Exhibit 10.1
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AGREEMENT AND PLAN OF MERGER
by and among
TRADESTAR SERVICES, INC.,
TRADESTAR ACQUISITION SUB, L.L.C.,
THE CYMRI CORPORATION
and
LARRY M. WRIGHT
FRANKLIN M. CANTRELL, JR.
ROBERT G. WONISH
and
MICHAEL W. HOPKINS,
Dated as of May 23, 2006
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ARTICLE I DEFINITIONS....................................................... 1
ARTICLE II THE MERGER.......................................................10
2.1 THE MERGER......................................................10
2.2 EFFECTIVE TIME..................................................10
2.3 EFFECTS OF THE MERGER...........................................10
2.4 ARTICLES OF INCORPORATION, BYLAWS AND DIRECTORS AND OFFICERS....10
2.5 CONVERSION OF SHARES; STOCK OPTIONS; WARRANTS...................11
2.6 EXCHANGE OF SHARES FOR MERGER CONSIDERATION.....................11
2.7 BUYER MEMBERSHIP INTERESTS......................................12
2.8 DELIVERY OF CERTIFICATES AND CASH...............................12
2.9 DISSENTER'S RIGHTS..............................................13
2.10 THE CLOSING.....................................................13
2.11 CLOSING DELIVERIES BY THE SHAREHOLDERS AND THE COMPANY..........13
2.12 CLOSING DELIVERIES BY PARENT AND BUYER..........................15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS..................16
3.1 ORGANIZATION AND QUALIFICATION OF THE COMPANY AND ITS
SUBSIDIARIES..................................................17
3.2 CAPITALIZATION..................................................17
3.3 STOCK OWNERSHIP BY SHAREHOLDERS.................................18
3.4 AUTHORIZATION; ENFORCEABILITY...................................18
3.5 NO CONFLICT; GOVERNMENTAL CONSENTS..............................18
3.6 FINANCIAL STATEMENTS AND UNDISCLOSED LIABILITIES................19
3.7 LABOR MATTERS...................................................19
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS............................20
3.9 TAXES...........................................................21
3.10 MATERIAL CONTRACTS..............................................23
3.11 REAL AND PERSONAL PROPERTY; TITLE TO PROPERTY; LEASES...........25
3.12 CONDITION AND SUFFICIENCY OF TANGIBLE ASSETS....................26
3.13 LICENSES, PERMITS AND AUTHORIZATIONS............................26
3.14 INTELLECTUAL PROPERTY...........................................27
3.15 LITIGATION; COMPLIANCE WITH LAWS................................28
3.16 INSURANCE.......................................................28
3.17 EMPLOYEE BENEFIT PLANS..........................................29
3.18 TRANSACTIONS WITH AFFILIATES....................................31
3.19 NO BROKERS OR FINDERS...........................................32
3.20 ACCURACY OF INFORMATION.........................................32
3.21 RECEIVABLES.....................................................32
3.22 ENVIRONMENTAL...................................................32
3.23 RESTRICTIONS ON BUSINESS ACTIVITIES.............................33
3.24 INTERNAL CONTROLS...............................................33
3.25 ABSENCE OF CERTAIN PAYMENTS.....................................34
3.26 BANK ACCOUNTS...................................................34
3.27 SHAREHOLDER'S INVESTMENT REPRESENTATIONS........................34
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ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT.........................34
4.1 ORGANIZATION AND AUTHORITY OF PARENT AND BUYER..................34
4.2 NO CONFLICT; GOVERNMENTAL CONSENTS..............................35
4.3 FINANCIAL STATEMENTS............................................35
4.4 NO BROKERS OR FINDERS...........................................35
4.5 PARENT SEC DOCUMENTS............................................36
ARTICLE V ADDITIONAL AGREEMENTS.............................................36
5.1 NOTICES AND CONSENTS............................................36
5.2 TAKING OF NECESSARY ACTION; FURTHER ACTION......................37
5.3 DIRECTORS AND OFFICERS..........................................37
5.4 DIRECTORS AND OFFICERS..........................................37
ARTICLE VI TAX MATTERS......................................................37
6.1 CONVEYANCE TAXES................................................37
6.2 MISCELLANEOUS...................................................37
ARTICLE VII INDEMNIFICATION.................................................38
7.1 OBLIGATIONS OF SHAREHOLDERS.....................................38
7.2 OBLIGATIONS OF PARENT...........................................38
7.3 PROCEDURE.......................................................39
7.4 SURVIVAL........................................................40
7.5 NOTICE BY INDEMNIFYING PARTY....................................40
7.6 INDEMNITY THRESHOLD AND CAP.....................................40
7.7 EXCLUSIVE REMEDY................................................41
7.8 MITIGATION......................................................41
ARTICLE VIII GENERAL........................................................41
8.1 AMENDMENTS; WAIVERS.............................................41
8.2 SCHEDULES; EXHIBITS; INTEGRATION................................41
8.3 GOVERNING LAW...................................................41
8.4 NO ASSIGNMENT...................................................41
8.5 HEADINGS........................................................42
8.6 COUNTERPARTS....................................................42
8.7 PUBLICITY AND REPORTS...........................................42
8.8 PARTIES IN INTEREST.............................................42
8.9 NOTICES.........................................................42
8.10 REMEDIES; WAIVER................................................44
8.11 ATTORNEY'S FEES.................................................44
8.12 SEVERABILITY....................................................44
8.13 ENTIRE AGREEMENT................................................44
8.14 TIME IS OF THE ESSENCE..........................................44
8.15 ARBITRATION.....................................................44
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Exhibits
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Exhibit A Form of Articles of Merger
Exhibit B Form of Legal Opinion of Counsel for Shareholders and Company
Exhibit C Form of Employment Agreement
Exhibit D Form of Release
Exhibit E Form of Non-Competition Agreement
Exhibit F Form of Registration Rights Agreement
Exhibit G Form of Legal Opinion of Counsel for Parent and Buyer
Exhibit H Form of Warrant
Exhibit I Form of Subscription Agreement
Exhibit J Form of Promissory Note
Exhibit K Form of Assumption and Indemnification Agreement
Exhibit L Form of Security Agreement
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AGREEMENT AND PLAN OF MERGER
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This Agreement and Plan of Merger is entered into as of May 23, 2006, by
and among TRADESTAR SERVICES, INC., a Nevada corporation ("Parent"); TRADESTAR
ACQUISITION SUB, L.L.C., a Nevada limited liability company ("Buyer"); THE CYMRI
CORPORATION, a Texas corporation (the "Company"); and LARRY M. WRIGHT, FRANKLIN
M. CANTRELL, JR., MICHAEL W. HOPKINS and ROBERT G. WONISH, the holders of all of
the capital stock of the Company (each individually a "Shareholder" and
collectively, the "Shareholders"). Parent, Buyer, Company and the Shareholders
are each a "party" and together are "parties" to this Agreement.
R E C I T A L S
WHEREAS, the Boards of Directors of Parent and the Company and all of the
managers of Buyer have each approved the merger of the Company with and into
Buyer, with Buyer surviving such merger, upon the terms and subject to the
conditions set forth in this Agreement, whereby the issued and outstanding
shares of the capital stock of the Company will be canceled and retired or
converted into the right to receive the Merger Consideration (as defined
herein);
WHEREAS, it is intended that, for federal income tax purposes, the
transactions contemplated by this Agreement shall qualify as a tax free
reorganization under the provisions of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended, and the rules and regulations promulgated
thereunder (the "Code"); and
WHEREAS, Parent, Buyer, the Company and the Shareholders desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger (as defined below) and also to prescribe various conditions to the
Merger.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, and intending to be legally bound the parties agree as
follows:
ARTICLE I
DEFINITIONS
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For all purposes of this Agreement, except as otherwise expressly provided,
(a) the terms defined in this Article I have the meanings assigned to
them in this Article I and include the plural as well as the singular,
(b) all accounting terms not otherwise defined herein have the
meanings assigned under GAAP,
(c) all references in this Agreement to designated "Articles,"
"Sections" and other subdivisions are to the designated Articles, Sections
and other subdivisions of the body of this Agreement,
(d) pronouns of either gender or neuter shall include, as appropriate,
the other pronoun forms, and
(e) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
As used in this Agreement and the schedules delivered pursuant to this
Agreement, the following definitions shall apply:
"AAA Rules" has the meaning set forth in Section 8.16.
"Action" means any action, complaint, claim, charge, petition,
investigation, suit or other proceeding, whether civil or criminal, in law
or in equity, or before any mediator, arbitrator or Governmental Entity.
"Affiliate" means with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such
specified Person.
"Agreement" means this Agreement and Plan of Merger, as amended or
supplemented, together with all exhibits and schedules attached or
incorporated by reference.
"Approval" means any approval, authorization, consent, qualification
or registration, or any waiver of any of the foregoing, required to be
obtained from, or any notice, statement or other communication required to
be filed with or delivered to, any Governmental Entity or any other Person.
"Articles of Merger" has the meaning set forth in Section 2.2.
"Assets" has the meaning set forth in Section 3.11(d).
"Assumption and Indemnification Agreement" has the meaning set forth
in Section 2.11(s).
"Benefit Plans" has the meaning set forth in Section 3.17(a).
"Business" means the business of the Company and each of its
Subsidiaries, and shall be deemed to include any of the following incidents
of such business: income, cash flow, operations, condition (financial or
other), assets, anticipated revenues, prospects, liabilities and personnel.
"Business Day" means any day that is not a Saturday, a Sunday or other
day on which banks are required or authorized by law to be closed in the
City of Houston, Texas.
"Buyer" has the meaning set forth in the preamble to this Agreement.
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"Cash Portion of the Merger Consideration" means any cash payable to
the Shareholders as Merger Consideration.
"Certificates" has the meaning set forth in Section 2.6.
"Claim" has the meaning set forth in Section 7.3.
"Claim Notice" has the meaning set forth in Section 7.3.
"Closing" has the meaning set forth in Section 2.10.
"Closing Date" means the date of the Closing as set forth in Section
2.10.
"Cloyses Agreement" has the meaning set forth in Section 3.19.
"Code" has the meaning set forth on the preamble to this Agreement.
"Common Stock" means the common stock, par value $0.01 per share, of
the Company.
"Company" has the meaning set forth on the preamble to this Agreement.
"Company Financial Statements" means (a) the audited consolidated
balance sheets of the Company and its Subsidiaries as of December 31, 2003
and 2004, as well as the unaudited consolidated balance sheets of the
Company and its Subsidiaries as of December 31, 2005 and the related
(audited with respect to 2003 and 2004 and unaudited with respect to 2005)
statements of income, changes in stockholders' equity, and cash flow for
each of the fiscal years then ended, together with the auditor's report
pertaining to such financial statements for of Melton & Melton, independent
certified public accountants, and (b) an unaudited consolidated balance
sheet of the Company and its Subsidiaries as of April 30, 2006 (the
"Company Interim Balance Sheet") and the related unaudited consolidated
statements of income for the four (4) months then ended.
"Company Group" means any "affiliated group" (as defined in Section
1504(a) of the Code without regard to the limitations contained in Section
1504(b) of the Code) that, at any time before the Closing Date, includes or
has included the Company or any predecessor of or successor to the Company
(or another such predecessor or successor), or any other group of
corporations that, at any time on or before the Closing Date, files or has
filed Tax Returns on a combined, consolidated or unitary basis with the
Company or any predecessor of or successor to the Company (or another such
predecessor or successor).
"Company Interim Balance Sheet" has the meaning set forth in the
definition of the Company Financial Statements.
"Contract" means any agreement, contract, arrangement, bond, loan
commitment, franchise, indemnity, indenture, instrument, lease, license or
understanding, whether or not in writing.
3
"December 31, 2005 Company Balance Sheet" has the meaning set forth in
Section 3.6(b).
"Defensible Title" shall mean as to the oil and gas Assets, such title
held by the Company or any of the Company's Subsidiaries that, subject to
and except for the Permitted Encumbrances: (i) entitles such entity to
receive not less than the "Net Revenue Interest" set forth in Schedule
3.11, Part II for the relevant Asset of all oil, gas and associated liquid
and gaseous hydrocarbons produced, saved and marketed from such Asset, (ii)
obligates such entity to bear costs and expenses relating to the
maintenance, development and operation of an oil and gas Asset in an amount
not greater than the "Working Interest" set forth in Schedule 3.11, Part
II, with respect to such Asset (unless there is a proportionate increase in
such entity's "Net Revenue Interest" for such oil and gas Asset); and (iii)
is free and clear of Encumbrances, other than Permitted Encumbrances.
"Dissenting Shareholder" has the meaning set forth in Section 2.9.
"DOL" has the meaning set forth in Section 3.17(k).
"Effective Time" has the meaning set forth in Section 2.2.
"Employee" or "Employees" means any individual who is (a) an employee
of the Company or any of its Subsidiaries immediately prior to the Closing
Date and (b) employees of the Company or any of its Subsidiaries on any
authorized leave of absence, including, without limitation, short- or
long-term disability leave, worker's compensation leave or vacation leave
as of the Closing Date.
"Employment Agreement" has the meaning set forth in Section 2.11(d).
"Encumbrance" means any claim, charge, easement, encumbrance, lease,
covenant, security interest, lien, option, pledge, rights of others, or
restriction (whether on voting, sale, transfer, disposition or otherwise),
whether imposed by agreement, understanding, law, equity or otherwise,
except for any restrictions on transfer generally arising under any
applicable federal or state securities law.
"Environmental Defect" shall mean a condition with respect to the
Assets that constitutes a violation of Environmental Law; provided that an
Environmental Defect shall not be deemed to exist for the purposes of this
Agreement unless the estimated Lowest Cost Response for remedying such
Environmental Defect exceeds $25,000.
"Environmental Laws" shall mean all Laws relating to (a) the control
of any potential pollutant or protection of the air, water, land or
protected species, (b) solid, gaseous or liquid waste generation, handling,
treatment, storage, disposal or transportation and (c) the regulation of or
exposure to hazardous, toxic or other substances alleged to be harmful.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the related regulations and published interpretations.
"ERISA Affiliate" has the meaning set forth in Section 3.17(a).
4
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the SEC promulgated thereunder.
"GAAP" means generally accepted accounting principles in the United
States, as in effect from time to time.
"GCLN" has the meaning set forth in Section 2.1.
"Governmental Entity" means any government or any agency, bureau,
board, commission, court, department, official, political subdivision,
tribunal or other instrumentality of any government, whether federal, state
or local, domestic or foreign.
"Hazardous Materials" means any "hazardous substance," "pollutant or
contaminant," and "petroleum" and "natural gas liquids" as those terms are
defined or used in section 101 of the Comprehensive Environmental Response,
Compensation and Liability Act, and any other material regulated under any
Environmental Law because of its effect or potential effect on public
health and the environment, including without limitation, PCBs, lead paint,
asbestos, urea formaldehyde, radioactive materials and wastes generated
during the production of oil and gas.
"Income Tax Return" means Tax Returns relating to Income Taxes.
"Income Taxes" shall mean any Taxes imposed on or determined by
reference to net income, together with any interest or penalty, addition to
tax or additional amount imposed by any taxing authority on account of such
Taxes.
"Indemnified Party" has the meaning set forth in Section 7.3.
"Indemnifying Party" has the meaning set forth in Section 7.3.
"Intellectual Property" has the meaning set forth in Section 3.14(a).
"IRS" means the United States Internal Revenue Service or any
successor entity, and to the extent relevant, the United States Department
of Treasury.
"Knowledge" or "Known" shall mean, with respect to Shareholders, the
actual knowledge (without investigation) of any of the Shareholders or Ken
Thomas.
"Law" means any constitutional provision, statute or other law, rule,
regulation, or interpretation of any Governmental Entity and any Order.
"Loss" means any action, cost, damage, disbursement, expense,
liability, loss, deficiency, diminution in value, obligation, penalty or
settlement of any kind or nature, whether foreseeable or unforeseeable,
including but not limited to, interest or other carrying costs, penalties,
legal, accounting and other professional fees and expenses incurred in the
investigation, collection, prosecution and defense of claims and amounts
paid in settlement, that may be imposed on or otherwise incurred or
suffered by the specified Person.
5
"Lowest Cost Response" shall mean the response required or allowed
under Environmental Laws that addresses the condition present at the lowest
cost (considered as a whole taking into consideration any material negative
impact such response may have on the operations of the relevant assets and
any potential material additional costs or liabilities that may likely
arise a result of such response) as compared to any other response that is
consistent with Environmental Laws.
"Material Adverse Effect" means, with respect to any Person, (i) a
material adverse effect on the condition (financial or otherwise),
business, prospects, assets, liabilities, or results of operations of such
Person in an amount individually or in the aggregate equal to or greater
than $100,000; or (ii) a material adverse effect on the ability of such
Person to consummate the transactions contemplated by this Agreement.
"Material Contract" means any Contract deemed material by Section
3.10.
"Merger" has the meaning set forth in Section 2.1.
"Merger Consideration" has the meaning set forth in Section 2.5(a).
"Non-Competition Agreement" has the meaning set forth in Section
2.11(o).
"Note" and "Notes" means secured promissory notes of Parent in the
form of Exhibit J hereto.
"Note Portion of Merger Consideration" means that portion of the
Merger Consideration that is evidenced by the Notes.
"Options" has the meaning set forth in Section 2.5(b).
"Order" means any decree, injunction, judgment, order, ruling,
assessment or writ of any Governmental Entity.
"Parent" has the meaning set forth on the preamble to this Agreement.
"Parent Financial Statements" means the (a) audited consolidated
balance sheets of Parent as of December 31, 2003, 2004 and 2005, and the
related audited consolidated statements of income, changes in stockholders'
equity, and cash flow for each of the fiscal years then ended, together
with the auditor's report pertaining to such financial statements of Gordon
Hughes & Banks, independent certified public accountants; and (b) unaudited
consolidated balance sheet of Parent as of March 31, 2006 (the "Parent
Interim Balance Sheet") and the related unaudited consolidated statement of
income for the three (3) months then ended.
"Parent Indemnified Party" has the meaning set forth in Section 7.1.
"Parent Indemnifying Party" has the meaning set forth in Section 7.2.
"Parent Interim Balance Sheet" has the meaning set forth in the
definition of Parent Financial Statements.
6
"Parent SEC Documents" has the meaning set forth in Section 4.5(a).
"Parent Shares" shall mean shares of common stock, par value $0.001
per share, of Parent.
"PBGC" has the meaning set forth in Section 3.17(k).
"PEI Notes" means (i) the Promissory Note dated December 3, 2004,
executed by the Company in favor of Don E. Claxton and Betty Jane Claxton;
(ii) the Promissory Note dated December 3, 2004, executed by the Company in
favor of C. T. ("Skip") Kimball, III and Linda R. Kimball; and (iii) the
Promissory Note dated December 3, 2004, executed by the Company in favor of
The Irene and Alvin Bellaire, Jr. Trust.
"Permit" means any license, permit, franchise, certificate of
authority, or order, or any waiver of the foregoing, required to be issued
by any Governmental Entity.
"Permitted Encumbrances" shall mean, with respect to the oil and gas
Assets, any or all of the following: (a) Encumbrances that arise under
operating agreements to secure payment of amounts not yet delinquent and
are of a type and nature customary in the oil and gas industry; (b)
Encumbrances that arise as a result of pooling and unitization agreements,
declarations, orders, or Laws (in each case) to the extent the same do not
operate to reduce the "Net Revenue Interest" of the Company or any of its
Subsidiaries in and to any oil and gas Asset to less than the amount set
forth in Schedule 3.11, Part II for such oil and gas Asset or increase the
"Working Interest" of the Company or any of its Subsidiaries in and to any
oil and gas Asset to greater than the amount set forth in Schedule 3.11,
Part II for such oil and gas Asset (without a corresponding increase in the
"Net Revenue Interest" for such Warranty Well); (c) Encumbrances securing
payments to mechanics and materialmen or securing payment of taxes or
assessments that are, in either case, not yet delinquent; (d) lessor's
royalties, overriding royalties, division orders, reversionary interests
and other similar burdens that do not operate to reduce the "Net Revenue
Interest" of the Company or any of its Subsidiaries in and to any oil and
gas Asset to less than the amount set forth in Schedule 3.11, Part II for
such oil and gas Asset or increase the "Working Interest" of the Company or
any of its Subsidiaries in and to any Warranty Well to greater than the
amount set forth in Schedule 3.11, Part II for such oil and gas Asset
(without a corresponding increase in the "Net Revenue Interest" for such
oil and gas Asset); (e) easements, rights-of-way, servitudes, permits,
surface leases, surface use restrictions and other surface uses and
impediments on, over or in respect of any of the Assets, provided that they
do not interfere materially with the ownership, operation, value, or use of
the property affected; (f) production sales contracts; division orders;
contracts for sale, purchase, exchange, refining or processing of
hydrocarbons; farm-out or farm-in agreements; participation agreements; and
similar agreements to the extent the same (i) are ordinary and customary to
the oil, gas and other mineral exploration, development, processing or
extraction business and (ii) do not operate to reduce the "Net Revenue
Interest" of the Company or any of its Subsidiaries in and to any oil and
gas Asset to less than the amount set forth in Schedule 3.11, Part II for
such oil and gas Asset or increase the "Working Interest" of the Company or
any of its Subsidiaries in and to any oil and gas Asset to greater than the
amount set forth in Schedule 3.11, Part II for such oil and gas Asset
(without a corresponding increase in the "Net Revenue Interest" for such
Warranty Well); (g) preferential purchase rights and transfer restrictions,
(h) Encumbrances created by or in connection with the Sterling Debt, and
(i) Encumbrances created by or in connection with the Wells Fargo Debt.
7
"Person" means an association, a corporation, an individual, a
partnership, a limited liability company, a trust or any other entity or
organization, including a Governmental Entity.
"Qualified Plan" has the meaning set forth in Section 3.17(b).
"Real Property" has the meaning set forth in Section 3.11(a).
"Registration Rights Agreement" has the meaning set forth in Section
2.11(p).
"Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration
into the indoor or outdoor environment, including, without limitation, the
movement of Hazardous Materials through air, soil, surface water, ground
water, wetlands, land or subsurface strata
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Security Agreement" has the meaning set forth in Section 2.11(t).
"Share" and "Shares" has the meaning set forth in Section 2.5(a).
"Shareholder" and "Shareholders" has the meaning set forth in the
preamble to this Agreement.
"Shareholder Indemnified Party" has the meaning set forth in Section
7.2.
"Shareholder Indemnifying Party" and "Shareholder Indemnifying
Parties" has the meaning set forth in Section 7.1.
"Sterling Debt" means all amounts outstanding under the Amended and
Restated Credit Agreement, dated December 3, 2004, by and among the
Company, Petroleum Engineers, Inc., Petroleum Engineers International, Inc.
and Triumph Energy, Inc., as debtors, and Sterling Bank, as lender,
including that certain Revolving Note payable to Sterling Bank in the
original principal amount of $20,000,000.
"Stock Option Plans" has the meaning set forth in Section 2.5(b).
"Stock Portion of Merger Consideration" means that portion of the
Merger Consideration that is evidenced by the Parent Shares issued to the
Shareholders as set forth in Schedule 2.5.
"Subscription Agreement" has the meaning set forth in Section 3.27.
8
"Subsidiary" means, with respect to any Person, (a) any corporation
50% or more of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time stock of any class
or classes of such corporation have or might have voting power by reason of
the happening of any contingency) is at the time owned by such Person,
directly or indirectly through Subsidiaries; and (b) any partnership,
limited liability company, association, joint venture, trust or other
entity in which such Person, directly or indirectly through Subsidiaries,
is either a general partner, has a 50% or greater equity interest at the
time or otherwise owns a controlling interest.
"Surviving Entity" has the meaning set forth in Section 2.1.
"Tax" (and, with correlative meaning, "Taxes") means: (i) any federal,
state, local or foreign net income, gross income, gross receipts, windfall
profit, severance, property, production, sales, use, license, excise,
franchise, employment, payroll, withholding, alternative or add-on minimum,
ad valorem, value added, transfer, stamp, or environmental tax, or any
other tax, custom, duty, governmental fee or other like assessment or
charge of any kind whatsoever, together with any interest or penalty,
addition to tax or additional amount imposed by any governmental authority;
and (ii) any liability of the Company or any of its Subsidiaries for the
payment of amounts with respect to payments of a type described in clause
(i) as a result of being a member of an affiliated, consolidated, combined
or unitary group, or as a result of any obligation of the Company or any of
its Subsidiaries under any Tax Sharing Arrangement or Tax Indemnity
Agreement.
"Tax Indemnity Agreement" means any written or unwritten agreement or
arrangement pursuant to which the Company may be required to indemnify or
reimburse another party for any liability relating to Taxes.
"Tax Return" means any return, report or similar statement required to
be filed with respect to any Tax (including any attached schedules),
including any information return, claim for refund, amended return or
declaration of estimated Tax.
"Tax Sharing Arrangement" means any written or unwritten agreement or
arrangement for the allocation or payment of Tax liabilities or payment for
Tax benefits with respect to a consolidated, combined or unitary Tax Return
which includes the Company.
"TBCA" has the meaning set forth in Section 2.1.
"Threshold" has the meaning set forth in Section 7.6(a).
"Third Party Intellectual Rights" has the meaning set forth in Section
3.14(b).
"Title Defect" shall mean, with respect to any oil and gas Asset, any
encumbrance, encroachment, irregularity, or defect in the title of the
Company or any Subsidiary of the Company that alone or in combination with
other defects in title renders the title of the Company or any Subsidiary
of the Company to the oil and gas Assets or part thereof to be less than
Defensible Title; provided that a Title Defect shall not be deemed to exist
for the purposes of this Agreement unless the estimated cost to remedy such
Title Defect exceeds One Hundred Thousand Dollars ($100,000.00).
9
"Wells Fargo Debt" means all amounts outstanding under the Credit
Agreement, dated May 23, 2006, by and among Petroleum Engineers, Inc. and
Tradestar Construction Services, Inc., as debtors, and Wells Fargo,
National Association, as lender, including that certain Revolving Note
payable to Wells Fargo in the original principal amount of $5,000,000.
ARTICLE II
THE MERGER
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2.1 The Merger. At the Effective Time and upon the terms and subject to the
conditions of this Agreement and in accordance with the Texas Business
Corporation Act (the "TBCA") and the General Corporation Law of Nevada,
including but not limited to Chapters 78 (Private Corporations), 86 (Limited
Liability Companies) and 92(a) (Mergers, Conversions, Exchanges and
Divestitures) of Title 7 of the Nevada Revised Statutes, (the "GCLN"), the
Company shall be merged with and into Buyer (the "Merger"). Following the
Merger, Buyer shall continue as the surviving entity (the "Surviving Entity")
and the separate corporate existence of the Company shall cease. Parent, as the
sole owner of Buyer, hereby approves the Merger and this Agreement.
2.2 Effective Time. Subject to the terms and conditions set forth in this
Agreement, on the Closing Date, Articles of Merger substantially in the form of
Exhibit A (collectively, the "Articles of Merger") shall be duly executed and
acknowledged by the Company and Buyer and thereafter delivered to the
Secretaries of State of each of the States of Texas and Nevada for filing. The
Merger shall become effective at such time as a properly executed copy of the
Articles of Merger is duly filed with the Secretaries of State of each of the
States of Texas and Nevada or such later time as Parent and the Shareholders may
agree upon and as set forth in the Articles of Merger (the time the Merger
becomes effective being referred to herein as the "Effective Time").
2.3 Effects of the Merger. The Merger shall have the effects set forth in
the TBCA and the GCLN. Without limiting the generality of the foregoing and
subject thereto, at the Effective Time, all the properties, rights, privileges,
powers and franchises of the Company and Buyer shall vest in the Surviving
Entity, and all debts, liabilities and obligations of the Company and Buyer
shall become the debts, liabilities and obligations of the Surviving Entity.
2.4 Articles of Incorporation, Bylaws and Directors and Officers. The
Articles of Incorporation of the Company shall, without further action, be
terminated, and the organizational documents of Buyer in effect at the Effective
Time shall be the organizational documents of the Surviving Entity until amended
in accordance with applicable law. From and after the Effective Time, until
successors are duly elected or appointed and qualified in accordance with
applicable law, the managers and the initial officers of Buyer at the Effective
Time shall become managers and the officers of the Surviving Entity and the
officers and directors of the Company shall cease to act as such effective as of
the Effective Time.
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2.5 Conversion of Shares; Stock Options; Warrants.
(a) At the Effective Time, by virtue of the Merger (and without any
action on the part of Buyer or the Company), each share of common stock,
par value $0.01 per share, of the Company (each a "Share" and,
collectively, the "Shares") issued and outstanding immediately prior to the
Effective Time shall be converted into the right to receive the Merger
Consideration. The "Merger Consideration" is as set forth on Schedule 2.5
attached hereto, which Merger Consideration is comprised of (i) the Cash
Portion of Merger Consideration, (ii) the Stock Portion of Merger
Consideration, and (iii) the Note Portion of Merger Consideration, less all
amounts outstanding (including but not limited to all principal and accrued
and unpaid interest) under the Sterling Debt immediately prior to the
Closing and all amounts outstanding (including but not limited to all
principal and accrued and unpaid interest) under the PEI Notes immediately
prior to the Closing.
(b) The Company shall take such action in order that, prior to the
Effective Time, the options granted under any Company stock option plan or
agreement (collectively, as such plans or agreements may have been amended,
supplemented or modified from time to time, the "Stock Option Plans") that
are unexercised, whether or not then exercisable (the "Options"), shall
have been extinguished. The Company shall ensure that, in connection with
the extinguishment of each Option, a release of any and all rights the
holder had or may have had in the Option is obtained. All Stock Option
Plans shall terminate as of the Effective Time and the provisions in any
other plan, program or arrangement providing for the issuance or grant of
any other interest in respect of the capital stock of the Company or any
Subsidiary shall be extinguished as of the Effective Time.
(c) The Company shall take such action in order that, prior to the
Effective Time, all warrants issued to purchase securities of the Company
shall be canceled and the holders of such warrants shall release any and
all rights such holders had or may have had in such warrants.
2.6 Exchange of Shares for Merger Consideration. At the Effective Time,
each Share issued and outstanding immediately prior to the Effective Time shall
no longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist, and each certificate previously evidencing any such Shares
(the "Certificates") shall thereafter represent the right to receive only the
amount of Merger Consideration set forth opposite such Shareholder's name who
holds the Certificates as set forth on Schedule 2.5. Each share of any class of
Company capital stock issued and outstanding immediately prior to the Effective
Time that is owned by the Company or by any Subsidiary of the Company (other
than shares in trust accounts, security accounts, custodial accounts and similar
holdings like that are beneficially owned by third parties), shall automatically
be canceled and retired and shall cease to exist, and no cash or other
consideration shall be delivered or deliverable in exchange therefor.
2.7 Buyer Membership Interests. At the Effective Time, the outstanding
membership interests of Buyer shall be converted into 100% of the membership
interests of the Surviving Entity.
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2.8 Delivery of Certificates and Cash.
(a) Delivery. At the Closing, each Shareholder shall deliver such
Shareholder's Certificate(s) to Parent. Upon delivery of a Certificate for
cancellation to Parent, Parent shall deliver in exchange therefor payment
of the Merger Consideration determined in accordance with Section 2.5 and
the Cash Portion of Merger Consideration shall be paid by check or by wire
transfer to the respective accounts designated by each Shareholder as
provided to Parent not less than two (2) Business Days prior to the Closing
Date and the Certificate(s) so surrendered by the Shareholder shall
forthwith be canceled. If any cash is to be paid to a name other than that
which the Certificate(s) surrendered in exchange therefor is registered, or
in the event of a transfer of ownership of Shares that is not registered in
the transfer records of the Company, it shall be a condition of payment of
the Merger Consideration that the Certificate so surrendered shall be
properly endorsed or shall be otherwise in proper form for transfer and
that the Person requesting such payment shall have paid any transfer and
other taxes required by reason of the payment of the Merger Consideration
to a Person other than the registered holder of the Certificate surrendered
or shall have established to the satisfaction of Parent that such tax
either has been paid or is not applicable. Parent reserves the right in its
sole discretion to pay Merger Consideration only to the Person whose name
is on the Certificate(s) surrendered in exchange therefor and registered on
the transfer records of the Company. Until surrendered as contemplated by
this Section 2.8, each Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender
the Merger Consideration as contemplated by this Section 2.8.
(b) No Further Registration. The Merger Consideration paid upon the
surrender of Shares in accordance with the terms hereof shall be deemed to
have been paid in full satisfaction of all rights pertaining to such
Shares. From and after the Effective Time, there shall be no further
registration of transfers on the transfer books of the Surviving Entity of
the Shares that were outstanding immediately prior to the Effective Time.
(c) Withholding Taxes. Parent shall be entitled to deduct and withhold
from the Merger Consideration otherwise payable to a holder of Shares
pursuant to the Merger such amounts as Parent is required to deduct and
withhold with respect to the making of such payment under the Code or any
provision of state, local or foreign tax law. To the extent amounts are so
withheld by Parent, the withheld amounts shall be (i) timely paid to the
appropriate Governmental Entity to whom such taxes are owed and (ii)
treated for all purposes of this Agreement as having been paid to the
holder of the Shares in respect of which the deduction and withholding was
made.
(d) Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required
by Parent, the posting by such person of a bond in such reasonable amount
as Parent may direct as indemnity against any claim that may be made
against it with respect to such Certificate, Parent shall deliver in
exchange for such lost, stolen or destroyed Certificate the applicable
Merger Consideration with respect thereto.
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2.9 Dissenter's Rights. Any Shares that a Shareholder properly exercising
his, her or its dissent or appraisal rights under the TBCA (a "Dissenting
Shareholder") holds will be converted into the right to receive such
consideration as may be determined to be due to such Dissenting Shareholder
under the TBCA; except that any such Shares that a Dissenting Shareholder holds
for which, after the Effective Time, such Dissenting Shareholder withdraws his,
her or its demand for purchase or loses its purchase right as provided in the
TBCA, will be deemed to be converted, as of the Effective Time, into the right
to receive the applicable Merger Consideration, without any interest thereon, in
accordance with Section 2.5. The Company will give Parent (a) prompt notice of
any written demands for purchase, withdrawals of demands for purchase and any
other instruments served under the TBCA, and (b) the opportunity to direct all
negotiations and proceedings with respect to demands for purchase under the
TBCA. The Company will not voluntarily make any payment with respect to any
purchase demands and will not, except with Parent's prior written consent,
settle or offer to settle any such demands. Each Dissenting Shareholder shall be
responsible for all costs and expenses (including reasonable attorney's fees and
costs) of Parent, Buyer or the Surviving Entity associated with such Dissenting
Shareholder exercising his, her or its dissent or appraisal rights under the
TBCA.
2.10 The Closing. Upon the terms and subject to the conditions of this
Agreement, the transactions contemplated by this Agreement shall take place at a
closing (the "Closing") to be held at the offices of Haynes and Boone, LLP,
legal counsel to Parent and Buyer, located at One Houston Center, 1221 McKinney,
Suite 2100, Houston, Texas 77010 contemporaneously with the execution of this
Agreement, or at such other place or at such other time or on such other date as
the Shareholders and Parent may mutually agree upon in writing, provided that
all closing deliveries required of the parties in this Article II have been
delivered (the day on which the Closing takes place being the "Closing Date").
It is anticipated by the parties hereto that the Closing will occur on or about
May 23, 2006. The Closing may, with the consent of all parties, take place by
delivering an exchange of documents by facsimile transmission or electronic mail
with originals to follow by overnight mail service courier.
2.11 Closing Deliveries by the Shareholders and the Company. At the
Closing, against delivery of, among other things, the Merger Consideration, the
Shareholders shall deliver or cause to be delivered to Parent:
(a) the Certificates in accordance with Section 2.8;
(b) a legal opinion from Hirsch & Westheimer, P.C., legal counsel to
the Company and the Shareholders, addressed to Parent and dated the Closing
Date, substantially in the form of Exhibit B;
(c) each in form and substance satisfactory to Parent in its
reasonable discretion, all Approvals of all Governmental Entities and
officials which are necessary for the consummation of the transactions
contemplated by this Agreement and all third party consents and estoppel
certificates identified on Schedule 3.5;
(d) an employment agreement with the Surviving Entity duly executed by
Larry M. Wright in the form attached hereto as Exhibit C (the "Employment
Agreement");
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(e) a non-foreign status certificate that would exempt the
transactions contemplated by this Agreement from withholding pursuant to
the provisions of Sections 897 and 1445 of the Code and the Treasury
Regulations promulgated thereunder;
(f) a Subscription Agreement duly executed by each Shareholder;
(g) All minute books, seals and other records of the Company and each
of its Subsidiaries;
(h) Certificates of the Secretary of State and the taxing authorities
of the State of Texas or Louisiana, as applicable, or other appropriate
government authority, dated not more than five (5) days prior to the
Closing Date, attesting to the incorporation and good standing of the
Company and each Subsidiary as a corporation in its jurisdiction of
incorporation, and to the payment of all state taxes due and owing thereby;
(i) Copies, certified by the Secretary of State of Texas, dated not
more than five (5) days prior to the Closing Date, of the Articles of
Incorporation of the Company, and all amendments thereto;
(j) Copies, certified by the Secretary of State of the jurisdiction of
incorporation of each Subsidiary of the Company, dated not more than five
(5) days prior to the Closing Date, of the charter of such Subsidiary of
the Company, and all amendments thereto;
(k) Copies, certified the by Secretary or Assistant Secretary of the
Company as of the Closing Date, of the bylaws of the Company, and all
amendments thereto;
(l) Copies, certified the by Secretary or Assistant Secretary of each
Subsidiary of the Company as of the Closing Date, of the bylaws of such
Subsidiary of the Company, and all amendments thereto;
(m) a release duly executed by the Shareholders in the form of Exhibit
D attached hereto;
(n) any Permits necessary to the operations of the Business amended to
adequately reflect any change of control or other amendment necessary to
reflect the Merger;
(o) a Confidentiality, Non-Competition and Non-Solicitation Agreement
by and between each Shareholder (except Larry M. Wright) and Parent, in the
form of Exhibit E attached hereto (each a "Non-Competition Agreement"),
executed by each Shareholder (except Larry M. Wright);
(p) a Registration Rights Agreement by and among the Shareholders and
Parent providing for piggy-back registration rights for the Shareholders,
in the form of Exhibit F attached hereto (a "Registration Rights
Agreement"), executed by each Shareholder;
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(q) written evidence of the termination or cancellation of all
guaranties, reimbursements, "hold harmless," indemnities and similar
obligations and liabilities of the Company on behalf of any Person other
than the Company or any Subsidiary of the Company, including without
limitation those obligations listed on Schedule 2.11(q);
(r) the Articles of Merger duly executed by the Company;
(s) an Assumption and Indemnification Agreement in the form of Exhibit
K (the "Assumption and Indemnification Agreement") duly executed by each
Shareholder (except Michael W. Hopkins) and the Company; and
(t) a Pledge and Security Agreement in the form of Exhibit L (the
"Security Agreement") duly executed by Larry M. Wright and Franklin M.
Cantrell, Jr.
2.12 Closing Deliveries by Parent and Buyer. At the Closing, against
delivery of, among other things, the Certificates, Buyer and Parent shall
deliver to the applicable Shareholders:
(a) except as otherwise set forth in Section 2.5 above, the Cash
Portion of Merger Consideration by wire transfer in immediately available
funds to the bank account(s) designated by the applicable Shareholders;
(b) stock certificates evidencing the Stock Portion of Merger
Consideration;
(c) the Notes evidencing the Note Portion of Merger Consideration;
(d) a legal opinion from Haynes and Boone, LLP, legal counsel to
Parent and Buyer, addressed to the Shareholders and dated the Closing Date,
substantially in the form of Exhibit G;
(e) the Employment Agreement duly executed by the Surviving Entity;
(f) Certificates of the Secretary of State and the taxing authorities
of the State of Nevada or other appropriate government authority, dated not
more than five (5) days prior to the Closing Date, attesting to the
incorporation and good standing of Parent as a corporation in its
jurisdiction of incorporation, and to the payment of all state taxes due
and owing thereby;
(g) a Subscription Agreement with each Shareholder duly executed by
Parent;
(h) a Non-Competition Agreement with each Shareholder (except Larry M.
Wright) duly executed by Parent;
(i) a copy, certified as of the Closing Date by the Secretary or
Assistant Secretary of Parent, of the bylaws of Parent and all amendments
thereto and resolutions of the Board of Directors of Parent authorizing
Parent's execution, delivery and performance of this Agreement, the
consummation the transactions contemplated herein, and the taking of all
such other corporate action as shall have been required as a condition to,
or in connection with the consummation of the contemplated transactions;
(j) the Registration Rights Agreement duly executed by Parent;
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(k) warrants issued to Larry M. Wright and Franklin M. Cantrell, Jr.
to purchase Parent Shares, in the form of Exhibit H, duly executed by
Parent;
(l) Certificates of the Secretary of State and the taxing authorities
of the State of Nevada or other appropriate government authority, dated not
more than five (5) days prior to the Closing Date, attesting to the
incorporation and good standing of Buyer as a corporation in its
jurisdiction of incorporation, and to the payment of all state taxes due
and owing thereby;
(m) a copy, certified as of the Closing Date by the Secretary or
Assistant Secretary of Buyer, of the resolutions of the managers and sole
member of Buyer authorizing Buyer's execution, delivery and performance of
this Agreement, the consummation the transactions contemplated herein, and
the taking of all such other limited liability company action as shall have
been required as a condition to, or in connection with the consummation of
the contemplated transactions;
(n) Copies, certified by the Secretary of State of Nevada, dated not
more than five (5) days prior to the Closing Date, of the Articles of
Organization of Buyer, and all amendments thereto;
(o) Copies, certified the by Secretary or Assistant Secretary or any
manager of Buyer as of the Closing Date, of the Operating Agreement of
Buyer, and all amendments thereto;
(p) the Articles of Merger duly executed by Buyer;
(q) the Assumption and Indemnification Agreement duly executed by
Parent and Buyer; and
(r) the Security Agreement duly executed by Parent.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS
----------------------------------------------
The Shareholders, jointly and severally, represent and warrant to Parent
and agree as follows:
3.1 Organization and Qualification of the Company and its Subsidiaries.
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Texas. Each of the Company
and its Subsidiaries has all necessary corporate power and authority to
own, operate or lease the properties and assets now owned, operated or
leased by it and to carry on the Business as it has been and is currently
conducting. Each of the Company and its Subsidiaries is duly licensed or
qualified to do business and is in good standing in each jurisdiction in
which the properties owned or leased by it or the operation of its business
makes such licensing or qualification necessary. Schedule 3.1 correctly
lists with respect to the Company and its Subsidiaries their respective
jurisdiction of incorporation, each jurisdiction in which they are
qualified to do business as a foreign corporation, and their directors and
executive officers. The Shareholders have delivered to Parent complete and
correct copies of the charter and bylaws of the Company and its
Subsidiaries as now in effect as of the Closing Date.
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(b) Each of the Company and its Subsidiaries owns all assets and
rights necessary to conduct the Business of the Company and its
Subsidiaries as presently conducted. Each of the Subsidiaries of the
Company is listed on Schedule 3.1.
3.2 Capitalization.
(a) The authorized capital stock of the Company consists of 1,000,000
shares of Common Stock. As of the date hereof, 100,000 shares of Common
Stock are issued and outstanding and each record owner of Shares and the
number of Shares held by each record owner is set forth on Schedule 3.2.
Except as set forth on Schedule 3.2, there are no shares of capital stock
of the Company issued and outstanding. All of the Shares have been duly
authorized and validly issued and is fully paid and non-assessable. None of
the Shares was issued in violation of any preemptive rights or is subject
to any preemptive rights of any Person. All of the Shares have been issued
and granted in all material respects in compliance with applicable
securities Laws and other requirements of Law. No legend or other reference
to any Encumbrance appears upon any certificate representing the Shares,
except for customary legends with respect to transfer restrictions for
restricted securities under federal and Texas securities Law.
(b) The authorized capital stock of each Subsidiary of the Company and
the number of shares of capital stock of each Subsidiary of the Company,
including the record and beneficial owner thereof, is set forth on Schedule
3.2. All of the shares of capital stock of each of the Subsidiaries of the
Company has been duly authorized and validly issued and is fully paid and
non-assessable. None of the capital stock of the Subsidiaries of the
Company was issued in violation of any preemptive rights or is subject to
any preemptive rights of any Person. All of the capital stock of each of
the Subsidiaries of the Company has been issued and granted in all respects
in compliance with applicable securities Laws and other requirements of
Law. No legend or other reference to any Encumbrance appears upon any
certificate representing the capital stock of any Subsidiary of the
Company, except for customary legends with respect to transfer restrictions
for restricted securities under federal and Texas securities Law. The
Company owns no capital stock or other securities in any Person other than
the Subsidiaries of the Company set forth on Schedule 3.2.
(c) There are no outstanding options, warrants, agreements, conversion
rights, preemptive rights or other rights to subscribe for or purchase from
any of the Shareholders, the Company or any Subsidiaries of the Company, or
any plans, contracts or commitments providing for the issuance of, or the
granting of rights to acquire, (i) any capital stock or other ownership
interests of the Company or any of the Subsidiaries of the Company,
including, but not limited to the Shares; or (ii) any securities
convertible into or exchangeable for any such capital stock or other
ownership interests. There are no outstanding contractual obligations or
plans of any of the Shareholders, the Company or any Subsidiaries of the
Company to transfer, issue, repurchase, redeem or otherwise acquire any
outstanding shares of capital stock or other ownership interests of the
Company or any Subsidiaries of the Company, including, but not limited to
the Shares. Except as described on Schedule 3.1, neither the Company nor
any of its Subsidiaries owns or has any contract, agreement or
understanding to acquire, any equity securities or other securities of any
Person or any direct or indirect equity or ownership interest in any other
business.
17
3.3 Stock Ownership by Shareholders. Each Shareholder has good and
marketable title to, and sole record and beneficial ownership of, the Shares as
listed on Schedule 3.2 and the Shares are free and clear of any and all
covenants, conditions, marital property rights or other Encumbrances. Upon
consummation of the transactions contemplated by this Agreement, Parent will own
all the issued and outstanding capital stock of the Surviving Entity free and
clear of all Encumbrances, and such capital stock will be fully paid and
nonassessable. There are no voting trusts, stockholder agreements, proxies or
other agreements or understandings in effect with respect to the voting or
transfer of any of the Shares or any of the capital stock of any of the
Subsidiaries of the Company.
3.4 Authorization; Enforceability. The execution, delivery and performance
of this Agreement by each Shareholder and the Company and the consummation by
each Shareholder and the Company of the transactions contemplated hereby have
been duly authorized by all requisite action on the part of each Shareholder and
the Company. This Agreement has been duly executed and delivered by each
Shareholder and the Company, and assuming due authorization, execution and
delivery by Buyer and Parent, this Agreement constitutes a valid and binding
obligation of each of the Shareholders and the Company enforceable against each
of the Shareholders and the Company in accordance with its terms, except to the
extent that the enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar Laws, or by equitable principles relating
to the rights of creditors generally.
3.5 No Conflict; Governmental Consents.
(a) The execution, delivery and performance of this Agreement by each
of the Shareholders and the Company do not and will not (i) violate,
conflict with or result in the breach of any provision of the charter or
by-laws of the Company, (ii) except as set forth in Schedule 3.5, to the
Knowledge of the Shareholders, conflict with or violate in any material
respect any Law or Order applicable to any of the Shareholders or the
Company or any of its Subsidiaries, or (iii) except as set forth in
Schedule 3.5, conflict with, result in any breach of, constitute a default
(or event which with the giving of notice or lapse of time, or both, would
become a default) under, require any consent under, or give to others any
rights of termination, amendment, acceleration, suspension, revocation or
cancellation of, or result in the creation of any Encumbrance on any of the
Shares or on any of the assets or properties of the Shareholders or the
Company pursuant to, any note, bond, mortgage, indenture, license, permit,
lease, sublease or other Contract to which any of the Shareholders or the
Company is a party or by which any of the Stock or any of such assets or
properties is bound or affected.
(b) The execution, delivery and performance of this Agreement by each
of the Shareholders and the Company do not and will not require any
Approval or Order of any Governmental Entity, except as described in
Schedule 3.5.
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3.6 Financial Statements and Undisclosed Liabilities.
(a) The Shareholders have delivered to Parent true, correct and
complete copies of the Company Financial Statements. The Company Financial
Statements have been prepared in conformity with GAAP applied on a
consistent basis (except that such Company Financial Statements may not
include footnotes which may be required by GAAP and may be subject to
normal year-end adjustments). Such statements of operations and cash flow
present fairly in all material respects the results of operations and cash
flows of the Company and each of its Subsidiaries for the respective
periods covered, and the balance sheets present fairly in all material
respects the financial condition of the Company and each of its
Subsidiaries as of their respective dates. Except as disclosed on Schedule
3.6, since December 31, 2005, there has been no change in any of the
significant accounting policies, practices or procedures of Company or any
of its Subsidiaries.
(b) Neither the Company nor any of its Subsidiaries has any
liabilities or obligations of any nature (whether known or unknown and
whether absolute, accrued, contingent, or otherwise), except for
liabilities or obligations reflected or reserved against the December 31,
2005 balance sheet of the Company (the "December 31, 2005 Company Balance
Sheet"), current liabilities incurred in the ordinary course of business
and consistent with past practice since December 31, 2005 and liabilities
that would not be reasonably expected to result in a Material Adverse
Effect on the Company or any of its Subsidiaries.
3.7 Labor Matters. Neither the Company nor any of its Subsidiaries has
entered into any collective bargaining agreements. With respect to the Company's
employees and the employees of the Subsidiaries of the Company, there are no
presently pending, or to the Knowledge of any of the Shareholders, threatened
(x) arbitration proceedings, labor strikes, slowdowns or stoppages, grievances
or other labor disputes; (y) Actions related to an alleged material violation
pertaining to labor relations or employment matters, including but not limited
to claims for unpaid wages or penalties, discrimination, harassment, or
retaliation, or wrongful discharge in violation of public policy; or (z) any
scheduled vote or application for certification of a collective bargaining agent
or, to the Knowledge of any of the Shareholders, any organizing campaign.
Neither the Company nor any of its Subsidiaries is delinquent in any material
respect in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed for
it or amounts required to be reimbursed to such employees. There are no pending
claims against the Company or any of its Subsidiaries under any workers'
compensation plan or policy or for long term disability. To the Knowledge of the
Shareholders, no employee of the Company or any Subsidiary of the Company is in
any material respect in violation of any term of any employment contract,
non-disclosure agreement, non-competition agreement, or any restrictive covenant
to a former employee relating to the right of any such employee to be employed
by the Company or the applicable Subsidiary of the Company because of the nature
of the business conducted by it or to the use of trade secrets or proprietary
information of others.
3.8 Absence of Certain Changes or Events. Except as set forth in Schedule
3.8 (with subsection references corresponding to those set forth below), since
December 31, 2005, the Company has operated the Business only in the ordinary
course and consistent with past practice. As amplification and not limitation of
the foregoing, since December 31, 2005, except as described on Schedule 3.8,
there has not been:
19
(a) any change in the Company's authorized or issued capital stock;
(b) any amendment to the Company's charter or by-laws;
(c) the occurrence of any event that might reasonably be deemed to
have a Material Adverse Effect on the Company or any of its Subsidiaries;
(d) to the Knowledge of the Shareholders, any damage, destruction or
loss, whether covered by insurance or not, adversely affecting the
Company's or any of its Subsidiaries' respective properties or businesses
which might reasonably be expected to result in a Material Adverse Effect
on the Company or any of its Subsidiaries;
(e) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to, or the
incurrence of any obligation to repurchase, any shares of any class of
capital stock of the Company;
(f) any entry into an employment or severance agreement or any
understanding for payments to any employee or former employee of the
Company or any of its Subsidiaries which might reasonably be expected to
result in a Material Adverse Effect on the Company or any of its
Subsidiaries;
(g) any material increase in compensation or benefits expense to the
Company or any of its Subsidiaries, any increase in the compensation or
other benefits payable or to become payable by the Company or any of its
Subsidiaries to its directors, officers or employees or any bonus,
insurance, pension or other employee benefit plan, payment or arrangement
made to, for or with any of its directors, officers or employees, other
than the items disclosed on Schedule 3.8;
(h) any entry into any commitment or transaction material to the
Company (including but not limited to, any borrowing, sale, lease or other
disposition of an asset or group of assets with an original cost in excess
of $75,000 in the aggregate or capital expenditure or group of capital
expenditures in excess of $75,000 in the aggregate);
(i) any entry into any transaction with any director, officer,
shareholder or Affiliate of the Company that is either not in the ordinary
course of business, or on terms less favorable to the Company than those
that would have been obtained in a comparable transaction by the Company
with an unrelated Person;
(j) to the Knowledge of the Shareholders, any cancellation or waiver
of any claims or rights which might reasonably be expected to result in a
Material Adverse Effect on the Company or any of its Subsidiaries;
(k) any material change in the Tax or accounting methods used by the
Company;
(l) to the Knowledge of the Shareholders, any cancellation,
termination or amendment to any Material Contract; or
20
(m) to the Knowledge of the Shareholders, any agreement, whether oral
or written, to do any of the foregoing.
3.9 Taxes. Except as set forth in Schedule 3.9 (with subsection references
corresponding to those set forth below):
(a) All Tax Returns required to be filed by or with respect to the
Company and each of its Subsidiaries have been timely filed (other than the
2005 Income and Franchise Tax Returns, as to which extensions have been
timely filed), and all such Tax Returns are complete and correct in all
respects. Each of the Company and its Subsidiaries has paid (or there has
been paid on its behalf) all material Taxes, whether shown on any Tax
Returns, that are due from or with respect to it for the periods covered by
such Tax Returns and has made all required estimated payments of Tax
sufficient to avoid any penalties for underpayment. The accrual for Taxes
in the Company Interim Balance Sheet is adequate to cover any and all Taxes
(whether or not disputed and whether or not due) of Company with respect to
all taxable periods ending on or before the date of such Company Interim
Balance Sheet. Neither the Company nor any of its Subsidiaries has incurred
any liability for Taxes subsequent to the date of the Company Interim
Balance Sheet other than in the ordinary course of the Company's business
or in connection with transactions contemplated by this Agreement;
(b) To the Knowledge of the Shareholders, no claim has ever been made
by an authority in a jurisdiction where the Company or any of its
Subsidiaries does not file a Tax Return that the Company or any of its
Subsidiaries may be subject to taxation in that jurisdiction and no basis
exists for any such claim. There is no proposed assessment and no audit,
examination, suit, investigation or similar proceeding pending, proposed or
threatened with respect to Taxes of the Company or any of its Subsidiaries
and, to the Knowledge of the Shareholders, no basis exists therefor;
(c) There are no outstanding waivers extending the statutory period of
limitation relating to the payment of Taxes due from the Company or any of
its Subsidiaries which are expected to be outstanding as of the Closing
Date;
(d) All Tax Sharing Arrangements and Tax Indemnity Agreements relating
to the Company or any of its Subsidiaries (other than this Agreement) will
terminate prior to the Closing Date and neither the Company nor any of its
Subsidiaries will have any liability thereunder on or after the Closing
Date;
(e) There are no Encumbrances for Taxes upon the assets of the Company
or any of its Subsidiaries except Encumbrances relating to current Taxes
not yet due and payable;
(f) No power of attorney granted by or with respect to the Company or
any of its Subsidiaries relating to Taxes is currently in force;
(g) To the Knowledge of the Shareholders, no closing agreement
pursuant to Section 7121 of the Code or any similar provision of any state,
local or foreign law has been entered into by or with respect to the
Company or any of its Subsidiaries which could reasonably be expected to
have an effect on the Company's liability for or reporting of Taxes in any
period ending after the Closing Date;
21
(h) All Taxes which the Company and each of its Subsidiaries is
required by Law to withhold or to collect for payment have been duly
withheld and collected, and have been paid or accrued, reserved against and
added on the books of the Company. To the Knowledge of the Shareholders,
the Company has complied with all information reporting and backup
withholding requirements, including maintenance of required records with
respect thereto, in connection with amounts owing to any employee,
independent contractor, creditor, stockholder or other third party;
(i) Neither the Company nor any of its Subsidiaries has been a member
of any Company Group other than each Company Group of which it is a member
as of the date hereof and the Company has not had any direct or indirect
ownership in any limited liability company, partnership, joint venture or
other "pass-through" entity for Tax purposes;
(j) Since December 31, 2005, neither the Company nor any of its
Subsidiaries has prepared or filed any Tax Return inconsistent with past
practice or, on any such Tax Return, taken any position, made any election,
or adopted any method that is inconsistent with positions taken, elections
made or methods used in preparing or filing similar Tax Returns in prior
periods (including, without limitation, positions, elections or methods
which would have the effect of deferring income to periods after the
Closing Date or accelerating deductions to periods on or prior to the
Closing Date);
(k) To the Knowledge of the Shareholders, no consent to the
application of Section 341(f)(2) of the Code (or any similar state or local
law provision) has been made or filed by or with respect to the Company or
any of its Subsidiaries. None of the assets or properties of the Company or
any of its Subsidiaries is an asset or property that is or will be required
to be treated as being (A) owned by any Person (other than the Company or
its Subsidiaries) pursuant to the provisions of Section 168(f)(8) of the
Internal Revenue Code of 1954, as amended and in effect immediately before
the enactment of the Tax Reform Act of 1986, as amended; or (B) tax exempt
use property within the meaning of Section 168(h)(1) of the Code;
(l) To the Knowledge of the Shareholders, there is no contract or
arrangement, plan or agreement by or with Company or any of its
Subsidiaries covering any Person as to which payment or vesting thereunder
(including any payment or vesting as a result of the transactions
contemplated by this Agreement), could give rise to the payment of any
amount that would not be deductible by the Company by reason of Section
280G of the Code or an excise tax to the beneficiary of such payment or
vesting pursuant to Section 4999 of the Code;
(m) No state or federal "net operating loss" of the Company determined
as of the Closing Date is subject to limitation on its use pursuant to
Section 382 of the Code or comparable provisions of state Law as a result
of any "ownership change" within the meaning of Section 382(g) of the Code
or comparable provisions of any state Law occurring prior to the Closing
Date.
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(n) No Tax rulings have been requested by the Company or, since June
1, 2004, any of its Subsidiaries.
(o) The Company and its Subsidiaries do not have any income reportable
for a period ending after the Closing Date but attributable to a
transaction (e.g., installment sale) or a change in accounting method
occurring in or made for a period ending on or prior to the Closing Date
which results in a deferred reporting on income from such transaction or
from such change in accounting method. The Shareholders have delivered to
Parent (i) a schedule of the filing dates of all Tax Returns required to be
filed by the Company and its Subsidiaries, and (ii) a list of the
countries, states, territories and jurisdictions (whether foreign or
domestic) to which any Tax is properly payable by the Company and its
Subsidiaries. The Company and its Subsidiaries have retained all supporting
and backup papers, receipts, spreadsheets and other information necessary
for (i) the preparation of all Tax Returns that have not yet been filed,
and (ii) the defense of all Tax audits involving taxable periods either
ending on or during the six (6) years prior to the Closing Date or from
which there are unutilized net operating losses, capital losses or
investment tax credit carryovers. Neither the Company nor any of its
Subsidiaries has been party to a "listed transaction" as defined in
Treasury Regulation 1.6011-4(b)(2). The Company and its Subsidiaries have
disclosed on their U.S. federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of federal
income Tax within the meaning of IRC Section 6662.
3.10 Material Contracts. The following shall be deemed to be Material
Contracts and identified on Schedule 3.10, and each such Contract was entered
into in the ordinary course of business by the Company and/or its Subsidiaries:
(a) any Contract for the furnishing of services to or by the Company
or any of its Subsidiaries or otherwise related to the Business under the
terms of which the Company or any of its Subsidiaries: (A) is likely to pay
or otherwise give consideration of more than $50,000 in the aggregate
during the calendar year ended December 31, 2006, (B) is likely to pay or
otherwise give consideration of more than $50,000 in the aggregate over the
remaining term of such Contract or (C) cannot be canceled by the Company or
one of its Subsidiaries without penalty or further payment and without more
than thirty (30) days' notice;
(b) any Contract that represents a contract upon which the Business is
substantially dependent or which is otherwise material to the Business;
(c) any Contract that limits or restricts the ability of Company or
any of its Subsidiaries to compete or otherwise to conduct its Business in
any manner or place;
(d) any Contract for the employment, severance or retention of any
director, officer, employee, agent, shareholder, consultant or advisor or
any other Contract with any director, officer, employee, agent,
shareholder, consultant or advisor that does not provide for termination at
will by the Company or one of its Subsidiaries without further cost or
liability to the Company or such Subsidiary as of or at any time after the
date of this Agreement;
(e) any Contract in the nature of a profit sharing, bonus, stock
option, stock purchase, pension, deferred compensation or retirement,
severance, hospitalization, insurance or other plan or contract providing
benefits to any Person or former director, officer, employee, agent,
shareholder, consultant or advisor or such Persons' dependents,
beneficiaries or heirs;
23
(f) any Contract in an amount exceeding $50,000 or with a value
exceeding $50,000 in the nature of an indenture, mortgage, promissory note,
loan or credit agreement or other Contract relating to the borrowing of
money or a line of credit by or from the Company or any of its Subsidiaries
or to the direct or indirect guaranty or assumption by the Company or any
of its Subsidiaries of obligations of others;
(g) any Contract for capital expenditures in an amount exceeding
$50,000 in any individual case or in the aggregate;
(h) any Contract that is a joint venture, partnership, or other
agreement (however named) involving a sharing of profits, losses, costs, or
liabilities involving an amount exceeding $50,000 individually or in the
aggregate;
(i) any Contracts that are leases, rental or occupancy agreements,
licenses, installments and conditional sale agreements, and other
agreements affecting the ownership of, leasing of, title to, use of, or any
leasehold or other interest in, any real or personal property (except
personal property leases and installment and conditional sales agreements
having a value per item or aggregate payments of less than $50,000 and with
terms of less than one (1) year);
(j) any Contracts that are licensing agreements or other agreements
with respect to patents, trademarks, copyrights, or other Intellectual
Property, including agreements with current or former employees,
consultants, or contractors regarding the appropriation or the
non-disclosure of any of the Intellectual Property;
(k) any Contracts in an amount exceeding or with a value exceeding
$50,000 to which the Company or any of its Subsidiaries is a party with any
Governmental Entity;
(l) any Contracts between or among the Company or any of its
Subsidiaries and any of the Shareholders or any Affiliate of any of the
Shareholders; and
(m) any Contract that was not made in the ordinary course of business,
including agreements with:
(i) consequential or liquidated damages or other indemnity
provisions that are not based upon the Company's or any of its
Subsidiaries' negligence in the performance of its services;
(ii) fitness for purpose warranties or process, efficacy or
similar guarantees;
(iii) lump sum turn key, or similar contract risks or
arrangements; or
(iv) provisions relating to the testing, discovery, removal,
remediation or disposal of any Hazardous Substance.
24
True and complete copies of the Contracts appearing on Schedule 3.10,
including all amendments and supplements, have been delivered to Parent.
Each Material Contract is valid and legally binding and the Company or its
Subsidiaries, as applicable, have duly performed all its obligations
thereunder to the extent that such obligations to perform have accrued. No
breach or default, alleged breach or default, or event which would (with
the passage of time, notice or both) constitute a breach or default
thereunder by the Company or any of its Subsidiaries or, to the Knowledge
of the Shareholders, any other party or obligor with respect thereto, has
occurred or as a result of this Agreement or performance thereof will
occur. Consummation of the transactions contemplated by this Agreement will
not (and will not give any person a right to) terminate or modify any
rights of, or accelerate or augment any obligation of, the Company or any
of its Subsidiaries under any of those agreements to the extent such
termination, modification, acceleration or augmentation could be reasonably
expected to have a Material Adverse Effect on the Company or any of its
Subsidiaries.
3.11 Real and Personal Property; Title to Property; Leases.
(a) Schedule 3.11, Part I accurately identifies, by street address or
other identifying information, all real property and leased property owned
or leased by the Company or any of its Subsidiaries that is not related to
the oil and gas business of the Company or its Subsidiaries and Schedule
3.11, Part II identifies all leasehold and other real property interests
owned by the Company or any of its Subsidiaries that is part of or related
to the oil and gas businesses of the Company or any of its Subsidiaries
(collectively, the "Real Property"). Each of the Shareholders has delivered
or made available to Parent copies of the deeds and other instruments (as
recorded) in the possession of such Shareholder or the Company and its
Subsidiaries and relating to such property by which the Company or its
Subsidiaries acquired such property.
(b) The Real Property, other than the oil and gas Assets, is free and
clear of all Encumbrances and is not subject to any rights of way,
exceptions, reservations, or other Encumbrances of any nature except: (a)
mortgages, liens or security interests securing obligations shown on the
December 31, 2005 Company Balance Sheet as securing specified liabilities
or obligations, with respect to which no default (or event that, with
notice or lapse of time or both, would constitute a default) exists; (b)
Encumbrances for current Taxes not yet due, (c) (i) minor imperfections of
title, if any, that do not materially impair the use of the Real Property
subject thereto for its current purposes and (ii) zoning laws and other
land use restrictions that do not materially impair the use of the property
subject thereto for its current purposes and (d) Permitted Encumbrances.
(c) Except as set forth in Schedule 3.11, Part II and except for
Permitted Encumbrances, the Company's and its Subsidiaries' defensible
title to the oil and gas Assets is free of any Title Defects.
(d) Either the Company or its Subsidiaries owns, leases or has the
legal right to use all the properties and assets, including, without
limitation, the Intellectual Property and the Real Property, used or
intended to be used in the conduct of the Business or otherwise owned,
leased or used by the Companies or any of its Subsidiaries (all such
properties and assets being the "Assets").
25
(e) The Assets constitute all the properties, assets and rights
forming a part of, used, held or intended to be used in, and all such
properties, assets and rights as are necessary in the conduct of, the
Business as it is currently conducted as of the date hereof. The Assets are
free and clear of all Encumbrances or other third party interests of any
nature whatsoever, except (i) those set forth on Schedule 3.11 hereto and
(ii) Permitted Encumbrances.
(f) Immediately following the consummation of the transactions
contemplated by this Agreement, the Company or its Subsidiaries will
continue to own, or lease, under valid and subsisting Contracts, or
otherwise retain its respective interest in the Assets without incurring
any penalty or other adverse consequence, including, without limitation,
any increase in rentals, royalties, or licenses or other fees imposed as a
result of, or arising from, the consummation of the transactions
contemplated by this Agreement, except for Permitted Encumbrances.
Immediately following the Closing, either the Company or its Subsidiaries
shall own and possess all documents, books, records, agreements and
financial data of any sort used by the Company or any of its Subsidiaries
in the conduct of the Business.
3.12 Condition and Sufficiency of Tangible Assets. To the Knowledge of the
Shareholders, the buildings, plants, structures, and equipment of the Company
and its Subsidiaries are structurally sound, are in good operating condition and
repair, except for ordinary wear and tear, and are adequate for the uses to
which they are being put, and none of such buildings, plants, structures, or
equipment is in need of maintenance or repairs except for ordinary, routine
maintenance and repairs that are not material in nature or cost. To the
Knowledge of the Shareholders, the building, plants, structures, and equipment
of the Company and its Subsidiaries are sufficient for the continued conduct of
the Business after the Closing in substantially the same manner as conducted
prior to the Closing.
3.13 Licenses, Permits and Authorizations. The Company, its Subsidiaries
and, to the Knowledge of the Shareholders, their respective Employees hold all
licenses, permits, franchises and other authorizations required by any
Governmental Entity that are necessary for the Business as presently conducted
or, in the case of such Employees, to carry out their duties on behalf of the
Company or its Subsidiaries. Such licenses, permits, franchises and other
authorizations of the Company, its Subsidiaries and, to the Knowledge of the
Shareholders, the Company's Employees are valid and in full force and effect and
will remain so upon consummation of the transactions contemplated by this
Agreement. None of the Shareholders knows of any threatened suspension,
cancellation or invalidation of, or challenge to, any such license, permit,
franchise or other authorization.
3.14 Intellectual Property.
(a) To the Knowledge of the Shareholders, the Company or its
Subsidiaries own, or is licensed or otherwise possesses legally enforceable
rights to use, all patents, trademarks, trade names, service marks, domain
names, copyrights, and any applications therefor, trade secrets, and
computer software programs or applications (collectively, the "Intellectual
Property") that are used in the Business as currently conducted. Schedule
3.14 sets forth each item of Intellectual Property and lists the owners of
all right, title and interest in and to any item of Intellectual Property
not solely owned by the Company. All requisite renewals and affidavits of
use have been filed with respect to each of the registrations set forth in
Schedule 3.14, and each is presently in full force and effect and each of
the trade names and trademarks is valid, and is in good standing and active
use and none has been abandoned.
26
(b) To the Knowledge of the Shareholders, there is no unauthorized
use, disclosure, infringement or misappropriation of any Intellectual
Property rights of the Company, or any third party patents, trademarks or
copyrights, including software (collectively, the "Third Party Intellectual
Property Rights") to the extent licensed by or through the Company or any
of its Subsidiaries, by any third party.
(c) To the Knowledge of the Shareholders, neither the Company nor any
of its Subsidiaries is in breach of any license or other agreement relating
to the Intellectual Property of the Company, its Subsidiaries or any Third
Party Intellectual Property Rights.
(d) Within the last three (3) years, neither the Company nor any of
its Subsidiaries (i) has been a party to, or to the Knowledge of the
Shareholders, been notified or advised of, any suit, action or proceeding
that involves a claim of infringement of any patents, trademarks, service
marks, copyrights or violation of any trade secret or other proprietary
right of any third party; or (ii) has brought any action, suit or
proceeding for infringement of Intellectual Property or breach of any
license agreement involving Intellectual Property against any third party.
The design, development, distribution, marketing, licensing or sale of
products or services of the Company and its Subsidiaries does not infringe
on any patent, trademark, service mark or copyright of any third party.
(e) To the Knowledge of the Shareholders, the Company and its
Subsidiaries have secured valid written assignments or work for hire
agreements from all consultants and employees who contributed to the
creation and development of Intellectual Property of the rights to such
contributions that the Company or its Subsidiaries does not already own by
operation of law.
(f) To the Knowledge of the Shareholders, the Company and its
Subsidiaries have taken reasonable steps to protect their respective rights
in its confidential information and trade secrets that reasonably require
protection.
3.15 Litigation; Compliance with Laws.
(a) Except as set forth on Schedule 3.15, there is no Action pending
or, to the Knowledge of the Shareholders, threatened against or affecting
any of the Shareholders, the Company, any Subsidiaries of the Company or
any of their respective Assets, and there is no basis known to any such
Shareholder for any such Action.
(b) Except as disclosed on Schedule 3.15, neither the Shareholders,
the Company nor any Subsidiaries of the Company is (i) to the Knowledge of
the Shareholders, in violation of any applicable Law or (ii) subject to or
in default with respect to any Order to which any of them, or any of their
respective properties or assets (owned or used), is subject. At all times
since June 1, 2004, each of the Company and its Subsidiaries has been in
full compliance with each Law that is or was applicable to it or to the
conduct or operation of the Business or the ownership or use of any of its
Assets.
27
(c) To the Knowledge of the Shareholders, no event has occurred or
circumstance exists that (with or without notice or lapse of time) (i) may
constitute or result in a violation by the Company or any of its
Subsidiaries of, or a failure on the part of any of them, to comply with,
any Law.
(d) Except as provided in Schedule 3.15, none of the Shareholders, the
Company nor any Subsidiaries of the Company has received, at any time since
June 1, 2004, any notice or other communication (whether oral or written)
from any Governmental Entity or any other Person regarding (i) any actual,
alleged, possible, or potential violation of, or failure to comply with,
any Law or (ii) any actual, alleged, possible, or potential obligation on
the part of the Company or any of its Subsidiaries to undertake, or to bear
all or any portion of the cost of, any remedial action of any nature.
3.16 Insurance.
(a) Schedule 3.16 sets forth the following information with respect to
each insurance policy under which the Company or any of its Subsidiaries
has been an insured, a named insured or otherwise the principal beneficiary
of coverage at any time within the past year:
(i) the name, address and telephone number of the agent or
broker;
(ii) the name of the insurer and the names of the principal
insured and each named insured; and
(iii) the policy number, general description of coverage and the
period of coverage.
The Company has delivered to Parent copies of all such insurance
policies.
(b) Except as set forth in Schedule 3.16, there is no actual, pending,
or, to the Knowledge of the Shareholders, threatened claims against Company
or any of its Subsidiaries that would come within the scope of such
coverage listed on Schedule 3.16, nor has any current carrier provided
notice to Company or any of its Subsidiaries that it intends to terminate
any policy or to deny coverage with respect to any claim. There are no
actual, pending or, to the Knowledge of the Shareholders, threatened claims
against the Company or any of its Subsidiaries that would not come within
the scope of the insurance coverage of the Company or its Subsidiaries
listed in Schedule 3.16.
(c) The Company has maintained during the past three (3) years and
currently maintains (i) insurance on all of the Assets used in connection
with the Business of a type customarily insured, covering property damage
and loss of income by fire or other casualty, and (ii) adequate insurance
protection (subject to the deductible amounts and dollar limits of coverage
set forth in Schedule 3.16) against all errors and omissions and other
liabilities, claims, and risks, which it is customary and reasonable to
insure with respect to the Business. Neither the Company nor any of its
Subsidiaries has, within the past three (3) years, allowed any insurance
policy to lapse for failure to renew or for any other reason. Neither the
Company nor any of its Subsidiaries has failed to give any notice or
present any claim under any insurance policy in due and timely fashion
under the applicable insurance policy.
28
(d) None of the Shareholders has Knowledge of (i) any proposed
material increases in the premiums for insurance or for contributions for
worker's compensation or unemployment insurance applicable to the Company
or any of its Subsidiaries, (ii) any conditions or circumstances applicable
to the Business as currently conducted that could reasonably be expected to
result in such increase, or (iii) any material decrease in coverage or
other policy benefits. Further, none of the Shareholders has Knowledge that
any existing insurer of the Company or any of its Subsidiaries has denied
the Company or its Subsidiaries coverage on any claim or refused to approve
any proposed settlement.
3.17 Employee Benefit Plans.
(a) Schedule 3.17 sets forth a true and complete list of (i) all
employee benefit plans" as defined by Section 3(3) of ERISA, all specified
fringe benefit plans as defined in Section 6039D of the Code, and all other
bonus, incentive compensation, deferred compensation, profit sharing, stock
option, stock appreciation right, stock bonus, stock purchase, employee
stock ownership, savings, severance, supplemental unemployment, layoff,
salary continuation, retirement, pension, health, life insurance, dental,
disability, accident, group insurance, vacation, holiday, sick leave,
fringe benefit or welfare plan, and any other employee compensation or
benefit plan, agreement, policy, practice, commitment, contract, or
understanding (whether qualified or nonqualified, currently effective or
terminated, written or unwritten), and any trust, escrow or other agreement
related thereto, which currently is sponsored, established, maintained or
contributed to or required to be contributed by the Company, any of its
Subsidiaries or for which the Company or any of its Subsidiaries has any
liability, contingent or otherwise, and (ii) all "multiemployer plans," as
that term is defined in Section 4001 of ERISA and all "employee benefit
plans" (as defined in Section 3(3) of ERISA) that are subject to Title IV
of ERISA or Section 412 of the Code which the Company or any other
corporation or trade or business controlled by, controlling, or under
common control with the Company (within the meaning of Section 414 of the
Code or Section 4001(a)(14) or 4001(b) of ERISA) ("ERISA Affiliate") has
maintained or contributed to or been required to contribute to at any time
within the last six (6) years or with respect to which, the Company or any
ERISA Affiliate has any liability (collectively, (i) and (ii) are referred
to herein as the "Benefit Plans").
(b) Neither the Company nor any of its Subsidiaries maintains or is
obligated to provide benefits under any life, medical, or health plan
(other than as an incidental benefit under any Benefit Plan intended to be
"qualified" within the meaning of Section 401(a) of the Code ("Qualified
Plan")) which provides benefits to retirees or other terminated employees
other than benefit continuation rights under the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended. No Benefit Plan is a
"multiple employer welfare arrangement" within the meaning of Section 3(40)
of ERISA.
(c) No Benefit Plan is a "multiemployer plan," as that term is defined
in Section 4001 of ERISA or an "employee benefit plan" (as defined in
Section 3(3) of ERISA) that is subject to Title IV of ERISA or Section 412
of the Code.
29
(d) Each of the Benefit Plans and its administration is currently in
compliance in all material respects with ERISA and the Code and all other
applicable Laws and has been operated in accordance with the terms and
conditions of the plan documents.
(e) The Company and its Subsidiaries have performed all of their
obligations under all Benefit Plans, and all contributions and other
payments required to be made by the Company or any of its Subsidiaries to
any Benefit Plan have been made or reserves adequate for such contributions
or other payments have been set aside therefor and have been reflected in
the Company Financial Statements.
(f) There are no pending, or to the Knowledge of Sellers, threatened
claims by or on behalf of any Benefit Plan, or by any person covered
thereby, other than ordinary claims for benefits submitted by participants
or beneficiaries, or any pending or threatened claims regarding breaches of
fiduciary duty under ERISA, and there is no basis for any such claim.
(g) No employer securities, employer real property or other employer
property is included in the assets of any Benefit Plan.
(h) The Company has delivered to Parent:
(i) copies of the current Benefit Plan document and any
amendments thereto for each Benefit Plan and copies of any related
trusts, and (A) the most recent summary plan descriptions of such
Benefit Plans for which the Company or any of its Subsidiaries is
required to prepare, file, and distribute summary plan descriptions,
and (B) the most recent copy of all summaries and descriptions
furnished to participants and beneficiaries regarding Benefit Plans
for which a plan description or summary plan description is not
required;
(ii) a sample copy of the forms currently used by the Company and
any of its Subsidiaries for providing all notifications required to be
given to employees under Section 601 et seq. of ERISA, Section 4980B
of the Code, Section 9801 et seq. of the Code, and under all other
applicable federal and state laws regulating the notice requirements
of "group health plans" (as defined in Section 607(1) of ERISA);
(iii) the Form 5500 filed in each of the most recent three (3)
plan years with respect to each Benefit Plan, including all schedules
thereto and any opinions of independent accountants relating thereto;
(iv) all insurance policies or agreements regarding other funding
arrangements that are currently in force which were purchased by or
that provide benefits under any Benefit Plan or otherwise reimburse
for benefits paid under the Benefit Plans;
(v) all written agreements that are currently in force with third
party administrators, investments managers, consultants and service
providers relating to any Benefit Plan and any and all written
reports, including discrimination testing, submitted to the Company or
any of its Subsidiaries by such third party administrators, investment
managers, consultants and service providers within the four (4) years
preceding the date hereof;
30
(vi) with respect to Benefit Plans that are Qualified Plans, the
most recent determination letter for each such Benefit Plan; and
(vii) with respect to each trust funding a Benefit Plan that is
intended to be qualified under Section 501(c)(9) of the Code, a copy
of the determination letter for such trust.
(i) Each Benefit Plan can be terminated without payment of any
additional contribution or amount and, except for any vesting of benefits
of a Qualified Plan, without the vesting or acceleration of any benefits
promised by such Benefit Plan.
(j) The Company has the right to modify and terminate benefits as to
retirees (other than pensions) with respect to both retired and active
employees.
(k) To the Knowledge of the Shareholders, neither the Company nor any
of its Subsidiaries has filed or been required to file any notices, forms
or reports with the IRS, the Pension Benefit Guaranty Corporation (the
"PBGC") or the Department of Labor ("DOL"), pursuant to statute, other than
annual reports, within the four (4) years preceding the date hereof.
(l) Neither the Company nor any of its Subsidiaries has received any
notice from the IRS, the PBGC, or the DOL relating to any Benefit Plan
regarding an audit of any Benefit Plan or the assessment of a material
penalty.
(m) To the Knowledge of the Shareholders, neither the execution of
this Agreement nor the consummation of the transactions contemplated herein
will result in the payment, vesting, or acceleration of any benefit under
any Benefit Plan, assuming that no employee incurs a termination of
employment or reduction in hours in connection with the transactions
contemplated herein.
3.18 Transactions with Affiliates. To the Knowledge of the Shareholders,
except (i) for employment and benefit arrangements, (ii) arrangements on arm's
length terms in the ordinary course of business and (iii) agreements set forth
on Schedule 3.18, no director, officer or Affiliate of the Company or any of its
Subsidiaries or, to the Knowledge of the Shareholders, any Person with whom any
such director, officer or Affiliate has any direct or indirect relation by
blood, marriage or adoption, or any entity in which any such director, officer
or Affiliate owns any beneficial interest (other than a publicly held
corporation whose stock is traded on a national securities exchange or in the
over-the-counter market and less than one percent (1%) of the stock of which is
beneficially owned by all such Persons), has any interest in (a) any Contract
with the Company or relating to the Business, including any Contract for or
relating to indebtedness of the Company or any of its Subsidiaries; or (b) any
property, including Intellectual Property and Real Property, used or currently
intended to be used in, the Business.
3.19 No Brokers or Finders. Except as may arise out of that certain letter
agreement, dated February 20, 2006, between Parent and Cloyses Partners, LLC
(the "Cloyses Agreement"), no agent, broker, finder, or investment or commercial
banker, or other Person or firm engaged by or acting on behalf of any of the
Shareholders, the Company, any Subsidiary of the Company or any of their
respective Affiliates, in connection with the negotiation, execution or
performance of this Agreement or the transactions contemplated by this
Agreement, is or will be entitled to any brokerage or finder's or similar fee or
other commission as a result of this Agreement or such transactions.
31
3.20 Accuracy of Information. To the Knowledge of the Shareholders, None of
the information supplied in writing by or on behalf any of the Shareholders, the
Company or any Subsidiaries of the Company, to Parent or its Affiliates, agents
or representatives in connection with the transactions contemplated in this
Agreement, this Agreement or the negotiations leading up to this Agreement
contain, or at the respective times such information was delivered, contained
any untrue statement of a material fact, or omit or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading.
3.21 Receivables. All receivables of the Company or any of its
Subsidiaries, whether reflected on the Company Interim Balance Sheet or
otherwise and including "work in process" inventory and accrued and unbilled
revenues, represent actual revenues invoiced or expected to be invoiced in the
ordinary course of business, and are, or when invoiced, will be fully
collectible net of any reserves shown on the Company Interim Balance Sheet
(which reserves are adequate and were calculated on a basis consistent with GAAP
and past practices). The Shareholders have delivered to Parent a complete and
accurate aging list of all receivables of the Company and its Subsidiaries.
3.22 Environmental.
(a) Except as set forth in Schedule 3.22, to the Shareholders'
Knowledge, the Assets, the Company and the Company's Subsidiaries are free
of any Environmental Defects, except as would not reasonably be expected to
have a Material Adverse Effect on the Company, the Company's Subsidiaries
or the Assets.
(b) With respect to the Assets, except as set forth in Schedule 3.22,
neither the Company nor any of its Subsidiaries has entered into, or is
subject to, any agreements, consents, orders, decrees, judgments or other
directives of Governmental Entities in existence at this time based on any
Environmental Laws.
(c) Except as set forth in Schedule 3.22, to the Shareholders'
Knowledge, none of the Company nor the Company's Subsidiaries has received
written notice from any Person of, and no investigation or written claim is
pending regarding, any Release, disposal, event, condition, circumstance,
activity, practice or incident concerning the Company, any of the Company's
Subsidiaries, the Assets, the Company's or any of the Company's
Subsidiaries' current or prior operations or any land, facility, asset or
property currently or formerly owned or leased by any of the Company or the
Company's Subsidiaries and alleging either (i) a violation of Environmental
Law, including common law, or (ii) obligations, including remediation or
other liabilities under Environmental Law, except, in the case of either
clause (i) or (ii) hereof, as would not reasonably be expected to have a
Material Adverse Effect on the Company, and of the Company's Subsidiaries
or the Assets.
32
(d) Except as set forth in Schedule 3.22, to the Shareholders'
Knowledge, there has been no Release on or from the Assets or on or from
any property currently or formerly owner, or operated by the Company or any
of the Company's Subsidiaries of any Hazardous Materials in any substantial
amount or concentration that is reasonably likely to have a Material
Adverse Effect on the Company, the Company's Subsidiaries or the Assets.
(e) Except as set forth in Schedule 3.22, the Company or one or more
of the Company's Subsidiaries, or, to the Shareholders' Knowledge, an
operator of the Assets, holds those licenses, permits, or other
authorizations necessary under Environmental Laws to carry on operations
connected with the Assets to the extent of and as currently conducted,
except where the failure to obtain such licenses, permits, or other
authorizations could not reasonably be expect to have a Material Adverse
Effect on any of the Company, the Company's Subsidiaries or the Assets.
3.23 Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon Company or any of its Subsidiaries that
has, or could reasonably be expected to have, the effect of prohibiting or
materially impairing the conduct of the Business as presently conducted.
3.24 Internal Controls. The Company and its Subsidiaries maintain a system
of internal controls sufficient to provide reasonable assurances that:
(a) transactions are executed in accordance with management's general
or specific authorization;
(b) transactions are recorded as necessary (1) to permit preparation
of financial statements in conformity with GAAP or any other criteria
applicable to such statements and (2) to maintain accountability for
assets; and
(c) access to proprietary assets is permitted only in accordance with
management's general or specific authorization.
3.25 Absence of Certain Payments. None of the Shareholders, the Company,
the Subsidiaries of the Company, nor, to the Knowledge of the Shareholders, any
director, officer, agent, employee or Affiliate of any of them, has used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, or made any direct or indirect
unlawful payments to government officials or employees from corporate funds, or
established or maintained any unlawful or unrecorded funds.
3.26 Bank Accounts. Schedule 3.26 sets forth an accurate list of each bank,
trust company, savings institution or other financial institution with which the
Company or any of its Subsidiaries has an account or safe deposit box and the
names and identification of all Persons authorized to draw thereon or to have
access thereto, and sets forth the names of each Person holding powers of
attorney or agency authority from the Company or any of its Subsidiaries and a
summary of the terms thereof.
3.27 Shareholder's Investment Representations. Each of the Shareholders has
made representations and warranties contained in the Subscription Agreement,
dated the date hereof and in the form attached hereto as Exhibit I (the
"Subscription Agreement").
33
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
----------------------------------------
Parent represents and warrants to the Shareholders and agrees as follows:
4.1 Organization and Authority of Parent and Buyer.
(a) Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Nevada and the execution,
delivery and performance of this Agreement by the Parent and the
consummation by Parent of the transactions contemplated hereby have been
duly authorized by all requisite action on the part of Parent. The Parent
Shares to be issued to the Shareholders as part of the Merger Consideration
have been duly authorized by all necessary corporate action on the part of
Parent and, upon receipt of the Shares from the Shareholders, will be
validly issued, fully paid and nonassessable. This Agreement has been duly
executed and delivered by Parent, and assuming due authorization, execution
and delivery by the Shareholders, the Company and Buyer, this Agreement
constitutes a valid and binding obligation of Parent enforceable against
Parent in accordance with its terms, except to the extent that the
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws, or by equitable principles relating to the
rights of creditors generally.
(b) Buyer is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Nevada and the
execution, delivery and performance of this Agreement by Buyer and the
consummation by Buyer of the transactions contemplated hereby have been
duly authorized by all requisite action on the part of Buyer. This
Agreement has been duly executed and delivered by Buyer, and assuming due
authorization, execution and delivery by the Shareholders, the Company and
the Parent, this Agreement constitutes a valid and binding obligation of
Buyer enforceable against Buyer in accordance with its terms, except to the
extent that the enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws, or by equitable principles
relating to the rights of creditors generally.
4.2 No Conflict; Governmental Consents.
(a) The execution, delivery and performance of this Agreement by Buyer
and Parent does not and will not (a) violate, conflict with or result in
the breach of any provision of the charter or bylaws of Buyer or Parent,
(b) conflict with or violate in any material respect any Law or Order
applicable to Buyer or Parent, or (c) conflict with, result in any breach
of, constitute a default (or event which with the giving of notice or lapse
of time, or both, would become a default) under, require any consent under,
or give to others any rights of termination, amendment, acceleration,
suspension, revocation or cancellation of, or result in the creation of any
Encumbrance on any of the assets or properties of Buyer or Parent pursuant
to, any note, bond, mortgage, indenture, license, permit, lease, sublease
or other material contract, agreement, or instrument or arrangement to
which Buyer or Parent is a party or by which any of their assets or
properties is bound or affected, except for conflicts or violations which
would not have a material adverse effect on the ability of Buyer or Parent
to consummate the transactions contemplated by this Agreement.
34
(b) The execution, delivery and performance of this Agreement by Buyer
and Parent do not and will not require any Approval or Order of any
Governmental Entity.
4.3 Financial Statements. Parent has delivered to the Shareholders the
Parent Financial Statements. The Parent Financial Statements have been prepared
in conformity with GAAP applied on a consistent basis. The statements of
operations and cash flow of Parent present fairly in all material respects the
respective results of operations and cash flows of Parent for the respective
periods covered, and the balance sheets of Parent present fairly in all material
respects the respective financial condition of Parent as of their respective
dates. Since the date of the Parent Interim Balance Sheet, there has been no
change in any of the significant accounting policies, practices or procedures of
Parent.
4.4 No Brokers or Finders. Except as may arise out of the Cloyses
Agreement, no agent, broker, finder, or investment or commercial banker, or
other Person or firm engaged by or acting on behalf of any of Buyer, Parent or
any of their Affiliates, in connection with the negotiation, execution or
performance of this Agreement or the transactions contemplated by this
Agreement, is or will be entitled to any brokerage or finder's or similar fee or
other commission as a result of this Agreement or such transactions.
4.5 Parent SEC Documents.
(a) Parent has made available to the Shareholders a true and complete
copy of each report, schedule, registration statement and definitive proxy
statement filed by Parent with the SEC since January 1, 2004 (the "Parent
SEC Documents"), including Parent's 2005 Form 10-K, which are all the
documents (other than preliminary documents) that Parent was required to
file with the SEC since January 1, 2004. As of their respective dates, the
Parent SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and the rules and regulations of the SEC thereunder applicable to such
Parent SEC Documents, and none of the Parent SEC Documents contained as of
their respective dates any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(b) The financial statements of Parent included in the Parent SEC
Documents, including the notes and schedules thereto, complied as to form
in all material respects with the rules and regulations of the SEC with
respect thereto, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto or, in the case of the unaudited statements, as permitted
by Rule 10-01 of Regulations S-X of the SEC) and fairly present the
consolidated financial position of Parent and its consolidated Subsidiaries
as of their respective dates and the consolidated results of operations and
the consolidated cash flows of Parent and its consolidated Subsidiaries for
the periods presented therein in accordance with applicable requirements of
GAAP (subject, in the case of the unaudited statements, to normal,
recurring adjustments, none of which are material) applied on a consistent
basis during the periods presented.
(c) No Material Adverse Effect with respect to Parent has occurred
since the date of Parent's Form 10-Q for the three (3) month period ended
March 31, 2006.
35
ARTICLE V
ADDITIONAL AGREEMENTS
---------------------
5.1 Notices and Consents. Each of the Shareholders and Parent agree that,
in the event any Approval necessary to preserve for the Business or the Company
or any of its Subsidiaries any right or benefit under any Contract, to which the
Company or any of its Subsidiaries is a party, is not obtained prior to the
Closing, the Shareholders will, subsequent to the Closing, cooperate with the
Surviving Entity, Parent and their Subsidiaries in attempting to obtain such,
Approval as promptly thereafter as practicable.
5.2 Taking of Necessary Action; Further Action. If, at any time after the
Closing Date, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Entity with full right,
title and possession to all assets, property, rights, privileges, powers and
franchises of the Company and its Subsidiaries, the officers and directors of
the Surviving Entity are fully authorized in the name of the Surviving Entity or
otherwise to take, and will take, all such actions at Parent's expense;
provided, however, if the action is necessary or desirable to cure a breach of
any representation, warranty or covenant of the Shareholders under this
Agreement, the Shareholders shall reimburse Parent for the expenses of such
action. The Shareholders shall also take all such other actions, and execute and
deliver all such other instruments, agreements and documents as Parent shall
reasonably request to separate from the Company any activities and operations of
the Shareholders and their respective Affiliates that are not related to the
primary business and operations of the Company.
5.3 Directors and Officers. Parent agrees to use commercially reasonable
efforts to cause the Board of Directors of Parent to increase the size of the
Board of Directors of Parent by two (2) members and to elect or appoint Larry M.
Wright and Robert G. Wonish to the Board of Directors of Parent. Parent agrees
to use commercially reasonable efforts to cause the Surviving Entity and its
Subsidiaries to elect or appoint the officers, directors and/or managers as set
forth on Schedule 5.3 attached hereto.
5.4 Directors and Officers. Parent agrees to issue warrants to purchase
Parent Shares, substantially in the form of Exhibit H, to the Persons and in the
amounts set forth on Schedule 5.4.
ARTICLE VI
TAX MATTERS
-----------
6.1 Conveyance Taxes. Each of the Shareholders shall pay any real property
transfer or gains, sales, use, transfer, value added, stock transfer, and stamp
taxes, any transfer, recording, registration, and other fees, and any similar
Taxes which become payable in connection with the transactions contemplated by
this Agreement, and shall file such applications and documents as shall permit
any such Tax to be assessed and paid on or prior to the Closing Date in
accordance with any available pre-sale filing procedure. Each party hereto shall
execute and deliver all instruments and certificates necessary to enable the
other party or parties to comply with the foregoing.
36
6.2 Miscellaneous.
(a) Each of the Shareholders and Parent agree to treat all payments
made by any of them to or for the benefit of the other (including any
payments to the Company) under this Article VI, under other indemnity
provisions of this Agreement and for any misrepresentations or breaches of
warranties or covenants as adjustments to the Merger Consideration for Tax
purposes and that such treatment shall govern for purposes hereof.
(b) All amounts payable under any tax sharing agreement or arrangement
between the Shareholders and the Company or any Subsidiary for any taxable
period ending on or prior to the Closing Date shall be calculated on a
basis consistent with that used to date.
(c) For purposes of this Article VI, "Parent" and "the Shareholders",
respectively, shall include each member of the affiliated group of
corporations of which it is or becomes a member (other than the Company,
except to the extent expressly referenced).
ARTICLE VII
INDEMNIFICATION
---------------
7.1 Obligations of Shareholders.
The Shareholders (each a "Shareholder Indemnifying Party" and collectively, the
"Shareholder Indemnifying Parties"), jointly and severally, agree to indemnify
and hold harmless Parent, the Surviving Entity and their respective directors,
officers, agents, managers, employees, representatives and Affiliates and their
successors and assigns (each a "Parent Indemnified Party") from and against any
and all Losses of the Parent Indemnified Parties, directly or indirectly, as a
result of, or based upon or arising from:
(a) the breach of any representation or warranty made by any of the
Shareholders contained in this Agreement;
(b) the breach of any covenant or agreement by any Shareholder
contained in this Agreement;
(c) the ownership of the Shares prior to the Closing Date; and
(d) the ownership, management or use of the Assets and the operation
of the Business, all as prior to the Closing Date.
7.2 Obligations of Parent. Parent (the "Parent Indemnifying Party") agrees
to indemnify and hold harmless each of the Shareholders and their respective
agents, representatives and Affiliates and their successors and assigns (each a
"Shareholder Indemnified Party") from and against any and all Losses of the
Shareholder Indemnified Parties, directly or indirectly, as a result of, or
based upon or arising from:
(a) the breach of any representation or warranty made by Parent
contained in this Agreement;
37
(b) the breach of any covenant or agreement by Parent contained in
this Agreement; and
(c) the ownership, management or use of the Assets and the operation
of the Business, all as after the Closing Date, unless and to the extent
that such Losses arise solely from any action or inaction of any
Shareholder or Shareholders or any of their Affiliates after the Closing
Date.
7.3 Procedure. A Shareholder Indemnified Party or a Parent Indemnified
Party (each, an "Indemnified Party") shall give the Parent Indemnifying Party or
Shareholder Indemnifying Party (each, an "Indemnifying Party"), as applicable,
notice (a "Claim Notice") of any matter which an Indemnified Party has
determined has given or could give rise to a right of indemnification under this
Agreement (a "Claim"), within sixty (60) days of such determination; provided,
however, that any failure of the Indemnified Party to provide such Claim Notice
shall not release the Indemnifying Party from any of its obligations under this
Article VII except to the extent the Indemnifying Party is materially prejudiced
by such failure and shall not relieve the Indemnifying Party from any other
obligation or liability that it may have to any Indemnified Party otherwise than
under this Article VII. Upon receipt of the Claim Notice, the Indemnifying Party
shall be entitled to assume and control the defense of such Claim at its expense
if it gives notice of its intention to do so to the Indemnified Party within
five (5) Business Days of the receipt of such Claim Notice from the Indemnified
Party; provided, however, that (i) Indemnified Party must approve of the
selection of legal counsel by Indemnifying Party, which approval shall not be
unreasonably withheld or delayed and (ii) if there exists or is reasonably
likely to exist a conflict of interest that would make it inappropriate in the
judgment of the Indemnified Party, in its sole and absolute discretion, for the
same counsel to represent both the Indemnified Party and the Indemnifying Party,
then the Indemnified Party shall be entitled to retain its own counsel, in each
jurisdiction for which the Indemnified Party determines counsel is required, at
the expense of the Indemnifying Party. In the event the Indemnifying Party
exercises the right to undertake any such defense against any such Claim as
provided above, the Indemnified Party shall cooperate with the Indemnifying
Party in such defense and make available to the Indemnifying Party, at the
Indemnifying Party's expense, all witnesses, pertinent records, materials and
information in the Indemnified Party's possession or under the Indemnified
Party's control relating thereto as is reasonably required by the Indemnifying
Party. Similarly, in the event the Indemnified Party is, directly or indirectly,
conducting the defense against any such Claim, the Indemnifying Party shall
cooperate with the Indemnified Party in such defense and make available to the
Indemnified Party, at the Indemnifying Party's expense, all such witnesses,
records, materials and information in the Indemnifying Party's possession or
under the Indemnifying Party's control relating thereto as is reasonably
required by the Indemnified Party. No such Claim may be settled by the
Indemnifying Party without the prior written consent of the Indemnified Party,
which consent shall not be unreasonably withheld so long as (a) there is no
payment or other consideration required of the Indemnified Party and (b) such
settlement does not require or otherwise involve any restrictions on the conduct
of business by the Indemnified Party.
38
7.4 Survival.
(a) The representations and warranties of the Shareholders and Parent
contained in this Agreement, including the Exhibits and the Schedules to
this Agreement, shall survive the Closing until the third (3rd) anniversary
of the Closing Date; provided, however, that the representations and
warranties in Section 3.3, Section 3.17 and the second sentence of Section
4.1(a) shall survive the Closing indefinitely; provided further that the
representations and warranties in Section 3.9 and the covenants and
agreements in Article VI shall survive until sixty (60) days after the
expiration of the statute of limitations period or periods legally
applicable to them. Neither the period of survival nor the liability of the
Shareholders or Parent with respect to the Shareholders' or Parent's
representations and warranties shall be reduced by any investigation made
at any time by or on behalf of Parent or the Shareholders, respectively. An
Indemnifying Party is not required to make any indemnification payment
hereunder unless a Claim is initiated prior to expiration of the survival
period set forth in this Section 7.4(a), except with respect to claims
based on fraud committed by the Indemnifying Party.
(b) Any matter as to which a Claim has been asserted by a Claim Notice
to the other party that is pending or unresolved at the end of any
applicable limitation period shall continue to be covered by this Article
VII notwithstanding any applicable statute of limitations (which the
parties hereby waive) until such matter is finally terminated or otherwise
resolved by the parties under this Agreement or by a court of competent
jurisdiction and any amounts payable hereunder are finally determined and
paid.
7.5 Notice by Indemnifying Party. The Indemnifying Party agrees to notify
the Indemnified Party of any liabilities, claims or misrepresentations, breaches
or other matters covered by this Article VII upon discovery or receipt of notice
thereof (other than such claims from the Indemnified Party).
7.6 Indemnity Threshold and Cap.
(a) The Shareholders shall not have any liability to any Parent
Indemnified Party with respect to Losses arising out of any of the matters
referred to in Section 7.1, except with respect to Claims based on fraud
committed by the Shareholders, until such time as the amount of all such
liability shall collectively exceed $150,000 (the "Threshold"), whereupon
the Losses exceeding the Threshold shall be payable by the Shareholders.
Also, in no event shall the Shareholders' aggregate liability to any
Indemnified Party under Section 7.1 exceed the Merger Consideration, except
with respect to Claims based on fraud committed by any of the Shareholders.
(b) Parent shall not have any liability to any Shareholder Indemnified
Party with respect to Losses arising out of any of the matters referred to
in Section 7.2, except with respect to Claims based on fraud committed by
Parent, until such time as the amount of all such liability shall
collectively exceed the Threshold, whereupon the Losses exceeding the
Threshold shall be payable by Parent. Also, in no event shall Parent's
aggregate liability under Section 7.2 exceed the Merger Consideration, less
the Cash Portion of Merger Consideration, except with respect to Claims
based on fraud committed by Parent.
39
7.7 Exclusive Remedy. Other than rights to equitable relief or claims for
fraud to the extent available under applicable Law, each of the Shareholders and
Parent acknowledge and agree that the sole and exclusive remedy for any Losses
arising from Claims described in Sections 7.1 and 7.2 shall be indemnification
in accordance with this Article VII.
7.8 Mitigation. Prior to the resolution of any Claim for indemnification
under this Agreement, the Indemnified Party shall utilize all commercially
reasonable efforts, consistent with normal past practices and policies and good
commercial practice, to mitigate such Losses. All indemnification or
reimbursement payments required pursuant to this Agreement shall be made after
all insurance benefits actually received by the Indemnified Party.
ARTICLE VIII
GENERAL
-------
8.1 Amendments; Waivers. This Agreement and any schedule or exhibit
attached hereto may be amended only by agreement in writing of all parties. No
waiver of any provision nor consent to any exception to the terms of this
Agreement or any agreement contemplated hereby shall be effective unless in
writing and signed by the party to be bound and then only to the specific
purpose, extent and instance so provided.
8.2 Schedules; Exhibits; Integration. Each schedule and exhibit delivered
pursuant to the terms of this Agreement shall be in writing and shall constitute
a part of this Agreement, although schedules need not be attached to each copy
of this Agreement. This Agreement, together with such schedules and exhibits,
constitutes the entire agreement among the parties pertaining to the subject
matter hereof and supersedes all prior agreements and understandings of the
parties in connection therewith.
8.3 Governing Law. This Agreement, the legal relations between the parties
and any Action, whether contractual or non-contractual, instituted by any party
with respect to matters arising under or growing out of or in connection with or
in respect of this Agreement, including but not limited to the negotiation,
execution, interpretation, coverage, scope, performance, breach, termination,
validity, or enforceability of this Agreement, shall be governed by and
construed in accordance with the laws of the State of Texas.
8.4 No Assignment. Neither this Agreement nor any rights or obligations
under it are assignable without the express written consent of the Shareholders
and Parent, except that Parent may assign its rights hereunder to the purchaser
of all or substantially all of the assets or capital stock of Parent (by merger
or otherwise).
8.5 Headings. The descriptive headings of the Articles, Sections and
subsections of this Agreement are for convenience only and do not constitute a
part of this Agreement.
8.6 Counterparts. This Agreement and any amendment hereto or any other
agreement (or document) delivered pursuant hereto may be executed in one or more
counterparts and by different parties in separate counterparts. All of such
counterparts shall constitute one and the same agreement (or other document) and
shall become effective (unless otherwise provided therein) when one or more
counterparts have been signed by each party and delivered to the other party.
40
8.7 Publicity and Reports. The Shareholders and Parent shall coordinate all
publicity relating to the transactions contemplated by this Agreement and no
party shall issue any press release, publicity statement or other public notice
relating to this Agreement, or the transactions contemplated by this Agreement,
without obtaining the prior consent of both the Shareholders and Parent.
8.8 Parties in Interest. This Agreement shall be binding upon and inure to
the benefit of each party, and nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement. Nothing in this Agreement is
intended to relieve or discharge the obligation of any third person to any party
to this Agreement.
8.9 Notices. Any notice or other communication hereunder must be given in
writing and (a) delivered in person, (b) transmitted by facsimile or (c) mailed
by certified mail, postage prepaid, return receipt requested as follows:
If to Parent, addressed to:
Tradestar Services, Inc.
3451 Candelaria NE
Albuquerque, New Mexico 87107
Attention: Frederick Huttner, Chief Financial Officer
Facsimile: (213) 593-8727
With a copy to:
Haynes and Boone, LLP
One Houston Center
1221 McKinney Street, Suite 2100
Houston, Texas 77010
Attention: Bryce D. Linsenmayer, Esq. or Amy Moss, Esq.
Facsimile: (713) 236-5540 or (713) 236-5550
If to Shareholders, addressed to:
Larry M. Wright
911 Creek Wood Way
Houston, Texas 77024
Facsimile: (713) 464-8048
Franklin M. Cantrell, Jr.
5555 Del Monte, Suite 2305
Houston, Texas 77056-4121
41
Michael W. Hopkins
651 Bering Drive, Suite 2002
Houston, Texas 77057
Robert G. Wonish
17315 Klee Circle
Spring, Texas 77379
With a copy to:
Hirsch & Westheimer, P.C.
700 Louisiana Street, 25th Floor
Houston, Texas 77002-2728
Attention: Bradley E. Rauch, Esq. and Michael S. Wilk, Esq.
Facsimile: (713) 223-9319
and
Beyt & Beyt
700 East University Avenue
Lafayette, Louisiana 70503
Attention: Raymond Beyt, Esq.
Facsimile: (337) 233-6773
or to such other address or to such other person as either party shall have last
designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by facsimile, when transmitted to
the applicable number so specified in (or pursuant to) this Section 8.9 and an
appropriate answerback is received, (ii) if given by mail, three (3) days after
such communication is deposited in the mails by certified mail, return receipt
requested, with postage prepaid and addressed as aforesaid or (iii) if given by
any other means, when actually delivered at such address.
8.10 Remedies; Waiver. To the extent permitted by Law, all rights and
remedies existing under this Agreement are cumulative to and not exclusive of,
any rights or remedies otherwise available under applicable Law. No failure on
the part of any party to exercise or delay in exercising any right hereunder
shall be deemed a waiver thereof, nor shall any single or partial exercise
preclude any further or other exercise of such or any other right.
8.11 Attorney's Fees. In the event of any Action by any party to enforce
against another party a right or claim, the prevailing party shall be entitled
to reasonable attorney's fees, costs and expenses incurred in such Action.
Attorney's fees incurred in enforcing any judgment in respect of this Agreement
are recoverable as a separate item.
42
8.12 Severability. If any provision of this Agreement is determined to be
invalid, illegal or unenforceable by any Governmental Entity, the remaining
provisions of this Agreement to the extent permitted by Law shall remain in full
force and effect; provided that the essential terms and conditions of this
Agreement for all parties remain valid, binding and enforceable. In event of any
such determination, the parties agree to negotiate in good faith to modify this
Agreement to fulfill as closely as possible the original intents and purposes
hereof. To the extent permitted by Law, the parties hereby to the same extent
waive any provision of Law that renders any provision hereof prohibited or
unenforceable in any respect.
8.13 Entire Agreement. This Agreement constitutes and includes that entire
agreement of the parties with reference to the subject matter hereof and
supersedes all prior agreements and understandings relating to the subject
matter hereof. No promise or representation of any kind has been made to any of
the parties to this Agreement by any other party or parties to this Agreement or
anyone acting for any of such parties, except as is expressly stated in this
Agreement.
8.14 Time is of the Essence. Time is of the essence in interpreting and
enforcing this Agreement.
8.15 Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be resolved by binding arbitration
administered by the American Arbitration Association under its Commercial
Arbitration Rules in effect on the date of this Agreement (herein the "AAA
Rules"), and judgment on the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof. The arbitrator shall be selected pursuant
to the AAA Rules and shall be a neutral and impartial lawyer with excellent
academic and professional credentials (i) who is or has been practicing law for
at least fifteen (15) years, specializing in general commercial litigation or
general corporate and commercial matters and (ii) who has both training and
experience as an arbitrator and is generally available to serve as an
arbitrator. The arbitration shall be governed by the arbitration law of the
Federal Arbitration Act and shall be held in Houston, Texas.
8.16 Expenses. All legal and accounting fees incurred by the Shareholders
in connection with the negotiation and execution of the transactions
contemplated hereby will be paid by the Company.
[Remainder of Page Left Intentionally Blank]
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its duly authorized officers as of the day and year first above
written.
PARENT:
TRADESTAR SERVICES, INC.
By: /s/ Clarence J. Downs
-------------------------------------------
Clarence J. Downs
Chairman and Chief Executive Officer
COMPANY:
THE CYMRI CORPORATION
By: /s/ Larry M. Wright
--------------------------------------------
Name: Larry M. Wright
Title: Chief Executive Officer and President
BUYER:
TRADESTAR ACQUISITION SUB, L.L.C.
By: /s/ Frederick A. Huttner
-------------------------------------------
Frederick A. Huttner
Vice President and Manager
SHAREHOLDERS:
/s/ Larry M. Wright
-------------------------------------------
LARRY M. WRIGHT
/s/ Franklin M. Cantrell, Jr.
-------------------------------------------
FRANKLIN M. CANTRELL, JR.
/s/ Robert G. Wonish
-------------------------------------------
ROBERT G. WONISH
/s/ Michael W. Hopkins
-------------------------------------------
MICHAEL W. HOPKINS
43