<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1999
-------------------------------------------------
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission File Number: 1-13630
--------------------------------------------------------
CEC RESOURCES LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Alberta Canada 98-0018241
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1605, 700 6/th/ Ave. S.W., Calgary, Alberta, Canada T2P 0T8
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(403) 265-7605
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 14, 1999
- ------------------------------------- ----------------------------------------
Common stock, stated value $.20 1,521,400
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CEC RESOURCES LTD.
BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
August 31 November 30,
1999 1998
---------------- -----------------
(unaudited)
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 1,666
Accounts receivable:
Oil and gas sales 421 466
Crown royalty refund and other 470 333
Joint interest partners 24 8
Income tax receivable 58 -
---------------- -----------------
Total current assets 973 2,473
---------------- -----------------
Property and equipment:
Oil and gas assets, full cost method 22,023 16,192
Liquid extraction plant 1,477 1,477
Other property and equipment 200 108
---------------- -----------------
23,700 17,777
Less: Accumulated depreciation, depletion, amortization
and valuation allowance (10,556) (9,015)
---------------- -----------------
Net property and equipment 13,144 8,762
---------------- -----------------
Other assets 1,864 -
---------------- -----------------
$ 15,981 $ 11,235
================ =================
(continued)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
CEC RESOURCES LTD.
BALANCE SHEETS - (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
August 31 November 30,
1999 1998
---------------- --------------
(unaudited)
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 282 $ 237
Income tax payable 2 3
Undistributed oil and gas production receipts
507 113
---------------- ------------
Total current liabilities 791 353
---------------- ------------
Future site restoration costs (Note 5) 221 165
Deferred income taxes (Note 3) 1,739 1,995
Long-term debt 4,850 -
Stockholders' equity:
Preferred stock, authorized unlimited number of
shares, no par value; none issued
Share capital, common stock, authorized unlimited number of shares,
without nominal or par value; 1,521,400 shares issued in 1999 and
1,544,400 in 1998 1,512 1,534
Retained earnings 6,868 7,188
---------------- ------------
Total stockholders' equity 8,380 8,722
---------------- ------------
$ 15,981 $ 11,235
================ ============
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 31, Three Months Ended August 31,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- ---------------
(in Canadian dollars)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 3,684 $ 2,380 $ 1,408 $ 727
Royalties (732) (460) (279) (133)
Alberta royalty tax credit 434 242 159 76
Field services 75 175 19 54
Other 2 27 - 12
-------- --------- --------- --------
Total revenues 3,463 2,364 1,307 736
-------- --------- --------- --------
Costs and expenses:
Lease operating expenses 585 563 231 187
Field services 65 111 25 33
General and administrative 1,522 615 466 256
Depreciation, depletion and amortization 1,597 686 618 212
-------- --------- --------- --------
Total costs and expenses 3,769 1,975 1,340 688
-------- --------- --------- --------
Operating income (306) 389 (33) 48
-------- --------- --------- --------
Interest expense and other 136 (23) 77 (30)
-------- --------- --------- --------
Earnings before income taxes (442) 412 (110) 78
Provision for income taxes (Note 3) (254) 144 (146) 24
-------- --------- --------- --------
Net earnings $ (188) $ 268 $ 36 $ 54
======== ========= ========= ========
Earnings per share:
Basic $ (0.12) $ 0.17 $ 0.02 $ 0.04
======== ========= ========= ========
Fully diluted $ (0.12) $ 0.17 $ 0.02 $ 0.04
======== ========= ========= ========
Average number of common shares outstanding:
Basic 1,529 1,542 1,521 1,539
======== ========= ========= ========
Fully diluted 1,529 1,546 1,523 1,543
======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CEC RESOURCES LTD.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended August 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Retained
Shares Amount Earnings
----------- ------------ -------------
(in Canadian dollars)
(in thousands, except share data)
<S> <C> <C> <C>
Balances, November 30, 1998 1,544,400 $ 1,534 $ 7,188
Purchase and cancellation of shares (23,000) (22) (132)
Net earnings - - (188)
---------- -------- -------
Balances, August 31, 1999 1,521,400 $ 1,512 $ 6,868
========== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CEC RESOURCES LTD.
STATEMENTS OF CASH FLOW (Note 2)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended August 31,
----------------------------------
1999 1998
------------ -----------
(in Canadian dollars)
(in thousands)
<S> <C> <C>
Net earnings $ (188) $ 268
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,597 686
Future income taxes (256) 120
Other (55) -
Net change in operating assets and liabilities 291 144
-------- -------
Net cash provided by operating activities 1,389 1,218
-------- -------
Cash flows from investing activities:
Additions to oil and gas properties (5,851) (489)
Additions to other assets (1,900) -
-------- -------
Net cash used in investing activities (7,751) (489)
Cash flows from financing activities:
Proceeds from long-term debt 4,850 -
Proceeds from issuance of common stock 513
Purchase of common stock (154) (592)
-------- -------
Net cash provided by (used in) financing activities 4,696 (79)
Net increase (decrease) in cash and cash equivalents (1,666) 650
Cash and cash equivalents at beginning of period 1,666 1,073
-------- -------
Cash and cash equivalents at end of period $ - $ 1,723
======== =======
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Income taxes, net of refunds $ 40 $ (50)
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
(1) BASIS OF PRESENTATION
The accompanying financial statements are for CEC Resources Ltd.
("Resources" or "Company"). Resources is an independent oil and gas company and
was incorporated on May 31, 1955 under the Business Corporations Act (Alberta )
in Canada and was acquired by the former parent of Columbus Energy Corporation
("Columbus") in 1969 and by Columbus on July 31, 1984. It remained a wholly
owned subsidiary of Columbus until spun-off from Columbus by a rights offering
in February 1995.
These financial statements are prepared in accordance with Canadian
generally accepted accounting principles ("GAAP") and require the use of
management's estimates. These statements contain all adjustments (consisting
only of normal recurring accruals) which, in the opinion of management, are
necessary to present fairly the financial position of the Company as of
August 31, 1999 and November 30, 1998, and the results of its operations and of
its cash flows for the periods presented. The results of operations for interim
periods are not necessarily indicative of results to be expected for the full
year.
Currency
The amounts in these financial statements and notes thereto are in Canadian
dollars, unless otherwise stated.
Cash Equivalents
For purposes of the statements of cash flow, the Company considers all
temporary investments to be cash equivalents. Results of hedging activities,
when employed, are included in cash flow from operations in the statements of
cash flow.
Oil and Gas Properties
The Company follows the full cost method of accounting whereby all costs
associated with the acquisition of, exploration for, and the development of oil
and gas reserves are capitalized. Such costs include land acquisition costs,
geological and geophysical expenditures, drilling costs of productive and non-
productive wells and tangible production equipment. General and administrative
expenses are capitalized to the extent such costs are directly associated with
acquisition, exploration and development of oil and gas properties. Proceeds
from the sale of petroleum and natural gas properties reduce capitalized costs
without recognition of a gain or loss unless such a sale would significantly
alter the rate of depletion and depreciation.
Capitalized costs, including tangible production equipment, are depleted
using the unit of production method based on proved reserves of oil and gas,
before royalties, as estimated by independent engineers. For purposes of the
calculation, oil and gas reserves are converted to a common unit of measure on
the basis of six thousand cubic feet of gas
7
<PAGE>
to one barrel of oil. Depreciation of the natural gas liquids processing plant
and other property and equipment are calculated using the straight line method
over their estimated useful lives.
In applying the full cost method, the Company performs a ceiling test which
restricts the net capitalized costs from exceeding an amount equal to the
estimated undiscounted value of future net revenues from proven oil and gas
reserves, based on current prices and costs, after deducting estimated future
operating costs, development costs, general and administrative expenses and
income tax expense.
Estimated future site abandonment and restoration costs are provided using
the unit of production method over the life of proven reserves with the current
year provision included in depreciation, depletion and amortization expense.
Site abandonment and restoration expenditures incurred are recorded as a
reduction of the accumulated accrual.
Field Services Business Segment
The Company receives field service revenue generated by its share of
natural gas processing fees at the Carbon gas plant. The portion of the plant
processing fee revenue attributable to Resources own gas volumes processed by
the plant is not reported as field service revenue, but instead offsets an
identical amount otherwise chargeable to lease operating expenses. The Carbon
plant also processes natural gas belonging to unrelated plant non-owners which
represents the majority of Resources field services revenues.
Resources also derives less significant revenues and net cash flow from
other gathering and compression facilities in which it has ownership. Amounts
applicable to Resources' own gas production volumes have likewise been
eliminated from both revenues and expenses from these operations.
Income Taxes
The liability method is used in measuring income taxes based on temporary
differences including timing differences and other differences between the tax
basis of an asset or liability and its carrying amount in the financial
statements. The method uses the tax rate and the tax law expected to apply to
taxable income in the periods in which the future income tax asset or liability
is expected to be realized. The Company is subject to tax under applicable
Canadian tax law.
Earnings Per Share
Basic earnings per share are calculated using the weighted average number
of shares of common stock outstanding during the period. Fully diluted earnings
per share are calculated assuming the exercise of outstanding dilutive options.
8
<PAGE>
(2) STATEMENTS OF CASH FLOW
The Company elected for 1998 to adopt Canadian Institute of Chartered
Accountants (CICA) 1540, Cash Flow Statements, which require a business
enterprise to provide a statement of cash flow in place of a statement of
changes in financial position. Application of CICA 1540 is required for fiscal
years beginning on or after August 1, 1998. Cash flow information for prior
years is restated to conform to the requirements of CICA 1540 as follows:
<TABLE>
<CAPTION>
Net Cash Provided by Net Cash Provided by
Operating Activities (Used In) Investing Activities
-------------------- ------------------------------
(In Canadian Dollars) (In Canadian Dollars)
Nine Months Ended August 31, 1999 (In Thousands) (In Thousands)
- ---------------------------------
<S> <C> <C>
As previously reported $ 835 $ (106)
Restatement 383 (383)
-------- ----------
As Restated $ 1,218 $ (489)
======== ==========
</TABLE>
(3) INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended August 31, Three Months Ended August 31,
---------------------------- -----------------------------
1999 1998 1999 1998
----------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Current:
Federal $ 2 $ 24 $ 23 $ 1
Alberta - - - -
------ ------ ------ ------
2 24 23 1
====== ====== ====== ======
Future:
Federal (160) 68 (83) 13
Alberta (96) 52 (86) 10
------ ------ ------ ------
(256) 120 (169) 23
------ ------ ------ ------
Total income tax expense $ (254) $ 144 $ (146) $ 24
====== ====== ====== ======
</TABLE>
9
<PAGE>
Total tax provision has resulted in effective tax rates which differ from
statutory Federal income tax rates. The reasons for these differences are
illustrated by the following table:
<TABLE>
<CAPTION>
Percent of Pretax Earnings
Nine Months Ended August 31,
---------------------------
1999 1998
------------ -------------
<S> <C> <C>
Federal Canadian and provincial statutory rates 45 % 45 %
Resource allowance 28 (27)
Crown royalties, net of credits (19) 16
Statutory rate change
Adjustments of prior year amounts and other 3 1
------ -----
Effective rate 57 % 35 %
====== =====
</TABLE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities and charges were as follows (in thousands):
<TABLE>
<CAPTION>
Current Year
Dec. 1, 1998 Activity August 31,1999
------------- ------------ --------------
<S> <C> <C> <C>
Deferred tax liabilities:
Temporary differences, principally oil
and gas properties $ 1,995 $ (256) $ 1,739
============ ============ =============
</TABLE>
For Canadian income tax purposes Resources has tax pools available at
August 31, 1999 to reduce future taxable income. These pools include oil and gas
property expenses of $4,235,000, development and exploration expenses of
$1,042,000, earned depletion base of $1,170,000 and undepreciated capital costs
of $2,465,000. The tax attributes of carryforward pools are included to
determine the temporary differences shown as deferred tax liabilities. These
attributes generally do not expire.
(4) RELATED PARTY TRANSACTIONS
Resources incurred certain direct and indirect general and administrative
costs for services provided by its former Parent in lieu of expanding the number
of its own full-
10
<PAGE>
time employees. These costs were primarily for labor, related benefits and other
overhead costs as provided by an agreement between the parties. These costs were
$54,000 and $271,000 for the first nine months of 1999 and 1998, respectively.
Effective March 31, 1999, this management agreement was terminated.
(5) COMMITMENTS
The majority of the Company's natural gas is contracted to gas marketing
companies on a deliverability basis and sold at published index prices less
applicable transportation and marketing charges. The Company has temporarily
assigned its firm transportation agreements through October, 1999 and has
retained the option to obtain additional firm transportation service. At
August 31, 1999, the Company had seven forward priced hedge contracts. These
contracts allow the Company to receive fixed prices for a percentage of its
production. The terms of these transactions are as follows:
<TABLE>
<CAPTION>
Daily Quantity Contract Quantity Fixed Price/
Period GigaJoules GigaJoules GigaJoule
- -------------------- ---------------- ------------------- -------------
<S> <C> <C> <C>
Apr 99 - Oct 99 1,055 226,000 $2.390
Dec 98 - Oct 01 1,055 1,125,000 $2.570
Apr 99 - Oct 99 1,000 214,000 $2.310
Apr 99 - Oct 99 500 107,000 $2.220
Nov 99 - Oct 00 1,000 366,000 $2.720
Nov 99 - Mar 00 750 113,250 $3.620
Apr 00 - Oct 00 750 160,500 $2.925
</TABLE>
The unrecognized loss on these contracts totaled $806,000 based on
August 31, 1999 market values.
The Company estimates that future costs of site abandonment and restoration
of well sites, gas processing plants and other facilities will be $434,362 as of
August 31, 1999 in addition to $221,000 already accrued as a liability. The
estimated costs are being recognized on a unit-of-production basis over the life
of the properties.
(6) ACQUISITION OF OIL AND GAS PROPERTIES
Between December 1998 and April 1999, Resources purchased producing oil and
gas properties and natural gas gathering and compression facilities in Alberta,
Canada. These acquisitions were accounted for as a purchase and considered
"material" by management for purposes of pro forma disclosure. The following pro
forma statement presents incremental results of operations for the current year
and for the corresponding period of the preceding year as though the
acquisitions had occurred at the beginning of
11
<PAGE>
the periods being reported on. Revenues and expenses subsequent to the purchase
dates have been included in 1999 operating results and are not included in the
incremental results.
The incremental pro forma results below are not indicative of the results
that would have occurred if the acquisitions had been in effect for the entire
periods presented. The pro forma results are not intended to be a projection of
future results. Financial information showing the incremental pro forma results
of the acquisition is presented below:
<TABLE>
<CAPTION>
Nine Months Ending August 31, Three Months Ending August 31,
----------------------------- ------------------------------
1999 1998 1999 1998
------------- -------------- ------------- ---------------
(in Canadian dollars)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 168 $ 1,080 $ - $ 324
Direct Operating Expenses 64 510 - 182
Depreciation & Depletion 109 682 - 210
Interest Expense 40 237 - 78
Income Tax Expense (a) (15) (122) - (45)
Net Income (30) (227) - (101)
Earnings per share (0.02) (0.15) - (0.07)
</TABLE>
(a) Income taxes at Company's effective rate for the applicable period.
(7) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
The financial statements have been prepared in accordance with Canadian
GAAP and differ in certain respects from financial statements which the Company
would have made had its financial statements been prepared in accordance with
United States GAAP. Differences between the two methods which affect these
financial statements are:
(a) Under U.S. GAAP, cash (and cash equivalents) includes bank deposits,
money market instruments, and commercial paper with original
maturities of three months or less. Canadian GAAP permits the
inclusion in cash of temporary investments with maturities greater
than 90 days. The differences in measurement had no impact on
classifications in the balance sheets.
(b) Basic earnings per share using U.S. GAAP is the same as basic earnings
per share using Canadian GAAP. Under U.S. GAAP, fully diluted
earnings per share are reported using the "treasury stock
method." Under Canadian GAAP, fully diluted earnings per share assumes
that cash proceeds from the deemed exercise of stock options are
invested by the
12
<PAGE>
Company in such a way as to earn a reasonable return. The number of
shares used in the calculation is the same for both methods.
(c) Under U.S. GAAP, the full cost accounting method requires that
capitalized costs less related accumulated depletion and deferred
income taxes may not exceed the sum of (1) the present value
(discounted at 10%) of future net revenues from estimated production
of proved oil and gas reserves; plus (2) the cost of properties not
being amortized, if any, plus (3) the lower of cost or estimated fair
value of unproved properties included in the costs being amortized if
any, less (4) income tax effects related to differences in the book
and tax basis of oil and gas properties. Using U.S. GAAP, there would
not have been an impairment to the full cost pool.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below summarizes the Company's financial condition and
results of operations and should be read in conjunction with the financial
statements and related notes. The financial related comments contained in this
section are derived from financial statements prepared in accordance with
Canadian GAAP.
The information presented below contains forward-looking statements within
the meaning of the U.S. Private Securities Litigation Reform Act of 1995.
Statements that are not historical facts contained in this report are forward-
looking statements that involve risks and uncertainties that could cause actual
results to differ from projected results. Such statements address activities,
events or developments that the Company expects, believes, projects, intends or
anticipates will or may occur, including such matters as future capital,
development and exploration expenditures (including the amount and nature
thereof), drilling or deepening of wells, reserve estimates (including estimates
of future net revenues associated with such reserves and the present value of
future net revenues), future production of oil and natural gas, business
strategies, expansion and growth of the Company's operations, cash flow and
anticipated liquidity, prospect development and property acquisition, obtaining
financial or industry partners for prospect or program development, or marketing
of oil and natural gas. Factors that could cause actual results to differ
materially are described, among other places in the Company's 1998 Form 10-K and
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Without limiting the factors so described, factors
include, among others: general economic conditions, the market price of oil and
natural gas, the risks associated with exploration, the Company's ability to
find, acquire, market, develop and produce new properties, operating hazards
attendant to the oil and natural gas business, uncertainties in the estimation
of proved reserves and in the projection of future rates of production and
timing of development expenditures, the strength and financial resources of the
Company's competitors, the Company's ability
13
<PAGE>
to find and retain skilled personnel, climatic conditions, labor relations,
availability and cost of material and equipment, environmental risks, the
results of financing efforts and regulatory developments. The Company disclaims
any obligation to update or revise any forward-looking statement to reflect
events or circumstances occurring hereafter or to reflect the occurrence of
anticipated or unanticipated events.
Results of Operations
Three months ended August 31, 1999 compared to three months ended August 31,
l998.
Total revenues for the third quarter of 1999 were $1,307,000, a 77%
increase from the prior year period amount of $737,000. The increase was due
primarily to higher natural gas production, including production resulting from
the Company's Acquisitions, and higher natural gas, oil and plant liquid prices.
Net income in the third quarter of 1999 was $36,000 compared to $54,000 in the
third quarter of 1998. The decrease was primarily due to increased general and
administrative expenses, increased depletion, depreciation and amortization
expenses, offset by higher natural gas, oil and plant liquid revenues, lease
operating cost efficiencies and a deferred tax benefit.
The following table show comparative revenue, sales volumes, average prices
and percentage changes between periods, for natural gas, oil and plant liquids
for the third quarters of 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended August 31,
---------------------------------------
1999 1998 % Change
--------- --------- -----------
<S> <C> <C> <C>
Natural gas revenues M$ 1,100 537 105%
Oil revenues M$ 151 117 30%
Natural gas liquids revenues M$ 156 73 114%
Natural gas sales volumes:
Millions of cubic feet 411 271 52%
MCF/day 4,471 2,947
Oil sales volumes:
Barrels 5,869 6,884 -15%
Barrels/day 64 75
Natural gas liquids sales volumes:
Barrels 8,289 6,199 34%
Barrels/day 90 67
Average price received:
Natural gas - $/MCF 2.67 1.98 35%
Oil - $/BBL 25.78 16.96 52%
Plant liquids - $/BBL 18.84 11.75 60%
</TABLE>
14
<PAGE>
Average daily oil and plant liquid production in the third quarter of 1999
were 64 and 90 barrels, respectively. Average daily gas production for the third
quarter of 1999 was 4,471 mcf. This is an increase of 42% on a barrel of oil
equivalent ("boe") basis compared to the same period in 1998.
The Company's continued success with the exploitation of properties
acquired during 1999 and current development activity has resulted in
increasing production for three successive quarters. Exploration activities are
expected to continue for the balance of 1999.
Average oil prices increased 52% from $16.96 per barrel in the third
quarter of 1998 to $25.78 in 1999. Average plant liquid prices increased 60%
from $11.75 in the third quarter of 1998 to $18.84 in 1999. Average natural gas
prices increased 35% from $1.98 per mcf for the third quarter of 1998 to $2.67
per mcf in 1999.
Royalty expense consists primarily of Crown Royalties as well as smaller
amounts of freehold and gross overriding royalties. The Company is eligible for
the Alberta Royalty Tax Credit ("ARTC") which varies inversely with prevailing
prices for oil and gas sales in Alberta. For the third quarter of 1999 the net
Crown Royalty rate was 6% compared to 5% in 1998.
Lease operating expenses totaled $231,000 or $2.79 per boe for the third
quarter of 1999 compared to $187,000 or $3.20 per boe in the prior year period.
This reduction in per boe expense is due to efficiencies realized from operating
the Company's East Carbon properties and the fact that lease operating
expenses for 1998 were higher due to well workovers at the Company's Hoffer
properties.
Field netbacks commonly reported by Canadian energy companies equate to oil
and gas sales less royalties and lease operating expenses. Resources' average
field netback increased significantly for the third quarter of 1999 to $12.78
per boe compared to $8.29 for the third quarter of 1998 primarily due to the
positive revenue and lease operating expense variances previously discussed.
Resources has always followed the U.S. practice of converting its natural
gas to boe based on the heating value ratio of six mcf of natural gas to one
barrel of oil. A ratio of 10:1 which historically has more closely approximated
price ratios, is used by nearly all Canadian public companies.
If natural gas had been converted to boe using the Canadian practice of a
10:1 ratio, then reported field netbacks would have been $19.12 and $12.01 per
boe for the third quarter of 1999 and 1998, respectively.
General and administrative expenses, net of third party reimbursements, for
the third quarter of 1999 totaled $466,000, a $210,000 or 82% increase for the
same period of
15
<PAGE>
1998. The increase in general and administrative expense was primarily due to
the hiring of full time employees
Interest and other expenses were $77,000 in the third quarter of 1999, a
$107,000 increase from the prior year period. Interest expense increased as a
result of incurring long-term debt in 1999 to partially fund acquisitions. See
"Acquisitions" and "Liquidity and Capital Resources". The Company's average
borrowing rate for the third quarter of 1999 was 7.0%.
Depletion, depreciation and amortization expense for the third quarter of
1999 totaled $618,000, an increase of $406,000 or 191% from the 1998 level.
Depletion expense increased primarily due to increased gas sales and a
downward adjustment to CEC's 1998 year end developed non-producing and proved
undeveloped natural gas reserves that resulted in an increased depletion rate
per boe in 1999 compared to 1998.
Nine months ended August 31, 1999 compared to nine months ended August 31, 1998.
Revenues for the nine months ended August 31, 1999 totaled $3,463,000
million, a 46% increase from the prior year period. The increase was due
primarily to increased natural gas and plant liquid production, including
production resulting from the Company's acquisitions and higher natural gas, oil
and plant liquid prices. The net loss in the first nine months of 1999 was
$188,000 compared to net income of $268,000 in the first nine months of 1998.
The decrease was primarily due to increased general and administrative expenses,
increased depletion, depreciation and amortization expenses partially offset by
higher oil, natural gas and plant liquid revenues.
The following table shows comparative revenue, sales volume, average prices
and percentage changes between periods, for natural gas, oil, and plant liquids
for the first nine months of 1999.
16
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended August 31,
------------------------------------
1999 1998 % Change
--------- --------- ------------
<S> <C> <C> <C>
Natural gas revenues M$ 2,934 1,716 71%
Oil revenues M$ 385 367 5%
Natural gas liquids revenues M$ 365 297 23%
Natural gas sales volumes:
Millions of cubic feet 1,115 889 25%
MCF/day 4,069 3,244
Oil sales volumes:
Barrels 18,395 19,797 -7%
Barrels/day 67 72
Natural gas liquids sales volumes:
Barrels 23,802 20,206 18%
Barrels/day 87 74
Average price received:
Natural gas - $/MCF 2.63 1.93 36%
Oil - $/BBL 20.91 18.51 13%
Plant liquids - $/BBL 15.34 14.69 4%
</TABLE>
Average daily oil and plant liquid production for the first nine months of
1999 were 67 and 87 barrels, respectively. Average daily gas production for the
first nine months of 1999 was 4,069 mcf. This is an increase of 21% on a boe
equivalent basis compared to the same period in 1998.
The Company's continued success with the exploitation of properties
acquired during 1999 and current development activity has resulted in
increasing production for three successive quarters. Exploration activities are
expected to continue for the balance of 1999.
Average oil prices increased 13% from $18.51 per barrel in the first 9
months of 1998 to $20.91 in 1999. Average plant liquids prices increased 4% from
$14.69 for the first nine months of 1998 to $15.34 in 1999. Average natural gas
prices increased 36% from $1.93 per mcf for the first nine months of 1998 to
$2.63 in 1999.
Royalty expense consists primarily of Crown Royalties as well as smaller
amounts of freehold and gross overriding royalties. The Company is eligible for
the Alberta Royalty Tax Credit ("ARTC") which varies inversely with prevailing
prices for
17
<PAGE>
oil and gas sales in Alberta. For the first nine months of 1999 and 1998 the net
Crown Royalty rate was 6%.
Lease operating expenses totaled $585,000 or $2.57 per boe for the first
nine months of 1999 compared to $563,000 or $2.99 per boe in the prior year
period. This reduction in per boe expense is due to efficiencies realized from
operating the Company's East Carbon properties and the fact that lease operating
expenses for 1998 were higher due to well workovers at the Company's Hoffer
properties.
Field netbacks commonly reported by Canadian energy companies equate to oil
and gas sales less royalties and lease operating expenses. Resources' average
field netback increased significantly for the first nine months of 1999 to
$12.28 per boe compared to $8.50 per boe for the first nine months of 1998
primarily due to the positive revenue and lease operating expense variances
previously discussed.
Resources has always followed the U.S. practice of converting its natural
gas to boe based on the heating value ratio of six mcf of natural gas to one
barrel of oil. A ratio of 10:1 which historically has more closely approximated
price ratios, is used by nearly all Canadian public companies.
If natural gas volume had been converted to boe using the Canadian practice
of a 10:1 ratio, then reported field netbacks would have been $18.22 and $12.40
per boe for the first nine months of 1999 and 1998, respectively.
General and administrative expenses, net of third party reimbursements, for
the first nine months of 1999 totaled $1,522,000, a $908,000 or 148% increase
from the same period in 1998. The increase in general and administrative expense
was primarily due to the hiring of full time employees, partially offset by a
reduction in charges for management services provided by Columbus under a
management contract which was terminated March 31, l999.
Interest and other expenses increased to $136,000 for the first nine months
of 1999, a $159,000 increase from the prior year period. Interest expense
increased as a result of incurring long-term debt in 1999 to partially fund
acquisitions. See "Acquisitions" and "Liquidity and Capital Resources". The
Company's average interest rate for the first nine months of 1999 was 7.25%.
Depletion, depreciation and amortization expense for the nine month period
ended August 31, l999 totaled $1,597,000, a increase of $911,000 or 133% from
the 1998 level. Depletion expense increased primarily due to increased gas sales
and a downward adjustment to CEC's 1998 year end developed non-producing and
proved undeveloped natural gas reserves that resulted in an increased depletion
rate boe in 1999 compared to 1998. For the first nine months of 1999 the
depletion rate was $6.29 per boe, compared to $3.20 per boe for the same period
in 1998.
18
<PAGE>
Acquisitions
In December 1998 the Company acquired for $2.3 million working interests in
16 natural gas wells, associated natural gas gathering and compression
facilities and undeveloped lands in the East Carbon Field (Wayne-Rosedale),
located in Alberta, Canada from Neutrino Resources, Ltd. The acquisition was
funded with cash and bank financing. The acquisition increased the Company's
working interest ownership in the East Carbon Field from 33-1/3% to 64%. The
Company estimates that as of November 30, 1998, the remaining proved reserves
before royalty of the acquired properties are approximately 51,000 barrels of
oil and natural gas liquids and approximately 2.3 billion cubic feet of natural
gas.
In March 1999, the Company acquired for $800,000 a 100% working interest in
one natural gas well, associated natural gas gathering facilities and
underdeveloped lands in the East Carbon Field, located in Alberta, Canada from
Westdrum Energy Ltd. and C. & D. Oil and Gas Ltd. The acquisition was funded
with bank financing. The Company estimates that as of March 1, 1999, the
remaining proved reserves before royalty of the acquired property are
approximately 19,000 barrels of oil and natural gas liquids and approximately
720,000 mcf of natural gas.
In March 1999, the Company acquired for $2.1 million working interests in
17 natural gas wells, associated natural gas gathering and compression
facilities in the East Carbon Field, located in Alberta, Canada from Cometra
Energy (Canada) Ltd. The acquisition was funded with bank financing. The
acquisition increased the Company's working interest ownership in the East
Carbon Field from 64% to 97%. The Company estimates that as of March 1, 1999,
the remaining proved reserves before royalty of the
19
<PAGE>
acquired properties are approximately 48,000 barrels of oil and natural gas
liquids and approximately 2.1 billion cubic feet of natural gas.
In April 1999, the Company acquired for $125,000 working interests in 13
natural gas wells, associated natural gas gathering and compression facilities
and undeveloped lands in the East Carbon Field, located in Alberta, Canada from
Springroad Resources, Inc. The acquisition was funded with bank financing. The
acquisition increased the Company's working interest ownership in the East
Carbon Field from 97% to approximately 100%. The Company estimates that as of
March 1, 1999, the remaining proved reserves before royalty of the acquired
properties are approximately 4,000 barrels of oil and natural gas liquids and
approximately 180,000 mcf of natural gas.
On August 12, 1999, the Company entered into an agreement to acquire all of
the stock of Denver based Bonneville Fuels Corporation ("Bonneville"), an oil
and gas exploration and production company with working interests in
approximately 290 oil and natural gas wells and over 150,000 net acres located
in Colorado, Kansas, New Mexico, Texas, and Utah. Bonneville is a wholly owned
subsidiary of Bonneville Pacific Corporation. The purchase price for the stock
of Bonneville is approximately $24,000,000, subject to adjustments, plus debt of
approximately $6,500,000 remaining at Bonneville.
Net proved reserves of Bonneville are estimated at approximately 250,000
barrels of oil and approximately 40 billion cubic feet of natural gas. Current
net production from the properties to be acquired is approximately 13,000 mcf of
gas per day and 200 barrels of oil per day.
Carbon Energy Corporation ("Carbon"), a Colorado corporation, has been
formed and will receive from Yorktown Energy Partners III ("Yorktown"), equity
funds in the amount of $24,750,000 which will be used to purchase Bonneville
stock. Yorktown will purchase Carbon common stock at U.S. $5.50 per share. It is
intended that Carbon common stock will be listed on the American Stock Exchange.
Shareholders of CEC will be offered the opportunity to exchange their shares of
CEC for shares of Carbon on the basis of one share of CEC for one share of
Carbon. At the completion of the exchange offer, CEC will become a subsidiary of
Carbon. Closing of the Bonneville purchase is scheduled for October 31, 1999.
The exchange offer will commence later this year after effectiveness of a
registration statement to be filed with the Security and Exchange Commission.
Those arrangements are covered by an Exchange and Financing Agreement among
Carbon, CEC and Yorktown Energy III, L.P.
Carbon on a consolidated basis with both Bonneville and CEC, will have
reserves of oil and natural gas more than four times larger than CEC; and Carbon
will have, in addition to CEC's Canadian operations, a base of operations in the
western region of the U.S. with potential for development of the acquired
properties and additional acquisitions in the U.S. and Canada. Reserves of the
combined companies will be approximately 52 bcf of gas and 475,000 barrels of
oil and natural gas liquids. The combined companies will have daily production
in excess of 18,000 mcf of gas per day and nearly 400 barrels of oil per day.
20
<PAGE>
Exploration Activities
Under the full cost method of accounting, all exploration costs associated
with continuing efforts to acquire or review prospects including outside
geological and seismic consultants are capitalized. A total of $201,000 of
exploration costs were capitalized during the first nine months of 1999 compared
to $40,000 in the first nine months of 1998.
Liquidity and Capital Resources
The principal sources of the Company's funds are cash flows from operating
activities and available borrowings under the Company's financing commitment.
For the first nine months of 1999, net cash from operating activities was
$1,389,000 compared to $1,218,000 for the same period in 1998. The increase is
primarily due to increased oil and gas sales, a positive net change in operating
assets and liabilities, partially offset by general and administrative expenses.
Net cash used in investing activities was $7,751,000 for the first nine months
of 1999 compared to $489,000 in 1998. This increase was primarily due to
acquisitions in the East Carbon Area and a deposit related to the Bonneville
Fuels acquisition. "See Acquisitions". Net cash provided by financing activities
in the first nine months of 1999 was $4,696,000 which was primarily due to the
proceeds from long-term debt, partially offset by the acquisition of 23,000
shares of the Company's common stock. Net cash used in financing activities in
the first nine months of 1998 was $79,000 due to the acquisition of 83,000
shares of the Company's common stock partially offset by the issuance of 70,000
shares of the Company's common stock.
In December 1998, Resources received a financing commitment from Canadian
Imperial Bank of Commerce ("CIBC"). The purpose of the loan is to provide
financing for the acquisition of oil and gas reserves and for normal operating
requirements. The loan is secured by the Company's oil and gas assets. The
interest rate on outstanding borrowings is the CIBC Prime Rate plus 3/4%. The
initial commitment was a $2.5 million revolving loan. In March 1999, the
commitment was increased to a $5.0 million revolving loan. In October 1999, the
commitment was increased to a $6.5 million revolving loan. The commitment will
be reduced to $5.75 million upon closing of the Bonneville Fuels acquisition
"See Acquisitions". The revolving phase of the loan will expire on April 30,
2000 and may be renewed by CIBC. If the revolving commitment is not renewed by
CIBC, the loan would be converted into a term loan and will be permanently
reduced by way of consecutive monthly principal payments over a period not to
exceed 36 months. Borrowings under the loan during 1999 have resulted in
increased interest expense during 1999 compared to 1998.
Income Taxes
In 1997, the Company adopted CICA 3465, Income Taxes. Since 1993, Resources
had paid current taxes to Revenue Canada based on its taxable income after
utilization, to the extent allowed, of its tax pool carry forwards. Currently
payable taxable income for future periods is dependent upon the level and type
of capital expenditures incurred in those future periods as well as percentage
limitations for utilization of existing tax pools. For 1999, the Company
anticipates little or no current income tax liability based upon current and
anticipated 1999 activity. For 1998, Federal and provincial taxes were $41,000.
21
<PAGE>
Exchange Rate of the Canadian Dollar
All dollar amounts in this report are in Canadian dollars except where
otherwise indicated. The following table sets forth the rates of exchange for
the Canadian dollar, expressed in United States dollars:
<TABLE>
<CAPTION>
Nine Months Ended August 31,
------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Rate at end of period 0.6685 0.6361
Average rate during period 0.6657 0.6880
High 0.6894 0.7105
Low 0.6440 0.6343
</TABLE>
On September 30, 1999, the noon buying rate in Canadian dollars was .6803
U.S.= $1.00 Canadian.
Year 2000 Issues
The Year 2000 issue is the result of computer programs being written using
two digits rather than four, or other methods, to define the applicable year.
Computer programs that have date sensitive software may recognize a date using
"00" as the year 1900, rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to price transactions, send invoices or
engage in similar normal business activities. In addition to affecting mainframe
and mid-range computer systems, this problem potentially impacts computer chips
integrated in security, plant automation, and pipeline control and metering
systems.
Resources is currently completing an external review of all Year 2000
issues by contacting and/or sending out questionnaires to all of its natural gas
purchasers, gathering system and plant operators, downstream pipeline operators,
equipment and service providers, operators of its oil and gas properties,
financial institutions and vendors providing payroll and medical benefits and
services. The preliminary phase of this review has been completed. Based upon
this review, a schedule of revisions (if any) to existing systems as well as
requisite contingency plans will be designed and implemented.
Resources utilizes a service bureau for its accounting processing. The oil
and gas accounting system utilized by the service bureau is Year 2000 compliant.
Resources has selected an accounting system and is in the process of bringing
all accounting services and processing in-house. The oil and gas accounting
system selected is Year 2000 compliant. Resources is also dependent upon
personal computer based software programs and files that may not be Year 2000
compliant. Resources has set a revised deadline of November 1999 to be
internally compliant with Year 2000 specifications.
22
<PAGE>
Management expects costs for Resources to become Year 2000 compliant will
not be significant. Resources does not believe that any loss of revenue will
occur as a result of the Year 2000 problem. However, despite Resosurces's
efforts to identify and remedy Year 2000 problems, there may be related failures
that disrupt Resources's business temporarily. In addition, the timetable for
Resources's planned completion of its own Year 2000 modifications and the
estimated costs to accomplish this are management's best estimates. These
assessments involve many assumptions concerning future events, including the
continued availability of certain resources, particularly personnel able to
locate, reprogram or replace, and test Resources's hardware and software in
accordance with Resources's established schedule. There can be no guarantee that
Resources's estimates will prove accurate, and actual results could differ
significantly because of the non-compliance of third parties of business
importance to Resources.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operation or cash flow of the Company due to adverse
changes in financial and commodity market prices and rates.
Market and Commodity Risk
The Company's major market risk exposure is in the pricing applicable to
its oil and natural gas production. Pricing is primarily driven by the
prevailing prices for oil and gas in Central Alberta. Historically, prices
received for oil and gas production have been volatile and unpredictable.
Pricing volatility is expected to continue. A significant decline in the prices
of oil or natural gas could have a material adverse effect on the Company's
financial condition and results of operations.
As described in Note 5 to the Financial Statements, from time to time, the
Company enters into commodity derivatives contracts and fixed-price physical
contracts to manage its exposure to oil and gas prices volatility and to support
oil and natural gas prices at targeted levels. The Company primarily uses
futures swap instruments to hedge its commodity prices. Realized gains or losses
from price risk management activities are recognized in oil and gas sales
revenues in the period in which the associated production occurs.
Inflation and Changes in Prices
While certain of its costs are affected by the general level of inflation,
factors unique to the oil and natural gas industry result in independent price
fluctuations. Over the past five years, significant fluctuations have occurred
in oil and natural gas prices.
23
<PAGE>
Although it is particularly difficult to estimate future prices of oil and
natural gas, price fluctuations have had, and will continue to have, a material
effect on the Company.
In regard to interest rate risk, the Company has established a $6.5 million
credit facility with a Canadian bank as described in "Liquidity and Capital
Resources" under Item 2 "Management's Discussion of Analysis of Financial
Condition and Results of Operations". The interest rate for borrowings under
this facility is variable. In regard to foreign currency risk, the Company's
operations are primarily conducted in Canada. The Company does not use financial
instruments relating to currency and exchange rates. For information on the
exchange rate of the Canadian dollar, refer to "Exchange Rate of the Canadian
Dollar" under Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings pending or, to our knowledge,
threatened against the Company.
Item 6. Exhibits and Reports on Form 8-k
(a) Exhibits
10.1 - Stock Purchase Agreement dated as of August 11, 1999 by
and between Bonneville Pacific Corporation as seller and
CEC Resources Ltd. as buyer.
10.2 - Exchange and Financing Agreement dated as of October 14,
1999 among Carbon Energy Corporation, CEC Resources Ltd,
and Yorktown Energy Partners III, L.P.
11 - Computation of per share earnings
27 - Financial Data Schedule
24
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CEC RESOURCES LTD.
Registrant
DATE: October 15, 1999 /s/ Patrick R. McDonald
------------------------ ----------------------------------
President and
Chief Executive Officer
(a duly authorized officer)
DATE: October 15, 1999 /s/ Kevin D. Struzeski
------------------------ ----------------------------------
Treasurer
(Chief Financial Officer)
25
<PAGE>
EXHIBIT 10.1
BY AND BETWEEN
BONNEVILLE PACIFIC CORPORATION,
AS SELLER,
AND
CEC RESOURCES LTD.
AS BUYER
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of August 11,
1999, is by and between Bonneville Pacific Corporation, a Delaware corporation
("Seller"), and CEC Resources Ltd., a company organized under the laws of the
Province of Alberta, Canada ("Buyer").
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, all of the issued and outstanding capital stock of Bonneville Fuels
Corporation, a Colorado corporation (the "Company"), a wholly owned subsidiary
of Seller, upon the terms and subject to the conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, the parties hereto agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
-------------------
Section 1.1 Certain Defined Terms. Unless the context otherwise requires,
---------------------
the respective terms defined in Appendix A attached hereto and incorporated
herein shall, when used herein, have the respective meanings therein specified,
with each such definition to be equally applicable both to the singular and the
plural forms of the term so defined.
Section 1.2 References, Gender, Number. All references in this Agreement
--------------------------
to an "Article," "Section," or "subsection' shall be to an Article, Section, or
subsection of this Agreement, unless the context requires otherwise. Unless the
context otherwise requires, the words "this Agreement," "hereof," "hereunder,"
"herein," "hereby," or words of similar import shall refer to this Agreement as
a whole and not to a particular Article, Section, subsection, clause or other
subdivision hereof. Whenever the context requires, the words used herein shall
include the masculine, feminine and neuter gender, and the singular and the
plural.
ARTICLE 2
SALE AND PURCHASE OF STOCK
--------------------------
Section 2.1 Sale and Purchase. On and subject to the terms and conditions
-----------------
of this Agreement, Seller agrees to sell and convey to Buyer, and Buyer agrees
to purchase from Seller, all of the issued and outstanding Company Shares.
<PAGE>
ARTICLE 3
PURCHASE PRICE AND PAYMENT
--------------------------
Section 3.1 Purchase Price. The purchase price for the sale and
--------------
conveyance of the Company Shares to Buyer is Twenty-Three Million Eight Hundred
Fifty-Seven Thousand Nine Hundred Fifty-One Dollars and no/100 ($23,857,951.00)
(the "Purchase Price"), subject to adjustment in accordance with the terms of
this Agreement. The "Adjusted Purchase Price" shall be the Purchase Price (i) as
adjusted downward for any Environmental Defect pursuant to Section 5.5, (ii) as
adjusted downward for Title Defects, if any, in accordance with Section 6.2,
(iii) as adjusted for undisclosed gas imbalances, if any, pursuant to Section
3.3, (iv) as adjusted downward by the amount of the Deposit, and (v) as adjusted
downward for the amount of any loss of deduction pursuant to Section 8.15.
Section 3.2 Payment. Contemporaneously with the execution of this
-------
Agreement, Buyer shall deposit with Seller an amount equal to five percent (5%)
of the Purchase Price ($1,200,000) as a deposit hereunder (the "Deposit"). The
"Closing Payment" shall be an amount equal to the Adjusted Purchase Price. At
the Closing, Buyer shall wire transfer the Closing Payment in immediately
available funds to the account specified by Seller to Buyer. Seller shall be
entitled to all interest and other amounts earned on the Deposit and such
amounts shall not be applied to the Adjusted Purchase Price.
Section 3.3 Gas Imbalance Adjustments. The Purchase Price shall be:
-------------------------
(a) reduced by the product obtained by multiplying the aggregate amount of
Unscheduled (Negative) Imbalances by $2.00 per MMBtu; and
(b) increased by the product obtained by multiplying the aggregate amount
of Unscheduled (Positive) Imbalances by $2.00 per MMBtu;
provided, however, that there shall be no adjustment for Unscheduled (Negative)
Imbalances or for Unscheduled (Positive) Balances if the aggregate amount of net
adjustments under clauses (a) and (b) above is less than $50,000.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 4.1 Representations and Warranties of Seller. As of the date of
----------------------------------------
this Agreement, Seller represents and warrants to Buyer as follows:
(a) Organization and Qualification of Seller. Seller is a corporation
----------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware.
-2-
<PAGE>
(b) Organization and Qualification of the Company. The Company is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Colorado and has the requisite corporate power to carry on its
business as it is now being conducted. The Company is duly qualified to do
business, and is in good standing, in each jurisdiction in which the Assets
owned or leased by it makes such qualification necessary, except where the
failure to so qualify and be in good standing will not have a Material Adverse
Effect.
(c) Authority. Seller has all requisite corporate power and authority to
---------
execute and deliver this Agreement and to perform its obligations hereunder.
The execution, delivery and performance of this Agreement and the transactions
contemplated hereby have been duly and validly authorized by all requisite
corporate action on the part of Seller, except as provided in Section 9.1(g).
(d) Enforceability. This Agreement constitutes a valid and binding
--------------
agreement of Seller enforceable against Seller in accordance with its terms,
subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws of general application with respect to creditors, (ii)
general principles of equity and (iii) the power of a court to deny enforcement
of remedies generally based upon public policy.
(e) Company Shares. The Seller holds of record and owns beneficially all
--------------
outstanding Company Shares free and clear of any security interests, liens,
options, warrants, purchase rights, or other encumbrances (except as created by
this Agreement and restrictions on sales of stock under applicable securities
laws). Upon the purchase of the Company Shares as contemplated by this
Agreement, the Buyer will obtain good and valid title to the Company Shares free
and clear of all security interests, liens, options, warrants, purchase rights,
or other encumbrances (other than those created by, through or under Buyer and
restrictions on sales of stock under applicable securities laws). The Seller is
not a party to any option, warrant, purchase right, or other contract or
commitment (other than this Agreement) that could require the Seller to sell,
transfer, or otherwise dispose of any Company Shares. Except as created by this
Agreement, the Seller is not a party to any voting trust, proxy, or other
agreement or understanding with respect to the voting, holding or disposition of
any Company Shares.
(f) Company Capitalization. The entire authorized capital stock of the
----------------------
Company consists of 1,000 shares of common stock, of which only the 1,000
Company Shares held beneficially and of record by the Seller are issued and
outstanding. All of the issued and outstanding Company Shares have been duly
authorized and are validly issued, fully paid and nonassessable and were not
issued in violation of the preemptive rights of any person. Except for the
Company Shares, there are outstanding (i) no shares of capital stock or other
voting securities of the Company; (ii) no securities of the Company convertible
into or exchangeable for shares of capital stock or other voting securities of
the Company; and (iii) no options, warrants, calls, rights (including preemptive
rights), commitments or agreements to which the Company or Seller or any
Affiliate of Seller is a party or by which any of them is bound in any case
obligating the Company or Seller or any Affiliate of Seller to issue, deliver,
sell, purchase, redeem or acquire,
-3-
<PAGE>
or cause to be issued, delivered, sold, purchased, redeemed or acquired,
additional shares of capital stock or other voting securities of the Company, or
obligating the Company, the Seller or any Affiliate of Seller to grant, extend
or enter into any such option, warrant, call, right, commitment or agreement.
(g) Company Financial Statements. Attached hereto as Schedule 4.1(g) are
----------------------------
the following financial statements (collectively the "Financial Statements"):
(i) audited Consolidated Financial Statements for the Company and Subsidiaries,
including Consolidated Balance Sheets - December 31, 1998 and 1997; Consolidated
Statements of Operations - For the Years Ended December 31, 1998, 1997 and 1996;
Consolidated Statement of Stockholders Equity - For the Period From January 1,
1996 Through December 31, 1998; and Consolidated Statements of Cash Flows - For
the Years Ended December 31, 1998, 1997 and 1996; and (ii) unaudited
Consolidated Financial Statements for the Company and Subsidiaries, including
Consolidated Balance Sheet as of March 31, 1999 and 1998; Consolidated Statement
of Operations For the three months ended March 31, 1999; Consolidated Statement
of Stockholders Equity For the three months ended March 31, 1999, and the year
ended December 31, 1998; and Consolidated Statements of Cash Flows For the three
months ended March 31, 1999 and 1998 (the "Most Recent Financial Statements").
The Financial Statements present fairly, in all material respects and in
accordance with GAAP applied on a consistent basis throughout the periods
covered, the financial condition of the Company as of such dates and the results
of operations and cash flows of the Company for such periods; provided, however,
that (1) the Most Recent Financial Statements are subject to normal year-end
adjustments and lack footnotes and other presentation items and (2) no
representation or warranty is made under this subsection with respect to the
title of the Company to any Subject Interests, any matters addressed in any
Reserve Report or in Section 3.3, any pending or threatened Actions, any
Plugging and Abandonment Obligations, or the existence, non-existence or effect
of any Environmental Condition, Environmental Claims, Offsite Environmental
Matters, Environmental Liabilities, Environmental Defects or Environmental
Matters. With respect to Plugging and Abandonment Obligations, Seller does
represent and warrant that its estimates of the Company's share of the costs to
plug and abandon existing wells included in the Wells or Units are in accordance
with GAAP and reflect all notices received from any Governmental Authority or
any operator with respect to the plugging and abandonment of any such wells.
(h) No Conflict or Violation. Except for any exceptions set forth in
------------------------
Section 4.1(i) (or Schedule 4.l(i)) , neither the execution and delivery of this
Agreement nor the consummation of the transactions and performance of the terms
and conditions contemplated hereby by Seller will (i) conflict with or result in
a violation or breach of or default under any provision of the certificate of
incorporation, by-laws or other similar governing documents of Seller or the
Company, (ii) conflict with or result in a violation or breach of or default
under any agreement, indenture or other instrument under which Seller or the
Company is bound, other than such conflicts, breaches, violations or defaults as
will not have a Material Adverse Effect, or (iii) violate or conflict with any
Law applicable to Seller or the Company or the properties or assets of Seller or
the Company.
-4-
<PAGE>
(i) Consents. Except for the consents, filings, notices or preferential
--------
or preemptive rights expressly described and set forth in Schedule 4.1(i) (the
"Unobtained Consents") or the failure of which to obtain or with which to comply
will not have a Material Adverse Effect, no consent, approval, authorization or
permit of, or filing with or notification to, or waiver or non-exercise of any
preferential or preemptive rights by any Person (including, without limitation,
any consent under the Public Utility Holding Company Act of 1935, as amended) is
required for or in connection with the execution and delivery of this Agreement
by Seller or for or in connection with the consummation of the transactions and
performance of the terms and conditions contemplated hereby by Seller or the
Company.
(j) Actions. Except as set forth on Schedule 4.1(j), there is no Action
-------
pending against the Company or, to the knowledge of Seller, pending against the
Assets or threatened against the Company or the Assets, other than Actions which
are not reasonably likely to have a Material Adverse Effect.
(k) Compliance With Laws. To the knowledge of Seller and except as set
--------------------
forth on Schedule 4.l(k), the Company is not in violation of any Law, other than
violations of Law which are not reasonably likely to have a Material Adverse
Effect; provided that, Seller makes no representation or warranty, express or
implied with respect to any Environmental Law, any Tax Law or any employee
benefit plans or arrangements except as respectively set forth in Sections
4.1(p), 4.1(q) and 4.1(r).
(l) Advisors' and Brokers' Fees. Seller has engaged CIBC World Markets as
---------------------------
its financial advisor in connection with the transactions contemplated by this
Agreement. Neither Seller nor any Affiliate of Seller has retained any other
advisor or broker in respect of the transactions contemplated by this Agreement
for which Buyer or the Company are liable or shall incur any liability.
(m) Bankruptcy. There are no bankruptcy, reorganization or arrangement
----------
proceedings pending against, being contemplated by, or, to the knowledge of
Seller, threatened against Seller or the Company.
(n) Material Contracts. To the knowledge of Seller, Schedule 4.1(n) sets
------------------
forth a complete list of the following contracts, agreements or commitments to
which the Company is a party or by which the Company or its Assets are bound:
(1) any written or oral contract or agreement with Seller or any
Affiliate of Seller relating to the provision of goods or services which
will survive the Closing;
(2) any contract, agreement or commitment that commits the Company to
aggregate expenditures with respect to the Company's interest of more than
$100,000 in any calendar year, excluding (i) the Subject Interests and any
contracts or agreements creating interests in the Subject Interests or in
any Wells or Units, (ii) joint operating
-5-
<PAGE>
agreements, (iii) unitization or pooling agreements, and (iv) any
contracts, agreements or commitments listed pursuant to other clauses of
this Section 4.1(n);
(3) any lease, sublease, installment purchase or similar arrangement
for the use or occupancy of any land, building or other real property,
excluding (i) interests in the Subject Interests or in any Wells or Units,
(ii) surface leases not material to the operation of the Subject Interests,
and (iii) leases of real property which involve aggregate expenditures or
receipts by the Company of $100,000 or less in any calendar year;
(4) any indenture, trust agreement, loan agreement or note under which
the Company has outstanding indebtedness for borrowed money or with respect
to which the Company has guaranteed the obligations of any other Person for
borrowed money;
(5) any agreement of surety, guarantee or indemnification by the
Company outside of the ordinary course of the Company's business; and
(6) any covenant not to compete or area of mutual interest agreement
(collectively the "Material Contracts").
(o) Events Subsequent to Report Date. Except in each case as set forth in
--------------------------------
Schedule 4.1(o), Schedule 4.1(r) and Section 7.2(b), or as otherwise disclosed
in the Financial Statements, since the Report Date the Company has engaged in
business in a manner consistent with its past practices, and to the knowledge of
Seller there has not been any:
(1) destruction, damage to, or loss of any Assets of the Company that
(after giving effect to any insurance coverage with regard thereto) is
reasonably likely to have a Material Adverse Effect;
(2) change in accounting policies or practices (including, without
limitation, any change in depreciation or amortization policies) by the
Company, except as required under GAAP;
(3) sale or other disposition of any properties or assets of the
Company except (i) in the ordinary course of business having a value of
less than $50,000,. or (ii) any item of personal property or equipment
having a value of less than $25,000;
(4) employment agreement (not terminable at will) entered into by the
Company or any material increases in the compensation payable to any
officers or employees of the Company (other than increases for employees
who are not officers of the Company made in the ordinary course of business
and consistent with past practice);
-6-
<PAGE>
(5) (i) dividend or other distribution in respect of the Company
Shares or (ii) other transactions between the Company and the Seller or any
Affiliate of Seller;
(6) change in any Plan or Benefit Arrangement, except as required by
Law;
(7) labor dispute, strike or similar work stoppages or, to the
knowledge of Seller, threats thereof by or with respect to persons employed
by the Company; or
(8) settlement entered into or consent made to any order, decree or
judgment relating to or arising out of any Action relating to the Company
which is reasonably likely to have a Material Adverse Effect.
(9) notice from any Governmental Authority or any operator with
respect to the plugging and abandonment of any Well.
(10) material adverse change in the business or financial condition of
the Company. For purposes hereof a material adverse change means an
unfavorable or adverse change or occurrence, or the result thereof, which
causes the business, operations, financial condition, prospects or
properties of the Company and its Subsidiaries as a whole to be materially
impaired or reduced.
(p) Environmental Matters. Except as set forth in Schedule 4.1(p)),
---------------------
Seller has no knowledge of any Environmental Claim or Offsite Environmental
Matter, other than Environmental Claims and Offsite Environmental Matters which,
either individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect.
(q) Tax Matters. With respect to the Company, except as set forth in
-----------
Schedule 4.1(q), (i) all reports, returns, statements (including, without
limitation, estimated reports, returns, or statements), and other similar
filings required to be filed on or before the Closing Date by the Company (or
the common parent of the affiliated, consolidated, combined and/or unitary group
of which the Company is a member) (the "Tax Returns") with respect to any Taxes
have been or will be timely filed with the appropriate governmental agencies in
all jurisdictions in which such Tax Returns are required to be filed; (ii) the
Tax Returns are or will be true and correct in all material respects, and all
Taxes reported on such returns, and all other material Taxes of the Company that
are due on or prior to the Closing Date (except those Taxes that are being
disputed in good faith and for which adequate provision has been made in the
Company's Financial Statements to the extent required by GAAP), have been or
will be paid; (iii) the Company (or the common parent of the affiliated,
consolidated, combined and/or unitary group of which the Company is a member)
has not extended or waived the application of any statute of limitations of any
jurisdiction regarding the assessment or collection of any Tax; (iv) there are
no audits, claims, proposed or final deficiency notices, assessments, levies,
administrative proceedings, or lawsuits pending or, to the knowledge of Seller,
threatened against the Company by any taxing
-7-
<PAGE>
authority; (v) there are no liens for Taxes upon any of the Assets except liens
for Taxes not yet delinquent; (vi) the Company does not have any liability for
the Taxes of any Person other than the Company under Treasury Regulation
Section 1.1502-6 (or any similar provision of state, local or foreign tax law);
(vii) no agreements relating to the allocation or sharing of, or liability or
indemnification for, Taxes exist among the Company and any other Person; (viii)
all Taxes required by law to be withheld or collected by the Company (including,
but not limited to, Taxes required to be withheld with respect to amounts paid
or owing to any officer, employee, creditor, stockholder, independent contractor
or other person) have been timely withheld or collected and, to the extent
required by Law, have been timely paid, remitted or deposited to or with the
relevant taxing authority in all material respects; (ix) no closing agreement or
agreement pursuant to Section 7121 of the Code or any similar provision of any
state, local or foreign law has been entered into by or with respect to the
Company, and the Company has not agreed to make any adjustment pursuant to
Section 481(a) of the Code (or any predecessor provision) by reason of any
change in any accounting method of the Company, which requires the Company to
include any item of income in, or exclude any item of deduction from, any Tax
Return; (x) the Company has not filed a consent under Section 341(f) of the Code
concerning collapsible corporations; (xi) the Company has not made any material
payments nor is it obligated to make material payments, nor is it a party to any
agreement that under certain circumstances could obligate it to make any
material payments that will not be deductible under Section 280G of the Code;
(xii) except for Taxes resulting from any Section 338(h)(10) Election, the
unpaid income Taxes of the Company do not as of the Most Recent Financial
Statements for the Company, exceed the reserve for Tax liability (rather than
any reserve for deferred taxes established to reflect timing differences between
book and tax income) set forth on the face of the Most Recent Financial
Statements for the Company (rather than in any notes thereto) and will not
exceed that reserve as adjusted for operations and transactions through the
Closing Date in accordance with past custom and practice in the filing of the
Company's Tax returns; (xiii) the Company has not been a member of an affiliated
group of corporations filing a consolidated federal income Tax Return other than
a group the common parent of which is Seller; and (xiv) all material income
Taxes owed by any affiliated group with which Company has filed a consolidated
return have been or will be paid for each taxable period during which Company
was a member of such group.
(r) Employee Benefit Plans.
----------------------
(1) List of Plans. Except to the extent of obligations provided for
-------------
under Section 7.2(b), Schedule 4.1(r) includes a complete and accurate list
of all material employee benefit plans as defined in section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
("Plans"), and material benefit arrangements that are not Plans ("Benefit
Arrangements"), including, but not limited to any (A) incentive bonus or
deferred bonus arrangements, (B) arrangements providing termination
allowance, severance or similar benefits, (C) equity compensation plans,
(D)deferred compensation plans, (E) employee assistance programs, (F)
vacation policies, and (G) stock option plans that are currently in effect
or were maintained within three years of the Closing Date, or have been
approved before the Closing Date but are not yet
-8-
<PAGE>
effective, for the benefit of directors, officers, employees or former
employees (or their beneficiaries) of the Company or with respect to which
the Company would have any liability.
(2) Compliance. Except as otherwise disclosed in Schedule 4.1(r),
----------
with respect to each Plan listed on Schedule 4.1(r), (i) the plan is in
material compliance with ERISA in all respects, including but not limited
to the reporting and disclosure requirements of Part 1 of Subtitle B of
Title I of ERISA; (ii) there has been no transaction described in section
406 or 407 of ERISA or section 4975 of the Code relating to the plan unless
exempt under section 408 of ERISA or section 4975 of the Code, as
applicable; (iii) the bonding requirements of section 412 of ERISA have
been satisfied; and (iv) there is no litigation, action, proceeding,
investigation or claim asserted or, to the Seller's knowledge, threatened
(other than the payment of benefits in the normal course). All group
health plans maintained by the Company have been operated in material
compliance with section 4980B of the Code.
(3) Severance Pay and Medical Coverage. Except as provided under
----------------------------------
Section 7.2(b) or as disclosed on Schedule 4.1(r), no plan, arrangement or
agreement with any one or more employees will cause, and the execution,
delivery and performance of this Agreement by Seller will not cause, the
Company to have liability for severance pay as a result of the consummation
of the transactions described in this Agreement. The Company's liability
for severance pay will be funded exclusively through the Employee Benefits
Trust described in Section 7.2(b). Except as provided under Section 7.2(b)
or as disclosed on Schedule 4.1(r), the Company does not provide employee
post-retirement medical coverage or contribute to or maintain any plan or
arrangement that provides for medical coverage following termination of
employment except as is required by section 4980B(f) of the Code, nor has
it made any representations, agreements, covenants or commitments to
provide that coverage.
(4) Certain Pension Plans. The terms of all pension plans listed in
---------------------
Schedule 4.1(r) to this Agreement that are intended to qualify under
section 401(a) of the Code (i) have been determined by the IRS to be
qualified under section 401(a) of the Code or (ii) the applicable remedial
amendment periods will not have ended before the Closing Date. Except as
disclosed on Schedule 4.1(r), neither Seller nor the Company has any
knowledge of any event or circumstance that would jeopardize the tax
qualified status of the Plans listed in Schedule 4.1(r).
(5) No Multiemployer Pension Plans. Neither the Company nor any
------------------------------
entity (whether or not incorporated) that was at any time during the six
years before the Closing Date treated as a single employer together with
the Company under section 414 of the Code has ever maintained, had any
obligation to contribute to or incurred any liability with respect to a
pension plan that is or was subject to the provisions of Title IV of ERISA
or section 412 of the Code.
-9-
<PAGE>
(s) Subsidiaries. Except as set forth in Schedule 4.1(s), the Company
------------
does not have any Subsidiaries. Each such Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation and is duly qualified to do business, and is in good standing,
in each jurisdiction in which the properties owned or leased by it make such
qualification necessary, except where the failure to so qualify and be in good
standing will not have a Material Adverse Effect. The Company holds of record
and owns beneficially all outstanding shares issued and outstanding of such
Subsidiaries, free and clear of any security interests, liens, options,
warrants, purchase rights, or other encumbrances (except restrictions on sales
of stock under applicable securities laws), and there is no option, warrant,
purchase right, or other contract or commitment that could require the Company
to sell, transfer, or otherwise dispose of any of the shares of such
Subsidiaries, nor is the Company a party to any voting trust, proxy, or other
agreement or understanding with respect to the voting, holding or disposition of
such shares.
(t) No Default. To the knowledge of Seller, the Company is not in default
----------
under any term or provision of any of the Material Contracts in any material
respect.
(u) Royalties. Except (i) for matters which, individually or in the
---------
aggregate, are not reasonably likely to have a Material Adverse Effect, and (ii)
for matters which would not result in the cancellation or loss of title in a
Subject Interest, all royalties, overriding royalties and other similar payments
due and payable on production with respect to a Subject Interest have been
timely and fully paid, except amounts that are being held in suspense for title
and other reasons which are customary in the industry and which suspense will
not result in grounds for cancellation of the Company's rights in such Subject
Interest.
(v) Employees. The Company is not a party to or subject to any collective
---------
bargaining agreement. To the knowledge of Seller, no collective bargaining
agent has been certified as a representative of any of the employees or former
employees of the Company. To the knowledge of Seller, no union organizational
campaign is currently pending with respect to any of the employees or former
employees of the Company.
(w) Information Regarding Subject Interests.
---------------------------------------
(1) Except as set forth in Schedule 4.1(w), there is no contract,
commitment or agreement binding on the Subject Interests which provides for
the approval of specific capital expenditures by the Company or Seller and
under which the Company or Seller has approved future capital expenditures
in excess of $100,000.
(2) Except as set forth in Schedule 4.1(w), this Agreement and any
document executed in connection herewith, there are no agreements or
arrangements relating to the Subject Interests with Seller or any Affiliate
of Seller that will be binding on Buyer, the Company or the Subject
Interests after the Closing.
-10-
<PAGE>
(3) Except as set forth in Schedule 4.1(w), there are no contracts,
commitments or agreements for the sale or other disposition of oil, natural
gas or natural gas liquids attributable to the Subject Interests having a
term in excess of one year that are not terminable without penalty on 90
days' notice or less.
(x) Wells and Units. Without representing or warranting the Company's
---------------
title therein, the Property Schedule sets forth in all material respects a
complete listing of all Wells and Units in which the Company owns an interest,
together with the locations thereof and the Company's Net Revenue Interests and
Working Interests therein.
(y) Permits. Except for those with respect to Environmental Laws, which
-------
are addressed exclusively in Sections 4.1(p) and 5.3, the Company has, and, to
the knowledge of Seller, each other Person who operates a Well or Unit has,
obtained all material permits, licenses, franchises, authorities, consents and
approvals necessary for owning and operating the Wells and Units as presently
operated, and all such permits, licenses, franchises, authorities, consents and
approvals are in full force and effect, except such failures as would not,
individually or in the aggregate, have a Material Adverse Effect.
(z) Personal Property. Subject to the repairs, maintenance and
-----------------
replacements contemplated by the capital expenditures referenced in Schedule
4.1(n), all equipment and all vehicles owned or leased by the Company and
currently used by the Company in connection with the operation of the Wells and
Units have been maintained in an operable state of repair adequate to maintain
normal operations in a manner consistent with the Company's past practices,
except such failures to maintain as would not, individually or in the aggregate,
have a Material Adverse Effect.
(aa) Public Utility Holding Company Act. Except as set forth in Schedule
----------------------------------
4.1(aa), neither the Company nor Seller nor any of the Subsidiaries is a
"holding company" or a "subsidiary company" of a "holding company" or an
"affiliate" of either a "holding company" or a "subsidiary company" of a
"holding company," in each case within the meaning of the Public Utility Holding
Company Act of 1935, as amended. Further, neither the Company nor any of the
Subsidiaries is a "public utility company" or an "electric utility company" or a
"gas utility company, " in each case within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
(bb) Investment Company Act. The Company is not an "investment company"
----------------------
within the meaning of the Investment Company Act of 1940, as amended, and the
Seller is not required to register under the Investment Company Act of 1940, as
amended.
(cc) Seller's Knowledge. Seller has no knowledge of any fact which results
------------------
in any representation or warranty of Buyer in Section 4.2 being breached. If
after the date of this Agreement, Seller obtains knowledge of any fact which
results in any representation or warranty of Buyer in Section 4.2 being
breached, Seller will immediately furnish Buyer written notice
-11-
<PAGE>
thereof. This Section 4.1(cc) shall not apply to Buyer's representation and
warranty in Section 4.2(i).
(dd) Representations and Warranties re Company. To the extent that the
-----------------------------------------
foregoing representations of Seller relate to the Company, such representations
and warranties are for the purpose of establishing whether Buyer's closing
conditions have been satisfied under Section 9.2 and shall not form the basis
for any claim, action, suit or proceeding based on a breach thereof.
(ee) Y2K Representation and Warranty. The Company has made inquiries of
-------------------------------
the suppliers and manufacturers of its computer systems, including equipment
supplied by third parties, and has been advised that such systems are Y2K
Compliant except in the case of the Company's property management software which
is currently under review regarding Y2K compliance. Except for costs associated
with the items set forth on Schedule 4.1(ee), the cost to the Company of the
reasonably foreseeable consequences of the failure of the Company's computer
systems to be Y2K Compliant cannot be reasonably expected to have a Material
Adverse Effect. For purposes hereof, "Y2K Compliant" means that the Company's
computer systems, including equipment supplied by third parties, will record,
process, calculate and present calendar dates falling on and after January 1,
2000 and calculate information dependent on or relating to such dates in the
same manner and with the same functionality, data integrity and performance as
such systems record, process, calculate and present calendar dates on or before
December 31, 1999 or calculate any information dependent on or relating to such
dates.
Section 4.2 Representations and Warranties of Buyer. Buyer represents
---------------------------------------
and warrants to Seller as follows:
(a) Organization and Qualification. Buyer is a corporation duly organized,
------------------------------
validly existing and in good standing under the laws of the Province of Alberta,
Canada, and has the requisite corporate power to carry on its business as it is
now being conducted.
(b) Authority. Buyer has all requisite corporate power and authority to
---------
execute and deliver this Agreement and to perform its obligations under this
Agreement. The execution, delivery and performance of this Agreement and the
transactions contemplated hereby have been duly and validly authorized by all
requisite corporate action on the part of Buyer.
(c) Enforceability. This Agreement constitutes a valid and binding
--------------
agreement of Buyer enforceable against Buyer in accordance with its terms,
subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium and
other similar laws of general application with respect to creditors, (ii)
general principles of equity and (iii) the power of a court to deny enforcement
of remedies generally based upon public policy.
(d) No Conflict or Violation. Neither the execution and delivery of this
------------------------
Agreement nor the consummation of the transactions and performance of the terms
and conditions contemplated hereby by Buyer will (i) conflict with or result in
a violation or breach of any provision of the certificate of incorporation,
bylaws or other similar governing documents of
-12-
<PAGE>
Buyer or any material agreement, indenture or other instrument under which Buyer
is bound or (ii) violate or conflict with any Law applicable to Buyer or the
properties or assets of Buyer.
(e) Consents. No consent, approval, authorization or permit of, or filing
--------
with or notification to, any Person (including, without limitation, any consent
under the Public Utility Holding Company Act of 1935, as amended) is required
for or in connection with the execution and delivery of this Agreement by Buyer
or for or in connection with the consummation of the transactions and
performance of the terms and conditions contemplated hereby by Buyer, except for
such consents, approvals, authorizations, permits, filings and notifications the
failure of which to obtain or make are not reasonably likely to have a material
adverse effect on the ability of Buyer to consummate and perform the
transactions contemplated by this Agreement.
(f) Actions. There is no Action pending against Buyer or, to the knowledge
-------
of Buyer, threatened against Buyer, other than Actions which are not reasonably
likely to have a material adverse effect on the ability of Buyer to consummate
and perform the transactions contemplated by this Agreement.
(g) Advisors' and Brokers' Fees. Neither Buyer nor any Affiliate of Buyer
---------------------------
has retained any advisor or broker in respect of the transactions contemplated
by this Agreement for which Seller or the Company are liable or shall incur any
liability.
(h) Qualified Owner. The consummation of the transactions contemplated
---------------
hereby will not cause Buyer or the Company to be disqualified as an owner of any
federal or state oil, gas and mineral lease or to exceed any acreage limitation
imposed by any statute, rule, regulation or order of governmental authority.
(i) Funds. Buyer has, and at all times prior to Closing will have,
-----
sufficient funds available to enable Buyer to consummate the transactions
contemplated hereby and to pay the Closing Payment and all related fees and
expenses of Buyer.
(j) Buyer's Knowledge. Buyer has no knowledge of any fact which results
-----------------
in any representation or warranty of Seller in Section 4.1 being breached. If
after the date of this Agreement, Buyer obtains knowledge of any fact which
results in any representation or warranty of Seller in Section 4.1 being
breached, Buyer will immediately furnish Seller written notice thereof.
(k) No Distribution. Buyer is an experienced and knowledgeable investor in
---------------
the oil and gas business. Prior to entering into this Agreement, Buyer was
advised by its counsel and such other persons it has deemed appropriate
concerning this Agreement and has relied solely on an independent investigation
and evaluation of, and appraisal and judgment with respect to, the geologic and
geophysical characteristics of the Subject Interests, the estimated reserves
recoverable therefrom, and the price and expense assumptions applicable thereto.
Buyer is an "accredited investor," as such term is defined in Regulation D of
the Securities Act of 1933, as
-13-
<PAGE>
amended, and will acquire the Company Shares for its own account and not with a
view to a sale or distribution thereof in violation of the Securities Act of
1933, as amended, and the rules and regulations thereunder, any applicable state
blue sky laws or any other applicable securities laws.
(1) Bankruptcy. There are no bankruptcy, reorganization or arrangement
----------
proceedings pending against, being contemplated by, or to the knowledge of
Buyer, threatened against Buyer.
ARTICLE 5
ACCESS TO INFORMATION; ENVIRONMENTAL MATTERS; ETC.
--------------------------------------------------
Section 5.1 General Access. Subject to Section 5.4 (which shall govern
--------------
all environmental reviews, inspections and audits), promptly following the
execution of this Agreement and until the Closing Date (or earlier termination
of this Agreement), Seller shall cause the Company (i) to permit Buyer and its
representatives to have reasonable access at reasonable times in the Company's
offices, and in a manner so as not to interfere unduly with the business
operations of the Company, to the Company's books, records, contracts, abstracts
of title, title opinions, title files, ownership maps, lease files, assignments,
division orders, Reserve Reports and documents relating to the Assets or the
Company insofar as the same are in the Company's or Seller's possession and
insofar as the Company and Seller may do so without (a) violating legal
constraints or any legal obligation or (b) waiving any attorney/client, work
product or like privilege and (ii), subject to any required consent of any third
Person (other than an Affiliate of Seller), to permit Buyer and its
representatives at reasonable times and at Buyer's sole risk, cost and expense,
to conduct, in the presence of Company representatives, reasonable inspections
of the Assets; provided, however, Buyer shall repair any damage to the Assets
resulting from such inspections and Buyer does hereby indemnify and hold
harmless, release and agree to defend the Seller Indemnified Parties and the
Company from and against any and all losses, costs, damages, obligations,
claims, liabilities, expenses and causes of action to the extent arising from
Buyer's inspection of the Assets, including, without limitation, claims for
personal injuries, property damage and reasonable attorney's fees and expenses,
regardless of the form of claim whether at common law, strict liability
negligence under any statute or regulation. However, except to the extent such
inspections materially contribute to, materially aggravate or materially
adversely affect an Environmental Defect, such indemnification shall not extend
to any Environmental Defect discovered in the course of such inspections, shall
expire upon the Closing and shall not in any way affect or limit Seller's
liabilities or responsibilities with respect to any Environmental Defect.
Nothing in this Article V shall be construed to permit Buyer or its
representatives to have access to any files, records, contracts or documents of
Seller relating to this transaction, including, without limitation, any bids or
offers received by Seller or the Company for the sale of the Company or any of
the Company's assets in competition with the Buyer's bid or offer, it being
agreed that any such competing bids or offers shall be the sole property of the
Seller.
-14-
<PAGE>
Section 5.2 Confidential Information. Unless and until the Closing
------------------------
occurs, Buyer agrees to maintain all information made available to it pursuant
to this Agreement confidential and to cause its officers, employees,
representatives, consultants and advisors to maintain all information made
available to them pursuant to this Agreement confidential, all as provided in
that certain confidentiality agreement dated May 10, 1999 (the "Confidentiality
Agreement"), by and between Seller and Buyer, the terms of which are
incorporated herein by reference and made a part of this Agreement.
Section 5.3 No Warranty or Representation. Except for Seller's warranty
-----------------------------
and representation in Section 4.1(p), Seller makes no warranty or
representation, express or implied, statutory or otherwise, with respect to any
Environmental Matters (including, without limitation, any Environmental
Condition, Environmental Claim or Offsite Environmental Matter) and Buyer hereby
acknowledges and agrees that Buyer's sole remedy for any Environmental Matter
(including, without limitation any Environmental Defect, Environmental
Condition, Environmental Claim or Offsite Environmental Matter) with respect to
any of the Assets or the Company shall be pursuant to the Seller's limited
warranty and representation in Section 4.1(p)) (which shall not survive the
Closing) and the procedures set forth in Sections 5.4 and 5.5. Furthermore,
without limiting the provisions of the Confidentiality Agreement (which shall
continue in full force and effect) and except for the express representations
and warranties contained in Section 4.1, Seller makes no warranty or
representation, express, implied, statutory or otherwise, with respect to the
accuracy or completeness of the information, records and data now, heretofore or
hereafter made available to Buyer in connection with this Agreement, including,
without limitation, any description of the Assets, pricing assumptions,
potential for production of oil, gas or other hydrocarbons from the Subject
Interests, projected development costs, projected plugging and abandonment costs
or any other matters contained in or related to the Reserve Reports, any
environmental information, or any other material furnished to Buyer by Seller,
the Company or any other source, including any of their respective directors,
officers, employees, counsel, agents or advisors.
Section 5.4 Environmental Review and Audit.
------------------------------
(a) Environmental Access. For a period of forty-five (45) days following
--------------------
the execution of this Agreement (the "Environmental Examination Period") and
subject to the restrictions contained in this Agreement and any required consent
or waiver of any third Person (other than an Affiliate of Seller), Seller shall
cause the Company (i) to permit Buyer and its representatives to have reasonable
access at reasonable times in the Company's offices, and in a manner so as not
to interfere unduly with the business operations of the Company, to Seller's and
the Company's environmental files and records in the Seller's or the Company's
possession relating to the Assets or any property formerly owned or operated by
the Company insofar as Seller and the Company may do so without waiving any
attorney/client, work product or like privilege and (ii) to permit Buyer and the
Environmental Consultant to have reasonable access to the Assets for the purpose
of allowing Buyer and the Environmental Consultant to inspect and/or
-15-
<PAGE>
audit the Assets for any Environmental Defects (collectively, "Buyer's
Environmental Review"), all at Buyer's sole risk, cost and expense.
(b) Conduct of Review. Prior to conducting Buyer's Environmental Review,
-----------------
Buyer shall furnish Seller with a proposed scope of Buyer's Environmental
Review, including a description of the activities to be conducted and the
locations of such activities. No third Person, other than the Environmental
Consultant and Buyer's employees and attorneys, may conduct Buyer's
Environmental Review. Buyer shall not commence any activity proposed to be
included in Buyer's Environmental Review unless and until such activity
(including the location thereof) has been approved in writing by Seller, which
approval shall not be unreasonably withheld and shall be given or denied within
two Business Days after Buyer furnishes Seller with reasonably sufficient
information with respect to such activity. Seller or its representative shall
have the right to be present during any inspection (including Buyer's
Environmental Review) of the Assets and shall have the right, at its option and
expense, to split samples with Buyer.
(c) Buyer Responsibility for Review. In connection with Buyer's
-------------------------------
Environmental Review, Buyer agrees that Buyer, the Environmental Consultant and
Buyer's employees, agents and contractors shall comply with all Laws and shall
exercise due care with respect to the Assets and their condition, taking into
consideration the characteristics of any wastes or substances found thereon, and
in light of all relevant facts and circumstances. Specifically, but without
limitation, when handling solid waste or hazardous substances, if any,
discovered during the inspection of the Assets, Buyer, the Environmental
Consultant and Buyer's employees, agents and contractors shall handle such waste
or substances in accordance with all Laws. Any soil or water samples taken by
Buyer from the Assets shall be managed by Buyer consistent with the applicable
rules and regulations of the U.S. Environmental Protection Agency and applicable
state agencies with regulatory authority, provided, the Company shall be
identified as the generator of such samples. Promptly after completing Buyer's
Environmental Review, Buyer shall, at its sole cost and expense, restore the
Assets to substantially the same condition the Assets were in at the time of
Buyer's entry thereon, in accordance with good engineering practice, if changed
due to Buyer's Environmental Review. Failure by Buyer to comply with the
requirements of this subsection within a reasonable time period will entitle
(but shall not obligate) Seller or the Company to take any action deemed
necessary or appropriate by Seller or the Company to correct such failure after
written notice to Buyer, all at Buyer's expense. Buyer shall maintain and shall
cause its officers, employees, agents, representatives, contractors, consultants
(including the Environmental Consultant) and advisors to maintain all
information obtained by Buyer and the Environmental Consultant pursuant to the
Buyer's Environmental Review as strictly confidential and shall not disclose
same to any third Person without the prior written consent of Seller, except to
the extent required by Law. Buyer shall provide Seller's counsel with copies of
any final written reports prepared and analytical test results received by Buyer
or the Environmental Consultant promptly following Buyer's or the Environmental
Consultant's preparation or receipt of same. Buyer does hereby indemnify and
hold harmless, release and agree to defend the Seller Indemnified Parties and
the Company from and against any and all losses, costs, damages, obligations,
claims, liabilities, expenses and causes of action,
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including all Environmental Liabilities, to the extent arising out of any
violation by Buyer or Buyer's officers, employees, agents, representatives,
contractors, consultants (including the Environmental Consultant) and advisors
of the provisions of this subsection or from the inspection or testing of the
Assets conducted by or on behalf of Buyer, including, without limitation, claims
for personal injuries, property damage and reasonable attorney's fees and
expenses, regardless of the form of claim whether at common law, strict
liability, negligence or under any statute or regulation. However, except to the
extent such inspections or testings materially contribute to, materially
aggravate or materially adversely affect an Environmental Defect, such
indemnification shall not extend to any Environmental Defect discovered in the
course of such inspections and testings, shall expire upon the Closing and shall
not in any way affect or limit Seller's liabilities or responsibilities with
respect to any Environmental Defect.
Section 5.5 Environmental Defects.
---------------------
(a) Buyer's Assertions of Environmental Defects. Prior to the expiration
-------------------------------------------
of the Environmental Examination Period, Buyer may notify Seller in writing of
any matters which, in Buyer's reasonable opinion, constitute Environmental
Defects. Buyer's written notice must include (i) a specific description of each
Asset (or portion thereof) that is affected by the alleged Environmental Defect,
(ii) a description of the alleged Environmental Defect and the facts and
circumstances giving rise thereto, including all evidence compiled by Buyer
which supports the existence of such alleged Environmental Defect, and (iii) a
calculation of the Remediation Amount (itemized in reasonable detail) that Buyer
asserts is attributable to such Environmental Defect. Buyer's calculation of
the Remediation Amount must describe the Remediation proposed for the
Environmental Condition that gives rise to the asserted Environmental Defect and
identify all material assumptions used by the Buyer in calculating the
Remediation Amount, including the standards the Buyer asserts must be met to
comply with Environmental Laws.
(b) Seller's Rights and Elections. If Buyer timely notifies Seller in
-----------------------------
writing of any Environmental Defect as required by Section 5.5(a), Seller shall
have the right to then or thereafter dispute the existence of such Environmental
Defect and/or the alleged Environmental Defect Amount asserted with respect
thereto in accordance with the provisions of Section 6.5 of this Agreement. In
addition, Seller, at its option, shall elect, at or prior to the Closing, one of
the following options with respect to the Assets affected by the alleged
Environmental Defect and, at Seller's option, any other Assets which form part
of any field or other economic operating unit which includes such affected
Assets (collectively, the "Environmental Defect Property"):
(i) leave such Environmental Defect Property in the Assets and assume
responsibility for the Remediation of such Environmental Defect; provided
that, all costs for Remediation shall first be borne by Buyer to the extent
Seller elects to apply any of the Environmental Defect Deductible to such
costs; or
(ii) leave such Environmental Defect Property in the Assets and reduce
the Purchase Price by the Environmental Defect Amount with respect to such
Environmental
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Defect (taking into account any application of the Environmental Defect
Deductible which Seller elects to make with respect thereto).
If Seller elects the option set forth in clause (ii) above, Buyer shall be
deemed to have assumed responsibility for Remediation of such Environmental
Defect and such Environmental Defect shall be deemed to constitute a Company
Liability. If Seller elects the option set forth in clause (i) above, Seller
shall use commercially reasonable efforts to implement such Remediation in a
manner which is consistent with the requirements of Environmental Laws and the
provisions of any applicable lease, and Seller shall have access to the
Environmental Defect Property after the Closing Date to implement and complete
such Remediation in accordance with this section and an Access Agreement in
substantially the form attached hereto as Exhibit 5.5(b) (the "Access
Agreement"). Seller will be deemed to have adequately completed the Remediation
required in the immediately preceding sentence (a) (i) upon receipt of a
certificate or approval from the applicable state or federal authority that the
Remediation has been implemented to the extent necessary to comply with existing
regulatory requirements or (ii) upon receipt of a certificate from a licensed
professional engineer if the approval or certification specified in (i) cannot
be obtained because provision for such approval or certification is not provided
under federal or state law and (b) to the extent express approval from the
lessor is required under any applicable lease, upon receipt of such approval.
(c) Environmental Defect Amount. If Seller elects the option set forth in
---------------------------
Section 5.5(b)(ii) with respect to one or more Environmental Defects, then as
Buyer's sole and exclusive remedy with respect to such Environmental Defects,
Buyer shall be entitled to reduce the Purchase Price by the amount (the
"Environmental Defect Amount"), if any, by which the Remediation Amount with
respect to the Environmental Conditions giving rise to such Environmental
Defects exceeds that part, if any, of $500,000 (the "Environmental Defect
Deductible") which Seller elects to apply as an offset or deduction against such
Remediation Amount. Seller may also apply any part of the Environmental Defect
Deductible to the cost of any Remediation undertaken by Seller pursuant to the
option set forth in Section 5.5(b)(i). Any Remediation costs to which Seller
elects to apply the Environmental Defect Deductible shall be borne by the Buyer.
Seller shall have the right from time to time upon written notice to Buyer to
reallocate and change its application of the Environmental Defect Deductible,
except to the extent of Remediation costs already incurred or contracted for by
Buyer based on Seller's previous application thereof. It is expressly
understood and agreed that the Environmental Defect Deductible represents an
aggregate deductible for Environmental Defects which may be apportioned as
provided in this Section 5.5(c) rather than as a separate deductible for each
individual Environmental Claim.
(d) Waiver by Buyer. If, prior to the expiration of the Environmental
---------------
Examination Period, the Buyer has knowledge of an Environmental Defect and does
not notify Seller in writing of the existence thereof on or before the
expiration of the Environmental Examination Period (including, without
limitation, any Environmental Defect noted or described in any oral or written
report prepared by the Environmental Consultant), the Buyer shall be deemed to
have
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waived such Environmental Defect and such Environmental Defect shall be deemed
to constitute a Company Liability. In addition, all conditions and matters of
which Buyer has knowledge prior to the expiration of the Environmental
Examination Period and which would have constituted Environmental Defects but
for the $50,000 threshold limitation set forth in the definition of
Environmental Defect shall be deemed to constitute Company Liabilities.
ARTICLE 6
TITLE ADJUSTMENTS
-----------------
Section 6.1 No Title Warranty or Representation. Without limiting
-----------------------------------
Buyer's right to adjust the Purchase Price by operation of Section 6.2, Seller
makes no warranty or representation, express, implied, statutory or otherwise,
with respect to the Company's title to any of the Assets and Buyer hereby
acknowledges and agrees that Buyer's sole remedy for any defect of title,
including any Title Defect, with respect to any of the Assets shall be pursuant
to the procedures set forth in this Article VI, which remedies shall cease, and
be deemed to be finally and conclusively satisfied, in all respects, upon the
Closing.
Section 6.2 Buyer's Title Review.
--------------------
(a) Buyer's Assertion of Title Defects. For a period of forty-five (45)
----------------------------------
days following the execution of this Agreement (the "Title Examination Period"),
Buyer shall have the right to furnish Seller written notice meeting the
requirements of this Section 6.2(a) (the "Title Defect Notice") setting forth
any matters which, in Buyer's reasonable opinion, constitute Title Defects and
which Buyer asserts as a Title Defect with respect to any Well or Unit pursuant
to this Article VI. For all purposes of this Agreement, Buyer shall be deemed
to have waived any Title Defect which Buyer fails to assert as a Title Defect by
a Title Defect Notice given to Seller on or before the expiration of the Title
Examination Period. To be effective, Buyer's Title Defect Notice of a Title
Defect must include (i) a brief description of the matter constituting the
asserted Title Defect, (ii) the claimed Title Defect Amount attributable
thereto, and (iii) supporting documents reasonably necessary for Seller (as well
as any title attorney or examiner hired by Seller) to verify the existence of
such asserted Title Defect. To give Seller an opportunity to commence reviewing
and curing Title Defects, on or before the end of each calendar week during the
Title Examination Period, Buyer agrees to give Seller written notice of all
Title Defects discovered by Buyer during such calendar week, which may be
preliminary in nature and supplemented prior to the end of the Title Examination
Period. At the same time, Buyer shall also furnish Seller with written notice
of any Seller Title Credit which is discovered during such calendar week by any
of Buyer's employees or representatives while conducting Buyer's title review,
due diligence or investigation with respect to any Well or Unit.
(b) Purchase Price Allocations. A portion of the Purchase Price has been
--------------------------
allocated to the various Wells and Units in the manner and in accordance with
the respective values set forth in the Property Schedule. If any adjustment is
made to the Purchase Price pursuant to this
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Section 6.2, a corresponding adjustment shall be made to the portion of the
Purchase Price allocated to the affected Well or Unit in the Property Schedule.
(c) Seller's Rights and Opportunity to Cure. If Buyer timely gives Seller
---------------------------------------
Title Defect Notice(s) of one or more Title Defects, Seller shall have the right
to then or thereafter dispute the existence of such Title Defect and/or the
alleged Title Defect Amount asserted with respect thereto in accordance with the
provisions of Section 6.5 of this Agreement. In addition, the following terms
and conditions shall apply with respect to any Title Defect asserted by Buyer in
a timely Title Defect Notice:
(i) Seller shall have until two (2) days prior to the Closing Date,
at its cost and expense, if it so elects but without obligation, to cure
all or a portion of such asserted Title Defects. Any asserted Title
Defects which are waived by Buyer within such time shall be deemed
"Permitted Encumbrances" hereunder. Subject to Sections 6.2(c)(ii) and
6.2(c)(iii) and Seller's continuing right to dispute the existence of a
Title Defect and/or the Title Defect Amount asserted with respect thereto
under Section 6.5, if Seller within such time fails to cure any Title
Defect of which Buyer has given timely written notice as required above,
and Buyer has not and does not waive same on or before the day immediately
preceding the Closing Date, the Well or Unit affected by such uncured and
unwaived Title Defect shall be a "Title Defect Property."
(ii) If Buyer furnishes to Seller timely Title Defect Notice(s) of
one or more Title Defects and the same are not waived or cured as provided
in Section 6.2(c)(i), Seller may elect to delay the Closing for a period of
up to thirty (30) calendar days to afford Seller the opportunity, if it so
elects, to attempt to cure any of the properly asserted Title Defects prior
to the Closing. Subject to Section 6.2(c)(iii) and Seller's continuing
right to dispute the existence of a Title Defect and/or the Title Defect
Amount asserted with respect thereto under Section 6.5, if Seller within
such time period fails or refuses to cure any Title Defect of which Buyer
has given a timely Title Defect Notice and Buyer has not waived and does
not waive the same before the delayed Closing, the Well or Unit affected by
such uncured and unwaived Title Defect shall be a "Title Defect Property."
(iii) If Buyer furnishes to Seller timely Title Defect Notice(s) of
one or more Title Defects and the same are not waived or cured as provided
in Section 6.2(c)(i) or Section 6.2(c)(ii), as applicable, Seller may elect
to close the transactions contemplated hereby and retain the right to cure
any of such Title Defects after Closing (whether or not Seller elects to
delay Closing pursuant to Section 6.2(c)(ii) above). In such event, but
subject to Seller's continuing right to dispute the existence of a Title
Defect and/or the Title Defect Amount asserted with respect thereto under
Section 6.5, the Purchase Price shall be subject to reduction pursuant to
Section 6.2(d) taking into account all Title Defect Amounts attributable to
the Title Defect Properties affected by the Title Defects which Seller may
elect to cure after Closing. Seller shall have one hundred twenty (120)
calendar days after the Closing Date (as may be delayed pursuant to Section
6.2(c)(iii)
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above) in which to attempt to cure any such Title Defects and to increase
or restore any Seller Title Credits. If Seller cures any such Title Defect,
then Buyer shall promptly pay Seller the Title Defect Amount with respect
to the Title Defect that is so cured, but not exceeding the aggregate
amount of the reductions in the Purchase Price which Buyer received as a
result of any Title Defects, together with interest on the amount due
Seller from the Closing Date through and including the date of payment at
the Agreed Rate. Furthermore, the Title Defect Deductible shall be restored
to the extent any portion of the Title Defect Deductible was applied as a
credit against the Title Defect Amount attributable to such cured Title
Defect. If a positive balance exists in the Available Deductible Amount
after any restorations or increases thereof pursuant to the foregoing, and
Seller has suffered a reduction in the Purchase Price as a result of any
one or more uncured Title Defects, Buyer shall pay to Seller an amount
(together with interest thereon from the Closing Date through and including
the date of payment at the Agreed Rate) equal to the lesser of (i) the
amount by which the Purchase Price was reduced as a result of such uncured
Title Defects and (ii) the then existing balance of the Available
Deductible Amount.
(d) Buyer's Title Adjustments. As Buyer's sole and exclusive remedy with
-------------------------
respect to Title Defects, Buyer shall be entitled to reduce the Purchase Price
by the amount, if any, by which the aggregate amount of Title Defect Amounts
with respect to all Title Defect Properties exceeds the sum (the "Available
Deductible Amount") of $500,000 (the "Title Defect Deductible") plus the
aggregate amount of Seller Title Credits with respect to all Wells or Units.
"Title Defect Amount" shall mean, with respect to a Title Defect Property, the
amount by which the value of such Title Defect Property is impaired as a result
of the existence of one or more uncured and unwaived Title Defects, which amount
shall be determined as follows and subject to the following conditions:
(1) If the Title Defect results from the Company having a lesser Net
Revenue Interest in such Title Defect Property than the Net Revenue
Interest specified therefor in the Property Schedule, the Title Defect
Amount shall be equal to the product obtained by multiplying the portion of
the Purchase Price allocated to such Title Defect Property in the Property
Schedule by a fraction, the numerator of which is the reduction in the Net
Revenue Interest and the denominator of which is the Net Revenue Interest
specified for such Title Defect Property in the Property Schedule.
(2) If the Title Defect results from the Company having a greater
Working Interest in a Title Defect Property than the Working Interest
specified therefor in the Property Schedule, the Title Defect Amount shall
be equal to the product obtained by multiplying the portion of the Purchase
Price allocated to such Title Defect Property in the Property Schedule by a
fraction, the numerator of which is the increase in the Working Interest
and the denominator of which is the Working Interest specified for such
Title Defect Property in the Property Schedule.
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(3) If the Title Defect results from the existence of a lien, the
Title Defect Amount shall be an amount sufficient to discharge such lien.
(4) If the Title Defect results from any matter not described in
paragraphs (1), (2) or (3) above, the Title Defect Amount shall be an
amount equal to the difference between the value of the Title Defect
Property affected by such Title Defect with such Title Defect and the value
of such Title Defect Property without such Title Defect (taking into.
account the portion of the Purchase Price allocated in the Property
Schedule to such Title Defect Property); provided, that if such Title
Defect is reasonably susceptible of being cured, the Title Defect Amount
shall be the reasonable cost and expense of curing such Title Defect, if
less.
(5) If a Title Defect is not effective or does not affect a Title
Defect Property throughout the entire productive life of such Title Defect
Property, such fact shall be taken into account in determining the Title
Defect Amount.
(6) The Title Defect Amount with respect to a Title Defect Property
shall be determined without duplication of any costs or losses included in
another Title Defect Amount hereunder.
(7) The Title Defect Amount attributable to a Title Defect Property
shall not exceed the portion of the Purchase Price allocated to such Title
Defect Property in Section 6.2(b).
(8) No Title Defect Amount shall be allowed on account of and to the
extent that an increase in the Company's Working Interest in a Well or Unit
has the effect of proportionately increasing the Company's Net Revenue
Interest in such Well or Unit.
(9) With respect to any Well or Unit in which Buyer or an Affiliate
of Buyer likewise owned an undivided interest at the Effective Time, no
Title Defect Amount shall be allowed on account of a Title Defect affecting
such Subject Interest that also affected Buyer's or such Affiliate's
interest in such Well or Unit in the same manner at the Effective Time.
(10) Notwithstanding the foregoing, if the Title Defect Amount
determined pursuant to the foregoing with respect to a Title Defect
Property is $50,000 or less, after taking into account any curative work
performed by or on behalf of Seller, then the Title Defect Amount with
respect to such Title Defect Property shall be deemed zero.
Section 6.3 Determination of Title Defects. A Well or Unit shall not be
------------------------------
deemed to have a "Title Defect" if the following statements are true in all
material respects with respect to such Well or Unit as of the Closing Date:
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(a) The Company has Defensible Title thereto.
(b) All rentals, Pugh clause payments, shut-in gas payments and other
similar payments (other than royalties, overriding royalties and other similar
payments on production) due with respect to such Well or Unit have been properly
and timely paid.
(c) Seller is not in default under the material terms of any leases,
farmout agreements or other contracts or agreements respecting such Well or Unit
which could (1) prevent the Company from receiving the proceeds of production
attributable to the Company's interest therein, or (2) result in cancellation of
the Company's interest therein.
Notwithstanding any other provision in this Agreement to the contrary, the
following matters shall not be asserted as, and shall not constitute Title
Defects: (i) defects in the chain of title such as minor name discrepancies, the
mere failure to recite marital status in a document, or omissions of successions
of heirship proceedings, unless Buyer provides affirmative evidence that such
failure or omission results in another Person's superior claim of title to the
relevant Subject Interest or portion thereof, (ii) defects arising out of lack
of survey, (iii) defects arising out of lack of corporate authorization, unless
Buyer provides affirmative evidence that such lack of authorization results in
another Person's superior claim of title to the relevant Subject Interest or
portion thereof, (iv) the failure to obtain or absence of any federal patent or
conveyance with respect to any lands over which any state has claimed ownership
and which have been covered by a state lease for more than ten years, (v)
defects that have been cured by possession under the applicable statutes of
limitations or statutes for prescription and (vi) other defects of a type
expected to be encountered in the area involved and customarily acceptable to
prudent operators and interest owners. Furthermore, in determining the
existence of a Title Defect, due consideration shall be given to the length of
time hydrocarbons have been produced from the affected property in an undisputed
"pay status" without any adverse claim even though such period may be less than
the period of possession or use required under applicable limitations or
prescription statutes. (As used herein, "pay status" shall mean payment is
being made by a third party for production from the affected Well or Unit
without indemnity from the Company except such indemnities as are customarily
included in division orders, transfer orders, product purchase agreements and
similar documents commonly used in connection with the payment of proceeds from
production.)
Section 6.4 Seller Title Credit. A "Seller Title Credit" shall mean,
-------------------
with respect to a Well or Unit, the amount by which the value of such Well or
Unit is enhanced by virtue of (a) the Company having a greater Net Revenue
Interest in such Well or Unit than the Net Revenue specified therefor in the
Property Schedule, (b) the Company having a lesser Working Interest in such Well
or Unit than the Working Interest specified therefor in the Property Schedule,
or (c) such Well or Unit being subject to a lien indebtedness which is less than
that used for the Purchase Price allocation in the Property Schedule, which
amount shall be determined as follows:
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(1) If the Seller Title Credit results from the Company having a
greater Net Revenue Interest in such Well or Unit than the Net Revenue
Interest specified therefor in the Property Schedule, the Seller Title
Credit shall be equal to the product obtained by multiplying the portion of
the Purchase Price allocated to such Well or Unit in the Property Schedule
by a fraction, the numerator of which is the increase in the Net Revenue
Interest and the denominator of which is the Net Revenue Interest specified
for such Well or Unit in the Property Schedule.
(2) If the Seller Title Credit results from the Company having a
lesser Working Interest in a Well or Unit than the Working Interest
specified therefor in the Property Schedule, the Seller Title Credit shall
be equal to the product obtained by multiplying the portion of the Purchase
Price allocated to such Well or Unit in the Property Schedule by a
fraction, the numerator of which is the decrease in the Working Interest
and the denominator of which is the Working Interest specified for such
Well or Unit in the Property Schedule.
(3) If the Seller Title Credit results from a Well or Unit being
subject to lesser lien indebtedness, the Seller Title Credit shall be equal
to the amount of the Company's proportionate share of the reduction in such
lien indebtedness; provided that, if lien indebtedness affects more than
one Well or Unit, the Seller Title Credits with respect to such Wells or
Units shall be determined without duplication (e.g., credit shall not be
given twice to the same reduction in indebtedness);and provided further, no
Seller Title Credit shall be allowed to the extent such lien indebtedness
is paid by the Company after the Report Date and is not reimbursed by
Seller.
(4) In determining the amount of Seller Title Credits, the principles
and methodology set forth in paragraphs (5), (6) and (7) of Section 6.2(d)
shall be applied, mutatis mutandis.
----------------
(5) No Seller Title Credit shall be allowed on account of and to the
extent that a decrease in the Company's Working Interest in a Well or Unit
has the effect of proportionately decreasing the Company's Net Revenue
Interest in such Well or Unit.
(6) Notwithstanding the foregoing, if the Seller Title Credit
determined pursuant to the foregoing with respect to any Well or Unit is
$50,000 or less, then the Seller Title Credit with respect thereto shall be
deemed zero.
The Title Defect Deductible shall be increased dollar for dollar by the
aggregate amount of all Seller Title Credits. In addition, the Title Defect
Deductible shall be restored to the extent that any portion thereof is applied
as a credit against a Title Defect Amount attributable to a Title Defect which
is subsequently cured by Seller or determined not to constitute a Title Defect.
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Section 6.5 Deferred Claims and Disputes. In the event that Buyer and
----------------------------
Seller have not agreed upon (i) the existence of one or more Title Defects or
Seller Title Credits or one or more adjustments, credits or offsets claimed by
Buyer or Seller pursuant to and in accordance with the requirements of this
Article VI, or (ii) the existence of one or more Environmental Defects, any
Remediation, Remediation Amount or plan therefor, or one or more adjustments,
credits or offsets claimed by Buyer or Seller pursuant to Section 5.5, any such
dispute or claim (a "Deferred Adjustment Claim") shall be settled pursuant to
this Section 6.5 and, except as provided in Sections 9.1(f), 9.2(f) and 9.4,
shall not prevent or delay Closing. In no event shall any Title Defect Amount,
Environmental Defect Amount or Remediation Amount asserted by Buyer, or any
Seller Title Credit asserted by Seller, as a Deferred Adjustment Claim exceed
the amount asserted by Buyer or Seller therefor prior to the end of the Title
Examination Period in accordance with Section 6.2 or the Environmental
Examination Period in accordance with Section 5.5, as applicable. With respect
to each potential Deferred Adjustment Claim, Buyer and Seller shall deliver to
the other a written notice describing each such potential Deferred Adjustment
Claim, the amount in dispute and a statement setting forth the facts and
circumstances that support such party's position with respect to such Deferred
Adjustment Claim. At Closing, the Purchase Price shall not be adjusted on
account of, and, except as provided in Sections 9.1(f) and 9.2(f), no effect
shall be given to, the Deferred Adjustment Claim. On or prior to the thirtieth
(30th) consecutive calendar day following the Closing Date or, if earlier, the
date which was the "Closing Date" before Closing was delayed under Section 9.4
(the "Deferred Matters Date"), the Seller and Buyer shall attempt in good faith
to reach agreement on the Deferred Adjustment Claims and, ultimately, to resolve
by written agreement all disputes regarding the Deferred Adjustment Claims. Any
Deferred Adjustment Claims which are not so resolved on or before the Deferred
Matters Date may be submitted by either party to final and binding arbitration
in accordance with the Arbitration Procedures; provided, however, that the
Seller may elect at any time to resolve all disputes relating to the Deferred
Adjustment Claims by the payment to Buyer of the amount by which the Purchase
Price would have been reduced at Closing on account of the Title Defects or
Environmental Defects which constitute Deferred Adjustment Claims if same did
not constitute Deferred Adjustment Claims, together with interest thereon from
the Closing Date to the date of such payment at the Agreed Rate.
Notwithstanding anything herein provided to the contrary, including Section
6.2(c), but without limiting Seller's rights under Sections 6.2(c)(ii) and
6.2(c)(iii), Seller shall be entitled to cure any Title Defect which constitutes
a Deferred Adjustment Claim at any time prior to the point in time when a final
and binding written decision of the board of arbitrators is made with respect
thereto in accordance with the Arbitration Procedures. The amount of any
reduction in the Purchase Price to which Buyer becomes entitled under the final
and binding written decision of the board of arbitrators shall be promptly
refunded by Seller to Buyer, together with interest thereon from the Closing
Date to the date of payment at the Agreed Rate.
Section 6.6 No Duplication. Notwithstanding anything herein provided to
--------------
the contrary, if a Title Defect results from any matter which could also result
in the breach of any representation or warranty of Seller set forth in Section
4.1, then Buyer shall only be entitled to
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assert such matter as a Title Defect pursuant to this Article VI and shall be
precluded from also asserting such matter as the basis of the breach of any such
representation or warranty.
ARTICLE 7
TAXES AND EMPLOYEE BENEFITS
---------------------------
Section 7.1 Tax Agreements.
--------------
(a) Tax Return Filings and Tax Payments for 1999. Seller shall include the
--------------------------------------------
Company in its consolidated federal income Tax Return, and in those state, local
and foreign income Tax Returns that are filed on a consolidated, combined,
unitary or nonunitary basis, for its tax period that includes the Closing Date,
and Seller shall be responsible for the payment of, and shall indemnify and hold
harmless the Buyer against, all Taxes required to be paid with respect to such
consolidated, combined, unitary or nonunitary Tax Returns. Such Tax Returns
shall include (a) the income and gains resulting from the purchase and sale of
the Company Shares, including, without limitation, any gain or loss recognized
pursuant to any Section 338(h)(10) Election made pursuant to Section 7.1(d)
below, (b) any deferred income and gain taken into income by reason of Treasury
Regulation Section 1.1502-13 or any similar provision of state, local or foreign
law, and (c) all other items of income, gain, loss, deduction and credit of the
Company for the period up to and including the Closing Date, as determined by
closing the books of the Company as of the end of the Closing Date; provided,
however, such Tax Return shall not include any income, gain, loss, deduction or
credit of the Company arising as a result of action of Buyer or the Company
taken after the Closing, and all such Tax Returns shall be prepared in a manner
consistent with past practice (including any Tax elections and methods of
accounting), unless a contrary treatment is required by a change in Law (or the
judicial or administrative interpretations thereof).
(b) Termination of Existing Income Tax Sharing Agreements. The Seller
-----------------------------------------------------
shall cause any existing income tax sharing agreements or arrangements disclosed
on Schedule 4.1(q) to be terminated as of the Closing Date. The Company shall
not be obligated to pay the Seller (or Seller's successor in interest) for any
tax benefit it receives from the utilization of net operating losses in Seller's
consolidated return filing for any period to and including the Closing Date.
The Company shall have no liability to Seller or Seller's Affiliates for any
income taxes with respect to any periods ending on or prior to the Closing Date.
(c) State and Local Taxes/Refunds. Buyer shall prepare or cause to be
-----------------------------
prepared with respect to Taxes other than income Taxes and file or cause to be
filed any Tax Returns of the Company for Tax periods which begin before the
Closing Date and end after the Closing Date. With respect to Taxes (other than
Taxes to be included by Seller in its Tax Returns as required in Section 7.1(a)
above) that are imposed on a periodic basis and are payable for a taxable period
that includes (but does not end on) the Closing Date, the Company has accrued as
of March 31, 1999, and is continuing to accrue reserves for Taxes through the
Closing Date. The parties agree
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<PAGE>
that such accruals will be a final settlement as between the parties for all
liabilities relating to such taxes and that no adjustments or refunds will be
made with respect thereto.
(d) Section 338(h)(10) Election. At Buyer's option, Seller (or Seller's
---------------------------
successor in interest) (or if applicable, its ultimate parent corporation) will
join with Buyer in making an election under Section 338(h)(10) of the Code (and
any corresponding elections under state, local, or foreign tax law)
(collectively, a "Section 338(h)(10) Election") with respect to the purchase and
sale of the stock of the Company hereunder. Seller (or Seller's successor in
interest) will pay any Tax attributable to the making of the Section 338(h)(10)
Election and will indemnify the Buyer and the Company against any liability
arising out of any failure to pay such Tax. Seller will also pay any state,
local or foreign Tax (and indemnify Buyer and Company against any liability
arising out of any failure to pay such Tax) attributable to an election under
state, local, or foreign law similar to the election available under Section
338(g) of the Code (or which results from the making of an election under 338(g)
of the Code) with respect to the purchase and sale of stock of the Company
hereunder.
(e) Allocation of Purchase Price. The parties agree to negotiate in good
----------------------------
faith to agree upon an allocation of the Purchase Price for Tax purposes among
the Company's Assets as promptly as possible after Closing; and the parties
further agree that for all income and franchise tax purposes (and, where
applicable, financial accounting purposes), including but not limited to section
338 of the Code, they and their Affiliates will report consistently with such
allocation; provided if no such allocation is agreed upon within one (1) year
following Closing, the parties will not be required to report on a consistent
basis.
Section 7.2 Employee Matters.
----------------
(a) Maintenance of Health Benefit Program. From and after Closing, and
-------------------------------------
until a date not earlier than the expiration of the Trust provided for under
Section 7.2(b), Buyer agrees to cause the Company to (a) maintain equal or
greater medical benefit coverage under the same or better terms and conditions
as is provided under the Company's existing plans which plans are in effect
immediately prior to the Closing Date and which provide benefits to current and
former Company employees covered under such plans as of the date of this
Agreement and their covered dependents, and (b) fulfill the medical benefit
commitments described on Schedule 4.1(r).
(b) Employee Benefits Trust. Prior to Closing, the Company shall establish
-----------------------
a trust, pursuant to an Employee Benefits Trust Agreement substantially in the
form attached hereto as Exhibit "C," for the purpose of providing salary
continuation and benefits under the Company's insurance plans for the periods
provided and in accordance with the terms set forth in Exhibit "C." Prior to
Closing, the Company shall fund the Employee Benefits Trust with not more than
$1,730,000 to cover the obligations to such employees of the Company under the
terms of the Employee Benefits Trust Agreement, the letters describing severance
benefits dated March 30, 1999 and April 11, 1999, and each and every employment
agreement with an employee of the Company, and such funding shall not cause any
adjustment in the Purchase Price. Unutilized
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<PAGE>
funds in the trust shall be the property of the Company as set forth in the
Employee Benefits Trust Agreement. Prior to the Closing, no change in the
Employee Benefits Trust Agreement from the form attached hereto as Exhibit "C"
shall be made without the prior written consent of Buyer, which consent shall
not be unreasonably withheld. Any payment made pursuant to the terms of the
Employee Benefits Trust shall comply with ERISA regulation '2510.3.2(b).
(c) Company Employee Benefits. With respect to those employees of the
-------------------------
Company who continue their employment with the Company after the Closing Date or
are hired by the Buyer or an Affiliate of Buyer within the six (6) month period
following the Closing Date, Buyer shall, or shall cause the Company or the
Buyer's Affiliates to, take all action necessary to cause all such employees to
be covered under the employee benefit plans and fringe benefit arrangements of
the Company, Buyer or Buyer's Affiliates, as the case may be, on the same basis
as those provided to employees of Buyer or its Affiliates who hold comparable
positions, as determined by Buyer in its discretion; and further provided that
Buyer's or its Affiliates' health plans shall not impose any preexisting
condition or waiting period requirement on any such employee's participation in
such health plan with respect to conditions currently permitted to be covered
thereunder if such employee enrolls within thirty (30) days of beginning
employment with Buyer or Buyer's Affiliate. Buyer or Buyer's Affiliate shall
grant all such employees credit for purposes of eligibility and vesting under
Buyer's or its Affiliate's employee benefit plans (including vacation and
severance) for their service with the Company prior to the Closing Date. If
Buyer or its Affiliates give credit under their employee vacation plans for oil
and gas industry experience, such employees shall be given credit for their
years of industry experience prior to the Closing Date for vacation plan
purposes rather than for their years of service with the Company prior to the
Closing Date.
(d) Severance of Employment Relationship With Certain Employees. As of or
-----------------------------------------------------------
prior to the Closing Date, Seller shall cause the Company to sever its
employment relationship with any person who is designated by Buyer in accordance
with the provisions of this Section 7.2(d). No later than ten (10) Business
Days prior to Closing, Buyer shall provide Seller with irrevocable written
notice of which employees of Company will not continue to be employed by the
Company following the Closing Date. Buyer agrees to make its determination and
selection of such employees in compliance with applicable federal and state
laws. Within five (5) Business Days after Seller receives such written notice
regarding an employee, Seller will cause the Company to provide such employee
with written notice of the date of such employee's severance of employment with
the Company, which notice shall comply with the requirements of any employment
agreement, as applicable, and with the notice requirements of ERISA ''606 and
701.
ARTICLE 8
COVENANTS OF SELLER AND BUYER
-----------------------------
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<PAGE>
Section 8.1 Conduct of Business Pending Closing. Subject to Section 8.2
-----------------------------------
and the constraints of applicable operating agreements and other existing
agreements with third Persons (other than any Affiliate of Seller) from the date
hereof through the Closing, except as disclosed in Schedule 8.1. or as otherwise
consented to or approved by Buyer (which consent or approval shall not be
unreasonably withheld or delayed), Seller covenants and agrees that:
(a) Changes in Business. The Company shall not:
-------------------
(1) make any material change in the conduct of its business or
operations;
(2) except in the ordinary course of business and consistent with
past practices, enter into, assign, terminate or amend, in any material
respect, any contract or agreement required to be disclosed pursuant to
Section 4.1(n);
(3) declare or pay any dividends, or make any distributions, in
respect of, or issue any of, its equity securities or securities
convertible into its equity securities, or repurchase, redeem or otherwise
acquire any such securities or make or propose to make any other change in
its capitalization;
(4) merge into or with or consolidate with any other corporation or
acquire all or substantially all of the business or assets of any
corporation or other Person;
(5) make any change in its articles of incorporation or by-laws;
(6) purchase any securities of or equity interests in any corporation
or other Person, except for investments in marketable securities made in
the ordinary course of business and consistent with prior practices;
(7) other than pursuant to the requirements of existing contracts or
commitments, sell, lease or otherwise dispose of any of the Assets, except
(i) Assets sold, leased or otherwise disposed of in the ordinary course of
business having a value of less than $50,000 and (ii) any item of personal
property or equipment having a value of less than $25,000;
(8) take any action or enter into any commitment with respect to or
in contemplation of any liquidation, dissolution, recapitalization,
reorganization or other winding up of its business or operations;
(9) enter into any settlement of any pending or threatened Action,
unless the settlement involves the payment of money damages of not more
than $50,000 individually or $500,000 in the aggregate (other than on
account of any insurance deductible of $50,000 or less) and does not impose
an injunction or similar equitable
-29-
<PAGE>
relief upon the Company or materially impair the Company's defense of any
other Action then pending or threatened against the Company of which the
Company has knowledge;
(10) change its accounting policies or practices (including without
limitation, any change in depreciation or amortization policies), except as
required under GAAP;
(11) enter into any employment agreement not terminable at will or
grant any increases in the compensation of its officers and employees,
except increases to employees who are not officers made in the ordinary
course of business and consistent with past practices;
(12) create or change any Plan or any Benefit Arrangement except as
contemplated in Section 7.2(b);
(13) incur any indebtedness for borrowed money or guarantee the
indebtedness or obligations of any other Person for borrowed money except
for advances and payments in the ordinary course of business under the
Company's existing credit facility with U.S. Bank National Association, et.
al. (See Schedule 4.1(n));
(14) enter into any transactions, agreement or contract with Seller or
any Affiliate of Seller other than in the ordinary course of business and
consistent with prior practices pursuant to agreements disclosed in
Schedule 4.1(n);
(15) except in the ordinary course of business and consistent with
prior practices, enter into any material lease (whether such lease is an
operating or capital lease);
(16) make or rescind any material express or deemed election relating
to Taxes unless it is reasonably expected that such action will not
materially and adversely affect the Company or Buyer, settle or compromise
any material claim, action, suit, litigation, proceeding, arbitration,
investigation, audit or controversy relating to Taxes or change in any
material respect any of its methods of reporting income or deductions for
federal income tax purposes from those employed in the preparation of its
federal income tax returns for the taxable year ending December 31, 1998,
except as may be required by Law or except for such changes as are not
reasonably expected to materially and adversely affect the Company or
Buyer; or
(17) agree in writing to do any of the foregoing matters which are
prohibited by this Section 8.1(a).
(18) adopt, amend, modify or alter any Plan or Benefit Arrangement
listed in Schedule 4.1(r) or describe in Section 7.2 to increase the cost
or obligation of the Company thereunder.
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<PAGE>
(b) Liens. The Company shall not create any express lien or security
-----
interest on any Assets, except to the extent (i) required or permitted incident
to the exploration, operation or development of the Assets and the business of
the Company pursuant to this Section 8.1 or (ii) required or evidenced by any
contract or agreement required to be disclosed pursuant to Section 4.1(n).
(c) Operation of Assets. The Company shall:
-------------------
(1) cause the Assets to be maintained and operated in the ordinary
course of business in accordance with the Company's past practices
(including the repair or replacement of damaged, destroyed, obsolete,
depreciated, non-working or non-economical items of equipment or other
personal property without regard to the limitation of Section 8.1(c)(3)
below), maintain insurance now in force with respect to the Assets, and pay
or cause to be paid all costs and expenses in connection therewith promptly
when due;
(2) cause, or in the event the Company is not operator, use
reasonable efforts to cause, the Assets to be maintained and operated in
material compliance with all Laws;
(3) (a) not commit to participate in the drilling of any new well or
other new capital expenditure on the Assets the projected cost of which
(net to the Company's interest and without consideration of any cost
overruns) is in excess of $500,000 in any single instance, or (b) elect to
become a nonconsenting party with respect to any operation or capital
expenditure proposed by a third Person if the projected cost of such
operation or capital expenditure (net to the Company's interest and without
consideration of any cost overruns) is in excess of $500,000 in any single
instance, or if the Company's election not to participate in such operation
or capital expenditure would cause a permanent forfeiture of any Well or
Unit valued in excess of $500,000 in the Property Schedule, in both cases
without the advance written consent of Buyer, which consent shall not be
unreasonably withheld and which consent or non-consent must be given by
Buyer within the lesser of (x) ten (10) days of Buyer's receipt of the
notice from Seller or the Company or (y) one-half (2) of the applicable
notice period within which the Company is contractually obligated to
respond to third parties to avoid a deemed election by the Company
regarding such operation or capital expenditure (provided Seller or the
Company promptly gives such notice to Buyer after Seller or the Company
receives it), as specified in Seller's or the Company's notice to Buyer
requesting such consent which notice shall set forth the Company's
recommendation as to whether the Company should participate in such
operation or capital expenditure; provided that, failure by Buyer to
respond within the aforesaid applicable period shall constitute Buyer's
approval of the recommendation of the Company set forth in such notice with
respect to such operation or capital expenditure;
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<PAGE>
(4) maintain and keep the Assets in full force and effect, except
where such failure is due to (i) the failure to pay a delay rental,
royalty, shut in royalty or other payment by mistake or oversight
(including the Company's negligence) unless caused by the Company's gross
negligence or willful misconduct, or (ii) the failure to participate in an
operation due to the express or deemed nonconsent of Buyer; and
(5) use reasonable diligence to maintain its relationships with
suppliers, customers and others having material business relations with the
Company with respect to the Assets so that they will be preserved for Buyer
on and after the Closing Date.
(d) Contracts and Agreements. The Company shall not:
------------------------
(1) grant or create any Preference Right or Transfer Requirement with
respect to the Assets except (i) in connection with the performance by the
Company of an obligation or agreement existing on the date hereof or
pursuant to this Agreement or (ii) in connection with the acquisition of
Assets after the Effective Time if granting or creating such Preference
Right or Transfer Requirement is a condition of such acquisition;
(2) enter into any oil, gas or other hydrocarbon sales, exchange,
processing or transportation contract with respect to the Assets having a
term in excess of one year which is not terminable without penalty on
notice of ninety (90) days or less; or
(3) voluntarily relinquish the Company's position as operator with
respect to any of the Assets.
Section 8.2 Qualifications on Conduct.
-------------------------
(a) Emergencies; Legal Requirements. Seller or the Company may take (or
-------------------------------
not take, as the case may be) any of the actions mentioned in Section 8.1 above
if reasonably necessary under emergency circumstances (or if required or
prohibited (as the case may be) pursuant to Law) and provided, Buyer is notified
as soon thereafter as practicable.
(b) Non-Operated Properties. If the Company is not the operator of a
-----------------------
particular portion of the Assets, the obligations of the Company in Section 8.1
above with respect to such portion of the Assets which have reference to
operations or activities that pursuant to existing contracts are carried out or
performed by the operator, shall be construed to require only that the Company
use reasonable diligence (without being obligated to incur any expense or
institute any cause of action) to cause the operator of such portion of the
Assets to take such actions or render such performance within the constraints of
the applicable operating agreements and other applicable agreements.
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<PAGE>
(c) Certain Operations.
------------------
(1) Should the Company not wish to pay any lease rental or other
payment or participate in any reworking, deepening, drilling, completion,
equipping or other operation on or with respect to any well or other Well
or Unit which may otherwise be required by Section 8.1 above, the Company
shall give Buyer written notice thereof at least fifteen (15) days prior to
the date such rental or other payment is due or, in the case of an
operation, promptly after the Company receives notice of such proposed
operation from the operator of such property (or if the Company is the
operator, at the same time the Company gives or is required to give notice
of such proposed operation to the non-operators of such property). The
Company shall not be obligated to make any such payment or to elect to
participate in any such operation which the Company does not wish to make
or participate in unless the Company receives from Buyer, within a
reasonable time prior to the date when such payment or election is required
to be made by the Company, (a) the written election and agreement of Buyer
(i) to require the Company to take such action and (ii) to pay all costs
and expenses of the Company with respect to such lease rental or other
payment or such operation and (b) the funds necessary for such payment or
operation as contained in the applicable AFE therefor or estimated by the
Company. Notwithstanding the foregoing, the Company shall not be obligated
to pay any lease rental or other payment or to elect to participate in any
operation if the operator of the property involved recommends that such
action not be taken.
(2) If a notice delivered to Buyer pursuant to Section 8.1(c)(3) sets
forth a recommendation that the Company participate in an operation or
capital expenditure the failure in which to participate will cause the
forfeiture of all or any portion of a Subject Interest (or any interest in
production attributable thereto) and the Buyer timely notifies Seller that
it does not desire the Company to participate in same, then the resulting
forfeiture shall not be a Title Defect nor shall the Subject Interest
affected be a Title Defect Property for purposes of this Agreement.
Section 8.3 Public Announcements. Prior to the Closing Date, no party
--------------------
hereto will issue, or permit any agent or Affiliate of it to issue, any press
releases or otherwise make, or cause any agent or Affiliate of it to make, any
public statements with respect to this Agreement and the transactions
contemplated hereby without first providing a copy to the other party and
allowing them the opportunity to comment on such press release or statement,
except where such release or statement is deemed in good faith by the releasing
party to be required by Law or under the rules and regulations of any stock
exchange on which the shares of such party or any of its Affiliates are listed.
In each case to which such exception applies, the releasing party will use
reasonable diligence to provide a copy of such release or statement to the other
party prior to releasing or making the same.
Section 8.4 Actions by Parties. Each of the parties agrees to use
------------------
reasonable diligence to satisfy the conditions to Closing set forth in Article
IX and to refrain from taking any action within its control which would cause a
breach by such party of a representation or warranty set
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<PAGE>
forth herein; provided, however, that neither Seller nor any Affiliate of Seller
(other than the Company) shall be required to expend any funds or incur any
costs to prevent or cure a breach of the representations and warranties set
forth in Section 4.1 with respect to the Company.
Section 8.5 Further Assurances. Seller and Buyer each agrees that from
------------------
time to time after the Closing Date, each of them will execute and deliver or
cause their respective Affiliates (including the Company) to execute and deliver
such further instruments, and take (or cause their respective Affiliates,
including the Company, to take) such other action, as may be necessary to carry
out the purposes and intents of this Agreement.
Section 8.6 Records and Record Keeping System. Buyer agrees to maintain
---------------------------------
(or cause the Company to maintain) the Company Records until the fifth
anniversary of the Closing Date (or for such longer period of time as Seller
shall advise Buyer (or the Company) is necessary in order to have Company
Records available with respect to open years for tax audit purposes), or, if any
of the Company Records pertain to any claim or dispute pending on the fifth
anniversary of the Closing Date, Buyer shall maintain any of the Company Records
designated by Seller until such claim or dispute is finally resolved and the
time for all appeals has been exhausted. In addition, Buyer agrees to maintain
(or cause the Company to maintain) the financial record keeping system
(including the computer system) relating to the Company and Assets which exists
on the Closing Date (the "Record Keeping System") for a period of six months
from the Closing Date. Buyer shall provide (or cause the Company to provide)
Seller and its representatives reasonable access at reasonable times to and the
right to copy all or any portion of the Company Records and the Record Keeping
System (at Seller's sole expense) for the purposes of (i) preparing and
delivering any accounting provided for under this Agreement and adjusting,
prorating and settling the charges and credits provided for in this Agreement,
(ii) complying with any Law affecting Seller's interest in the Company Shares or
the Company's interest in the Assets prior to the Closing Date, (iii) preparing
any audit of the books and records of any third party relating to Seller's
interest in the Company Shares or the Company's interest in the Assets prior to
the Closing Date, or responding to any audit prepared by such third parties,
(iv) preparing Tax Returns, (v) responding to or disputing any Tax audit or (vi)
asserting, defending or otherwise dealing with any claim or dispute under this
Agreement or with respect to the Company or the Assets.
Section 8.7 Maintenance of Indemnification Provisions. In addition to
-----------------------------------------
and without limiting the Company's and Buyer's respective obligations under
Articles XII and XIII, from and after the Closing Date, Buyer shall indemnify
(or shall cause Company and its successors and assigns to indemnify) and hold
harmless each present and former director and officer of the Company as to all
claims, actions, suits, proceedings, or investigations arising out of or
pertaining to matters existing or occurring at or prior to the Closing Date to
the extent provided in the Company's certificate of incorporation and bylaws (or
similar governing documents) as in effect on the date hereof (to the extent
consistent with Law), which provisions shall survive the Closing Date and shall
continue in full force and effect for a period of not less than five years from
the Closing Date with respect only to the officers and directors of the Company
as of and
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<PAGE>
prior to the Closing; Buyer shall not amend (or shall cause Company and its
successors and assigns not to amend) those provisions for such period to the
extent such amendment would affect the Company's indemnity obligations under
this Section 8.7 with respect to the period at or prior to the Closing Date; and
Buyer shall advance (or shall cause Company and its successors and assigns) to
advance expenses to each person indemnified hereunder to the fullest extent
permitted by Law and required by such certificate of incorporation and bylaws
(or similar governing documents). If any claim or claims are asserted or made as
to matters subject to the foregoing indemnity provisions within such five year
period, all rights to indemnification in respect of any such claim or claims
shall continue until the disposition thereof. Buyer shall take all steps
necessary to assure the Company's compliance with the foregoing covenants. This
Section 8.7 shall not prevent the dissolution, merger or reorganization of the
Company provided the indemnification obligations in this Section 8.7 are carried
forward to the Company's successor by merger or reorganization or are adequately
provided for in the event of a dissolution.
Section 8.8 Minimum Net Worth. In addition to and without limiting the
-----------------
Company's and Buyer's respective obligations under Section 8.7 and Articles XII
and XIII, from and after the Closing Date, Buyer agrees to cause Company and its
successors and assigns to maintain a minimum net worth of not less than 50% of
the net worth of the Company as of the Effective Time during the term of the
Employee Benefits Trust Agreement provided for under Section 7.2(b).
Section 8.9 Company Obligations. From and after Closing, Buyer agrees to
-------------------
cause the Company to perform and comply with each of the actions and obligations
required or stipulated in this Agreement to be performed or complied with by the
Company and not to take any action which would prevent such performance and
compliance by the Company; provided that, without limiting the representations,
warranties, covenants and agreements of the Buyer which are set forth in other
Sections of this Agreement or releasing the Buyer or any Affiliate of Buyer from
any duty, obligation or requirement under the Uniform Fraudulent Transfer Act or
any other Law, neither Buyer nor any Affiliate of Buyer (other than the Company)
shall be required to contribute any capital to the Company by virtue of Buyer's
obligations under this Section.
Section 8.10 Unobtained Consents. Seller agrees to provide all Unobtained
-------------------
Consents to Buyer on the Closing Date.
Section 8.11 Financial Statements and Reports. From time to time
--------------------------------
following the execution of this Agreement, Buyer shall provide Seller with
written notice identifying any financial and other information specifically
related to the Company that are in Seller's possession or under its control and
that Buyer reasonably believes it will need before or after the Closing. Seller
will use its reasonable best efforts to provide Buyer, at Buyer's expense, with
copies of the material requested at or prior to Closing, and will cooperate with
Buyer, at Buyer's expense, in connection with furnishing any additional
financial and other information that are in Seller's possession or under its
control specifically concerning the Company that Buyer may reasonably
-35-
<PAGE>
request from Seller within one year following Closing that Buyer reasonably
needs to prepare its financial statements, tax returns, or reports or
registrations required by federal or state securities laws. In addition, Seller
will provide Buyer at the Closing with written authorization for Seller's
accountants to release to Buyer, at Buyer's expense, any such information
concerning the Company needed to prepare Buyer's financial statements, tax
returns or reports or registrations required by federal or state securities
laws. Seller shall also obtain and provide to Buyer at Closing a covenant of any
successor to Seller or substantially all assets of Seller that the successor
will comply in full with this Section 8.11, as if the successor were the Seller,
for a period of one year from the date of the Closing.
Section 8.12 Salary Continuation and Other Employee Benefits. On or
-----------------------------------------------
before the Closing Date, Seller shall provide Buyer with copies of documentation
reasonably satisfactory to Buyer that any payments provided under the Employee
Benefits Trust Agreement to any employee of the Company by reason of the
termination of his or her employment during the term of the Employee Benefits
Trust Agreement include, and are not in addition to, severance pay and insurance
benefits payable under any employment agreement with such employee or under the
two letters referred to in Section 7.2(b). Nothing in this Section 8.12 or
elsewhere in this Agreement, including without limitation the Employee Benefits
Trust Agreement, shall limit or otherwise affect the Company's obligations under
the terms of any employment agreement disclosed in Schedule 4.1(r) with respect
to matters other than the payment of such severance pay and insurance benefits.
Section 8.13 Targeted Incentive Plan. The Seller shall provide the
-----------------------
Company with funds to make all payments to employees of the Company required
under Seller's Targeted Incentive Plan. The Company shall make all such
payments prior to Closing. In addition, prior to or at the Closing, Seller
shall provide evidence reasonably satisfactory to Buyer (i) that Seller has
provided the Company with all funds necessary to make all payments to employees
of the Company required under Seller's Targeted Incentive Plan and (ii) that the
Company has made all such payments.
Section 8.14. Approval by Buyer's Shareholders. If Buyer determines that
--------------------------------
approval of its shareholders is required in connection with the transactions
contemplated by this Agreement, Buyer may extend the Closing Date for up to 30
days after October 31, 1999, provided that (i) the approval by Buyer's
shareholders shall not be a condition to closing; and (ii) in no event shall the
Closing Date be extended by reason of this Section 8.14 beyond the date agreed
to by Seller in an agreement to be entered into concerning a sale or merger of
Seller as the target date for closing such sale or merger.
Section 8.15 Excess Parachute Payments. The Seller shall be responsible
-------------------------
for and shall make all payments to employees of the Company that are "Excess
Parachute Payments" within the meaning of Code Section 280G and that are
attributable to the vesting of options of the
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<PAGE>
Seller, and shall be entitled to claim the deduction therefor. The Purchase
Price shall be adjusted downward at the Closing by an amount equal to the amount
of any loss of deduction for "Excess Parachute Payments" made to any employees
of the Company, calculated for each employee of the Company and totaled for all
employees, and borne by the Company calculated as follows at the Closing:
<TABLE>
<S> <C>
(Company Obligations under the Employee Benefits Trust and
Employment Agreements (Related to Payments in Lieu of Notice) x "Excess Parachute Payment"
--------------------------------------------------------------
Total Parachute Payment)
</TABLE>
Multiplied by an assumed combined federal and state income Tax rate of
40%.
An example of this calculation for an individual employee using estimated
figures available on the date hereof is attached hereto as Schedule 8.15.
ARTICLE 9
CLOSING CONDITIONS
------------------
Section 9.1 Seller's Closing Conditions. The obligation of Seller to
---------------------------
proceed with the Closing contemplated hereby is subject, at the option of
Seller, to the satisfaction on or prior to the Closing Date of all of the
following conditions:
(a) Representations, Warranties and Covenants. The (1) representations and
-----------------------------------------
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects on and as of the Closing Date, and (2) covenants and
agreements of Buyer to be performed on or before the Closing Date in accordance
with this Agreement shall have been duly performed in all material respects;
provided however, for purposes of this Section 9.1(a), in determining whether
this condition has been satisfied, any such representation, warranty, covenant
or agreement of Buyer contained in this Agreement which is qualified by
materiality shall be read and interpreted as if such qualification was not
included therein (it being the intent of the parties not to apply a double
materiality threshold in determining the satisfaction of this condition).
(b) Officer's Certificate. Seller shall have received a certificate dated
---------------------
as of the Closing Date, executed by a duly authorized officer of Buyer, to the
effect that to such officer's knowledge the conditions set forth in subsection
(a) of this Section 9.1 have been satisfied.
(c) Closing Documents. On or prior to the Closing Date, Buyer shall have
-----------------
delivered, or be standing ready to deliver at Closing, all agreements,
instruments and other documents required to be delivered by Buyer pursuant to
Section 10.3.
(d) No Action. On the Closing Date, no suit, action or other proceeding
---------
(excluding any such matter initiated by Seller or any of its Affiliates) shall
be pending or threatened before
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any court or governmental agency or body of competent jurisdiction seeking to
enjoin or restrain the consummation of the Closing or recover damages from
Seller or any Affiliate of Seller resulting therefrom.
(e) Opinion of Counsel. Buyer shall have delivered to Seller the written
------------------
opinion of counsel to Buyer, dated as of the Closing Date, which counsel shall
be reasonably acceptable to Seller, substantially in the form attached hereto as
Exhibit 9.1(e).
(f) Adjustments. The sum of (i) the reductions in the Purchase Price on
-----------
account of the aggregate (net) amount of all Environmental Defect Amounts and
Title Defect Amounts, and (ii) the aggregate amount of Environmental Defect
Amounts and Title Defect Amounts claimed by Buyer with respect to unresolved
Deferred Adjustment Claims shall not exceed $3,000,000.
(g) Seller Shareholder Approval. The transactions provided for under this
---------------------------
Agreement shall have been approved by Seller's shareholders, provided that
Seller may waive this condition based on Seller having obtained an opinion of
Delaware counsel to the effect that such approval is not required under the
General Corporation Law of Delaware, which opinion shall be from a firm and in a
form and substance reasonably satisfactory to Buyer and Buyer's counsel.
Section 9.2 Buyer's Closing Conditions. The obligation of Buyer to
--------------------------
proceed with the Closing contemplated hereby is subject, at the option of Buyer,
to the satisfaction on or prior to the Closing Date of all of the following
conditions:
(a) Representations, Warranties and Covenants. (1) The representations and
-----------------------------------------
warranties of Seller contained in this Agreement (i) which contain a Material
Adverse Effect qualifier shall be true and correct on and as of the Closing Date
as though made as of the Closing Date and (ii) which do not contain a Material
Adverse Effect qualifier shall be true and correct in all material respects on
and as of the Closing Date as though made as of the Closing Date, and (2) the
covenants and agreements of Seller to be performed on or before the Closing Date
in accordance with this Agreement shall have been duly performed in all material
respects.
If the Seller breaches any of the representations and warranties of the Seller
contained herein, which breaches individually would not have a Material Adverse
Effect, but that in the aggregate would exceed $1,000,000 (an "Aggregate
Material Adverse Effect"), on or before the Closing Date, the Buyer may notify
the Seller of such Aggregate Material Adverse Effect, and Seller shall have
right to (x) extend the Closing Date by no more than ten days and cure the
breaches underlying the Aggregate Material Adverse Effect to the satisfaction of
the Buyer within such ten-day period or (y) reduce the Purchase Price by the
estimated amount of such Aggregate Material Adverse Effect, it being understood
by the parties that if the Seller (x) cures such breaches to the satisfaction of
the Buyer within such ten-day period or (y) adjusts the Purchase Price
accordingly, the Buyer shall not have the right to terminate this Agreement
under this Section 9.2(a). Notwithstanding the foregoing, for purposes of
determining whether breaches of Seller's representations and warranties have an
"Aggregate Material Adverse Effect," any
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breaches of any single representation and warranty which have an adverse effect
on the value of the Company of $200,000 or less will be treated as having a
value of zero. In addition, Buyer agrees to use diligent efforts to notify
Seller of any asserted breach of Seller's representations and warranties as soon
as reasonably possible so that Seller, at its option, can attempt to cure such
asserted breaches.
(b) Officer's Certificate. Buyer shall have received a certificate dated
---------------------
as of the Closing Date, executed by a duly authorized officer of the Seller and
the Company, to the effect that to such officers' knowledge the conditions set
forth in subsection (a) of this Section 9.2 have been satisfied.
(c) Closing Documents. On or prior to the Closing Date, Seller shall have
-----------------
delivered, or be standing ready to deliver at the Closing, all agreements,
instruments and documents required to be delivered by Seller pursuant to Section
10.2.
(d) No Action. On the Closing Date, no suit, action or other proceeding
---------
(excluding any such matter initiated by Buyer or any of its Affiliates) shall be
pending or threatened before any court or governmental agency or body of
competent jurisdiction seeking to enjoin or restrain the consummation of the
Closing or recover damages from Buyer or any Affiliate of Buyer resulting
therefrom.
(e) Opinion of Counsel. Seller shall have delivered to Buyer the written
------------------
opinion of counsel to Seller, dated as of the Closing Date, which counsel shall
be reasonably acceptable to Buyer, substantially in the form attached hereto as
Exhibit 9.2(e).
(f) Adjustments. The sum of (i) the reductions in the Purchase Price on
-----------
account of the aggregate (net) amount of all Environmental Defect Amounts and
Title Defect Amounts, and (ii) the aggregate amount of Environmental Defect
Amounts and Title Defect Amounts claimed by Buyer with respect to unresolved
Deferred Adjustment Claims shall not exceed $3,000,000.
Section 9.3 Regulatory Approvals. If Buyer or Seller determines that
--------------------
approval of a Governmental Authority is required to permit the Company or Buyer
to continue to use any governmental permits with respect to the Assets or the
Company after Closing, Buyer and Seller shall, as promptly as practicable after
the date of this Agreement, cooperate in filing the required applications and
notices with the appropriate Governmental Authorities seeking authorization to
confirm the Company's continued right to use such permits or to transfer or
assign such permits to Buyer (the "Regulatory Approvals") as necessary. To the
extent assignable and assignment to Buyer is necessary in the foregoing context,
Seller will cause the Company to assign such permits to Buyer at the Closing.
Each party agrees to use reasonable diligence to obtain the Regulatory Approvals
and the parties agree to cooperate fully with each other and with all
Governmental Authorities to obtain the Regulatory Approvals at the earliest
practicable date.
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Section 9.4 Deferred Adjustment Claims Extension. Notwithstanding
------------------------------------
Section 9.2(f), if Buyer elects not to proceed with the Closing as a result of
the non-satisfaction of the condition set forth in Section 9.2(f) and such
condition would have been satisfied but for the amount of Environmental Defect
Amounts and Title Defect Amounts claimed by Buyer with respect to unresolved
Deferred Adjustment Claims, Seller may elect to delay the Closing until the
tenth Business Day following the date when a sufficient amount of such Deferred
Adjustment Claims have been resolved pursuant to Section 6.5 to determine that
the condition set forth in Section 6.5 has been satisfied or has not been
satisfied. A Deferred Adjustment Claim will be deemed resolved pursuant to
Section 6.5 when a final and binding written decision of the board of
arbitrators is made with respect thereto in accordance with the Arbitration
Procedures.
Section 9.5 Failure to Disclose. The breach by Seller of its obligation
-------------------
to give notice to Buyer under Section 4.1(cc) and the breach by Buyer of its
obligation to give notice to Seller under Section 4.2(j) shall not constitute a
failure of the conditions to Closing under Sections 9.1 and 9.2. From and after
Closing, neither Buyer nor Seller shall have any obligation or liability under
this Agreement or in connection with the transaction contemplated in this
Agreement for any breach of a representation or warranty by such party prior to
Closing by reason of any fact or facts of which the other party had knowledge
prior to Closing if and to the extent such other party breached its obligation
to give notice of such fact or facts to the other party pursuant to Section
4.1(cc) or 4.2(j), as applicable. From and after Closing, this Section 9.5
shall constitute the sole remedy of Buyer and Seller for the other party's
breach of Section 4.1(cc) or 4.2(j), as the case may be.
ARTICLE 10
CLOSING
-------
Section 10.1 Closing. The Closing shall be held on the Closing Date at
-------
10:00 a.m., Mountain time, at the offices of the Company, Denver, Colorado, or
at such other time or place as Seller and Buyer may otherwise agree in writing.
Section 10.2 Seller's Closing Obligations. At Closing, Seller shall
----------------------------
execute and deliver, or cause to be executed and delivered, to Buyer the
following:
(a) The stock certificates representing all Company Shares, endorsed in
blank or accompanied by duly executed assignment documents;
(b) The officer's certificate referred to in Section 9.2(b);
(c) The legal opinion referred to in Section 9.2(e);
(d) Resignations or terminations of the officers and directors of the
Company from their status as officers or directors effective as of the Closing
that are requested by Buyer at least two Business Days prior to the Closing
Date; and
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(e) A non-foreign affidavit, as such affidavit is referred to in Section
1445(b)(2) of the Code, in form attached hereto as Exhibit 10.2(e), dated as of
the Closing Date.
Section 10.3 Buyer's Closing Obligations. At Closing, Buyer shall (i)
---------------------------
deliver, or cause to be delivered, the Closing Payment to Seller in immediately
available funds to the bank account as provided in Section 3.2 and (ii) execute
and deliver, or cause to be executed and delivered, to Seller the following:
(a) The officer's certificate of Buyer referred to in Section 9.1(b);
(b) The legal opinion referred to in Section 9.1(e); and
(c) An Assumption Agreement executed by each officer of the Company whose
resignation or termination is not requested by Buyer pursuant to Section
10.2(d), in the form attached hereto as Exhibit 10.3(d).
ARTICLE 11
SURVIVAL
--------
Section 11.1 Survival. Except as provided in this Section 11.1, no
--------
representations, warranties, covenants and agreements made herein shall survive
the Closing. Each representation, warranty, covenant and agreement made herein
shall terminate and cease to be of further force and effect as of the Closing or
such later date after Closing as is expressly stipulated in this Section 11.1
for the survival thereof. Following the Closing or such later date stipulated
in this Section 11.1 for the survival thereof, such representation, warranty,
covenant or agreement shall not form the basis for or give rise to any claim,
demand, cause of action, counterclaim, defense, damage, indemnity, obligation or
liability which is asserted, claimed, made or filed following the Closing or
such later date stipulated for survival. It is expressly agreed that the terms
and provisions of Sections 5.3, 5.5, 6.5, 7.1, 7.2, 8.5, 8.6, 8.7, 8.8, 8.9,
8.11, 8.13 and 9.5, Articles VI, XI, XII, XIII and XV, and Buyer's indemnity and
hold harmless of the Seller Indemnified Parties under Sections 5.1 and 5.4 shall
survive the Closing indefinitely or for such shorter period of time as may be
stipulated in such provisions. In addition, the definitions set forth in
Appendix A to this Agreement or in any other provision of this Agreement which
are used in the representations, warranties, covenants and agreements which
survive the Closing pursuant to this Section 11.1 shall survive the Closing to
the extent necessary to give operative effect to such surviving representations,
warranties, covenants and agreements.
ARTICLE 12
LIMITATIONS
-----------
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Section 12.1 Disclaimer of Warranties. NOTWITHSTANDING ANYTHING
------------------------
CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, IT IS THE
EXPLICIT INTENT OF EACH PARTY HERETO THAT SELLER IS NOT MAKING ANY
REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE,
BEYOND THOSE REPRESENTATIONS OR WARRANTIES EXPRESSLY GIVEN IN THIS AGREEMENT,
AND IT IS UNDERSTOOD THAT, SUBJECT TO SUCH EXPRESS REPRESENTATIONS AND
WARRANTIES, BUYER TAKES THE COMPANY AND THE ASSETS "AS IS" AND "WHERE IS."
WITHOUT LIMITING THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, SELLER
HEREBY (I) EXPRESSLY DISCLAIMS AND NEGATES ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AT COMMON LAW, BY STATUTE OR OTHERWISE, RELATING TO (A)THE
CONDITION OF THE ASSETS (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OF
CONFORMITY TO MODELS OR SAMPLES OF MATE, OR THE PRESENCE OR ABSENCE OF ANY
HAZARDOUS MATE IN OR ON, OR DISPOSED OF OR DISCHARGED FROM, THE ASSETS) OR (B)
ANY INFRINGEMENT BY SELLER OR ANY OF ITS AFFILIATES OF ANY PATENT OR PROPRIETARY
RIGHT OF ANY THIRD PARTY, AND (II) NEGATES ANY RIGHTS OF BUYER UNDER STATUTES TO
CLAIM DIMINUTION OF CONSIDERATION AND ANY CLAIMS BY BUYER FOR DAMAGES BECAUSE OF
REDHIBITORY VICES OR DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION
OF SELLER AND BUYER THAT THE ASSETS ARE TO BE ACCEPTED BY BUYER IN THEIR PRESENT
CONDITION AND STATE OF REPAIR.
Section 12.2 Damages. NOTWITHSTANDING ANYTHING CONTAINED TO THE CONTRARY
-------
IN ANY OTHER PROVISION OF THIS AGREEMENT, SELLER AND BUYER AGREE THAT, EXCEPT AS
PROVIDED IN SECTIONS 14.2 and 14.3, THE RECOVERY OF ANY DAMAGES SUFFERED OR
INCURRED AS A RESULT OF ANY BREACH BY ANY PARTY OR THE COMPANY OF ANY OF ITS
REPRESENTATIONS, WARRANTIES OR OBLIGATIONS UNDER THIS AGREEMENT SHALL BE LIMITED
TO THE ACTUAL DAMAGES SUFFERED OR INCURRED (WHICH SHALL INCLUDE ANY INDIRECT,
CONSEQUENTIAL, SPECIAL, EXEMPLARY OR PUNITIVE DAMAGES AWARDED AGAINST OR PAID BY
THE INDEMNIFIED PARTY SEEKING INDEMNITY HEREUNDER TO ANY THIRD PERSON WHO IS NOT
AFFILIATED WITH SUCH INDEMNIFIED PARTY) AS A RESULT OF THE BREACH BY THE
BREACHING PARTY OF ITS REPRESENTATIONS, WARRANTIES OR OBLIGATIONS HEREUNDER AND
IN NO EVENT SHALL THE BREACHING PARTY BE LIABLE TO THE NON-BREACHING PARTY OR
ANY INDEMNIFIED PARTY FOR ANY INDIRECT, CONSEQUENTIAL, SPECIAL, EXEMPLARY OR
PUNITIVE DAMAGES (INCLUDING, WITHOUT LIMITATION, ANY DAMAGES ON ACCOUNT OF LOST
PROFITS OR OPPORTUNITIES OR LOST OR DELAYED PRODUCTION) SUFFERED OR INCURRED BY
THE NONBREACHING PARTY OR ANY INDEMNIFIED PARTY AS A RESULT OF THE
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BREACH BY THE BREACHING PARTY OF ANY OF ITS REPRESENTATIONS, WARRANTIES OR
OBLIGATIONS HEREUNDER. This Section 12.2 shall operate only to limit a party's
liability and shall not operate to increase or expand any contractual obligation
of a party hereunder or cause any contractual obligation of a party hereunder to
survive longer than provided in Section 11.1.
Section 12.3 Plugging and Abandonment Obligations. NOTWITHSTANDING
------------------------------------
ANYTHING CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, IT
IS EXPRESSLY AGREED FOR ALL PURPOSES OF THIS AGREEMENT THAT (I) THE PLUGGING AND
ABANDONMENT OBLIGATIONS CONSTITUTE COMPANY LIABILITIES, (II) THE PLUGGING AND
ABANDONMENT OBLIGATIONS SHALL NOT CONSTITUTE ENVIRONMENTAL CONDITIONS,
ENVIRONMENTAL CLAIMS, OFFSITE ENVIRONMENTAL MATTERS, ENVIRONMENTAL LIABILITIES,
ENVIRONMENTAL DEFECTS, OR ENVIRONMENTAL MATTERS, (III) SELLER MAKES NO WARRANTY
OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PLUGGING AND
ABANDONMENT OBLIGATIONS, AND (IV) SELLER SHALL HAVE NO LIABILITIES OR
OBLIGATIONS WITH RESPECT TO PLUGGING AND ABANDONMENT OBLIGATIONS.
Section 12.4 Environmental Release. From and after Closing, Buyer shall
---------------------
have no rights to recovery or indemnification for Environmental Liabilities or
any Environmental Matters under this Agreement or Law, and all rights or
remedies which Buyer may have at or under Law with respect to any Environmental
Liabilities or Environmental Matters are expressly waived. FROM AND AFTER
CLOSING BUYER HEREBY AGREES, WARRANTS AND COVENANTS TO RELEASE, ACQUIT AND
FOREVER DISCHARGE SELLER AND ALL SELLER INDEMNIFIED PARTIES FROM ANY AND ALL
CLAIMS, DEMANDS AND CAUSES OF ACTION OF WHATSOEVER NATURE, INCLUDING WITHOUT
LIMITATION ALL CLAIMS, DEMANDS AND CAUSES OF ACTION FOR CONTRIBUTION AND
INDEMNITY UNDER STATUTE OR COMMON LAW, WHICH COULD BE ASSERTED NOW OR IN THE
FUTURE AND THAT RELATE TO OR IN ANY WAY ARISE OUT OF ENVIRONMENTAL LIABILITIES
OR ENVIRONMENTAL MATTERS. FROM AND AFTER CLOSING, BUYER, THE COMPANY AND ALL
OTHER BUYER INDEMNIFIED PARTIES WARRANT, AGREE AND COVENANT NOT TO SUE OR
INSTITUTE ARBITRATION AGAINST THE SELLER OR ANY SELLER INDEMNIFIED PARTY UPON
ANY CLAIM, DEMAND OR CAUSE OF ACTION FOR INDEMNITY AND CONTRIBUTION THAT HAVE
BEEN ASSERTED OR COULD BE ASSERTED FOR ANY ENVIRONMENTAL LIABILITIES OR
ENVIRONMENTAL MATTERS.
ARTICLE 13
INDEMNIFICATION
---------------
Section 13.1 Indemnification By Buyer. From and after the Closing Date,
------------------------
the Company shall pay, perform, fulfill and discharge all Company Liabilities.
Buyer
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shall indemnify and hold harmless the Seller and all Seller Indemnified Parties
(other than the Company), each of their respective past, present and future
directors, officers, employees, consultants and agents, each of the Company's
past and present (and, through the Closing, future) directors, officers,
employees, consultants and agents), and each of the directors, officers, heirs,
executors, successors and assigns of any of the foregoing (collectively, the
"Seller Indemnified Parties") from and against any and all (i) Company
Liabilities incurred by or asserted against any of the Seller Indemnified
Parties, INCLUDING, WITHOUT LIMITATION, ANY COMPANY LIABILITY BASED ON
NEGLIGENCE OR STRICT LIABILITY OF THE SELLER INDEMNIFIED PARTIES OR ANY OTHER
THEORY OF LIABILITY, WHETHER IN LAW (WHETHER COMMON OR STATUTORY) OR EQUITY BUT
NOT INCLUDING COMPANY LIABILITIES BASED ON GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE SELLER INDEMNIFIED PARTIES and (ii) subject to the limitations
of Section 11.1 and Article XII, any Covered Liability resulting from, arising
out of or on account of any breach, failure or nonfulfillment of any
representation, warranty, covenant or agreement on the part of Buyer which is
expressly set forth in this Agreement.
Section 13.2 Third Party Claims. If a claim by a third party is made
------------------
against a Seller Indemnified Party, and if such party (the "Indemnified Party")
intends to seek indemnity with respect thereto under Section 5.1, 5.4, 8.7, or
13.1, the Indemnified Party shall promptly furnish written notice to Buyer (the
"Indemnitor"), of such claims. The Indemnitor shall have thirty (30) days after
receipt of such notice to undertake, conduct and control, through counsel of its
own choosing and at its own expense, the settlement or defense thereof, and the
Indemnified Party shall cooperate with it in connection therewith; provided that
the Indemnitor shall permit the Indemnified Party to participate in such
settlement or defense through counsel chosen by such Indemnified Party, however,
the fees and expenses of such counsel shall be borne by such Indemnified Party.
So long as the Indemnitor, at Indemnitor's cost and expense, (1) has undertaken
the defense of, and assumed full responsibility for all indemnified liabilities
with respect to, such claim, (2) is reasonably contesting such claim in good
faith, by appropriate proceedings, and (3) has taken such action (including the
posting of a bond, deposit or other security) as may be necessary to prevent any
action to foreclose a lien against or attachment of the property of the
Indemnified Party for payment of such claim, the Indemnified Party shall not pay
or settle any such claim. Notwithstanding compliance by the Indemnitor with the
preceding sentence, the Indemnified Party shall have the right to pay or settle
any such claim, provided that in such event it shall waive any right to
indemnity therefor by the Indemnitor for such claim. If, within thirty (30) days
after the receipt of the Indemnified Party's notice of a claim of indemnity
hereunder, the Indemnitor does not notify the Indemnified Party that it elects,
at Indemnitor's cost and expense, to undertake the defense thereof and assume
full responsibility for all indemnified liabilities with respect thereto, or
gives such notice and thereafter fails to contest such claim in good faith or to
prevent action to foreclose a lien against or attachment of the Indemnified
Party's property as contemplated above, the Indemnified Party shall have the
right to contest, settle and/or compromise the claim and, to the extent the
actions, if any, taken by the Indemnified Party in settling or compromising such
claim are reasonable and in good faith, the Indemnified Party shall not thereby
waive any right to indemnity therefor pursuant to this Agreement.
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Section 13.3 Seller's General Liability Limitation. Notwithstanding
-------------------------------------
anything herein provided to the contrary, Seller shall not have any liability to
Buyer, any Affiliate of Buyer, the Company, any of their respective past,
present and future directors, officers, employees, consultants and agents, or
the directors, officers, heirs, executors, successors or assigns of any of the
foregoing for any matter relating to the Company or arising in connection with
the transactions covered by this Agreement, including without limitation Company
Liabilities from and after the Closing, it being understood and agreed that all
such liabilities will be resolved, settled and fully disposed of (or allowances
made therefor) prior to Closing in accordance with the terms and conditions of
this Agreement.
ARTICLE 14
TERMINATION; REMEDIES; LIMITATIONS
----------------------------------
Section 14.1 Termination.
-----------
(a) Termination of Agreement. This Agreement and the transactions
------------------------
contemplated hereby may be terminated at any time prior to the Closing:
(1) By mutual written consent of Seller and Buyer; or
(2) If the Closing has not occurred by the close of business on March
31, 2000, then (i) by Seller if any condition specified in Section 9.1 has
not been satisfied on or before such close of business, and shall not
theretofore have been waived by Seller, or (ii) by Buyer if any condition
specified in Section 9.2 has not been satisfied on or before such close of
business, and shall not theretofore have been waived by Buyer, or if the
transactions provided for under this Agreement have not been approved by
Seller's shareholders and such condition has not been waived by Seller as
provided in Section 9.1(g); provided, in each case, that the failure to
consummate the transactions contemplated hereby on or before such date did
not result from the failure by the party or parties seeking termination of
this Agreement to fulfill any undertaking or commitment provided for herein
on the part of such party or parties that is required to be fulfilled on or
prior to Closing.
(b) Effect of Termination. Without limiting Seller's and Buyer's
---------------------
respective remedies and rights in regard to the Deposit under Section 14.2, in
the event of termination of this Agreement by Seller, on the one hand, or Buyer,
on the other hand, pursuant to Section 14. l(a), written notice thereof shall
forthwith be given by the terminating party or parties to the other party or
parties hereto, and this Agreement shall thereupon terminate; provided, however,
that following such termination Buyer will continue to be bound by its
obligations set forth in Sections 5.1, 5.2 and 5.4. If this Agreement is
terminated as provided herein all filings,
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applications and other submissions made to any Governmental Authority shall, to
the extent practicable, be withdrawn from the Governmental Authority to which
they were made.
Section 14.2 Remedies.
--------
(a) Seller's Remedies. Notwithstanding anything herein provided to the
-----------------
contrary, upon the failure by Buyer to satisfy the conditions to Closing or the
Closing obligations, as the case may be, set forth in (i) item (1) of clause (a)
of Section 9.1 on account of breaches of the representations and warranties made
by Buyer on and as of the date of this Agreement, (ii) item (2) of clause (a) of
Section 9.1, (iii) clause (b) of Section 9.1 on account of breaches of the
representations and warranties made by Buyer on and as of the date of this
Agreement or the failure by Buyer to satisfy the condition set forth in item (2)
of clause (a) of Section 9.1, (iv) clause (e) of Section 9.1, or (v) clause (i)
or (ii)(c) of Section 10.3 on or prior to the Closing Date, Seller, at its sole
option, may (i) enforce specific performance of this Agreement or (ii) terminate
this Agreement and, without waiving or releasing Buyer's obligations under
Sections 5.1, 5.2 and 5.4, be paid the Deposit, together with all interest and
other amounts earned thereon as liquidated damages, as Seller's sole and
exclusive remedy for such failure, all other remedies being expressly waived by
Seller. Seller and Buyer agree upon the Deposit amount together with all
interest and other amounts earned thereon, as liquidated damages due to the
difficulty and inconvenience of measuring actual damages and the uncertainty
thereof, and Seller and Buyer agree that such amount is a reasonable estimate of
Seller's loss in the event of any such failure by Buyer.
(b) Buyer's Remedies. Notwithstanding anything herein provided to the
----------------
contrary, upon failure of the Seller to satisfy the conditions to Closing or the
Closing obligations, as the case may be, set forth in (i) item (1) of clause
(a) of Section 9.2 on account of breaches of the representations and warranties
made by Seller on and as of the date of this Agreement, (ii) item (2) of clause
(a) of Section 9.2, (iii) clause (b) of Section 9.2 on account of breaches of
the representations and warranties made by Seller on and as of the date of this
Agreement or the failure by Seller to satisfy the condition set forth in item
(2) of clause (a) of Section 9.2, (iv) clause (e) of Section 9.2, or (v) clauses
(a), (d) or (e) of Section 10.2 on or prior to the Closing Date, Buyer, at its
sole option, may (i) enforce specific performance of this Agreement or (ii)
terminate this Agreement and receive back the Deposit, together with all
interest and other amounts earned thereon, as Buyer's sole and exclusive remedy
for such failure, all other remedies being expressly waived by Buyer.
Section 14.3 Break-Up Fee. If, as of the Closing Date, Seller has
------------
failed to obtain approval of this Agreement (and the transactions contemplated
hereby) by the shareholders of Seller as required by Section 9.1(g) and this
Agreement is thereafter terminated, Seller shall promptly (but in no event later
than one business day after the occurrence of such event) pay to Buyer a fee in
the amount of $1,500,000 and receive back the Deposit, together with all
interest and other amounts earned thereon, which amounts shall be payable by
wire transfer in immediately available funds to an account designated by Buyer.
The parties hereto agree and
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acknowledge that the $1,500,000 break-up fee payable pursuant to this Section
14.3 is not a penalty, and represents the parties' efforts to reasonably
estimate a fair compensation for the expenses that might be suffered by Buyer in
the event the transactions contemplated by this Agreement shall not be
consummated for the above reason.
ARTICLE 15
MISCELLANEOUS
-------------
Section 15.1 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.
Section 15.2 Governing Law; Jurisdiction; Process.
------------------------------------
(a) THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE
GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW RULES
THAT WOULD DIRECT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION, EXCEPT TO
THE EXTENT THAT IT IS MANDATORY THAT THE LAW OF ANOTHER JURISDICTION, WHEREIN OR
ADJACENT TO WHICH THE ASSETS ARE LOCATED, SHALL APPLY.
(b) SUBJECT TO THE ARBITRATION AGREEMENT SET FORTH IN SECTION 15.10, BUYER
AND SELLER CONSENT TO PERSONAL JURISDICTION IN ANY LEGAL ACTION, SUIT OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT IN ANY COURT, FEDERAL OR STATE, WITHIN
THE CITY AND COUNTY OF DENVER, COLORADO, HAVING SUBJECT MATTER JURISDICTION AND
WITH RESPECT TO ANY SUCH CLAIM, BUYER AND SELLER IRREVOCABLY WAIVE, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY CLAIM, OR ANY OBJECTION THAT BUYER OR
SELLER MAY NOW OR HEREAFTER HAVE, THAT VENUE OR JURISDICTION IS NOT PROPER WITH
RESPECT TO ANY SUCH LEGAL ACTION, SUIT OR PROCEEDING BROUGHT IN SUCH COURT IN
THE CITY AND COUNTY OF DENVER, COLORADO, INCLUDING ANY CLAIM THAT SUCH LEGAL
ACTION, SUIT OR PROCEEDING BROUGHT IN SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM AND ANY CLAIM THAT BUYER OR SELLER IS NOT SUBJECT TO PERSONAL
JURISDICTION OR SERVICE OF PROCESS IN SUCH CITY AND COUNTY OF DENVER, COLORADO
FORUM.
Section 15.3 Entire Agreement. This Agreement (including the
----------------
Confidentiality Agreement) and the Appendices, Schedules and Exhibits hereto
contain the entire agreement
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<PAGE>
between the parties with respect to the subject matter hereof and there are no
agreements, understandings, representations or warranties between the parties
other than those set forth or referred to herein.
Section 15.4 Expenses. Buyer shall be responsible for (i) all transfer,
--------
stamp, documentary and similar Taxes imposed on the parties hereto with respect
to the purchase and sale of the Company Shares contemplated pursuant to this
Agreement and (ii) all recording, filing or registration fees for any assignment
or conveyance delivered to Buyer under or pursuant to this Agreement. All other
costs and expenses incurred by each party hereto in connection with all things
required to be done by it hereunder, including attorney's fees, accountant fees
and the expense of environmental and title examination, shall be borne by the
party incurring same.
Section 15.5 Notices. All notices hereunder shall be sufficiently given
-------
for all purposes hereunder if in writing and delivered personally, sent by
documented overnight delivery service or, to the extent receipt is confirmed, by
United States Mail, telecopy, telefax or other electronic transmission service
to the appropriate address or number as set forth below. Notices to Seller shall
be addressed as follows:
Bonneville Pacific Corporation
50 West 300 South, Suite 300
Salt Lake City, Utah 84101
Attention: Clark M. Mower
Tel: (801) 363-2520 ext. 101
Fax: (801) 359-1735
with copies to:
Bonneville Pacific Corporation
50 West 300 South, Suite 300
Salt Lake City, Utah 84101
Attention: Steven H. Stepanek
Tel: (801) 363-2520 ext. 111
Fax: (801) 363-9557
and to:
Welborn Sullivan Meck & Tooley, P.C.
1775 Sherman Street, Suite 1800
Denver, Colorado 80203
Attention: John F. Meck
Tel: (303) 830-2500
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<PAGE>
Fax: (303) 832-2366
and through Closing to the Company at:
Bonneville Fuels Corporation
1660 Lincoln Street, Suite 2200
Denver, Colorado 80264
Attention: Jim Cable
Tel: (303) 863-1555 ext.217
Fax: (303) 863-1558
or at such other address and to the attention of such other Person as Seller may
designate by written notice to Buyer. Notices to Buyer shall be addressed to:
CEC Resources Ltd.
1700 Broadway, Suite 1150
Denver, Colorado 80290
Attention: Patrick R. McDonald
Tel: (303 860-1575
Fax: (303) 860-9128
with copies to:
Holland & Hart, L.L.P.
555 Seventeenth Street, Suite 3200
Denver, Colorado 80201-8749
Attention: Dennis M. Jackson
Tel: (303) 298-8115
Fax: (303) 295-8261
or at such other address and to the attention of such other Person as Buyer may
designate by written notice to Seller.
Section 15.6 Successors and Assigns. This Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. This Agreement may not be assigned by any
party hereto except with the prior written consent of the other party hereto,
which consent shall not be unreasonably withheld or delayed, and any such
assignment shall be void and of no force or effect; provided, however, that
-------- -------
Buyer may assign this Agreement to any Affiliates of Buyer or of an entity
providing equity financing to Buyer for the purchase of the Company Shares with
prior notice to Seller, and in that event, that Buyer shall remain fully liable
for all obligations of Buyer contained herein."
-49-
<PAGE>
Section 15.7 Amendments and Waivers. This Agreement may not be modified
----------------------
or amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, only by an instrument in writing, waive compliance by another
party hereto with any term or provision of this Agreement on the part of such
other party hereto to be performed or complied with. The waiver by any party
hereto of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach.
Section 15.8 Appendices, Schedules and Exhibits. All Appendices,
----------------------------------
Schedules and Exhibits hereto which are referred to herein are hereby made a
part hereof and incorporated herein by such reference.
Section 15.9 Interpretation. It is expressly agreed that this Agreement
--------------
shall not be construed against any party, and no consideration shall be given or
presumption made, on the basis of who drafted this Agreement or any particular
provision hereof or who supplied the form of Agreement. Each party agrees that
it has been purposefully drawn and correctly reflects their understanding of the
transaction that it contemplates. In construing this Agreement:
(a) examples shall not be construed to limit, expressly or by implication,
the matter they illustrate;
(b) the word "includes" and its derivatives means "includes, but is not
limited to" and corresponding derivative expressions;
(c) a defined term has its defined meaning throughout this Agreement and
each Appendix, Exhibit and Schedule to this Agreement, regardless of whether it
appears before or after the place where it is defined;
(d) each Exhibit and Schedule to this Agreement is a part of this
Agreement, but if there is any conflict or inconsistency between the main body
of this Agreement (including Appendices A and B which shall be considered part
of the main body of this Agreement) and any Exhibit or Schedule, the provisions
of the main body of this Agreement shall prevail; and
(e) the headings and titles herein are for convenience only and shall have
no significance in the interpretation hereof.
Section 15.10 Arbitration. It is agreed, as a severable and independent
-----------
arbitration agreement separately enforceable from the remainder of this
Agreement, that if the parties hereto, the Company, the Indemnified Parties or
their respective successors, assigns, heirs or legal representatives of any of
the foregoing are unable to amicably resolve any dispute or difference arising
under or out of, in relation to or in any way connected with this Agreement
(whether contractual, tortious, equitable, statutory or otherwise) after
endeavoring for a period of at least 30 days to resolve any such dispute through
good faith negotiations among officers of the
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<PAGE>
disputing parties (except as provided in Section 6.5 or with respect to
arbitration instituted prior to Closing), such matter shall be finally and
exclusively referred to and settled by arbitration under the Commercial
Arbitration Rules of the American Arbitration Association pursuant and subject
to the arbitration procedures set forth in the Arbitration Procedures; provided
that, the foregoing shall not prevent Seller, the Company or their Affiliates
from seeking specific performance, an injunction or other equitable relief with
respect to their rights under the Confidentiality Agreement through judicial
means in any jurisdiction. In the event of any conflict between the Commercial
Arbitration Rules of the American Arbitration Association and the Arbitration
Procedures, the Arbitration Procedures shall govern and control.
Section 15.11 Agreement for the Parties' Benefit Only. Subject to the
---------------------------------------
limitations of this Section 15.11, Sections 5.1, 5.4, 6.5 and 8.7 and Article
XIII are intended to benefit and to be enforceable by any of the Indemnified
Parties thereunder as third party beneficiaries of this Agreement. Except for
the limited rights of the Indemnified Parties, this Agreement is not intended to
confer upon any Person not a party hereto any rights or remedies hereunder, and
no Person, other than the parties hereto, is entitled to rely on any
representation, warranty, covenant or agreement contained herein. Any
Indemnified Party which is (i) an assignee of an Indemnified Party, (ii) a
consultant or agent of an Indemnified Party, (iii) a director, officer,
employee, consultant or agent of an assignee of an Indemnified Party, or (iv) a
Person which is a director, officer, heir, executor, successor or assign of any
Person in clauses (i), (ii) or (iii) above (a "Special Indemnitee") shall not be
entitled to enforce this Agreement or any term hereof and shall be indemnified
under the terms of this Agreement only to the extent that a party hereto elects
to exercise such right of indemnity on behalf of such Special Indemnitee. No
party hereto shall have any direct liability or obligation to any Special
Indemnitee for any election or non-election or any act or failure to act under
or in regard to any term of this Agreement. Any claim for indemnity hereunder on
behalf of a Special Indemnitee must be made and administered by a party to this
Agreement. Subject to the foregoing limitations on Special Indemnitees, any such
third party beneficiary of this Agreement may only bring suit against the
defaulting party or parties.
Section 15.12 Attorneys' Fees. The prevailing party in any legal
---------------
proceeding brought under or to enforce this Agreement shall be additionally
entitled to recover court costs, reasonable costs of arbitration and reasonable
attorneys' fees from the nonprevailing party.
Section 15.13 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any adverse
manner to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the extent possible.
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<PAGE>
Section 15.14 No Recordation. Without limiting any party's right to file
--------------
suit to compel arbitration to enforce its rights under this Agreement, Buyer and
Seller expressly covenant and agree not to record or place of record this
Agreement or any copy or memorandum hereof.
Section 15.15 Time of Essence. Time is of the essence in this Agreement.
---------------
If the date specified in this Agreement for giving any notice or taking any
action is not a Business Day (or if the period during which any notice is
required to be given or any action taken expires on a date which is not a
Business Day), then the date for giving such notice or taking such action (and
the expiration date of such period during which notice is required to be given
or action taken) shall be the next day which is a Business Day.
IN WITNESS WHEREOF, this Agreement has been signed by or on behalf of each
of the parties as of the day first above written.
SELLER:
BONNEVILLE PACIFIC CORPORATION
Attest:_________________ By:______________________________
Name: Clark M. Mower
Title: President and CEO
BUYER:
CEC RESOURCES LTD.
Attest:_________________ By:_____________________________
Name: Patrick R. McDonald
Title: President
STOCK PURCHASE AGREEMENT
DATED AS OF AUGUST 11, 1999
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<PAGE>
Exhibit 10.2
EXCHANGE AND FINANCING AGREEMENT
AMONG
CARBON ENERGY CORPORATION
CEC RESOURCES LTD.
AND
YORKTOWN ENERGY PARTNERS III, L.P.
DATED
OCTOBER 14, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
Article 1 Articles and Bylaws of Carbon........................................2
Article 2 Authorization and Sale of Carbon Common Stock........................2
2.1 Authorization and Sale of Shares .....................................2
2.2 Closing for Shares ...................................................2
2.3 Use of Proceeds ......................................................2
Article 3 Assignment of Stock Purchase Agreement...............................3
3.1 Assignment ...........................................................3
3.2 Assumption; Reimbursement of Deposit .................................3
3.3 Amendments ...........................................................3
Article 4 Exchange Offer.......................................................3
4.1 The Offer ............................................................3
4.2 Compliance With Applicable Law .......................................4
4.3 CEC Canada Approval ..................................................4
4.4 Shareholder Information ..............................................5
Article 5 Stock Options........................................................5
5.1 Stock Option Plan ....................................................5
5.2 Replacement of Stock Options .........................................5
5.3 Employment Agreements ................................................6
5.4 Related Actions ......................................................6
5.5 [Other Employee Plans] ...............................................6
Article 6 Board of Directors of Carbon.........................................6
6.1 Definitions ..........................................................6
i
<PAGE>
6.2 Board of Directors After BFC Closing .................................7
6.3 Yorktown Designations ................................................7
6.4 McDonald as a Director ...............................................7
6.5 Nominating Committee .................................................7
6.6 Nomination of Directors ..............................................8
6.7 Vacancies ............................................................8
6.8 Voting of Shares .....................................................8
6.9 Super Majority .......................................................9
6.10 Termination of this Article .........................................9
Article 7 Representations and Warranties of Carbon.............................9
7.1 Organization and Authority ...........................................9
7.2 No Subsidiaries ......................................................9
7.3 Capitalization ......................................................10
7.4 Authorization; No Conflict ..........................................10
7.5 No Operations .......................................................11
7.6 Brokers and Finders .................................................11
Article 8 Representations and Warranties of CEC Canada........................11
8.1 Organization and Authority ..........................................11
8.2 No Subsidiaries .....................................................11
8.3 Capitalization ......................................................11
8.4 Authorization; No Conflict ..........................................12
8.5 Brokers and Finders .................................................13
8.6 SEC Reports .........................................................13
Article 9 Representations and Warranties of Yorktown..........................13
ii
<PAGE>
9.1 Organization and Authority ..........................................13
9.2 Authorization .......................................................14
9.3 Brokers and Finders .................................................14
9.4 Investment Matters ..................................................15
Article 10 Covenants..........................................................15
10.1 Covenants of Carbon ................................................15
10.2 Covenants of CEC Canada ............................................18
10.3 Covenants of Yorktown ..............................................20
Article 11 Conditions.........................................................21
11.1 Conditions Precedent to Obligation of Carbon and CEC Canada ........21
11.2 Condition Precedent to Obligation of Yorktown ......................21
Article 12 Termination and Miscellaneous......................................22
12.1 Obligation to Make Exchange Offer ..................................22
12.2 Termination of Agreement ...........................................22
12.3 HSR Act Filing .....................................................23
12.4 Expenses ...........................................................23
12.5 Successors and Assigns .............................................23
12.6 Third Party Beneficiaries ..........................................23
12.7 Notices ............................................................24
12.8 Complete Agreement .................................................25
12.9 Captions ...........................................................25
12.10 Waiver and Other Action ...........................................25
12.11 Amendment .........................................................25
12.12 Governing Law .....................................................25
iii
<PAGE>
12.13 Non-Survival of Representations and Warranties ....................25
12.14 Attorneys' Fees ...................................................25
12.15 Counterparts ......................................................25
iv
<PAGE>
EXCHANGE AND FINANCING AGREEMENT
This Agreement is made as of October 14, 1999 among Carbon Energy
Corporation ("Carbon"), a Colorado corporation, CEC Resources Ltd. ("CEC
Canada"), an Alberta corporation, and Yorktown Energy Partners III, L.P.
("Yorktown").
Recitals
A. CEC Canada has entered into a Stock Purchase Agreement dated August 11,
1999 (as it may be amended from time to time, called the "Stock Purchase
Agreement") with Bonneville Pacific Corporation ("Bonneville Pacific"). The
Stock Purchase Agreement provides for the purchase by CEC Canada from Bonneville
Pacific of all outstanding shares of Bonneville Fuels Corporation ("BFC") for
$24,000,000 in cash, subject to certain adjustments. After this transaction, BFC
will continue to have outstanding certain indebtedness.
B. The parties desire that the purchase of BFC stock under the Stock
Purchase Agreement be completed by Carbon which is a corporation organized under
the laws of a state in the United States and which has its principal executive
offices in the United States. The Stock Purchase Agreement permits the
assignment of rights and obligations of CEC Canada under the Stock Purchase
Agreement to Carbon as an affiliate of Yorktown.
C. Yorktown has committed to purchase equity of Carbon for $24,750,000 in
order to provide equity financing for the total purchase price of the BFC shares
under the Stock Purchase Agreement.
D. All parties to this Agreement require that, in connection with the
assignment of the Stock Purchase Agreement to Carbon and as part of an overall
plan to contribute cash, securities and other property by CEC Canada, Yorktown
and shareholders of CEC Canada to Carbon, Carbon shall make an offer to all
shareholders of CEC Canada to exchange one share of Carbon for each outstanding
share of CEC Canada.
E. The Boards of Directors of CEC Canada and Carbon have unanimously
approved of the making of the exchange offer described in paragraph D above and
later in this Agreement. The Board of Directors of CEC Canada has also resolved
to recommend that the holders of shares of CEC Canada tender their shares
pursuant to that exchange offer.
1
<PAGE>
Agreement
In consideration of the mutual promises and covenants contained in this
Agreement, the parties, intending to be legally bound, agree as follows:
Article 1
Articles and Bylaws of Carbon
The parties concur and approve of the Articles of Incorporation of Carbon
and Bylaws of Carbon as currently in effect, subject to any changes to be made
in the future.
Article 2
Authorization and Sale of Carbon Common Stock
2.1 Authorization and Sale of Shares.
--------------------------------
Carbon shall authorize the sale and issuance of 4,500,000 shares of its
common stock to Yorktown. Subject to the terms and conditions of this
Agreement, Carbon shall issue and sell to Yorktown, and Yorktown shall purchase
from Carbon, 4,500,000 shares of Carbon common stock at a total purchase price
of $24,750,000 in cash, which is $5.50 per share.
2.2 Closing for Shares.
------------------
The closing of the purchase and sale of the Carbon common stock to Yorktown
as provided in Section 2.1 shall be held at a date, time and place mutually
agreeable to all parties to this Agreement but in any event no later than the
closing of the purchase of BFC stock under the Stock Purchase Agreement (the
"BFC Closing"). At the closing for the sale of Carbon shares as provided in
Section 2.1, Carbon shall deliver to Yorktown a certificate or certificates,
registered in Yorktown's name, representing 4,500,000 shares, free and clear of
any liens, security interests or encumbrances (other than any transfer
restrictions imposed by securities laws); and at that closing Yorktown shall pay
to Carbon the purchase price of $24,750,000 in immediately available funds by
wire transfer per instructions of Carbon.
2.3 Use of Proceeds.
---------------
The proceeds of the sale of shares to Yorktown as provided in this
Agreement shall be used for the purchase of BFC shares under the Stock Purchase
Agreement, and any remaining proceeds after that purchase shall be added to and
be part of the working capital of Carbon.
2
<PAGE>
Article 3
Assignment of Stock Purchase Agreement
3.1 Assignment.
----------
On a date mutually agreed upon by all parties to this Agreement but in any
event immediately prior to the BFC Closing, CEC Canada shall assign all rights
and obligations of CEC Canada under the Stock Purchase Agreement to Carbon,
including the right to purchase all outstanding BFC shares. CEC Canada shall
cause prior notice of this assignment to be given to Bonneville Pacific under
the terms of the Stock Purchase Agreement. It is further understood that, in
accordance with the terms of the Stock Purchase Agreement, CEC Canada shall
remain fully liable for all of its obligations under the Stock Purchase
Agreement.
3.2 Assumption; Reimbursement of Deposit.
------------------------------------
Carbon, upon receipt of that assignment of the Stock Purchase Agreement,
shall perform and comply with all obligations and terms applicable to CEC Canada
under the Stock Purchase Agreement, as if Carbon were named as the Buyer in the
Stock Purchase Agreement instead of CEC Canada. Also, upon receipt of that
assignment of the Stock Purchase Agreement, Carbon shall pay $1,200,000 to CEC
Canada as reimbursement of the deposit made by CEC Canada on the purchase price
under the Stock Purchase Agreement.
3.3 Amendments.
----------
Neither CEC Canada nor Carbon will make any amendment to the Stock Purchase
Agreement or grant any waiver under the Stock Purchase Agreement without the
permission and consent of the other parties to this Agreement, including
Yorktown.
Article 4
Exchange Offer
4.1 The Offer.
---------
Carbon shall, and Yorktown and CEC Canada shall cause Carbon to, make an
offer to all holders of shares of CEC Canada to exchange one share of common
stock of Carbon for each outstanding share of CEC Canada (the "Exchange Offer")
as promptly as reasonably practicable after the BFC Closing. The obligation of
Carbon to make the Exchange Offer is subject only to the assignment of the Stock
Purchase Agreement by CEC Canada to Carbon as provided above and the
consummation of the BFC Closing. In order for any specific term to be included
in the Exchange Offer, the term must be approved by Yorktown, CEC Canada and
Carbon, whose approval shall not be unreasonably withheld. Promptly after the
expiration of any
3
<PAGE>
withdrawal rights for tendered shares in the Exchange Offer or the expiration of
the Exchange Offer, as the case may be, Carbon shall exchange its shares for all
shares of CEC Canada validly tendered in the Exchange Offer and not withdrawn.
4.2 Compliance With Applicable Law.
------------------------------
Carbon shall take, and CEC Canada and Yorktown shall cause Carbon to take,
all necessary steps to comply with applicable law in making the Exchange Offer,
including without limitation (a) filing with the Securities and Exchange
Commission ("SEC") a registration statement on Form S-4 (together with any
amendments and supplements, called the "Registration Statement") under the
Securities Act of 1933 (the "Securities Act"), (b) filing with the SEC a tender
offer statement on Schedule 14D-1 (together with all amendments and supplements,
called the "Schedule 14D-1") with respect to the Exchange Offer, and (c) filing
all documents required to obtain any permits and approvals, if any, required to
carry out the transactions contemplated by this Agreement under any applicable
Canadian laws or state securities laws and will use its best efforts to obtain
such permits and approvals. The Registration Statement and Schedule 14D-1 shall
include summary advertisements, letters of transmittal and such other documents
as necessary to make the Exchange Offer (the Registration Statement, Schedule
14D-1 and other documents, together with all supplements and amendments, are
called collectively the "Offer Documents").
4.3 CEC Canada Approval.
-------------------
CEC Canada hereby approves of the Exchange Offer and represents that the
Board has unanimously determined that this Agreement and the transactions
contemplated by this Agreement, including the Exchange Offer, are fair to and in
the best interests of the shareholders of CEC Canada. The Board of Directors of
CEC Canada shall recommend that the shareholders of CEC Canada accept the
Exchange Offer, and CEC Canada consents to the inclusion in the Registration
Statement and other Offer Documents of the recommendation of the Board of
Directors as described above. Also CEC Canada represents that it has been
advised by each of its directors and executive officers that each of them
intends either to tender or cause to be tendered all shares of CEC Canada
beneficially owned by them in the Exchange Offer. As soon as reasonably
practical and no later than the date of commencement of the Exchange Offer, CEC
Canada shall file with the SEC a Solicitation/ Recommendation Statement on
Schedule 14D-9 (which, together with all amendments and supplements, is called
the "Schedule 14D-9") containing the recommendation of the Board described in
this Section and shall disseminate the Schedule 14D-9 to the extent required by
rules of the SEC under the Securities Exchange Act of 1934 (the "Exchange Act")
and any other applicable federal securities laws. CEC Canada agrees to correct
promptly any information provided by it for use in the Schedule 14D-9 which
shall have become false or misleading and to take all steps necessary to cause
the Schedule 14D-9 as so corrected to be filed with
4
<PAGE>
the SEC and disseminated to holders of shares of CEC Canada to the extent
required by applicable federal securities laws.
4.4 Shareholder Information.
-----------------------
CEC Canada shall promptly furnish to Carbon mailing labels containing the
name and addresses of all record holders of shares of CEC Canada and with
security position listings of all shares held in stock depositories, each as of
a recent date, together with all other available listings and computer files
containing names, addresses and security position listings of record holders and
beneficial owners of shares of CEC Canada. CEC Canada shall furnish Carbon with
such additional information, including without limitation, updated listings and
computer files of shareholders, mailing labels and security position listings
and such other assistance as Carbon may reasonably request for the Exchange
Offer. Carbon shall, subject to the requirements of applicable law and except
as necessary to disseminate the Exchange Offer and any Offer Documents, hold in
confidence the information contained in those labels, listings and files and
shall use such information only in connection with the Exchange Offer.
Article 5
Stock Options
5.1 Stock Option Plan.
-----------------
Each of the parties shall approve the 1999 Stock Option Plan of Carbon (the
"Carbon Stock Option Plan") and the 1999 Restricted Stock Plan, both attached
as Exhibit 1, and shall cause these Plans to be in effect prior to the BFC
---------
Closing.
5.2 Substitution of Stock Options.
-----------------------------
Carbon shall grant under the Carbon Stock Option Plan substitute options
for each option outstanding under the CEC Resources Ltd. Stock Option Plan (the
"CEC Canada Stock Option Plan"). Any option granted by Carbon in substitution
for an option granted under the CEC Stock Option Plan shall expressly provide
that it is being granted in full satisfaction of, and in substitution for, any
and all options for CEC Resources, Ltd. Stock previously granted under the CEC
Stock Option Plan. The following terms and conditions of the substitute options
granted pursuant to the Carbon Stock Option Plan shall be the same as the terms
and conditions relating to the specific options granted pursuant to an
optionee's Stock Option Agreement executed under the terms of CEC Stock Option
Plan: (1) the grant and exercise prices of the option; (2) the character of the
option as an "incentive stock option" or a "nonqualified stock option" (as
defined in the Code); (3) the vesting provisions applicable to the option
(except to the extent previously modified in executed employment agreements
between the optionee and CEC Canada); (4) the change in
5
<PAGE>
control provisions applicable to the option (except to the extent previously
modified in executed employment agreements between the optionee and CEC Canada);
(5) the provisions addressing the consequences of the optionee's termination of
employment for any reason; (6) the limitations on assignability of the option;
(7) the expiration date of the option; and (8) the payment method for the
purchase of the shares subject to the option.
5.3 Employment Agreements.
---------------------
The parties approve of the Employment Agreements with Patrick R. McDonald
("McDonald") and Kevin Struzeski ("Struzeski") in the forms attached as Exhibit
-------
2 to this Agreement and will cause Carbon to enter into these Employment
- -
Agreements on or prior to the BFC Closing.
5.4 Related Actions.
---------------
Concurrently with acquiring shares of Carbon as provided below, Yorktown
shall, as a shareholder of Carbon, approve of the Carbon Stock Option Plan,
Carbon's 1999 Restricted Stock Plan and the above-described Employment
Agreements. Carbon and Yorktown shall cause the Board of Directors of Carbon to
approve and adopt the Carbon Stock Option Plan, Carbon's 1999 Restricted Stock
Plan and the Employment Agreements.
5.5 Other Employee Plans.
--------------------
CEC Canada may, in its discretion, transfer the sponsorship of all employee
benefit plans formerly sponsored by CEC Canada, including but not limited to the
CEC Resources Ltd. 401(k) Profit Sharing Plan, to Carbon as soon as practicable
following the completion of the Exchange Offer.
Article 6
Board of Directors of Carbon
6.1 Definitions.
-----------
For purposes of this Article 6, the following terms have the following
meanings:
"Beneficial ownership" or "owned beneficially" with respect to any voting
stock means stock of which a person or entity is a beneficial owner as defined
at the date hereof in Rule 13d-3 of the SEC under the Exchange Act.
"Independent director" means a person who is not an officer or employee of
Carbon, is not related to an officer of Carbon and does not represent Yorktown
or any other beneficial owner of 10% or more of the outstanding voting stock of
Carbon.
6
<PAGE>
"Super majority vote of the Board" means approval by a majority of the
entire Board of Directors of Carbon, which majority includes a majority of all
Yorktown directors and at least one independent director.
"Voting stock" means securities having the right to vote generally in any
election of directors of Carbon.
6.2 Board of Directors After BFC Closing.
------------------------------------
After consummation of the BFC Closing, the Board of Directors of Carbon
shall consist of five directors, and these five directors shall be: David H.
Kennedy; Lambros J. Lambros; Bryan H. Lawrence; Peter A. Leidel; and McDonald.
Upon completion of the Exchange Offer, and if Harry A. Trueblood accepts the
Exchange Offer for all CEC shares owned beneficially by him, the Board of
Directors of Carbon shall consist of six directors, and these six directors
shall be the above-named five persons and Harry A. Trueblood.
6.3 Yorktown Designations.
---------------------
Bryan H. Lawrence and Peter A. Leidel named above are persons designated by
Yorktown. So long as Yorktown is the beneficial owner of voting shares with 50%
or more of the outstanding votes in the election of directors of Carbon,
Yorktown shall have the right to designate for nomination two directors of
Carbon ("Yorktown Directors"). If Yorktown owns beneficially voting stock with
25% or more but less than 50% of the outstanding votes in the election of
directors of Carbon, then Yorktown shall have the right to designate for
nomination one director of Carbon. Yorktown will not have the right, as a
contractual matter under this Agreement, to designate any persons for nomination
as directors if Yorktown owns beneficially voting stock with less than 25% of
the outstanding votes in the election of directors of Carbon.
6.4 McDonald as a Director.
----------------------
So long as McDonald is an officer of Carbon, McDonald shall be designated
for nomination as a director of Carbon.
6.5 Nominating Committee.
--------------------
The Board of Directors of Carbon shall establish, empower and maintain a
nominating committee. The nominating committee shall be responsible for
determining, on behalf of the Carbon Board of Directors, nominees for the
position of director of Carbon or persons to be elected by the Board of
Directors or shareholders to fill any vacancy in the Board of Directors. The
nominating committee shall be comprised of one Yorktown director, McDonald so
long as he is a director of Carbon and two independent directors. The Yorktown
director to serve on the nominating
7
<PAGE>
committee shall be selected by a majority vote of the Yorktown directors. A
majority of the independent directors shall designate the independent directors
to serve on the nominating committee. Any Yorktown or independent director may
select himself or herself to serve on the nominating committee. A quorum of the
nominating committee, which shall be required for any action of the nominating
committee, shall be all members of the nominating committee. The nominating
committee shall act by a majority vote of the entire nominating committee.
6.6 Nomination of Directors.
-----------------------
The directors of Carbon shall be nominated at all times from and after the
consummation of the BFC Closing as follows (a nomination includes any nomination
of an incumbent director to be reelected to the Board):
(a) The nominating committee shall nominate for director each Yorktown
director which Yorktown has the right to designate and has so designated;
(b) The nominating committee shall nominate McDonald if he is entitled to
be so nominated as provided in Section 6.4 above; and
(c) The nominating committee shall nominate the remaining directors and at
least two of the persons so nominated shall be independent directors unless the
size of the Board has been changed by a super majority vote of the Board and
there are not sufficient positions for the election of two independent directors
after taking into account Yorktown directors and the nomination of McDonald.
6.7 Vacancies.
---------
Upon the death, resignation, retirement, disqualification or removal from
office, with or without cause, of any independent director or Yorktown director,
the nominating committee (in the case of an independent director) and the
remaining Yorktown director (in the case of the vacancy relating to a Yorktown
director) shall have the right to designate any replacement to fill the vacancy.
Any vacancy on the Board of Directors caused by the death, resignation,
retirement, disqualification or removal of McDonald, shall be designated by the
nominating committee. The Board of Directors shall take any action necessary to
duly appoint or elect as a director each person so designated to fill a vacancy
on the Board.
6.8 Voting of Shares.
----------------
Each party shall take such actions as a shareholder of Carbon, or as is
otherwise reasonably in the party's control, to effectuate the election of
directors and the filling of vacancies as provided in this Article 6. In
addition, Carbon shall use all reasonable efforts to solicit from shareholders
of Carbon eligible to vote in the election of directors proxies in favor of the
nominees selected in accordance with this
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Article 6. In any election of directors or any meeting of shareholders for the
removal of directors, Yorktown and McDonald shall be present for purposes of
establishing a quorum and shall vote all of their voting stock in favor of any
nominee for director selected in accordance with this Article 6 and against the
removal of any director selected in accordance with this Article 6, except that
Yorktown and McDonald may vote for the removal of any Yorktown director for
which Yorktown has indicated approval of the removal and Yorktown and McDonald
may vote for the removal of any independent director as to which the nominating
committee has recommended removal.
6.9 Super Majority.
--------------
No action by Carbon shall be taken with respect to the following without
approval of the Board of Directors of Carbon which approval shall be by a super
majority vote of the Board: Any change in the size or composition of the Board
of Directors of Carbon or the nominating committee.
6.10 Termination of this Article.
---------------------------
This Article shall cease to be effective and shall not apply to any Carbon
matters (a) 10 years after the consummation of the BFC Closing or, if earlier,
(b) when and if Yorktown owns beneficially voting shares with less than 25% of
the outstanding votes in the election of directors and McDonald is no longer an
officer of Carbon.
Article 7
Representations and Warranties of Carbon
Carbon represents and warrants at the date hereof to Yorktown and CEC
Canada as follows:
7.1 Organization and Authority.
--------------------------
Carbon is a corporation duly organized, validly existing and in good
standing under the laws of the State of Colorado, is duly qualified to do
business and is in good standing in all jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and failure to be so qualified would have a material adverse effect on
the business, financial condition or results of operations (a "Material Adverse
Effect") of Carbon and has corporate power and authority to own its properties
and assets and to carry on its business as it is now being conducted. Carbon
has furnished Yorktown and CEC Canada true and correct copies of its articles of
incorporation and bylaws, as amended.
7.2 No Subsidiaries.
---------------
9
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Prior to the BFC Closing, Carbon has no subsidiaries.
7.3 Capitalization.
--------------
The authorized capital stock of Carbon consists of 10,000,000 shares of
preferred stock, no par value, of which no shares are outstanding, and
20,000,000 shares of common stock, no par value, of which as of the date of this
Agreement 100 shares issued to Yorktown were outstanding. Except for the
options required by Article 5 above, there are no outstanding subscriptions,
contracts, conversion privileges, options, warrants, calls, preemptive rights or
other rights obligating Carbon to issue, sell or otherwise dispose of, or to
purchase, redeem or otherwise acquire, any shares of capital stock of Carbon.
7.4 Authorization; No Conflict.
--------------------------
Carbon has the corporate power and authority to enter into this Agreement
and to carry out its obligations under this Agreement. The execution, delivery
and performance of this Agreement by Carbon and the consummation of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of Carbon This Agreement is a valid and binding obligation of Carbon
enforceable against Carbon in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors and
contracting parties generally and except as enforceability may be subject to
general principles of equity.
Neither the execution, delivery and performance by Carbon of this
Agreement, nor the consummation of the transactions contemplated hereby, nor
compliance by Carbon with any of the provisions hereof, will (a) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event of which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration of,
or result in the creation of, any lien, security interest, charge or encumbrance
upon any of the properties or assets of Carbon under any of the terms,
conditions or provisions of (i) its articles of incorporation or bylaws or (ii)
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other instrument or obligation to which Carbon is a party or by which it may be
bound, or to which Carbon or any of the properties or assets of Carbon may be
subject, or (b) subject to compliance with the statutes and regulations referred
to in the next paragraph, to the knowledge of Carbon, violate any judgment,
ruling, order, writ, injunction, decree, statute, rule or regulation applicable
to Carbon or any of its properties or assets.
Other than in connection or in compliance with the provisions of the
Securities Act and the rules and
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regulations thereunder, the securities or blue sky laws of the various states or
Canadian provinces, no notice to, filing with, exemption or review by, or
authorization, consent or approval of, any public body or authority is necessary
for the consummation by Carbon of the transactions contemplated by this
Agreement.
7.5 No Operations.
-------------
Carbon was incorporated in September, 1999 and has not conducted any active
business between its date of incorporation and the date of this Agreement,
except any actions to enter into this Agreement, complete the purchase of BFC
Stock under the Stock Purchase Agreement and make the Exchange Offer.
7.6 Brokers and Finders.
-------------------
Neither Carbon nor any of its officers, directors or employees has employed
any broker or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or finder's fees, and no broker or finder has acted
directly or indirectly for Carbon in connection with this Agreement or the
transactions contemplated hereby.
ARTICLE 8
REPRESENTATIONS AND WARRANTIES OF CEC CANADA
CEC Canada represents and warrants at the date hereof to Yorktown and
Carbon as follows:
8.1 Organization and Authority.
--------------------------
CEC Canada is a corporation duly organized, validly existing and in good
standing under the laws of the Province of Alberta, is duly qualified to do
business and is in good standing in all jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and failure to be so qualified would have a Material Adverse Effect on
CEC Canada and has corporate power and authority to own its properties and
assets and to carry on its business as it is now being conducted. CEC Canada
has furnished the other two parties true and correct copies of its articles of
incorporation and bylaws, as amended.
8.2 No Subsidiaries.
---------------
CEC Canada has no subsidiaries.
8.3 Capitalization.
--------------
The authorized capital stock of CEC Canada consists of an unlimited number
of shares of preferred stock, no par value, of which no shares are outstanding,
and an
11
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unlimited number of shares of common stock, no par value, of which as of the
close of business on August 31, 1999, 1,521,400, shares were outstanding. The
maximum number of shares of CEC Canada common stock (assuming for this purpose
that phantom shares and other share-equivalents constitute CEC Canada common
stock) that would be outstanding as of August 31, 1999, if all options,
warrants, conversion rights and other rights with respect thereto were exercised
is 1,785,900. All of the outstanding shares of capital stock of CEC Canada have
been duly and validly authorized and issued and are fully paid and
nonassessable. Except as set forth in Exhibit 3, there are no outstanding
---------
subscriptions, contracts, conversion privileges, options, warrants, calls,
preemptive rights or other rights obligating CEC Canada to issue, sell or
otherwise dispose of, or to purchase, redeem or otherwise acquire, any shares of
capital stock of CEC Canada. Since May 31, 1999, no shares of CEC Canada common
stock have been purchased, redeemed or otherwise acquired, directly or
indirectly, by CEC Canada, and no dividends or other distributions have been
declared, set aside, made or paid to the shareholders of CEC Canada.
8.4 Authorization; No Conflict.
--------------------------
CEC Canada has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The execution, delivery
and performance of this Agreement by CEC Canada and the consummation of this
Agreement by CEC Canada have been duly authorized by the Board of Directors of
CEC Canada. This Agreement is a valid and binding obligation of CEC Canada
enforceable against CEC Canada in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors and
contracting parties generally and except as enforceability may be subject to
general principles of equity.
Except as set forth on Exhibit 4 attached hereto, neither the execution,
---------
delivery and performance of CEC Canada of this Agreement, nor the consummation
of the transactions contemplated hereby, nor compliance by CEC Canada with any
of the provisions hereof, will (a) violate, conflict with, or result in a breach
of any provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the performance required by, or result in a right
of termination or acceleration of, or result in the creation of, any lien,
security interest, charge or encumbrance upon any of the properties or assets of
CEC Canada under any of the terms, conditions or provisions of (i) its articles
of incorporation or bylaws or (ii) any material note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation to
which CEC Canada is a party or by which it may be bound, or to which CEC Canada
or any of the properties or assets of CEC Canada may be subject, or (b) subject
to compliance with the statutes and regulations referred to in the next
paragraph, to the knowledge of CEC Canada, violate any judgment, ruling, order,
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<PAGE>
writ, injunction, decree, statute, rule or regulation applicable to CEC Canada
or any of its material properties or assets.
Other than in connection or in compliance with the provisions of the
Securities Act and the rules and regulations thereunder, the Exchange Act and
the rules and regulations thereunder, the securities or blue sky laws of the
various states or Canadian provinces, no notice to, filing with, exemption or
review by, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by CEC Canada of the transactions
contemplated by this Agreement.
8.5 Brokers and Finders.
-------------------
Neither CEC Canada nor any of its officers, directors or employees has
employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions or finder's fees, and no broker or
finder has acted directly or indirectly for CEC Canada in connection with this
Agreement or the transactions contemplated hereby.
8.6 SEC Reports.
-----------
Since December 1, 1998, CEC Canada has filed all reports, registrations and
statements, together with any required amendments thereto, that it was required
to file with the SEC, including, but not limited to, Forms 10-K, Forms 10-Q and
proxy statements. All such reports and statements filed with the SEC are
collectively referred to herein as the "CEC Canada Reports." As of their
respective dates the CEC Canada Reports complied in all material respects with
all the rules and regulations promulgated by the SEC, and as of their respective
dates, the CEC Canada Reports filed with the SEC did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Copies of all the
CEC Canada Reports have been made available to Yorktown and Carbon by CEC
Canada.
Article 9
Representations and Warranties of Yorktown
Yorktown represents and warrants at the date hereof to Carbon and CEC
Canada.
9.1 Organization and Authority.
--------------------------
Yorktown is a limited partnership duly organized, validly existing and in
good standing under the laws of the State of Delaware, is duly qualified to do
business and is in good standing in all jurisdictions where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified and failure to be so qualified
13
<PAGE>
would have a Material Adverse Effect on Yorktown and has full power and
authority to own its properties and assets and to carry on its business as it is
now being conducted.
9.2 Authorization.
-------------
Yorktown has the full power and authority to enter into this Agreement and
to carry out its obligations hereunder. The execution, delivery and performance
of this Agreement by Yorktown and the consummation of the transactions
contemplated hereby have been duly authorized by the governing board of
Yorktown. No approval or consent by the members of Yorktown is necessary for
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby. This Agreement is a valid and binding
obligation of Yorktown enforceable against Yorktown in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors and contracting parties generally and except as enforceability may be
subject to general principles of equity.
Neither the execution, delivery and performance by Yorktown of this
Agreement nor the consummation of the transactions contemplated hereby, nor
compliance by Yorktown with any of the provisions hereof; will (a) violate,
conflict with, or result in a breach of any provision of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or acceleration of,
or result in the creation of, any lien, security interest, charge or encumbrance
upon any of the properties or assets of Yorktown under any of the terms,
conditions or provisions of (i) its organizational documents or operating
agreements or (ii) any material note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Yorktown is
a party or by which it may be bound, or to which Yorktown or any of the
properties or assets of Yorktown may be subject, or (b) subject to compliance
with the statutes and regulations referred to in the next paragraph, to the
knowledge of Yorktown, violate any judgment, ruling, order, writ, injunction,
decree, statute, rule or regulation applicable to Yorktown or any of its
properties or assets.
Other than in connection with or in compliance with the provisions of the
Securities Act and the rules and regulations thereunder, the Exchange Act and
the rules and regulations thereunder, the securities or blue sky laws of the
various states or Canadian provinces, no notice to, filing with, exemption or
review by, or authorization, consent or approval of, any public body or
authority is necessary for the consummation by Yorktown of the transactions
contemplated by this Agreement.
9.3 Brokers and Finders.
-------------------
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<PAGE>
Neither Yorktown nor any of its respective managers, officers, directors,
partners, members or employees has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions or
finder's fees, and no broker or finder has acted directly or indirectly for
Yorktown in connection with this Agreement or the transactions contemplated
hereby.
9.4 Investment Matters.
------------------
Yorktown has substantial experience in evaluating and investing in private
placement transactions of securities in companies similar to Carbon so that it
is capable of evaluating the merits and risks of its investment in Carbon and
has the capacity to protect its own interests.
It is acquiring Carbon shares as provided in Article 2 for investment for
its own account, not as a nominee or agent, and not with the view to, or for
resale in connection with, any distribution thereof. It understands that Carbon
shares have not been, and will not be registered, under the Securities Act by
reason of a specific exemption from the registration provisions of the
Securities Act, the availability of which depends upon, among other things, the
bona fide nature of the investment intent and the accuracy of Yorktown's
representations as expressed in this Section.
Yorktown has had an opportunity to discuss Carbon's business, management
and financial affairs with Carbon's management and has had the opportunity to
review Carbon's existing and proposed properties and operations. It has also
had an opportunity to ask questions of officers of Carbon, which questions were
answered to its satisfaction.
Article 10
Covenants
10.1 Covenants of Carbon.
-------------------
Carbon covenants and agrees with CEC Canada and Yorktown as follows:
(a) From the date hereof until completion of the Exchange Offer, Carbon
will maintain its corporate existence in good standing; after acquisition of the
stock of BFC pursuant to the Stock Purchase Agreement, maintain the general
character of BFC's business and conduct BFC's business in its ordinary and usual
manner; maintain all books and records of Carbon and, after the purchase of
BFC's stock, of BFC, including all financial statements, in accordance with the
accounting principles and practices consistent with those used for CEC Canada
financial statements, except for changes in such principles and practices
required under generally accepted accounting principles or as to which Yorktown
and CEC Canada concur.
15
<PAGE>
(b) As promptly as practicable after the execution of this Agreement,
Carbon will file with the SEC the Registration Statement under the Securities
Act, the Schedule 14D-1 and any other applicable documents, relating to the
Exchange Offer and the shares of Carbon common stock to be delivered to the
stockholders of CEC Canada pursuant to this Agreement and the Exchange Offer,
and will use its best efforts to cause the Registration Statement to become
effective as soon as practicable. At the time the Registration Statement becomes
effective, the Registration Statement will comply in all material respects with
the provisions of the Securities Act and the published rules and regulations
thereunder, and will not contain any 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 not false or misleading, and at the times of making and
completing the Exchange Offer the prospectus included as part of the
Registration Statement, as amended or supplemented by any amendment or
supplement filed by Carbon (called the "Prospectus"), will not contain any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein not false or misleading; provided, however, that
-------- -------
none of the provisions of this paragraph shall apply to statements in or
omissions from the Registration Statement or the Prospectus made in reliance
upon and in conformity with information furnished by Yorktown or CEC Canada for
use in the Registration Statement or the Prospectus. The Schedule 14D-1 shall
comply in all material respects with provisions of applicable law.
(c) Carbon will file all documents required to be filed to list Carbon
common stock to be issued pursuant to this Agreement and the Exchange Offer on
the American Stock Exchange and use its best efforts to effect said listing at
or prior to completion of the Exchange Offer.
(d) The shares of Carbon common stock to be issued by Carbon to the
shareholders of CEC Canada pursuant to this Agreement and the shares of Carbon
to be issued by Carbon to Yorktown will, upon such issuance and delivery to said
shareholders and Yorktown pursuant to this Agreement, be duly authorized,
validly issued, fully paid and nonassessable. The shares of Carbon common stock
to be delivered to the shareholders of CEC Canada and to Yorktown pursuant to
this Agreement are and will be free of any preemptive rights of any shareholders
of Carbon and free and clear of any liens, security interests or encumbrances
(other than transfer restrictions imposed by securities laws).
(e) Carbon will file all documents required to obtain, prior to commencing
the Exchange Offer, all necessary Blue Sky and Canadian Province permits and
approvals, if any, required to carry out the transactions contemplated by this
Agreement, will pay all expenses incident thereto and will use its best efforts
to obtain such permits and approvals.
16
<PAGE>
(f) Carbon will hold in confidence all documents and information
concerning CEC Canada and Yorktown furnished to it and its representatives in
connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law or in connection with the Exchange Offer or the Registration Statement and
except to its outside professional advisers in connection with this Agreement,
with the same undertaking from such professional advisers. If the transactions
contemplated by this Agreement shall not be consummated, such confidence shall
be maintained and, upon request, all such documents, copies thereof or extracts
therefrom shall immediately thereafter be returned to CEC Canada or Yorktown, as
the case may be.
(g) Carbon shall consult with CEC Canada and Yorktown as to the form and
substance of any proposed press release or other proposed public disclosure by
Carbon of matters related to this Agreement or any of the transactions
contemplated hereby, except Carbon may make any press release or statement
believed in good faith by Carbon to be required by law or under the rules and
regulations of any stock exchange on which its shares are listed.
(h) With respect to the indemnification of officers and directors and
officers' and directors' insurance, Carbon agrees as follows:
(i) Carbon shall ensure that all rights to indemnification and all
limitations of liability existing in favor of any person who is now, or has
been at any time prior to the date hereof, or who becomes prior to the
completion of the Exchange Offer, a director or officer of CEC Canada (an
"Indemnified Party" and, collectively, the "Indemnified Parties"), in CEC
Canada's Articles of Incorporation or Bylaws or similar governing documents
shall, with respect to claims arising from (A) facts or events that occurred
before the completion of the Exchange Offer, or (B) this Agreement or any of
the transactions contemplated by this Agreement, whether in any case
asserted or arising before or after the completion of the Exchange Offer,
survive the Exchange Offer and shall continue in full force and effect.
Nothing contained in this paragraph 10.1(h)(i) shall be deemed to preclude
the liquidation, consolidation or merger of CEC Canada, in which case all of
such rights to indemnification and limitations on liability shall be deemed
to survive and continue as contractual rights notwithstanding any such
liquidation or consolidation or merger; provided, however, that in the event
-------- -------
of liquidation or sale of substantially all of the assets of CEC Canada,
Carbon shall guarantee, to the extent of the net asset value of Carbon as of
the completion of the Exchange Offer, the indemnification obligations of CEC
Canada to the extent of indemnification obligations of Carbon described
above.
(ii) any Indemnified Party wishing to claim indemnification under
paragraph 10.1(h)(i), upon learning of any such claim, action, suit,
proceeding
17
<PAGE>
or investigation, shall promptly notify Carbon thereof, but the failure to
so notify shall not relieve Carbon of any liability it may have to such
Indemnified Party. In the event of any such claim, action, suit, proceeding
or investigation (whether arising before or after completion of the Exchange
Offer), (A) Carbon shall have the right to assume the defense thereof and
Carbon shall not be liable to any Indemnified Party for any legal expenses
of other counsel or any other expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof, except that if
Carbon elects not to assume such defense or counsel for the Indemnified
Party advises that there are issues which raise conflicts of interest
between Carbon and the Indemnified Party, the Indemnified Party may retain
counsel satisfactory to them, and Carbon shall pay the reasonable fees and
expenses of such counsel for the Indemnified Party promptly as statements
therefor are received; provided, however, that Carbon shall be obligated
-------- -------
pursuant to this subparagraph (ii) to pay for only one firm of counsel for
all Indemnified Parties in any jurisdiction unless the use of one counsel
for such Indemnified Parties would present such counsel with a conflict of
interest and (B) such Indemnified Party shall cooperate in the defense of
any such matter. In any event, Carbon shall not be liable for the settlement
of any claim, action, suit, proceeding or investigation unless Carbon
consents to the settlement, which consent shall not be unreasonably
withheld.
(iii) if Carbon or any of its successors or assigns (A) shall
consolidate with or merge into any other corporation or entity and shall not
be the continuing or surviving corporation or entity of such consolidation
or merger or (B) shall transfer all or substantially all of its properties
and assets to any individual, corporation or other entity, then and in each
such case, proper provision shall be made so that the successors and assigns
of Carbon shall assume the obligations set forth in this paragraph 10.1(h).
(iv) the provisions of this paragraph 10.1(h) are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and his
or her heirs and representatives.
10.2 Covenants of CEC Canada.
-----------------------
CEC Canada covenants and agrees with Carbon and Yorktown as follows:
(a) Except as otherwise permitted or required by this Agreement, from the
date hereof until completion of the Exchange Offer, CEC Canada will: maintain
its corporate existence in good standing; maintain the general character of its
business and conduct its business in its ordinary and usual manner; maintain
proper business and accounting records in accordance with generally accepted
principles; maintain in all material respects presently existing insurance
coverage; use its reasonable efforts to preserve its business organization
intact, to keep the services of its present
18
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principal employees and to preserve its good will and the good will of its
suppliers, customers and others having business relationships with it; use its
reasonable efforts to obtain any approvals or consents required to maintain
existing leases and other contracts in effect following the Exchange Offer; and
furnish monthly financial reports, in the form submitted by CEC Canada to its
management, to Carbon and Yorktown.
(b) Except as otherwise contemplated or required by this Agreement, from
the date hereof until completion of the Exchange Offer, CEC Canada will not
(without the prior written consent of Carbon and Yorktown): amend or otherwise
change its articles of incorporation or association or Bylaws; issue or sell or
authorize for issuance or sale, or grant any options or make other agreements
with respect to the issuance or sale or conversion of, any shares of its capital
stock, phantom shares or other share-equivalents or any other of its securities,
except that CEC Canada may issue shares of CEC Canada common stock upon the
exercise of any outstanding options; authorize or incur any long-term debt
(other than borrowings under a revolving line of credit in the ordinary course
of business or borrowings to replace any existing borrowings or borrowings as to
which Yorktown and Carbon approve); mortgage, pledge or subject to lien or other
encumbrance any of its properties, except in the ordinary course of business or
in connection with borrowings permitted by this paragraph; amend or terminate
any employee plan except as required by law; make any contributions to any
employee plan except as required by the terms of such plan in effect as of the
date hereof except discretionary contributions made in the ordinary course of
business in accordance with past practices; declare, set aside, make or pay any
dividend or other distribution with respect to its capital stock; redeem,
purchase or otherwise acquire, directly or indirectly, any of the capital stock
of CEC Canada; increase the compensation of any officers, directors or executive
employees, except pursuant to existing compensation plans and practices; or sell
or otherwise dispose of any of its assets or properties other than in the
ordinary course of business.
(c) CEC Canada will furnish or cause to be furnished to Carbon all the
information concerning CEC Canada required for inclusion in the Registration
Statement or other Offer Documents. Any financial statement for any fiscal year
provided under this paragraph must include the audit opinion and the consent of
the relevant auditor to use such opinion in such Registration Statement. The
information regarding CEC Canada furnished by CEC Canada will not contain any
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, not false or
misleading, at the time of any filing of the Registration Statement or other
Offer Documents with the SEC or any other regulatory authority, at the time of
making the Exchange Offer and throughout the making of the Exchange Offer. CEC
Canada shall correct promptly any information provided by CEC Canada for use in
the Registration Statement or other Offer Documents which is or shall become
false or misleading. All documents
19
<PAGE>
which CEC Canada is responsible for filing with the SEC in connection with the
Exchange Offer will comply as to form in all material respects with the
provisions of applicable law.
(d) CEC Canada will cooperate in obtaining and file any documents which
may be required to obtain all necessary Blue Sky and Canadian Province permits
and approvals, if any, required to carry out the transactions contemplated by
this Agreement.
(e) CEC Canada shall consult with Carbon and Yorktown as to the form and
substance of any proposed press release or other proposed public disclosure, by
CEC Canada or any of its representatives of matters related to this Agreement or
any of the transactions contemplated hereby, except that CEC Canada may make any
press release or statement believed in good faith by CEC Canada to be required
by law or under the rules and regulations of any stock exchange on which its
shares are listed.
(f) CEC Canada will take all action necessary or required to terminate or
amend, if requested by Carbon, all qualified pension and welfare benefit plans
to facilitate the merger of such plans with Carbon plans without gaps in
coverage for participants in the plans and without duplication of costs caused
by the continuation of such plans after coverage is available under Carbon
plans, [and all non-qualified benefit plans and compensation arrangements as of
the completion of the Exchange Offer].
10.3 Covenants of Yorktown.
---------------------
Yorktown covenants and agrees with Carbon and CEC Canada as follows:
(a) From the date hereof until completion of the Exchange Offer, Yorktown
will maintain its existence in good standing.
(b) Yorktown will furnish to Carbon all the information concerning
Yorktown required for inclusion in the Registration Statement or other Offer
Documents. Such information will not contain any 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 not false or misleading, at the time of filing
the Registration Statement or other Offer Document with the SEC or any other
regulatory authority, the making of the Exchange Offer and throughout the making
of the Exchange Offer. Yorktown shall correct promptly any information provided
by Yorktown for use in the Registration Statement or other Offer Documents which
is or shall become false or misleading.
(c) Yorktown will cooperate in obtaining and file any documents which may
be required to obtain all necessary Blue Sky and Canadian Province permits and
20
<PAGE>
approvals, if any, required to carry out the transactions contemplated by this
Agreement.
(d) Yorktown will hold in confidence all documents and information
concerning Carbon and CEC Canada furnished to it and its representatives in
connection with the transactions contemplated by this Agreement and will not
release or disclose such information to any other person, except as required by
law and except to its outside professional advisers or its limited partners in
connection with this Agreement, with the same undertaking from such professional
advisers or limited partners, as the case may be. If the transactions
contemplated by this Agreement shall not be consummated, such confidence shall
be maintained (except to the extent that such information can be shown to be
previously known to Yorktown, in the public domain, or later acquired by
Yorktown from other legitimate sources) and, upon request, all such documents,
copies thereof or extracts therefrom shall immediately thereafter be returned by
Carbon or CEC Canada, as the case may be.
(e) Yorktown shall consult with Carbon and CEC Canada as to the form and
substance of any proposed press release or other proposed public disclosure of
matters related to this Agreement or any of the transactions contemplated hereby
except that Yorktown may make a press release or statement believed in good
faith to be required by law.
Article 11
Conditions
11.1 Conditions Precedent to Obligation of Carbon and CEC Canada.
-----------------------------------------------------------
The obligation of Carbon to make and complete the Exchange Offer and CEC
Canada to recommend favorably the Exchange Offer to its shareholders shall be
subject to the satisfaction of the following
(a) No court or governmental authority of competent jurisdiction shall
have issued an order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(b) The Registration Statement (as amended or supplemented) shall have
become effective under the Securities Act and shall not be subject to any stop
order. Carbon shall have received all state securities law or blue sky and
Canadian Province authorizations necessary in any material respect to carry out
the transactions contemplated by this Agreement.
11.2 Condition Precedent to Obligation of Yorktown.
---------------------------------------------
The obligation of Yorktown to effect the purchase of Carbon common stock as
required by Article 2 shall be subject to the satisfaction at or before the
21
<PAGE>
consummation of the BFC Closing of the following condition, which may be waived
in writing by Yorktown: No court or governmental authority of competent
jurisdiction shall have issued an order restraining, enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this Agreement.
Article 12
Termination and Miscellaneous
12.1 Obligation to Make Exchange Offer.
---------------------------------
On and after the BFC Closing has been consummated, the parties shall
cause the Exchange Offer to be made subject only to the conditions stated
expressly in Article 11, whether or not there has been a breach of any provision
of this Agreement by any party. The obligations of the parties regarding the
Exchange Offer are independent of any other provisions of this Agreement, and
the remedy of any party for breach of any covenant or other provisions of this
Agreement shall be limited to damages or specific performance and shall not
include any right under this Agreement or applicable law to terminate this
Agreement.
12.2 Termination of Agreement.
------------------------
(a) This Agreement may be terminated at any time prior to the consummation
of the BFC Closing:
(i) by mutual written consent of the parties hereto;
(ii) by any of the parties hereto upon written notice to the other
parties if the BFC Closing shall not have been consummated by April 1, 2000
unless such failure of consummation shall be due to the failure of the
party seeking to terminate to perform or observe in all material respects
the covenants and agreements hereof to be performed or observed by such
party; or
(iii) by a party upon written notice to the other parties if any
court or governmental authority of competent jurisdiction shall have issued
a final order restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement.
(b) Termination of this Agreement under this Section 12.1 shall not
release, or be construed as so releasing, any party hereto from any liability or
damage to the other parties hereto arising out of the breaching party's willful
and material breach of the warranties and representations made by it, or willful
and material failure in performance of any of its covenants, agreements, duties
or obligations arising hereunder, and the obligations under paragraphs 10.1(f),
10.1(g), 10.2(d), 10.3(e) and 10.3(f) and Article 12 shall survive such
termination.
22
<PAGE>
12.3 HSR Act Filing
--------------
Carbon and Yorktown shall, as promptly as possible, make or cause to be
made any required filings under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 and the rules and regulations thereunder (the "HSR Act") with respect to
the purchase of BFC shares and the Exchange Offer and shall cooperate with each
other regarding these matters. Each party shall promptly inform the other
parties of any material communication between the party and the Federal Trade
Commission, the Department of Justice or any other governmental authority
regarding any of the transactions contemplated by this Agreement. If any party
receives a request for additional information or documents from any such
governmental authority with respect to the transactions contemplated by this
Agreement, then the parties shall use its reasonable efforts, as soon as
reasonably practicable, and after consultation with the other parties, an
appropriate response in substantial compliance with the request. Each party
shall take all reasonable actions necessary to cause the expiration of the
waiting periods under the HSR Act as promptly as possible.
12.4 Expenses.
--------
All expenses in connection with this Agreement and the transactions
contemplated hereby, including without limitation legal and accounting fees,
incurred by a party shall be borne by the party, except that Carbon shall
reimburse CEC Canada for any and all expenses in connection with this Agreement,
the transactions contemplated hereby and the Stock Purchase Agreement upon
consummation of the BFC Closing and for those expenses incurred by CEC Canada
after consummation of the BFC Closing and except Carbon shall reimburse Yorktown
for all its reasonable out-of-pocket legal expenses (including, without
limitation, reasonable, attorneys fees), and any out-of-pocket expenses of
Yorktown relating to any filings under the HSR Act, in connection with this
Agreement and the transactions contemplated hereby.
12.5 Successors and Assigns.
----------------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, but shall not be
assignable by either party hereto without the prior written consent of the other
parties hereto. Notwithstanding the foregoing, Yorktown may assign this
Agreement to any party controlled by, under common control with or controlling
Yorktown with prior notice to Carbon and CEC Canada, and in that event Yorktown
shall nevertheless remain fully liable for all obligations of Yorktown contained
in this Agreement.
12.6 Third Party Beneficiaries.
---- -------------------------
23
<PAGE>
Each party hereto intends that except as otherwise expressly provided
herein, this Agreement shall not benefit or create any right or cause of action
in or on behalf of any person other than the parties hereto.
12.7 Notices.
---- -------
Any notice or other communication provided for herein or given hereunder to
a party hereto shall be in writing and shall be delivered in person or shall be
mailed by first class registered or certified mail, postage prepaid, addressed
as follows or may be delivered by fax or other electronic transmission to the
appropriate address:
If to Carbon:
Carbon Energy Corporation
1700 Broadway, Suite 1150
Denver, CO 80290-1101
Attention: President
Telephone Number: (303) 860-1575
Fax Number: (303) 860-9128
Email Address: [email protected]
If to CEC Canada:
CEC Resources Ltd.
1700 Broadway, Suite 1150
Denver, CO 80290-1101
Attention: President
Telephone Number: (303) 860-1575
Fax Number: (303) 860-9128
Email Address: [email protected]
If to Yorktown:
Yorktown Energy Partners III, L.P.
Attention: Peter A. Leidel
410 Park Avenue, Suite 1900
New York, NY 10025
Telephone Number: (212) 515-2113
Fax Number: (212) 515-2105
Email Address: [email protected]
or to such other address with respect to a party as such party shall notify the
other in writing as above provided.
24
<PAGE>
12.8 Complete Agreement.
---- ------------------
This Agreement contains the complete agreement between the parties hereto
with respect to the Exchange Offer and other transactions contemplated hereby
and supersede all prior agreements and understandings between the parties hereto
with respect thereto.
12.9 Captions.
---- --------
The captions contained this Agreement are for convenience of reference only
and do not form a part of this Agreement.
12.10 Waiver and Other Action.
----- -----------------------
Either party hereto may, by a signed writing, given any consent or waiver.
The waiver by any party of a breach of any term or provision of this Agreement
shall not construed as a waiver of any subsequent breach.
12.11 Amendment.
----- ---------
The parties hereto, by action taken by all of their respective Boards of
Directors or governing authorities or pursuant to authority delegated by all of
their respective Boards of Directors or governing authorities, may amend this
Agreement. Any amendment of this Agreement must be in writing signed by the
party against which enforcement of the amendment is sought.
12.12 Governing Law.
----- -------------
This Agreement shall be construed and enforced in accordance with the laws
of the State of Colorado.
12.13 Non-Survival of Representations and Warranties.
----- ----------------------------------------------
No representation or warranty contained in this Agreement shall survive the
consummation of the BFC Closing.
12.14 Attorneys' Fees.
----- ---------------
A prevailing party in any legal proceeding brought under or to enforce this
Agreement shall be entitled to recover court costs, reasonable costs of the
legal proceeding and reasonable attorneys' fees from the non-prevailing parties.
12.15 Counterparts.
----- ------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which shall constitute but one
instrument.
25
<PAGE>
The parties hereto have executed this Agreement as of the day and year
first above written.
CARBON ENERGY CORPORATION CEC RESOURCES LTD.
By: /s/ Patrick R. McDonald By: /s/ Patrick R. McDonald
------------------------ ------------------------
Name: Name:
------------------------ ------------------------
Title: President Title: President
----------------------- -----------------------
YORKTOWN ENERGY PARTNERS III, L.P.
By: /s/ Peter Leidel
-------------------------------
General Partner
By:
---------------------
Name:
-------------------
Title:
------------------
DENVER:0938621.08
26
<PAGE>
EXHIBIT 11
CEC RESOURCES LTD.
Statement of Computation of Per Share Earnings
(Unaudited)
(In Thousand Except Per Share Data)
<TABLE>
<CAPTION>
Nine Months Ended August 31, Three Months Ended August 31,
---------------------------- ------------------------------
Basic: 1999 1998 1999 1998
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding: 1,529 1,542 1,521 1,539
Incremental shares attributable to dilutive stock
options and warrants outstanding based on average
market prices during the period calculated using
the treasury stock method - 4 2 4
--------- --------- --------- ---------
Diluted common and common equivalent shares 1,529 1,546 1,523 1,543
========= ========= ========= =========
Net earnings $ (188) $ 268 $ 36 $ 54
========= ========= ========= =========
Earnings per share:
Basic earnings per share $ (0.12) $ 0.17 $ 0.02 $ 0.04
========= ========= ========= =========
Diluted earnings per share $ (0.12) $ 0.17 $ 0.02 $ 0.04
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF AUGUST 31, 1999 AND THE STATEMENT OF INCOME FOR THE NINE MONTHS
ENDED AUGUST 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 0.6685
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 973
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 973
<PP&E> 23,700
<DEPRECIATION> 10,556
<TOTAL-ASSETS> 15,981
<CURRENT-LIABILITIES> 791
<BONDS> 0
0
0
<COMMON> 1,512
<OTHER-SE> 6,868
<TOTAL-LIABILITY-AND-EQUITY> 15,981
<SALES> 3,463
<TOTAL-REVENUES> 3,463
<CGS> 650
<TOTAL-COSTS> 3,769
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 136
<INCOME-PRETAX> (442)
<INCOME-TAX> (254)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (188)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
