do so by the Company or
any of its Subsidiaries of any capital stock or other equity securities of, or
other ownership interests in, the Company or any of its Subsidiaries;
(c) any split, combination or reclassification of any
Company capital stock or any issuance of or the authorization of any issuance of
any other securities in respect of, in lieu of or in substitution for, shares of
such capital stock;
(d) other than the $2,000,000 of release and bonus
payment amounts included in the Company Transaction Costs, any grant by the
Company or any of its Subsidiaries (including HRM) of any increase in
compensation to any director, officer, stockholder or (except in the ordinary
course of business) employee, any payment of any bonus or other benefit to any
director, officer, stockholder or employee or any adoption or modification of
any profit sharing, bonus, deferred compensation, savings, insurance, retirement
or other employee benefit plan for or with any employees of the Company or any
of its Subsidiaries;
(e) any change in accounting methods, principles or
practices, except for such changes as may have been required by a change in
GAAP;
(f) any (i) material elections with respect to Taxes by
the Company or any of its Subsidiaries, (ii) settlement or compromise by the
Company or any of its Subsidiaries of any material Tax liability or refund or
(iii) assessment of a material Tax against the Company or any of its
Subsidiaries by any Governmental Entity;
(g) any amendment of any term of any outstanding security
of the Company or any of its Subsidiaries that would materially increase the
obligations of the Company or any of its Subsidiaries under such security;
(h) any incurrence, assumption or guarantee by the
Company or any of its Subsidiaries of any indebtedness for borrowed money except
for borrowings under the Bank Credit Agreement;
(i) any creation or assumption by the Company of any of
its Subsidiaries of any Lien other than Permitted Encumbrances on any asset of
the Company or any of its Subsidiaries;
(j) any making of any loan, advance or capital
contribution to or investment in any person by the Company or any of its
Subsidiaries other than (i) in connection with any acquisition or capital
expenditure permitted by Section 6.1, or (ii) loans or advances to employees of
the Company or any of its Subsidiaries made in the ordinary course of business;
35
(k) (i) any acquisition by the Company or any of its
Subsidiaries 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, joint venture, association
or other business organization or division thereof, (ii) any sale, lease,
license, encumbrance or other disposition of material assets of the Company or
any of its Subsidiaries, other than sales of produced Hydrocarbons or tangible
equipment and inventory in the ordinary course of business and the Lien securing
the Bank Credit Agreement, (iii) any capital expenditures by the Company or any
of its Subsidiaries, other than (A) in connection with its drilling and
completion activities (both on Company-operated and non-operated properties),
new oil and gas leases, renewals of oil and gas leases, non-producing leasehold
acquisitions, acquisitions of producing oil and gas properties and otherwise in
the ordinary course of business, or (B) capital expenditures contained in the
Capital Budget (2004), or (iv) any modification, amendment, assignment,
cancellation, waiver or termination by the Company or any of its Subsidiaries of
any Material Agreement, material license or other material right (other than oil
and gas leases or other agreements or contracts expiring pursuant to their terms
or the Bank Credit Agreement);
(l) any material damage, destruction or loss (whether or
not covered by insurance) with respect to any assets of the Company or any of
its Subsidiaries;
(m) any downward revaluation by the Company or any of its
Subsidiaries of any of its material assets, including but not limited to writing
down the value of its oil and gas properties as a whole or writing off notes or
accounts receivable, other than in the ordinary course of business;
(n) except as set forth in Schedule 4.26 of the Company
Disclosure Schedule, any agreement or arrangement by or involving the Company or
any of its Subsidiaries providing for options, swaps, floors, caps, collars,
forward sales or forward purchases involving commodities or commodity prices, or
indexes based on any of the foregoing and any other similar agreement or
arrangement or other derivative security; or
(o) any agreement, commitment or undertaking to take any
action referred to in Sections 4.30(a) through 4.30(n).
4.31 RELATED PARTY TRANSACTIONS. Except as set forth in Schedule
4.31 of the Company Disclosure Schedule, to the knowledge of the Company no
stockholder or any officer or director of the Company or any of its Subsidiaries
owns or holds, directly or indirectly, any interest in (excepting holdings
solely for passive investment purposes of securities of publicly held and traded
entities constituting less than 5% of the equity of any such entity), or is an
officer, director, employee or consultant of any Person that is, a competitor,
lessor, lessee, customer or supplier of the Company or any of its Subsidiaries.
No stockholder, officer or director of the Company or any of its Subsidiaries
(a) to the knowledge of the Company has any claim, charge, action or cause of
action against the Company or any of its Subsidiaries, except for claims for
reasonable unreimbursed travel or entertainment expenses, accrued vacation payor
accrued benefits under any Company Employee Benefit Plan existing on the date
hereof, (b) to the knowledge of the Company, has made, on behalf of the Company
or any of its Subsidiaries, any payment or commitment to pay any commission, fee
or other amount to, or to purchase or
36
obtain or otherwise contract to purchase or obtain any goods or services from,
any other person of which any stockholder owning more than 1% of the outstanding
common stock of the Company or any officer or director of the Company or any of
its Subsidiaries is a partner or stockholder (except holdings solely for passive
investment purposes of securities of publicly held and traded entities
constituting less than 5% of the equity of any such entity), (c) owes any money
to, the Company or any of its Subsidiaries or (d) has any interest in any
property, real or personal, tangible or intangible, used in or pertaining to the
business of the Company or any of its Subsidiaries.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company and the Securityholders as
follows:
5.1 ORGANIZATION. Buyer (a) is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware,
(b) has the requisite power and authority to own, lease and operate its
properties and to conduct its business as it is presently being conducted, and
(c) is duly qualified to do business as a foreign corporation, and is in good
standing, in each jurisdiction where the character of the properties owned or
leased by it or the nature of its activities makes such qualification necessary
(except where any failure to be so qualified as a foreign corporation or to be
in good standing would not be reasonably likely to have a Material Adverse
Effect on Buyer).
5.2 AUTHORITY AND ENFORCEABILITY. Buyer has all requisite power
and authority to enter into this Agreement and to consummate the transactions
contemplated herein. The execution and delivery of this Agreement by Buyer and
the consummation of the transactions contemplated herein have been duly
authorized by all necessary corporate action on the part of Buyer. This
Agreement has been duly executed and delivered by Buyer and, assuming that this
Agreement constitutes the valid and binding agreement of the other parties
hereto, constitutes the valid and binding obligations of Buyer, enforceable
against Buyer in accordance with its terms and conditions, except that the
enforcement hereof may be limited by (i) applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws now or
hereafter in effect relating to creditors' rights generally and (ii) general
principles of equity (regardless of whether enforceability is considered in a
proceeding at law or in equity).
5.3 NO VIOLATIONS. The execution and delivery of this Agreement
does not, and the consummation of the transactions contemplated hereby and
compliance by Buyer with the provisions hereof will not, conflict with, result
in any violation of or default (with or without notice or lapse of time or both)
under, give rise to a right of termination, cancellation or acceleration of any
obligation or to the loss of a material benefit under, or result in the creation
of any Lien on any of the properties or assets of Buyer under, any provision of
(a) the certificate of incorporation or bylaws of Buyer, (b) any loan or credit
agreement, note, bond, mortgage, indenture applicable to Buyer or (c) assuming
the consents, approvals, authorizations or permits and filings or notifications
referred to in Section 5.4 are duly and timely obtained or made, any laws
(including common law), statutes, rules, regulations, ordinances, judgments,
orders, decrees, injunctions and writs of any Governmental Authority having
jurisdiction over the business or operations of Buyer, as may be in effect on
the date of this Agreement or the Closing
37
Date, other than any such conflict, violation, default, right, loss or Lien
that, individually or in the aggregate, would not have a Material Adverse Effect
on Buyer.
5.4 CONSENTS AND APPROVALS. No Third-Party Consent of, or
registration, declaration or filing with, any Person is required by or with
respect to Buyer in connection with the execution and delivery by Buyer of this
Agreement or the consummation of the transactions contemplated herein, except
for (a) such Third-Party Consents as may be required under any environmental,
health or safety law or regulation pertaining to any notification, disclosure or
required approval necessitated by the transactions contemplated by this
Agreement and (b) such other Third-Party Consents, the failure of which to
obtain would not be reasonably likely to have a Material Adverse Effect on
Buyer.
5.5 LITIGATION. There is no action, suit or judicial or
administrative proceeding pending or, to the knowledge of Buyer, threatened
against Buyer relating to the transactions contemplated by this Agreement or
which, if adversely determined, would be reasonably likely to have a Material
Adverse Effect on Buyer.
5.6 FUNDING. Buyer has available adequate funds or the means to
obtain adequate funds in an aggregate amount sufficient to pay (i) the Closing
Aggregate Purchase Price to each Securityholder and (ii) all expenses incurred
in connection with this Agreement and the transactions contemplated hereby.
5.7 BROKERS. No broker, finder, investment banker or other Person
is or will be, in connection with the transactions contemplated by this
Agreement, entitled to any brokerage, finder's or other fee or compensation
based on any arrangement or agreement made by or on behalf of Buyer and for
which the Company will have any obligation or liability.
ARTICLE 6
COVENANTS
6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING CLOSING.
(a) Except as contemplated by this Agreement or the
matters disclosed on the Company Disclosure Schedule or to the extent that Buyer
shall otherwise consent in writing (which consent will not be unreasonably
withheld), during the period from the date of this Agreement to the Closing, the
Company shall not, and shall not permit any of its Subsidiaries to take any
action except in the ordinary course of business and the Company shall, and
shall cause its Subsidiaries to use all reasonable efforts to preserve intact in
all material respects the respective business organizations, assets, prospects
and advantageous business relationships of the Company and its Subsidiaries and
to maintain satisfactory relationships with their respective licensors,
licensees, suppliers, contractors, distributors and customers. Without limiting
the generality of the foregoing, except as contemplated by this Agreement or the
matters disclosed on the Company Disclosure Schedule, the Company shall not, and
shall not cause or permit any of its Subsidiaries to engage in any practice,
take any action, or enter into any transaction outside the ordinary course of
business. Without limiting the generality of the foregoing and except as set
forth on the Company Disclosure Schedule or the transactions contemplated by
this Agreement, the Company shall not, and shall not cause or permit any of its
Subsidiaries to:
38
(i) (A) declare, set aside or pay any dividends
on, or make any other distributions (whether in cash, stock, property or
otherwise) in respect of, any of the Company's or any of its Subsidiary's
capital stock (other than dividends or distributions by a Subsidiary to the
Company), (B) effect any reorganization or recapitalization or split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock, or (C) except for repurchases pursuant to the Company's Option
Plan effective as of March 10, 2000, as amended, directly or indirectly offer to
or purchase, redeem or otherwise acquire any shares of its capital stock or any
other securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
(ii) offer, issue, deliver, sell, grant, pledge,
transfer or otherwise encumber or dispose of or subject to any Lien or
limitation on voting rights (A) any shares of the Company's or any of its
Subsidiary's capital stock, (B) any securities convertible into or exchangeable
for, or any options, warrants, commitments or rights of any kind to acquire, any
such shares, voting securities or convertible or exchangeable securities or (C)
any "phantom" stock, "phantom" stock rights, stock appreciation rights or
stock-based performance units, other than the issuance of Company common stock
upon the exercise of Options outstanding on the date of this Agreement and in
accordance with their terms as in effect on the date of this Agreement;
(iii) propose or adopt any amendments to its
articles of incorporation or bylaws or amend or otherwise modify the terms of
any outstanding capital stock, securities convertible into or exchangeable for,
or any options, warrants, commitments or rights of any kind to acquire such
securities of the Company or any of its Subsidiaries the effect of which will
make such terms more favorable to the holders thereof;
(iv) expand, or fail to maintain, its planned
level of drilling and completion activities with respect to properties that it
operates in accordance with the drilling schedule covering the next 90 days that
the Company has provided to Buyer and that identifies the wells to be drilled
during such period, except to the extent the Company reasonably believes such
activities would result in a default of a covenant under the Bank Credit
Agreement or where it would be reasonable for a prudent operator to change
drilling locations, delay or accelerate drilling of specific wells or change the
order of drilling of wells to maximize the efficiency of the drilling program
and/or to minimize risks and/or costs of such program, provided that such
change, delay or acceleration in such program is discussed at an operational
meeting of the Company at which Buyer has a representative and reasonable
operational consensus is achieved, or fail to continue to participate in the
ordinary course of business in drilling, workover, completion and recompletion
activities with respect to properties it does not operate without prior
notification to Buyer;
(v) (A) merge, consolidate, combine, dissolve or
liquidate or resolve to or publicly announce an intention to do any of the
foregoing, (B) (other than through the exercise of a consent right under the
terms of a joint operating agreement) acquire or agree to acquire, directly or
indirectly by merger, consolidation, equity interest purchase or otherwise, any
producing oil and gas properties, or enter into or acquire any new non-producing
oil and gas leases, or (C) enter into or acquire any renewals of non-producing
oil and gas leases;
39
(vi) (A) grant to any employee, officer or
director of the Company or any Subsidiaries (including HRM) any increase in
compensation or pay any bonus or other benefit (other than the $2,000,000 of
release and bonus payment amounts included in the Company Transaction Costs),
(B) establish, adopt or enter into any agreement or plan that would constitute a
Company Employee Benefit Plan (if it had been in effect on the date hereof), any
collective bargaining agreement, or other labor union agreement or amend any
Company Employee Benefit Plan, collective bargaining agreement or other labor
union agreement or (C) grant any severance or termination pay;
(vii) make any change in accounting methods,
principles or practices in effect at December 31, 2003, except as required by a
change in GAAP;
(viii) sell, lease (as lessor), license, farm out,
encumber or otherwise dispose of (other than through the exercise of a
non-consent right under the terms of a joint operating agreement) or subject to
any Lien other than Permitted Encumbrances any properties or assets, except for
sales of produced Hydrocarbons or for sales of tangible equipment or inventory
of not more than $50,000;
(ix) (A) incur, create, assume, guarantee or
otherwise become liable for any indebtedness except (x) trade debt in the
ordinary course of business and (y) pursuant to existing credit facilities or
arrangements or any extensions, renewals or redeterminations thereof, or (B)
make or forgive any loans, advances or capital contributions to, or investments
in, any other Person;
(x) make or change any material Tax election or
settle or compromise any material Tax liability or refund or change any of its
methods of reporting income or deductions for U.S. federal tax purposes except
as may be required by Applicable Law;
(xi) (A) pay, discharge, settle or satisfy any
claims, liabilities, obligations or litigation other than insured claims or
liabilities, repayments of borrowings under the Bank Credit Agreement or the
payment, discharge, settlement or satisfaction, in accordance with their terms,
of liabilities reflected or reserved against in the most recent financial
statements (or the notes thereto) of the Company provided to Buyer prior to the
date hereof or incurred since the date of such financial statements in the
ordinary course of business or (B) cancel or forgive any indebtedness to the
Company or any Subsidiary;
(xii) permit any material insurance policy naming
it as a beneficiary or a loss payable payee to lapse, be cancelled or expire
unless a new policy with substantially identical coverage is in effect as of the
date of lapse, cancellation or expiration;
(xiii) enter into any material renewal of,
modification to or amendment to, or terminate any Material Agreement, or waive,
delay the exercise of, assign or release any material rights or claims
thereunder, except as otherwise permitted above in this Section 6.1, or enter
into or amend in any material manner any agreement or commitment with any former
or present director, officer or employee of the Company or any Subsidiary or
with any affiliate of any of the foregoing persons;
40
(xiv) except as contemplated in the Capital Budget
(2004), none of the Company and its Subsidiaries shall make any capital
expenditure without the prior consent of Buyer;
(xv) none of the Company and its Subsidiaries
will modify, renew or amend the terms of or close out any of its positions under
its existing Product Hedging Contracts or enter into any new hedging position or
any other agreement providing for options, swaps, floors, caps, collars, forward
sales or forward purchases involving commodities or commodity prices, or indexes
based on any of the foregoing and any other similar agreement or arrangement or
other derivative security;
(xvi) transfer or assign to HRM, or cause or allow
HRM to transfer or assign to the Company or any of its Subsidiaries, any assets,
properties, rights or obligations other than as specifically provided in Section
2.6; or
(xvii) authorize, or commit or agree to take, any
of the foregoing actions or take any action that would (y) make any
representation or warranty in Article 3 or Article 4 hereof untrue or incorrect
in any material respect, or (z) result in any of the conditions set forth in
Article 7 hereof not being satisfied.
(b) Notwithstanding anything in Section 6.1(a) to the
contrary, in the event of an emergency with respect to the Ownership Interests,
the Company and its Subsidiaries may take such action as a prudent operator
would take to protect life, health, the environment or property and shall notify
Buyer of such action promptly thereafter.
(c) Notwithstanding anything in Section 6.1(a) to the
contrary, prior to the Closing the Company and its Subsidiaries shall, with
respect to their respective obligations under the Furst Ranch Exploration
Agreement and the Furst Ranch Oil and Gas Lease that are necessary to extend
such agreements to the second phase of drilling commitments, (i) obtain all
necessary Third-Party Consents for the drilling of two additional wells and (ii)
drill and case such wells in accordance with the drilling plans therefor so that
such wells may be subsequently completed. In addition, the Company and its
Subsidiaries shall use their reasonable best efforts to cause Enbridge to begin
in earnest its work (including clearing and trenching operations and laying
pipe) such that it is reasonably certain that the Furst Ranch Exploration
Agreement and the Furst Ranch Oil and Gas Lease will be extended to the second
phase of drilling commitments.
(d) Notwithstanding anything in Section 6.1(a) to the
contrary, prior to the Closing the Company shall cause its Subsidiary Cortez
Operating Company to further amend its amended certificate of incorporation to
delete Article XI thereof relating to "Control Share Acquisitions" and any
related provisions.
(e) The Company and its Subsidiaries shall report
periodically to Buyer regarding the status of their business, operations and
financial condition, such reporting to include any changes in production,
transportation or processing imbalances with respect to the Ownership Interests.
6.2 ACCESS TO ASSETS, PERSONNEL AND INFORMATION.
41
(a) From the date hereof until the Closing, the Company
shall afford to Buyer and the Buyer Representatives, at Buyer's sole risk and
expense, reasonable access, during normal business hours, upon reasonable prior
notice and in such manner as will not unreasonably interfere with the conduct of
business of the Company or any of its Subsidiaries, to all of the assets,
properties, books and records, contracts, facilities, audit and tax work papers,
information systems and computer networks, and payroll records of the Company or
any of its Subsidiaries (including access to the Operated Properties to conduct
Environmental and Regulatory Assessments) and to any of the directors, officers,
personnel or professional advisors (including the Company's independent public
accountants) of the Company or any of its Subsidiaries and shall, upon
reasonable request, furnish promptly to Buyer (at Buyer's expense) a copy of any
file, book, record, contract, permit, correspondence, or other written
information, document or data concerning the Company or any of its Subsidiaries
(or any of their respective assets) that is within the possession or control of
the Company or any of its Subsidiaries. The Company and its Subsidiaries shall
instruct Ernst & Young LLP, the Company's independent accountants, to reasonably
cooperate with Buyer in connection with Buyer's evaluation of the business,
operations and financial condition of the Company and its Subsidiaries. In that
connection, the Company and its Subsidiaries shall promptly provide to Ernst &
Young LLP such waivers, releases or other documentation as may be reasonably
necessary to effectuate the purposes and intents of the preceding sentence.
(b) Notwithstanding anything in this Section 6.2 to the
contrary, (i) the Company shall not be obligated under the terms of this Section
6.2 to disclose to Buyer or the Buyer Representatives, or grant Buyer or the
Buyer Representatives access to, information that is within the Company's
possession or control but subject to a valid and binding confidentiality
agreement with a third party that prohibits such disclosure without first
obtaining the consent of such third party, and the Company, to the extent
reasonably requested by Buyer, will use its reasonable efforts to obtain any
such consent and (ii) is subject to an attorney/client or attorney work product
privilege ("Company Privileged Information"); provided, however, that with
respect to any information that the Company claims is Company Privileged
Information, the Company agrees to describe such information as fully and
completely as reasonably possible without resulting in the loss of such
privilege or disclosing specific legal advice and to reasonably cooperate with
Buyer in providing additional information reasonably requested by Buyer, in as
much detail as reasonably possible while maintaining the confidential or
privileged nature of such information.
6.3 ENVIRONMENTAL STUDIES. The Company hereby acknowledges Buyer's
right to conduct a Phase I environmental analysis (as contemplated by the most
recent version of ASTM 1527E) of the Operating Properties. Notwithstanding
anything to the contrary contained herein, prior to the Closing, no further
inspections, including invasive or intrusive samplings or studies, may be
conducted by Buyer, its Affiliates or any of their respective representatives
with respect to any properties of the Company or its Subsidiaries without the
consent of the Company, which consent may be withheld in the Company's sole and
absolute discretion. The Company shall advise Buyer as to whether it consents to
such further inspections within three calendar days of Buyer's written request
to conduct same.
6.4 THIRD PARTY CONSENTS. After the date hereof and prior to the
Closing, the Company shall use its commercially reasonable efforts, but
excluding any obligation to make
42
any payments, to obtain Third-Party Consents under the Material Agreements that
are required to permit the consummation of the transactions contemplated by this
Agreement.
6.5 PUBLIC ANNOUNCEMENTS; CONFIDENTIALITY.
(a) Prior to the Closing, the Company and Buyer shall
consult with each other before any of them issues any press release or otherwise
makes any public statements with respect to the transactions contemplated by
this Agreement; provided, however, that such approval shall not be required
where such release or announcement is required by any laws (including common
law), statutes, rules, regulations, ordinances, judgments, orders, decrees,
injunctions and writs of any Governmental Authority having jurisdiction over the
business or operations of the Company or Buyer; and provided further, that
either the Company or Buyer may respond to inquiries by the press or others
regarding the transactions contemplated by this Agreement, so long as such
responses are consistent with such party's previously issued press releases.
(b) From and after the date hereof, each Restricted Party
agrees, severally and not jointly with any other Person, to keep confidential
and protect, and not divulge or otherwise allow access to any and all
information of the Company or any of its Subsidiaries relating to or arising out
of the business or operations of the Company and its Subsidiaries, including any
and all notes, analyses, compilations, studies, summaries and other material
containing or based, in whole or in part, on any such information (the
"Confidential Information"). Each Restricted Party agrees, severally and not
jointly with any other Person, that such Confidential Information constitutes a
unique and valuable asset, and that any disclosure of such Confidential
Information in breach of this Section 6.5(b) would be wrongful and would cause
irreparable harm to Buyer. The foregoing obligations of confidentiality will not
apply to any Confidential Information (i) that is now or subsequently becomes
generally publicly known, other than as a direct or indirect result of the
breach of this Agreement by any Restricted Party, (ii) that a Restricted Party
receives from a third party without obligation of confidentiality, (iii) that a
Restricted Party independently develops after Closing or (iv) that is learned or
developed by a Restricted Party as a result of his or its general experience in
the oil and gas business. Each Restricted Party agrees, severally and not
jointly with any other Person, that the provisions and restrictions contained in
this Section 6.5(b) are necessary to protect the legitimate continuing interests
of Buyer in acquiring the Company and entering into this Agreement, that the
covenants in this Section 6.5(b) have been specifically bargained for, that any
violation or breach of such provisions and restrictions will result in
irreparable injury to Buyer for which a remedy at law would be inadequate and
that, in addition to any relief at law that may be available to Buyer for such
violation or breach and regardless of any other provision contained in this
Agreement, Buyer will be entitled to injunctive or other equitable relief
restraining such violation or breach (without any requirement that Buyer provide
any bond or other security). All obligations arising under this Section 6.5(b)
shall terminate in full as of the first anniversary of the Closing Date.
6.6 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
written notice to Buyer of (a) the occurrence, or failure to occur, of any event
of which it has knowledge that has caused any representation or warranty of the
Company contained in this Agreement to be untrue or inaccurate in any material
respect as of the date of this Agreement and (b) the failure of the Company to
comply with or satisfy in any material respect any covenant to be complied with
43
by it hereunder. No such notification shall affect the representations or
warranties of the parties or the conditions to their respective obligations
hereunder.
6.7 NO NEGOTIATIONS. None of the Securityholders, the Company, its
Subsidiaries nor their officers, directors, employees, Affiliates, stockholders,
representatives, agents, nor anyone acting on behalf of any of them shall,
directly or indirectly, encourage, solicit, initiate or engage in discussions or
negotiations with, provide any nonpublic information or assistance to, or
consider the merits of any unsolicited inquiries or proposals from, any Person
(other than Buyer) concerning any merger, sale of assets, purchase or sale of
equity securities or similar transaction involving, directly or indirectly, the
Company or its Subsidiaries unless this Agreement is terminated pursuant to and
in accordance with Article 8. The Company shall notify Buyer of such inquiries
or proposals (including in such notification the identity of the Person making
the inquiry or proposal and the terms thereof), if any, and of any subsequent
communications by the Person making such inquiry or proposal, in each case
within 24 hours of the making thereof.
6.8 ACCESS TO INFORMATION. From and after the Closing Date, Buyer
shall, and shall cause the Company and each of its Subsidiaries to, during
normal business hours and upon reasonable notice, make available to each
Securityholder and their respective representatives (including counsel and
independent auditors) reasonable access to all financial and Tax information,
files, documents and records (written and computer) of the Company and its
Subsidiaries, to the extent that such access is reasonably required in order for
a Securityholder to comply with a Tax or other legally required reporting
obligation or Tax or legal dispute (excluding any such dispute in which the
Company, Buyer or any of their Affiliates may be an adverse party) arising out
of any period prior to and including the Closing Date. Any such access shall be
at the sole cost and expense of the respective Securityholder.
6.9 INVESTIGATION AND AGREEMENT BY BUYER; NO OTHER REPRESENTATIONS
OR WARRANTIES.
(a) Buyer acknowledges and agrees that it has made its
own inquiry and investigation into, and, based thereon, has formed an
independent judgment concerning, the Company and its Subsidiaries and their
respective businesses and operations, and Buyer has been furnished with or given
full access to such information about the Company and its Subsidiaries and their
respective businesses and operations as they requested. In connection with
Buyer's investigation of the Company and its Subsidiaries and their respective
businesses and operations, Buyer and its representatives have received from the
Company or its representatives certain projections and other forecasts for the
Company and its Subsidiaries and certain estimates, plans and budget
information. Buyer acknowledges and agrees that (i) there are uncertainties
inherent in attempting to make such projections, forecasts, estimates, plans and
budgets, (ii) Buyer is familiar with such uncertainties, (iii) Buyer is taking
full responsibility for making its own evaluations of the adequacy and accuracy
of all estimates, projections, forecasts, plans and budgets so furnished to them
or its representatives and (iv) Buyer will not (and will cause all of its
Subsidiaries and other Affiliates and all other Persons acting on its behalf to
not) assert any claim or cause of action against the Company, its Subsidiaries
or any of the Company's direct or indirect directors, officers, employees,
agents, stockholders, Affiliates, consultants, counsel, accountants, investment
bankers or representatives with respect thereto, or hold any such other Person
liable with respect thereto.
44
(b) Buyer agrees that, except for the representations and
warranties in Articles 3 and 4 of this Agreement, neither the Company nor any of
its respective Affiliates has made and shall not be deemed to have made to Buyer
or to any of its representatives or Affiliates any representation or warranty of
any kind. Without limiting the generality of the foregoing, Buyer is not relying
upon any projections, forecasts, estimates, plans or budgets of future revenues,
expenses or expenditures, future results of operations (or any component
thereof), future cash flows (or any component thereof) or future financial
condition (or any component thereof) of the Company or any of its Subsidiaries
or the future business, operations or affairs of the Company or any of its
Subsidiaries heretofore or hereafter delivered to or made available to Buyer,
its Affiliates or their respective counsel, accountants, advisors, lenders or
other representatives.
(c) The Company acknowledges and agrees that except for
the representations and warranties made by Buyer as expressly set forth in this
Agreement, neither Buyer nor any of its Affiliates has made and shall not be
construed as having made to the Company or any Affiliate thereof any
representation or warranty of any kind.
6.10 INDEMNIFICATION.
(a) From and after the Closing, each of the
Securityholders shall, severally and not jointly, indemnify, defend and hold
harmless the Company, Buyer and their Affiliates and each of their respective
directors, officers, employees, controlling persons, agents and representatives
(the foregoing references to Affiliates, directors, officers, employees,
controlling persons, agents and representatives being only to such Persons
having such relationships or acting in such capacities after the Closing) and
their successors and assigns (collectively, the "Buyer Indemnitees") from and
against all liability, demands, claims, actions or causes of action,
assessments, losses, damages, costs and expenses (including reasonable
attorneys', experts' and consultants' fees and expenses as well as reasonable
costs of investigation, sampling and defense) (collectively, "Buyer Damages")
asserted against or incurred by any Buyer Indemnitee as a result or arising out
of any breach of any representation or warranty contained in Article 3.
(b) HRM hereby acknowledges and agrees that it is
responsible for all employment and employee benefit-related liabilities and
obligations (other than the obligation to make monthly payments pursuant to the
Seal Agreement), whenever arising, related to (i) individuals performing
services for the Company, any of its Subsidiaries or any ERISA Affiliate at any
time prior to the Closing and (ii) employee benefit plans or arrangements of any
kind with respect to any such individuals, including for purposes of clauses (i)
and (ii), (A) any obligation pursuant to COBRA (or any equivalent state
continuation coverage requirement) to provide post-employment group health plan
coverage to any employee or former employee of the Company or any Subsidiary,
and (B) any obligation for any income and employment Tax withholding, reporting
or payment obligations (including FICA, Medicare and FUTA) and any contributions
to the HRM 401(k) Plan, in each case relating to the payment(s) provided for in
Section 2.1(g). From and after the Closing, HRM shall indemnify, defend and hold
harmless the Buyer Indemnitees from and against all Buyer Damages asserted
against or incurred by any Buyer Indemnitee as a result or arising out of (I)
the matters described in the preceding sentence, (II) any other liability or
obligation of HRM and (III) any of the Excluded Assets.
45
6.11 INDEMNIFICATION OF OFFICERS AND DIRECTORS.
(a) On and following the Closing, Buyer shall cause the
Company (or its successors and assigns) to indemnify the officers and directors
of the Company and its Subsidiaries to the same extent as any such entity is
required to indemnify any such person pursuant to its certificate of
incorporation or by-laws as in effect on the date of this Agreement.
(b) On and following the Closing, Buyer shall cause the
Company (or its successors and assigns) to perform the indemnification
obligations under the agreements identified on Schedule 6.11(b) of the Company
Disclosure Schedule.
6.12 COMPLIANCE WITH FURST RANCH EXPLORATION AGREEMENT. Buyer
acknowledges and understands the "tag along" and related rights (the "Tag-Along
Rights") of Jack D. Furst pursuant to Section 8 of the Furst Ranch Exploration
Agreement that are triggered upon execution of this Agreement and in connection
therewith Buyer hereby agrees as follows:
(a) Buyer hereby acknowledges that Schedule 1.1-A sets
forth the Allocated Value of the Company's 50% working interest in the Furst
Ranch Oil and Gas Lease; and
(b) on and following the Closing Date, Buyer shall cause
the Company to comply in all respects with the Tag-Along Rights.
ARTICLE 7
CONDITIONS
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION. The respective
obligations of the Company, Securityholders and Buyer to effect the transactions
contemplated hereby are subject to the satisfaction on or prior to the Closing
Date of the following conditions:
(a) Consents and Approvals. All Third-Party Consents
imposed by any Governmental Authority necessary for the consummation of the
transactions contemplated by this Agreement shall have been obtained, occurred
or been filed.
(b) No Injunctions or Restraints. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect.
(c) No Action. No action shall have been taken nor any
statute, rule or regulation shall have been enacted by any Governmental
Authority that makes the consummation of the transactions contemplated hereby
illegal.
(d) Adjustments. Buyer and the Company shall have reached
an agreement or an arbitrative order shall have been obtained as to amounts for
adjustment pursuant to Section 2.4 (including the sufficiency of any cure
pursuant to Section 2.4(c)) and Section 2.5(c).
46
7.2 CONDITIONS TO OBLIGATION OF BUYER. The obligation of Buyer to
effect the transactions contemplated hereby is subject to the satisfaction of
the following conditions unless waived, in whole or in part, by Buyer:
(a) Representations and Warranties. Each of the
representations and warranties of the Company and the Securityholders set forth
in this Agreement shall be true and correct in all material respects as of the
date of this Agreement (except for any representations or warranties that are
qualified by the concept of materiality, which shall be true and correct in all
respects) and (except to the extent such representations and warranties speak
expressly as of an earlier date) as of the Closing Date as though made on and as
of the Closing Date; provided, however, that the requirements of the preceding
clause shall be deemed to have been satisfied (i) with respect to the first
$1,250,000 of value attributed to breaches of representations and warranties
(without giving effect to knowledge qualifications or the materiality
qualifications described in Section 2.4(b)(i) or disclosures made on Schedule
4.16 of the Company Disclosure Schedule as provided in Section 2.4(b)(i)), (ii)
to the extent that an adjustment to the Total Preliminary Aggregate Purchase
Price has been made in respect of an asserted Rep and Warranty Defect in
accordance with Section 2.4 or (iii) with respect to a breach of a
representation or warranty that was made known in writing to Buyer by the
Company not later than the fifth calendar day prior to the Notice Date and was
not raised in a Defect Notice. Buyer shall have received a certificate signed on
behalf of each Securityholder to such effect with respect to such
Securityholder's representations and warranties in Article 3. Buyer shall have
received a certificate signed on behalf of the Company by the Chief Executive
Officer or the Chief Financial Officer of the Company to such effect with
respect to the representations and warranties in Article 4.
(b) Covenants of the Company and the Securityholders. The
Company and the Securityholders shall have performed in all material respects
all of their respective obligations required to be performed by them under this
Agreement at or prior to the Closing Date, and Buyer shall have received a
certificate signed on behalf of the Company by the Chief Executive Officer or
the Chief Financial Officer of the Company to such effect.
(c) Furst Ranch Matters. The covenant in Section 6.1(c)
shall have been performed in all respects, and Enbridge shall have begun in
earnest its work (including clearing and trenching operations and laying pipe)
such that it is reasonably certain that the Furst Ranch Exploration Agreement
and the Furst Ranch Oil and Gas Lease will be extended to the second phase of
drilling commitments.
(d) Closing Deliveries. The Company and the
Securityholders, as applicable, shall have delivered to Buyer all documents,
instruments, certificates or other items required to be delivered at the Closing
by the Company and the Securityholders, as applicable, pursuant to this
Agreement.
7.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY AND THE
SECURITYHOLDERS. The obligation of the Company and Securityholders to effect the
transactions contemplated hereby is subject to the satisfaction of the following
conditions unless waived, in whole or in part, by the Company:
47
(a) Representations and Warranties. Each of the
representations and warranties of Buyer set forth in this Agreement shall be
true and correct in all material respects as of the date of this Agreement
(except for any representations and warranties that are qualified by the concept
of materiality, which shall be true and correct in all respects) and (except to
the extent such representations and warranties speak as of an earlier date) as
of the Closing Date as though made on and as of the Closing Date. The Company
shall have received a certificate signed on behalf of Buyer by the President or
the Chief Financial Officer of Buyer to such effect.
(b) Covenants of Buyer. Buyer shall have performed in all
material respects all obligations required to be performed by Buyer under this
Agreement at or prior to the Closing Date, and the Securityholders shall have
received a certificate signed on behalf of Buyer by the President or the Chief
Financial Officer of Buyer to such effect.
(c) Closing Deliveries. Buyer shall have delivered to the
Securityholders all documents, instruments, certificates or other items
(including the Closing Aggregate Purchase Price) required to be delivered at the
Closing by Buyer pursuant to this Agreement.
ARTICLE 8
TERMINATION
8.1 TERMINATION. This Agreement may be terminated prior to the
Closing and the transactions contemplated hereunder may be abandoned at any time
prior to the Closing Date:
(a) by mutual written consent of Buyer and the Company;
(b) by Buyer if the Company refuses to consent to Buyer's
conducting further inspections, including invasive or intrusive samplings and
studies, as contemplated by Section 6.3 hereof;
(c) by either Buyer or the Company:
(i) if the aggregate of all adjustments pursuant
to Sections 2.4 and 2.5(a)(i) would result in a reduction to the Total
Preliminary Aggregate Purchase Price by more than $5,000,000;
(ii) if there shall have been any breach by the
other party of any representation, warranty, covenant or agreement set forth in
this Agreement, which breach would give rise to the failure of a condition to
the Closing hereunder;
(iii) if a court of competent jurisdiction or
other Governmental Authority shall have issued an order, decree or ruling or
taken any other action (which order, decree or ruling Buyer and the Company
shall use their reasonable best efforts to lift), in each case 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;
(iv) if the Closing shall not have occurred on or
before June 30, 2004 (the "Termination Date"); provided, however, that the right
to terminate this Agreement under
48
this clause (iv) shall not be available to any party whose breach of this
Agreement has been the cause of, or resulted in, the failure of the Closing to
occur on or before such date.
8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement by either the Company or Buyer as provided in Section 8.1, this
Agreement shall forthwith become void and there shall be no liability or
obligation hereunder on the part of Buyer, the Company or any Securityholder or
their respective Affiliates, officers, directors, employees or stockholders,
except (a) Article 8 and Article 10 shall survive such termination and (b) no
such termination shall relieve any party from liability for breach of any term
or provision hereof, provided that no party shall have any liability or
obligation hereunder in the event of a termination of this Agreement pursuant to
Section 8.1(b) or 8.1(c)(i).
8.3 RETURN OF DOCUMENTATION. Following termination of this
Agreement in accordance with Section 8.1, Buyer shall return to the Company all
agreements, documents, contracts, instruments, books, records, materials and all
other information regarding the Company or any of its Subsidiaries or other
Affiliates provided to Buyer or any Buyer Representatives in connection with the
transactions contemplated by this Agreement.
ARTICLE 9
LIMITATIONS ON COMPETITION
9.1 PROHIBITED ACTIVITIES. Each member of the Restricted Group
agrees, severally and not jointly with any other Person, that except as
otherwise provided herein such member of the Restricted Group will not, during
the period beginning on the date hereof and ending with respect to the covenants
set forth in Sections 9.1(a)(i), 9.1(a)(ii), 9.1(b) (insofar as it pertains to a
Relevant Geographic Area described in Section 9.1(a)(i) or 9.1(a)(ii)) and
9.1(c) (insofar as it pertains to a Relevant Geographic Area described in
Section 9.1(a)(i) or 9.1(a)(ii)), on the first anniversary of the Closing Date,
and with respect to the covenants set forth in Section 9.1(a)(iii), 9.1(b)
(insofar as it pertains to a Relevant Geographic Area described in Section
9.1(a)(iii)) and 9.1(c) (insofar as it pertains to a Relevant Geographic Area
described in Section 9.1(a)(iii)) below, on the date six months immediately
following the Closing Date (as applicable, the "Restricted Period"), directly or
indirectly, for any reason, for such member's own account or on behalf of or
together with any other Person: (a) acquire, for such member's own account or
the account of any business in which he owns more than 1% of the outstanding
capital stock, (i) in the case of Ownership Interests in Operated Properties in
Denton County, Texas and Tarrant County, Texas, any interest in any oil or
natural gas property within a one-mile radius of any such Operated Properties,
(ii) in the case of all other Ownership Interests in Operated Properties, any
interest in any oil or natural gas property on which such Ownership Interests
are located or (iii) in the case of Ownership Interests that are not in Operated
Properties, any interest in any oil or natural gas property on which such
Ownership Interests are located (collectively, the "Relevant Geographic Area"),
(b) accept employment, advise, assist or render service in any way to any Person
that competes directly with the Company in the acquisition, exploration,
development, exploitation or production of oil and natural gas in the Relevant
Geographic Area or (c) enter into or take part in or lend his name, counsel or
assistance to any business, either as proprietor, principal, investor, partner,
director, officer, executive, consultant, advisor, agent, independent
contractor, or in any other capacity whatsoever, for any purpose that would be
directly competitive with the acquisition, exploration, development,
exploitation or production
49
activities of the Company or any of its affiliated companies in the Relevant
Geographic Area. Notwithstanding the foregoing, the provisions set forth in this
Section 9.1 shall not apply or otherwise restrict any member of the Restricted
Group from acquiring any ownership interest in property included in the Relevant
Geographic Area and otherwise restricted pursuant to this Section 9.1 if such
property (A) is not an Operated Property or the acquired ownership is in the
form of a royalty interest and (B) does not have a PV-10% value in the Reserve
Report of greater than $250,000. Notwithstanding the foregoing, any member of
the Restricted Group may own and hold as a passive investment up to 5% of the
outstanding capital stock of a competing Person if that class of capital stock
is listed on a national stock exchange or included in the Nasdaq National
Market. Further, notwithstanding the foregoing, each member of the Restricted
Group may acquire interests in properties that are within the Relevant
Geographic Area (other than properties within the boundaries of the real
property described in the Furst Ranch Oil and Gas Lease) and otherwise
restricted pursuant to this Section 9.1(a) (collectively, the "Restricted
Properties") if such acquisition transaction is with one or more third parties
and the Restricted Properties do not constitute more than 20% of the aggregate
value of such acquisition transaction. For purposes of this Section 9.1, the
word "acquire" and correlative terms shall mean and include all direct and
indirect acquisitions, whether individually or through or in combination with
another Person, and whether consummated through a purchase, lease, merger,
consolidation, exchange, business combination or other transaction, in a single
transaction or series of transactions.
9.2 INJUNCTIONS AND RESTRAINING ORDERS. Because of the difficulty
of measuring economic losses to Buyer as a result of any breach by a member of
the Restricted Group of such member's covenants in Section 9.1, and because of
the immediate and irreparable damage that could be caused to Buyer for which it
would have no other adequate remedy, each member of the Restricted Group agrees
that Buyer may enforce the provisions of Section 9.1 by injunctions and
restraining orders against that member if such member breaches any of those
provisions.
9.3 RESTRAINT. The parties hereto each agree that Sections 9.1 and
9.2 impose a reasonable restraint on the Restricted Group in light of the
activities and business of Buyer on the date hereof and the current business
plans of Buyer.
9.4 SEVERABILITY; REFORMATION. The covenants in this Article 9 are
severable and separate, and the unenforceability of any specific covenant in
this Article 9 is not intended by any party hereto to, and shall not, affect the
provisions of any other covenant in this Article 9. If any court of competent
jurisdiction shall determine that the scope, time or territorial restrictions
set forth in Section 9.1 are unreasonable as applied to any member of the
Restricted Group, the parties hereto, including that member of the Restricted
Group, acknowledge their mutual intention and agreement that those restrictions
be enforced to the fullest extent the court deems reasonable, and thereby shall
be reformed to that extent as applied to that member and any other member of the
Restricted Group similarly situated.
9.5 INDEPENDENT COVENANT. All the covenants in this Article 9 are
intended by each party hereto to, and shall, be construed as an agreement
independent of any other provision in this Agreement, and the existence of any
claim or cause of action of any member of the Restricted Group against Buyer,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by Buyer of any covenant in this Article 9. It is
50
specifically agreed that the period specified in Section 9.1 shall be extended
in the case of each member of the Restricted Group by the time during which that
member is in violation of any provision of Section 9.1. The covenants contained
in this Article 9 shall not be affected by any breach of any other provision
hereof by any party hereto.
9.6 MATERIALITY. The Company and each member of the Restricted
Group, severally and not jointly with any other Person, hereby agree that this
Article 9 is a material and substantial part of the transactions contemplated
hereby.
ARTICLE 10
MISCELLANEOUS
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as
expressly provided in Section 6.10, none of the representations or warranties
contained in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Closing. Except as expressly provided in Section 2.4
and Section 6.10, the representations and warranties contained herein are to
serve only as a basis for a party to assert, under Article 7, that the
conditions to Closing have not been met and, under Article 8, that it has a
specified termination right. Accordingly, after Closing and except as provided
in Section 6.10 no party hereto shall have any liability to any other party
hereto based upon any representation or warranty made herein or in any
instrument delivered pursuant to or in connection with this Agreement. After the
Closing, the provisions of Section 6.10 shall be Buyer's sole and exclusive
remedy with respect to any breach of any representation, warranty or covenant of
the Company, HRM or any Securityholder.
10.2 AMENDMENT AND MODIFICATION. This Agreement may only be amended
by written agreement of the Company, Buyer and the Securityholder Representative
or, as provided in Section 10.19, the applicable Securityholder.
10.3 NOTICES.
(a) Any notice or other communication required or
permitted hereunder shall be in writing and either delivered personally, by
facsimile transmission, by a reputable overnight delivery service company or by
registered or certified mail (postage prepaid and return receipt requested) and
shall be deemed given upon receipt or written evidence of transmission by the
sending party (or, if mailed, five Business Days after the date of mailing) at
the following addresses or facsimile transmission numbers (or at such other
address or facsimile transmission number for a party as shall be specified by
like notice):
(i) If to Buyer:
Encore Acquisition Company
777 Main Street, Suite 1400
Ft. Worth, Texas 76102
Attention: President
Facsimile: 817-877-1655
with a copy to:
51
Baker Botts L.L.P.
910 Louisiana Street
Houston, Texas 77002
Attention: Sean T. Wheeler
Facsimile: 713-229-7868
(ii) If to the Company:
Cortez Oil & Gas, Inc.
2745 Dallas Parkway, Suite 220
Plano, Texas 75093
Attention: Chief Executive Officer
Facsimile: 972-781-6505
with a copy to:
Vinson & Elkins L.L.P.
2001 Ross Avenue, Suite 3700
Dallas, Texas 75201
Attention: A. Winston Oxley
Facsimile: 214-999-7891
(iii) If to Securityholders or the Securityholder
Representative:
c/o C. Randall Hill
Cortez Oil & Gas, Inc.
2745 Dallas Parkway, Suite 220
Plano, Texas 75093
Facsimile: 972-781-6505
with a copy to:
Vinson & Elkins L.L.P.
2001 Ross Avenue, Suite 3700
Dallas, Texas 75201
Attention: A. Winston Oxley
Facsimile: 214-999-7891
(b) Any of the above addresses may be changed at any time
by notice given as provided above; provided, however, that any such notice of
change of address shall be effective only upon receipt.
10.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
52
10.5 SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only so broad as is enforceable.
10.6 ATTORNEYS' FEES. In any action or proceeding instituted by a
party arising in whole or in part under, related to, based on, or in connection
with, this Agreement or the subject matter hereof, the prevailing party shall be
entitled to receive from the losing party reasonable attorney's fees, costs and
expenses incurred in connection therewith, including any appeals therefrom.
10.7 TIME. Time is of the essence in each and every provision of
this Agreement.
10.8 PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and its successors and
permitted assigns. Nothing in this Agreement is intended to confer upon any
other Person any rights or remedies of any nature whatsoever under or by reason
of this Agreement except as expressly set forth herein.
10.9 ENTIRE AGREEMENT. This Agreement (which term shall be deemed
to include the exhibits and schedules hereto and the other certificates,
documents and instruments delivered hereunder) and the Confidentiality Agreement
constitute the entire agreement of the parties hereto and supersede all prior
agreements, letters of intent and understandings, both written and oral, among
the parties with respect to the subject matter hereof. There are no
representations or warranties, agreements or covenants other than those
expressly set forth in this Agreement and the Confidentiality Agreement.
10.10 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT GIVING
EFFECT TO ANY CONFLICTS OF LAW PROVISIONS.
10.11 ASSIGNMENT. Except with respect to certain rights and
obligations assigned to the Securityholder Representative as provided by this
Agreement, neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
10.12 WAIVERS. At any time prior to the Closing, the parties hereto
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive performance of any of the
covenants or agreements, or satisfaction of any of the conditions, contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party. Except as provided in this
53
Agreement, no action taken pursuant to this Agreement shall be deemed to
constitute a waiver by the party taking such action of compliance with any
representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision hereof
shall not operate or be construed as a waiver of any prior or subsequent breach
of the same or any other provisions hereof.
10.13 CONFIDENTIALITY AGREEMENT. The Confidentiality Agreement is
hereby incorporated herein by reference and shall constitute a part of this
Agreement for all purpose and shall remain in full force and effect following
the execution of this Agreement until terminated in accordance with its terms;
provided, however, immediately after the Closing Date, the Confidentiality
Agreement shall automatically terminate without any further action by any party
thereto.
10.14 INCORPORATION. Exhibits and Schedules referred to herein are
attached to and by this reference incorporated herein for all purposes.
10.15 COOPERATION AFTER CLOSING. Each party shall, at any time and
from time to time after Closing, execute, acknowledge where appropriate and
deliver such further instruments and documents and take such other action as may
be reasonably requested by another party in order to carry out the intent and
purpose of this Agreement.
10.16 RULES OF CONSTRUCTION.
(a) Each of the parties acknowledges that it has been
represented, or has been advised of its right to be represented, by independent
counsel of its choice throughout all negotiations that have preceded the
execution of this Agreement. Each party and its counsel cooperated in the
drafting and preparation of this Agreement and the documents referred to herein,
and any and all drafts relating thereto shall be deemed the work product of the
parties and may not be construed against any party by reason of its preparation.
Accordingly, any rule of law or any legal decision that would require
interpretation of any ambiguities in this Agreement against any party that draft
it is of no application and is hereby expressly waived.
(b) The inclusion of any information in the Company
Disclosure Schedule shall not be deemed an admission or acknowledgment, in and
of itself and solely by virtue of the inclusion of such information in the
Company Disclosure Schedule, that such information is required to be listed in
the Company Disclosure Schedule or that such items are material to the Company
or its Subsidiaries. Any headers, footers or other references indicating a date
as of which any schedule or any list, memorandum, spreadsheet or other
attachment to any schedule was prepared or otherwise purporting to indicate any
date as of which any such information speaks shall have no effect on the dates
or times as of which any representation or warranty in this Agreement is made.
The headings, if any, of the individual sections of each of the Company
Disclosure Schedules are inserted for convenience only and shall not be deemed
to constitute a part thereof or a part of this Agreement. The Company Disclosure
Schedule is arranged in sections corresponding to those contained in this
Agreement merely for convenience, and the disclosure of an item in one section
of the Company Disclosure Schedule as an exception to a particular
representation or warranty shall be deemed adequately disclosed as an exception
with respect to all other representations or warranties to the extent that the
relevance of such item to
54
such representations or warranties is readily apparent on the face of such item,
notwithstanding the presence or absence of an appropriate section of the Company
Disclosure Schedule with respect to such other representations or warranties or
an appropriate cross reference thereto.
(c) The specification of any dollar amount in the
representations and warranties or otherwise in this Agreement or in the Company
Disclosure Schedule is not intended and shall not be deemed to be an admission
or acknowledgment of the materiality of such amounts or items, nor shall the
same be used in any dispute or controversy between the parties to determine
whether any obligation, item or matter (whether or not described herein or
included in any schedule) is or is not material for purposes of this Agreement.
10.17 EXPENSES AND OBLIGATIONS. Except as otherwise set forth
herein, all costs and expenses incurred by the parties hereto in connection with
the transactions contemplated by this Agreement shall be borne solely and
entirely by the party that has incurred such expenses. As provided in Section
2.1, Buyer shall pay the Company Legal Costs on the Closing Date. If any Company
Legal Costs are submitted to the Company after the Closing Date, such fees shall
be paid by the Securityholders, pro rata in accordance with their ownership of
the Shares immediately prior to Closing.
10.18 RELEASE. Subject to the limitations set forth in the last
sentence in this Section 10.18, as of the Closing Date each Securityholder shall
be deemed to unconditionally and irrevocably release and forever discharge,
effective as of and forever after the Closing Date, to the fullest extent
permitted by laws (including common law), statutes, rules, regulations,
ordinances, judgments, orders, decrees, injunctions and writs of any
Governmental Authority having jurisdiction over the Securityholder, each of
Buyer and its Subsidiaries, the Company and its Subsidiaries (other than HRM)
and their respective officers, directors, employees, agents, counsel and
representatives (collectively, the "Released Parties") from any and all debts,
liabilities, obligations, claims, demands, actions or causes of action, suits,
judgments or controversies of any kind whatsoever that Securityholder may
possess (collectively, "Pre-Acquisition Claims") against the Company and its
Subsidiaries (other than HRM), if any, or any of them that arises out of or is
based on any agreement or understanding or act or failure to act (including any
act or failure to act that constitutes ordinary or gross negligence or reckless
or willful, wanton misconduct), misrepresentation, omission, transaction, fact,
event or other matter occurring on or prior to the Closing Date (whether based
at law or in equity or otherwise, foreseen or unforeseen, matured or unmatured,
known or unknown, accrued or not accrued) (collectively, "Pre-Acquisition
Matters"), including: (a) claims by the Securityholder with respect to repayment
of loans or indebtedness; (b) any rights, titles and interests in, to or under
any agreements, arrangements or understandings to which the Securityholder is a
party; and (c) claims by the Securityholder with respect to dividends, violation
of preemptive rights, or payment of salaries or other compensation or in any way
arising out of or in connection with the Securityholder's employment with the
Company or any of its Subsidiaries (other than HRM), the cessation of that
employment, the Securityholder's status as an officer, director, stockholder or
optionholder of the Company or otherwise. Each Securityholder further agrees,
from and after the Closing Date, not to file or bring any claim before any
Governmental Authority on the basis of or respecting any Pre-Acquisition Claim
concerning any Pre-Acquisition Matter against any Released Party. Each
Securityholder (a) acknowledges that such Securityholder fully comprehends and
understands all the terms of this Section 10.18 and their legal effects and (b)
55
expressly represents and warrants that (i) such Securityholder is competent to
effect the release made in this Section 10.18 knowingly and voluntarily and
without reliance on any statement or representation of any Released Party or its
representatives and (ii) such Securityholder had the opportunity to consult with
an attorney of such Securityholder's choice regarding this Section 10.18.
Notwithstanding the foregoing, this Section 10.18 shall not affect the rights
and remedies of the Securityholders with respect to (A) this Agreement,
including Section 6.11 and (B) any rights against HRM.
10.19 APPOINTMENT OF ATTORNEY-IN-FACT.
(a) C. Randall Hill (the "Securityholder Representative")
(and any successor appointed to act on its behalf in accordance with this
Section 10.19), hereby is appointed, authorized and empowered to act, on behalf
of the Securityholders, in connection with, and to facilitate the consummation
of the transactions contemplated by, this Agreement and the related transaction
documents, and in connection with the activities to be performed on behalf of
the Securityholders under this Agreement.
(b) Buyer and its Subsidiaries shall be entitled to rely
exclusively upon the communications of the Securityholder Representative
relating to the communications of the Securityholders. Buyer need not be
concerned with, and shall be entitled to rely on, the authority of the
Securityholder Representative to act on behalf of all Securityholders hereunder,
and shall not be held liable or accountable in any manner for any act or
omission of the Securityholder Representative in such capacity.
(c) Except as set forth in the following sentence, the
Securityholder Representative may enter into and grant any amendments,
modifications, waivers or consents with respect to this Agreement and the
related transaction documents. Notwithstanding the foregoing, the parties
acknowledge and agree that (i) the Securityholder Representative may not enter
into or grant any amendments, modifications, waivers or consents with respect to
this Agreement unless such amendments, modifications, waivers or consents shall
affect each Securityholder similarly and to the same relative extent, and (ii)
any such amendment, modification, waiver or consent which does not affect any
Securityholder similarly and to the same relative extent as it affects other
Securityholders must be executed by such Securityholder to be binding on such
Securityholder.
(d) Notwithstanding anything to the contrary herein, the
Securityholders Representative in its role as Securityholder Representative
shall have no liability whatsoever to the Company or Buyer.
(e) In the event of the death, disability or incapacity
of the Securityholder Representative, the Securityholders may appoint a
substitute therefor. The Securityholders shall act by majority vote in interest.
Each Securityholder, by his or her execution of this Agreement, hereby
irrevocably appoints the Securityholder Representative as his or her agent,
proxy and attorney-in-fact for all purposes of this Agreement.
(f) The grant of authority provided for in this Section
10.19 is coupled with an interest and is being granted, in part, as an
inducement to the parties to enter into this
56
Agreement and shall be irrevocable and survive the death, incompetency,
bankruptcy or liquidation of any Securityholder and shall be binding on any
successor thereto.
10.20 ARBITRATION.
(a) Any dispute arising under Sections 2.4 or 2.5(c),
which cannot be resolved by mutual agreement, shall be resolved exclusively by
final and binding arbitration in the State of Texas, County of Tarrant, in
accordance with the commercial arbitration rules of the AAA, except as otherwise
provided herein. Either Buyer or the Company may invoke arbitration of such
issue by serving on the other party a written notice of arbitration (the
"Arbitration Notice"), which shall specify with reasonable detail (i) the issues
in dispute, (ii) the claims asserted, (iii) the remedies sought by the party
invoking arbitration and (iv) the name of such party's chosen arbitrator. Within
five (5) Business Day of receipt of the notice, the receiving party shall (A)
select its arbitrator and (B) notify the party who shall have given the
Arbitration Notice. Within five (5) Business Days thereafter, the two
arbitrators so chosen shall choose a third arbitrator. Each arbitrator shall
have general experience in the oil and gas industry.
(b) The decision of the arbitrators shall be rendered
within fifteen (15) days following the appointment of the third arbitrator. All
decisions of the arbitrators shall be by a majority vote. Each of Buyer and the
Company shall pay the fees and expenses of the arbitrator chosen by such party
and shall pay one-half of the fees and expenses of the third arbitrator.
(c) A judgment on the award by the arbitrators may be
entered by any court having jurisdiction thereof.
(d) All aspects of the arbitration shall be confidential,
and the parties and arbitrators shall not disclose to others (other than the
Securityholders and their respective representatives), or permit disclosure of,
any information related to the proceedings, including but not limited to
discovery, testimony and other evidence, briefs and the award.
[Signature Page Follows]
57
IN WITNESS WHEREOF, the parties have executed, or caused this Agreement
to be executed by their duly authorized representatives, as of the date first
written above.
ENCORE ACQUISITION COMPANY
By: /s/ Robert S. Jacobs
-------------------------------------------
Name: Robert S. Jacobs
Title: Senior Vice President
CORTEZ OIL & GAS, INC.
By: /s/ C. Randall Hill
-------------------------------------------
C. Randall Hill
Chief Executive Officer
NATURAL GAS PARTNERS V, L.P.
By: G.F.W. Energy V, L.P., its general partner
By: GFW V L.L.C., its general partner
By: /s/ Kenneth A. Hersh
----------------------------------
Kenneth A. Hersh
Authorized Member
/s/ C. Randall Hill
----------------------------------------------
C. Randall Hill
/s/ R. Cory Richards
----------------------------------------------
R. Cory Richards
/s/ David C. Myers
----------------------------------------------
David C. Myers
/s/ Randall K. Click
----------------------------------------------
Randall K. Click
/s/ Todd G. Laney
----------------------------------------------
Todd G. Laney
/s/ Roxanne W. Hicks
----------------------------------------------
Roxanne W. Hicks
/s/ Robert Brandon Hussing
----------------------------------------------
Robert Brandon Hussing
/s/ James A. Smith
----------------------------------------------
James A. Smith
HRM RESOURCES, INC., SOLELY FOR PURPOSES OF
SECTIONS 2.1(g), 2.6, 6.1(a)(vi) AND (xvi),
6.5(b) AND 6.10(b)
By: /s/ C. Randall Hill
-------------------------------------------
C. Randall Hill
Chief Executive Officer