INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT dated as of November 28, 2000 (as
amended, supplemented or modified from time to time, this "Agreement") by and
among Bernard J. Zahren, Finova Mezzanine Capital Corp., AJG Financial Services,
Inc., ("AJG") Environmental Opportunities Fund ("EOF"), Environmental
Opportunities Fund Cayman ("EOF-C"), Frederic Rose, M&R Associates, Martin F.
Laughlin, Richard J. Augustine and Michael J. Carolan (each, a "Major
Shareholder"), AJG Financial Services, Inc., by its Vice President, General
Counsel, as agent for the Major Shareholders (the "Major Shareholder Agent"),
Zahren Alternative Power Corporation, a Delaware Corporation, ("ZAPCO"), U.S.
Energy Systems, Inc., a Delaware corporation ("USE"), USE Acquisition Corp., a
Delaware corporation (the "Sub" and together with the USE, the "Beneficiaries")
and Cinergy Energy Solutions, Inc., a Delaware corporation ("CES")
W I T N E S S E T H:
WHEREAS, ZAPCO and the Beneficiaries are party to that certain
agreement and plan of reorganization and merger (the "Merger Agreement") dated
as of the date hereof providing for the merger (the "Merger") of ZAPCO and the
Sub, as contemplated therein;
WHEREAS, pursuant to the Merger Agreement, the shares of ZAPCO's
common stock (the "ZAPCO Common Stock") and preferred stock (the "ZAPCO
Preferred Stock") shall be converted upon the effectiveness of the Merger into
the right to receive the Merger Consideration (as such term is defined in the
Merger Agreement);
WHEREAS, pursuant to Section 2.05 of the Merger Agreement , in
certain circumstances a post-closing adjustment (the "Adjustment") to the Merger
Consideration will be required;
WHEREAS, it is a condition to the willingness of the Beneficiaries
to enter into the Merger Agreement and the obligations of the Beneficiaries to
consummate the Merger that the Major Shareholders indemnify and hold harmless
the Beneficiaries from certain Damages (as herein defined) relating to such
Agreement;
WHEREAS, ZAPCO makes certain representations, warranties, and
covenants in the Merger Agreement and the Major Shareholders desire to provide
for indemnification with respect to breaches of these representations,
warranties, and covenants, all as set forth herein.
WHEREAS, it is a condition to the willingness of the Beneficiaries
to enter into the Merger Agreement and the obligations of the Beneficiaries to
consummate the Merger that the Major Shareholders indemnify and hold harmless
the Beneficiaries (and, following the Merger, the Surviving Corporation) and
their respective affiliates, shareholders, officers, directors, employees and
agents, and the heirs, successors and assigns of each of the foregoing (each a
"Purchaser Indemnitee" and, collectively, the "Purchaser Indemnitees") from
Damages, all as provided herein.
<PAGE>
WHEREAS, the Major Shareholders' execution of this Agreement is a
condition to the Beneficiaries' entering into the Merger Agreement and the
Beneficiaries' obligation to consummate the transactions contemplated by the
Merger Agreement;
WHEREAS, the Beneficiaries make certain representations,
warranties, and covenants in the Merger Agreement and desire to provide for
indemnification with respect to breaches of these representations, warranties,
and covenants, all as set forth herein.
WHEREAS, it is a condition to the willingness of ZAPCO to enter
into the Merger Agreement and the obligations of ZAPCO to consummate the Merger
that the Beneficiaries indemnify and hold harmless the Major Shareholders and
ZAPCO's shareholders, and the heirs, successors and assigns of each of the
foregoing (each a "ZAPCO Indemnitee" and, collectively, the "ZAPCO Indemnitees";
the ZAPCO Indemnitees and the Purchaser Indemnitees are collectively referred to
as the "Indemnitees") from Damages, all as provided herein.
WHEREAS, the Beneficiaries' execution of this Agreement is a
condition to ZAPCO's entering into the Merger Agreement and ZAPCO's obligation
to consummate the transactions contemplated by the Merger Agreement;
WHEREAS, concurrently with the execution of the Merger Agreement
and this Agreement, USE and CES are entering into a certain subscription
agreement (the "Subscription Agreement") dated as of the date hereof to acquire
4,574 shares of the Sub's Class B Common Stock (the "Class B Stock");
WHEREAS, Zapco's and the Beneficiaries' execution of this
Agreement is a condition to CES's entering into the Subscription Agreement, and
CES's obligations to consummate the transactions contemplated by the
Subscription Agreement and accordingly CES shall be considered a "Purchaser
Indemnitee" under the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the benefits accruing to the
Beneficiaries and the Major Shareholders, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby make the following
representations and warranties and hereby covenant and agree as follows:
1. As used in this Agreement, capitalized terms not defined herein
which are defined in the Merger Agreement are used herein as therein defined,
and the following terms shall have the following meanings:
"Damages" means all liabilities, judgments, demands, claims,
actions or causes of action, regulatory, legislative or judicial
proceedings or investigations, assessments, levies, losses, fines,
2
<PAGE>
penalties, damages, costs and expenses. For the purposes of
clarification, any of the foregoing Damages incurred or suffered
by the Surviving Corporation by virtue of a state of facts which
constitute an inaccuracy in or breach of a representation and
warranty or covenant by ZAPCO or the effects thereby shall
(without duplication) be deemed to have been suffered by USE and
CES. Without limiting the generality of the foregoing, the
Purchaser Indemnities' Damages include, without limitation:
reasonable attorneys', arbitrators', accountants', investigators',
environmental consultants' and experts' fees and expenses,
sustained or incurred in connection with the enforcement by a
Purchaser Indemnitee of its rights and remedies under this
Indemnification Agreement, or the Merger Agreement, or any
agreement, instrument or document executed or to be delivered in
connection with the Merger Agreement by ZAPCO or any of its
stockholders in connection therewith (collectively, including the
Merger Agreement, the "Transaction Documents"). Without limiting
the generality of the foregoing, the ZAPCO Indemnitees' Damages
include, without limitation: reasonable attorneys', arbitrators',
accountants', investigators', environmental consultants' and
experts' fees and expenses, sustained or incurred in connection
with the enforcement by a ZAPCO Indemnitee of its rights and
remedies under the Transaction Documents.
"Escrow Agreement" shall mean that certain agreement dated
as of the date hereof by the parties hereto and the escrow agent
thereunder.
"Person" shall mean an individual, partnership, corporation,
limited liability company, association, joint stock company,
trust, joint venture, or unincorporated organization, or the
United States of America or any other nation, or any state or
other political subdivision thereof, or any entity with executive,
legislative, judicial, regulatory or administrative functions of
government; and
"USE Share" means a share of Series C preferred stock (the
"Preferred Stock") or common stock (the "Common Stock") of USE,
and for purposes of determining the number of USE Shares to be
issued to ZAPCO Indemnitees or Purchaser Indemnitees, (i) each
share of Common Stock shall be valued at the average of the
closing price per share of Common Stock on the Nasdaq National
Market System, and if the Common Stock is not listed on such
System, the average of the last reported sale price per share of
Common Stock on the Nasdaq Small Cap Market (in either case as
reported in the Wall Street Journal) for ten consecutive trading
days ending on the trading day which is two (2) Business Days
prior to the date of the delivery of the Notice of Claim with
respect to which Damages are being paid and the closing price per
share of Common Stock on the Nasdaq Small Cap Market for ten
consecutive trading days ending on the trading day which is two
(2) Business Days prior to the date of payment of the Damages with
respect to which Damages are being paid and (ii) each share of
Preferred Stock shall be valued at $30.00.
2. (a) From and after the Closing, the Major Shareholders shall
indemnify the Purchaser Indemnitees as provided in this Indemnification
3
<PAGE>
Agreement. For the purposes of this Indemnification Agreement, the Major
Shareholders shall be deemed to have remade all representations and warranties
of ZAPCO contained in the Transaction Documents at the Closing with the same
effect as if originally made at the Closing.
(b) From and after the Closing, the Beneficiaries shall
indemnify the ZAPCO Indemnitees as provided in this Indemnification Agreement.
For the purposes of this Indemnification Agreement, the Beneficiaries shall be
deemed to have remade all representations and warranties of the Beneficiaries
contained in the Transaction Documents at the Closing with the same effect as if
originally made at the Closing.
3. (a) Each of the Major Shareholders hereby unconditionally and
irrevocably, subject to Section 4, agrees to indemnify, save and keep the
Purchaser Indemnitees harmless at all times after the Closing Date against and
from all Damages sustained or incurred by any Purchaser Indemnitee as a result
of, or arising out of, by virtue of, or in connection with:
i. any inaccuracy in or breach of any representation and
warranty made by ZAPCO in the Transaction Documents;
ii. any breach by ZAPCO of, or failure by ZAPCO to comply
with, any of its covenants or obligations under the
Transaction Documents;
iii. if any holder of ZAPCO Common Stock or ZAPCO Preferred
Stock exercises his, her or its appraisal rights pursuant to
Section 262 of the Delaware corporation code, the amount, if
any, by which the sum such holder receives pursuant to
Section 262 exceeds the Merger Consideration Value (as
defined in the Merger Agreement) of the Merger Consideration
(including any Merger Consideration placed into escrow
pursuant to the Merger Agreement and any portion of the
Contingent Merger Payment (as defined in the Merger
Agreement) allocated to such Major Shareholder) which such
Major Shareholder is entitled to receive pursuant to
Schedule 2.01(a) of the Merger Agreement (the "Scheduled
Merger Consideration.")
iv. the amounts described as being liabilities of Zapco in
Section 10(a) hereof;
v. the amounts described as being liabilities of Zapco in
Section 10(b) hereof provided that the sum of the Damages
arising under Sections 3(a)(iv) and 3(a)(v) hereof shall be
reduced by the "Ordinary Course Working Capital Surplus".
For purposes of this Agreement the "Ordinary Course Working
Capital Surplus" shall mean the amount by which Ordinary
Course Working Capital (as defined in the Merger Agreement
but without treating Transfer Taxes as allowable payables
for purposes of calculating Ordinary Course Working Capital)
is a greater number than negative $1,200,000.00
(-$1,200,000). In the event the Ordinary Course Working
Capital Surplus exceeds the sum of the Damages arising under
Sections 3(a)(iv) and 3(a)(v) hereof, then no party shall
have any liability to any other party under such sections.
For example if Damages arising from Section 3(a)(iv) and
3(a)(v) were $600,000.00 and Ordinary Course Working Capital
4
<PAGE>
(without accounting for Transfer Taxes) was negative
$700,000.00 (-$700,000.00) then the Major Shareholder's
indemnity obligation under 3(a)(iv) and 3(a)(v) would equal
$100,000.00 ($600,000.00 - $500,000.00).
vi. all claims, actions, suits, proceedings, demands,
assessments, judgments, costs and expenses ("Claims")
relating to the manner in which the Merger Consideration is
allocated among Zapco's stockholders;
vii. all Claims incident to any of the foregoing;
viii. any breach by ZAPCO of, or failure by ZAPCO to comply
with, any of its covenants or obligations under the YESCO
Agreement and the other agreements (collectively, the "YESCO
Documents") executed and delivered in connection with the
YESCO Transaction and any breach by ZAPCO of, or failure by
ZAPCO to comply with, any of its covenants or obligations
under the YESCO Documents and any liability of ZAPCO in
connection with the YESCO Transaction in each case only to
the extent it arises or accrues before the Effective Time;
ix. any breach by ZAPCO of, or failure by ZAPCO to comply
with, any of its covenants or obligations under the AJG
Agreement and the other agreements (collectively, the "AJG
Documents") executed and delivered in connection with the
AJG Genco Transaction, any breach by ZAPCO of, or failure by
ZAPCO to comply with, any of its covenants or obligations
under the AJG Genco Documents and any liability of ZAPCO in
connection with the AJG Genco Transaction in each case only
to the extent it arises or accrues before the Effective
Time;
x. any breach by ZAPCO of, or failure by ZAPCO to comply
with, any of its covenants or obligations under the
agreements (collectively, the "AJG Gasco Documents")
executed and delivered in connection with the AJG Gasco
Transaction, any breach by ZAPCO of, or failure by ZAPCO to
comply with, any of its covenants or obligations under the
AJG Gasco Documents and any liability of ZAPCO in connection
with the AJG Gasco Transaction in each case only to the
extent it arises or accrues before the Effective Time; and
xi. any breach by ZAPCO of, or failure by ZAPCO to comply
with, any of its covenants or obligations under the Cinergy
Gasco Purchase and Sale Agreement and the other agreements
(collectively, with the Cinergy Gasco Purchase and Sale
Agreement, the "Cinergy Gasco Documents") executed and
delivered in connection with the transactions contemplated
by the Cinergy Gasco Purchase and Sale Agreement (the
"Cinergy Gasco Transaction"), any breach by ZAPCO of, or
failure by ZAPCO to comply with, any of its covenants or
5
<PAGE>
obligations under the Cinergy Gasco Documents and any
liability of ZAPCO in connection with the Cinergy Gasco
Transaction in each case only to the extent it arises or
accrues before the Effective Time.
(b) Each of the Beneficiaries hereby unconditionally and
irrevocably, subject to Section 4, agrees to indemnify, save and keep the ZAPCO
Indemnitees harmless at all times after the Closing Date against and from all
Damages sustained or incurred by any ZAPCO Indemnitee as a result of, or arising
out of, by virtue of, or in connection with:
i. any inaccuracy in or breach of any representation and
warranty made by the Beneficiaries in the Transaction
Documents;
ii. any breach by the Beneficiaries of, or failure by the
Beneficiaries to comply with, any of their covenants or
obligations under the Transaction Documents; and
iii. all claims, actions, suits, proceedings, demands,
assessments, judgments, costs and expenses incident to any
of the foregoing.
(c) The respective obligations of the Major Shareholders and the
Beneficiaries, under Sections 3(a) and 3(b) hereof are referred to herein as the
"Obligations."
4. (a) The Purchaser Indemnitees shall not be entitled to recover
under Section 3(a):
i. unless a Notice of Claim (as defined herein) has been
delivered to the Major Shareholders, on or prior to the date which is
eighteen months after the Closing Date provided that notwithstanding
anything to the contrary in this Section 4(a)(i) Notices of Claim
arising from or relating to breaches of Section 3.10, 3.17 and 3.20 of
the Merger Agreement may be delivered prior to the sixth anniversary of
the Closing Date;
ii. for Damages to the extent such Damages (other than
pursuant to 3(a)(iii) and 3(a)(vi) do not exceed $500,000 in the
aggregate;
iii. from any Major Shareholder more than the Merger
Consideration Value of such Shareholder's Scheduled Merger
Consideration;
iv. for Damages to the extent such Damages were expressly
included in the Post-Closing Adjustment Amount as provided in Section
2.5 of the Merger Agreement; and
v. with respect to lost profits or punitive damages (other
than punitive damages paid or payable to, or claimed by third parties).
6
<PAGE>
vi. from any Major Shareholder more than the aggregate
amount of the Damages multiplied by a fraction, the numerator of which
is the Merger Consideration Value of such Major Shareholder's Scheduled
Merger Consideration and the denominator of which is the Merger
Consideration Value of all of the Major Shareholders' Scheduled Merger
Consideration; provided however that to the extent that any Major
Shareholder does not, within thirty days following the determination
that any Damages are due, whether by the Major Shareholder Agent,
pursuant to Section 4(c) or otherwise, pay to any Purchaser Indemnitee
all of the Damages such Major Shareholder is obligated to pay, such
Purchaser Indemnitee may require either AJG or Bernard Zahren or both
jointly to pay such amount to the extent such payment would not require
either AJG or Bernard Zahren to pay any amount, under this Agreement
which would be more than the Merger Consideration Value of their
Scheduled Merger Consideration.
The ZAPCO Indemnitees shall not be entitled to recover under Section 3(b):
i. unless a Notice of Claim (as defined herein) has been
delivered to the Beneficiaries, on or prior to the date which is
eighteen months after the Closing Date except that Notices of Claim
arising from or relating to the breaches of Sections 4.09, 4.15 and
4.18 of the Merger Agreement may be delivered prior to the sixth
anniversary of the Closing Date;
ii. for Damages to the extent such Damages do not exceed
$500,000 in the aggregate;
iii. to the extent the aggregate claims actually paid by the
Beneficiaries to the ZAPCO Indemnitees thereunder exceeds $13,000,000
and the Merger Consideration Value (other than the aggregate Cash
Payment (as defined in the Merger Agreement)) which all of ZAPCO's
stockholders are entitled to receive pursuant to Schedule 2.01 (a);
iv. with respect to lost profits or punitive damages (other
than punitive damages paid or payable to, or claimed by third parties);
and
v. unless the claim is brought by the Major Shareholder
Agent.
(b) The payment of any Damages to which the Purchaser
Indemnitees are entitled pursuant to Section 3(a) of this Indemnification
Agreement shall first be satisfied by, on a proportionate basis, (I) disbursing
cash (including any investments made pursuant to Section 2 of the Escrow
Agreement), USE Shares (valued in accordance with the definition of Merger
Consideration Value)and any other assets held in the Indemnification Escrow Fund
(as defined in the Escrow Agreement) held in such Fund pursuant to the terms of
Section 3(c) of the Escrow Agreement, to the extent available, until the
Indemnification Escrow Fund has been reduced to zero (with all amounts being
released from the Indemnification Escrow being deemed to have been furnished by
each Major Shareholder in proportion to the ratio of the Merger Consideration
Value of such Shareholder's Scheduled Merger Consideration to the Merger
Consideration Value of all of the Major Shareholders' Scheduled Merger
7
<PAGE>
Consideration) and (II) reducing the amount of the Contingent Merger Payment,
until such Contingent Merger Payment has been reduced to zero; thereafter
the payment of such Damages shall be satisfied by the Major Shareholders
on a several basis in the case of each Major Shareholder directly, in the case
of cash, by wire transfer in immediately available funds to such bank account
or accounts as Purchaser Indemnitees shall designate by written notice to the
Major Shareholders and, in the case of USE Shares, to the Purchaser Indemnitee
at such address as the Purchaser Indemnitee shall designate by written notice.
The payment of Damages to which the Purchaser Indemnities are entitled to
receive from any Major Shareholder pursuant to this Indemnification Agreement
once the Indemnification Escrow Fund and the Contingent Merger Payment have been
reduced to zero shall be made such that 50.5% of the value of such payment
shall be made in USE Shares valued in accordance with the definition of USE
Shares set forth in Section 1 hereof, and 49.5% of the value of such payment
shall be made in cash; provided, however that such indemnifying Major
Shareholder may, at his option, pay such Damages solely in cash.
The payment of any Damages to which the ZAPCO Indemnitees are
entitled pursuant to this Indemnification Agreement shall be satisfied by the
Beneficiaries by the delivery of cash or, at the Beneficiaries' option, by the
delivery of USE Shares, valued in accordance with the definition of USE Shares
set forth in Section 1 hereof, to such account or accounts as the Major
Shareholder Agent shall designate by written notice to the Beneficiaries;
provided however, that USE shall not be required to distribute such shares if
such distribution would violate the securities laws (in which case USE shall use
its best reasonable efforts so that a distribution may be made without the
violation of any such securities laws and the ZAPCO Indemnitees shall cooperate
in such efforts and if despite such efforts and cooperation USE is not able to
make such distribution within 90 days, USE shall satisfy the payment of such
Damages by the delivery of cash; and provided further however, that USE shall
provide registration rights for such shares analogous to the registration rights
provided pursuant to Articles 1 and 2 of the Registration Rights Agreement dated
as of the date hereof between USE and certain other parties relating to shares
of USE issued in connection with the Merger Agreement.
(c) The parties hereto agree that the provisions of this
Section 4 will govern any claims for indemnification under this Indemnification
Agreement. If and when a Purchaser Indemnitee desires to assert a claim for
Damages against the Major Shareholders pursuant to the provisions of this
Indemnification Agreement, or a ZAPCO Indemnitee desires to assert a claim for
Damages against the Beneficiaries pursuant to the provisions of this
Indemnification Agreement, the Purchaser Indemnitee or the Major Shareholder
Agent, acting on behalf of the ZAPCO Indemnitee, shall deliver to (i) the Major
Shareholders and the Major Shareholder Agent or (ii) the Beneficiaries as the
case may be (the "Indemnifying Party") reasonably promptly after its receipt of
a claim or specific and affirmative awareness of a potential claim, a
certificate signed by the Indemnitee (the "Notice of Claim"): (i) stating the
amount of Damages (to the extent then known); and, (ii) specifying to the extent
possible (A) the individual items of Damages included in the amount so stated,
(B) the date each such item is to be paid or accrued and (C) the basis upon
which Damages are claimed. The Major Shareholder Agent, acting on behalf of the
Major Shareholders, and the Beneficiaries shall proceed, in good faith, and
using reasonable efforts, to agree upon the amount of such Damages. If the
Indemnifying Party (with the Major Shareholder Agent acting on behalf of the
Major Shareholders if the Major Shareholders are the Indemnifying Party) does
8
<PAGE>
not notify the Indemnitee within thirty (30) days of the giving of such Notice
of Claim that the Indemnifying Party) disputes such Damages, the amount of such
Damages shall be conclusively deemed a liability of the Indemnifying Party
hereunder. If the Major Shareholder Agent and the Beneficiaries are unable to
agree on the amount of such Damages within thirty (30) days after giving the
Notice of Claim then the provisions of Section 4(d) shall become effective.
Notwithstanding the foregoing paragraph, the parties hereto
agree that if CES or USE ("Sub Shareholder") has a good faith belief that
Purchaser Indemnitee has the basis to submit a Notice of Claim, such Sub
Shareholder shall not submit a Notice of Claim on its own behalf but may deliver
to the Major Shareholder Agent a notice (the "Sub Shareholder Notice") detailing
the basis and providing the information that would be included in a Notice of
Claim. If such Purchaser Indemnitee does not both (I) notify such Sub
Shareholder within thirty (30) days of the giving of such Sub Shareholder Notice
that such Purchaser Indemnitee shall submit a Notice of Claim and prosecute its
rights under this Section 4(c) and (II) submit such Notice of Claim within forty
five (45) days of the giving of such Sub Shareholder Notice, then such Sub
Shareholder shall be entitled, acting for itself and as agent for the other Sub
Shareholder, and for the benefit of both Sub Shareholders, to deliver a Notice
of Claim to the Indemnifying Party reasonably promptly thereafter. The Major
Shareholder Agent, acting on behalf of the Major Shareholders, and such Sub
Shareholder shall proceed, in good faith, and using reasonable efforts, to agree
upon the amount of such Damages. If the Indemnifying Party (with the Major
Shareholder Agent acting on behalf of the Major Shareholders) does not notify
such Sub Shareholder within thirty (30) days of the giving of such Notice of
Claim that the Indemnifying Party disputes such Damages, the amount of such
Damages shall be conclusively deemed a liability of the Indemnifying Party
hereunder. If the Major Shareholder Agent and such Sub Shareholder are unable to
agree on the amount of such Damages within thirty (30) days after giving the
Notice of Claim then the provisions of Section 4(d) shall become effective,
provided, however that such Sub Shareholder shall be entitled, acting on its own
behalf and on behalf of the other Sub Shareholder, to take any action that any
Purchaser Indemnitee would be entitled to take thereunder. All amounts payable
by the Indemnifying Party to USE, CES and/or the Sub shall be paid without
duplication to USE 54.3% and CES 45.7%, provided, however, that the Sub
Shareholder shall be entitled to reimbursement by the Indemnifying Party of its
reasonable expenses respecting the prosecution of the matters raised in the
Notice of Claim if it is determined that the Purchaser Indemnitee is entitled to
indemnification. If it is ultimately determined that the Purchaser Indemnitee is
not entitled to indemnification for a claim prosecuted by a Sub Shareholder then
USE shall be responsible for 54.3% of the expenses respecting the prosecution of
the matters raised in the Notice of Claim and CES shall be responsible for 45.7%
of the expenses respecting the prosecution of the matters raised in the Notice
of Claim. The Sub Shareholders shall make such adjusting payments as are
necessary to accord with the foregoing sentence.
(d) Each and every controversy or claim arising out of or
relating to indemnification for Damages pursuant to Section 4(c) of this
Indemnification Agreement which the Indemnifying Party and the Indemnitee (the
"Parties") have not resolved, shall be resolved by arbitration in accordance
with the rules of the American Arbitration Association ("AAA") as modified by
9
<PAGE>
this Agreement. Each party shall select one arbitrator and the two such selected
arbitrators shall select a third arbitrator (who shall not be appointed by the
Parties) selected from the AAA. Judgment upon the award rendered in such
arbitration shall be final and binding upon the Parties and may be entered in
any court having jurisdiction thereof. Notice of the demand for arbitration
shall be filed in writing with the other party and with the office of the AAA,
located in Manhattan, New York, which such demand shall set forth in the same
degree of particularity as required for complaints under the Federal Rules of
Civil Procedure the claims to be submitted to arbitration. Additionally, the
demand for arbitration shall include appropriate copies of all documents on
which the claims are based and a list of all persons who the party seeking
arbitration will call as witnesses with respect to such claims. The arbitration
shall take place in Manhattan, New York. This agreement to arbitrate may be
specifically enforced by a court of competent jurisdiction under the applicable
law of the State of New York pertaining to arbitrations.
The arbitrator shall have the authority and jurisdiction to enter
any pre-arbitration awards that would aid and assist the conduct of the
arbitration or preserve the Parties' rights with respect to the arbitration as
the arbitrator shall deem appropriate in his discretion. The award of the
arbitrator shall be in writing and it shall specify in detail the issues
submitted to arbitration and the award of the arbitrator with respect to each of
the issues so submitted.
The provisions of the Federal Rules of Civil Procedure relating to
the right of discovery in civil actions shall be applicable to such arbitration
proceedings except as modified by the terms of this Indemnification Agreement.
Within thirty (30) days after the commencement of any arbitration proceeding
under this Indemnification Agreement, each party shall file with the arbitrator
its contemplated discovery plan outlining the desired documents to be produced,
the depositions to be taken and any other discovery action sought in the
arbitration proceeding. After a hearing, the arbitrator in an interim award
shall fix the scope and content of each Party's discovery plan as the arbitrator
deems appropriate. The arbitrator shall have the authority to modify, amend or
change such interim award fixing the discovery plans of the Parties upon
application by either Party, if good cause appears for doing so.
The "Prevailing Party" as determined by the arbitrator shall
be entitled to recover from the losing party reasonable expenses, attorneys'
fees and costs incurred in connection therewith and in the enforcement or
collection of any judgment or award rendered therein. The "Prevailing Party"
means the Party determined by the arbitrator to have most nearly prevailed, even
if such Party does not prevail in all matters, or is not the Party in whose
favor an award is rendered. Included within the cost recoverable pursuant to the
terms of this Section 4(d) shall be included service of process costs, filing
fees, arbitration fees, arbitrators' fees, court and reporter costs,
investigative costs, and expert witness fees. The award pursuant to such
arbitration will be final, binding and conclusive.
5. The liability of each Indemnifying Party hereunder is
independent of any agreements to indemnify the Indemnitees whether executed by
the parties hereto, any other indemnifying person or by any other party, and the
liability of the parties hereunder shall not be affected or impaired by (a) any
direction as to application of payment by USE, ZAPCO, the Surviving Corporation
or any Indemnifying Party, (b) any other continuing or other indemnity,
undertaking of a party hereto or of any other indemnifying person or other party
10
<PAGE>
as to the Obligations, (c) any payment on or in reduction of any such other
indemnity or undertaking, or (d) any dissolution, termination or increase,
decrease or change in personnel by USE, ZAPCO, the Surviving Corporation or any
Indemnifying Party.
6. The obligations of each party hereto hereunder are independent
of the obligations of any other party hereto, or indemnifying person or other
party of any of the Obligations, and a separate action or actions may be brought
and prosecuted against any party hereto, subject to Section 4(a), whether or not
action is brought against any other party hereto, or indemnifying person or
other party of, or with respect to, any of the Obligations, and whether or not
any other party hereto or indemnifying person or other party of, or with respect
to, any of the Obligations, be joined in any such action or actions. No
Indemnifying Party shall be entitled to require that any action be brought
against any other Person before action is brought against it hereunder by the
Indemnitee. Subject to Section 4(a) hereof, each party hereto waives, to the
fullest extent permitted by law, the benefit of any statute of limitations
affecting its liability hereunder or the enforcement thereof. Any payment by
USE, ZAPCO, the Surviving Corporation or any Indemnifying Party, or other
circumstance which operates to toll any statute of limitations as to USE, ZAPCO,
the Surviving Corporation or any Indemnifying Party shall operate to toll the
statute of limitations as to each Indemnifying Party.
7. No invalidity, irregularity or unenforceability of all or any
part of the Obligations or of any security therefor shall affect, impair or be a
defense to this Agreement, and (except to the extent, if any, as shall be
required by applicable statute and cannot be waived) this Agreement shall be
primary, absolute and unconditional notwithstanding the occurrence of any event
or the existence of any other circumstances which might constitute a legal or
equitable discharge of an indemnifying person except payment in full of the
Obligations. No provision of this Agreement shall be deemed to be a waiver by
any party hereto of its right to assert that its Obligations have been paid in
full.
8. Each Indemnifying Party waives any right (except as shall be
required by applicable statute or law and cannot be waived) to require the
Indemnitees to: (i) proceed against ZAPCO, any party hereto, indemnifying person
or other person of, or with respect to, any of the Obligations or; (ii) proceed
against or exhaust any security held from ZAPCO or any party hereto,
indemnifying person of, or with respect to, any of the Obligations; or (iii)
pursue any other remedy in any Indemnitee's power whatsoever. Each Indemnifying
Party waives (to the fullest extent permitted by applicable law) any defense
based on or arising out of any defense of ZAPCO, any party hereto, indemnifying
person of, or with respect to, any of the Obligations other than payment in full
of the Obligations, including, without limitation, any defense based on or
arising out of the disability of ZAPCO, any party hereto, indemnifying person
of, or with respect to, any of the Obligations, or the unenforceability of the
Obligations or any part thereof from any cause, or the cessation from any cause
of the liability of ZAPCO other than payment in full of the Obligations. Each
party waives any defense arising out of any such election by the Indemnitees,
even though such election operates to impair or extinguish any right of
reimbursement or subrogation or other right or remedy of any party hereto
against ZAPCO or any party or any security.
11
<PAGE>
9. In order to induce the Beneficiaries and ZAPCO to enter into
and consummate the transactions contemplated by the Merger Agreement, each party
hereto represents, warrants and covenants that:
(a) no consent of any other Person and no consent or
authorization of, filing with or other act by or in respect of, any Governmental
Entity or any other Person is required in connection with the execution,
delivery or performance by such party, or the validity or enforceability of,
this Agreement, except for consents, authorizations, filings or acts which have
been made or obtained, as the case may be, and are in full force and effect; and
(b) the execution, delivery and performance by such party of
this Indemnification Agreement will not (i) violate any law, statute, rule,
regulation or ordinance or any order, writ, junction or decree of any court,
Governmental Entity or arbitration board or tribunal, or (ii) conflict or be
inconsistent with or result in any breach of, any of the terms, covenants,
conditions or provisions of, or constitute a default under, or (other than
pursuant to the Transaction Documents) result in the creation or imposition of
(or the obligation to create or impose) any lien upon any of the property or
assets of such party pursuant to the terms of any indenture, mortgage, deed of
trust, loan agreement, credit agreement or other material agreement or other
instrument to which such party is a party or by which it or any of its property
or assets is bound or to which it may be subject.
10. (a) ZAPCO shall be liable for any stock transfer or similar
taxes ("Transfer Taxes") arising from or relating to the AJG Gasco Transaction
and those aspects of the AJG Genco Transaction that are required to be
consummated prior to the Effective Time pursuant to the AJG Agreement; provided
that any amounts paid by ZAPCO for such Transfer Taxes shall be deemed to be
allowable payable for purposes of the definition of Ordinary Course Working
Capital in the Merger Agreement.
(b) Cinergy Gasco Solutions, LLC and ZAPCO shall each be
liable for 50% of the Transfer Taxes arising from or relating to the Cinergy
Gasco Transaction.
11. Nothing contained in this Indemnification Agreement shall
limit the ability of the Indemnitees to pursue Damages or such other remedies,
at law or in equity, resulting from fraud or intentional misrepresentation.
12. (a) All representations and warranties set forth in this
Indemnification Agreement shall survive the Closing for a period of six years
following the Effective Time (and none shall merge into any instrument of
conveyance) regardless of any investigation or lack of investigation by the
parties hereto provided that this sentence is not intended to extend the time
limits respecting the delivery of Notices of Claims set forth in Section 4(a)
hereof. No specific representation and warranty shall limit the generality or
applicability of a more general representation and warranty. The failure in any
one or more instances of a party to insist upon performance of any of the terms,
covenants or conditions of this Indemnification Agreement, to exercise any right
or privilege conferred in this Indemnification Agreement, or the waiver by said
party of any breach of any of the terms, covenants or conditions of this
12
<PAGE>
Indemnification Agreement, shall not be construed as a subsequent waiver of any
such terms, covenants, conditions, right or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or waiver
had occurred. No waiver shall be effective unless it is in writing and signed by
an authorized representative of the waiving party.
(b) This Indemnification Agreement sets forth the exclusive
remedies of the Indemnitees against the Indemnifying Parties, absent fraud or
intentional misrepresentation, with respect to the matters expressly set forth
in Section 3 hereof.
13. This Indemnification Agreement shall inure to the benefit of
and be binding upon the parties hereto, and their successors and permitted
assigns. Nothing in this Indemnification Agreement, express or implied, is
intended to confer on any person other than the parties hereto, and their
respective successors and permitted assigns any rights, remedies, obligations or
liabilities under or by reason of this Indemnification Agreement.
14. This Indemnification Agreement shall not be assignable by the
parties without the prior written consent of the other parties, except that
after the Closing, subject to compliance with all applicable securities laws,
each Major Shareholder and Beneficiary may assign its respective rights and
delegate its respective obligations under this Indemnification Agreement to any
third party which assumes all of the assigning Beneficiary's or Major
Shareholder's obligations hereunder provided, however, that such assigning
Beneficiary or Major Shareholder shall remain liable for all of its obligations
hereunder.
15. This Indemnification Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, and all such
counterparts shall constitute but one instrument.
16. The parties shall execute such further documents, and perform
such further acts, as may be necessary to otherwise comply with the terms of
this Indemnification Agreement, the Merger Agreement and the other Transaction
Documents and consummate the transactions contemplated thereby. In addition, the
Purchaser Indemnitees shall, and shall cause the Surviving Corporation to,
cooperate with the Major Shareholders in connection with all claims giving rise
to any claim for indemnification hereunder. In furtherance of the foregoing, the
Purchaser Indemnitees shall and shall cause the Surviving Corporation (at the
expense of the Major Shareholders) to make available to the Major Shareholders,
and permit the Major Shareholders to make copies of all records, data and other
materials and otherwise to cooperate in all respects with the prosecution and
defense of all such claims.
17. None of the terms or provisions of this Agreement may be
amended, supplemented or otherwise modified except by a written instrument
executed by the Major Shareholder Agent (acting on behalf of the Major
Shareholders), CES and the Beneficiaries.
13
<PAGE>
18. Each Major Shareholder acknowledges that an executed (or
conformed) copy of each Transaction Document has been made available to him and
he is familiar with the contents thereof.
19. Any notice or request hereunder may be given to each Major
Shareholder at its address (including telecopy number) set forth under its
signature below or to Beneficiaries at:
If to USE:
U.S. Energy Systems, Inc.
One North Lexington Avenue, 4th Floor
White Plains, New York 10601
Facsimile No.: 561-820-9775
Attention: Goran Mornhed, President and Chief
Operating Officer
with a copy to:
Robinson Brog Leinwand Greene Genovese & Gluck P.C.
1345 Avenue of the Americas
New York, New York 10105
Facsimile No.: 212-956-2164
Attention: Allen J. Rothman, Esq.
If to ZAPCO:
Zahren Alternative Power Corporation
40 Tower Lane
Avon, CT 06001
Facsimile No.: 860-677-6054
Attention: Bernard J. Zahren, President
with a copy to:
Shipman & Goodwin LLP
One American Row
Hartford, CT 06103-2819
Facsimile No.: 860-251-5999
Attention: John H. Lawrence, Esq.
Marcus D. Wilkinson, Esq.
and
14
<PAGE>
Tannenbaum Helpern Syracuse & Hirschtritt LLP
900 Third Avenue
New York, New York 10022
Facsimile No.: 212-836-0773
Attention: Stephen Rosenberg, Esq.
If to Major Shareholder Agent:
A. J. G. Financial Services Co., Inc.
c/o Arthur J. Gallagher & Co.
Gallagher Centre
2 Pierce Place
Itasca, Illinois
Facsmile: 630-285-3473
Attention: Vice President and General Counsel
with a copy to: to be supplied
If to CES:
c/o Cinergy Solutions, Inc.
1000 East Main Street
Plainfield, IN 46168
Attention: M. Stephen Harkness, President and COO
Facsimile: 317-838-2090
with a copy to:
Cinergy Corp.
221 East Fourth Street
Cincinnati, Ohio 45201
Attention: Jerome Vennemann, Esq.
Facsimile: 513-287-1363
or, at such other address as may hereafter be specified in a notice designated
as a notice of change of address under this Section. Any notice or request
hereunder shall be given by reputable overnight courier. Any notice or other
communication required or permitted pursuant to this Agreement shall be deemed
given upon actual receipt thereof when sent by a recognized overnight delivery
service.
20. Subject to Section 4(d) hereof, this Agreement shall be
governed by and construed in accordance with the laws of the State of New York
applied to contracts to be performed wholly within the State of New York,
without giving effect to the principles of conflicts of law. Any judicial
proceeding brought by or against any party hereto with respect to this Agreement
or any related agreement may be brought in the Supreme Court of the State of New
15
<PAGE>
York located in the County of New York or in the United States District Court
for the Southern District of New York and, by execution and delivery of this
Agreement, each party accepts, for itself or himself and in connection with its
or his properties, generally and unconditionally, the non-exclusive jurisdiction
of the aforesaid courts, and irrevocably agrees to be bound by any judgment
rendered thereby in connection with this Agreement. Each party hereto hereby
waives personal service of any and all process upon it or him and consents that
all such service of process may be made by registered mail (return receipt
requested) directed to such party at the address set forth pursuant to Section
18 hereto and service so made shall be deemed completed five (5) days after the
same shall have been so deposited in the mails of the United States of America.
Nothing herein shall affect the right to serve process in any manner permitted
by law or shall limit the right of any party to bring proceedings against any
other party in the courts of any other jurisdiction. The parties hereto waive
any objection to jurisdiction and venue of any action instituted hereunder in
any court referred to above and shall not assert any defense based on lack of
jurisdiction or venue or based upon forum non conveniens.
21. All payments made by the Indemnifying Parties hereunder will
be made without set off, counterclaim or other defense.
22. If any part of this Agreement is contrary to, prohibited by,
or deemed invalid under applicable laws or regulations, such provision shall be
inapplicable and deemed omitted to the extent so contrary, prohibited or
invalid, but the remainder hereof shall not be invalidated thereby and shall be
given effect so far as possible.
23. Each Major Shareholder hereby appoints the Major Shareholder
Agent as his representative to take any action and receive any notice hereunder
on behalf of such Major Shareholder as set forth herein.
24. This Agreement shall not become effective until the Effective
Time (as defined in the Merger Agreement). If the Merger Agreement is terminated
before the Effective Time, this Agreement shall be null and void and of no
effect.
25.(a)USE, the Sub, Zapco and CES (all of the foregoing
collectively referred to as the "Releasing Parties") have agreed to release
Finova Mezzanine Capital Corp. ("Finova") from its obligations hereunder with
respect to one or more of the transactions (each, a "Transaction" and
collectively, the "Transactions") contemplated by the Yesco Documents, the AJG
Documents, AJG Gasco Documents or the Cinergy Gasco Documents (collectively, the
"Closing Documents") if (i) Finova reasonably gives written notice (the
"Objection Notice") to the Releasing Parties not less than 24 hours prior to the
scheduled closing of the applicable Transaction to the effect that it will be
exposed to liability materially greater than the liability it was exposed to
under the Original Documents (as defined) by the changes to the Closing
Documents. The term "Original Document" means the latest form of Closing
Document with respect to such Transaction provided to Finova or its counsel
prior to the execution of this agreement.
(b) By virtue of giving the Objection Notice, Finova
relinquishes any and all of its rights to the Contingent Merger Consideration
and any and all of its rights under the Registration Rights Agreement. In the
16
<PAGE>
event of any conflict between the provisions of this Section 25 and the
provisions of the Registration Rights Agreement and the Merger Agreement with
respect to Finova's rights to Contingent Merger Consideration and/or its right
to register USE securities pursuant to the Registration Rights Agreement, the
provisions of this Section 25 shall govern.
(c) Zapco hereby agrees to provide Finova with the Closing
Documents for the applicable Transaction not later than 48 hours prior to the
scheduled closing of such transaction.
(d) In the event the Objection Notice is given, then the
denominator referred to in Section 4(a)(vi) hereof shall, notwithstanding such
provision, equal the Merger Consideration Value of all the Major Shareholders
Scheduled Merger Consideration other than Finova.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
ZAHREN ALTERNATIVE POWER CORPORATION
By:/s/ Bernard J. Zahren
---------------------------------------------
Name: Bernard J. Zahren
Title: President and Chief Executive Officer
MAJOR SHAREHOLDERS:
AJG Financial Services, Inc.
By: /s/Mark P. Strauch
-------------------------------------
Name: Mark P. Strauch
Title: Executive Vice President
BERNARD J. ZAHREN
/s/ Bernard J. Zahren
------------------------
ENVIRONMENTAL OPPORTUNITIES FUND
By: Keneth Leung
-----------------------------
Name:
Title:
ENVIRONMENTAL OPPORTUNITIES FUND/CAYMAN
By: Kenneth Leung
---------------------------
Name:
Title:
18
<PAGE>
FINOVA MEZZANINE CAPITAL CORP.
By: /s/ Kevin Pearce
--------------------------
Name: Kevin Pearce
Title: Vice President
FREDERIC ROSE
/s/ Frederic Rose
------------------------------
M & R ASSOCIATES
By: /s/ Frederic Rose
-----------------------------
Name: Frederic Rose
Title: President
MARTIN F. LAUGHLIN
/s/ Martin F. Laughlin
--------------------------------
MICHAEL J. CAROLAN
/s/ Michael J. Carolan
-------------------------------
RICHARD J. AUGUSTINE
/s/ Richard J. Augustine
--------------------------------
19
<PAGE>
MAJOR SHAREHOLDER AGENT:
/s/ John C. Rosengren
---------------------------
CES:
CINERGY ENERGY SOLUTIONS, INC.
By: /s/ M. Stephen Harkness
-------------------------------
Name: M. Stephen Harkness
Title: President and Chief
Operating Officer
BENEFICIARIES:
U.S. ENERGY SYSTEMS, INC.
/s/ Goran Mornhed
-------------------------------------
Name: Goran Mornhed
Title: President and Chief Operating Officer
USE ACQUISITION CORP.:
/s/ Goran Mornhed
---------------------------
Name:
Title:
20
