<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 17, 1996
KCS ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-11698 22-2889587
(State or other (Commission File Number) (IRS Employer
jurisdiction of incorporation) Identification No.)
379 Thornall Street
Edison, New Jersey 08837
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908) 632-1770
Not applicable
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. Other Events.
KCS Energy, Inc. has announced (see Exhibit 99.2 to this report) that
it entered into a Stock Purchase Agreement on November 14, 1996 to acquire all
of the outstanding stock of Medallion.
Financial statements of Medallion through June 30, 1996 and certain pro
forma financial information through June 30, 1996 reflecting the combined
operations of the Company and Medallion have been previously filed with this
report. Financial statements of Medallion and pro forma information through
September 30, 1996 are attached to this report. These statements and the pro
forma information are also reflected in a Registration Statement on Amendment
No. 1 to Form S-3 that is being filed with the Securities and Exchange
Commission on the date hereof.
1
<PAGE> 3
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business acquired.
2
<PAGE> 4
THE INTERCOAST ENTITIES
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue
Gas and oil revenues.................. $37,359 $44,466 $48,109 34,624 51,229
Natural gas sales revenues............ 16,715 13,700 25,351 6,561 108,635
Gathering system revenues............. -- -- -- -- 644
------- ------- ------- ------- --------
54,074 58,166 73,460 41,185 160,508
------- ------- ------- ------- --------
Operating costs and expenses
Gas and oil operating expenses........ 9,616 15,016 14,552 10,920 12,367
Cost of gas sold...................... 16,216 13,142 24,361 6,139 106,546
Gathering system expenses............. -- -- -- -- 109
Other operating and administrative
expenses........................... 2,268 2,713 2,658 1,679 3,407
Depreciation, depletion and
amortization....................... 13,672 18,782 21,705 15,953 20,360
------- ------- ------- ------- --------
41,772 49,653 63,276 34,691 142,789
------- ------- ------- ------- --------
Interest expense........................ -- -- -- -- 992
Income before income taxes.............. 12,302 8,513 10,184 6,494 16,727
Provision for income taxes.............. 5,383 3,202 3,638 2,319 5,973
------- ------- ------- ------- --------
Net income......................... $ 6,919 $ 5,311 $ 6,546 4,175 10,754
======= ======= ======= ======= ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
3
<PAGE> 5
THE INTERCOAST ENTITIES
COMBINED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- 1996
1994 1995 -------------
-------- -------- (UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents................................. $ 5,124 $ 8,323 $ 3,542
Trade accounts receivable................................. 6,586 24,101 29,740
Other..................................................... 2,311 1,383 2,332
-------- -------- --------
Total current assets.............................. 14,021 33,807 35,614
Gas and oil properties, net................................. 141,070 158,597 199,427
Gas gathering system........................................ -- -- 2,950
Other property, net......................................... 754 872 1,174
Intangible and other assets, net............................ 1,840 3,511 5,066
-------- -------- --------
Total assets...................................... $157,685 $196,787 $ 244,231
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 3,104 $ 18,702 $ 21,461
Other current liabilities................................. 993 3,625 4,187
-------- -------- --------
Total current liabilities......................... 4,097 22,327 25,648
-------- -------- --------
Accumulated deferred income taxes, net...................... 13,541 25,088 31,866
-------- -------- --------
Long-term debt due to MidAmerican Capital................... -- -- 52,402
Stockholders' equity, per accompanying statements
Common stock, InterCoast Oil and Gas Company ($1 par
value, 1,000 shares authorized, issued and
outstanding)........................................... 1 1 1
Common stock, InterCoast Gas Services Company ($1 par
value, 1,000 shares authorized, issued and
outstanding)........................................... 1 1 1
Common stock, GED Energy Services, Inc. ($1 par value, 0,
1,000 and 1,000 shares authorized, issued and
outstanding at December 31, 1994 and 1995 and September
30, 1996).............................................. -- 1 1
Additional paid-in capital................................ 123,802 126,580 100,769
Retained earnings......................................... 16,243 22,789 33,543
-------- -------- --------
Total stockholders' equity........................ 140,047 149,372 134,315
-------- -------- --------
Total liabilities and stockholders' equity........ $157,685 $196,787 $ 244,231
======== ======== ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
4
<PAGE> 6
THE INTERCOAST ENTITIES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------
INTERCOAST OIL ADDITIONAL COMBINED
AND INTERCOAST GAS GED ENERGY PAID-IN RETAINED STOCKHOLDERS'
GAS COMPANY SERVICES COMPANY SERVICES, INC. CAPITAL EARNINGS EQUITY
-------------- ---------------- -------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992....... $ 1 $ 1 $ -- $ 57,683 $ 4,013 $ 61,698
Net income......................... -- -- -- -- 6,919 6,919
Contributions from parent.......... -- -- -- 49,467 -- 49,467
-- -- --
-------- ------- --------
Balance at December 31, 1993....... 1 1 -- 107,150 10,932 118,084
Net income......................... -- -- -- -- 5,311 5,311
Contributions from parent.......... -- -- -- 16,652 -- 16,652
-- -- --
-------- ------- --------
Balance at December 31, 1994....... 1 1 -- 123,802 16,243 140,047
Formation of GED Energy Services,
Inc. ............................ -- -- 1 -- -- 1
Net income......................... -- -- -- -- 6,546 6,546
Contributions from parent.......... -- -- -- 2,778 -- 2,778
-- -- --
-------- ------- --------
Balance at December 31, 1995....... 1 1 1 126,580 22,789 149,372
Net income (unaudited)............. -- -- -- -- 10,754 10,754
Dividend to parent (unaudited)..... -- -- -- (25,811) -- (25,811)
-- -- --
-------- ------- --------
Balance at September 30, 1996
(unaudited)...................... $ 1 $ 1 $ 1 $ 100,769 $ 33,543 $ 134,315
== == == ======== ======= ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
5
<PAGE> 7
THE INTERCOAST ENTITIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income.................................. $ 6,919 $ 5,311 $ 6,546 $ 4,175 $ 10,754
Adjustments to reconcile net income to net
cash from operating activities:
Deferred income taxes, net............... 4,020 2,502 11,547 3,608 6,778
Provision for depreciation, depletion and
amortization........................... 13,672 18,782 21,705 15,953 20,360
Change in working capital items:
Accounts receivable.................... (2,791) 3,309 (17,515) (2,981) (5,639)
Other current assets................... 296 (1,032) 928 (297) (949)
Accounts payable....................... 2,869 (2,782) 15,598 2,758 2,759
Other current liabilities.............. 1,773 (1,840) 2,632 (291) 562
-------- -------- -------- -------- --------
Net cash from operating
activities........................ 26,758 24,250 41,441 22,925 34,625
-------- -------- -------- -------- --------
Cash flows from investing activities
Investments in:
Gas and oil properties................... (74,984) (42,849) (40,845) (30,059) (61,979)
Other.................................... (460) (26) (2,004) (149) (4,173)
Proceeds from sale of gas and oil
properties............................. 1,495 3,465 1,829 1,829 155
-------- -------- -------- -------- --------
Net cash from investing
activities........................ (73,949) (39,410) (41,020) (28,379) (65,997)
-------- -------- -------- -------- --------
Cash flows from financing activities
Borrowings from MidAmerican Capital......... -- -- -- -- 52,402
-------- -------- -------- -------- --------
Contributions from (dividends to) parent.... 49,467 16,652 2,778 5,949 (25,811)
-------- -------- -------- -------- --------
Net cash from financing activities............ 49,467 16,652 2,778 5,949 26,591
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 2,276 1,492 3,199 495 (4,781)
Cash and cash equivalents at beginning of
period...................................... 1,356 3,632 5,124 5,124 8,323
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period...................................... $ 3,632 $ 5,124 $ 8,323 $ 5,619 $ 3,542
======== ======== ======== ======== ========
Supplemental cash flow information
Cash paid (received) during the period for:
Income taxes................................ $ 1,363 $ 700 $ (7,909) $ (1,233) $ (641)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
6
<PAGE> 8
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Corporate Structure
InterCoast Oil and Gas Company (InterCoast Oil and Gas, formerly Medallion
Production Company), a Delaware corporation, and InterCoast Gas Services
Company, a Delaware corporation, (InterCoast Gas Services -- Delaware) are
wholly-owned subsidiaries of InterCoast Energy Company (InterCoast Energy).
InterCoast Gas Services Company, an Oklahoma corporation, (InterCoast Gas
Services -- Oklahoma) and GED Energy Services, Inc., a Delaware corporation,
(GED) are wholly-owned subsidiaries of InterCoast Gas Services -- Delaware.
InterCoast Energy is a wholly-owned subsidiary of MidAmerican Capital Company
(MidAmerican Capital), which is wholly-owned by MidAmerican Energy Company
(MidAmerican Energy).
InterCoast Oil and Gas is primarily engaged in the acquisition,
development, exploration and production of natural gas and oil. InterCoast Gas
Services -- Oklahoma and GED are primarily engaged in the marketing of natural
gas.
Basis of Presentation
The accompanying financial statements reflect the combined operations of
InterCoast Oil and Gas, InterCoast Gas Services -- Oklahoma and GED
(collectively, the InterCoast Entities). The financial statements are presented
on a combined historical cost basis because the InterCoast Entities are under
common control and because InterCoast Energy and its wholly-owned subsidiary,
InterCoast Gas Services -- Delaware, have signed letters of intent to sell the
stock of the InterCoast Entities to KCS Energy, Inc. (see Note 10).
InterCoast Gas Services -- Delaware formed GED and acquired the assets of
GED Gas Services, L.L.C. effective November 1, 1995. The accompanying combined
financial statements include the results of GED for the period since the date of
such acquisition.
Intercompany and affiliated company accounts and transactions have been
eliminated in the combination. Since there is no parent-subsidiary relationship
between the InterCoast Entities, there is no basis for eliminating the equity
accounts of any of the entities.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results may differ from those estimates.
Oil and Gas Properties
The InterCoast Entities account for their gas and oil properties using the
full cost method of accounting which provides for the capitalization of all
acquisition, exploration and development costs incurred for the purpose of
finding natural gas and oil reserves. The unamortized cost of gas and oil
properties, including estimated future development and abandonment costs, is
amortized using the unit-of-production method based on the ratio of volumes
produced to proved reserves.
Unevaluated properties and associated costs not currently being amortized
and included in oil and gas properties were $1.5 million, $1.6 million and $2.1
million at December 31, 1993, 1994 and 1995, respectively and $3.3 million at
September 30, 1996. Such costs relate to projects which were at such dates
undergoing exploration or development activities or in which the InterCoast
Entities intend to commence such activities in the future. The InterCoast
Entities will begin to amortize these costs when proved reserves are established
or impairment is determined.
7
<PAGE> 9
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The InterCoast Entities' unamortized costs of gas and oil properties are
limited to the sum of the future net revenues attributable to proved oil and gas
reserves discounted at ten percent plus the cost of any unproved properties. If
the InterCoast Entities' unamortized costs in oil and gas properties exceed this
ceiling amount, a provision for additional depreciation, depletion and
amortization is required. At December 31, 1993, 1994 and 1995 and September 30,
1996, the InterCoast Entities' unamortized costs of oil and gas properties did
not exceed such ceiling amount.
Proceeds from the sale of oil and gas properties are applied to reduce the
costs in the full cost pool unless the sale involves a significant quantity of
reserves in relation to the cost center, in which case a gain or loss would be
recognized.
The InterCoast Entities conduct certain of their drilling activities
(Programs), on a joint venture basis, together with working interest
participants. The agreements under which these investors participate provide the
InterCoast Entities with certain reversionary interests in the properties in the
Programs and current reimbursement of proportionate amounts of overhead and
seismic costs. Overhead reimbursements are included in the Combined Statements
of Income as a reduction of general and administrative expenses. The amounts of
such reimbursements were $872,000, $1,520,000 and $2,047,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, and were $2,022,000 and
$2,653,000 for the nine months ended September 30, 1995 and 1996, respectively.
Production Imbalances
Joint interest owners may take more or less than their ownership interest
of natural gas volumes from jointly owned reservoirs. The InterCoast Entities
follow the sales method of accounting for imbalances, whereby they recognize
revenues based on the actual volumes of natural gas sold to purchasers. The
InterCoast Entities record a liability if sales of natural gas volumes in excess
of their entitlements from a jointly owned reservoir exceed their interest in
the remaining estimated natural gas reserves of such reservoir. Volumetric
production is monitored to minimize imbalances, and such imbalances were not
significant at December 31, 1993, 1994 and 1995 and September 30, 1996.
Amortization of Goodwill
Goodwill was recognized with the acquisition of operating rights, certain
other assets and personnel of Medallion Petroleum, Inc. in 1992 by InterCoast
Oil and Gas and with the acquisition of certain assets and personnel of GED Gas
Services, L.L.C. in 1995 by GED. Goodwill is amortized over the expected period
of benefit of forty years using the straight line method. The unamortized
balance of goodwill included on the Combined Balance Sheets as Intangible and
Other Assets at December 31, 1994 and 1995 and September 30, 1996 is $1,829,000,
$3,486,000 and $3,417,000, respectively.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This statement, which the InterCoast Entities adopted
on January 1, 1996, requires the InterCoast Entities to review long-lived assets
for impairment whenever circumstances indicate that the carrying amount of an
asset may not be recoverable. Adoption of SFAS No. 121 had no impact on the
InterCoast Entities' results of operations or financial position at the time of
adoption.
Stock-Based Compensation Plans
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation" regarding accounting for stock-based compensation plans. This
statement, which is effective for reporting
8
<PAGE> 10
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
periods beginning January 1, 1996, allows for alternative methods of adoption.
The InterCoast Entities do not expect the accounting provisions or the
alternative disclosure provisions of SFAS No. 123 to have a material impact on
the InterCoast Entities' compensation costs.
Accounting for Commodity Price Risk Management
The InterCoast Entities engage in price risk management activities to
minimize the impact of market fluctuations on assets, liabilities, production or
other contractual commitments. Changes in the market value of these transactions
are deferred until the gain or loss on the underlying item is recognized. See
Note 6 for further discussion of the InterCoast Entities' price risk management
activities.
Combined Statements of Cash Flows
For purposes of the Combined Balance Sheets and Combined Statements of Cash
Flows, the InterCoast Entities consider all highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash
equivalents. There were no material non-cash investing or financing activities
in the years ended December 31, 1993, 1994 or 1995 or in the nine months ended
September 30, 1995 and 1996.
2. OIL AND GAS PROPERTIES, NET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Oil and gas properties.............................. $186,131 $225,147 $286,116
Accumulated depreciation, depletion and
amortization...................................... (45,061) (66,550) (86,689)
-------- -------- --------
Oil and gas properties, net......................... $141,070 $158,597 $199,427
======== ======== ========
</TABLE>
The provision for depreciation, depletion and amortization of the
InterCoast Entities' oil and gas properties was recorded at the rate of $0.80,
$0.86 and $0.90, per equivalent thousand cubic feet of natural gas production
for the years ended December 31, 1993, 1994 and 1995, respectively, and at the
rate of $0.83 and $0.88 for the nine months ended September 30, 1995 and 1996,
respectively.
3. INCOME TAXES
The InterCoast Entities are included in the consolidated federal and, where
appropriate, state income tax returns of MidAmerican Energy. The consolidated
income tax currently payable (or receivable) has been allocated among the
InterCoast Entities and other members of the affiliated income tax reporting
group (Group) based on the respective contributions to the consolidated taxable
income and tax credits of the Group. The InterCoast Entities have received (or
made) payments for the income tax reductions (or increases) contributed to the
Group.
The components of the provision for income taxes are shown below:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current -- Federal..................................... $1,136 $ 560 $(7,143)
-- State....................................... 227 140 (766)
Deferred -- Federal..................................... 3,135 1,772 10,382
-- State....................................... 885 730 1,165
------ ------ ------
Total......................................... $5,383 $3,202 $ 3,638
====== ====== ======
</TABLE>
9
<PAGE> 11
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the overall
effective income tax rate follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.......................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit...... 2.0 2.5 2.1
State tax true-ups......................................... 1.7 -- --
Other items, net........................................... 5.1 0.1 (1.4)
---- ---- ----
Overall effective income tax rate.......................... 43.8% 37.6% 35.7%
==== ==== ====
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Accelerated depreciation/depletion methods...................... $(4,271) $(13,940)
Intangible drilling costs....................................... 17,062 38,278
Other........................................................... 750 750
------- --------
Accumulated deferred income taxes............................... $13,541 $ 25,088
======= ========
</TABLE>
4. RELATED PARTY TRANSACTIONS
The InterCoast Entities receive general and administrative services from
InterCoast Energy, MidAmerican Capital and MidAmerican Energy. The costs of such
services received, including overhead costs, are assigned (and billed) to the
InterCoast Entities. Wages and salaries of the corporate staff and personnel of
InterCoast Energy, MidAmerican Capital and MidAmerican Energy are assigned based
upon an estimate of the time spent by staff and personnel benefitting the
InterCoast Entities. The estimate is reviewed and updated annually. Such wages
and salaries are billed to the InterCoast Entities, along with associated
payroll taxes and the costs of benefits. In addition, certain directly assigned
expenses paid by MidAmerican Capital are billed to the InterCoast Entities.
The InterCoast Entities are parties to guarantee agreements between
InterCoast Energy and its primary lender.
MidAmerican Capital and InterCoast Energy have entered into letters of
credit and financial guarantees on behalf of the InterCoast Entities to support
certain well costs and the natural gas purchases. Letters of credit and
financial guarantees are conditional commitments issued by MidAmerican Capital
InterCoast Energy to guarantee performance to a third party.
The InterCoast Entities have letters of credit totaling $1,914,000 and
$1,103,000 and financial guarantees amounting to $2,750,000 and $0 which were
not reflected on the Combined Balance Sheets as of December 31, 1995 and 1994,
respectively.
The fair value of the letters of credit was $14,000 and $8,000 at December
31, 1995 and 1994, respectively, estimated based on fees currently charged for
similar agreements. The fair value of the financial guarantees is not
determinable based on the specific characteristics of the guarantees.
5. EMPLOYEE BENEFITS
The InterCoast Entities' employees participate in MidAmerican Energy's
noncontributory defined benefit retirement income plan. Benefits under the plan
are based on participants' compensation, years of service and age at retirement.
Funding is based on the actuarially determined costs of the plan and the
requirements of the Internal Revenue Code and the Employee Retirement Income
Security Act.
As of December 31, 1993, 1994 and 1995, the InterCoast Entities have not
been required to contribute to the plan. Pension costs are allocated to the
InterCoast Entities based on participants' compensation. The
10
<PAGE> 12
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
amount the InterCoast Entities expensed during 1995, 1994 and 1993 was $12,000,
$44,000 and $0, respectively. The InterCoast Entities' pension accrual included
in the Combined Balance Sheets as Other Current Liabilities was $56,000 at
December 31, 1994 and 1995.
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
Price Risk Management
The InterCoast Entities have entered into swaps, futures and options to
manage risks associated with fluctuations in the price of natural gas production
and marketing activities.
Commodity Price Swaps. Commodity price swap agreements require the
InterCoast Entities to make payments to (or entitle it to receive payments from)
the counterparties based upon the differential between a specified fixed and
variable price. The InterCoast Entities account for these transactions on a
settlement basis and, accordingly, gains or losses are included in oil and gas
revenues in the period in which the underlying natural gas is produced. These
agreements do not impose cash margin requirements on the InterCoast Entities or
provide for collateral to the InterCoast Entities. At December 31, 1995,
InterCoast Oil and Gas was party to commodity price swap agreements covering
approximately 8.0 million MMBtu, 6.3 million MMBtu and 23.2 million MMBtu of
natural gas for the years 1996 and 1997 and for the period 1998 through 2005,
respectively.
Futures and Options Contracts. Natural gas futures require the InterCoast
Entities to buy or sell natural gas at a fixed price. Natural gas options held
to hedge price risk only provide the right, not the requirement, to buy or sell
natural gas at a fixed price. The InterCoast Entities use futures to manage
margins on offsetting fixed-price purchase or sale commitments for physical
quantities of natural gas. The InterCoast Entities use options to limit overall
price risk exposure. Futures contracts mandate initial margin requirements. The
InterCoast Entities maintain such margin accounts and funds in cash any daily
settlement requirements relating to futures contracts.
At December 31, 1995, the InterCoast Entities had futures contracts to
purchase natural gas for approximately 10.1 million MMBtu and to sell natural
gas for approximately 4.9 million MMBtu. The associated unrecognized gain on
futures contracts was $486,000.
Basis Swaps. Basis swap agreements require the InterCoast Entities to make
payments to (or entitle it to receive payments from) the counterparties based
upon the differential between the variable costs associated with the delivery of
natural gas production to specific delivery points and a contractually specified
fixed cost. At December 31, 1995, InterCoast Oil and Gas had basis swap
arrangements relating to a total of approximately 2.1 million MMbtu during 1996.
Credit Risk
Credit risk relates to the risk of loss that the InterCoast Entities would
incur as a result of the nonperformance by counterparties pursuant to the terms
of their contractual obligations. The InterCoast Entities' overall exposure to
credit risk may be affected positively or negatively in that the counterparties
may be similarly affected by changes in economic, regulatory or other
conditions. The InterCoast Entities maintain credit policies with regard to
counterparties that management believes minimize overall credit risk. With
regard to commodity price and basis swaps, these policies include an evaluation
of potential counterparties' financial condition (including credit rating),
collateral agreements under certain circumstances and the use of standardized
agreements. With regard to futures and options contracts, the InterCoast
Entities utilize New York Mercantile Exchange (NYMEX) contracts. Such contracts
are guaranteed by the NYMEX and, accordingly, have nominal credit risk. As a
result, the InterCoast Entities' risk is limited to the initial purchase price
of the options and to changes in the market value of the futures contracts.
Accordingly, the InterCoast Entities do not anticipate any material impact on
their financial position or results of operations as a result of
11
<PAGE> 13
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
nonperformance by counterparties to the financial instruments related to natural
gas production and marketing activities.
7. CONCENTRATION OF CREDIT RISK
Although credit risk is inherent to the foregoing types of financial
instruments and the InterCoast Entities are exposed to losses in the event of
nonperformance by the counterparties, the InterCoast Entities believe that the
aggregate credit risk associated with present swap and hedge arrangements is not
significant due to the nature of the contracts and the counterparties thereto.
The InterCoast Entities' gas and oil production purchasers consist
primarily of independent marketers and major natural gas pipeline companies. The
InterCoast Entities perform credit evaluations of their customers' financial
condition and obtain credit support if the InterCoast Entities believe it is
warranted. The InterCoast Entities have not experienced any significant losses
from uncollectible accounts.
8. COMMITMENTS AND CONTINGENCIES
The InterCoast Entities are lessees in several agreements to lease office
space at various locations. The lease agreements expire in 1999 through 2001,
with various options for renewal. The following is a schedule by year of
estimated future rent expense on such leases as of December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996.................................................................... $ 218,000
1997.................................................................... 205,000
1998.................................................................... 204,000
1999.................................................................... 205,000
2000.................................................................... 204,000
Thereafter.............................................................. 205,000
----------
Total......................................................... $1,241,000
==========
</TABLE>
On June 19, 1996, an action was brought by Nab Nat. Resources, L.L.C.
against several defendants, including InterCoast Oil and Gas, in the Second
Judicial District Court, Claiborne Parish, State of Louisiana, seeking a
declaration of the court that certain leases and a unit agreement had lapsed by
reason of a cessation of production of oil or gas in paying quantities that
allegedly occurred in the mid 1980s. The plaintiff also seeks, among other
things, an accounting of the production of oil, natural gas and other minerals
from the properties since the alleged lapse of the leases, damages of not less
than $5,000,000 for restoration and clean up of the lands covered by the leases
and certain other damages for trespass and mental anguish. InterCoast Oil and
Gas is in the preliminary stages of investigating the facts on which the lawsuit
appear to be based. Based on InterCoast Oil and Gas' preliminary investigations,
the claim of damages for restoration and clean up of certain lands appears to
relate to properties which the InterCoast Oil and Gas does not own. InterCoast
Oil and Gas currently intends to continue its investigation of the lawsuit and
to defend the action vigorously.
9. SIGNIFICANT ACQUISITION
In April 1996, InterCoast Oil and Gas acquired the interests of Enron Oil &
Gas Company in certain gas and oil properties (the Sawyer Canyon Properties),
associated natural gas gathering lines and other well equipment located in
Texas. The net purchase price at closing was approximately $53.2 million.
InterCoast Oil and Gas concurrently conveyed certain interests in particular
wells to InterCoast Global Management, Inc., a wholly-owned subsidiary of
MidAmerican Capital. InterCoast Oil and Gas retained a production payment on 100
percent of the net proceeds of production from such wells until approximately 80
percent of the estimated
12
<PAGE> 14
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
proved developed natural gas reserves attributable to the wells is produced. In
consideration, InterCoast Oil and Gas received from InterCoast Global
Management, Inc. $5.6 million in cash and a promissory note in the amount of
$2.3 million, which is payable in 48 monthly installments over four years and
bears interest at the prime rate. The total adjusted purchase price was $45.2
million. InterCoast Oil and Gas recorded no gain or loss related to this
transaction. The proved reserves associated with the production payment are
included in the InterCoast Entities' estimated net quantities of oil and gas
reserves presented in Note 12.
InterCoast Oil and Gas funded the net purchase price of $45.2 million under
a promissory note due to MidAmerican Capital. This promissory note was due on or
before April 12, 1997, with interest payable quarterly at a floating rate based
on LIBOR plus 55 basis points. The promissory note was repaid in full in July
1996.
The following unaudited pro forma revenues, and net income for the years
ended December 31, 1994 and 1995 and for the three months ended March 31, 1996,
presented below have been prepared assuming the acquisition described above had
been consummated as of January 1, 1994. However, such pro forma information is
not necessarily indicative of what actually would have occurred had the
transaction occurred on such date.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -----------------
<S> <C> <C> <C>
Revenues (in thousands).................. $ 80,860 $ 88,138 $ 164,248
Net income (in thousands)................ 9,980 7,866 11,370
------- ------- ------
</TABLE>
10. SUBSEQUENT EVENT
On November 14, 1996, InterCoast Energy and its wholly-owned subsidiary,
InterCoast Gas Services -- Delaware, signed definitive agreements to sell the
stock of the InterCoast Entities to KCS Energy, Inc. Under the terms of these
agreements, KCS Energy, Inc. will pay approximately $219 million in cash and
deliver warrants to acquire 435,000 shares of KCS Energy, Inc. common stock at a
price of $45 per share.
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The combined results of operations by quarter for the years ended December
31, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1994 QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues.............................. $15,460 $15,459 $ 14,125 $13,122
Income before income taxes.................. $ 2,391 $ 2,930 $ 2,035 $ 1,157
Net income.................................. $ 1,492 $ 1,828 $ 1,269 $ 722
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Total revenues.............................. $12,990 $14,182 $ 14,012 $32,276
Income before income taxes.................. $ 1,641 $ 2,652 $ 2,201 $ 3,690
Net income.................................. $ 1,055 $ 1,705 $ 1,415 $ 2,371
</TABLE>
In the fourth quarter of 1994, the InterCoast Entities experienced a
significant decline in realized natural gas price causing reductions in oil and
gas revenues and income before income taxes as compared to the prior three
quarters of 1994.
13
<PAGE> 15
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In the fourth quarter of 1995, InterCoast Energy acquired certain assets of
GED Gas Services, L.L.C. The acquisition generated natural gas sales revenues of
$15.4 million in such quarter. Additionally, in the fourth quarter of 1995, the
InterCoast Entities' natural gas production volumes and realized natural gas
prices increased resulting in higher oil and gas revenues and income before
income taxes as compared to the prior three quarters of 1995.
12. SUPPLEMENTARY OIL AND GAS DISCLOSURES
Users of the following information should be aware that the process of
estimating quantities of proved and proved developed oil and gas reserves is
very complex, requiring significant subjective decisions in the evaluation of
all available geological, engineering and economic data for each reservoir. The
data for a given reservoir may also change substantially over time as a result
of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessment possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
Proved reserves are estimated quantities of natural gas, crude oil and
condensate that geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
economic and operating conditions existing at the time the estimates were made.
Proved developed reserves are proved reserves that can be expected to be
recovered through wells and equipment in place and under operating methods being
utilized at the time the estimates were made.
Capitalized costs for oil and gas producing activities consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Proved properties.................................. $146,422 $184,502 $223,088
Unproved properties................................ 1,487 1,629 2,059
Accumulated depletion, depreciation and
amortization..................................... (26,459) (45,061) (66,550)
-------- -------- --------
Net capitalized costs.................... $121,450 $141,070 $158,597
======== ======== ========
</TABLE>
Costs incurred for oil and gas property acquisition, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Development........................................... $12,749 $22,000 $34,639
Property acquisitions................................. 59,913 18,705 2,726
Exploration........................................... 2,322 2,144 3,480
------- ------- -------
Net capitalized costs....................... $74,984 $42,849 $40,845
======= ======= =======
</TABLE>
14
<PAGE> 16
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Estimated Net Quantities of Oil and Gas Reserves--(Unaudited)
The following table sets forth the InterCoast Entities' net proved
reserves, including the changes therein, and proved developed reserves (all
within the United States) at the end of each of the three years in the period
ended December 31, 1995:
<TABLE>
<CAPTION>
NATURAL OIL AND
GAS LIQUIDS TOTAL
(MMCF) (MBBL) (MMCFE)
--------- -------- ---------
<S> <C> <C> <C>
Net proved reserves at December 31, 1992........... 64,806.5 3,111.0 83,472.5
Revisions of previous estimates.................. (6,649.3) 441.8 (3,998.5)
Extensions, discoveries and other additions...... 14,911.6 288.4 16,642.0
Purchases of reserves in place................... 55,740.1 5,840.3 90,781.9
Production....................................... (12,741.8) (690.8) (16,886.6)
Sales of reserves in place....................... (4,043.7) (35.6) (4,257.3)
--------- -------- ---------
Net proved reserves at December 31, 1993........... 112,023.4 8,955.1 165,754.0
Revisions of previous estimates.................. (10,931.0) (1,089.0) (17,465.0)
Extensions, discoveries and other additions...... 39,713.5 375.0 41,963.5
Purchases of reserves in place................... 23,804.9 1,489.6 32,742.5
Production....................................... (15,590.9) (1,024.4) (21,737.3)
Sales of reserves in place....................... (408.9) (1,402.5) (8,823.9)
--------- -------- ---------
Net proved reserves at December 31, 1994........... 148,611.0 7,303.8 192,433.8
Revisions of previous estimates.................. (22,594.8) 3,265.8 (3,000.0)
Extensions, discoveries and other additions...... 24,372.5 514.0 27,456.5
Purchases of reserves in place................... 1,119.2 12.7 1,195.4
Production....................................... (17,835.4) (1,027.9) (24,002.8)
Sales of reserves in place....................... 0.0 (224.4) (1,346.4)
--------- -------- ---------
Net proved reserves at December 31, 1995........... 133,672.5 9,844.0 192,736.5
========= ======== =========
Net proved developed reserves at December 31,
1993............................................. 100,660.0 8,173.0 149,698.0
at December 31, 1994............................. 115,099.0 6,717.0 155,401.0
at December 31, 1995............................. 111,189.0 8,255.0 160,719.0
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (Unaudited)
The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 "Disclosures
about Oil and Gas Producing Activities" (SFAS No. 69) and based on oil and gas
reserve and production volumes estimated, in part by the InterCoast Entities,
but primarily by the InterCoast Entities' independent reserve engineers,
Netherland, Sewell and Associates, Inc. It may be useful for certain comparative
purposes, but should not be solely relied upon in evaluating the InterCoast
Entities or their performance. Further, information contained in the following
table should not be considered as representative of realistic assessments of
future cash flows, nor should the Standardized Measure of Discounted Future Net
Cash Flows be viewed as representative of the current value of the InterCoast
Entities.
The InterCoast Entities believe that the following factors should be taken
into account in reviewing the following information: (1) future costs and
selling prices will probably differ from those required to be used in these
calculations; (2) due to future market conditions and governmental regulations,
actual rates of production achieved in future years may vary significantly from
the rate of production assumed in the
15
<PAGE> 17
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
calculations; (3) selection of a 10% discount rate is arbitrary and may not be
reasonable as a measure of the relative risk inherent in realizing future net
oil and gas revenues; and (4) future net revenues may be subject to different
rates of income taxation.
Under the Standardized Measure, future cash inflows were estimated by
applying period-end oil and gas prices adjusted for fixed and determinable
escalations to the estimated future production of period-end reserves. As of
December 31, 1995, approximately 37.5 Bcf of gas of the InterCoast Entities'
future production was subject to commodity price swap agreements (see Note 6).
Future cash inflows were reduced by estimated future development, abandonment
and production costs based on period-end costs in order to arrive at future net
cash flow before tax. Future income tax expense has been computed by applying
period-end statutory tax rates to aggregate future pre-tax net cash flows,
reduced by the tax basis of the properties involved and tax carryforwards. Use
of a 10% discount rate is required by SFAS No. 69.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as possible reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows............................. $ 354,076 $ 369,430 $ 430,282
Future production costs......................... (119,855) (123,914) (155,984)
Future development and abandonment costs........ (13,886) (24,003) (16,078)
--------- --------- ---------
Future net cash flows before income taxes....... 220,335 221,513 258,220
Future income tax expense....................... (50,633) (47,526) (65,314)
10% annual discount for estimating timing of
cash flows.................................... (51,500) (47,943) (55,982)
--------- --------- ---------
Standardized measure of discounted future net
cash flows.................................... $ 118,202 $ 126,044 $ 136,924
========= ========= =========
</TABLE>
16
<PAGE> 18
THE INTERCOAST ENTITIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the principal changes in the standardized measure of
discounted future net cash flows applicable to proved oil and gas reserves is as
follows (unaudited):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of the period............................ $ 62,177 $118,202 $126,044
-------- -------- --------
Revisions of previous estimates:
Changes in prices and costs........................ (551) (25,715) 8,275
Changes in quantities.............................. (3,957) (13,134) (2,627)
Changes in future development costs................ (6,016) (7,323) (2,948)
Previously estimated development costs incurred
during the period................................ 8,951 11,572 17,954
Additions to proved reserves resulting from
extensions and discoveries, less related cost.... 16,314 31,935 26,998
Sales of reserves in place......................... (2,763) (663) (769)
Purchases of reserves in place..................... 68,074 27,006 2,085
Accretion of discount.............................. 7,760 13,771 14,460
Sales of oil and gas, net of production costs...... (27,728) (29,129) (32,961)
Net changes in income taxes........................ (4,089) 958 (12,684)
Changes in estimated timing of production
and other........................................ 30 (1,436) (6,903)
-------- -------- --------
Net increase....................................... 56,025 7,842 10,880
-------- -------- --------
End of period...................................... $118,202 $126,044 $136,924
======== ======== ========
</TABLE>
17
<PAGE> 19
(b) Pro forma financial information.
18
<PAGE> 20
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information is derived from the
historical financial statements of KCS Energy, Inc. and the statements of the
InterCoast Entities (Medallion) and the Sawyer Canyon Properties included
elsewhere in or previously filed with this report.
The unaudited Pro Forma Statement of Consolidated Income for the year ended
December 31, 1995 reflects (i) the Company's Rocky Mountain Acquisition and
Michigan Acquisition, (ii) the sale of the Senior Notes, (iii) the Medallion
Acquisition (which includes Medallion's acquisition of the Sawyer Canyon
Properties in April 1996) and (iv) the sale of the Common Stock offered
pursuant to a Registration Statement on Form S-3 previously filed and the
application of the estimated net proceeds therefrom as if each transaction had
occurred on January 1, 1995.
The unaudited Pro Forma Statement of Consolidated Income for the nine
months ended September 30, 1996 reflects the Medallion Acquisition (which
includes Medallion's acquisition of the Sawyer Canyon Properties in April 1996),
the sale of the Common Stock and the application of the estimated net proceeds
therefrom as if each transaction had occurred on January 1, 1995.
The unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1996
reflects the Medallion Acquisition, the sale of the Common Stock and the
application of the estimated net proceeds therefrom as if each transaction had
occurred on September 30, 1996.
The unaudited pro forma financial data should be read in conjunction with
the notes thereto and the Consolidated Financial Statements of the Company
(including the notes thereto) previously filed with the Securities and Exchange
Commission. The unaudited pro forma financial data does not purport to be
indicative of the financial position or results of operations that would
actually have occurred if the transactions described had occurred as presented
in such statements or that may he obtained in the future. In addition, future
results may vary significantly from the results reflected in such statements due
to normal crude oil and gas production declines, changes in prices received for
crude oil and gas, future acquisitions and dispositions of reserves, changes in
estimates of reserves and of the future net revenues therefrom and other
factors.
19
<PAGE> 21
KCS ENERGY, INC.
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
KCS
ACQUISITIONS
AND NOTE KCS MEDALLION
KCS OFFERING PRO FORMA MEDALLION MEDALLION PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED HISTORICAL ACQUISITIONS COMBINED
----------- ------------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue.............................. $ 449,965 $ 15,035 (a) $ 465,000 $ 73,460 $ 72,881(a) $ 146,341
Operating costs and expenses:
Cost of natural gas sales........... 356,186 -- 356,186 24,361 57,216(a) 81,577
Other operating and administrative
expenses.......................... 18,669 4,769 (a) 23,438 17,210 4,024(a) 21,234
Depreciation, depletion and
amortization...................... 39,209 5,207 (b) 44,416 21,705 -- 21,705
----------- ---------- --------- ---------- ----------- ---------
Operating costs and expenses........ 414,064 9,976 424,040 63,276 61,240 124,516
----------- ---------- --------- ---------- ----------- ---------
Operating income.................. 35,901 5,059 40,960 10,184 11,641 21,825
Interest and other income, net....... 3,713 -- 3,713 -- -- --
Interest expense..................... (7,732) (11,108)(c) (18,840) -- -- --
----------- ---------- --------- ---------- ----------- ---------
Income before income taxes
(benefit)........................... 31,882 (6,049) 25,833 10,184 11,641 21,825
Federal and state income taxes
(benefit)........................... 10,576 (2,117)(e) 8,459 3,638 4,074(e) 7,712
----------- ---------- --------- ---------- ----------- ---------
Net income (loss)............... $ 21,306 $ (3,932) $ 17,374 $ 6,546 $ 7,567 $ 14,113
=========== ========== ========= ========== =========== =========
Earnings per share................... $ 1.81
===========
Average shares outstanding........... 11,760,701
===========
<CAPTION>
ACQUISITION
AND OTHER PRO FORMA
ADJUSTMENTS AS ADJUSTED
------------ ------------
<S> <C> <C>
Revenue.............................. $ -- $ 611,341
Operating costs and expenses:
Cost of natural gas sales........... -- 437,763
Other operating and administrative
expenses.......................... -- 44,672
Depreciation, depletion and
amortization...................... 611 (b) 66,732
---------- ----------
Operating costs and expenses........ 611 549,167
---------- ----------
Operating income.................. (611) 62,174
Interest and other income, net....... -- 3,713
Interest expense..................... (6,148)(d) (24,988)
---------- ----------
Income before income taxes
(benefit)........................... (6,759) 40,899
Federal and state income taxes
(benefit)........................... (2,366)(e) 13,805
---------- ----------
Net income (loss)............... $ (4,393) $ 27,094
========== ==========
Earnings per share................... $ 1.84
==========
Average shares outstanding........... 14,760,701
==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
20
<PAGE> 22
KCS ENERGY, INC.
PRO FORMA STATEMENT OF CONSOLIDATED INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MEDALLION ACQUISITION
KCS MEDALLION SAWYER CANYON PRO FORMA AND OTHER PRO FORMA
HISTORICAL HISTORICAL PROPERTIES(f) COMBINED ADJUSTMENTS AS ADJUSTED
----------- ----------- ---------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue............................... $ 316,604 $ 160,508 $ 3,740 $ 164,248 $ -- $ 480,852
Operating costs and expenses:
Cost of natural gas sales........... 231,063 106,546 -- 106,546 -- 337,609
Other operating and administrative
expenses.......................... 19,427 15,883 645 16,528 -- 35,955
Depreciation, depletion and
amortization...................... 33,933 20,360 -- 20,360 84 (g) 54,377
----------- ----------- ----------- ----------- ----------- -----------
Operating costs and expenses........ 284,423 142,789 645 143,434 84 427,941
----------- ----------- ----------- ----------- ----------- -----------
Operating income.................. 32,181 17,719 3,095 20,814 (84) 52,911
Interest and other income, net........ 4,850 -- -- -- -- 4,850
Interest expense...................... (13,858) (992) -- (992) (2,947)(h) (17,797)
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes
(benefit)........................... 23,173 16,727 3,095 19,822 (3,031) 39,964
Federal and state income taxes
(benefit)........................... 8,367 5,973 1,083(i) 7,056 (1,061)(i) 14,362
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............ $ 14,806 $ 10,754 $ 2,012 $ 12,766 $ (1,970) $ 25,602
=========== =========== =========== =========== =========== ===========
Earnings per share.................... $ 1.25 $ 1.72
=========== ===========
Average shares outstanding............ 11,886,434 14,886,434
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
21
<PAGE> 23
KCS ENERGY, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(UNAUDITED, DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING
KCS MEDALLION ACQUISITION PRO FORMA AND OTHER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
---------- ---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 53,597 $ 3,542 $ -- $ 57,139 $ (50,030)(m) $ 7,109
Trade accounts receivable, net............ 39,146 29,740 -- 68,886 -- 68,886
Receivable from Tennessee Gas............. -- -- -- -- -- --
Fuel inventories.......................... 884 -- -- 884 -- 884
Other current assets...................... 5,055 2,332 -- 7,387 -- 7,387
--------- --------- --------- -------- -------- ---------
Current assets.......................... 98,682 35,614 -- 134,296 (50,030) 84,266
Property, plant and equipment, net:
Oil and gas properties, net............... 206,308 199,427 318 (j) 406,053 -- 406,053
Natural gas transportation systems, net... 22,296 2,950 2,050 (j) 27,296 -- 27,296
Other property, plant and equipment....... 2,979 1,174 (674)(j) 3,479 -- 3,479
--------- --------- --------- -------- -------- ---------
Property, plant and equipment, net...... 231,583 203,551 1,694 436,828 -- 436,828
--------- --------- --------- -------- -------- ---------
Investments and other assets................ 10,887 5,066 (866)(j) 15,087 -- 15,087
--------- --------- --------- -------- -------- ---------
$341,152 $244,231 $ 828 $586,211 $ (50,030) $ 536,181
========= ========= ========= ======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 34,680 $ 21,461 $ -- $ 56,141 $ -- $ 56,141
Accrued liabilities....................... 7,032 4,187 -- 11,219 -- 11,219
--------- --------- --------- -------- -------- ---------
Current liabilities..................... 41,712 25,648 -- 67,360 -- 67,360
Deferred credits and other
liabilities............................... 33,298 31,866 (31,866)(j) 33,298 -- 33,298
Long-term debt.............................. 149,830 52,402 161,598 (k) 363,830 (161,304)(m)(n) 202,526
Stockholders' equity:
Preferred stock........................... -- -- -- -- -- --
Common stock.............................. 125 3 (3)(j) 125 30(n) 155
Additional paid-in capital................ 25,997 100,769 (95,358)(j)(l) 31,408 111,244(n) 142,652
Retained earnings......................... 93,578 33,543 (33,543)(j) 93,578 -- 93,578
Less treasury stock....................... (3,388) -- -- (3,388) -- (3,388)
--------- --------- --------- -------- -------- ---------
Total stockholders' equity......... 116,312 134,315 (128,904) 121,723 111,274 232,997
--------- --------- --------- -------- --------- ---------
$341,152 $244,231 $ 828 $586,211 $(50,030) $ 536,181
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Financial Statements.
22
<PAGE> 24
KCS ENERGY, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The accompanying pro forma financial statements have been prepared to
reflect certain adjustments to the historical consolidated financial statements
of the Company.
Unaudited Pro Forma Statement of Consolidated Income for the Year Ended December
31, 1995:
(a) Adjustments to reflect revenues, cost of sales and other operating
expenses from January 1, 1995, until the dates of the Rocky Mountain
Acquisition and the Michigan Acquisition by the Company, the Sawyer Canyon
and other acquisitions of Medallion, and the Medallion Acquisition by the
Company.
(b) Adjustments to reflect depreciation, depletion and amortization
expense calculated using the future gross revenue method applied to the
adjusted basis of the acquired properties and entities using the purchase
method of accounting.
(c) Adjustment to reflect additional interest expense calculated,
assuming the Company's As Adjusted debt balance at December 31, 1995
($170,529), was outstanding for the entire year, including amortization of
deferred financing cost.
(d) Adjustment to reflect incremental interest expense under the Bank
Credit Facilities ($13,445) to fund the $214,000 cash payment for the
Medallion Acquisition, and to reflect the interest expense savings ($7,297)
a result of the application of the estimated net proceeds of $111,274 from
the Offerings.
(e) Adjustments to the provision for income taxes related to the above
adjustments.
Unaudited Pro Forma Statement of Consolidated Income for the Nine Months ended
September 30, 1996:
(f) Reflects results of operations for the Sawyer Canyon Properties
for the three months ended March 31, 1996, prior to their acquisition by
Medallion on April 1, 1996.
(g) Adjustment to reflect depreciation, depletion and amortization
expense calculated using the future gross revenue method applied to the
adjusted basis of the Medallion Acquisition using the purchase method of
accounting.
(h) Adjustment to reflect incremental interest expense under the Bank
Credit Facilities ($10,084) to fund the $214,000 cash payment for the
Medallion Acquisition, and to reflect the interest expense savings ($5,222)
as a result of the application of the estimated net proceeds of $111,274
from the Offerings.
(i) Adjustment to the provision for income taxes related to the above
adjustments.
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 1996:
(j) Adjustment to (i) eliminate the historical basis of certain assets
and liabilities of Medallion and (ii) reflect the adjusted basis of these
items using the purchase method of accounting. (See detail of the purchase
price and related allocation to assets and liabilities in the table below.)
(k) Adjustment to reflect the elimination of the historical debt of
Medallion of $52,402 and additional debt under the Bank Credit Facilities
of $214,000 for the Medallion Acquisition.
(l) Adjustment to reflect warrants to purchase 435,000 shares of
Common Stock granted in connection with the Medallion Acquisition presented
at estimated fair value ($5,411).
(m) Reflects the application of $50.0 million from cash to reduce
long-term debt.
(n) Adjustment to reflect the application of the estimated net
proceeds of $111,274 from the Offerings (approximately $117,750 in gross
proceeds net of $6,476 in estimated underwriting discount and expenses) to
reduce long-term debt.
The following table summarizes elements of the Medallion Acquisition, which was
accounted for as a purchase transaction of Medallion by the Company as described
in these notes:
<TABLE>
<S> <C>
Consideration:
Cash paid to seller....................................................... $214,000
Common stock warrants..................................................... 5,411
Liabilities Assumed:
Current liabilities....................................................... 30,183
Assets Acquired:
Current assets............................................................ (36,168)
Other assets.............................................................. (4,200)
--------
$209,226
========
</TABLE>
23
<PAGE> 25
(c) Exhibits.
Exhibit No. Exhibits
- ----------- --------
2.1 Stock Purchase Agreement dated November 14, 1996 by and between
the Registrant, InterCoast Energy Company and InterCoast Gas
Services Company.
99.2 Press released dated November 15, 1996.
SIGNATURE
Pursuant to the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Dated: November 15, 1996 KCS ENERGY, INC.
(Registrant)
/s/ HENRY A. JURAND
--------------------------------------
(Signature)
Henry A. Jurand
Vice President, Chief Financial Officer
and Secretary
24
<PAGE> 26
INDEX TO EXHIBITS
Exhibit No. Exhibits
- ----------- --------
2.1 Stock Purchase Agreement dated November 14, 1996 by and between
the Registrant, InterCoast Energy Company and InterCoast Gas
Services Company.
99.2 Press released dated November 15, 1996.
<PAGE> 1
STOCK PURCHASE AGREEMENT
by, between and among
KCS Energy, Inc.,
InterCoast Energy Company,
and
InterCoast Gas Services Company
DATED: November 14, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I. PURCHASE AND SALE OF SHARES . . . . . . . . . . . 1
1.1 Sale and Purchase . . . . . . . . . . . . . . . . 1
1.2 Delivery and Payment. . . . . . . . . . . . . . . 1
1.3 Consideration . . . . . . . . . . . . . . . . . . 2
1.4 Closing Date. . . . . . . . . . . . . . . . . . . 2
1.5 Purchaser's Additional Deliveries . . . . . . . . 3
1.6 Intercompany Payables . . . . . . . . . . . . . . 3
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE
PURCHASER . . . . . . . . . . . . . . . . . . . . 6
2.1 Organization and Standing . . . . . . . . . . . . 6
2.2 Agreement Authorized and Enforceable. . . . . . . 6
2.3 Non-Interference. . . . . . . . . . . . . . . . . 6
2.4 Investigations; Litigation. . . . . . . . . . . . 7
2.5 Finder's and Similar Fees . . . . . . . . . . . . 7
2.6 Financial Ability . . . . . . . . . . . . . . . . 7
2.7 Capitalization. . . . . . . . . . . . . . . . . . 8
2.8 Financial Statements. . . . . . . . . . . . . . . 8
2.9 Disclosure. . . . . . . . . . . . . . . . . . . . 9
2.10 Changes . . . . . . . . . . . . . . . . . . . . . 9
2.11 Laws. . . . . . . . . . . . . . . . . . . . . . . 9
2.12 Certain Changes . . . . . . . . . . . . . . . . . 10
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF THE
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . 10
3.1 Title to Shares . . . . . . . . . . . . . . . . . 10
3.2 Voting Arrangements . . . . . . . . . . . . . . . 10
3.3 Organization and Standing . . . . . . . . . . . . 11
3.4 Capitalization. . . . . . . . . . . . . . . . . . 11
3.5 Subsidiary. . . . . . . . . . . . . . . . . . . . 11
3.6 Assets and Title to Assets. . . . . . . . . . . . 12
(a) Oil and Gas Properties . . . . . . . . . . 12
(b) Investments. . . . . . . . . . . . . . . . 12
(c) Other Assets. . . . . . . . . . . . . . . 13
(d) Definitions. . . . . . . . . . . . . . . . 13
(e) Representations Regarding Oil and Gas
Properties . . . . . . . . . . . . . . . . 18
(f) Representations Respecting Certain
Assets . . . . . . . . . . . . . . . . . . 18
3.7 Financial Statements. . . . . . . . . . . . . . . 19
3.8 Investigations; Litigation. . . . . . . . . . . . 20
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
3.9 Guarantees and Contingent Obligations . . . . . . 20
3.10 No Defaults . . . . . . . . . . . . . . . . . . . 20
3.11 Changes . . . . . . . . . . . . . . . . . . . . . 20
3.12 No Affiliate Farmouts . . . . . . . . . . . . . . 24
3.13 Compliance With Law . . . . . . . . . . . . . . . 24
3.14 Agreement Authorized and Enforceable. . . . . . . 27
3.15 Finder's and Similar Fees . . . . . . . . . . . . 27
3.16 Non-Interference. . . . . . . . . . . . . . . . . 27
3.17 Insurance . . . . . . . . . . . . . . . . . . . . 28
3.18 Compliance with ERISA . . . . . . . . . . . . . . 29
3.19 Oil and Gas Reserves. . . . . . . . . . . . . . . 31
3.20 Contracts . . . . . . . . . . . . . . . . . . . . 32
3.21 Representations, Warranties and Covenants
Regarding Taxes . . . . . . . . . . . . . . . . . 33
3.22 Corporate Records . . . . . . . . . . . . . . . . 36
3.23 Officers and Directors; Bank Accounts;
Powers of Attorney . . . . . . . . . . . . . . . 36
3.24 Labor Matters . . . . . . . . . . . . . . . . . . 36
3.25 Certain Changes . . . . . . . . . . . . . . . . . 37
3.26 Hedging Transactions. . . . . . . . . . . . . . . 37
3.27 Gas Imbalances. . . . . . . . . . . . . . . . . . 37
ARTICLE IV. OBLIGATIONS OF THE SHAREHOLDERS PENDING CLOSING
DATE. . . . . . . . . . . . . . . . . . . . . . . 37
4.1 Ownership of Stock. . . . . . . . . . . . . . . . 37
4.2 Voting Arrangements . . . . . . . . . . . . . . . 38
4.3 Agreements of Shareholders Pending Closing Date . 38
4.4 Notification by Shareholders of Certain Matters . 38
4.5 Preserve Accuracy of Representations
and Warranties . . . . . . . . . . . . . . . . . 39
ARTICLE V. OBLIGATIONS OF THE PURCHASER PENDING CLOSING
DATE. . . . . . . . . . . . . . . . . . . . . . . 39
5.1 Notification by Purchaser of Certain Matters. . . 39
5.2 Preserve Accuracy of Representations and
Warranties . . . . . . . . . . . . . . . . . . . 39
ARTICLE VI. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
PURCHASER . . . . . . . . . . . . . . . . . . . . 40
6.1 Representations and Warranties of the
Shareholders True at Closing Date . . . . . . . . 40
6.2 No Litigation by Non-Parties. . . . . . . . . . . 40
6.3 Resignations. . . . . . . . . . . . . . . . . . . 40
6.4 Tender of the Shares. . . . . . . . . . . . . . . 40
6.5 No Enjoinder. . . . . . . . . . . . . . . . . . . 41
6.6 Investment Suitability and Investment
Representations . . . . . . . . . . . . . . . . . 41
6.7 Corporate Documents . . . . . . . . . . . . . . . 41
6.8 Secretary's Certificate of the Shareholders . . . 41
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
6.9 Non-Foreign Affidavit . . . . . . . . . . . . . . 42
6.10 Secretary's Certificate of the Companies
and Subsidiary . . . . . . . . . . . . . . . . . 42
6.11 Consents, Waivers and Approvals . . . . . . . . . 42
6.12 Guaranty. . . . . . . . . . . . . . . . . . . . . 42
6.13 Other Certificates. . . . . . . . . . . . . . . . 42
6.14 Form and Substance of Shareholders' Actions
and Documents . . . . . . . . . . . . . . . . . . 42
ARTICLE VII. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . 42
7.1 Representations and Warranties of the Purchaser
True at Closing Date. . . . . . . . . . . . . . . 42
7.2 No Litigation by Non-Parties. . . . . . . . . . . 43
7.3 Tender of Purchase Price and Delivery
of Documents . . . . . . . . . . . . . . . . . . 43
7.4 No Enjoinder. . . . . . . . . . . . . . . . . . . 43
7.5 Investment Suitability and Investment
Representations . . . . . . . . . . . . . . . . . 43
7.6 Corporate Documents . . . . . . . . . . . . . . . 43
7.7 Secretary's Certificate . . . . . . . . . . . . . 44
7.8 Form and Substance of Purchaser's Actions
and Documents . . . . . . . . . . . . . . . . . . 44
ARTICLE VIII.TERMINATION AND ABANDONMENT . . . . . . . . . . . 44
8.1 Termination . . . . . . . . . . . . . . . . . . . 44
(a) By Mutual Consent. . . . . . . . . . . . . 44
(b) By the Purchaser or the Shareholders
if Transactions Not Consummated . . . . . 44
(c) By Purchaser if Material Breach
By Shareholders . . . . . . . . . . . . . 44
(d) By Shareholders if Material Breach
by Purchaser . . . . . . . . . . . . . . . 44
(e) By Shareholders or Purchaser Pursuant
to Section 9.2 . . . . . . . . . . . . . . 45
8.2 Accomplishment of Termination . . . . . . . . . . 45
8.3 Effect of Termination . . . . . . . . . . . . . . 45
8.4 Waiver of Conditions. . . . . . . . . . . . . . . 45
ARTICLE IX. ADDITIONAL AGREEMENTS OF THE PURCHASER AND THE
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . 45
9.1 Adjustments for Title Defects . . . . . . . . . . 45
(a) Access to Records and Summaries. . . . . . 45
(b) Notice of Asserted Title Defects . . . . . 46
(c) Notice in Response to Purchaser's Notice . 47
(d) Method of Determination of Defect Amounts. 47
(e) Shareholders' Pre-Closing Election . . . . 48
(f) Pre-Closing Adjustment for Uncured
Title Defects . . . . . . . . . . . . . . 49
(g) Resolution or Cure of Title Defects. . . . 49
(h) Arbitration. . . . . . . . . . . . . . . . 50
(i) Post-Closing Adjustment for Uncured
Title Defects . . . . . . . . . . . . . . 51
9.2 Adjustments for Environmental Matters . . . . . . 52
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
(a) Availability of Data to Purchaser. . . . . 52
(b) Identification of Environmental Matters
Prior to Closing . . . . . . . . . . . . . 53
(c) Election to Terminate. . . . . . . . . . . 55
(d) Definitions. . . . . . . . . . . . . . . . 55
9.3 Tax Matters . . . . . . . . . . . . . . . . . . . 57
(a) Liabilities for Taxes. . . . . . . . . . . 57
(b) Responsibility for Tax Returns . . . . . . 59
(c) Contest Provisions . . . . . . . . . . . . 60
(d) Assistance and Cooperation . . . . . . . . 61
(e) Adjustment to Purchase Price . . . . . . . 62
(f) Definition of Taxes. . . . . . . . . . . . 62
9.4 Change of Name. . . . . . . . . . . . . . . . . . 63
9.5 Retention of Records. . . . . . . . . . . . . . . 63
9.6 Fees and Expenses . . . . . . . . . . . . . . . . 63
9.7 Employee Benefits Plan and Practices. . . . . . . 64
(a) Employee Benefits Generally. . . . . . . . 64
(b) Upstream Affiliate's Tax Qualified Plans . 65
(c) Participation of Continuing Employees
in Purchaser's Tax Qualified Plan . . . . 65
(d) Incentive and Supplemental Deferred
Compensation Plans . . . . . . . . . . . . 66
(e) Welfare Benefit Plans. . . . . . . . . . . 66
(f) Continuation Coverage. . . . . . . . . . . 67
(g) Life Insurance . . . . . . . . . . . . . . 67
(h) Disability Benefits. . . . . . . . . . . . 68
(i) Pre-Closing Long-Term Disability. . . 68
(ii) Post-Closing Long-Term and Short-Term
Disability. . . . . . . . . . . . . . 68
(i) Worker's Compensation. . . . . . . . . . . 68
(j) Severance Pay. . . . . . . . . . . . . . . 68
(k) Certain Employees. . . . . . . . . . . . . 68
(l) Purchaser's Plans. . . . . . . . . . . . . 69
(m) Cooperation. . . . . . . . . . . . . . . . 69
9.8 Guarantees, Letters of Credit and
Similar Instruments . . . . . . . . . . . . . . . 69
(a) Discontinue Activities . . . . . . . . . . 69
(b) Hedging Accounts . . . . . . . . . . . . . 69
9.9 Confidential Nature of Information. . . . . . . . 70
9.10 No Public Announcement. . . . . . . . . . . . . . 70
ARTICLE X. INDEMNIFICATIONS. . . . . . . . . . . . . . . . . 70
10.1 Survival. . . . . . . . . . . . . . . . . . . . . 71
10.2 General Indemnification by the Shareholders . . . 71
10.3 Special Indemnification by the Shareholders . . . 72
10.4 Indemnification by Purchaser. . . . . . . . . . . 72
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C>
10.5 Cooperation with Respect to Third Party Claims. . 73
10.6 Shareholders' Environmental Indemnification . . . 73
10.7 Notice of Claims. . . . . . . . . . . . . . . . . 78
10.8 Exclusive Remedies. . . . . . . . . . . . . . . . 78
ARTICLE XI. MISCELLANEOUS . . . . . . . . . . . . . . . . . . 79
11.1 Entirety. . . . . . . . . . . . . . . . . . . . . 79
11.2 Counterparts. . . . . . . . . . . . . . . . . . . 79
11.3 Notices and Waivers . . . . . . . . . . . . . . . 79
11.4 Definitions, Gender and Certain References. . . . 80
11.5 Successors and Assigns. . . . . . . . . . . . . . 80
11.6 Severability. . . . . . . . . . . . . . . . . . . 80
11.7 Applicable Law. . . . . . . . . . . . . . . . . . 81
11.8 Release . . . . . . . . . . . . . . . . . . . . . 81
11.9 Further Assurances. . . . . . . . . . . . . . . . 81
11.10 Person; Affiliate . . . . . . . . . . . . . . . . 81
11.11 Knowledge . . . . . . . . . . . . . . . . . . . . 82
11.12 Construction. . . . . . . . . . . . . . . . . . . 82
11.13 Disclaimer. . . . . . . . . . . . . . . . . . . . 82
</TABLE>
v
<PAGE> 7
SCHEDULES
- ---------
1.6(b) Intercompany Payables and Equity Investment
3.3 Jurisdictions in Which the Companies are Qualified to do Business
3.5(a) Direct and Indirect Subsidiaries and Other Entities
3.5(b) Jurisdictions in Which Subsidiary is Qualified to do Business
3.6(a) Oil and Gas Properties
3.6(b) Investments
3.6(c) List of Material Tangible Assets of the Companies and Subsidiary
3.7 Certain Accounts Receivable
3.8 Investigations; Litigation
3.9 Certain Guarantees and Contingent Obligations
3.10 Defaults
3.11(e) Sales of Properties
3.11(h) Capital Expenditures
3.11(i) Payments to Affiliates
3.11(l) Certain Costs and Expenses
3.11(q) Third Party Approvals
3.11(r) Real Property Transactions
3.11(s) Debts
3.11(v) Severance Arrangements
3.11(x) Actions Outside Ordinary Course of Business
3.13(a) Environmental Matters
3.13(b) Underground Storage Tanks
3.13(c) Environmental Audit Reports
3.13(f) Governmental Permits
3.16 Non-Interference
3.17 Insurance Coverage
3.18 Employee Benefit Plan Matters
3.18(e) Severance Agreements
3.19 List of Reserve Reports
3.20(a) Affiliate Contracts
3.20(b) Other Contracts
3.21 Income Tax Matters
3.23 Officers and Directors; Bank Accounts; Powers of Attorney
3.24 Employee Matters
3.25 Certain Changes
3.26 Hedging Accounts
3.27 Production Imbalances
9.7(j) Severance Pay
9.8 Guarantees, Letters of Credit and Similar Instruments
vi
<PAGE> 8
EXHIBITS
- --------
A Form of Warrants
B Form of Guaranty of MCC
vii
<PAGE> 9
LOCATIONS OF DEFINITIONS
- ------------------------
AAA 1.6(e)
AFE 3.11(h)
Additional Properties 3.6(d)
Affected Property 9.2(b)
Affiliate 11.10
Agreed Rate 1.6(h)
Agreement Initial Paragraph
Annual Report 2.8
Arbitrable Disputes 9.1(h)(i)
Arbitrator 9.1(h)(i)
Benefits Affiliate 9.7(a)(iii)
Business Day 1.3(a)(ii)
Claim Notice 10.7(a)
Closing 1.4
Closing Date 1.4
Closing Date Statement 1.6(c)
Code 3.7
Company/Companies Recitals
Company or Subsidiary Employee 9.7(e)(i)
Company Property 3.6(d)
Company's Separate Plans 9.7(a)(ii)
Contaminant 9.2(d)
Continuing Employees 9.7(a)(i)
Cure Period 3.6(d)
Defect Amount 3.6(d)
Effective Date 1.6(i)
Encumbrance 3.6(d)
Environmental Claims 10.6(a)
Environmental Encumbrance 9.2(d)
Environmental Law 9.2(d)
Environmental Liabilities 9.2(d)
Environmental Matters 9.2(d)
Equity Investment 1.6(b)
ERISA 3.18
Final Closing Date Statement 1.6(f)
Financial Statements 3.7
GED Recitals
GED Shares Recitals
Governmental Body 3.11(u)
Governmental Permits 3.13(f)(i)
HSR 2.4
Hydrocarbons 3.6(d)
viii
<PAGE> 10
LOCATIONS OF DEFINITIONS (CONTINUED)
- ------------------------------------
ICE Initial Paragraph
Identified Zone 3.6(d)
IGS(DE) Initial Paragraph
IGS(OK) Recitals
IGS(OK) Shares Recitals
Insurance Policies 3.17
Intercompany Payables 1.6(a)
Interim Period 1.6(i)
Investments 3.6(b)
IOG Recitals
IOG Shares Recitals
Lands 3.6(d)
Leases 3.6(d)
Losses 10.2
Marketable Title 3.6(d)
MEC Group 3.21(a)
MEC Selling Group 3.21(a)
MCC 9.7(d)
Most Recent Financial Statements 3.7
Most Recent Purchaser Financial Statements 2.8
NRI 3.6(d)
Oil and Gas Property/Oil and Gas Properties 3.6(d)
Offsite Environmental Liability 9.2(d)
Onsite Environmental Liability 9.2(d)
Other Assets 3.6(f)
Parent 3.11(i)
Parent's Benefit Plans 9.7(a)(i)
Permitted Encumbrances 3.6(d)
Person 11.10
Phase I Environmental Audit 9.2(d)
Plan 3.18
Privileged Information 9.2(a)
Property/Properties 3.6(d)
Proposed Adjustment 1.6(d)(ii)
Purchase Price 1.3(a)
Purchaser Initial Paragraph
Purchaser Agreements 2.2
Purchaser Common Stock 1.3(a)(ii)
Purchaser Financial Statements 2.8
Purchaser Shares 1.3(a)(ii)
Purchaser's Benefit Plans 9.7(a)(i)
Purchaser's S-3 2.7
ix
<PAGE> 11
LOCATIONS OF DEFINITIONS (CONTINUED)
- ------------------------------------
Purchaser's Qualified Pension Benefit Plan 9.7(c)
Quarterly Report 2.8
Reclassification 1.6(a)
Release 9.2(d)
Remedial Action 9.2(d)
Requirements of Laws 3.13(e)
Reserve Reports 3.19
Response Notice 9.1(c)
Section 338(h)(10) Election 9.3(g)
Shareholder/Shareholders Initial Paragraph
Shares Recitals
Significant Properties 3.6(d)
Straddle Year 9.3(a)(iv)
Subsidiary 3.5(a)
Tax, Taxes, Taxable 9.3(f)
Tax Package 9.3(b)(iii)
Tax Proceeding 9.3(c)
Threshold Amount 1.6(b)
Title Defect 3.6(d)
Title Defect Notice 9.1(b)
Title Examination Period 9.1(b)
Title Waiver 9.1(e)
Units 3.6(d)
Upstream Affiliates 9.7(a)(i)
Upstream Affiliate's Qualified Pension Benefit Plans 9.7(b)
Value 3.6(d)
Warrants 1.3(a)(ii)
Wells 3.6(d)
WI 3.6(d)
WSJ 1.6(h)
x
<PAGE> 12
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of November 14, 1996 ("Agreement"), by,
between and among KCS Energy, Inc., a Delaware corporation ("Purchaser"),
InterCoast Energy Company, a Delaware corporation ("ICE"), and InterCoast Gas
Services Company, a Delaware corporation ("IGS(DE)") (ICE and IGS(DE) are
sometimes hereinafter referred to individually as "Shareholder" and together as
"Shareholders").
W I T N E S S E T H:
WHEREAS, ICE is the owner of all of the outstanding capital stock of
InterCoast Oil and Gas Company, a Delaware corporation (formerly named
Medallion Production Company) ("IOG"), consisting solely of 1,000 shares of
common stock, par value $1.00 per share (the "IOG Shares"); and
WHEREAS, IGS(DE) is the owner of all of the outstanding capital stock of
(i) InterCoast Gas Services Company, an Oklahoma corporation ("IGS(OK)"),
consisting solely of 1,000 shares of common stock, par value $1.00 per share
(the "IGS(OK) Shares"), and (ii) GED Energy Services, Inc., a Delaware
corporation ("GED") (IOG, IGS(OK) and GED are sometimes hereinafter referred to
individually as a "Company" and collectively as the "Companies"), consisting
solely of 1,000 shares of common stock, par value $1.00 per share (the "GED
Shares") (the IOG Shares, the IGS(OK) Shares and the GED Shares are sometimes
hereinafter referred to collectively as the "Shares"); and
WHEREAS, Purchaser desires to purchase the IOG Shares from ICE and the
IGS(OK) Shares and GED Shares from IGS(DE), all upon the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements, and subject to the terms and conditions, herein
contained, the parties hereto hereby agree as follows:
ARTICLE I.
PURCHASE AND SALE OF SHARES
1.1 Sale and Purchase. ICE hereby agrees to sell to the Purchaser on the
Closing Date (as defined in Section 1.4) all of the IOG Shares, and the
Purchaser hereby agrees to purchase from ICE and pay for all of the IOG Shares
on the Closing Date. IGS(DE) hereby agrees to sell to the Purchaser on the
Closing Date all of the IGS(OK) Shares and the GED Shares, and the Purchaser
hereby agrees to purchase from IGS(DE) and pay for all of the IGS(OK) Shares
and GED Shares on the Closing Date.
1.2 Delivery and Payment. On the Closing Date and subject to the terms and
conditions hereof, each of the Shareholders shall deliver to the Purchaser one
or more
<PAGE> 13
certificates in good delivery form and duly endorsed for transfer to the
Purchaser, or accompanied by duly executed stock powers, evidencing all of the
Shares. In exchange, the Purchaser shall deliver to the Shareholders the
consideration set forth in Section manner provided in Section 1.3.
1.3 Consideration.
(a) On the Closing Date, the Purchaser shall pay aggregate
consideration (the "Purchase Price") for the Shares, subject to any
adjustments to the Purchase Price made pursuant to Sections 1.6, 9.1 and
9.2, as follows:
(i) The Purchaser shall pay (by wire transfer of immediately
available funds to a bank or banks and to an account or accounts
thereat which the Shareholders shall have specified by written notice
to the Purchaser at least three (3) Business Days prior to the
Closing Date) to the Shareholders $209,415,000, to be allocated
between the Shareholders and in the case of amounts allocated to
IGS(DE) between the amount paid for the IGS(OK) Shares and the GED
Shares as the Shareholders shall have specified by written notice to
the Purchaser at least three (3) Business Days prior to the Closing
Date; and
(ii) The Purchaser shall deliver to the Shareholders warrants
(the "Warrants") substantially in the form of Exhibit A attached
hereto to purchase 435,000 shares ("Purchaser Shares") of common
stock, par value $0.01 per share, of the Purchaser ("Purchaser Common
Stock"), which number of Purchaser Shares and the exercise price
thereof shall be subject to appropriate adjustment in accordance with
the terms of the Warrants if such adjustment would be required by
such terms had such Warrants been issued as of the date hereof, and
which Warrants shall be allocated between the Shareholders and in the
case of amounts allocated to IGS(DE) between the amount paid for the
IGS(OK) Shares and the GED Shares as the Shareholders shall have
specified by written notice to the Purchaser at least three (3)
Business Days prior to the Closing Date.
As used herein, a "Business Day" shall mean a day other than a Saturday,
Sunday or national legal holiday.
(b) Any adjustments to the Purchase Price made pursuant to Sections
1.6, 9.1 and 9.2 shall reduce or increase, as appropriate, the cash
portion of the Purchase Price payable under Section 1.3(a)(i).
1.4 Closing Date. Consummation of the transactions contemplated by this
Agreement (the "Closing") shall take place on December 12, 1996, or on the
earliest date thereafter which is the third (3rd) Business Day following the
concurrence by both the Purchaser and the Shareholders (which concurrence shall
not be unreasonably withheld by any party to this Agreement) that all of the
conditions to the Closing (other than delivery of the Shares and of the
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<PAGE> 14
documents to be delivered at the Closing pursuant hereto and payment of the
Purchase Price) have been satisfied or waived, provided that the parties may
mutually agree in writing to an earlier date (the "Closing Date"). The Closing
shall take place at the offices of counsel for Purchaser's lender in Houston,
Texas, or such other place as the parties hereto shall mutually agree.
1.5 Purchaser's Additional Deliveries. At the Closing, Purchaser shall
deliver to the Shareholders all of the following: (i) the cash portion of the
Purchase Price as provided in Section 1.3(a)(i), and (ii) the Warrants duly
executed by Purchaser.
1.6 Intercompany Payables.
(a) The parties agree that effective immediately prior to the Closing
all intercompany payables (other than those arising from the purchase or
sale of oil or gas) owed by any of the Companies or Subsidiary to ICE or
any of its Affiliates other than any of the Companies or Subsidiary
("Intercompany Payables") shall be reclassified as additional paid-in
capital of the Companies and Subsidiary (the "Reclassification") and that
from and after the Reclassification, neither ICE nor any of such
Affiliates shall have any right to collect such amounts from any of the
Companies or Subsidiary. At Closing, the Shareholders shall deliver to
Purchaser a copy of the resolutions adopted by the Boards of Directors of
ICE and each of such Affiliates to which any Intercompany Payables are
owed, pursuant to which the contribution thereof to the capital of the
Companies or the Subsidiary has been authorized, which copy shall be
certified by the respective secretaries of ICE and such Affiliates of ICE
to be true, correct and in full force and effect as of the Closing.
(b) The Purchase Price is based in part on the assumption that, and
the Shareholders agree for purposes of this Agreement that, the total
equity investment (paid-in capital and retained earnings) in the Companies
and Subsidiary was $98,443,000 as of the close of business on June 30,
1996 (the "Equity Investment"). The Purchase Price is also based in part
on the assumption that the amount of Intercompany Payables (determined as
set forth below) immediately prior to the Reclassification shall be
$91,225,000 (the "Threshold Amount"), which the Shareholders agree for
purposes of this Agreement to be the amount of Intercompany Payables as of
the close of business on June 30, 1996. Schedule 1.6(b) sets forth the
Shareholders' calculation of the Threshold Amount and the Equity
Investment. If the amount of Intercompany Payables immediately prior to
the Reclassification is greater or less than the Threshold Amount, then
the Purchase Price shall be adjusted as set forth below, dollar for
dollar, by the amount of the difference. The amount of Intercompany
Payables immediately prior to the Reclassification shall be determined
consistent with practices used in the preparation of the audited financial
statements of the Companies and Subsidiary as of December 31, 1995, and in
the same manner as the Threshold Amount was determined including, if
applicable, among other things, allocations with respect to general and
administrative expense incurred during the Interim Period solely with
respect to the Companies or the
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<PAGE> 15
Subsidiary, but excluding any amounts for or with respect to interest or
corporate overhead. Notwithstanding the preceding sentence, the amount of
Intercompany Payables immediately prior to the Reclassification (and for
which an adjustment of the Purchase Price shall be made) shall be (i)
determined without taking into account the amount of Federal, state and
local income tax liabilities of the Companies or Subsidiary with respect
to their taxable income during the Interim Period (and which will be borne
by Shareholders pursuant to Section 9.3(a)(i) and Section 9.3(a)(iii)) or
any Federal, state and local income tax benefits or savings with respect
to the activities of the Companies and Subsidiary during the Interim
Period which will accrue to the benefit of the Parent or other members of
the MEC Selling Group as a result of the MEC Selling Group filing a
consolidated, combined or unitary income tax return with the Companies and
Subsidiary for the Interim Period, (ii) debited with any amount paid by
the Companies or Subsidiary to Parent or other member of the MEC Selling
Group to reflect the Federal, state or local income tax of the Companies
and Subsidiary attributable to the Interim Period which will be borne by
Shareholders pursuant to Section 9.3(a)(i) and Section 9.3(a)(iii), (iii)
credited with any amount paid by Parent or other member of the MEC Selling
Group to the Companies or Subsidiary to reflect the Federal, state or
local income tax benefits or savings realized by the MEC Selling Group as
a result of the activities of the Companies and Subsidiary during the
Interim Period and (iv) debited with the amount of any payments made by or
on behalf of the Companies or Subsidiary with respect or relating to the
initial public offering proposed to be made (but subsequently abandoned)
by ICE.
(c) After the Closing, the Shareholders shall prepare or cause to be
prepared a statement of Intercompany Payables as of the time immediately
prior to the Reclassification in reasonable detail (the "Closing Date
Statement"), which the Shareholders shall deliver to Purchaser within 30
days after the Closing Date.
(d) Purchaser shall have the opportunity to review the Closing Date
Statement at Purchaser's expense. Purchaser shall be accorded access for
this purpose on reasonable notice during business hours to all relevant
books and records used in the preparation of the Closing Date Statement.
As promptly as practicable after Purchaser has received the Closing Date
Statement, but in any event no later than 45 days after receipt, Purchaser
shall give the Shareholders a written notice which shall either:
(i) State that Purchaser accepts the Closing Date Statement; or
(ii) Describe in reasonable detail, including nature and amount,
each adjustment (a "Proposed Adjustment") that Purchaser proposes to
make in the Closing Date Statement. If the Shareholders have not
received a notice from Purchaser within the 45-day period, Purchaser
shall be deemed to have accepted the amount of Intercompany Payables
set forth in the Closing Date Statement.
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<PAGE> 16
(e) If Purchaser's notice to the Shareholders includes any Proposed
Adjustment, then the parties shall negotiate in good faith any
disagreement as to the propriety of the Proposed Adjustment. If they have
not resolved all such adjustments within 30 days following the
Shareholders' receipt of Purchaser's notice, then the parties shall
jointly select an independent public accounting firm of national
reputation, other than any accounting firm retained by (i) either of the
parties to prepare or to review the Closing Date Statement or (ii) either
of the parties in connection with the audit of their annual financial
statements, to arbitrate all unresolved Proposed Adjustments. If the
parties cannot agree on an accounting firm to act as arbitrator, they will
use a list of all "Big Six" accounting firms that are not disqualified
from acting as arbitrator, and beginning with the Shareholders, the
Shareholders (acting jointly) and Purchaser shall each consecutively and
repeatedly strike one name from the list until only one name remains,
which shall be the arbitrator. The arbitration shall be conducted in
Houston, Texas, and shall be limited in scope solely to the unresolved
Proposed Adjustments set forth in Purchaser's notice. The arbitrator shall
follow the procedures of the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA"), but the arbitration shall not be
administered by the AAA. The parties shall direct the arbitrator to act
expeditiously to resolve all unresolved Proposed Adjustments. The
arbitrator's decision shall be final, binding and conclusive on the
parties and anyone else having an interest in the determination. The
arbitrator's fees and expenses for conducting the arbitration shall be
shared equally by the Shareholders, on the one hand, and Purchaser, on the
other.
(f) The "Final Closing Date Statement" shall be either:
(i) The Closing Date Statement, if accepted or deemed to have
been accepted by Purchaser in accordance with Section 1.6(d); or
(ii) The Closing Date Statement adjusted to reflect the
resolution of any Proposed Adjustments, whether by agreement of the
parties, or pursuant to the arbitrator's determination in accordance
with Section 1.6(e).
(g) Within ten days after the determination of the Final Closing Date
Statement, the Shareholders shall pay to Purchaser the difference, if
positive, between the Threshold Amount and the amount of Intercompany
Payables on the Final Closing Date Statement or Purchaser shall pay to the
Shareholders the difference, if positive, between the amount of
Intercompany Payables on the Final Closing Date Statement and the
Threshold Amount, in either event with interest at the Agreed Rate (as
hereinafter defined) on the amount of the payment for the period from the
Closing Date to the date of payment.
(h) The "Agreed Rate," as used herein, means that annual rate of
interest from time to time published in the daily issues of The Wall
Street Journal (the "WSJ") as the Prime Rate under the column presently
headed "Money Rates" as that base rate of
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<PAGE> 17
interest for corporate loans currently being charged by certain of the
largest commercial banks in the United States of America. If the WSJ
should cease to publish an annual rate of interest as the Prime Rate, the
Agreed Rate for purposes of this Agreement shall be that variable annual
rate of interest readily ascertainable from reported or published sources
established by others independent of the party paying such interest which
such party shall in good faith determine to be the principal equivalent of
that rate of interest formerly published in the WSJ as the Prime Rate.
(i) The "Interim Period" as used herein means that period beginning
at 12:01 a.m. on July 1, 1996 (the "Effective Date") and ending at and
including the Closing Date.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Representations and Warranties of the Purchaser. The Purchaser hereby
represents, warrants and agrees to and with the Shareholders as follows:
2.1 Organization and Standing. The Purchaser is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Delaware. Purchaser has full requisite corporate power and authority to
carry on its business as it is now being conducted and to own and operate the
properties now owned and operated by it.
2.2 Agreement Authorized and Enforceable. The execution and delivery of
this Agreement and the Warrants (collectively, the "Purchaser Agreements") have
been duly authorized by the board of directors of the Purchaser; the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all necessary corporate action on the part of the
Purchaser; and this Agreement is, and each of the other Purchaser Agreements
when executed and delivered will be, the legal, valid and binding obligation of
the Purchaser enforceable (subject to normal equitable principles) against the
Purchaser in accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency, fraudulent conveyance, reorganization, debtor
relief, or similar laws affecting the rights of creditors generally.
2.3 Non-Interference. The execution, delivery and performance of this
Agreement and the other Purchaser Agreements and the transactions contemplated
hereby and thereby will not conflict with or result in a violation or breach of
any term or provision of, nor constitute a default, an event of default or an
event creating rights of acceleration, termination or cancellation or a loss of
rights under, or result in the creation or imposition of any encumbrance upon
any of the assets or properties of the Purchaser under (i) the certificate of
incorporation or bylaws of the Purchaser, (ii) any note, instrument, lease,
license, franchise, permit, indenture, mortgage, deed of trust, credit
agreement or other authorization, right, restriction, obligation, contract or
agreement of any nature whatsoever to which the Purchaser is a party or
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<PAGE> 18
by which it or its properties are bound, other than such conflicts, violations,
breaches, defaults and events as would not (x) result in any material adverse
change in the assets, business, financial condition or results of operations of
Purchaser, or (y) interfere with the ability of the parties to consummate the
transactions contemplated hereby and to comply with all of the terms and
provisions of the Purchaser Agreements, (iii) any judgment, order, award or
decree of any foreign, federal, Indian, state, local or other court or tribunal
or any award in any arbitration proceeding to which Purchaser is a party or any
of the assets or properties of Purchaser is subject or by which Purchaser is
bound, or (iv) any Requirements of Laws affecting the Purchaser or its assets
or properties. Except as otherwise contemplated by Section 2.2, Purchaser is
not required or obligated to make any declaration, filing or registration with,
or to obtain any approvals, authorizations, consents, licenses or permits from,
third Persons, including, without limitation, courts or governmental
authorities, in order to consummate the transactions contemplated by the
Purchaser Agreements.
2.4 Investigations; Litigation. No investigation or review by any
governmental entity with respect to Purchaser and any of the transactions
contemplated by the Purchaser Agreements is pending or, to the best of
Purchaser's knowledge, threatened, and no governmental entity has indicated to
Purchaser an intention to conduct the same. There is no claim, action, suit or
administrative, arbitration, or other proceeding pending against or affecting
Purchaser, or to the best of Purchaser's knowledge, pending against or
affecting any Affiliate of Purchaser, or to the best of Purchaser's knowledge,
threatened against or affecting Purchaser or any Affiliate of Purchaser, at law
or in equity, or before any court or any foreign, federal, Indian, state,
local, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, with respect to any of the transactions contemplated
by the Purchaser Agreements or which may have a material adverse effect on the
assets, business, financial condition or results of operations of Purchaser. A
filing pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, 15 U.S.C. Section 18a ("HSR"), is not required before consummation of
the transactions contemplated hereby; and the Board of Directors of Purchaser
has made, or will have made prior to the Closing, a good-faith determination
within 60 days prior to the Closing that the fair market value in accordance
with 16 C.F.R. Section 801.10(2) (1995) of the assets of the Companies and
Subsidiary that are not reserves of oil, natural gas, shale or tar sands, or
rights to reserves of oil, natural gas, shale or tar sands and associated
exploration or production assets, as defined by 16 C.F.R. Section 802.3(a) -
(c), is less than $15 million.
2.5 Finder's and Similar Fees. None of Purchaser, any of its Affiliates
nor any Person acting on behalf of any of them has paid or become obligated to
pay any fee or commission to any broker, finder or intermediary for or on
account of the transactions contemplated by this Agreement.
2.6 Financial Ability. Purchaser has sufficient cash, commitments from
responsible lending institutions, available lines of credit or other sources of
immediately available cash, to enable it to deliver the cash portion of the
Purchase Price at the Closing and to take such other actions as may be required
by it to consummate the transactions contemplated hereby.
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<PAGE> 19
2.7 Capitalization. The authorized capital stock of Purchaser is
50,000,000 shares of common stock, par value $0.01 per share, of which
11,587,372 shares (and no more) were issued and outstanding as of September 30,
1996, and of which 524,500 shares were reserved for issuance; and 5,000,000
shares of preferred stock, par value $0.01 per share, none of which are issued
and outstanding. Other than in connection with the transactions contemplated by
this Agreement or by Purchaser's Registration Statement on Form S-3 (filed with
the Securities and Exchange Commission on November 5, 1996) ("Purchaser's S-3")
or pursuant to plans described in the Purchaser Financial Statements, (i)
Purchaser does not have outstanding any agreement, arrangement, subscription,
option, warrant, call or similar commitment to issue or sell any shares of its
capital stock, (ii) Purchaser has not issued any shares of its capital stock
since September 30, 1996, and (iii) there is not outstanding any agreement of
Purchaser to issue or sell any shares of its capital stock or any securities or
obligations convertible into its capital stock. The Warrants have been duly
authorized and when executed and delivered in accordance with this Agreement
will be validly issued and will not be issued in violation of the preemptive or
similar rights of any Person. The Purchaser Shares have been duly authorized
and reserved for issuance and, when issued upon exercise of the Warrants, will
be validly issued, fully paid and nonassessable, and will not be issued in
violation of the preemptive or similar rights of any Person.
2.8 Financial Statements. Purchaser has delivered to the Shareholders the
following financial statements (the "Purchaser Financial Statements"): (i)
consolidated statements of financial position, results of operations, changes
in stockholders' equity and cash flows of Purchaser as of and for the years
ended December 31, 1993, 1994 and 1995, included in its annual report on Form
10-K for its fiscal year ended December 31, 1995 ("Annual Report"); and (ii)
consolidated statements of financial position, results of operations, changes
in stockholders' equity and cash flows of Purchaser as of and for the six
months ended June 30, 1996, included in its quarterly report on Form 10-Q for
its fiscal quarter ended June 30, 1996 ("Quarterly Report") (the "Most Recent
Purchaser Financial Statements"). The Purchaser Financial Statements were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved; provided, however, that the
Most Recent Purchaser Financial Statements are subject to normal year-end
adjustments and lack footnotes and other presentation items. The Purchaser
Financial Statements fairly present the financial position of the Purchaser as
of the respective dates thereof and the results of its operations, cash flows
and changes in financial position for the periods then ended. As of the
respective dates of the balance sheets included in the Purchaser Financial
Statements, Purchaser had no liabilities or obligations, accrued, absolute,
contingent or otherwise, which were required in accordance with generally
accepted accounting principles consistently applied to be set forth in such
balance sheets (excluding as to the Most Recent Purchaser Financial Statements
matters which would be required by generally accepted accounting principles to
be disclosed in notes thereto) other than those reflected or reserved against
in such balance sheets. Purchaser has no liabilities or obligations, accrued,
absolute, contingent or otherwise, which are required, in accordance with
generally accepted accounting principles consistently applied, to be set forth
in its balance sheet or notes thereto, other than those (x) reflected or
reserved against in the balance sheet included in the Most Recent Purchaser
Financial Statements (excluding matters which
8
<PAGE> 20
would be required to be disclosed in notes thereto) or (y) incurred in the
ordinary course of business since June 30, 1996. Purchaser shall promptly
provide to the Shareholders a copy of its quarterly report on Form 10-Q for the
fiscal quarter ended September 30, 1996, once the same has been filed with the
Securities and Exchange Commission.
2.9 Disclosure. The Annual Report and the Quarterly Report did not, as of
their respective dates, contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading.
2.10 Changes. From June 30, 1996 to the Closing Date and other than as
contemplated by this Agreement or except as consented to by each Shareholder in
writing (which consent will not unreasonably be withheld):
(a) Maintenance of Present Business. Purchaser has operated and shall
continue to operate its business in the ordinary and usual course and in
substantially the manner conducted at June 30, 1996.
(b) Capitalization Change. Except for issuances of stock pursuant to
plans or arrangements described in the Purchaser Financial Statements, as
contemplated by this Agreement or by Purchaser's S-3, there has not been
nor shall there be any change in the number of shares or classes of the
capital stock of Purchaser or in the number of shares of its capital stock
reserved for issuance. Purchaser has not authorized or entered into and
shall not authorize or enter into any merger, consolidation,
reorganization, dissolution or other action, agreement or transaction
which would change its corporate or capital structure. Purchaser has not
taken any action that would have adjusted, and shall not take any action
that would adjust, the number of Purchaser Shares covered by the Warrants
or the exercise price thereof, had the same been issued from and after
June 30, 1996.
(c) No Amendment to Certificate of Incorporation. Purchaser has not
amended, and shall not amend, its certificate of incorporation or bylaws.
(d) Other Changes. Purchaser has not engaged and shall not engage in
any transactions which in the aggregate would materially and adversely
alter its assets, business, financial condition or results of operations.
Where the future tense is used in covenants contained in the foregoing
subsections of this Section 2.10, such covenants refer to the time period
beginning on the date hereof and ending on the Closing Date.
2.11 Laws. Purchaser is not in violation of or default with respect to,
nor has it been notified of any alleged violation of or alleged default with
respect to, any applicable federal, state, local, or foreign statutes, rules,
regulations, orders, ordinances, codes, licenses,
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<PAGE> 21
franchises, permits, authorizations and concessions, or any injunction, order,
judgment, ruling, writ or decree of any court or any governmental commission,
board, bureau, agency, or instrumentality nor is Purchaser delinquent with
respect to any report required to be filed with any governmental commission,
board, bureau, agency, or instrumentality, except for any violations, defaults
or delinquencies which in the aggregate do not and are not reasonably expected
to have a material adverse effect upon the assets, business, financial
condition or results of operations of Purchaser.
2.12 Certain Changes. Other than as a result of (a) transactions
contemplated by this Agreement, (b) events or conditions which are of a general
or industry-wide nature, or (c) events or conditions pertaining to Purchaser
which have been disclosed prior to the Closing Date in writing by Purchaser to,
and waived in writing by, the Shareholders, since June 30, 1996, there has not
been:
(a) Property Damage. Any damage, destruction, or loss to the business
or properties of Purchaser (whether or not covered by insurance)
materially and adversely affecting the assets, business, financial
condition, or results of operations of Purchaser or the value thereof; or
(b) Other Changes. Any other event, circumstance or condition
particularly pertaining to and materially and adversely affecting the
assets, business, financial condition or results of operations of
Purchaser or its capital stock.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
Representations and Warranties of the Shareholders. Each Shareholder
represents, warrants, and agrees to and with Purchaser as follows:
3.1 Title to Shares. ICE has good and marketable title to the IOG Shares,
free and clear of any Encumbrance, and has the absolute and unrestricted right,
power, authority and capacity to sell and transfer the IOG Shares to Purchaser
in the manner provided herein, free and clear of any Encumbrance other than
that created by this Agreement. IGS(DE) has good and marketable title to the
IGS(OK) Shares and the GED Shares, free and clear of any Encumbrance other than
that created by this Agreement, and has the absolute and unrestricted right,
power, authority and capacity to sell and transfer the IGS(OK) Shares and the
GED Shares to Purchaser in the manner provided herein, free and clear of any
Encumbrance.
3.2 Voting Arrangements. None of the Shares is subject to any voting
trust, voting agreement or other agreement or understanding with respect to the
voting thereof, nor is any proxy in existence with respect to any of the
Shares.
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<PAGE> 22
3.3 Organization and Standing. Each of the Shareholders, IOG and GED is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware. IGS(OK) is a corporation duly organized, validly
existing, and in good standing under the laws of the State of Oklahoma. Each of
the Companies has full requisite corporate power and authority to carry on its
business as it is now being conducted and to own and operate the properties now
owned and operated by it, and is duly qualified or licensed to do business and
is in good standing as a foreign corporation authorized to do business in all
jurisdictions in which the character of the properties owned or the nature of
the business conducted by it makes such qualification or licensing necessary
except in such jurisdictions where the failure to be so qualified or in good
standing would not have a material adverse effect on the assets, business,
financial condition or results of operations of the Companies and Subsidiary
taken as a whole. The jurisdictions in which each of the Companies is qualified
or licensed to do business are set forth on Schedule 3.3.
3.4 Capitalization. The authorized capital stock of each of IOG and GED is
1,000 shares of common stock, par value $1.00 per share, of which, with respect
to each of these Companies, 1,000 shares (and no more) are issued and
outstanding. The authorized capital stock of IGS(OK) is 50,000 shares of common
stock, par value $1.00 per share, of which 1,000 shares (and no more) are
issued and outstanding. Other than the transactions contemplated by this
Agreement, none of the Companies has outstanding any agreement, arrangement,
subscription, option, warrant, call or similar commitment to purchase, issue,
redeem or sell any shares of its capital stock, and there is not outstanding
any agreement of any of them to purchase, issue or sell any shares of its
capital stock or any securities or obligations convertible into its capital
stock. The Shares have been duly authorized and validly issued, are fully paid
and nonassessable and were not issued in violation of the preemptive or similar
rights of any Person. Each of the IOG Shares, the IGS(OK) Shares and the GED
Shares constitute all of the issued and outstanding capital stock of IOG,
IGS(OK) and GED, respectively.
3.5 Subsidiary.
(a) Except as set forth in Schedule 3.5(a), there neither is nor has
ever been a direct or indirect subsidiary corporation of any of the
Companies other than Medallion California Properties Company, a Texas
corporation ("Subsidiary"). Except as set forth in Schedule 3.5(a), and
except for IOG's equity interest in Subsidiary and other than the
investments described in Section 3.6(b) hereto, none of the Companies or
Subsidiary owns or has owned, directly or indirectly, any capital stock,
equity interest or other ownership interest in any corporation,
partnership, association, joint venture (exclusive of any joint operating
agreement, participation agreement, development drilling agreement,
exploratory agreement, program agreement or tax partnership), limited
liability company or other entity, and there are no agreements,
arrangements, options, warrants, calls, rights or commitments of any
character by which any of the Companies or Subsidiary is or was bound
relating to the issuance, sale, purchase or redemption of any such
ownership interest.
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(b) Subsidiary's authorized capital stock consists of 1,000 shares of
common stock, par value $1.00 per share, of which 1,000 (and no more) are
issued and outstanding. IOG owns 100% of the authorized, issued and
outstanding capital stock of Subsidiary. None of the shares of
Subsidiary's capital stock is subject to any voting trust, voting
agreement or other agreement or understanding with respect to the voting
thereof, nor is any proxy in existence with respect to any of such shares.
All outstanding shares of Subsidiary's capital stock are duly authorized,
validly issued, fully paid and nonassessable and were not issued in
violation of the preemptive or similar rights of any Person, and IOG has
valid and marketable title thereto free and clear of any Encumbrance.
Subsidiary is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Texas and has full requisite
corporate power and authority to own its property and carry on its
business as it is now being conducted and is duly qualified or licensed to
do business and is in good standing as a foreign corporation authorized to
do business in all jurisdictions in which the character of the properties
owned or the nature of the business conducted by it makes such
qualification or licensing necessary except in such jurisdictions where
the failure to be so qualified or in good standing would not have a
material adverse effect on the assets, business, financial condition or
results of operations of the Companies and Subsidiary taken as a whole.
The jurisdictions in which Subsidiary is qualified or licensed to do
business are set forth in Schedule 3.5(b). There exist no outstanding
options, subscriptions, warrants, calls, or similar commitments to
purchase, issue or sell, or to convert any securities or obligations into,
any of the authorized or issued stock of Subsidiary or any securities or
obligations convertible into such capital stock.
3.6 Assets and Title to Assets.
(a) Oil and Gas Properties. Schedule 3.6(a) sets forth the Value of
each Oil and Gas Property and for each Well, Lease or Unit, as applicable,
the corresponding NRI, WI and Identified Zone (with respect to Properties
having a Reserve Category equal to 2, 3 or 4).
(b) Investments. The only material investments of the Companies and
Subsidiary ("Investments") are described as follows:
(i) IOG's 100% ownership of the outstanding capital stock of
Subsidiary;
(ii) IOG's 45% interest in the Battle Creek Gas Gathering
System, a Montana joint venture; and
(iii)IOG's 14% capital contributing limited partnership interest
in Merit Energy Partners, L.P., a Delaware limited partnership.
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Schedule 3.6(b) lists the Purchaser's and the Shareholders' agreed upon
value of Investments (ii) and (iii) above.
(c) Other Assets. Section 3.6(c) lists the material tangible assets
of the Companies and Subsidiary other than as referred to or described in
the preceding Sections 3.6(a) and 3.6(b) and other than assets classified
as current assets under generally accepted accounting principles.
(d) Definitions. The following terms, as used in this Agreement, have
the indicated meanings:
"Additional Properties" means the Oil and Gas Properties so
designated on Schedule 3.6(a) by a notation of "A" in the "Property
Type" column.
"Company Property" means all of the assets owned, leased or
operated by the Companies and the Subsidiary including, but not
limited to, those referred to or described in the preceding Sections
3.6(a), 3.6(b) and 3.6(c), and also including any and all real
property (including, but not limited to, surface estates and mineral
fees and leaseholds), plant, building, facility, structure,
underground storage tank, personal property, equipment, unit, or
other asset owned, leased or operated by either of the Companies or
the Subsidiary as of the date of execution of this Agreement.
"Cure Period" means with respect to each Title Defect asserted
by Purchaser, a one hundred twenty (120) day period of time beginning
on the date of Purchaser's receipt of the Shareholders' Response
Notice applicable thereto.
"Defect Amount" means the amount attributable to each Title
Defect, determined in accordance with Section 9.1(d).
"Encumbrance" means any lien (statutory or other), claim,
charge, security interest, mortgage, deed of trust, pledge,
hypothecation, assignment, conditional sale or other title retention
agreement, preference, priority or other security agreement or
preferential arrangement of any kind or nature, and any easement,
encroachment, covenant, restriction, contract right, right of way,
defect in or cloud on title or other encumbrance of any kind.
"Hydrocarbons" means oil, condensate, natural gas, natural gas
liquids, casinghead gas and liquid and gaseous hydrocarbons and any
combination or mixture of the foregoing.
"Identified Zone" means either (a) with respect to each Property
set forth in Schedule 3.6(a) that has a Reserve Category equal to
"1," the portion(s) of formation(s) in such Property that were
producing as of the Effective Date, as
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evidenced by the completion or recompletion report(s) on file with
the applicable regulatory agency for the Well(s) constituting such
Property, but only insofar as such portion(s) may be produced from
the Well(s) constituting such Property, or (b) with respect to each
Property set forth in Schedule 3.6(a) that has a Reserve Category
equal to "2, 3 or 4," the portion(s) of the formation(s) identified
in Schedule 3.6 "Top of Zone" and "Bottom of Zone," but only insofar
as such portion(s) may be produced from the Well(s) constituting such
Property.
"Lands" means the lands covered by the Leases and lands included
within the boundaries of the Units.
"Leases" means the oil and gas leases, oil, gas and mineral
leases, royalties, overriding royalties, production payments, net
profits interests, fee minerals, and other oil, gas or mineral
interests (together with contractual rights, options or interests in
and to any of the foregoing) owned by any of the Companies or the
Subsidiary.
"Marketable Title" means, with respect to the Companies' and the
Subsidiary's respective ownership of Leases or Lands attributable to
an Oil and Gas Property (insofar as such Leases and Lands are
attributable to the Identified Zone for such Property), a record
title or title established by orders of state regulatory agencies
that (a) entitles one of the Companies or the Subsidiary to receive,
throughout the life of such Property, not less than the NRI for such
Property shown in Schedule 3.6(a), except for (i) decreases in
connection with those operations to which any of the Companies or the
Subsidiary elects either before Closing with Purchaser's consent if
required hereunder or after Closing to become a non-consenting
co-owner and (ii) decreases resulting from such Property where any of
the Companies or the Subsidiary is obligated to allow others to make
up past underproduction (excluding, however, any underproduction
outstanding on the Closing Date that is attributable to or results
from an imbalance that is not described on Schedule 3.27); (b)
obligates one of the Companies or the Subsidiary to bear, throughout
the life of a Property (and the plugging, abandonment and salvage
thereof), no greater WI for such Property than the WI shown therefor
in Schedule 3.6(a), except increases in such WI that result in at
least a proportionate increase in such Company's or the Subsidiary's
NRI for such Property (including, without limitation, increases
resulting from co-owner non-consents) and increases that result from
contribution requirements with respect to defaulting co-owners, and
(c) is free and clear of all Encumbrances except for Permitted
Encumbrances. "Marketable Title" means with respect to any Oil and
Gas Property which does not consist of interests in Leases or Lands,
a record title that (x) is free from reasonable doubt as to all
matters of law and fact such that a reasonably prudent person,
engaged in the ownership, development and operation of oil and gas
properties or assets (including gas
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plants, treating and measurement facilities, and pipelines), with
knowledge of all the facts and appreciation of their legal
significance, would be willing to accept title to such property
without a reduction in the Value of such property, (y) obligates any
of the Companies or the Subsidiary to bear no more than its
proportionate share of the costs of operating or developing such
Property, taking into account the ownership interests held by third
parties, if any, in such Property, and (z) is free and clear of all
Encumbrances, except for Permitted Encumbrances.
"NRI" means a fractional or percentage interest in and to all
Hydrocarbons produced from or allocated to an Oil and Gas Property
(insofar as such Hydrocarbons are attributable to the Identified Zone
for such Property) after deduction of all lessors' royalties,
overriding royalties, and other burdens and payments out of
production that burden such fractional or percentage interest in such
property.
"Oil and Gas Properties" or "Properties" means collectively, and
"Oil and Gas Property" or "Property," means individually, all those
oil, gas and mineral properties or interests described in Schedule
3.6(a), including Wells, Leases, Units and other interests in
Hydrocarbons prior to severance, and the other assets described in
Schedule 3.6(a).
"Permitted Encumbrances" means:
(i) liens for taxes and other governmental charges and
assessments arising in the ordinary course of business which are not
yet due and payable, or, if due, are being challenged in good faith
by appropriate proceedings and as to which adequate reserves have
been established and are or will be reflected on a Company's or
Subsidiary's next regularly prepared monthly financial statement
after the incurrence thereof to the extent required by generally
accepted accounting principles consistently applied;
(ii) liens of landlords and liens of carriers, warehousemen,
mechanics and materialmen and other like liens arising in the
ordinary course of business for sums not yet due and payable, and
that will be paid or discharged in the ordinary course of business
or, if delinquent, that are being contested in good faith in the
ordinary course of business and as to which adequate reserves have
been established and are or will be reflected on a Company's or
Subsidiary's next regularly prepared monthly financial statement
after the incurrence thereof to the extent required by generally
accepted accounting principles consistently applied;
(iii)Encumbrances under operating agreements, unitization and
pooling arrangements and Hydrocarbon sales contracts that secure
payment of amounts not yet due and payable, or, if due, that are
being contested in good faith in the
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ordinary course of business, which are of a nature and scope
customary in connection with oil and gas drilling and producing
operations and as to which adequate reserves have been established
and are or will be reflected on a Company's or Subsidiary's next
regularly prepared monthly financial statement after the incurrence
thereof to the extent required by generally accepted accounting
principles consistently applied;
(iv) easements, rights-of-way, servitudes, permits, surface use
limitations, surface leases, and other rights in respect of surface
operations that do not materially interfere with any of the
Companies' or the Subsidiary's operations of the portion of the
Company Property burdened thereby;
(v) rights reserved to or vested in any Governmental Body to
control or regulate any of the Oil and Gas Properties and all
applicable laws, rules, regulations, and orders of such authorities
so long as the same do not (i) decrease any of the Companies' or the
Subsidiary's NRI below the NRI shown in Schedule 3.6(a), or increase
any of the Companies' or the Subsidiary's WI above the WI shown in
Schedule 3.6(a), without at least a proportionate increase in such
Company's or the Subsidiary's NRI, or (ii) create any liens in
respect of such Properties;
(vi) any Title Defects that Purchaser may have expressly waived
in writing or which are deemed to have been waived under Section 9.1;
(vii) the terms and conditions of contracts and agreements
relating to the Lands and the Oil and Gas Properties, including,
without limitation, exploration agreements, gas sales contracts,
processing agreements, farmins, farmouts, operating agreements,
right-of-way agreements, participation agreements, development
drilling agreements, exploratory agreements, program agreements,
agreements affecting operating rights and division orders, to the
extent such terms and conditions (i) only with respect to an
Identified Zone, do not decrease any of the Companies' or the
Subsidiary's NRI below the NRI shown in Schedule 3.6(a), or increase
any of the Companies' or the Subsidiary's WI above the WI shown in
Schedule 3.6(a), without at least a proportionate increase in such
Company's or the Subsidiary's NRI, (ii) are normal and customary in
the oil and gas industry, and (iii) do not conflict with any other
portion of this definition of Permitted Encumbrances;
(viii) royalties, overriding royalties, net profits interests,
production payments, reversionary interests, and similar interests
that do not decrease any of the Companies' or the Subsidiary's NRI
below the NRI shown in Schedule 3.6(a), or increase any of the
Companies' or the Subsidiary's WI above the WI shown in Schedule
3.6(a), without at least a proportionate increase in such Company's
or the Subsidiary's NRI;
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(ix) conventional rights of reassignment requiring any of the
Companies or Subsidiary to reassign interests in any Oil and Gas
Property to a third party, or to give notice to the holders of such
rights, prior to surrendering, abandoning or releasing an Oil and Gas
Property;
(x) calls on production exercisable only at prices substantially
equivalent to then-current fair market value;
(xi) consents to assignment and preferential rights to purchase
any or all of the Company Properties other than any such consents or
rights which (i) are applicable to the transactions contemplated by
this Agreement or (ii) were applicable to a previous transaction
involving the transfer of all or any portion of the Company Property
but were not complied with at the time of the consummation of such
transaction;
(xii) all rights to consent by, required notices to, filings
with, or other action by Governmental Bodies in connection with Oil
and Gas Properties;
(xiii) any cloud on title with respect to or resulting from the
property litigation matters disclosed on Schedule 3.8; and
(xiv) all other Encumbrances which individually or in the
aggregate (a) are not such as to interfere materially with the
operation, value or use of an Oil and Gas Property, (b) do not
prevent one of the Companies or Subsidiary from receiving the full
share and amount of revenues or proceeds of production attributable
to such Oil and Gas Property, (c) do not decrease any of the
Companies' or Subsidiary's NRI below the NRI shown in Schedule
3.6(a), and (d) do not increase any of the Companies' or Subsidiary's
WI above the WI shown in Schedule 3.6(a), without at least a
proportionate increase in such Company's or Subsidiary's NRI.
"Significant Properties" means the Oil and Gas Properties so
designated on Schedule 3.6(a) by a notation of "S" in the "Property
Type" column.
"Title Defect" means any Encumbrance, irregularity of title or
other condition that causes any of the Companies' or the Subsidiary's
title to one or more of the Oil and Gas Properties (or any portion
thereof), or the Hydrocarbons attributable thereto, to be less than
Marketable Title. Notwithstanding the foregoing, no Title Defect will
exist as to any Oil and Gas Property unless the aggregate Defect
Amounts affecting such Oil and Gas Property exceed $2,500. If a Title
Defect exists pursuant to the preceding sentence, the Defect Amount
for such Title Defect shall include the entirety of such Defect
Amount, whether below or above such threshold amount. In the event a
Well constituting a Property set forth in Schedule 3.6(a) that has a
Reserve Category equal to "4" is
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drilled after the Effective Date, but is not completed as a well
capable of producing in commercial quantities, neither the failure to
so complete such Well nor any loss of interests in Leases or Lands on
account thereof shall either constitute a Title Defect for purposes
of this Agreement or cause a Company's or the Subsidiary's title
thereto to be less than Marketable Title for purposes of this
Agreement.
"Units" means all units and pooled or communitized areas
designated as units in Schedule 3.6(a).
"Value" means the value allocated to a Property, as set forth in
Schedule 3.6(a).
"Wells" means wells (including projected future wells) for the
production of Hydrocarbons which are listed in Schedule 3.6(a) or
which are (or are projected to be) located on the Lands.
"WI" means a fraction or percentage of the costs and expenses
associated with the maintenance, exploration, development, operation
and abandonment of an Oil and Gas Property.
(e) Representations Regarding Oil and Gas Properties.
(i) The Companies and the Subsidiary own Marketable Title to
each of their respective Oil and Gas Properties set forth in Schedule
3.6(a).
(ii) The Companies and the Subsidiary have conducted such title
investigations and have acquired their respective interests in the
Oil and Gas Properties in such manner they believe is customary in
the oil and gas industry.
(iii) Except as disclosed in Schedule 3.10, the Companies and the
Subsidiary have complied in all material respects with the terms of
their respective Leases and other agreements and contracts relating
to the Oil and Gas Properties, and except as set forth in Schedule
3.8, no claim adverse to the rights of any of the Companies or the
Subsidiary as lessee or assignee under any of such Leases or
questioning their respective rights to the continued possession of
the Lands has been asserted by any party.
(f) Representations Respecting Certain Assets. Each of the Companies
has good and marketable title to all of its material tangible assets
(other than leased assets, the Investments and the Oil and Gas Properties)
including, without limitation, the assets referred to in Section 3.6(c)
(collectively, the "Other Assets"), to the extent necessary to carry on
their businesses, free and clear of any Encumbrances except Permitted
Encumbrances and except such as do not (i) interfere with the use made and
proposed
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<PAGE> 30
to be made of the Other Assets by the Companies and the Subsidiary, and
(ii) adversely affect the value of the assets of the Companies and the
Subsidiary taken as a whole, and all equipment and fixtures used in
connection with Hydrocarbon operations, the gas marketing business or the
gathering and transport of Hydrocarbons included in the Other Assets are
in good operating condition, normal wear and tear excepted. Except as set
forth in this Section 3.6(f), the Shareholders make no representations or
warranties respecting title to or the condition of the Other Assets. The
investments described in Section 3.6(b)(ii) and 3.6(b)(iii) are owned by
the Company named therein as the owner thereof, free and clear of any
Encumbrance other than Permitted Encumbrances or as may be set forth in
the agreements relating thereto. Complete and correct copies of the
partnership (joint venture) agreement of Battle Creek Gas Gathering System
and the limited partnership agreement of Merit Energy Partners, L.P. have
been furnished to Purchaser. No claim has been asserted against the
Company which is the owner of either of such investments (i) disputing the
ownership thereof or the percentage ownership thereof reflected in Section
3.6(b)(ii) and 3.6(b)(iii), and each such owner is not in default in any
material respect of any of its obligations relating to such investments.
3.7 Financial Statements. Shareholders have delivered to Purchaser the
following (the "Financial Statements"): (i) audited combined statements of
financial position, results of operations, changes in stockholder's equity and
cash flows as of and for the years ended December 31, 1993, 1994 and 1995, for
the Companies and Subsidiary for each of such years and (ii) unaudited combined
statements of financial position, results of operations, changes in
stockholder's equity and cash flows as of and for the six months ended June 30,
1996, for the Companies and Subsidiary (the "Most Recent Financial
Statements"). The Financial Statements (including the notes thereto) were
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved; provided, however, that the
Most Recent Financial Statements are subject to normal year-end adjustments and
lack footnotes and other presentation items. The Financial Statements fairly
present the financial position of the Companies and Subsidiary as of the
respective dates thereof and the results of their operations, cash flows and
changes in financial position for the periods then ended. Shareholders will
provide to Purchaser unaudited combined statements of, results of operations
and cash flows for the nine months ended September 30, 1995 and 1996, an
unaudited combined statement of changes in stockholders' equity for the nine
months ended September 30, 1996 and an unaudited combined balance sheet as of
September 30, 1996 of the Companies and Subsidiary as soon as they become
available but no later than November 15, 1996. In addition to providing
consolidated financial statements of the Companies and Subsidiary for the
September 30, 1996 periods, Shareholders will use reasonable efforts to
cooperate with and assist the Purchaser in the preparation of such financial
statements of the Companies as may be necessary in connection with preparation
of a report on Form 8-K (as promulgated under the Securities Exchange Act of
1934, as amended) with respect to the transaction contemplated hereby. None of
the Companies or Subsidiary has any liabilities or obligations, accrued,
absolute, contingent or otherwise, which are required, in accordance with
generally accepted accounting principles consistently applied, to be set forth
in the balance sheets included in the Financial Statements, other than those
(x) reflected, disclosed or reserved against in such balance sheets, (y)
liabilities
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and obligations that have been incurred in the ordinary course of business
since June 30, 1996 or (z) Taxes which are to be borne by Shareholders pursuant
to Section 9.3(a). All accounts receivable of the Companies and Subsidiary as
of June 30, 1996 or created after such date have been paid in full or are
reasonably expected to be paid in the ordinary course of business except for
the items of questionable collectibility listed in Schedule 3.7 for which
adequate reserves have been established as required by generally accepted
accounting principles consistently applied. In no event shall any of the
Companies or Subsidiary accrue prior to or as of the Closing Date any
liabilities associated with the election contemplated by this Agreement to be
made under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended
(the "Code").
3.8 Investigations; Litigation. Except as disclosed in Schedule 3.8, and
assuming inapplicability of HSR in reliance on Purchaser's representation and
warranty in the last sentence in Section 2.4, (i) no investigation or review by
any governmental entity with respect to any of the Companies or Subsidiary or
concerning any of the transactions contemplated by this Agreement is pending
or, to Shareholders' knowledge, threatened, nor has any governmental entity
indicated to any of the Companies or Subsidiary an intention to conduct the
same, and (ii) there are no claims, actions, suits or administrative,
arbitration or other proceedings pending or, to Shareholders' knowledge,
threatened against or affecting any of the Companies or Subsidiary at law or in
equity, or before any court or any foreign, federal, Indian, state, local,
municipal or other governmental department, commission, board, bureau, agency
or instrumentality with respect to the transactions contemplated by this
Agreement or which, if adversely determined, could reasonably be expected to
result in one or more losses to the Companies and the Subsidiary exceeding
$500,000 in the aggregate.
3.9 Guarantees and Contingent Obligations. Except as disclosed on Schedule
3.9, neither any of the Companies nor Subsidiary will on the Closing Date be a
guarantor, surety, co-maker or other obligor with respect to the debt or
liability of any other Person.
3.10 No Defaults. Except as disclosed on Schedule 3.10, there is no
existing material default on the part of any of the Companies or Subsidiary or,
to Shareholders' knowledge, any other party under any material obligation,
lease, contract, plan or other arrangement to which the Companies or Subsidiary
is a party or by which any of them is bound. To Shareholders' knowledge, there
is no existing event or circumstance which with notice or lapse of time would
give rise to a material default on the part of any of the Companies or
Subsidiary or any other party under any material obligation, lease, contract,
plan or other arrangement to which the Companies or Subsidiary is a party or by
which any of them is bound.
3.11 Changes. From June 30, 1996 to the Closing Date and other than as
contemplated by this Agreement or except as consented to by Purchaser in
writing (which consent will not unreasonably be withheld):
(a) Maintenance of Present Business. The Companies and Subsidiary
have (a) operated and shall continue to operate their respective
businesses in the ordinary and usual course and in substantially the
manner conducted at June 30, 1996, (b) used and
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<PAGE> 32
shall continue to use reasonable efforts to preserve intact their present
business organization, and (c) used reasonable efforts to preserve and
shall continue to use reasonable efforts to preserve their relationships
with customers and others having dealings with them. In addition, GED and
IGS(OK) have conducted and shall conduct their gas marketing businesses
and have entered into and performed and shall enter into and perform
agreements for the purchase, resale and transportation of Hydrocarbons
(including financial instruments relating thereto which qualify under
generally accepted accounting principles for accounting treatment as a
hedge) in a manner consistent with past practices and in the ordinary
course of GED's and IGS(OK)'s businesses.
(b) Operation of Properties. To the knowledge of Shareholders, the
Properties have been operated and shall continue to be operated in a
reasonably prudent manner and in accordance with good oilfield practices.
(c) Maintenance of Properties. The Companies and Subsidiary have
maintained and shall continue to maintain all of their respective Oil and
Gas Properties and Other Assets in customary repair, order and condition,
normal wear and tear excepted, if and to the extent that any of the
Companies or Subsidiary operate or have direct control over such
properties and assets. To Shareholders' knowledge, with respect to Oil and
Gas Properties and Other Assets that are not operated or directly
controlled by any of the Companies or Subsidiary, such properties and
assets have been maintained and shall continue to be maintained in
customary repair, order and condition, normal wear and tear excepted.
(d) Maintenance of Books and Records. The Companies and Subsidiary
have maintained and shall continue to maintain their respective books of
account and records in the usual, regular and ordinary manner, in
accordance with generally accepted accounting principles applied on a
consistent basis.
(e) Sales of Properties. Except for (i) Permitted Encumbrances, (ii)
as set forth in Schedule 3.11(e), and (iii) sales of produced Hydrocarbons
in the ordinary course of business, neither any of the Companies nor
Subsidiary has sold, exchanged, disposed of, or encumbered or shall sell,
exchange, dispose of, or encumber, any of their respective Oil and Gas
Properties, Investments or material Other Assets.
(f) Prohibition of Certain Employment Contracts. Except as otherwise
disclosed pursuant to Section 3.20, neither any of the Companies nor
Subsidiary has entered into or shall enter into any contracts or
arrangements of employment which cover a period beyond the Closing Date
and under which any of the Companies or Subsidiary has any obligation
after the consummation of the transactions contemplated hereby.
(g) Prohibition of Certain Loans. Except as otherwise disclosed
pursuant to Section 3.20, neither any of the Companies nor Subsidiary has
incurred or created or shall incur or create any indebtedness for borrowed
money (including, without limitation,
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any guaranty thereof) or, except in the ordinary course of business, any
other indebtedness for any purpose.
(h) Prohibition of Certain Commitments. Except (i) in connection with
operations necessary to deal with an emergency situation where there
exists potential harm to or loss of life or property, (ii) as set forth in
Schedule 3.11(h) or (iii) as contemplated by the Reserve Reports (as
hereinafter defined), neither any of the Companies nor Subsidiary has
entered or shall enter into commitments of a capital expenditure nature
for amounts over $50,000 (net to the Companies' and Subsidiary's interest)
for any one authority for expenditure ("AFE") (Purchaser's written consent
shall be deemed to have been obtained as to any requested AFE which is not
rejected in writing by the Purchaser within five Business Days of actual
receipt of notice thereof by the Purchaser).
(i) Dividends, Payments and Benefits. Except as set forth in Schedule
3.11(i), (a) none of the Companies has declared, set aside, or paid or
shall declare, set aside, or pay any dividend or other distribution in
respect of its capital stock and (b) neither any of the Companies nor
Subsidiary has redeemed, repurchased or acquired or caused to occur or
shall redeem, repurchase or acquire or cause to occur any direct or
indirect redemption, repurchase or any other acquisition of any stock by
any of the Companies or Subsidiary (payments by any of the Companies or
Subsidiaries to Shareholders or any of their Affiliates other than the
Companies and Subsidiary in the ordinary course of business consistent
with past practice as reflected in the Financial Statements with respect
to the purchase or sale of oil and gas, and any payments which reduce or
affect Intercompany Payables, such as tax payments or payments with
respect to any insurance or group employee benefit programs sponsored by
MidAmerican Energy Company ("Parent") and administered in a manner
consistent with past practice, shall not be deemed payments or
distributions for purposes of this Section 3.11(i)). Except as set forth
in Schedule 3.11(i) or as contemplated by this Agreement, neither any of
the Companies nor Subsidiary has made or shall make any payment to, or has
conferred or shall confer any benefit upon, either of the Shareholders or
their Affiliates.
(j) Capitalization Change. There has not been nor shall there be any
change in the number of shares or classes of the capital stock of any of
the Companies or Subsidiary or in the number of shares of the capital
stock reserved for issuance. Neither any of the Companies nor Subsidiary
has authorized or entered into or shall authorize or enter into any
merger, consolidation, reorganization, dissolution or other action,
agreement or transaction which would change its corporate or capital
structure.
(k) Amendments to Contracts. Except as disclosed pursuant to Section
3.20 or in Schedule 3.20(a) or 3.20(b), neither any of the Companies nor
Subsidiary has amended or modified or shall amend or modify any of its
material contracts and agreements in any material respect.
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(l) Costs and Expenses. Except as set forth in Schedule 3.11(l) or in
the Reserve Reports, neither any of the Companies nor Subsidiary has
incurred or shall incur any costs and expenses except normal and usual
expenses in the ordinary course of business. The Companies and Subsidiary
have paid and shall continue to pay in full when due in the ordinary
course of business all taxes, rentals, royalties and operating and other
costs and expenses attributable to the Properties to the extent they are
obligated to do so.
(m) Compensation. Neither any of the Companies nor Subsidiary has
granted or shall grant any increase in the compensation payable or to
become payable to its employees other than increases disclosed to
Purchaser in writing prior to the date of this Agreement or those
expressly agreed to by the Purchaser in writing. Neither any of the
Companies nor Subsidiary has paid or shall pay any bonus to any of its
employees except as disclosed to Purchaser in writing prior to the date of
this Agreement.
(n) Other Changes. Neither any of the Companies nor Subsidiary has
engaged or shall engage in any transactions which in the aggregate would
materially and adversely alter the assets, business, financial condition
or results of operations of the Companies and Subsidiary taken as a whole.
(o) Waiver of Rights. Neither any of the Companies nor Subsidiary has
waived or shall waive any material rights except as set forth on Schedule
3.11(h) or as to non-consent elections made in the ordinary course of
business consistent with past practice relating to the Oil and Gas
Properties.
(p) No Amendment to Certificate of Incorporation. Neither any of the
Companies nor Subsidiary has amended or shall amend its certificate or
articles of incorporation or bylaws.
(q) Third Party Approval. Except as set forth in Schedule 3.11(q),
neither any of the Companies nor Subsidiary has entered into or shall
enter into any contract which requires the consent or approval of any
third party to consummate the transactions contemplated by this Agreement.
(r) Real Property. Except as set forth in Schedule 3.11(r), neither
any of the Companies nor Subsidiary has entered into or shall enter into
any contract for the purchase, lease or other occupancy of real property,
or has exercised or shall exercise any option to purchase real property or
any option to extend a lease of real property except in the ordinary
course of business.
(s) Debts. Except as set forth in Schedule 3.11(s), neither any of
the Companies nor Subsidiary has cancelled or shall cancel any debts owed
to or claims held by any Company or Subsidiary which exceed $5,000
individually or $100,000 in the aggregate.
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(t) Settlements. Neither any of the Companies nor Subsidiary has
entered into or shall enter into settlements of any pending or threatened
litigation which requires the Companies and Subsidiary taken as a whole to
expend more than $50,000 or surrender Company Property valued in excess of
$50,000 in the aggregate.
(u) Governmental Decree or Fine. Neither any of the Companies nor
Subsidiary has consented or shall consent to the entry of any decree or
order by any foreign, federal, Indian, state, local or other governmental
authority or regulatory body ("Governmental Body") which requires the
payment of, or has paid or shall pay, fines and penalties of more than
$25,000 in the aggregate.
(v) Severance. Except as set forth on Schedule 3.11(v), neither any
of the Companies nor Subsidiary has made or shall make any accrual or
arrangement for or announcement, award or payment of bonuses or special
compensation of any kind or any severance or termination pay to any
present or former officer, employee or agent of any Company or Subsidiary.
(w) Entry into Commodity Futures. Neither the Companies nor the
Subsidiary has entered into or will enter into any future, hedge, swap,
collar, put, call, floor, cap, option or other similar contract which is
not considered a hedge under generally accepted accounting principles.
(x) General. Except as set forth on Schedule 3.11(x) or any other
Schedule hereto, neither any of the Companies nor Subsidiary has taken any
action outside of the ordinary course of business.
Where the future tense is used in covenants contained in the foregoing
subsections of this Section 3.11, such covenants refer to the time period
beginning on the date hereof and ending on the Closing Date.
3.12 No Affiliate Farmouts. Other than the Purchase and Sale Agreement
dated April 12, 1996, between IOG and InterCoast Global Management, Inc. and
the transactions contemplated thereby, neither any of the Companies nor
Subsidiary is a party to any farmout, farmin or similar agreement with any
Affiliate of any of the Companies or Subsidiary nor does any of the Companies
or Subsidiary have any understandings or arrangements to similar effect.
3.13 Compliance With Law.
(a) Environmental Matters. Except as disclosed on Schedule 3.13(a):
(i) the operations of the Companies and the Subsidiary comply in
all material respects with all applicable Environmental Laws, the
Companies and the Subsidiary have obtained those permits, licenses or
approvals required by
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Environmental Laws, and each is in material compliance with such
permits, licenses or approvals;
(ii) since January 1, 1994, neither the Companies nor the
Subsidiary have received any claims or written inquiry or notice from
any Governmental Body or other third party alleging that either the
Companies or the Subsidiary is not now, or in the past has not been,
in compliance with any then-applicable Environmental Laws;
(iii) since January 1, 1994, neither the Companies nor the
Subsidiary have received any written notice or claim to the effect
that they are or may be liable to any Person or Governmental Body for
Remedial Action as a result of a Release of a Contaminant, and to the
knowledge of Shareholders, no such actions are threatened;
(iv) no Environmental Encumbrance has attached to any Company
Property;
(v) to the knowledge of Shareholders, neither the Companies nor
the Subsidiary have received notice of any past or present events,
conditions, circumstances, activities, practices, incidents or
actions which relate to either of the Companies or the Subsidiary or
any Company Property, and (i) which are reasonably likely to
interfere with or prevent continued compliance with any Environmental
Laws, or (ii) which are reasonably likely to give rise to any
Environmental Liability;
(vi) to the knowledge of Shareholders, neither the Companies nor
the Subsidiary have caused or allowed a Release of any Contaminant
on, in, about, or from any Company Property in a manner (i) that is
other than as allowed by Environmental Laws or (ii) so as to give
rise to any Environmental Liabilities;
(vii) to the knowledge of Shareholders, there are no facts,
events or conditions relating to any Company Property, or any
operations of any of the Companies or the Subsidiary that give rise
to any Environmental Liabilities;
(viii) to the knowledge of Shareholders, neither the Companies
nor the Subsidiary have caused or allowed Contaminants to migrate
from any Company Property upon or beneath any other properties,
except as permitted by Environmental Laws, or caused or allowed
Contaminants to migrate from other properties onto or beneath any
Company Property, except as permitted by Environmental Laws;
(ix) to the knowledge of Shareholders, neither the Companies nor
the Subsidiary have generated, treated, processed, stored, or handled
Contaminants
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<PAGE> 37
(or transported, disposed, or arranged for disposal, reclamation,
recycling, or sale of Contaminants from any Company Property to other
properties) other than as allowed by Environmental Laws;
(x) to the knowledge of Shareholders, neither the Companies nor
the Subsidiary have generated, treated, processed, stored, or handled
Contaminants (or transported, disposed, or arranged for disposal,
reclamation, recycling, or sale of Contaminants from any Company
Property) under circumstances that give rise to Environmental
Liabilities;
(xi) to the knowledge of Shareholders, the Companies and the
Subsidiary have not, either expressly or by operation of law, assumed
or undertaken any Environmental Liability of any other Person;
(xii) Schedule 3.13(a) lists all material Governmental Permits
held by the Companies and the Subsidiary under any Environmental
Laws;
(b) To the knowledge of Shareholders, Schedule 3.13(b) lists all
underground storage tanks that exist under any Company Property;
(c) Schedule 3.13(c) lists all environmental audit reports (or other
reports, or other documentation of studies, relating to any investigation
of any Environmental Matters or any potential or actual Environmental
Liabilities) prepared by, for or with respect to either of the Companies
or the Subsidiary since January 1, 1993; and
(d) Neither the Companies nor the Subsidiary is subject to any
ongoing obligation under any consent order, consent judgment, consent
decree, court or administrative order, decree, or judgment issued by any
Governmental Body or court regarding any Environmental Matter or
pertaining to any claim under OSHA.
(e) No Violation of Laws. Except as set forth in Schedules 3.10,
3.13(a) and 3.13(f), neither any of the Companies nor Subsidiary is in
violation of or default with respect to, nor has any of them been notified
of any alleged violation of or alleged default with respect to, (i) any
existing applicable federal, Indian, state, local, or foreign laws,
statutes, rules, regulations, orders, ordinances, codes, licenses,
franchises, permits, authorizations and concessions, (ii) any injunction,
order, judgment, ruling, writ or decree of any Governmental Body or (iii)
common law, including, in each case, any such requirements of laws
pertaining to electrical, building, zoning, subdivision, land use,
environmental, or occupational safety and health requirements ((i), (ii)
and (iii) are collectively referred to herein as "Requirements of Laws")
nor are any of the Companies or Subsidiary delinquent with respect to any
report required to be filed with any governmental commission, board,
bureau, agency, or instrumentality, except for any violations, defaults or
delinquencies which in the aggregate do not and are not reasonably
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expected to have a material adverse effect upon the assets, business,
financial condition or results of operations of the Companies and
Subsidiary taken as a whole.
(f) Governmental Permits.
(i) Except as set forth on Schedule 3.13(f), each of the
Companies and the Subsidiary owns, holds or possesses all material
licenses, franchises, permits, privileges, immunities, concessions,
approvals and other authorizations from all Governmental Bodies which
are necessary to entitle each of them to own or lease, operate and
use its assets and to carry on and conduct its business substantially
as currently conducted (collectively, "Governmental Permits").
Schedule 3.13(f) lists all previously held Governmental Permits which
have expired and are being renewed or reissued by the Companies or
the Subsidiary and all applications for new permits which are pending
before a Governmental Body, the failure to have renewed or reissued
would have a material adverse effect on the Property affected
thereby.
(ii) Each of the Companies and the Subsidiary has fulfilled and
performed its respective obligations under each of the Governmental
Permits, and no event has occurred or condition or state of facts
exists which constitutes or, after notice or lapse of time or both,
would constitute a breach or default under any such Governmental
Permit or which permits or, after notice or lapse of time or both,
would permit revocation or termination of any such Governmental
Permit, and which would have a material adverse effect on the
Property affected thereby.
3.14 Agreement Authorized and Enforceable. The execution and delivery of
this Agreement have been duly authorized by the board of directors and sole
shareholder of each of the Shareholders; the consummation of the transactions
contemplated hereby has been duly and validly authorized by all necessary
corporate action on the part of each of the Shareholders; and this Agreement is
the legal, valid and binding obligation of the Shareholders enforceable
(subject to normal equitable principles) against the Shareholders in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, debtor relief, or similar
laws affecting the rights of creditors generally.
3.15 Finder's and Similar Fees. None of the Shareholders, the Companies,
Subsidiary, any of their Affiliates or any Person acting on behalf of any of
them has paid or become obligated to pay any fee or commission to any broker,
finder or intermediary for or on account of the transactions contemplated by
this Agreement other than to Dillon, Read & Co. Inc., whose fees and expenses,
to the extent payable, shall be paid by the Shareholders.
3.16 Non-Interference. The execution, delivery and performance of this
Agreement and the transactions contemplated hereby will not conflict with or
result in a violation or breach of any term or provision of, nor constitute a
default, an event of default or an event creating
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<PAGE> 39
rights of acceleration, termination or cancellation or a loss of rights under,
or result in the creation or imposition of any encumbrance upon any of the
assets or properties of any of the Shareholders, the Companies or Subsidiary
under (i) the certificate of incorporation or bylaws of any of the
Shareholders, the Companies or Subsidiary, (ii) except as disclosed on Schedule
3.16, any note, instrument, lease, license, franchise, permit, indenture,
mortgage, deed of trust, credit agreement or other authorization, right,
restriction, obligation, contract or agreement of any nature whatsoever to
which any of them is a party or by which any of them or their properties are
bound other than such conflicts, violations, breaches and defaults as would not
(x) result in any material adverse change in the assets, business, financial
condition or results of operations of the Companies and Subsidiary taken as a
whole, or (y) interfere with the ability of the parties to consummate the
transactions contemplated hereby, (iii) any judgment, order, award or decree of
any foreign, federal, Indian, state, local or other court or tribunal or any
award in any arbitration proceeding to which any of the Shareholders, the
Companies or Subsidiary is a party or any of the respective assets or
properties of any of the Shareholders, the Companies or Subsidiary is subject
or by which any of the Shareholders, the Companies or Subsidiary is bound, or
(iv) any Requirements of Laws affecting any of the Shareholders, the Companies
or Subsidiary or their respective assets or properties, assuming
inapplicability of HSR in reliance on Purchaser's representation and warranty
in the last sentence of Section 2.4. Except as otherwise contemplated by
Section 3.14, and subject to the assumption set forth in the prior sentence,
none of the Companies or the Shareholders is required or obligated to make any
declaration, filing or registration with, or to obtain any approvals, consents,
licenses or permits from, third Persons, including, without limitation, courts
or governmental authorities, in order to consummate the transactions
contemplated by this Agreement.
3.17 Insurance. The Companies and Subsidiary have in effect and shall
maintain in effect until the Closing Date the insurance coverage described on
Schedule 3.17 or substantially similar insurance coverage (the "Insurance
Policies"). Such insurance coverage is with reputable insurers and, in respect
of amounts, types and risks insured, is that which the Companies and Subsidiary
believe is customary with businesses of a similar nature and size in accordance
with good business practice, including insurance against loss or damage from
hazards and risks to the Person, rights and properties of others (including
employees of the Companies or Subsidiary), and insurance against loss or damage
to motor vehicles and real property of the Companies or Subsidiary. All of the
Insurance Policies are in full force and effect.
3.18 Compliance with ERISA. Except as listed in Schedule 3.18, none of the
Companies nor Subsidiary maintains, sponsors, or participates in or is required
to make contributions to any pension, profit sharing, thrift or other
retirement plan, employee stock ownership plan, deferred compensation, stock
ownership, stock purchase, performance share, bonus or other incentive plan,
severance plan, health or group insurance plan, death benefit plan, disability
benefit plan, welfare plan, or other similar plan, agreement, policy or
understanding, whether or not such plan is intended to be qualified under
Section 401(a) of the Code, including without limitation any employee benefit
plan within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") (each such plan, agreement, policy
or understanding individually, a "Plan"). The Shareholders have made available
to the
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<PAGE> 40
Purchaser true and complete copies of (i) each Plan and any trust agreement
and/or group annuity contract relating to such Plan, (ii) summary plan
description and any summary of material modifications of each Plan (if any such
summary is required), (iii) the three annual reports on Form 5500 most recently
filed with the IRS with respect to each Plan (if any such report was required),
(iv) the most recent IRS determination letter requested for each Plan intended
to meet the requirements of Section 401(a) of the Code, (v) the most recent
actuarial report for each Plan for which an actuarial report is required and
(vi) all related communications with respect to each Plan for the last three
consecutive years prior to the Closing Date with the IRS or U.S. Department of
Labor relating to Plan qualification, filing of required forms or audits.
(a) Prohibited Transactions. None of the Companies nor Subsidiary has
engaged in a transaction in connection with which any of the Companies or
Subsidiary could be subject to (either directly or indirectly) a liability
for either a civil penalty assessed pursuant to Section 502(i) or (l) of
ERISA or a tax imposed by Section 4975 of the Code.
(b) Plan Termination; Liabilities. There has been no termination or
partial termination of any Plan that would give rise to a liability to the
Pension Benefit Guaranty Corporation on the part of any of the Companies
or Subsidiary.
(c) Accumulated Funding Deficiency. Full payment has been made of all
amounts which are required by law, collective bargaining or other
agreement, or under the terms of each Plan to have been paid as
contributions to such Plan for all periods through the Closing Date
including a pro rata share of contributions due for the current plan year
which will have been made by such Closing Date or provided for by adequate
reserves by the Companies and Subsidiary, and no accumulated funding
deficiency (as defined in Section 302 of ERISA and Section 412 of the
Code), whether or not waived, or "liquidity shortfall" (as defined in
Section 412(m)(5) of the Code) exists with respect to any Plan.
(d) Relationship of Benefits to Pension Plan Assets. The present
value of all benefits (whether or not vested) under each of the Plans that
are described in Section 3(2) of ERISA does not exceed the current fair
market value of the assets of each such Plan allocable to such accrued
benefits. For purposes of the representations in this Section 3.18(d), the
assumptions prescribed by the Pension Benefit Guaranty Corporation for
valuing plan assets or liabilities upon plan termination shall be applied
and the term "benefits" shall include the value of all benefits, rights
and features protected under Section 411(d)(6) of the Code or its
successors and any ancillary benefits (including disability, shutdown,
early retirement and welfare benefits) provided under any such Plan and
all "benefit liabilities" as defined in Section 4001(a)(16) of ERISA.
(e) Execution of Agreements. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement will not
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involve any transaction which is subject to the prohibitions of Section
406 of ERISA or in connection with which a tax could be imposed pursuant
to Section 4975 of the Code, and except for agreements identified in
Schedule 3.18(e) or as expressly provided for in this Agreement, none of
the Companies nor the Subsidiary is a party to any agreement which (i)
requires any such organization to make any bonus or severance payment to
any of its officers or employees solely by reason of the change of control
of the Companies effected by the sale of the IOG Shares, IGS(OK) Shares or
GED Shares or (ii) requires it to make a payment to any of its officers or
employees that, to the knowledge of the Shareholders, may be an "excess
parachute payment" to a "disqualified individual", as such terms are
defined in Section 280G of the Code.
(f) Multiemployer Plans. None of the Companies nor Subsidiary ever
has had an obligation to contribute to a Multiemployer Plan, as such term
is defined in ERISA.
(g) Fiduciary and Other Liability. There have been no acts, failures
to act, omissions, transactions or pending issues involving a Plan or the
assets thereof which could result in imposition on any of the Companies or
Subsidiary (whether direct or indirect) of damages or liability in actions
brought under Section 502 of ERISA which might reasonably be expected to
subject the Companies and Subsidiary to the payment of any penalty,
interest, tax or other obligation that could adversely affect the value of
the assets and business of any of the Companies or Subsidiary. The
Companies and the Subsidiary are in full compliance with state law
requirements for worker's compensation coverage and existing insurance
contracts are, and as of the Closing will be, fully operative and in
effect. No claim or action for damages or liability for occupational
illness or injury to any employee of any of the Companies or Subsidiary
(based on intentional infliction of injury or otherwise) that would not be
covered by the insurance contracts described in the next preceding
sentence has been filed and the Companies and Subsidiary have no knowledge
of circumstances that would give rise to any such claim against any of the
Companies or the Subsidiary.
(h) Compliance with Reporting Requirements and Other Applicable Law.
Each Plan is in compliance with all applicable reporting, disclosure and
other requirements of ERISA, the Code and other applicable law as they
relate to such Plan, including but not limited to timely filing all
required Forms 5500 (or equivalent annual report) for such Plan.
(i) No Retiree Plans. Except as provided in Schedule 3.18, none of
the Companies or the Subsidiary provides post-retirement medical, health,
disability or death protection coverage or contributes to or maintains any
Plan which provides for medical, health, disability or death benefit
coverage following termination of employment by any present or former
officer, director or employee except as is required by Section 4980B(f) of
the Code or other applicable statute, nor has it made any representations,
agreements, covenants or commitments to provide that coverage.
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(j) Plan Amendment and Termination. Except as disclosed in Schedule
3.18, each such Plan (including any such plan covering retirees or other
former employees) may be amended or terminated without material liability
(with respect to benefits) to any of the Companies or Subsidiary on or at
any time after the consummation of the transactions contemplated by this
Agreement without contravening the terms of such plan, or any law or
agreement that pertains to any of the Companies or Subsidiary.
(k) Controlled Group Liabilities. None of the Companies or the
Subsidiary has or will have any material liability or obligation for
taxes, penalties, contributions, losses, claims, damages, judgments,
settlement costs, expenses, costs, or any other liability or liabilities
of any nature whatsoever arising out of or in any manner relating to any
Plan, (including but not limited to employee benefit plans such as foreign
plans which are not subject to ERISA), that has been, or is, contributed
to by any entity, whether or not incorporated, which is deemed to be under
common control (as defined in Section 414 of the Code), with any of the
Companies or the Subsidiary.
3.19 Oil and Gas Reserves. The Shareholders, IOG and Subsidiary have
furnished the Purchaser estimates of IOG's and Subsidiary's proved oil and gas
reserves as of the dates of the reports described in Schedule 3.19
(collectively, "Reserve Reports"). To Shareholders' knowledge, the information
contained in the Reserve Reports regarding the Properties was reasonable at
such dates and did not contain materially untrue statements of fact or omit to
state material facts which if completely and accurately stated would have had a
net effect upon the estimated net recoverable quantities of oil and gas
reflected in the Reserve Reports sufficient to materially and adversely affect
the assets, business, financial condition or results of operations of the
Companies and Subsidiary taken as a whole. All lease operating expenses
outlined in the Reserve Reports were based upon good faith estimates of such
expenses and are not materially inconsistent with the Companies' and the
Subsidiary's currently existing related contractual obligations and to the
Companies' and the Subsidiary's knowledge, currently existing Requirements of
Laws. The historical Hydrocarbon production information relating to the
Properties listed in the Reserve Reports which was provided by the
Shareholders, the Companies, the Subsidiary and Netherland, Sewell and
Associates, Inc. (and not by other third Persons) to Ryder Scott Company and
used in connection with such company's preparation of evaluations of the Oil
and Gas Properties on behalf of the Purchaser is, insofar as such information
relates to a specific Property, attributable solely to the Identified Zone for
such Property.
3.20 Contracts.
(a) Set forth on Schedule 3.20(a) is a description of each contract,
agreement, lease or similar arrangement to which Parent or any Affiliate
of Parent is a party and which evidences an obligation of Parent or any
Affiliate of Parent to guaranty or otherwise provide collateral or support
for any agreements or obligations of any of the Companies or Subsidiary.
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(b) Except for those contracts, agreements, leases or similar
arrangements identified in Schedule 3.20(b) and matters expressly
permitted by this Agreement, including Permitted Encumbrances, neither any
of the Companies nor Subsidiary is a party to or bound by any contract,
agreement, lease or similar arrangement, other than those cancelable on no
more than 30 days' notice without penalty, which (a) includes any
agreement relating to individuals who are employed by (or who serve as
consultants or independent contractors to) any of the Companies or
Subsidiary, including any employment agreements, collective bargaining
agreements, severance agreements or agreements to acquire (or to receive
an assignment of) an interest in any Company property; (b) is with respect
to any property, real or personal, whether as landlord, tenant, licensor
or licensee other than Leases and leases involving annual payments of less
than $10,000 and entered into in the ordinary course of business; (c) is
made other than in the ordinary course of business for the purchase of
materials or supplies or for the performance of services and has a term of
more than 60 days from the date of this Agreement; (d) is made in the
ordinary course of business for the purchase of materials or supplies or
for the performance of services over a period of more than one year from
the date of this Agreement; (e) involves an option to purchase or sell any
real or personal property (other than Leases and farmouts with respect to
an oil and gas property) other than those entered into in the ordinary
course of business and involving a purchase price of less than $25,000 and
those entered into in connection with the Companies' gas marketing
business in the ordinary course of business for the purchase or sale of
produced Hydrocarbons; (f) is an indenture, mortgage, note, debenture,
guaranty, security agreement or other debt instrument or agreement for
borrowed money; (g) involves consulting or other similar contracts; (h) is
with either of the Shareholders or any Affiliate of the Shareholders
(except for contracts that involve no parties other than the Companies and
Subsidiary) and (I) which will survive the Closing or (II) will not
survive the Closing and the loss of which would have a material adverse
effect on the assets, business, financial condition or results of
operations of any of the Companies or Subsidiary or would otherwise
materially and adversely affect a significant segment of any of the
Companies' or Subsidiary's business; (i) is an agreement for the sale or
purchase of any Hydrocarbons, except those sales or purchase agreements
which by the terms of such agreement expire within six months or can be
terminated by the Companies or Subsidiary upon no more than six months'
notice without penalty; (j) requires expenditures or provides for receipts
with respect to Oil and Gas Properties which are not Significant
Properties of $50,000 or more in any calendar year, excluding (I)
contracts or agreements creating interests in the Oil and Gas Properties,
(II) joint operating agreements, (III) unitization or pooling agreements,
and (IV) participation, joint venture, partnership, farmout, farmin or
similar agreements; (k) is a futures, hedge, swap, collar, put, call,
floor, cap, option or other contract which is intended to benefit from or
reduce or eliminate the risk of fluctuations in the price of commodities
(including Hydrocarbons) or securities, exclusive of those entered into in
the ordinary course of business in connection with GED's and IOG(OK)'s gas
marketing businesses; (l) evidences an obligation to pay a deferred
purchase price in excess of $25,000 for property or services, except
accounts payable arising in the ordinary course of business
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and obligations which involve a payment of $25,000 or less in any calendar
year; (m) subjects any of the Companies or Subsidiary or the assets of any
of the Companies or Subsidiary to any partnership agreement or provisions
requiring a partnership income tax return to be filed under Subchapter K
of Chapter 1 of Subtitle A of the Code; (n) restricts the ability of any
of the Companies or Subsidiary to conduct its business in the ordinary
course; or (o) is not described in subsections (a) through (n) above, and
the breach or loss of which would have a material adverse effect on the
assets, business, financial condition or results of operations of any of
the Companies or Subsidiary.
(c) Subject to clause (iv) of the following sentence, complete and
correct copies of all contracts, commitments, leases, agreements and other
documents described in Schedules 3.20(a) and 3.20(b) and written
descriptions of all oral understandings referred to in Schedules 3.20(a)
and 3.20(b) have been made available to the Purchaser. As to all
contracts, commitments, leases, agreements and other documents, except as
set forth in Schedules 3.20(a) and 3.20(b), (i) each is in full force and
effect in accordance with its terms; (ii) no notice of the exercise or
attempted exercise of premature termination, price reduction, market-out
or curtailment has been received by the Companies, the Subsidiary or
Shareholders with respect thereto; (iii) no notice has been received by
the Companies, Subsidiary, the Parent or Shareholders that any party
thereto intends not to honor its obligations thereunder, and (iv) except
with regard to contracts as to which such delivery or access would violate
the terms of such contract or any other agreement, true, correct and
complete copies thereof have been made available to the Purchaser by
Shareholders, the Companies, Subsidiary or the Parent and Shareholders
will promptly make requests of the parties for which delivery or access is
so restricted and use reasonable best efforts to obtain or afford
Purchaser access to such contracts.
3.21 Representations, Warranties and Covenants Regarding Taxes.
(a) The Parent is the common parent (as that term is used in Section
1504(a) of the Code) of an "affiliated group" of corporations (as defined
in Section 1504(a) of the Code), which includes, without limitation, the
Parent, the Shareholders, the Companies, and Subsidiary. Such "affiliated
group" of corporations is referred to herein as the "MEC Group." The MEC
Group without the Companies and Subsidiary is sometimes referred to herein
as the "MEC Selling Group." Except as disclosed in Schedule 3.21, none of
the Companies or Subsidiary have been a member of any affiliated group
other than the MEC Group.
(b) No member of the MEC Group has engaged or will engage in any
activity which will result in a deemed election by the Purchaser under
Section 338(e) of the Code with respect to any of the Companies or
Subsidiary to the extent any such entity is a "target corporation" or
"target affiliate" within the meaning of Code Sections 338(d)(2) and
338(h)(6)(A), respectively.
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(c) As of the Closing Date, all required state and local Tax returns,
reports and estimates which are due on or before the Closing Date will
have been timely filed (taking into account all extensions permitted by
applicable law) with the appropriate governmental agencies with respect to
the Companies and Subsidiary. All such returns are, or will be, in all
material respects, correct and complete. All taxes, deficiencies,
penalties and interest shown by such returns, reports and estimates to be
payable will have been paid or accrued on the books of the Companies and
Subsidiary, including all tax assessments and/or levies imposed upon any
of the Companies or Subsidiary or any of their property.
(d) The United States consolidated corporate income tax returns and
estimates of the MEC Group have been or will be timely filed with the
Internal Revenue Service for each taxable period ending on or before
December 31, 1995 (taking into account all extensions permitted by
applicable law). All such returns are, in all material respects, correct
and complete. Any amount of such taxes, deficiencies, penalties and
interest shown by such returns and estimates properly allocable to any of
the Companies or Subsidiary were previously paid or accrued on the books
of the Companies and Subsidiary or will be paid or accrued on the books of
the Companies and Subsidiary. The United States consolidated corporate
income tax return and estimates of the MEC Group for the taxable period
ending December 31, 1996 will be timely filed (taking into account all
extensions permitted by applicable law) with the Internal Revenue Service,
and any consolidated, combined or unitary income tax return required to be
filed by the MEC Group for the taxable period ending December 31, 1996
will be timely filed (taking into account all extensions permitted by
applicable law). Such returns will include the income, deductions and
credits of the Companies and Subsidiary for the period through and
including the Closing Date, including the amount of taxable income
resulting from the Section 338(h)(10) Election.
(e) Except as disclosed on Schedule 3.21, (i) no waivers of any
statute of limitations have been given with respect to any of the
Companies or Subsidiary or which relate to any of the Companies or
Subsidiary with respect to any Taxes for any period, (ii) no audit of any
federal, state or local return of any of the Companies or Subsidiary, or
of the consolidated federal income tax return of the MEC Group, is
presently in process nor has an appointment for or notice of any such
audit been requested or given by any taxing authority, (iii) no claims,
assessments, levies, administrative proceedings or lawsuits are pending or
threatened by any taxing authority with respect to any Tax for which
either of the Companies or Subsidiary may have liability, and (iv) no
requests for rulings or administrative determinations of any sort relating
to any Tax are pending between any of the Companies or Subsidiary and any
taxing authority.
(f) Except as disclosed on Schedule 3.21, no issue or issues, singly
or collectively, have been raised (and are currently pending or unsettled)
by any taxing authority in connection with any returns and reports
referred to in this Section 3.21 which would, if determined adversely,
have a material adverse effect on the assets,
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business, financial condition, results of operations or prospects of any
of the Companies or Subsidiary.
(g) All material required amounts have been or will be withheld by
each of the Companies and Subsidiary from its employees and accrued or
paid over to appropriate governmental authorities for all periods ending
on or before the Closing Date in full compliance with the tax withholding
provisions of applicable federal, state and local laws. Proper and
accurate federal, state and local returns have been or will be filed by or
on behalf of the Companies and Subsidiary for all periods for returns due
on or before the Closing Date with respect to income tax withholding,
social security, unemployment and any other trust fund or employer taxes,
and the amounts shown on such returns to be due and payable have been paid
or will be paid in full or adequate provision therefor has been or will be
made. To the extent that the employer's portion of such trust fund or
employer taxes for compensation attributable to the Interim Period is paid
by Parent, such payments shall result in an increase in the Intercompany
Payables which will affect the Purchase Price.
(h) Any and all Tax agreements or arrangements and any and all other
agreements or arrangements with respect to any Taxes imposed by any taxing
jurisdiction executed between or agreed to by any of the Companies and/or
Subsidiary with the Parent or any member of the MEC Selling Group which
relate to a payment by or to any of the Companies or Subsidiary with
respect to its Taxes, and which is continuing in effect will be terminated
without liability to either party and shall be void effective as of the
Closing Date. Since June 30, 1996, there has been no payment of cash or
property by any of the Companies or Subsidiary to any Affiliate of the
Companies in settlement of any accumulated deferred income taxes.
(i) At the direction of the Purchaser, the Shareholders shall request
the tax matters partner of any partnership in which any of the Companies
or Subsidiary is a partner to make or revoke an election under Code
Section 754. The Shareholders shall not object to any Code Section 754
election or revocation made after the Closing Date which may be effective
for tax years which include periods beginning after December 31, 1995.
3.22 Corporate Records. The corporate minute books of the Companies and
Subsidiary are correct and complete, contain true and complete copies of the
Companies' and Subsidiary's Certificate or Articles of Incorporation, as
amended, and the Companies' and Subsidiary's Bylaws, as amended, and the
minutes of all meetings and other actions taken by the shareholders and
directors of the Companies and Subsidiary. The stock record books of the
Companies and Subsidiary are true, complete and correct, and all other
corporate records of the Companies and Subsidiary are true, complete and
correct in all material respects.
3.23 Officers and Directors; Bank Accounts; Powers of Attorney. The
officers and directors of the Companies and Subsidiary are as set forth in
Schedule 3.23. Schedule 3.23 also
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sets forth (i) the name of each bank, savings institution or other Person with
which any of the Companies or Subsidiary 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 (ii) the names of all Persons, if any, holding powers
of attorney from any of the Companies or Subsidiary and a summary statement of
the terms thereof.
3.24 Labor Matters. Schedule 3.24 sets forth the names and positions of
each of the employees of the Companies and Subsidiary as of the date hereof.
The Shareholders have heretofore provided Purchaser a schedule of the current
annual rates of compensation of such employees. There are not any controversies
between any of the Companies or Subsidiary and any of its employees which might
reasonably be expected to have a material adverse effect on their assets,
business, financial condition or results of operations taken as a whole, or any
unresolved labor union grievances or unfair labor practice or labor arbitration
proceedings pending or threatened relating to its business, and there are not
any organizational efforts presently being made or threatened involving the
employees of any of the Companies or Subsidiary. Neither any of the Companies
nor Subsidiary has received notice of any claim that any of the Companies or
Subsidiary has not complied with any laws relating to the employment of labor,
including, without limitation, any provisions thereof relating to wages, hours,
collective bargaining, the payment of social security and similar taxes, equal
employment opportunity, employment discrimination and employment safety, or
that any of the Companies or Subsidiary is liable for any arrears of wages or
any taxes or penalties for failure to comply with any of the foregoing. To the
knowledge of Shareholders, as of the date hereof, no employee or executive of
either of the Companies or Subsidiary designated as a key employee and listed
as such on Schedule 3.24 has any plans to terminate employment with the Company
or Subsidiary that employs him or her. To Shareholders' knowledge, no employee
of any of the Companies or Subsidiary is subject to any noncompetition,
nondisclosure, confidentiality, employment, consulting, or similar agreements
with Persons other than any of the Companies or Subsidiary relating to the
present business activities of any of the Companies or Subsidiary. Except as
disclosed in Schedule 3.24, (i) all Continuing Employees are and will be
employed on an "at will" basis--i.e., that their employment may be terminated,
without any liability or claim therefor, with or without cause and without the
giving of any specified notice exceeding that which may be required by state
law, and (ii) none of the Continuing Employees is a party to a contract or has
any claim for benefits of a contract, relating to his employment.
3.25 Certain Changes. Except as set forth in Schedule 3.25, other than as
a result of (a) transactions contemplated by this Agreement, (b) events or
conditions which are of a general or industry-wide nature, or (c) events or
conditions pertaining to the Companies and Subsidiary which have been disclosed
prior to the Closing Date in writing by the Shareholders to, and waived in
writing by, the Purchaser, since June 30, 1996, there has not been:
(a) Property Damage. Any damage, destruction, or loss to the business
or properties of any of the Companies or Subsidiary (whether or not
covered by insurance) materially and adversely affecting the assets,
business, financial condition or results of
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operations of the Companies and Subsidiary or the value thereof, in any
event taken as a whole; or
(b) Other Changes. Any other event, circumstance or condition
particularly pertaining to and materially and adversely affecting the
assets, business, financial condition or results of operations of the
Companies and Subsidiary taken as a whole or their capital stock.
3.26 Hedging Transactions. Schedule 3.26 sets forth a description, and the
status as of June 30, 1996, of all accounts relating to the Companies or the
Subsidiary that include open futures, hedges, swaps, collars, puts, calls,
floors, caps, options or other contracts which are intended to benefit from or
reduce or eliminate the risk of fluctuations in the price of commodities
(including Hydrocarbons) or securities (and the corresponding deposits, if
any). Since June 30, 1996, Shareholders have made no additions or withdrawals
to or from any such accounts other than as reflected in the intercompany
accounts among the Companies, Subsidiary and their Affiliates in a manner
consistent with past practice.
3.27 Gas Imbalances. Schedule 3.27 correctly sets forth for the periods
shown (a) imbalances for overproduction and underproduction of Hydrocarbons
from the Oil and Gas Properties as of June 30, 1996, or as a result of the sale
or transportation of Hydrocarbons by the Companies or the Subsidiary, and (b)
obligations of the Companies or the Subsidiary as of June 30, 1996, for the
delivery of Hydrocarbons attributable to the Company Property in the future on
account of prepayment, advance payment, take-or-pay or similar obligations
without then or thereafter being entitled to receive full value therefor.
ARTICLE IV.
OBLIGATIONS OF THE SHAREHOLDERS PENDING CLOSING DATE
Agreements of the Shareholders. Each of the Shareholders agrees that from
the date hereof to the Closing Date:
4.1 Ownership of Stock. Each Shareholder will remain the record and
beneficial owner of the Shares owned by it. Neither Shareholder will suffer any
Encumbrance (other than this Agreement) to be created or exist upon any of the
Shares owned by it.
4.2 Voting Arrangements. Neither Shareholder will subject any of the
Shares owned by it to, or suffer to be created or exist with respect to such
Shares, any voting trust, proxy, voting agreement or other understanding or
arrangement with respect to the voting thereof.
4.3 Agreements of Shareholders Pending Closing Date. Each Shareholder
severally but not jointly agrees that from the date hereof to the Closing Date
it will cause the Companies and Subsidiary to do the following:
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(a) Inspection by the Purchaser. The Companies and Subsidiary shall
grant to the Purchaser, and its officers, employees and authorized
representatives, access, at the Purchaser's expense, to and the continued
right during normal business hours to inspect the Companies' and
Subsidiary's records and properties and to consult with and receive
assistance from the Companies' and Subsidiary's officers, employees,
attorneys and agents in order that the Purchaser may have full opportunity
to make such reasonable investigation as it shall desire of the affairs of
the Companies and Subsidiary and for the purpose of determining the
accuracy of the representations and warranties hereinabove made and the
compliance with covenants contained in this Agreement; and the Companies'
and Subsidiary's officers, employees, attorneys and agents will furnish
the Purchaser with such additional financial and operating data and other
information as to the business and properties of the Companies and
Subsidiary as the Purchaser shall from time to time reasonably request.
Purchaser's investigation shall be at its own risk with respect to bodily
injury or destruction of property. No investigation made by Purchaser or
its representatives hereunder shall affect the representations and
warranties of Shareholders hereunder. To the extent such access or
disclosure would violate the terms of any contract or agreement of the
Companies, Subsidiary or Shareholders, Shareholders will use their
reasonable best efforts to cause the other parties to any such contract
restricting access to permit Purchaser to review such contracts, documents
or records subject to such restrictions.
(b) Prohibition on Issuance, Sale or Purchase of Securities. Neither
any of the Companies nor Subsidiary shall issue or sell, or issue options
or rights to subscribe to, or enter into any contract or commitment to
issue or sell (upon conversion or otherwise), any shares of its capital
stock, or subdivide or in any way reclassify any shares of its capital
stock, or acquire, or agree to acquire, any shares of its capital stock.
(c) Suspended Funds. Without the consent of Purchaser (which consent
shall not unreasonably be withheld) neither any of the Companies nor
Subsidiary shall pay to any Person any funds held in suspense for the
benefit of such Person other than in the ordinary course of business and
other than in connection with escheat filings.
4.4 Notification by Shareholders of Certain Matters. From the date hereof
through the Closing Date, Shareholders will promptly advise Purchaser in
writing of (i) any event or condition (other than those which are of a general
or industry-wide nature) which has or can be reasonably expected to have a
material adverse effect on the assets, business, financial condition or results
of operations of any of the Companies and Subsidiary, (ii) any notice or other
communication from any third Person alleging that the consent of such third
Person is or may be required in connection with the transactions contemplated
by this Agreement, and (iii) any material default under any material agreement
or event which, with notice or lapse of time or both, would become such a
default on or prior to the Closing Date and of which Shareholders have
knowledge.
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4.5 Preserve Accuracy of Representations and Warranties. Shareholders
shall refrain from taking any action which would render any representation or
warranty contained in this Agreement inaccurate as of the Closing Date.
Shareholders shall promptly notify Purchaser of any action, suit, claim,
investigation or proceeding that shall be instituted or, to the knowledge of
Shareholders, threatened against Shareholders to restrain, prohibit or
otherwise challenge the legality of any transaction contemplated by this
Agreement. Shareholders shall promptly notify Purchaser of any lawsuit, claim,
proceeding or investigation that may be brought, asserted or commenced or, to
the knowledge of Shareholders, threatened against the Companies or Subsidiary.
ARTICLE V.
OBLIGATIONS OF THE PURCHASER PENDING CLOSING DATE
Agreements of the Purchaser. The Purchaser agrees that from the date
hereof to the Closing Date:
5.1 Notification by Purchaser of Certain Matters. From the date hereof
through the Closing Date, Purchaser will promptly advise Shareholders in
writing of (i) any event or condition (other than those which are of a general
or industry-wide nature) which has or can be reasonably expected to have a
material adverse effect on the assets, business, financial condition or results
of operations of Purchaser, (ii) any notice or other communication from any
third Person alleging that the consent of such third Person is or may be
required in connection with the transactions contemplated by this Agreement,
and (iii) any material default under any material agreement or event which,
with notice or lapse of time or both, would become such a default on or prior
to the Closing Date and of which Purchaser has knowledge.
5.2 Preserve Accuracy of Representations and Warranties. Purchaser shall
refrain from taking any action which would render any representation or
warranty contained in this Agreement inaccurate as of the Closing Date.
Purchaser shall promptly notify Shareholders of any action, suit, claim,
investigation or proceeding that shall be instituted or, to the knowledge of
Purchaser, threatened against Purchaser to restrain, prohibit or otherwise
challenge the legality of any transaction contemplated by this Agreement.
ARTICLE VI.
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER
Conditions Precedent to Obligations of the Purchaser. The obligations of
the Purchaser to consummate the transactions contemplated by this Agreement
shall be subject to the following conditions:
6.1 Representations and Warranties of the Shareholders True at Closing
Date. The representations and warranties of the Shareholders herein contained
(other than those in Sections 3.6(a), 3.6(e), and 3.13(a) and the other clauses
of Section 3.13 to the extent relating
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to Environmental Matters) which are qualified as to materiality shall be true
and correct as of and at the Closing Date with the same effect as though made
at such date, and the representations and warranties of the Shareholders herein
contained (other than those in Sections 3.6(a), 3.6(e), and 3.13(a) and the
other clauses of Section 3.13 to the extent relating to Environmental Matters)
which are not qualified as to materiality shall be true and correct in all
material respects as of and at the Closing Date with the same effect as though
made at such date (it being understood that if any such representation and
warranty which is not qualified as to materiality is not true and correct in
all respects, Purchaser shall retain any and all rights granted to it pursuant
to the terms of this Agreement as well as under applicable law with respect
thereto), except as affected by transactions permitted or contemplated by this
Agreement, including, without limitation, pursuant to Sections 9.1 and 9.2; the
Shareholders shall have performed and complied in all material respects with
all covenants required by this Agreement to be performed or complied with by
them on or prior to the Closing Date; and Shareholders, the Companies and
Subsidiary shall have delivered to the Purchaser a certificate to both such
effects, dated the Closing Date and signed by each of their chief executive
officers or Presidents.
6.2 No Litigation by Non-Parties. Except as disclosed in Schedule 3.8, no
suit, action or other proceeding brought by or at the instance of any Person or
entity other than any of the parties hereto or any of their respective
Affiliates shall be threatened or pending before any court or governmental
agency in which it will be, or it is, sought to restrain or prohibit or to
obtain damages or other relief in connection with, this Agreement or the
consummation of the transactions contemplated hereby. There shall not be an
injunction, judgment, order, decree or ruling in effect preventing consummation
of any of the transactions contemplated by this Agreement. Shareholders shall
have delivered to the Purchaser a certificate to such effect, dated the Closing
Date and signed by each of their chief executive officers or Presidents.
6.3 Resignations. Shareholders shall have delivered to the Purchaser on
the Closing Date written resignations of all directors of the Companies and
Subsidiary.
6.4 Tender of the Shares. Shareholders shall have delivered to the
Purchaser all certificates representing the Shares, duly endorsed for transfer
or accompanied by duly executed stock powers, free and clear of any
Encumbrance.
6.5 No Enjoinder. No order of any Governmental Body shall have been issued
which restricts or prohibits the consummation of the transactions contemplated
hereby.
6.6 Investment Suitability and Investment Representations. Shareholders
shall have executed and delivered to the Purchaser a document whereby the
Shareholders represent, warrant and agree that (i) they are knowledgeable in
operations of the type conducted by the Purchaser, (ii) Purchaser has made
available to them extensive legal, financial, accounting and other business
records for examination by them, (iii) Purchaser has made its principal
executive and operating personnel available for consultation with the
Shareholders' designated representatives, (iv) through their counsel, the
employees of the Shareholders, and other duly authorized representatives, they
have made an extensive investigation of the Purchaser's assets and
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liabilities, business and financial affairs, and operations, (v) they are aware
of the risks associated with ownership of equity securities, (vi) they are
capable of bearing the financial risks associated with such ownership, and
(vii) the Warrants and, upon exercise, the Purchaser Shares are being acquired
by the Shareholders for the account of the Shareholders for investment and not
with a view to the distribution thereof within the meaning of the securities
laws.
6.7 Corporate Documents. Shareholders shall have delivered to Purchaser:
(i) copies of the articles or certificate of incorporation of each of the
Shareholders, the Companies and Subsidiary which have been certified (a) by the
Secretary of State of the State of Delaware, as to the Shareholders, IOG and
GED, (b) by the Secretary of State of the State of Oklahoma, as to IGS(OK), and
(c) by the Secretary of State of the State of Texas, as to Subsidiary, all of
which are dated within ten business days prior to the Closing Date, (ii)
long-form certificates of good standing of the Shareholders, the Companies and
Subsidiary issued by the secretaries of state of each of their respective
states of incorporation and, as to each of the Companies, issued by the
secretaries of state of each of the states listed on Schedule 3.3 with respect
to such Company, and, as to Subsidiary, issued by the secretaries of state of
each of the states listed on Schedule 3.5(b), all of which are dated within ten
business days prior to the Closing Date, and (iii) certificates showing payment
of all franchise and similar taxes by the Companies and Subsidiary issued by
the appropriate officials of each of their respective states of incorporation,
and, as to each of the Companies, issued by the appropriate officials of each
of the states listed on Schedule 3.3 with respect to such Company, and, as to
Subsidiary, issued by the appropriate officials of each of the states listed on
Schedule 3.5(b), all of which are dated within ten business days prior to the
Closing Date.
6.8 Secretary's Certificate of the Shareholders. Each of the Shareholders
shall have delivered to Purchaser a certificate of its secretary or an
assistant secretary, dated the Closing Date, in form and substance reasonably
satisfactory to Purchaser, as to (i) no amendments to its certificate of
incorporation on or after the date of the certification thereof delivered
pursuant to Section 6.7, (ii) its bylaws, (iii) the resolutions of its Board of
Directors and sole shareholder authorizing the execution and performance of
this Agreement and the consummation of the transactions contemplated hereby,
and (iv) incumbency and signatures of its officers executing this Agreement and
any document or agreement delivered pursuant hereto.
6.9 Non-Foreign Affidavit. The Purchaser acknowledges that the Companies
and Subsidiary are United States Real Property Holding Corporations as defined
by Code Section 897(c)(2). Each of the Shareholders shall provide to Purchaser
on or before the Closing Date a non-foreign affidavit in compliance with United
States Treasury Regulation Section 1.1445- 2(b)(2).
6.10 Secretary's Certificate of the Companies and Subsidiary. The
Shareholders shall have delivered to Purchaser a certificate of the secretary
or an assistant secretary of each of the Companies and Subsidiary, dated the
Closing Date, in form and substance reasonably satisfactory to Purchaser, as to
(i) the Certificate of Incorporation of the Company or Subsidiary, (ii) the
By-laws of the Company or Subsidiary, and (iii) incumbency and signatures of
the
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officers of the Company or Subsidiary executing any document or agreement
delivered pursuant hereto.
6.11 Consents, Waivers and Approvals. The Shareholders shall have
delivered to Purchaser all consents, waivers or approvals obtained by (i) each
of the Shareholders or (ii) each of the Companies and Subsidiary with respect
to the consummation of the transactions contemplated by this Agreement.
6.12 Guaranty. The Shareholders shall have delivered to Purchaser a
guaranty by MidAmerican Capital Company of Shareholders' agreements and
obligations hereunder, in the form attached as Exhibit B.
6.13 Other Certificates. The Shareholders shall have delivered the
secretaries' certificates contemplated by Section 1.6.
6.14 Form and Substance of Shareholders' Actions and Documents. All
actions to be taken by Shareholders in connection with consummation of the
transactions contemplated hereby and all certificates, opinions, instruments
and other documents required to effect the transactions contemplated hereby
will be reasonably satisfactory in form and substance to Purchaser.
ARTICLE VII.
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS
Conditions Precedent to Obligations of Shareholders. The obligations of
the Shareholders to consummate the transactions contemplated by this Agreement
shall be subject to the following conditions:
7.1 Representations and Warranties of the Purchaser True at Closing Date.
The representations and warranties of the Purchaser herein contained which are
qualified as to materiality shall be true and correct as of and at the Closing
Date with the same effect as though made at such date, and the representations
and warranties of the Purchaser herein contained which are not qualified as to
materiality shall be true and correct in all material respects as of and at the
Closing Date with the same effect as though made at such date (it being
understood that if any such representation and warranty which is not qualified
as to materiality is not true and correct in all respects, Shareholders shall
retain any and all rights granted to them pursuant to the terms of this
Agreement as well as under applicable law with respect thereto), except as
affected by transactions permitted or contemplated by this Agreement; the
Purchaser shall have performed and complied in all material respects with all
covenants required by this Agreement to be performed or complied with by it on
or prior to the Closing Date; and the Purchaser shall have delivered to the
Shareholders a certificate, dated the Closing Date and signed by its chief
executive officer to both such effects.
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7.2 No Litigation by Non-Parties. Except as disclosed in Schedule 3.8, no
suit, action or other proceeding brought by or at the instance of any Person or
entity other than any of the parties hereto or any of their respective
Affiliates shall be threatened or pending before any court or governmental
agency in which it will be, or it is, sought to restrain or prohibit or to
obtain damages or other relief in connection with, this Agreement or the
consummation of the transactions contemplated hereby. There shall not be an
injunction, judgment, order, decree or ruling in effect preventing consummation
of any of the transactions contemplated by this Agreement. Purchaser shall have
delivered to the Shareholders a certificate, dated the Closing Date and signed
by its chief executive officer, to such effect.
7.3 Tender of Purchase Price and Delivery of Documents. On the Closing
Date the Purchaser shall have tendered to the Shareholders the Purchase Price
and shall have executed and delivered the documents and instruments referred to
in Section 1.5.
7.4 No Enjoinder. No order of any governmental body shall have been issued
which restricts or prohibits the consummation of the transactions contemplated
hereby.
7.5 Investment Suitability and Investment Representations. The Purchaser
shall have executed and delivered to the Shareholders a document whereby the
Purchaser represents, warrants and agrees that (i) it is knowledgeable in
operations of the type conducted by the Companies and Subsidiary, (ii) the
Companies and Subsidiary have made available to it extensive legal, financial,
accounting and other business records for examination by it, (iii) the
Companies and Subsidiary have made their principal executive and operating
personnel available for consultation with the Purchaser's designated
representatives, (iv) through its counsel, the employees of the Purchaser, and
other duly authorized representatives, it has made an extensive investigation
of the Companies' and Subsidiary's assets and liabilities, business and
financial affairs, and operations, (v) it is aware of the risks associated with
ownership of equity securities, (vi) it is capable of bearing the financial
risks associated with such ownership, and (vii) the Shares are being acquired
by the Purchaser for the account of the Purchaser for investment and not with a
view to the distribution thereof within the meaning of the securities laws.
7.6 Corporate Documents. Purchaser shall have delivered to Shareholders:
(i) a copy of the certificate of incorporation of Purchaser which has been
certified by the Secretary of State of the State of Delaware and which is dated
within ten business days prior to the Closing Date and (ii) a long-form
certificate of good standing of Purchaser issued by the Secretary of State of
the State of Delaware and which is dated within ten business days prior to the
Closing Date.
7.7 Secretary's Certificate. Purchaser shall have delivered to
Shareholders a certificate of the secretary or an assistant secretary of
Purchaser, dated the Closing Date, in form and substance reasonably
satisfactory to Shareholders, as to (i) no amendments to the certificate of
incorporation of Purchaser on or after the date of the certification thereof
delivered pursuant to Section 7.6, (ii) the bylaws of Purchaser, (iii) the
resolutions of the Board of Directors of Purchaser authorizing the execution
and performance of this Agreement and the consummation of the transactions
contemplated hereby, (iv) the resolutions of the Board of Directors of
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Purchaser with respect to the determination referred to in the last sentence of
Section 2.4, and (v) incumbency and signatures of the officers of Purchaser
executing this Agreement and any document or agreement delivered pursuant
hereto.
7.8 Form and Substance of Purchaser's Actions and Documents. All actions
to be taken by Purchaser in connection with consummation of the transactions
contemplated hereby and all certificates, opinions, instruments and other
documents required to effect the transactions contemplated hereby will be
reasonably satisfactory in form and substance to Shareholders.
ARTICLE VIII.
TERMINATION AND ABANDONMENT
8.1 Termination. Anything contained in this Agreement to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated herein abandoned at any time prior to the Closing Date:
(a) By Mutual Consent. By mutual consent of the Purchaser and the
Shareholders.
(b) By the Purchaser or the Shareholders if Transactions Not
Consummated. By either the Purchaser or the Shareholders if the
terminating party is not in breach of any of its material obligations
hereunder and if the transactions contemplated by this Agreement shall not
have been consummated on or before December 31, 1996.
(c) By Purchaser if Material Breach By Shareholders. By Purchaser in
the event of any material breach by either of the Shareholders of any of
Shareholders' agreements, representations or warranties contained herein
and the failure of Shareholders to cure such breach within 30 days after
receipt of notice from Purchaser requesting such breach to be cured.
(d) By Shareholders if Material Breach by Purchaser. By Shareholders
in the event of any material breach by Purchaser of any of Purchaser's
agreements, representations or warranties contained herein and the failure
of Purchaser to cure such breach within 30 days after receipt of notice
from Shareholders requesting such breach to be cured.
(e) By Shareholders or Purchaser Pursuant to Section 9.2. By
Shareholders or Purchaser upon the conditions set forth in Section 9.2(c).
8.2 Accomplishment of Termination. An election by the Purchaser to
terminate this Agreement and abandon the transactions contemplated hereby as
provided in Section 8.1 shall be exercised on behalf of the Purchaser by
delivery to the Shareholders of a written instrument to that effect signed by
the President or a Vice President of the Purchaser. An election by the
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Shareholders to terminate this Agreement and abandon the transactions
contemplated hereby as provided in Section 8.1 shall be exercised by delivery
to the Purchaser of a written instrument to that effect signed by the President
or a Vice President of each of the Shareholders.
8.3 Effect of Termination. If this Agreement is terminated and abandoned
pursuant to and in accordance with the provisions of Section 8.1, this
Agreement shall become void and have no effect, without any liability on the
part of any party hereto (or its stockholders or controlling Persons or
directors or officers), provided that nothing herein shall relieve any party
from liability for its breach of this Agreement. Notwithstanding the preceding
sentence, the provisions of Sections 9.6, 9.9 and 9.10 and Purchaser's
indemnity in Section 9.2(a) shall survive any termination hereof pursuant to
Section 8.1.
8.4 Waiver of Conditions. Any of the terms or conditions of this Agreement
may be waived at any time in writing by the party which is entitled to the
benefit thereof.
ARTICLE IX.
ADDITIONAL AGREEMENTS OF THE PURCHASER AND THE SHAREHOLDERS
9.1 Adjustments for Title Defects. The procedures to be followed with
respect to Purchaser's assertion of Title Defects, and the adjustment of the
Purchase Price attributable to such Title Defects, shall be as follows:
(a) Access to Records and Summaries. Promptly after execution of this
Agreement, Shareholders shall cause the Companies and the Subsidiary to
provide to Purchaser and its consultants and advisors (i) access at all
reasonable times to the Companies' and the Subsidiary's accounting, land,
production, engineering, and other records regarding the Oil and Gas
Properties for the purpose of reviewing title to the Oil and Gas
Properties and (ii) reasonable office space in the Companies' and the
Subsidiary's offices for such review. At Purchaser's request, to the
extent any such records are in the possession of a co-working interest
owner, partner or other third party and the Companies or the Subsidiary
have the right of access thereto, the Companies and the Subsidiary will
use their reasonable efforts (without being obligated to incur expense) to
provide Purchaser access to such other records or obtain copies thereof
for Purchaser's review. As soon as reasonably practicable, but in all
events prior to the Closing Date, Shareholders shall cause the Companies
and the Subsidiary to generate and deliver to the Purchaser summaries of
title and contractual information relating to each of the Significant and
the Additional Properties, such summaries to contain listings of all of
the following information: Leases, Lands, Wells and currently-effective
contracts and agreements (including contracts and agreements included
within the definition of Permitted Encumbrances and any other contractual
obligations of which any of the Companies or Subsidiary have knowledge)
which pertain or apply to each such Significant or Additional Property.
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(b) Notice of Asserted Title Defects. Prior to the expiration of the
period commencing on the execution of this Agreement and ending on the
first anniversary of the Closing Date (the "Title Examination Period"),
Purchaser shall furnish to Shareholders written notice specifying in
reasonable detail each matter which Purchaser in good faith asserts is a
Title Defect hereunder, together with the Defect Amount estimated in good
faith by Purchaser for each such asserted Title Defect and a reasonably
detailed explanation of the computation of and basis for such Defect
Amount (each such notice, a "Title Defect Notice"). Any Title Defects not
asserted by Purchaser on or before the expiration of the Title Examination
Period with respect to any of the Oil and Gas Properties shall be deemed
conclusively to be Permitted Encumbrances. Furthermore, if (i) on or
before the second (2nd) Business Day prior to the Closing Date, Purchaser
has knowledge of the verification of the existence of a Title Defect
affecting a Significant Property by way of a title opinion or other
written title report delivered to, or obtained, generated or reviewed by
Purchaser in connection with its title review conducted pursuant to this
Section 9.1 and possesses information in such detail as will enable
Purchaser to furnish Shareholders a Title Defect Notice with respect to
such Title Defect and (ii) Purchaser fails to assert such Title Defect
pursuant to this Section 9.1 on or before 5:00 p.m. on the second (2nd)
Business Day prior to the Closing Date, then such Title Defect shall be
deemed conclusively to be a Permitted Encumbrance with respect to such
Property. Anything herein to the contrary notwithstanding, after 5:00 p.m.
on the second (2nd) Business Day prior to the Closing Date, Purchaser may
only assert as Title Defects relating to the Significant Properties those
Title Defects which Purchaser asserts in good faith were created by,
through or under the Companies, the Subsidiary or any of their Affiliates
prior to the Closing (including Title Defects which could have been
asserted but for the failure of any summary delivered by the Companies or
the Subsidiary pursuant to Section 9.1(a) above to accurately and
completely set forth (i) the information required to be presented therein,
and (ii) any contracts, agreements or other contractual obligations
relating to the Significant Property in question to which such entity is a
party or under which such entity has obtained an assignment of rights).
Anything herein to the contrary notwithstanding, after 5:00 p.m. on
January 31, 1997, Purchaser may only assert as Title Defects relating to
the Additional Properties those Title Defects which Purchaser asserts in
good faith were created by, through or under the Companies, the Subsidiary
or any of their Affiliates prior to the Closing (including Title Defects
which could have been asserted but for the failure of any summary
delivered by the Companies or the Subsidiary pursuant to Section 9.1(a)
above to accurately and completely set forth (i) the information required
to be presented therein, and (ii) any contracts, agreements or other
contractual obligations relating to the Additional Property in question to
which such entity is a party or under which such entity has obtained an
assignment of rights). Title Defects affecting the Significant and the
Additional Properties, other than those created by, through or under the
Companies, the Subsidiary or any of their Affiliates (as referred to in
the preceding sentence), which Purchaser fails to assert on or prior to
5:00 p.m. on the second (2nd) Business Day prior to Closing Date or
January 31, 1997 (as applicable) shall be deemed conclusively to be a
Permitted Encumbrance with respect to such Property. During the
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portion of the Title Examination Period following the Closing Date,
Purchaser shall use its reasonable best efforts to furnish Shareholders
with a Title Defect Notice with respect to a Title Defect promptly after
Purchaser has knowledge of the verification of the existence of such Title
Defect and possesses information in such detail as will enable Purchaser
to furnish Shareholders a Title Defect Notice with respect thereto;
provided, however, that Purchaser shall not be obligated to furnish
Shareholders Title Defect Notices more often than every other Tuesday
during the Title Examination Period. Failure by Purchaser to identify all
Properties (or to identify all portions of a Property) which are subject
to a particular Title Defect in a Title Defect Notice shall not prevent
Purchaser from asserting such Title Defect in separate or subsequent Title
Defect Notices, subject to otherwise timely asserting such Title Defect
prior to the expiration of the Title Examination Period or any other
applicable time period set forth in Section 9.1(b).
(c) Notice in Response to Purchaser's Notice. Shareholders shall give
written notice to Purchaser for each Title Defect asserted in a Title
Defect Notice by Purchaser ("Response Notice") as to whether it (a)
intends to cure the asserted Title Defect, (b) disagrees with Purchaser's
assertion that the Title Defect exists, (c) disagrees with the Defect
Amount estimated by Purchaser for such Title Defect, or (d) takes any
combination of the foregoing positions. With respect to each Title Defect
Notice, Shareholders shall give their Response Notice on or before 5:00
p.m. on the 30th day following the Shareholders' receipt of such Title
Defect Notice. If Shareholders disagree with Purchaser's assertion of the
existence of a Title Defect or the Defect Amount with respect thereto,
Shareholders' Response Notice shall also specify in reasonable detail
Shareholders' grounds for such disagreement, the Defect Amount estimated
by Shareholders therefor, or both, as the case may be. Shareholders'
failure to deliver a timely Response Notice with respect to a Title Defect
asserted in a Title Defect Notice shall be deemed to be an admission of
the existence of such Title Defect, acceptance of Purchaser's estimate of
the Defect Amount with respect thereto and a waiver of Shareholders'
rights to cure such Title Defect.
(d) Method of Determination of Defect Amounts. Without limiting
Shareholders' right to dispute the existence of a Title Defect, Defect
Amounts for each asserted Title Defect shall be determined as follows (it
being understood that if a Title Defect is not effective or does not
affect one of the Companies' or the Subsidiary's title to a Property
throughout the entire productive life of such Property, such fact shall be
taken into account in determining the Defect Amount):
(i) If the Title Defect relates to failure of title to the
entirety of a Company's or the Subsidiary's title to an Oil and Gas
Property, the Defect Amount shall be the amount set forth as the
Value for that Property in Schedule
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(ii) If the Title Defect results from a lien, security interest,
pledge or collateral assignment upon one or more Oil and Gas
Properties (or a portion thereof) which is liquidated in amount, then
the Defect Amount shall be the amount necessary to remove such lien,
security interest, pledge or collateral assignment from a Company's
or the Subsidiary's title to such Properties (or portion thereof).
(iii)If the Title Defect results from any of the Companies or
the Subsidiary having a lesser NRI in an Oil and Gas Property than
the NRI specified therefor in Schedule 3.6(a), the Defect Amount
shall be equal to the product obtained by multiplying the Value for
that Property by a fraction, the numerator of which is the reduction
in the NRI and the denominator of which is the specified NRI for such
Property.
(iv) If the Title Defect results from any matter not described
in paragraphs (i), (ii), or (iii) above, then the Defect Amount shall
be a portion of the Value for that Property, said portion to be equal
to the difference between the Value of a Company's or the
Subsidiary's title to such Property without such Title Defect and
with such Title Defect.
Notwithstanding anything herein to the contrary, the aggregate Defect
Amounts attributable to Title Defects relating to a Property for which
Purchaser receives an adjustment in the Purchase Price shall never exceed
the Value of that Property.
(e) Shareholders' Pre-Closing Election. In the event Purchaser
asserts on or before 5:00 p.m. on the second (2nd) Business Day prior to
the Closing Date one or more Title Defects with respect to any Property,
then at any time on or before 5:00 p.m. on the Business Day prior to the
Closing Date, Shareholders may elect to cause the affected Company or
Subsidiary to convey to either Shareholder, or to an entity designated by
Shareholders, all of such Property, effective as of the Effective Date;
provided that Purchaser shall have the right to unconditionally waive any
asserted Title Defect and any claim against the Shareholders related to
such Title Defect (a "Title Waiver") at any time prior to such conveyance,
in which case the Property shall not be conveyed pursuant to Shareholders'
election. Shareholders shall notify Purchaser in writing of their election
to cause the affected Company or Subsidiary to convey any such Property on
or before 5:00 p.m. on the Business Day prior to the Closing Date and if
Shareholders give such notice, then the Purchase Price shall be reduced by
the Value of such Property adjusted to reflect the revenues and
expenditures (including capital expenditures) with respect to such
Property from and after the Effective Date. If Shareholders make an
election to cause a Property to be conveyed, then prior to Closing, unless
Purchaser makes a Title Waiver with respect to such Property, by an
instrument of assignment or conveyance which is expressly made without any
warranty or representation, express or implied, as to title, condition or
any other matter (but, to the extent transferable, with subrogation of
Shareholders or the designee referred to above
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to all covenants and warranties theretofore made by any of the Companies'
or the Subsidiary's predecessors in title, except any Affiliates of the
Companies), the affected Company or Subsidiary shall convey the title, if
any, which such Company or Subsidiary has in all of such Property to
either Shareholder (or to an entity designated by Shareholders) as
Shareholders shall elect.
(f) Pre-Closing Adjustment for Uncured Title Defects. If on or before
5:00 p.m. on the Business Day prior to the Closing Date, any Title Defect
and the Defect Amount as asserted by Purchaser are agreed to by
Shareholders as to one or more such Title Defects, then the sum of Defect
Amounts attributable to those Properties (or portions thereof) for which
Shareholders and Purchaser are in agreement as to both the existence of a
Title Defect and the Defect Amount, but excluding Properties conveyed to
either Shareholder (or their designee) pursuant to Section 9.1(e), shall
be applied to reduce the cash portion of the Purchase Price.
(g) Resolution or Cure of Title Defects. If Shareholders have
provided a Response Notice in accordance with Section 9.1(c), then
Shareholders shall use reasonable efforts to resolve or cure the Title
Defect in question during the Cure Period. On or before expiration of the
Cure Period with respect to such Title Defect, Shareholders shall give
Purchaser written notice of either (i) any curative actions which in
Shareholders' determination cure or reduce the Defect Amount of a Title
Defect asserted by Purchaser, including an explanation in reasonable
detail of any claimed reduction in the Defect Amount, or (ii)
Shareholders' inability to cure such Title Defect. On or before the
expiration of thirty (30) days after the end of all Cure Periods
applicable to Title Defects which Shareholders attempt to resolve or cure
pursuant to this Section 9.1(g), Purchaser shall provide to Shareholders
in writing a list of (x) those Title Defects asserted by Purchaser which
Shareholders claim to have cured and which Purchaser believes have not
been cured, together with the revisions, if any, in Purchaser's estimates
of the Defect Amounts attributable to such Title Defects after giving
effect, if any, to Shareholders' curative efforts and (y) all other
unresolved disputes with respect to Title Defects and/or Defect Amounts.
For a period of thirty (30) days after Shareholders' receipt of such
written list, Shareholders and Purchaser shall attempt to resolve disputes
as to such items. With respect to all such disputes which the parties are
unable to resolve, Shareholders shall at any time on or before the fifth
(5th) Business Day after the expiration of such 30-day period elect to
either (i) submit any or all of such disputes to arbitration in accordance
with Section 9.1(h) or (ii) cause the Property or Properties affected by
such disputes which are not submitted to arbitration to be conveyed to
either Shareholder or their designee as set forth in Section 9.1(e) with a
limited warranty of title with respect to Title Defects created by,
through or under any of the Companies or Subsidiary on or after the
Closing Date; provided that Purchaser shall have the right to make a Title
Waiver at any time prior to such conveyance, in which case the Property or
Properties shall not be conveyed pursuant to Shareholders' election.
During the Cure Period with respect to a Title Defect, and thereafter
until all disputes regarding such Title Defect and the Defect Amount in
respect thereof have been
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fully resolved by agreement or arbitration, Purchaser and the Companies
shall afford Shareholders and their representatives and agents access at
all reasonable times to the Companies' and the Subsidiary's files, records
and documents relating to title to the one or more Properties that are the
subject of such disputed Title Defect or Defect Amount. Such access shall
be subject to confidentiality restrictions reasonably imposed by Purchaser
or the Companies or the Subsidiary. Purchaser shall cause the Companies
and Subsidiary to implement (at Shareholders' expense) any curative action
which is jointly agreed upon by Purchaser and Shareholders.
(h) Arbitration.
(i) Shareholders and Purchaser agree to jointly select an
arbitrator experienced in U.S. oil and gas title matters, who shall
be the sole arbitrator (the "Arbitrator") to hear and decide all
disputes regarding asserted Title Defects and Defect Amounts
("Arbitrable Disputes") within thirty (30) days after Shareholders
elect to submit any Arbitrable Disputes to arbitration. The
Arbitrator chosen shall be impartial and independent of all parties
to this Agreement and shall be experienced and knowledgeable about
the subject matter (generally and not as to the express facts
concerning Company Property) of the disputes. If the Parties are
unable to agree upon the designation of a person as Arbitrator, then
Shareholders or Purchaser may in writing request the Houston, Texas
office of the AAA to appoint the Arbitrator and such Arbitrator shall
hear all matters submitted to arbitration under this Section 9.1(h);
(ii) Each arbitration hearing shall be held at a place in
Houston, Texas acceptable to the Arbitrator. The arbitration shall be
conducted in accordance with the Commercial Arbitration Rules of the
AAA. The decision of the Arbitrator with respect to Arbitrable
Disputes shall be reduced to writing and binding on the parties.
Judgment upon the award(s) rendered by the Arbitrator may be entered
and execution had in any court of competent jurisdiction or
application may be made to such court for a judicial acceptance of
the award and an order of enforcement. Notwithstanding any choice of
law provision in this Agreement, the United States Federal
Arbitration Act (9 U.S.C. Sections 1-16) shall govern the
interpretation and enforcement of this arbitration provision.
Shareholders and Purchaser, respectively, shall bear their own legal
fees and other costs incurred in presenting their respective cases.
The charges and expenses of the Arbitrator shall be shared one-half
by the Shareholders and one-half by Purchaser;
(iii) The arbitration hearing shall commence within thirty (30)
days after the Arbitrator is selected in accordance with the
provisions of Section 9.1(h)(i) above. In fulfilling his or her
duties with respect to determining the amount of a Defect Amount, the
Arbitrator may consider such matters as, in the opinion of the
Arbitrator, are necessary or helpful to make a proper valuation,
however, the
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Arbitrator shall be bound by those factors set forth in Section 9.1
above. Furthermore, the Arbitrator may consult with and engage
disinterested third parties to advise the Arbitrator including,
without limitation, geologists, geophysicists, petroleum engineers,
title lawyers, accountants and consultants and the fees and expenses
of such third parties shall be considered to be charges and expenses
of the Arbitrator. The sole remedy in any arbitration award shall be
resolution of alleged Title Defects and Defect Amounts which shall
then be applied as provided in Section 9.1(i) and the Arbitrator
shall not have power to award any other remedy, including without
limitation actual damages, exemplary damages, attorneys' fees and
interest reflecting the time value of money. The Arbitrator shall not
add any interest factor reflecting the time value of money to any
Defect Amount;
(iv) If the Arbitrator selected hereunder (whether selected by
Shareholders and Purchaser or by the AAA) should die, resign or be
unable to perform his or her duties hereunder, the parties or AAA
shall select a replacement Arbitrator. The procedure set forth in
this Section 9.1(h)(iv) for selecting a replacement Arbitrator shall
be followed from time to time as necessary;
(v) As to any determination of amounts owing under the terms of
this Section 9.1(h), no lawsuit based on such claimed amounts owing
shall be instituted by any party hereto, other than to compel
arbitration proceedings or enforce the award of the Arbitrator; and
(vi) All privileges under Texas and federal law, including
attorney-client and work-product privileges, shall be preserved and
protected to the same extent that such privileges would be protected
in a federal court proceeding applying Texas law.
(i) Post-Closing Adjustment for Uncured Title Defects. At mutually
agreeable times, but in all events when the last of all Title Defects
asserted by the Purchaser and the Defect Amounts, if any, with respect
thereto have been finally resolved, whether by agreement, arbitration
award or conveyance of the Properties affected thereby to either
Shareholder or their designee, the Purchase Price shall be reduced by the
aggregate amount of the Defect Amounts for all Title Defects which are
upheld or established and the aggregate Value of all Properties so
conveyed. The amount of each reduction in the Purchase Price pursuant to
this Section 9.1(i) shall bear interest at the Agreed Rate from the
Closing Date until paid. Any reduction in the Purchase Price, together
with any interest accruing thereon, shall be due and payable by
Shareholders to Purchaser in immediately available funds within ten days
after the date of the final resolution of the last of all Title Defects
asserted by Purchaser and the Defect Amounts associated therewith.
Notwithstanding any provision in this Agreement to the contrary, (a)
Shareholders' sole responsibility and Purchaser's sole and exclusive
remedy for the
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reduction in value of any of the Companies' or Subsidiary's title to a
Property resulting from the existence of a Title Defect shall be as
provided in this Section 9.1 and Shareholders shall not be liable for any
consequential damages or other Losses in respect of Title Defects and
Defect Amounts, and (b) the foregoing shall not operate to limit
Shareholders' responsibility for any reductions to the Purchase Price
pursuant to Section 9.2, or for any breach of any other provision of this
Agreement to the extent provided in Article X, except that any recovery to
which Purchaser may be entitled on account of such matters shall not be
duplicative of any amount recovered by Purchaser under this Section 9.1.
9.2 Adjustments for Environmental Matters.
(a) Availability of Data to Purchaser. After execution of this
Agreement, Shareholders, the Companies and the Subsidiary shall make
available to Purchaser (and its representatives) all information which is
in the possession or control of Shareholders, the Companies or the
Subsidiary or to which the Shareholders, the Companies or the Subsidiary
have access (other than publicly available information to which Purchaser
has equal access) and which relates to Environmental Matters of the
Companies or the Subsidiary or the environmental condition of any Company
Property, including, without limitation, information regarding
environmental audits and investigations; alleged violations of
Environmental Laws; correspondence and filings with environmental
agencies; crude oil and produced water that may have been spilled or
disposed of on-site and the locations thereof; pits and pit closures;
burial of wastes or other materials regulated under Environmental Laws;
land farming; land spreading; underground injection; and solid waste
disposal sites, in each case other than any such records or information
which Shareholders reasonably believe is subject to a legal privilege
("Privileged Information") whereby disclosure would result in the waiver
thereof, provided that Shareholders shall identify for Purchaser each
Property with respect to which such Privileged Information exists.
Shareholders agree that at least one officer of one of the Companies shall
be deemed to have actual knowledge of all Environmental Matters with
respect to which information asserted by Shareholders to be Privileged
Information relates. Also, prior to the Closing, Purchaser shall have the
right at its own risk and expense to conduct or have conducted a Phase I
Environmental Audit, copies of which shall be promptly provided to
Shareholders. To enable Purchaser to conduct the Phase I Environmental
Audit, Shareholders, the Companies and the Subsidiary will provide
Purchaser (and its representatives) with reasonable access to Company
Property, subject to any third party restrictions on the Companies or
Subsidiary with respect to access to Company Property, and will make
available for Purchaser employees of Shareholders, the Companies or the
Subsidiary and contractors or consultants to Shareholders, the Companies
or the Subsidiary. In conducting the Phase I Environmental Audit,
Purchaser shall treat, and will cause all of its assigns, representatives,
agents, consultants, contractors or subcontractors to treat, all
information obtained by Purchaser pursuant to the Phase I Environmental
Audit and otherwise pursuant to this Section as strictly confidential
(except to the extent such information is otherwise available to the
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general public) and will not disclose such information without the prior
written consent of Shareholders, except to the extent that such
information is legally required to be disclosed by Purchaser, in which
event Purchaser may disclose such information upon notice given to
Shareholders. Shareholders shall have the right to be present during any
inspection of Company Property and during any interviews of the Companies'
or the Subsidiary's employees, contractors, or consultants conducted as a
part of the Phase I Environmental Audit. Purchaser shall provide
Shareholders advance notice of such inspections and interviews. Purchaser
agrees to release, indemnify, defend, and hold Shareholders, the Companies
and the Subsidiary harmless from any fines, penalties or damage to persons
or property caused by the activities of Purchaser or its representatives,
agents, consultants, contractors or subcontractors in conducting the Phase
I Environmental Audit and other inspections permitted under this Section
9.2, except to the extent the damage arises from the negligence or
misconduct of Shareholders, the Companies or the Subsidiary. Should
Purchaser desire to conduct any procedures for environmental assessment
outside the scope of the Phase I Environmental Audit, Purchaser must make
written request for Shareholders' permission to do so, and will not
commence such procedures without first obtaining Shareholders' written
permission, which permission will not be unreasonably denied and will be
either given or denied not later than three (3) Business Days after
receipt of Purchaser's written request. If within such three-day period
Shareholders refuse to permit any request by Purchaser to conduct an
environmental assessment outside the scope of a Phase I Environmental
Audit, Purchaser shall have the right to cause the Property affected
thereby to be acquired by Shareholders (or their designee) in accordance
with the procedures set forth in Section 9.2(b).
(b) Identification of Environmental Matters Prior to Closing. If, in
the course of Purchaser's environmental due diligence in connection with
this transaction, Purchaser reasonably concludes that Environmental
Liabilities exist relating to the Companies, the Subsidiary, any Company
Property, or any business, operations, or activities conducted by the
Companies or the Subsidiary, then Purchaser shall advise Shareholders in
writing of each such discovered Environmental Liability as soon as is
feasible, but in all events on or before three (3) Business Days prior to
the Closing Date. Each such written notification shall contain a
reasonable description of the facts relied upon by Purchaser in making its
determination that such an Environmental Liability exists and shall
identify the Company Property affected by such Environmental Liability (an
"Affected Property"). Purchaser shall attempt to estimate in good faith
the scope of and cost to remedy the identified Environmental Liabilities
associated with an Affected Property in accordance with then-applicable
Environmental Law and, upon receipt of appropriate supporting information,
shall give written notice to Shareholders of its conclusions and its good
faith estimate of the amount of such Environmental Liabilities. Purchaser
shall give Shareholders written notice of its good faith estimate of the
amount of such Environmental Liabilities on and as of the third (3rd)
Business Day prior to the Closing Date. Upon receipt of Purchaser's notice
that an Environmental Liability exists, Shareholders shall attempt (or
cause the Companies or the Subsidiary to attempt) to
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remedy the situation to Purchaser's reasonable satisfaction prior to
Closing, or if Shareholders dispute that an Environmental Liability exists
or the magnitude thereof or if remediation is not feasible, then
Shareholders shall negotiate with Purchaser as to the existence or
magnitude of such identified Environmental Liability. In the event
Purchaser and Shareholders are able to mutually agree upon an acceptable
adjustment to the Purchase Price to account for such identified
Environmental Liability, then the cash portion of the Purchase Price shall
be adjusted downward by the agreed amount and Shareholders shall have no
further responsibility or liability to Purchaser either pursuant to this
Agreement (including Section 10.6) or at law with respect to the specific
Environmental Liability referenced in Purchaser's notice to Shareholders.
If the parties do not agree upon an acceptable Purchase Price adjustment,
then Shareholders shall either (x) submit the adjustment to the Purchase
Price to arbitration in accordance with procedures identical to the
procedures set forth in Section 9.1(h), other than the last three
sentences of clause (iii) thereof, for which the following three sentences
shall be substituted, with the Arbitrator to be experienced in
environmental matters, or (y) cause the Companies or the Subsidiary to
convey the Affected Property in accordance with this Section 9.2(b). The
Arbitrator in any such arbitration may consult with and engage
disinterested third parties to advise the Arbitrator including, without
limitation, environmental engineers, accountants and consultants and the
fees and expenses of such third parties shall be considered to be charges
and expenses of the Arbitrator. The sole remedy in any arbitration award
shall be resolution of alleged Purchase Price adjustments based on
Environmental Liabilities and the Arbitrator shall not have power to award
any other remedy, including without limitation actual damages, exemplary
damages, attorneys' fees and interest reflecting the time value of money.
The Arbitrator shall not add any interest factor reflecting the time value
of money to any Purchase Price adjustment. Each unresolved dispute as to
the amounts of an adjustment under this Section 9.2(b) shall be submitted
to arbitration unless Shareholders elect to cause the Companies or the
Subsidiary to convey the Affected Property, effective as of the Effective
Date to either the Shareholders or an entity designated by Shareholders,
in which case the cash portion of the Purchase Price shall be reduced by
the Value of the Affected Property, adjusted to reflect the revenues and
expenditures (including capital expenditures) attributable to the Affected
Property since the Effective Date, provided that (i) Shareholders fully
indemnify the Companies, the Subsidiary and Purchaser (and the other
Persons named as indemnitees in Section 10.6(a)) from and against any and
all Environmental Liabilities attributable to the Affected Property, in
the manner provided in Section 10.6, except that such indemnity shall not
be subject to or limited as to any amount, any deductible, any threshold
amount, any survival period or any other restrictions, if any, set forth
in this Agreement, and (ii) the conveyance of such Affected Property shall
be by an instrument of assignment or conveyance which is expressly made
without any warranty or representation, express or implied, as to title,
condition or any other matter (but, to the extent transferable, with
subrogation of Shareholders (or such designee) to all covenants and
warranties theretofore made by any of the Companies' or Subsidiary's
predecessors in title, except any subsidiary or Affiliate of the Companies
or Subsidiary). In the event Shareholders elect to submit an adjustment to
arbitration, the
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Closing shall not be delayed on account thereof, and the Purchase Price
shall be adjusted upon the conclusion of each such arbitration proceeding,
according to the Arbitrator's decision. Any adjustment awarded by the
Arbitrator shall bear interest at the Agreed Rate from the Closing Date
until paid. This Section 9.2(b) applies only to Environmental Liabilities
identified by Purchaser on or before three (3) Business Days prior to the
Closing Date. The provisions of this Section 9.2(b) shall not apply to the
claim disclosed as item 17 of Schedule 3.8.
(c) Election to Terminate. Notwithstanding anything to the contrary
in this Agreement, if, on or before 5:00 p.m. on the second (2nd) Business
Day prior to the Closing Date, Purchaser has identified one or more
Environmental Liabilities that on or prior to the Closing Date have not
been fully remedied by Shareholders, accepted by Purchaser pursuant to
Section 9.2(b), or conveyed to Shareholders or their designee pursuant to
Section 9.2(b), and that are estimated in good faith by either Purchaser
or Shareholders to be in excess of $25,000,000 in the aggregate, then
either Purchaser or the Shareholders may elect to terminate this Agreement
prior to the Closing in accordance with the provisions of Section 8.1(e)
hereof.
(d) Definitions. The following terms, as used in this Agreement, have
the indicated meanings:
"Agreed Rate" has the meaning specified in Section 1.6(h).
"Contaminant" means any contaminant, waste, pollutant, petroleum
waste, used oil, hazardous or toxic substance or waste (as such terms
are defined in Environmental Laws), and any other substances that are
regulated by any Governmental Body under any Environmental Laws when
present in amounts, concentrations or conditions requiring action
under Environmental Laws.
"Environmental Encumbrance" means an Encumbrance in favor of any
Governmental Body or other Person for (i) any liability under any
Environmental Law or (ii) damages arising from, or costs incurred by
such Governmental Body or Person in response to, a Release or
threatened Release of a Contaminant into the environment.
"Environmental Law" means all applicable Requirements of Laws in
effect on the date hereof derived from or relating to foreign,
federal, Indian, state and local laws (excluding common law) and
regulations relating to or addressing the environment, including but
not limited to (i) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (42 U.S.C. Sections 9601 et
seq.), the Resources Conservation and Recovery Act of 1976 (42 U.S.C.
Sections 6901 et seq.), and any state equivalents thereof and (ii)
all applicable Requirements of Laws relating to the emission,
discharge, disposal, treatment, recycling, reclamation, permitting,
manufacture, processing, distribution, generation,
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storage, transportation, Release or threatened Release of, or
exposure of persons or property to, contaminants, wastes, pollutants,
petroleum wastes, used oil, hazardous or toxic substances or wastes,
or any other regulated substances.
"Environmental Liabilities" means any and all reasonable costs
(including remedial, removal, response, abatement, cleanup,
investigative, and/or monitoring costs), damages, liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise),
settlements, expenses (including charges and assessments, and
expenses and costs of investigating, preparing or defending any
action or proceeding), liens, penalties, fines, taxes, prejudgment
and post-judgment interest, court costs and reasonable attorneys'
fees incurred or imposed in connection with any Environmental Matter
or any Environmental Law, including, without limitation, any of the
foregoing which are incurred or imposed (i) pursuant to any
agreement, order, notice of responsibility, directive (including
requirements embodied in Environmental Laws), injunction, judgment or
similar documents (including settlements) attributable to or arising
out of or under Environmental Laws, or (ii) pursuant to any claim by
a Governmental Body or other entity or Person for personal injury,
property damage, damage to natural resources, remediation or response
costs arising out of or attributable to any Environmental Matter.
"Environmental Matters" means matters (i) resulting from or
attributable to actual, threatened, or alleged Releases, (ii)
otherwise resulting from or attributable to the manufacture,
generation, processing, distribution, use, treatment, storage,
disposal, transport, or handling of Contaminants or (iii) otherwise
relating to any Environmental Law.
"Offsite Environmental Liability" means an Environmental
Liability arising from or relating or attributable to either (i)
Contaminants that have been transported (whether for treatment,
storage, disposal, reclamation, recycling or otherwise), or that have
otherwise migrated or been moved, from any Company Property to any
other property owned by a third party or (ii) a property previously
owned by either of the Companies or any of their present or past
subsidiaries prior to Closing.
"Onsite Environmental Liability" means an Environmental
Liability (i) that arises from or relates or is attributable to
conditions existing on Company Property as of the Closing Date, but
(ii) is not an Offsite Environmental Liability.
"Phase I Environmental Audit" means a visual and documentary
assessment of (a) Environmental Matters pertaining to any of the
Companies and the Subsidiary, (b) the Company Property, and (c)
compliance with Environmental Laws by the Companies and the
Subsidiary. The Phase I Environmental Audit may include, without
limitation, examination of the
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Companies' and the Subsidiary's files and public documents,
interviews of personnel of the Companies and the Subsidiary and of
other appropriate persons, visual inspection of Company Property and
other properties (subject to restrictions on access), and review of
NORM and asbestos surveys known to the Companies and the Subsidiary,
but shall not include invasive sampling or testing.
"Release" means any release, spill, emission, leaking, pumping,
pouring, emitting, emptying, injection, deposit, disposal, discharge,
dispersal, escaping, leaching, dumping (including the abandonment or
discarding of barrels, containers, and other closed receptacles
containing any Contaminant), or migration of a Contaminant into the
environment or into or out of any Company Property, including, to the
extent recognized by law as such, the movement of Contaminants
through or in the air, soil, surface water, groundwater of Company
Property.
"Remedial Action" means actions required under Environmental
Laws to (i) clean up, remove, treat or in any other way address
Contaminants in the indoor or outdoor environment, (ii) prevent the
Release or threatened Release or minimize the further Release of
Contaminants or (iii) investigate and determine if a remedial
response is needed and to design such a response and post-remedial
investigation, monitoring, operation and maintenance and care.
9.3 Tax Matters.
(a) Liabilities for Taxes.
(i) Shareholders shall be liable for all federal income taxes
(and state and local income taxes of taxing jurisdictions in which
Parent files a consolidated, combined or unitary income tax return
with a Company or Subsidiary) (A) imposed on the Companies or
Subsidiary pursuant to Treas. Reg. Section 1.1502-6 or similar
provision of state or local law as a result of the Companies or such
Subsidiary having been a member of the MEC Group, or (B) imposed on
the Companies or Subsidiary, or for which the Companies or Subsidiary
may otherwise be liable, for any Taxable year or period that ends
before or includes the Closing Date, including any such taxes imposed
(y) as a result of a Company or Subsidiary being a member of an
affiliated group, other than the MEC Group or (z) by any taxing
jurisdiction with respect to which a Section 338(h)(10) Election is
made, but excluding any transactions occurring on the Closing Date
(other than the Section 338(h)(10) Election, the conveyance of
properties to Shareholders or their designees pursuant to Section 9.1
or Section 9.2 and transactions in the ordinary course of business of
the Companies and Subsidiary) which are not directly related to the
sale of the Shares (the "Excluded Transactions"). Purchaser shall
reimburse Shareholders for any such income taxes attributable to the
Excluded Transactions. Shareholders shall be entitled to any
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refund of (or credit for) Taxes allocable to any Taxable year or
period that ends on or before the Closing Date (other than the
portion of such refund which is attributable to the Excluded
Transactions, which refund shall be for the account of Purchaser).
(ii) Purchaser shall be liable for all federal, state and local
income taxes imposed on the Companies or Subsidiary or for which the
Companies or Subsidiary may otherwise be liable for any Taxable year
or period that begins after the Closing Date.
(iii) Notwithstanding subsection (i) of this Section 9.3(a), if
a Company or Subsidiary, as the case may be, consistent with prior
years' practice, is included in any consolidated, combined or unitary
income tax return filed by Parent, but the Taxable year of such
Company or Subsidiary does not terminate as a result of the Section
338(h)(10) Election (or its equivalent under state or local income
Tax law) the Shareholders shall be liable for the income taxes
imposed by that jurisdiction for the Straddle Year, provided,
however, that Purchaser shall reimburse Shareholders for such income
taxes which are attributable to the Excluded Transactions plus such
income taxes attributable to the activities of the Companies and
Subsidiary from the day following the Closing Date through the last
day of the Straddle Year (or if the result of such activities
aggregated with the income taxes resulting from the Excluded
Transactions results in a tax savings to Shareholders, Shareholders
shall pay such tax savings to Purchaser). (The "Straddle Year" shall
mean any Taxable year that begins before and ends after the Closing
Date.) The portion of such income taxes attributable to the period
from the day following the Closing Date shall be determined on a
"closing of the books as of the close of business on the Closing
Date" basis, except that exemptions, allowances and deductions that
are determined on an annual basis shall be allocated on a daily
basis.
(iv) Except as otherwise provided in this Section 9.3(a), if a
Company or Subsidiary, as the case may be, consistent with prior
years' practice, is not included in any consolidated, combined or
unitary state or local income tax return filed by Parent, such
Company or Subsidiary shall be liable for its state income taxes. To
the extent that a Company's or Subsidiary's liability for such taxes
for Taxable years ending on or before June 30, 1996 plus the portion
of such taxes for the portion of the Straddle Year ending on June 30,
1996 is more than the reserve for such taxes included in the Most
Recent Financial Statements, Shareholders shall pay to Purchaser such
excess (together with the applicable amount of any interest and
penalties payable to the applicable taxing jurisdiction with respect
to such excess). The portion of such taxes which is attributable to
the portion of the Straddle Year ending on June 30, 1996 shall be
determined on a "closing of the books as of the close of business on
June 30, 1996" basis,
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except that exemptions, allowances and deductions that are determined
on an annual basis shall be allocated on a daily basis.
(v) Except as otherwise provided in Section 9.3(a)(vi), the
Companies or Subsidiary, as the case may be, will be liable for all
other Taxes. To the extent that a Company's or Subsidiary's liability
for such Taxes for Taxable years ending on or before June 30, 1996
plus the portion of the Straddle Year ending on June 30, 1996 is more
than the reserve for such Taxes included in the Most Recent Financial
Statements, Shareholders shall pay to Purchaser such excess (together
with the applicable amount of any interest and penalties payable to
the applicable taxing jurisdiction with respect to such excess). The
portion of such Taxes which is attributable to the portion of the
Straddle Year ending on June 30, 1996 shall be determined on a
"closing of the books as of the close of business on June 30, 1996"
basis, except that exemptions, allowances and deductions that are
determined on an annual basis shall be allocated on a daily basis.
(vi) Notwithstanding anything herein to the contrary, Purchaser
shall pay fifty percent (50%) and Shareholders shall pay fifty
percent (50%) of any real property transfer or gains Tax, sales Tax,
use Tax, stamp Tax, stock transfer Tax, or other similar Tax imposed
on the transactions contemplated by this Agreement.
(b) Responsibility for Tax Returns.
(i) Shareholders shall file or cause to be filed when due all
Tax returns that are required to be filed by or with respect to the
Companies and Subsidiary on or before the Closing Date (taking into
account all extensions permitted by applicable law) and Shareholders
shall remit or cause to be remitted to the appropriate taxing
authority any Taxes due in respect of such Tax returns, and Purchaser
shall file or cause to be filed when due all Tax returns that are
required to be filed by or with respect to the Companies and
Subsidiary after the Closing Date (taking into account all extension
permitted by applicable law) and Purchaser shall remit or cause to be
remitted to the appropriate taxing authority any Taxes due in respect
of such Tax returns. Notwithstanding the preceding sentence,
Shareholders shall file or cause to be filed the federal (and, in
jurisdictions in which consolidated, combined or unitary income Tax
returns are filed, state and local) income Tax returns for the
Straddle Year and shall remit or cause to be remitted to the
appropriate taxing authority any Taxes due in respect of such Tax
returns. Any Tax return required to be filed by Shareholders or
Purchaser pursuant to this Section 9.3(b) relating in whole or in
part to Taxes for which the other party(ies) may be liable pursuant
to the provisions of Section 9.3(a) or its representations set forth
in Section 3.7 shall be submitted to the other party for the other
party's approval not later than 30 days prior to the due date for the
filing of such Tax return (taking into account all extensions
permitted by
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applicable law); except that the material to be submitted by
Shareholders or Purchaser may be limited to the results of operations
of the Companies and Subsidiary. All Tax returns which Shareholders
or Purchaser are required to file or cause to be filed in accordance
with this Section 9.3(b) shall, to the extent permitted by applicable
law, be prepared and filed in a manner reasonably consistent with
past practice.
(ii) None of Purchaser or any Affiliate of Purchaser shall (or
shall cause or permit the Companies or Subsidiary to) amend, refile
or otherwise modify any Tax return relating in whole or in part to
the Companies or Subsidiary with respect to any Taxable year or
period ending on or before the Closing Date without the prior written
consent of Shareholders, which consent may be withheld in the sole
discretion of Shareholders. None of Shareholders, the MEC Group or
any of their Affiliates shall or shall cause or permit any amendment,
refiling or modification of any Tax return relating in whole or in
part to the Companies or Subsidiary with respect to any Taxable year
or period ending on or before the Closing Date, if such amendment,
refiling or modification could be reasonably expected to have any
adverse effect on Purchaser, Companies or Subsidiary without the
prior written consent of Purchaser, which consent may be withheld in
the sole discretion of Purchaser.
(iii) Purchaser shall promptly cause the Companies and
Subsidiary to prepare and provide to Shareholders a package of Tax
information materials, including, without limitation, schedules and
work papers (the "Tax Package") required by Shareholders to enable
Shareholders to prepare and file all Tax returns required to be
prepared and filed by Shareholders pursuant to this Section 9.3(b).
The Tax Package shall be completed in accordance with past practice,
including past practice as to providing such information and as to
the method of computation of separate Taxable income or other
relevant measure of income of the Companies and Subsidiary. Purchaser
shall cause the Tax Package to be delivered to Shareholders not later
than 30 days prior to the due date for such return (taking into
account all extensions permitted by applicable law).
(c) Contest Provisions. Purchaser shall promptly notify Shareholders
in writing upon receipt by Purchaser, any of its Affiliates, the Companies
or any Subsidiary of notice of any pending or threatened federal, state or
local Tax audits, examinations or assessments which could reasonably be
expected to affect the Tax liabilities for which Shareholders may be
responsible pursuant to Section 9.3(a). Shareholders shall promptly notify
Purchaser in writing upon receipt by Shareholders or any of their
Affiliates of notice of any pending or threatened federal, state or local
Tax audits, examinations or assessments which could reasonably be expected
to affect the Tax liabilities for which Purchaser may be responsible
pursuant to Section 9.3(a). Shareholders, at their sole cost, shall have
the sole right to represent the Companies' and Subsidiary's interests in
any Tax audit or administrative or court proceeding (a "Tax Proceeding")
relating to
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Taxable periods ending on or before the Closing Date and to employ counsel
of its choice at its expense. Purchaser, at its sole expense, shall have
the sole right to represent the Companies' and Subsidiary's interests in
any Tax Proceeding relating to Taxable periods ending after the Closing
Date and to employ counsel of its choice at its expense. Notwithstanding
the third and fourth sentences of this Section 9.3(c), in the case of a
Tax Proceeding for the Taxable year in which the Closing Date occurs for
which the Shareholders may be liable pursuant to Section 9.3(a) or
required to indemnify Purchaser pursuant to its representations set forth
in Section 3.7, Shareholders shall be entitled to participate at their
expense in the portion of such Tax Proceeding relating (in whole or in
part) to Taxes attributable to the portion of such year for which they
bear responsibility pursuant to Sections 3.7 or 9.3(a) and, with the
written consent of Purchaser (which may be withheld in the sole discretion
of Purchaser) the Shareholders, at their sole expense, may assume the
entire control of such Tax Proceeding. No deficiency or refund
attributable to any audit or administrative or judicial proceeding shall
affect the determination of the Intercompany Payables. None of Purchaser,
any of its Affiliates, the Companies or Subsidiary may settle any Tax
claim for any Taxable year or period ending on or before the Closing Date
(or for the Taxable year in which the Closing Date occurs) which may be
the subject of indemnification by MCC under Sections 3.7 or 9.3(a) without
the prior written consent of Shareholders, which consent may be withheld
in the sole discretion of Shareholders.
(d) Assistance and Cooperation. After the Closing Date, Shareholders
and Purchaser shall (and cause their respective Affiliates to):
(i) assist the other party in preparing any Tax returns which
such other party is responsible for preparing and filing in
accordance with Section 9.3(b);
(ii) cooperate fully in preparing for any audits of, or disputes
with taxing authorities regarding, any Tax returns of the Companies
and Subsidiary;
(iii) make available to the other and to any taxing authority as
reasonably requested all information, records, and documents relating
to Taxes of the Companies and Subsidiary;
(iv) provide timely notice to the other in writing of any
pending or threatened Tax audits or assessments of the Companies and
Subsidiary for Taxable periods for which the other may be responsible
under Section 9.3(b);
(v) furnish the other with copies of all correspondence received
from any taxing authority in connection with any Tax audit or
information request with respect to any such Taxable period; and
(vi) timely sign and deliver such certificates or forms as may
be necessary or appropriate to establish an exemption from (or
otherwise reduce),
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or file Tax returns or other reports with respect to, Taxes described
in paragraph (v) of Section 9.3(a) (relating to sales, transfer and
similar Taxes).
(e) Adjustment to Purchase Price. Any payment by Purchaser or
Shareholders under this Section 9.3 will be an adjustment to the Purchase
Price.
(f) Definition of Taxes. For purposes of this Agreement, the term
"Tax" (and, with correlative meaning, "Taxes" and "Taxable") shall mean
any federal, state, local or foreign income, gross receipts, property,
sales, use, license, excise, franchise, severance, employment, payroll,
withholding, alternative or add-on minimum, ad valorem, value added,
transfer or excise 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, imposed by any taxing authority.
(g) The Shareholders and the Purchaser shall timely make a joint
election pursuant to Section 338(h)(10) of the Code and Treas. Reg.
Section 1.338(h)(10)-1T(d)(1) (the "Section 338(h)(10) Election") for
federal, state and local income tax purposes (where permissible) with
respect to the purchase of the Shares as described herein. The Section
338(h)(10) Election will include the execution on the Closing Date and
subsequent filing of Internal Revenue Service Form 8023-A pursuant to the
requirements as stated therein. The Purchaser shall, within the later of
(i) 45 days after the Closing Date, and (ii) 15 days after the Final
Closing Date Statement has been accepted, deemed to have been accepted by
Purchaser or determined in accordance with Section 1.6(e), provide to
Shareholders an allocation of the deemed purchase price among the assets
of the Companies and Subsidiary in compliance with Temp. Treas. Reg.
Section 1.338(b)-2T(b). Such allocation shall be consistent with the
allocations of the Purchase Price set forth in the Schedules hereto. Such
allocation shall be deemed acceptable to Shareholders unless they notify
Purchaser of any objections within 30 days after receipt of such
allocation. If the Shareholders and Purchaser are unable to agree on such
allocation within the later of (i) 120 days after the Closing Date and
(ii) 15 days after the Final Closing Date Statement has been accepted,
deemed to have been accepted by Purchaser or determined in accordance with
Section 1.6(e), then an accounting firm chosen in accordance with the
procedures set forth in Section 1.6(e) shall make a binding determination
with respect to such allocation in accordance with Section 1.6(e). The
parties agree that for all Tax purposes, they and their Affiliates will
report consistently with such allocation of the deemed purchase price.
9.4 Change of Name. The Purchaser agrees that promptly after consummation
of the transactions contemplated by this Agreement on the Closing Date,
Purchaser will cause a Certificate of Amendment to the certificate of
incorporation of each of IOG and IGS(OK) to be filed with the Secretary of
State of their respective states of incorporation (and such other governmental
offices as are necessary), to effect a change in the names thereof to names not
including the word "InterCoast." The Purchaser shall cause to be removed the
names and marks used by the Companies and Subsidiary containing the words
"InterCoast" and all variations and
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derivatives thereof and logos relating thereto from the assets of the Companies
and Subsidiary and will not thereafter make any use nor permit any of the
Companies or Subsidiary to make any use whatsoever of such names, marks and
logos.
9.5 Retention of Records. For the entire period required by the Internal
Revenue Service, the Department of Labor, or other authorities or agencies for
which any of the Companies or Subsidiary is required to retain records, and for
at least a period of five years after the Closing Date Purchaser shall make
reasonable commercial efforts to ensure the maintenance of all books and
records of the Companies and Subsidiary relating to any period before the
Closing Date, and shall not dispose of or destroy or cause or permit the
disposition or destruction of such books and records before notifying the
Shareholders of the pending destruction or other disposition of such records
and to accord the Shareholders the right for a period of 60 days after such
notice is given to take physical possession of such records. As to such books
and records maintained by Purchaser, the Shareholders and their
representatives, upon at least ten days' notice to Purchaser, shall have
reasonable access during normal business hours to all books and records covered
by this Section 9.5 and relating to any period before the Closing Date, in all
cases for tax or other regulatory purposes, financial reporting purposes,
litigation or dispute resolution purposes and other valid business purposes.
Purchaser's compliance with this Section 9.5 shall be without cost to the
Shareholders except that the Shareholders shall pay or reimburse Purchaser for
Purchaser's out-of-pocket third party costs and expenses incurred in complying
with this Section
9.6 Fees and Expenses. Except as otherwise explicitly provided in this
Section 9.6, all fees, costs and expenses incurred by the Purchaser and the
Shareholders in negotiating this Agreement and in consummating the transactions
contemplated by this Agreement shall be paid by the party incurring the same,
including, without limitation, legal, engineering and accounting fees, costs
and expenses. Without limiting the foregoing, the Shareholders (and not any of
the Companies or Subsidiary, directly or indirectly) shall pay all of such
fees, costs and expenses incurred or caused to be incurred by them on or prior
to the Closing Date, including, without limitation, those in connection with
their curing of Title Defects pursuant to Section 9.1 and the remedying of
Environmental Liabilities pursuant to Section 9.2 in accordance with the
provisions of those Sections; provided, however, that (i) the costs and
expenses of the Companies and the Subsidiary in connection with the preparation
of the summaries referred to in Section 9.1(a) shall be paid by the Companies
and Subsidiary and (ii) the fees and expenses of Arthur Andersen LLP in
connection with the preparation of the Financial Statements shall be paid by
Purchaser. References herein to costs or expenses to be paid by the
Shareholders means that such costs or expenses shall be paid solely by the
Shareholders (and not by any of the Companies or Subsidiary, directly or
indirectly).
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9.7 Employee Benefits Plan and Practices.
(a) Employee Benefits Generally.
(i) Except as otherwise specifically provided in this Section
9.7, effective as of the Closing, Shareholders shall cause each of
the Companies and Subsidiary to cease to be participating employers
under any Plans which are sponsored or maintained by Shareholders,
Parent or any of their Affiliates other than the Companies or
Subsidiary ("Upstream Affiliates"), such Plans being herein referred
to as "Parent's Benefit Plans." Effective on and after the Closing,
except as otherwise specifically provided in this Section 9.7,
Purchaser will provide, or ensure that the Companies and Subsidiary
provide, individuals who are employed by any of the Companies or
Subsidiary on the Closing Date and who continue in the employment of
any of the Companies, Subsidiary or the Purchaser after the Closing
(including those on vacation) (hereinafter "Continuing Employees")
with benefits under benefit plans sponsored by Purchaser and in
effect from time to time ("Purchaser's Benefit Plans"), subject to
this Section 9.7; provided, however, that none of the individuals
described in Section 9.7(h)(i) shall be deemed to be a Continuing
Employee for any purposes of this Agreement unless and until he or
she shall have resumed full-time employment with the Companies or the
Subsidiary for a period of thirty (30) consecutive Business Days
after the Closing Date. In that connection, Purchaser shall amend
Purchaser's Benefit Plans to the extent necessary or appropriate to
credit Continuing Employees under Purchaser's Benefit Plans for their
period of employment with any of the Companies or Subsidiary or any
of their Affiliates.
(ii) On and after the Closing Date, Purchaser agrees that the
Companies or Subsidiary shall be responsible and liable for (and
Purchaser shall cause the Companies or Subsidiary to pay) any
payment, obligation or benefit under all Plans and policies sponsored
or maintained by the Companies or Subsidiary, including without
limitation, vacation and sick leave earned through the Closing Date
and worker's compensation (the "Company's Separate Plans") with
respect to Continuing Employees or former employees of the Companies
or Subsidiary whether such payment, obligation or benefit was earned
or incurred prior to or on or after the Closing Date; provided,
however, (1) that the foregoing shall not apply to (A) the Long-Term
Incentive Plan or (B) the liabilities and obligations under the
InterCoast Oil and Gas Company Change in Control and Severance
Agreements allocated to any Upstream Affiliate under Schedule 9.7(j)
and (2) that the Shareholders shall promptly reimburse GED (or any
successor) for one-half (not to exceed $72,000) of the amounts
payable to participants and beneficiaries under GED's Performance
Incentive Plan ("PIP") for 1996. Nothing herein shall preclude
amendment or termination of any of the Company's Separate Plans.
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(iii) On and after the Closing Date, except as provided in
Section 9.7(a)(ii) with respect to the Company's Separate Plans or as
otherwise specifically provided in this Section 9.7, neither the
Purchaser nor any of its Affiliates shall be responsible or liable
for any payment or benefit under any type of Plan, policy, or
arrangement, whether written or unwritten, collective or individual,
formal or informal, of any of the Companies or Subsidiary or any of
their Benefits Affiliates (defined below) including, without
limitation, any liabilities arising from the Coal Industry Retiree
Health Act of 1992. The term "Benefits Affiliate" means (i) any
corporation that is a member of a controlled group of corporations
(as defined in section 414(b) of the Code) that includes the
Companies, (ii) any trade or business (whether or not incorporated)
that is under common control (as defined in section 414(c) of the
Code) with the Companies, (iii) any organization (whether or not
incorporated) that is a member of an affiliated service group (as
defined in section 414(m) of the Code) that includes the Companies,
and (iv) any other entity required to be aggregated with the
Companies pursuant to regulations issued under section 414(o) of the
Code. On and after the Closing Date, except as specifically provided
in this Section 9.7, Shareholders shall be, or shall cause any
Upstream Affiliate that sponsors any Plan, policy or arrangement
described in the first sentence of this Section 9.7(a)(iii) to be,
liable for all such liabilities described in the first sentence of
this Section 9.7(a)(iii).
(b) Upstream Affiliate's Tax Qualified Plans. Shareholders shall
prevent any Upstream Affiliate from causing the transfer to any of
Purchaser's Benefit Plans any assets or liabilities of any tax-qualified
defined benefit pension plan or tax-qualified defined contribution plan of
the Upstream Affiliate (the "Upstream Affiliate's Qualified Pension
Benefit Plans"). Effective as of the date immediately prior to the Closing
Date, all individuals who as of such date were employed by any of the
Companies or the Subsidiary and were accruing benefits or earning service
credit for vesting under any Upstream Affiliate's Qualified Pension
Benefit Plans shall become one hundred percent (100%) vested in their
accrued benefits under such plans as of such date and shall cease to
accrue any benefits under such Plans. On and after the Closing Date,
Shareholders shall cause each affected Upstream Affiliate to remain liable
for the obligations of the Upstream Affiliate's Qualified Pension Benefit
Plans to the extent required under the terms of the Upstream Affiliate's
Qualified Pension Benefit Plans or applicable laws.
(c) Participation of Continuing Employees in Purchaser's Tax
Qualified Plan. Notwithstanding any other provision of this Section 9.7,
the Purchaser shall use its best efforts to cause the Companies and
Subsidiary to adopt Purchaser's tax-qualified defined contribution plan as
in effect from time to time (the "Purchaser's Qualified Pension Benefit
Plan") as of the Closing Date, but in any event Purchaser shall cause such
adoption within 45 days following the Closing Date. Purchaser shall use
its best efforts to allow the Continuing Employees in eligible categories
who satisfy applicable age and service requirements to be eligible to
participate in the Purchaser's Qualified Pension
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Benefit Plan as of the Closing Date, but in any event Purchaser shall
cause such eligibility within 45 days following the Closing Date. A
Continuing Employee's service with any of the Shareholders, the Companies
or Subsidiary or any of their Affiliates on and before the Closing Date
shall be credited under the Purchaser's Qualified Pension Benefit Plan for
purposes of participation and vesting (but not for benefit accrual).
Shareholders shall cause Purchaser to be provided any information the
Purchaser needs to administer this provision. The Purchaser shall cause
the Purchaser's Qualified Pension Benefit Plan to be amended, if
necessary, to accept direct rollovers from any Upstream Affiliate's
Qualified Pension Benefit Plans.
(d) Incentive and Supplemental Deferred Compensation Plans. Except as
provided in Section 9.7(a)(ii) with respect to the Company's Separate
Plans, none of the Purchaser, the Companies or Subsidiary or any of their
Affiliates shall assume any liabilities with respect to any (i) incentive
compensation plans (including but not limited to stock options or grants
of restricted stock) or (ii) nonqualified deferred compensation plan or
arrangement (including but not limited to any supplemental defined benefit
plans or any supplemental defined contribution plans), in which Continuing
Employees or individuals who terminated or retired from any of the
Shareholders, the Companies or Subsidiary on or prior to the Closing Date
participate. On and after the Closing Date, Shareholders shall, and shall
cause the Parent or MidAmerican Capital Company ("MCC") or any other
Upstream Affiliate to, retain all such liabilities.
(e) Welfare Benefit Plans.
(i) Except as provided in Section 9.7(a)(ii) with respect to the
Company's Separate Plans, none of the Purchaser, the Companies or
Subsidiary or any of their Affiliates shall be liable for payment of
any life insurance, accidental death and dismemberment, disability
and other welfare benefit plan expenses and benefits for each
individual employed by any of the Companies or Subsidiary prior to
the Closing Date ("Company or Subsidiary Employee") with respect to
claims incurred by such Company or Subsidiary Employee or such
Company or Subsidiary Employee's covered dependents prior to the
Closing Date. On and after the Closing Date, Shareholders shall, and
shall cause the Parent to, retain all liabilities described in the
immediately preceding sentence. Hospital, medical, life insurance,
accidental death and dismemberment, disability and other welfare
benefit plan expenses and benefits with respect to claims incurred by
any Continuing Employee or such Continuing Employee's covered
dependents on and after the Closing Date shall be Purchaser's
responsibility, and Purchaser shall cause such to be the Companies'
and Subsidiary's responsibility, in accordance with the terms of any
applicable welfare benefit plan maintained and in effect from time to
time by Purchaser, the Companies or Subsidiary for the Continuing
Employee. For purposes of this paragraph, a claim shall be deemed
incurred when the services giving rise to the claim were performed.
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(ii) On and after the Closing Date, the Continuing Employees and
their eligible dependents shall be eligible to continue as, or to
become, participants in the group medical, dental, cafeteria and/or
dependent care Plans that as of the Closing Date are offered by the
Companies or Subsidiary and subsequently may be in effect from time
to time. Nothing herein shall preclude amendment or termination of
any such Plan at any time without notice to Continuing Employees and
their eligible dependents.
(f) Continuation Coverage. The Companies or Subsidiary shall be
liable for the payment of any health expenses incurred for continuation
coverage under section 4980B of the Code or Part 6 of Title I of ERISA
with respect to "qualifying events" (within the meaning of section
4980B(f)(3) of the Code or section 603 of ERISA) occurring on or before
the Closing Date with respect to Continuing Employees or employees who
terminated employment with any of the Companies or Subsidiary on or before
the Closing Date. On and after the Closing Date, the Companies or
Subsidiary shall cause any "qualified beneficiary" (within the meaning of
section 4980B(g)(1) of the Code or section 607 of ERISA) with respect to
such qualifying events to be covered under the Companies' or Subsidiary's
group health plans that may be in effect for the period of continuation
coverage. On and after the Closing Date, the Companies and Subsidiary
shall be responsible and liable, for payments of any health care expenses
for continuation coverage (i) that are incurred by Continuing Employees
who terminate employment with or retire from the Purchaser, the Companies
or Subsidiary after the Closing Date and (ii) that are covered and payable
under any group health plan of the Purchaser, the Companies or Subsidiary
in which Continuing Employees participate.
(g) Life Insurance. None of Purchaser, the Companies or Subsidiary or
any of their Affiliates shall be liable for claims incurred with respect
to employees of the Companies and Subsidiary prior to the Closing Date
under any life insurance plan in which Continuing Employees or individuals
who were terminated or retired from any of the Shareholders, the Companies
or Subsidiary participate. Shareholders shall, and shall cause the Parent
or MCC to, retain liability for all such claims. Subject to Section
9.7(a)(i), Purchaser shall cause the Companies and Subsidiary to adopt,
effective as of the Closing Date, Purchaser's Benefit Plans that provide
death benefit protection. Continuing Employees shall be eligible to
participate in such plans in accordance with their terms.
(h) Disability Benefits.
(i) Pre-Closing Long-Term Disability. None of Purchaser, the
Companies or Subsidiary or any of their Affiliates shall be liable
for the payment of long-term disability benefits to any individuals
who may or may not have terminated employment with any of the
Shareholders, the Companies or Subsidiary prior to the Closing Date,
to the extent that such individuals are (1) receiving long-term
disability benefits on the Closing Date, or (2) on sick leave
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or leave of absence on the Closing Date and (if the sale had not
occurred) would have become eligible for long-term disability
benefits immediately following the expiration of such sick leave or
leave of absence. On and after the Closing Date, Shareholders shall,
and shall cause Parent or MCC to, retain liability for all such
payments.
(ii) Post-Closing Long-Term and Short-Term Disability. On and
after the Closing Date, Purchaser shall be responsible and liable, or
shall cause the Companies and Subsidiary to be responsible and
liable, for payment of any long-term or short-term disability
benefits (1) that are due to Continuing Employees who terminate
employment with or retire for disability from Purchaser, the
Companies or Subsidiary on or after the Closing Date and (2) that are
covered and payable under any long-term or short-term disability plan
of the Purchaser, the Companies or Subsidiary, as may be in effect
from time to time, in which Continuing Employees participate. Subject
to Section 9.7(a)(i), Purchaser shall cause the Companies and
Subsidiary to adopt, effective as of the Closing Date, Purchaser's
Benefit Plans that provide disability benefits. Continuing Employees
shall be eligible to participate in such plans in accordance with
their terms.
(i) Worker's Compensation. On and after the Closing Date, Purchaser
shall be responsible and liable, or shall cause the Companies and
Subsidiary to be responsible and liable, for the payment of any portion of
the unpaid cost and expense of all worker's compensation and the entire
cost and expense of all employee injury claims arising out of work related
injuries or illnesses sustained by Company or Subsidiary Employees on or
before the Closing Date and by Continuing Employees after the Closing
Date.
(j) Severance Pay. On and after the Closing Date, Purchaser shall be
responsible and liable, or shall cause the Companies and Subsidiary to be
responsible and liable, for payment of any severance benefits in
accordance with the terms of the severance plan described in Schedule
9.7(j) as provided therein.
(k) Certain Employees. Except as otherwise provided in this Section
9.7, on and after the Closing Date, none of Purchaser, the Companies or
Subsidiary or any of their Affiliates shall have any obligation to provide
benefits of any kind to, or with respect to, any individual who, as of the
Closing Date, is (i) a former employee of any of the Shareholders, the
Companies or Subsidiary or (ii) an employee or former employee of a
Benefits Affiliate. On and after the Closing Date, Shareholders shall, and
shall cause the Parent or MCC to, retain liability for all such
obligations.
(l) Purchaser's Plans. Nothing herein shall preclude amendment or
termination of any of the Purchaser's Benefit Plans (including, without
limitation, Purchaser's Qualified Pension Benefit Plan), the Company's
Separate Plans, or any other Plan, program, policy, fund or arrangement of
the Purchaser, any of the Companies or
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Subsidiary at any time without notice to Continuing Employees or any other
affected individuals.
(m) Cooperation. Purchaser and Shareholders agree to cooperate in
collecting and providing such information as may be required by either in
order to discharge their respective obligations under this Section 9.7.
Purchaser and Shareholders each agree to promptly make all payments and
perform all obligations with respect to which they have retained liability
under this Section 9.7.
9.8 Guarantees, Letters of Credit and Similar Instruments. At the Closing
Date, Shareholders and their Affiliates shall use their best efforts to cancel
or assign, and Purchaser shall use its best efforts to replace or assume or
cause its Affiliates to replace or assume, all of the then existing agreements
or obligations as set forth on Schedule 9.8 of the Shareholders and/or their
Affiliates to guarantee or otherwise warrant or ensure the performance of the
Companies and/or Subsidiary. Where any specific customer, supplier or other
beneficiary of a guarantee, letter of credit or similar instrument refuses to
surrender or relinquish any rights under any of Shareholders' guarantees or
obligations, or the guarantees or obligations of an Affiliate of a Shareholder,
Purchaser shall indemnify and hold the Shareholders and such Affiliates
harmless from and against Shareholders' obligations or the obligations of such
Affiliate under such guaranty or obligations until such time that Shareholders'
or Affiliate's obligation terminates by agreement or otherwise. Each of the
Parties shall use reasonable diligence to accomplish such transfers or
assumptions and Purchaser shall use its best efforts to take, or cause to be
taken, such action as is required to obtain any necessary consent or approval
of third parties for such transfers, assumptions or terminations of such
guarantees and obligations of Shareholders or their Affiliates.
(a) Discontinue Activities. Purchaser agrees to discontinue
activities under agreements and accounts guaranteed or otherwise supported
by Shareholders and Affiliates within 90 days following Closing unless
Shareholders' and Affiliates' guarantees and obligations have been
released or otherwise terminated.
(b) Hedging Accounts. At Closing, Shareholders shall transfer their
open futures, hedges, swaps, collars, puts, calls, floors, caps, options
or other contracts which are intended to benefit from or reduce or
eliminate the risk of fluctuations in the price of commodities (including
Hydrocarbons) or securities (and the corresponding deposits, if any)
relating to the Companies and Subsidiary reflected in Schedule 3.26 to an
account designated by Purchaser, and Purchaser shall assume responsibility
for changes in margin funding as required to maintain the account.
9.9 Confidential Nature of Information. Each party agrees that it will
treat in confidence all documents, materials and other information which it
shall have obtained regarding the other party during the course of the
negotiations leading to the consummation of the transactions contemplated
hereby (whether obtained before or after the date of this Agreement), the
investigation provided for herein and the preparation of this Agreement and
other related
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documents, and, in the event the transactions contemplated hereby shall not be
consummated, each party will return to the other party all copies of nonpublic
documents and materials which have been furnished in connection therewith. Such
documents, materials and information shall not be communicated to any Person
(other than, in the case of Purchaser, to its counsel, accountants, financial
advisors or lenders, and in the case of Shareholders, to their counsel,
accountants, financial advisors or lenders). No Person shall use any
confidential information in any manner whatsoever except solely for the purpose
of evaluating the transactions contemplated by this Agreement or the
negotiation or enforcement of this Agreement or any agreement contemplated
hereby; provided that after the Closing Purchaser, the Companies and Subsidiary
may use or disclose any confidential information related to the Companies,
Subsidiary or their assets or businesses. The obligation of each party to treat
such documents, materials and other information in confidence shall not apply
to any information which (i) is or becomes lawfully available to such party
from a source other than the furnishing party, (ii) is or becomes available to
the public other than as a result of disclosure by such party or its agents,
(iii) is required to be disclosed under applicable law or judicial process, but
only to the extent it must be disclosed, or (iv) such party reasonably deems
necessary to disclose to obtain any of the consents or approvals contemplated
hereby.
9.10 No Public Announcement. Except as Purchaser and Shareholders may
otherwise consent to in writing, neither Purchaser nor Shareholders shall (nor
shall Shareholders permit the Companies or Subsidiary to), without the approval
of the other, make any press release or other public announcement concerning
the transactions contemplated by this Agreement, except as and to the extent
that any such party shall be so obligated by law or the rules of any stock
exchange or quotation system, in which case the other party shall be advised
and the parties shall use their best efforts to cause a mutually agreeable
release or announcement to be issued; provided that the foregoing shall not
preclude communications or disclosures necessary to implement the provisions of
this Agreement or to comply with the accounting and Securities and Exchange
Commission disclosure obligations.
ARTICLE X.
INDEMNIFICATIONS
10.1 Survival.
(a) Notwithstanding any investigation at any time made by or on
behalf of any party hereto, all representations and warranties of the
parties contained in this Agreement or in any certificate delivered
pursuant hereto shall survive the Closing Date and shall continue until
the second anniversary of the Closing Date except as hereinafter provided
in this Section 10.1. Purchaser's representations and warranties contained
in Article II with respect to (i) the Warrants shall survive until one
year after the expiration of the Warrants, and (ii) the Purchaser Shares
shall survive without time limitation. Shareholders' representations and
warranties contained in Section 3.13 which give rise to Environmental
Claims (i) regarding any Onsite Environmental Liability shall survive
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until the expiration of Shareholders' indemnification obligations under
Section 10.6(c)(i) and (ii) regarding any Offsite Environmental Liability
shall survive until the expiration of Shareholders' indemnification
obligations under Section 10.6(c)(ii). Shareholders' representations and
warranties contained in Article III with respect to the Shares shall
survive without time limitation. Purchaser's exclusive remedies with
respect to the breach of the representations and warranties set forth in
Sections 3.6(a) and 3.6(e) are set forth in Section 9.1 and shall be as
provided in Section 9.1. Purchaser's and Shareholders' rights in respect
of representations and warranties which survive after the Closing Date
shall be preserved until a claim with respect thereto is settled or
satisfied or the applicable statute of limitations period expires,
provided that notice of such claim, specifying the factual basis of such
claim in reasonable detail to the extent known by the party giving notice,
is delivered to the Shareholders or Purchaser, as the case may be, on or
before the expiration of such survival.
(b) Notwithstanding anything to the contrary above or below, the
representations, warranties and indemnifications made herein with respect
to federal, state or local income and other Tax matters (including
liabilities for Taxes, penalties and interest) shall survive the Closing
Date and shall terminate upon, and only to the extent of, the expiration
of the statute of limitations applicable to the pertinent taxable years of
the MEC Group or of any of the Companies or Subsidiary, as the case may
be.
10.2 General Indemnification by the Shareholders. Upon and after
consummation of the transactions contemplated hereby, the Shareholders shall
indemnify and hold harmless the Purchaser for the full amount of all losses,
claims, costs, expenses, obligations, settlement, payments, awards, judgments,
fines, penalties, damages, deficiencies and liabilities or other charges
(including reasonable attorneys' fees) (collectively, "Losses"), arising from
or constituting (i) a breach of any of Shareholders' representations or
warranties herein or in any certificate delivered pursuant hereto by or on
behalf of the Shareholders (other than Section 3.6(a), Section 3.6(e), the sole
remedies for the breach thereof being set forth in Section 9.1, and other than
Section 3.13(a) and the other clauses of Section 3.13 to the extent they
address Environmental Matters, the sole remedies for the breach thereof being
set forth in Sections 9.2 and 10.6) or (ii) a breach of or failure to perform
any of the covenants or agreements made by the Shareholders or either of them
in this Agreement which survive the Closing Date and are not covered by Section
9.1, 9.2, 9.3 or 10.3. Notwithstanding the foregoing, the Shareholders shall be
liable under this Section 10.2 only if, and then only to the extent that, the
aggregate amount of any Losses pursuant to this Section 10.2 and any
Environmental Claims pursuant to Section 10.6 for which the Purchaser or any
other Person indemnified hereunder after the Closing Date is entitled to
indemnification (determined without regard to any materiality qualification, if
any, contained in any representation, warranty or covenant giving rise to a
claim for indemnity hereunder) (i) exceeds $750,000 in the aggregate and (ii)
shall not exceed 100% of the Purchase Price. Notwithstanding the preceding
sentence, Purchaser shall be entitled to indemnification for any Losses arising
from failure by the Shareholders to make any payments required to be made under
Section 1.6 as adjustments to the Purchase Price without regard to
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the $750,000 limitation set forth in clause (i) of such sentence but
nevertheless subject to clause (ii) of such sentence.
10.3 Special Indemnification by the Shareholders. Subject to consummation
of the transactions contemplated hereby, the Shareholders shall indemnify and
hold harmless the Purchaser, the Companies, the Subsidiary and each of their
respective Affiliates for (i) 90% of all Losses or Environmental Liabilities
arising from or incurred in connection with item 17 on Schedule 3.8, (ii) 60%
of all Losses arising from or incurred in connection with each of items 2, 10
and 12 on Schedule 3.8, (iii) 100% of all Losses arising from or incurred in
connection with item 5 on Schedule 3.10 (and further described in the second
paragraph of Schedule 3.7) and (iv) 60% of all Losses arising from or incurred
in connection with item 4 on Schedule 3.10, in each of the foregoing clauses to
the extent such claims or matters relate to or arise out of acts or omissions
occurring on or prior to the Closing Date. Notwithstanding the foregoing, the
Shareholders' aggregate liability under clause (i) above shall in no event
exceed 50% of the Purchase Price and such liability shall not be taken into
account for purposes of determining the limitation set forth in clause (ii) of
the last sentence of Section 10.2 or the last three sentences of Section
10.6(b). Shareholders' obligations with respect to any Environmental
Liabilities covered by clause (i) above shall be subject to the provisions of
Section 10.6(d) and 10.6(e) except that (i) the Shareholders shall not be
entitled to submit the appropriate amount of any payments to Purchaser to
arbitration as contemplated by clause (x) of the fifth sentence of Section
10.6(d), (ii) Shareholders' indemnification obligation with respect to an
Affected Property conveyed to a Shareholder (or an entity they designate) shall
be subject to the limitations set forth in this Section 10.3 rather than in
Sections 10.6(b) and 10.6(c), and (iii) in the event the Shareholders dispute
the necessity or efficacy of any workplan (or any amendment or supplement
thereto) submitted under Section 10.6(e), they shall not be entitled to submit
such dispute to arbitration but shall have the election provided in clause (y)
of Section 10.6(d).
10.4 Indemnification by Purchaser. Upon and after consummation of the
transactions contemplated hereby, the Purchaser shall indemnify and hold
harmless the Shareholders for the full amount of all Losses arising from or
constituting (i) a breach of any of Purchaser's representations or warranties
herein or in any certificate delivered pursuant hereto by or on behalf of
Purchaser or (ii) a breach of or failure to perform any of the covenants or
agreements made by Purchaser in this Agreement which survive the Closing Date.
Notwithstanding the foregoing, the liability of Purchaser under this Section
10.4 shall not exceed 100% of the Purchase Price.
10.5 Cooperation with Respect to Third Party Claims. The Purchaser and the
Shareholders agree to cooperate with each other in the defense of any
third-party claim pursuant to which indemnification is sought under this
Section 10.5. An indemnified party shall promptly give notice to the
indemnifying party of any third-party claim as to which the indemnified party
may be indemnified under this Agreement. If indemnification is sought with
respect to a third-party claim asserted or brought against an indemnified
party, the indemnifying party shall, upon notice to the indemnified party, be
entitled to assume the defense thereof, jointly with any other indemnifying
party similarly notified (to the extent that such other indemnifying party may
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wish), with counsel reasonably satisfactory to such indemnified party. After
such notice from the indemnifying party to the indemnified party of its
election to so assume the defense of such a third-party claim, the indemnifying
party shall not be liable to such indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof, other than reasonable and necessary costs of investigation,
unless the indemnifying party has failed to assume such defense and to employ
counsel reasonably satisfactory to such indemnified party. If the indemnifying
party gives such notice of assumption of such defense and then fails to assume
or carry on such defense, the indemnifying party shall indemnify and hold
harmless the indemnified party against any loss, cost or expense suffered as a
result thereof. Notwithstanding any of the foregoing to the contrary, the
indemnified party will be entitled to select its own counsel and assume the
defense of any action brought against it if the indemnifying party fails to
select counsel reasonably satisfactory to the indemnified party, the expenses
of such defense to be paid by the indemnifying party.
10.6 Shareholders' Environmental Indemnification. Notwithstanding any
provision of this Agreement to the contrary, except for the Shareholders'
obligations with respect to Environmental Matters identified in accordance with
Section 9.2 prior to the Closing Date and except as provided in Section 10.3,
the indemnification set forth in this Section 10.6 shall be the sole and
exclusive obligation of Shareholders regarding Environmental Matters and
Environmental Liabilities of the Companies, the Subsidiary or any Company
Property. Shareholders' obligations with respect to Environmental Matters and
Environmental Liabilities arising from or incurred in connection with item 17
of Schedule 3.8 shall be governed by Section 10.3 rather than this Section 10.6
except to the extent contemplated by Section 10.3.
(a) Shareholders agree, subject to the general notice provisions set
forth in Section 10.7 and the limitations of this Section 10.6 as
hereinafter set forth, to indemnify, defend, and hold harmless the
Companies, the Subsidiary and Purchaser and the Companies', the
Subsidiary's and Purchaser's respective Affiliates, from and against any
and all Environmental Liabilities imposed upon, asserted against, or
incurred by the Companies, the Subsidiary or the Purchaser or any such
Affiliates, arising out of or in connection with (i) any breach of any of
the representations and warranties set forth in Section 3.13(a), or in the
other clauses of Section 3.13 to the extent relating to Environmental
Matters; and (ii) any Environmental Liabilities arising from the
operations of the Companies and the Subsidiary, or the ownership or
operation of any current or former Company Property, in each case arising
out of acts or omissions which occurred prior to the Closing Date
(collectively "Environmental Claims"); provided, however, that in the
event that acts or omissions of any Person (other than the Shareholders or
any Person acting for or on behalf of the Shareholders) after the Closing
Date caused or contributed to a preexisting circumstance or condition,
then Shareholders' obligation to indemnify, defend and hold Purchaser, the
Companies, the Subsidiary and Purchaser's respective Affiliates harmless
as provided herein shall be reduced to the extent of any Environmental
Liabilities resulting from such post-Closing acts or omissions.
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(b) Shareholders shall be liable under this Section 10.6 only if, and
then only to the extent that, the aggregate amount of any Losses or
Environmental Claims for which the Purchaser, any Company, the Subsidiary
or any other Person indemnified hereunder after the Closing Date is
entitled to indemnification pursuant to Section 10.2 (determined without
regard to any materiality qualification contained in any representation,
warranty or covenant giving rise to a claim for indemnity hereunder) and
this Section 10.6 exceeds $750,000 in the aggregate. Once such Losses and
Environmental Claims exceed such $750,000 aggregate amount, Shareholders
shall be responsible for all Environmental Claims subject to this Section
10.6 up to an aggregate of $10 million. Should Environmental Claims
subject to this Section 10.6 exceed $10 million, Shareholders shall only
be responsible for 90% of any additional Environmental Claims until the
aggregate of all such Environmental Claims reaches $100 million, at which
point Shareholders shall have no further responsibility for any
Environmental Liabilities related to Environmental Claims. Notwithstanding
the foregoing, Shareholders' aggregate liability under Sections 10.2 and
10.6 shall in no event exceed 100% of the Purchase Price.
(c) By way of further limitation, Shareholders' indemnification
obligations shall survive:
(i) with respect to Environmental Claims resulting from Onsite
Environmental Liabilities, only to the extent that Purchaser, any of
the Companies or the Subsidiary, within two years after the Closing
Date, provides Shareholders notice of (x) the specific facts and
circumstances resulting in an Onsite Environmental Liability or such
an Environmental Claim relating to the breach of Section 3.13, or (y)
a third party claim relating to an Onsite Environmental Liability
(however, notice of a lawsuit or administrative proceeding filed
against Purchaser, any of the Companies or the Subsidiary prior to
the end of such two year period shall always be timely if Purchaser,
any of the Companies or Subsidiary give Shareholders notice thereof
within ten Business Days after being served therewith); and
(ii) with respect to Environmental Claims arising from Offsite
Environmental Liabilities, only to the extent that Purchaser, any of
the Companies or the Subsidiary, within six years after the Closing
Date, provides Shareholders notice of (x) the specific facts and
circumstances resulting in such Offsite Environmental Liability or
such an Environmental Claim relating to the breach of Section 3.13,
or (y) a third party claim relating to an Offsite Environmental
Liability (however, notice of a lawsuit or administrative proceeding
filed against Purchaser, any of the Companies or the Subsidiary prior
to the end of such six year period shall always be timely if
Purchaser, any of the Companies or the Subsidiary give Shareholders
notice thereof within ten Business Days after being served
therewith).
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(d) With respect to any Environmental Liability for which
Shareholders may have indemnification obligations under this Section 10.6,
Purchaser shall advise Shareholders of each such discovered Environmental
Liability in accordance with Section 10.7. Each such notification shall
contain a reasonable description of the facts relied upon by Purchaser in
making its determination that such an Environmental Liability may exist,
shall identify the Affected Property and shall set forth Purchaser's good
faith estimate of the scope of and cost to remedy the identified
Environmental Liabilities associated with the Affected Property in
accordance with Environmental Law. Upon receipt of Purchaser's notice that
an Environmental Liability may exist, if Shareholders dispute that an
Environmental Liability exists or the magnitude thereof, then Shareholders
shall negotiate with Purchaser as to the existence of or magnitude of such
identified Environmental Liability. In the event Purchaser and
Shareholders are able to mutually agree upon an acceptable payment to
Purchaser on account of such identified Environmental Liability, then
Shareholders shall pay the agreed amount to Purchaser and Shareholders
shall have no further responsibility or liability to Purchaser either
pursuant to this Agreement or at law with respect to the Environmental
Liability referenced in Purchaser's notice to Shareholders. If the parties
do not agree upon an acceptable payment to Purchaser, then Shareholders
shall either (x) submit the appropriate amount of the payment to Purchaser
to arbitration in accordance with procedures identical to the procedures
referred to in Section 9.2(b), (y) in the case of Onsite Environmental
Liability, demand that the Companies or the Subsidiary convey the Affected
Property in accordance with this Section 10.6, but only if the
Environmental Liability with respect to such Affected Property or series
of similarly situated Affected Properties is reasonably expected to exceed
$1,000,000, or (z) elect that corrective, remedial or other actions be
commenced pursuant to the provisions set forth in Section 10.6(e). If the
Shareholders demand the Companies or the Subsidiary convey the Affected
Property, then the Company or Subsidiary owning the same shall convey such
Affected Property to either Shareholder or an entity designated by
Shareholders, and the purchase price for such Affected Property shall be
the fair market value of such Affected Property at the time of conveyance
(ignoring and without reduction for the Environmental Liability with
respect to such Affected Property) as agreed by the Shareholders and the
Purchaser or, absent such agreement, determined pursuant to arbitration in
accordance with the procedures set forth above in this Section 10.6(d),
provided that (i) Shareholders fully indemnify the Companies, the
Subsidiary and Purchaser (and the other Persons named as indemnitees in
Section 10.6(a)) from and against any and all Environmental Liabilities
attributable to the Affected Property, in the manner provided in this
Section 10.6, and (ii) the conveyance of such Affected Property shall be
by an instrument of assignment or conveyance which is expressly made
without any warranty or representation, express or implied, as to title,
condition or any other matter (except that the assignor shall make a
limited warranty of title with respect to Title Defects created by,
through or under any of the Companies or Subsidiary on or after the
Closing Date only, and, to the extent transferable, with subrogation of
Shareholders (or such designee) to all covenants and warranties
theretofore made by the Companies' or Subsidiary's predecessors in title,
except any subsidiary or Affiliate of the Companies or Subsidiary). In the
event
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Shareholders elect to submit to arbitration, any payment required to be
made to Purchaser shall be made upon the conclusion of such arbitration
proceeding, according to the Arbitrator's decision.
(e) If any Environmental Liability requires corrective, remedial or
other actions pursuant to Environmental Laws to respond to, remove, or
otherwise address any conditions that cause, or contribute to, such
Environmental Liability, the Purchaser shall cause the Companies to retain
an environmental consultant approved by the Shareholders, which approval
shall not be unreasonably withheld or delayed. The consultant shall
prepare a remediation workplan, which shall be submitted to Shareholders,
as shall each amendment and supplement thereto which requires the
expenditure of material additional costs. Shareholders shall have ten (10)
Business Days after receipt of the workplan or such amendment or
supplement (as the case may be) to dispute in writing the necessity or
efficacy of any of the procedures or costs proposed therein, which writing
shall specify the reasons for such dispute. If the Shareholders fail to
give any notice of dispute within such ten (10) Business Day period, the
workplan, amendment or supplement (as the case may be) shall be deemed
accepted. If the Purchaser and the Shareholders cannot resolve such
dispute, the dispute shall be submitted to arbitration in accordance with
the procedures set forth in Section 9.2(b). In such event, the Purchaser
shall have the right to cause the Companies or Subsidiary, as the case may
be, to implement the workplan, including the disputed procedures. The
Shareholders shall bear the cost of the non-disputed procedures as
provided in this Section 10.6, and the Arbitrator shall determine which
party shall bear the cost of the disputed procedures. The Arbitrator shall
allocate responsibility for the costs of the disputed procedures by
determining whether the disputed procedures were necessary to effect the
remediation and were cost-effective. To the extent that the Arbitrator
finds that a disputed procedure was required to effect the remediation but
was not proposed to be conducted in a cost-effective manner, the
Arbitrator shall impose on the Shareholders the cost of accomplishing the
procedure in a cost-effective manner and upon the Purchaser, the balance
of such cost. The foregoing notice, dispute and arbitration procedure
shall be applicable to each material amendment and supplement to the
original workplan. Periodically, the Purchaser shall report to the
Shareholders the results of the corrective, remedial or other action and
the actual costs expended. Upon the Shareholders' receipt of each workplan
and each amendment or supplement to the workplan which requires the
expenditure of material additional costs, the Shareholders shall have the
elections pursuant to clauses (x) and (y) of Section 10.6(d); provided,
however, that Shareholders' rights to make such election shall be deferred
and the Purchaser shall not be obligated to deliver a workplan for any
time periods during which the Companies are required to respond to an
emergency situation or order of a Governmental Body which does not permit
the Purchaser adequate time to prepare a workplan or allow the
Shareholders to make such elections. In preparing each workplan and in
conducting all corrective, remedial or other actions, the Purchaser shall
cause the Companies to act in a reasonable and professional manner and
will use their best efforts to implement and complete the corrective,
remedial or other actions in a cost-effective manner. Subject to the
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foregoing, the Companies shall have sole and exclusive authority to
conduct any negotiations with any Governmental Body or third party
concerning the investigation, evaluation, selection and implementation of
any such corrective, remedial or other actions. Shareholders shall have
the right to participate in the planning and design of any such
corrective, remedial or other actions by reviewing and commenting on a
draft of any study, plan or report associated with such actions before the
study, plan or report is submitted to the Governmental Body. In planning
and designing any such study, plan or report and in considering
Shareholders' comments, suggestions and requests with respect thereto, the
Purchaser shall cause the Companies to give due consideration to the
multiple goals of minimizing Environmental Liabilities (including the
selection of remedies which reflect customary industry practices, are cost
effective and consider all related business and time requirements) and
fully complying with all Environmental Laws (including then-applicable
Requirements of Laws). The Purchaser shall in good faith carefully
consider each comment, suggestion or request made by Shareholders with
respect to the draft study, plan or report and will cooperate with
Shareholders by meeting periodically, at Shareholders' request, to discuss
any such study, plan or report. Shareholders shall maintain in confidence
all information provided by the Companies, the Subsidiary or Purchaser at
any such meeting except to the extent such information is otherwise
available to the general public or is information Shareholders are legally
required to disclose. In addition, the Purchaser shall provide
Shareholders copies of all reports, plans and correspondence submitted to
any Governmental Body with respect to such actions. Further, the Purchaser
shall provide Shareholders three days' notice (or shall provide
Shareholders notice as soon as practical if three days' notice is not
practical) of any formal meetings with, hearings before, or other formal
sessions with any Governmental Body which are expected to result in
decisions regarding actions to be required by the Governmental Body that
concern Environmental Liabilities for which Shareholders may be
responsible. Shareholders may attend such formal meetings, hearings or
other formal sessions, but Shareholders may not negotiate with any
Governmental Body or third party concerning the investigation, evaluation,
selection, or implementation of any above-referenced corrective, remedial,
or other actions necessary to respond to, remove, or otherwise address any
such conditions that cause, contribute to, or are associated with any such
Environmental Liability. Upon reasonable, periodic requests from
Purchaser, Shareholders shall provide periodic payments to the Companies
for expenses incurred by the Companies and the Subsidiary for such
corrective, remedial, or other actions to the extent Shareholders have
been afforded the new election options as set forth above, if applicable,
and the rights to participate as contemplated by this Agreement.
10.7 Notice of Claims.
(a) Any indemnified party shall give to the indemnifying party a
notice (a "Claim Notice") describing in reasonable detail the facts giving
rise to any claim for indemnification hereunder and shall include in such
Claim Notice (if then known) the amount or the method of computation of
the amount of such claim, and a reference to
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the provisions of this Agreement or any other agreement, document or
instrument executed hereunder or in connection herewith upon which such
claim is based; provided, that (a) a Claim Notice in respect of any action
at law or suit in equity by or against a third Person as to which
indemnification will be sought shall be given promptly after the action or
suit is commenced; and (b) failure to give such notice shall not relieve
the indemnifying party of its obligations hereunder except to the extent
it shall have been prejudiced by such failure.
(b) In calculating any Losses, there shall be deducted any insurance
recovery in respect thereof (and no right of subrogation shall accrue
hereunder to any insurer). To the extent that an indemnified party has
insurance coverage with respect to any Loss or Environmental Liability, or
is indemnified against any Loss or Environmental Liability by a Person
other than the Shareholders, such indemnified party shall, and agrees that
it will, seek to collect its damages first against such other Person and
only secondarily from an indemnifying party, and in the event that any
indemnifying party is required to indemnify any indemnified party for any
such Loss or Environmental Liability, the indemnifying party shall have a
right of subrogation with respect to such insurer or other Person.
(c) After the giving of any Claim Notice pursuant hereto, the amount
of indemnification to which an indemnified party shall be entitled under
this Section 10.7 shall be determined: (a) by the written agreement
between the indemnified party and the indemnifying party or, if such
written agreement cannot be reached, (b) by a final judgment or decree of
any court of competent jurisdiction or, to the extent provided herein, by
arbitration. The judgment or decree of a court shall be deemed final when
the time for appeal, if any, shall have expired and no appeal shall have
been taken or when all appeals taken shall have been finally determined.
10.8 Exclusive Remedies. Except as otherwise explicitly provided in this
Agreement or by statute to the extent that statutory remedies cannot legally be
waived by the Person entitled thereto, and except for fraud, deceit or
intentional misrepresentation by Purchaser or either Shareholder, after
consummation of the transactions contemplated by this Agreement the sole and
exclusive remedy of Purchaser and the Shareholders for breach of any of the
respective representations, warranties or covenants of Purchaser or either
Shareholder in this Agreement are as set forth in Sections 9.1, 9.2, and 9.3
and this Article X, provided that Purchaser and the Shareholders do not waive
any rights it or they may have to specific performance. Purchaser acknowledges
and agrees that neither of Shareholders would have entered into this Agreement
but for the inclusion herein of this Section 10.8.
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ARTICLE XI.
MISCELLANEOUS
11.1 Entirety. Each of Purchaser and Shareholders agrees that Purchaser
has made no express or implied agreements, representations or warranties to
Shareholders, and neither of Shareholders has made any express or implied
agreements, representations or warranties to Purchaser, in all cases relating
to the transactions contemplated by this Agreement, which are not expressly set
forth in this Agreement (including the Schedules hereto, the agreements
described therein and the Exhibits hereto). This Agreement embodies (including
the Schedules hereto, the agreements described therein and the Exhibits hereto)
the entire agreement between the parties hereto concerning the subject matter
hereof, and supersedes and cancels any express or implied prior agreement,
arrangement or understanding entered into between the parties hereto relating
to the subject matter hereof. This Agreement shall not be amended, modified or
supplemented except by a written instrument signed by an authorized
representative of each of the parties hereto.
11.2 Counterparts. Any number of counterparts hereof may be executed and
each such counterpart shall constitute an original instrument, but all such
counterparts together shall constitute but one instrument.
11.3 Notices and Waivers. Any notice, instruction, authorization, request
or demand required hereunder shall be in writing, and shall be delivered either
by personal delivery, by telegram, telex, telecopy or similar facsimile means,
by certified or registered mail, return receipt requested, or by courier or
delivery service, addressed to the parties hereto at the address indicated
beneath their respective signatures on the execution pages of this Agreement,
or at such other address and number as a party shall have previously designated
by written notice given to the other parties in the manner hereinabove set
forth. Receipt of notices shall constitute delivery; if sent by facsimile
means, confirmation of such receipt by confirmed facsimile transmission shall
constitute receipt of communications; and when delivered and receipted for (or
upon the date of attempted delivery where delivery is refused), if hand
delivered, sent by express courier or delivery service, or sent by certified or
registered mail, return receipt requested. In the event of any merger,
dissolution or other event pursuant to which the corporate existence of any
party hereto terminates, any notice, demand, claim or other communication
provided for in this Agreement may be given or delivered to any survivor or
successor to such party or all or any part of its assets. Any term or provision
of this Agreement may be waived, or the time for its performance may be
extended, by the party or parties entitled to the benefit thereof. Any such
waiver shall be validly and sufficiently given for the purposes of this
Agreement if, as to any party, it is in writing signed by an authorized
representative of such party. The failure of any party hereto to enforce at any
time any provision of this Agreement shall not be construed to be a waiver of
such provision, nor in any way to affect the validity of this Agreement or any
part hereof or the right of any party thereafter to enforce each and every such
provision. No waiver of any breach of this Agreement shall be held to
constitute a waiver of any other or subsequent breach.
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11.4 Definitions, Gender and Certain References. As used in this
Agreement, each parenthetically capitalized term in the introductions, recitals
or other Sections of this Agreement shall have the meaning so ascribed to it.
Whenever the context requires, the gender of all words used herein shall
include the masculine, feminine and neuter, and the number of all words shall
include the singular and plural. As used in this Agreement, the word
"including" means without limitation, the word "or" is not exclusive and the
terms "hereof", "herein", "hereby," "hereunder" or "hereto" shall refer to this
Agreement as a whole and not to any particular Article or Section hereof. All
titles and headings to Articles and Sections in this Agreement are included for
convenience and ease of reference only. Titles and headings shall not affect in
any way the meaning or interpretation of Articles or Sections of this
Agreement. Unless specified otherwise, references herein to: (i) specific
Articles, Sections, Exhibits and Schedules are to Articles, Sections, Exhibits
and Schedules in this Agreement; (ii) an agreement, instrument or other
document means such agreement, instrument or other document as amended,
supplemented and modified from time to time to the extent permitted by the
provisions thereof and by this Agreement; and (iii) a statute means such
statute as amended from time to time up to the date of this Agreement.
References herein to funds, dollars or other money forms are references to
legal tender of the United States of America. All Schedules and Exhibits
attached to this Agreement are by this reference incorporated herein and made a
part hereof for all purposes as if fully set forth herein. Disclosure of a
matter on a Schedule shall not be deemed a determination by the Shareholders
that such matter is material for purposes of this Agreement.
All references to times are to Central Time in Houston, Texas.
11.5 Successors and Assigns. All of the terms, provisions, covenants,
representations, warranties, and conditions of this Agreement shall be binding
upon and shall inure to the benefit of and be enforceable by the parties
hereto, their respective successors and permitted assigns, but this Agreement
and the rights and obligations hereunder shall not be assignable or delegable
by any party; provided, however, that Purchaser shall be entitled to assign its
rights and delegate its duties hereunder to any corporate Affiliate of
Purchaser, but any such assignment shall not have the effect of terminating
Purchasers, or any subsequent assignors' duties or obligations as provided
herein.
11.6 Severability. If any term, provision, covenant, or restriction of
this Agreement is held by the final, nonappealable order of a court of
competent jurisdiction to be invalid, void, or unenforceable, the remainder of
the terms, provisions, covenants, and restrictions shall remain in full force
and effect and shall in no way be affected, impaired, or invalidated thereby
unless such construction would be unreasonable. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants, and restrictions without including any
of such which may be hereafter declared invalid, void, or unenforceable.
11.7 Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND ENFORCED IN
ACCORDANCE WITH THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
DELAWARE, EXCEPT TO THE EXTENT
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MANDATORILY GOVERNED BY THE LAWS OF ANY JURISDICTION IN WHICH ANY PROPERTY IS
LOCATED.
11.8 Release. SHAREHOLDERS ACKNOWLEDGE THAT EMPLOYEES, REPRESENTATIVES OR
AGENTS OF PURCHASER HAVE ASSISTED IN OBTAINING INFORMATION FOR SHAREHOLDERS'
PREPARATION OF THE SCHEDULES CONTEMPLATED BY THIS AGREEMENT. SHAREHOLDERS AGREE
THAT PURCHASER'S ACTIONS IN OBTAINING SUCH INFORMATION SHALL NOT (i) BE THE
BASIS OF ANY CLAIM OF LIABILITY AVERRED, ALLEGED OR ASSERTED BY SHAREHOLDERS OR
(ii) CONSTITUTE A DEFENSE TO ANY CLAIM FOR RELIEF AVERRED, ALLEGED OR ASSERTED
BY PURCHASER AND PERMITTED BY THIS AGREEMENT. SHAREHOLDERS SHALL (i) RELEASE,
INDEMNIFY AND HOLD HARMLESS PURCHASER FROM AND AGAINST ANY AND ALL LOSSES,
CLAIMS, DAMAGES, EXPENSES AND LIABILITIES RELATING TO, RESULTING FROM, OR
ARISING OUT OF PURCHASER'S ACTIONS IN DEVELOPING SUCH INFORMATION FOR THE
SCHEDULES AND (ii) WAIVE ANY DEFENSE OF NEGLIGENCE TO ANY CLAIM FOR RELIEF
AVERRED, ALLEGED OR ASSERTED BY PURCHASER AND PERMITTED BY THIS AGREEMENT.
11.9 Further Assurances. After the Closing Date the Purchaser shall and
shall cause the Companies and Subsidiary to, and the Shareholders shall
execute, acknowledge and deliver all such instruments, certificates, deeds and
other documents as may be necessary or appropriate to further effect, formalize
or finalize the transactions contemplated by this Agreement or which were
effected or instituted prior to this Agreement; provided that such transactions
do not result in a breach of any of the representations or warranties herein
contained.
11.10 Person; Affiliate. As used herein, "Person" shall mean any natural
person, corporation, partnership, joint venture, limited liability company,
association, joint-stock company, trust, estate, unincorporated organization
governmental unit or other entity and "Affiliate" shall mean as to any Person,
any other Person who directly or indirectly controls, is under common control
with, or is controlled by such Person. As used in this Section 11.10, "control"
(including, with its correlative meanings, "controlled by" and "under common
control with") shall mean possession, directly or indirectly, of power to
direct or cause the direction of management or policies (whether through
ownership of securities or partnership or other ownership interests, by
contract or otherwise), provided that, in any event, any Person who owns
directly or indirectly 25% or more of the securities having ordinary voting
power for the election of directors or other governing body of a corporation or
25% or more of the partnership or other ownership interests of any other Person
(other than as a limited partner of such other Person) will be deemed to
control such corporation or other Person.
11.11 Knowledge. References herein to the knowledge of a party or matters
or information known to a party mean the actual knowledge or conscious
awareness of a director or an officer of such party or of a direct or indirect
subsidiary of such party.
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11.12 Construction. The parties acknowledge that they and their respective
counsel have negotiated and drafted this Agreement jointly and agree that the
rule of construction that ambiguities are to be resolved against the drafting
party shall not be employed in the interpretation or construction of this
Agreement.
11.13 Disclaimer. EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT AND
ANY OTHER DOCUMENT OR INSTRUMENT EXECUTED BY SHAREHOLDERS IN CONNECTION WITH
THE TRANSACTIONS CONTEMPLATED HEREBY, THE SHAREHOLDERS HEREBY EXPRESSLY
DISCLAIM AND NEGATE ANY REPRESENTATION OR WARRANTY INCLUDING WITHOUT LIMITATION
ANY REPRESENTATION OR WARRANTY AT COMMON LAW, BY STATUTE, OR OTHERWISE,
INCLUDING BUT NOT LIMITED TO THOSE RELATING TO (i) ANY IMPLIED OR EXPRESS
WARRANTY OF MERCHANTABILITY, (ii) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS
FOR A PARTICULAR PURPOSE, AND (iii) ANY IMPLIED OR EXPRESS WARRANTY OF
CONFORMITY TO MODELS OR SAMPLES OF MATERIALS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed in their respective names by their respective duly authorized
representatives as of the day and year first above written.
<TABLE>
<S> <C>
INTERCOAST ENERGY COMPANY
By: /s/ DENNIS MELSTAD
-----------------------------------------
Printed Name: Dennis Melstad
-------------------------------
Title: President
--------------------------------------
Address: 666 Grand Avenue
26th Floor, Ruan Center
Des Moines, Iowa 50309
Telecopy No.: 515/281-2312
Copy to: R. Todd Vieregg, Esq. Copy to: John E. Barry, Esq.
Andrew H. Shaw, Esq. Lawrence A. Hall, Esq.
Sidley & Austin Conner & Winters,
One First National Plaza A Professional Corporation
Chicago, Illinois 60603 2400 First Place Tower
15 East Fifth Street
Tulsa, Oklahoma 74103
Telecopy No.: (312) 853-7036 Telecopy No.: (918) 586-8549
INTERCOAST GAS SERVICES COMPANY,
a Delaware corporation
By: /s/ DENNIS MELSTAD
-----------------------------------------
Printed Name: Dennis Melstad
-------------------------------
Title: President
--------------------------------------
Address: 666 Grand Avenue
26th Floor, Ruan Center
Des Moines, Iowa 50309
Telecopy No.: (515) 281-2312
</TABLE>
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<TABLE>
<S> <C>
Copy to: R. Todd Vieregg, Esq. Copy to: John E. Barry, Esq.
Andrew H. Shaw, Esq. Lawrence A. Hall, Esq.
Sidley & Austin Conner & Winters,
One First National Plaza A Professional Corporation
Chicago, Illinois 60603 2400 First Place Tower
15 East Fifth Street
Tulsa, Oklahoma 74103
Telecopy No.: (312) 853-7036 Telecopy No.: (918) 586-8549
KCS ENERGY, INC.
By: /s/ JAMES W. CHRISTMAS
-----------------------------------------
Printed Name: James W. Christmas
-------------------------------
Title: President and Chief Executive Officer
--------------------------------------
Address: 379 Thornall Street
Edison, New Jersey 08837
Telecopy No.: 908/603-8960
Copy to: Diana M. Hudson, Esq. Copy to: Ralph M. Lowenbach, Esq.
Mayor, Day, Caldwell Orloff, Lowenbach, Stifelman
& Keeton, L.L.P. & Siegal, P.A.
700 Louisiana, Suite 1900 101 Eisenhower Parkway
Houston, Texas 77002 Roseland, New Jersey 07068
Telecopy No.: (713) 225-7047 Telecopy No.: (201) 622-3073
</TABLE>
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The schedules and exhibits to this agreement have been omitted. Such schedules
and exhibits are listed on pages (vi) and (vii) of this agreement and shall be
furnished supplementally to the Commission upon request.
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EXHIBIT 99.2
FOR IMMEDIATE RELEASE
Wednesday, November 15, 1996
KCS ENERGY, INC. SIGNS DEFINITIVE AGREEMENT TO ACQUIRE
THE OIL AND GAS OPERATIONS OF MIDAMERICAN ENERGY COMPANY
HOUSTON, TX, November 15, 1996 -- KCS Energy, Inc. (NYSE: KCS) today announced
it has signed a definitive agreement to purchase InterCoast Oil and Gas Company
(formerly known as Medallion Production Company -- "Medallion"), the Tulsa,
Oklahoma-based oil and gas exploration and production subsidiary and two gas
marketing subsidiaries of MidAmerican Energy Company, for a purchase price of
$210 million in cash and 435,000 warrants to purchase KCS common stock. The
warrants have a four-year term and an exercise price of $45 per share. In
addition, the Company has entered into a separate agreement to acquire related
Section 29 credits for a net purchase price of approximately $4 million. The
acquisition is expected to close before year end.
As previously announced on November 5, 1996, the Company has filed a
registration statement with the Securities and Exchange Commission concerning
the proposed public sale of 3 million shares of its common stock. Net proceeds
to the Company will be used to repay a portion of the indebtedness expected to
be incurred to finance the acquisition.
KCS is an independent energy company primarily engaged in the
acquisition, exploration, development and production of natural gas and crude
oil. The Company also operates natural gas transportation and marketing
businesses.
A registration statement relating to these securities has been filed
with the Securities and Exchange Commission but has not yet become effective.
These securities may not be sold nor may offers to buy be accepted prior to the
time the registration statement becomes effective. This release shall not
constitute an offer to sell or a solicitation to buy nor shall there be any
sale of these securities in any state in which such an offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of any such state.
