EXECUTION VERSION
QUEST RESOURCE CORPORATION
14,650,000 Shares of Common Stock
PURCHASE/PLACEMENT AGREEMENT
November 7, 2005
PURCHASE/PLACEMENT AGREEMENT
November 7, 2005
FRIEDMAN, BILLINGS, XXXXXX & CO., INC.
0000 00xx Xxxxxx Xxxxx
Xxxxxxxxx, Xxxxxxxx 00000
Dear Sirs:
QUEST RESOURCE CORPORATION, a Nevada corporation (the "Company"), proposes
to issue and sell to you, Friedman, Billings, Xxxxxx & Co., Inc. ("FBR"), as
initial purchaser, a number of shares of the Company's common stock, par value
$0.001 per share (the "Common Stock") equal to 14,650,000 shares less the number
of Regulation D Shares sold in the Private Placement (each as defined herein)
(the "144A/Regulation S Shares").
FBR will also act as the Company's exclusive placement agent in connection
with the Company's offer and sale to certain "Accredited Investors" (as such
term is defined in Regulation D ("Regulation D") under the Securities Act of
1933, as amended (the "Securities Act") of (a) that number of shares of Common
Stock equal to the difference between 14,650,000 shares and the number of
144A/Regulation S Shares (the "Regulation D Shares" and, together with the
144A/Regulation S Shares, the "Initial Shares"), and (b) the Placed Option
Shares (as defined herein), as set forth in the Final Memorandum (as defined
herein) under the headings "Plan of Distribution" and "Private Placement". The
offer and sale of the shares described in the first sentence of this paragraph
(the "Private Placement Shares") is referred to herein as the "Private
Placement".
In addition, the Company proposes to grant to you the option described in
Section 1(c) hereof to purchase or place all or any part of 1,465,000 additional
shares of Common Stock (the "Option Shares" and, together with the Initial
Shares, the "Shares") to cover additional allotments, if any.
The offer and sale of the Shares to you and to the Accredited Investors,
respectively, will be made without registration of the Shares under the
Securities Act and the rules and regulations thereunder (the "Securities Act
Regulations"), in reliance upon the exemption from the registration requirements
of the Securities Act provided by Section 4(2) thereof. You have advised the
Company that you will make offers and sales ("Exempt Resales") of the
144A/Regulation S Shares and the Purchased Option Shares (as defined herein)
purchased by you hereunder (such shares referred to collectively herein as
"Resale Shares") in accordance with Section 3 hereof on the terms set forth in
the Final Memorandum (as defined herein), as soon as you deem advisable after
this Agreement has been executed and delivered.
In connection with the offer and sale of the Shares, the Company has
prepared a preliminary offering memorandum, subject to completion, dated October
18, 2005 (the "Preliminary Memorandum"), and a final offering memorandum, dated
the date hereof and as it may be amended or supplemented from time to time (the
"Final Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum
sets forth certain information concerning
the Company, the Subsidiaries (as defined herein) and the Shares. The Company
hereby confirms that it has authorized the use of the Preliminary Memorandum and
the Final Memorandum in connection with (i) the offering and resale of the
Resale Shares by FBR and by all dealers to whom Resale Shares may be sold and
(ii) the Private Placement. Any references to the Preliminary Memorandum or the
Final Memorandum shall be deemed to include all exhibits and annexes thereto.
It is understood and acknowledged that holders (including subsequent
transferees) of the Shares will have the registration rights set forth in the
registration rights agreement between the Company and FBR, which shall be in
substantially the form attached hereto as Exhibit A and dated as of the Closing
Time (as defined herein) (the "Registration Rights Agreement"), for so long as
such securities constitute "Registrable Shares" (as defined in the Registration
Rights Agreement).
Pursuant to, and subject to the terms of, the Registration Rights
Agreement, the Company will agree to file with the Securities and Exchange
Commission (the "Commission"), under the circumstances set forth therein, a
shelf registration statement on Form S-1 or such other appropriate form pursuant
to Rule 415 under the Securities Act relating to the resale by holders of the
Registrable Shares, and to use its best efforts to cause any such registration
statement to be declared effective.
The Company and FBR agree as follows:
1. Sale and Purchase.
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(a) 144A/Regulation S Shares. Upon the basis of the warranties and
representations and other terms and conditions herein set forth, the
Company agrees to issue and sell to FBR and FBR agrees to purchase from the
Company the 144A/Regulation S Shares at a purchase price of $12.09 per
share (the "144A/Regulation S Purchase Price").
(b) Regulation D Shares. The Company agrees to issue and sell the
Regulation D Shares and, to the extent that FBR exercises the option
described in Section 1(c), the Placed Option Shares, for which the
Accredited Investors have subscribed pursuant to the terms and conditions
set forth in the subscription agreements substantially in the forms
attached to the Preliminary Memorandum as Annex III and Annex IV, as
applicable (each a "Subscription Agreement"). The Private Placement Shares
will be sold by the Company pursuant to this Agreement at a price of $13
per share (the "Regulation D Purchase Price"). As compensation for the
services to be provided by FBR in connection with the Private Placement,
the Company shall pay to FBR at each of the Closing Time and any Secondary
Closing Time (as defined herein), to the extent applicable, an amount equal
to $0.91 per Private Placement Share sold at such time (the "Placement
Fee").
(c) Option Shares. Upon the basis of the representations and
warranties and subject to the other terms and conditions herein set forth,
the Company hereby grants an option to FBR to (i) purchase from the
Company, as initial purchaser, up to an aggregate
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of 1,465,000 Option Shares at the 144A/Regulation S Purchase Price per
share (the "Purchased Option Shares"); and (ii) place, as exclusive
placement agent for the Company, up to that number of Option Shares
remaining, after subtracting any Purchased Option Shares with respect to
which FBR has exercised its option pursuant to clause (i), at the
Regulation D Purchase Price per share (the "Placed Option Shares"). The
option granted hereby will expire thirty (30) days after the date hereof
and may be exercised in whole or in part from time to time in one or more
installments, including at the Closing Time, only for the purpose of
covering additional allotments which may be made in connection with the
offering and distribution of the Initial Shares upon written notice by FBR
to the Company setting forth (i) the number of Option Shares as to which
FBR is then exercising the option, (ii) the names and denominations for the
certificates of the Option Shares, (iii) the number of Option Shares that
will be Purchased Option Shares and the number of Option Shares that will
be Placed Option Shares, and (iv) the time and date of payment for and
delivery of such Option Shares. Any such time and date of delivery shall be
determined by FBR, but shall not be later than five (5) full business days
nor earlier than two (2) full business days after the exercise of said
option, nor in any event prior to the Closing Time, unless otherwise agreed
in writing by FBR and the Company.
2. Payment and Delivery.
(a) 144A/Regulation S Shares. The closing of FBR's purchase of the
144A/Regulation S Shares shall be held at the New York office of Akin Gump
Xxxxxxx Xxxxx & Xxxx LLP (unless another place shall be agreed upon by FBR
and the Company). At the closing, subject to the satisfaction or waiver of
the closing conditions set forth herein, FBR shall pay to the Company the
aggregate purchase price for the 144A/Regulation S Shares by wire transfer
of immediately available funds to an account previously designated by the
Company in writing against delivery by the Company of the certificates for
the 144A/Regulation S Shares to FBR in such denominations and registered in
such names as FBR shall specify. Such payment and delivery shall be made at
10:00 a.m., New York City time, on the fourth (fifth, if pricing occurs
after 4:30 p.m. New York City time) business day after the date hereof
(unless another time, not later than ten (10) business days after such
date, shall be agreed to by FBR and the Company). The time at which such
payment and delivery are actually made is hereinafter sometimes called the
"Closing Time".
(b) Regulation D Shares. At the Closing Time, subject to the
satisfaction of the closing conditions set forth herein, FBR shall pay to
the Company the aggregate applicable purchase price for the Regulation D
Shares received by FBR prior to the Closing Time (net of any Placement Fee,
if the Placement Fee is withheld as provided in the immediately following
paragraph) against the Company's delivery of the certificates for the
Regulation D Shares to FBR, as placement agent in respect of such shares
for each such Accredited Investor. In addition, if within thirty (30) days
after the Closing Time, FBR receives the applicable purchase price for any
Regulation D Shares that were not issued at the Closing Time, FBR shall pay
to the Company such aggregate applicable purchase price (net of any
Placement Fee) by wire transfer of immediately available funds against the
Company's delivery of the certificates for the applicable Regulation D
Shares to FBR for each such Accredited Investor. Each such post-Closing
Time payment and delivery shall occur at such time and
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place to be mutually agreed upon by FBR and the Company. Each time at which
such payment and delivery are actually made is hereinafter sometimes called
a "Secondary Closing Time".
At each of the Closing Time and any such Secondary Closing Time,
unless FBR has withheld such amount from the applicable purchase price paid
by FBR to the Company with respect to the Regulation D Shares placed by FBR
on such date, the Company shall pay to FBR, by wire transfer of immediately
available funds to an account or accounts designated by FBR, any Placement
Fee amount payable with respect to the Regulation D Shares issued at such
Closing Time or such Secondary Closing Time for which the Company shall
have received the purchase price.
(c) Option Shares. The closing of FBR's purchase or placement of the
Option Shares shall occur from time to time at the New York office of Akin
Gump Xxxxxxx Xxxxx & Xxxx LLP (unless another place shall be agreed upon by
FBR and the Company). On the applicable Secondary Closing Time (as defined
herein), subject to the satisfaction or waiver of the closing conditions
set forth herein, FBR shall pay to the Company the aggregate applicable
purchase price for the Option Shares then purchased or placed by FBR (net
of any Placement Fee with respect to any Placed Option Shares) by wire
transfer of immediately available funds against the Company's delivery of
the Option Shares. Such payment and delivery shall be made at 10:00 a.m.,
New York City time, on each Secondary Closing Time. The certificates for
the Option Shares shall be delivered, in such names and in such
denominations as FBR shall specify. The time at which payment by FBR for
and delivery by the Company of any Option Shares are actually made is also
referred to herein as a "Secondary Closing Time".
3. Offering of the Shares; Restrictions on Transfer.
(a) FBR represents and warrants to and agrees with the Company that
(i) it has not solicited and will not solicit any offer to buy, and has not
and will not make any offer to sell, the Shares by means of any form of
general solicitation or general advertising (within the meaning of
Regulation D), and, with respect to Resale Shares sold in reliance on
Regulation S under the Securities Act ("Regulation S"), by means of any
directed selling efforts (within the meaning of Regulation S) in the United
States; and (ii) it has solicited and will solicit offers to buy the Resale
Shares only from, and has offered and will offer, sell and deliver the
Resale Shares only to, (A) persons who it reasonably believes to be
"qualified institutional buyers" (as defined in Rule 144A under the
Securities Act) ("QIBs") or, if any such person is buying for one or more
institutional accounts for which such person is acting as fiduciary or
agent, only when such person has represented to it that each such account
is a qualified institutional buyer to whom notice has been given that such
sale or delivery is being made in reliance on Rule 144A, and, in each case,
in transactions under Rule 144A and who provide to it a fully completed and
executed purchaser's letter substantially in the form of Annex I to the
Preliminary Memorandum or Final Memorandum, and (B) persons (each a
"Regulation S Purchaser") to whom, and under which circumstances, it
reasonably believes offers and sales of Resale Shares may be made without
registration under the Securities Act in reliance on Regulation S
thereunder, and who provide to it a fully completed and executed
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purchaser's letter substantially in the form of Annex II to the Preliminary
Memorandum or Final Memorandum (such persons specified in clauses (A) and
(B) being referred to herein as the "Eligible Purchasers").
(b) The Company represents and warrants to and agrees with FBR that,
assuming the accuracy of FBR's representations and warranties and FBR's
compliance with its obligations set forth in this Section 3, it (together
with its affiliates) has not solicited and will not solicit any offer to
buy, and it (together with its affiliates) has not offered and will not
offer to sell, the Shares by means of any form of general solicitation or
general advertising (within the meaning of Regulation D), and it has
solicited and will solicit offers to buy the Private Placement Shares only
from, and has offered and will offer, sell or deliver the Shares only to,
Accredited Investors. The Company also represents and warrants and agrees
that it will sell the Private Placement Shares only to persons that have
provided to the Company a fully completed and executed Subscription
Agreement in the form of Annex III or Annex IV, as applicable, to the
Preliminary Memorandum or Final Memorandum.
(c) The Company represents and warrants to and agrees with FBR that,
assuming the accuracy of FBR's representations and warranties and FBR's
compliance with its obligations set forth in this Section 3, (i) none of
the Company or its affiliates or any person acting on behalf of it or its
affiliates has engaged in, nor will it engage in, any directed selling
efforts (as that term is defined in Regulation S) with respect to the
Shares; and (ii) the Company, its affiliates, and any person acting on
behalf of it or its affiliates (in each case, other than FBR as to which
the Company makes no representation) have complied, and will comply, with
the offering restrictions requirement of Regulation S.
(d) FBR represents and warrants that it has not offered or sold, nor
will it offer or sell, any Resale Shares in a jurisdiction outside of the
United States except in material compliance with all applicable laws,
regulations and rules of those countries.
(e) Each of FBR and the Company represents and warrants to the other
that no action is being taken or is contemplated that would permit an
offering or sale of the Shares or possession or distribution of the
Preliminary Memorandum or the Final Memorandum or any other offering
material relating to the Shares in any jurisdiction where, or in any other
circumstances in which, action for those purposes is required (other than
in jurisdictions where such action has been duly taken by counsel for FBR).
(f) FBR and the Company agree that FBR may arrange (i) for the private
offer and sale of a portion of the Resale Shares to a limited number of
Eligible Purchasers (which may include affiliates of FBR), and (ii) for the
private offer and sale of the Private Placement Shares by the Company to
Accredited Investors (which may include affiliates of FBR), in each case
under restrictions and other circumstances designed to preclude a
distribution of the Shares that would require registration of the Shares
under the Securities Act.
(g) FBR and the Company agree that the Shares may be resold or
otherwise transferred by the holders thereof only if the offer and sale of
such Shares are registered
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under the Securities Act or if an exemption from registration is available.
FBR hereby establishes and agrees that it has observed and will observe the
following procedures in connection with offers, sales and subsequent
resales or other transfers of any Shares placed by FBR:
(i) Sales only to Eligible Purchasers. Initial offers and sales
of the Resale Shares will be made only in Exempt Resales by FBR to
investors that FBR reasonably believes to be Eligible Purchasers and
who have delivered to the Company and FBR a fully completed and
executed purchaser's letter substantially in the form of Annex I or
II, as applicable, to the Preliminary Memorandum or Final Memorandum.
(ii) No general solicitation. The Shares will be offered only by
approaching prospective purchasers on an individual basis with whom
FBR has an existing relationship. No general solicitation or general
advertising within the meaning of Regulation D will be used in
connection with the offering of the Shares.
(iii) Restrictions on transfer. The Final Memorandum shall state
that the offer and sale of the Shares have not been and will not be
registered (other than pursuant to the Registration Rights Agreement)
under the Securities Act, and that no resale or other transfer of any
Shares or any interest therein prior to the date that is two years (or
such shorter period as is prescribed by Rule 144(k) under the
Securities Act as then in effect) after the later of the original
issuance of such Shares and the last date on which the Company or any
"affiliate" (as defined in Rule 144 under the Securities Act) of the
Company was the owner of such Shares may be made by a purchaser of
such Shares except as follows:
(A) to the Company or any subsidiary thereof,
(B) pursuant to a registration statement that has been
declared effective under the Securities Act,
(C) for so long as the Shares are eligible for resale
pursuant to Rule 144A under the Securities Act, in a transaction
complying with the requirements of Rule 144A to a person who such
purchaser reasonably believes is a QIB that purchases for its own
account or for the account of a QIB and to whom notice is given
that the offer, resale, pledge or transfer is being made in
reliance on Rule 144A,
(D) pursuant to offers and sales to non-U.S. persons that
occur outside the United States within the meaning of Regulation
S, with the consent of the Company,
(E) to an Accredited Investor that is acquiring the Shares
for his, her or its own account or an investment adviser who is
acquiring the Shares for the account of an Accredited Investor
for investment purposes
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and not with a view to, or for offer or sale in connection with,
any distribution thereof, or
(F) pursuant to any other available exemption from the
registration requirements of the Securities Act,
in each case in accordance with any applicable federal securities laws
and the securities laws of any state of the United States or other
jurisdiction.
(h) FBR and the Company agree that each initial resale of Resale
Shares by FBR (and each purchase of Resale Shares from the Company by FBR)
in accordance with this Section 3 shall be deemed to have been made on the
basis of and in reliance on the representations, warranties, covenants and
agreements (including, without limitation, agreements with respect to
indemnification and contribution) of the Company and the Company Group (as
defined herein) herein contained.
4. Representations and Warranties of the Company.
---------------------------------------------
The Company, Quest Cherokee, LLC, Bluestem Pipeline, LLC and Quest Cherokee
Oilfield Service, LLC (collectively, the "Company Group") hereby jointly and
severally represent and warrant to FBR that, as of the date of this Agreement or
such other date set forth in the specific representation or warranty, whichever
is applicable:
(a) the Preliminary Memorandum did not, as of its date, contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; and the Final
Memorandum will not, as of its date, at Closing Time and each Secondary
Closing Time (if any), contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that this representation and warranty shall
not apply to any statement in or omission from the Preliminary Memorandum
or Final Memorandum made in reliance upon and in conformity with
information furnished to the Company in writing by FBR expressly for use
therein (that information being limited to that described in the last
sentence of Section 8(b) hereof);
(b) the Company is a corporation duly organized and validly existing
and in good standing under the laws of the State of Nevada, with requisite
corporate power and authority to own, lease or operate its properties and
to conduct its business as described in the Final Memorandum and to execute
and deliver this Agreement and the Registration Rights Agreement, and to
consummate the transactions contemplated hereby (including the issuance,
sale and delivery of the Shares) and thereby;
(c) each member of the Company Group and each of STP Cherokee, Inc.,
Quest Oil & Gas Corporation, Quest Energy Service, Inc., Ponderosa Gas
Pipeline Company, Inc., Producers Service, Incorporated and X-X Gas
Gathering, LLC (each, a "Subsidiary" and, collectively, the "Subsidiaries")
is a corporation or limited liability company duly organized or formed, as
applicable, and validly existing and in good
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standing under the laws of its jurisdiction of incorporation or formation,
as applicable, with requisite corporate or limited liability company power
and authority, as applicable, to own, lease or operate its properties and
to conduct its business as described in the Final Memorandum and to execute
and deliver this Agreement, and to consummate the transactions contemplated
hereby, as applicable;
(d) all issued and outstanding shares or membership interests, as
applicable, of each Subsidiary have been duly authorized and validly
issued, are fully paid and nonassessable, and have not been issued in
violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
shareholders or members arising by operation of law, under the certificate
of incorporation, certificate of formation, by-laws, limited liability
company agreement, or other organizational documents (collectively, the
"Charter Documents"), as applicable, of such Subsidiary under any agreement
to which such Subsidiary is a party or otherwise, and, as of the Closing
Time, will be owned by the Company, directly or indirectly, as the case may
be, free and clear of any pledge, security interests, liens, encumbrances,
claims or equitable interests, other than as disclosed in the Final
Memorandum. The Company does not, and as of the Closing Time will not, own
or control, directly or indirectly, any corporation, association or other
entity other than the Subsidiaries;
(e) the Company had, at the date indicated, the duly authorized
capitalization set forth in the Final Memorandum under the caption
"Capitalization"; all of the issued and outstanding shares of capital stock
of the Company have been duly and validly authorized and issued and are
fully paid and non-assessable, and have not been issued in violation of or
subject to any preemptive right or other similar right of stockholders
arising by operation of law, under the certificate of incorporation or
by-laws of the Company, under any agreement to which the Company is a party
or otherwise; except as disclosed in or contemplated by the Final
Memorandum, there are no outstanding (i) securities or obligations of the
Company or any Subsidiary convertible into or exchangeable for any capital
stock of the Company, (ii) warrants, rights or options to subscribe for or
purchase from the Company any such capital stock or any such convertible or
exchangeable securities or obligations or (iii) obligations of the Company
or any Subsidiary to issue or sell any shares of capital stock, any such
convertible or exchangeable securities or obligation, or any such warrants,
rights or options;
(f) the Shares have been duly authorized for issuance, sale and
delivery pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and
nonassessable, free and clear of any pledge, lien, encumbrance, security
interest or other claim created by or as a result of actions taken by the
Company, and the issuance, sale and delivery of the Shares by the Company
are not subject to preemptive right, co-sale right, registration right,
right of first refusal or other similar right of stockholders arising by
operation of law, under the articles of incorporation or by-laws of the
Company, under any agreement to which the Company is a party or otherwise,
other than as provided for in the Registration Rights Agreement; the Shares
satisfy the requirements set forth in Rule 144A under the Securities Act;
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(g) each of the Company and each Subsidiary is duly qualified or
licensed by, and is in good standing in, each jurisdiction in which it
conducts its business or in which it owns or leases property or maintains
an office and in which such qualification or licensing is necessary and in
which the failure, individually or in the aggregate, to be so qualified or
licensed could reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), results of operations or
prospects of the Company and the Subsidiaries taken as a whole (a "Material
Adverse Effect");
(h) each of the Company and the Subsidiaries has Title (as defined
below) to all of the producing gas and oil interests and rights reflected
as owned by them in the Final Memorandum (whether through fee ownership,
mineral estates or similar rights of ownership), with title investigations
having been carried out by or on behalf of such person in accordance with
reasonable practice in the gas industry in the areas in which the Company
and the Subsidiaries operate, and good and marketable title to
substantially all other real and personal property reflected as assets
owned by them in the Final Memorandum, in each case free and clear of all
liens, security interests, pledges, charges, encumbrances, mortgages and
defects, except such as are disclosed in the Final Memorandum or as could
not reasonably be expected to have a Material Adverse Effect; each of the
Company and the Subsidiaries has those ownership rights to all undeveloped
oil and gas interests and rights reflected as owned by them in the Final
Memorandum, subject to the matters set forth in the Final Memorandum under
"Risk Factors--We may incur losses as a result of title deficiencies in the
properties in which we invest" and have conducted limited title
investigations with respect to such undeveloped properties; any real
property or personal property held under lease by the Company or any of the
Subsidiaries is held under a lease that is valid, existing and enforceable
by the Company or such Subsidiary, with such exceptions as are disclosed in
the Final Memorandum or as could not reasonably be expected to have a
Material Adverse Effect, and neither the Company or any Subsidiary has any
notice of any material claim of any sort that has been asserted by anyone
adverse to the rights of the Company or any Subsidiary under any such lease
or affecting or questioning the rights of the Company or such Subsidiary to
the continued possession of the leased premises under such lease, except
for such claims as are disclosed in the Final Memorandum or as could not
reasonably be expected to have a Material Adverse Effect; the gas and
mineral leases, options to lease, drilling rights and concessions or other
property interests held or leased by the Company or its Subsidiaries
reflect in all material respects the right of the Company and its
Subsidiaries to explore, develop or receive production from the undeveloped
properties described in the Final Memorandum, and the care taken by the
Company and its Subsidiaries with respect to acquiring or otherwise
procuring such leases, options to lease, drilling rights and concessions or
other property interests was generally consistent with standard industry
practices in the areas in which the Company operates for acquiring or
procuring leases and interests therein to explore, develop or produce
coalbed methane; "Title" as used in this Section 4(h), shall mean title
that is free from reasonable doubt to the end that a prudent operator
engaged in the business of the ownership, development and operation
of producing coalbed methane gas properties or oil properties, as
applicable, with knowledge of all of the facts and their legal bearing
would be willing to accept and bear the risk of additional investment in
such coalbed methane gas or oil property, respectively, in the areas in
which the Company and the Subsidiaries operate;
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(i) the Company and the Subsidiaries own or possess such licenses or
other rights to use all patents, trademarks, service marks, trade names,
copyrights, software and design licenses, trade secrets, manufacturing
processes, other intangible property rights and know-how (collectively
"Intangibles"), as are necessary to entitle the Company and the
Subsidiaries, taken as a whole, to conduct the Company's business as
described in the Final Memorandum, and neither the Company nor any of the
Subsidiaries has received written notice of any infringement of or conflict
with (and, upon due inquiry, neither the Company nor any member of the
Company Group knows of any such infringement of or conflict with) asserted
rights of others with respect to any Intangibles which could reasonably be
expected to have a Material Adverse Effect;
(j) neither the Company nor any of the Subsidiaries has violated, or
received notice of any violation with respect to, any law, rule,
regulation, order decree or judgment applicable to it and its business,
including those relating to transactions with affiliates, environmental,
safety or similar laws, federal or state laws relating to discrimination in
the hiring, promotion or pay of employees, federal or state wages and hours
law, the Employee Retirement Income Security Act or the rules and
regulations promulgated thereunder, except for those violations as would
not reasonably be expected, individually or in the aggregate, to have a
Material Adverse Effect;
(k) neither the Company nor any Subsidiary nor, to the knowledge of
the Company, any officer, director, agent or employee purporting to act on
behalf of the Company or any Subsidiary has at any time, directly or
indirectly, (i) made any contributions to any candidate for political
office, or failed to disclose fully any such contributions, in violation of
law, (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or allowed by applicable
law (including the Foreign Corrupt Practices Act of 1977, as amended),
(iii) engaged in any transactions, maintained any bank account or used any
corporate funds except for transactions, bank accounts and funds which have
been and are reflected in the normally maintained books and records of the
Company and the Subsidiaries, (iv) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended, or (v) made any other unlawful
payment;
(l) except with respect to FBR, neither the Company nor any Subsidiary
has incurred any liability for any finder's fees or similar payments in
connection with the transactions contemplated hereby, except for any fees
payable in connection with the new credit facilities;
(m) neither the Company nor any of the Subsidiaries is in breach of,
or in default under (nor has any event occurred which with notice, lapse of
time, or both would constitute a breach of, or default under), its
respective Charter Documents or in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
agreement, instrument and other document described in or filed as an
exhibit to the Company's Form 10-KSB for the transition period ended
December 31, 2004, or in any subsequent filings with the Commission (each,
a "Material Agreement"), except for such breaches or defaults which would
not have a Material Adverse Effect;
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(n) the execution, delivery and performance of this Agreement by the
Company and each other member of the Company Group, of the Agreement for
Purchase and Sale of Units, by and between Cherokee Energy Partners LLC and
certain of the Company's Subsidiaries (the "ArcLight Agreement"), and of
the revolving loan agreement and the term loan agreements
------------------ provided by Guggenheim Corporate Funding, LLC (the
"Credit Facilities") (collectively, the "Transaction Agreements") and of
the Registration Rights Agreement by the Company, and -----------------
---------------------- the issuance, sale and delivery of the Shares by the
Company and the consummation by the Company and each other member of the
Company Group of the transactions contemplated hereby and, in the case of
the Company only, thereby, and compliance by the Company and each other
member of the Company Group with the terms and provisions hereunder and, in
the case of the Company only, thereunder will not conflict with, or result
in any breach of or constitute a default under (nor constitute any event
which with notice, lapse of time, or both would constitute a breach of, or
default under), (i) any provision of the Charter Documents of the Company
or any Subsidiary, (ii) any provision of any Material Agreement, or (iii)
any federal, state, local or foreign law, regulation or rule or any decree,
judgment, permit or order applicable to the Company or any of the
Subsidiaries, except in the case of clauses (ii) or (iii) for such
conflicts, breaches or defaults which have been validly waived or would not
reasonably be expected to have a Material Adverse Effect or, except for
liens created under the Credit Facilities, result in the creation or
imposition of any material lien, charge, claim or encumbrance upon any
property or asset of the Company or the Subsidiaries;
(o) (i) each of this Agreement and the ArcLight Agreement has been
duly authorized, executed and delivered by the Company and each other
member of the Company Group, as applicable, and constitutes a legal, valid
and binding agreement of the Company and such member of the Company Group,
as applicable, enforceable in accordance with its terms, (ii) the
Registration Rights Agreement has been duly authorized by the Company and
at the Closing Time will have been duly executed and delivered by the
Company and will constitute a legal, valid and binding agreement of the
Company enforceable in accordance with its terms, and (iii) at the Closing
Time, the Credit Facilities will have been duly authorized, executed and
delivered by the Company and each other member of the Company Group, as
applicable, and will constitute a legal, valid and binding agreement of the
Company and such member of the Company Group, as applicable, enforceable in
accordance with its terms, except in each case as may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, and by general principles of equity,
and except to the extent that the indemnification provisions hereof or
thereof may be limited by federal or state securities laws and public
policy considerations in respect thereof;
(p) the descriptions of the Shares, the Transaction Agreements and the
Registration Rights Agreement contained in the Final Memorandum constitute
a fair, accurate and complete summary of the material terms and provisions
thereof; the form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements
(including any requirement under Nevada law) and with any applicable
requirements of the Charter Documents of the Company;
11
(q) assuming the accuracy of FBR's representations and warranties set
forth in Section 3 of this Agreement, the accuracy of the representations
and warranties of the purchasers of the Resale Shares set forth in their
respective subscription agreements or purchaser's letters, and that the
purchasers who buy the Resale Shares in Exempt Resales are Eligible
Purchasers, no approval, authorization, consent or order of or filing with
any federal, state, local or foreign governmental or regulatory commission,
board, body, authority or agency is required in connection with the
execution, delivery and performance by the Company and each other member of
the Company Group of this Agreement or, in the case of the Company only,
the Registration Rights Agreement, or the consummation by the Company and
each other member of the Company Group of the transactions contemplated
hereby and, in the case of the Company, thereby, or the issuance, sale and
delivery of the Shares as contemplated hereby, other than (i) such as have
been obtained or made, or will have been obtained or made at the Closing
Time, (ii) any necessary qualification under the securities or blue sky
laws of the various jurisdictions in which the Shares are being offered or
placed by FBR, (iii) with or by federal or state securities regulatory
authorities in connection with or pursuant to the Registration Rights
Agreement, including without limitation the filing of the registration
statement(s) required thereby with the Commission, and (iv) the filing of a
Form D with the Commission and with the applicable state regulatory
authorities;
(r) each of the Company and each Subsidiary has all necessary
licenses, permits, certificates, authorizations, consents and approvals and
has made all necessary filings required under any federal, state, local or
foreign law, regulation or rule, and has obtained all necessary licenses,
permits, certificates, authorizations, consents and approvals from other
persons, required in order to conduct its respective business as described
in the Final Memorandum, except to the extent that any failure to have any
such licenses, permits, certificates, authorizations, consents or
approvals, to make any such filings or to obtain any such licenses,
permits, certificates, authorizations, consents or approvals would not,
alone or in the aggregate, reasonably be expected to have a Material
Adverse Effect; neither the Company nor any Subsidiary is in violation of,
or in default under, any such license, permit, certificate, authorization,
consent or approval or any federal, state, local or foreign law, regulation
or rule or any decree, order or judgment applicable to the Company or such
Subsidiary, the effect of which could reasonably be expected to have a
Material Adverse Effect;
(s) the Final Memorandum contains accurate summaries in all material
respects of all material contracts, agreements, instruments and other
documents of the Company that would be required to be described in a
prospectus included in a registration statement on Form S-1 under the
Securities Act; the copies of all contracts, agreements, instruments and
other documents (including governmental licenses, authorizations, permits,
consents and approvals and all amendments or waivers relating to any of the
foregoing) that have been previously furnished to FBR or its counsel are
complete and genuine and include all material collateral and supplemental
agreements thereto;
(t) other than as set forth in the Final Memorandum, and except as to
such matters as would not reasonably be expected to have a Material Adverse
Effect, there are no actions, suits or proceedings pending or, to the
knowledge of the Company or any
12
Subsidiary, threatened, nor to the knowledge of the Company are any
inquiries or investigations pending or threatened, against the Company or
such Subsidiary, or any of their respective properties, directors or
officers (in their capacity as an officer or director) at law or in equity,
or before or by any federal, state, local or foreign governmental or
regulatory commission, board, body, authority or agency; other than FBR,
the Company has not authorized anyone to make any representations regarding
the offer and sale of the Shares, or regarding the Company in connection
therewith; the Company has not received notice of any order or decree
preventing the use of the Preliminary Memorandum or the Final Memorandum or
any amendment or supplement thereto, or any order asserting that the
transactions contemplated by this Agreement are subject to the registration
requirements of the Securities Act, has been issued and no proceeding for
that purpose has commenced or is pending or, to its knowledge, is
contemplated;
(u) no securities of the Company are of the same class (within the
meaning of Rule 144A under the Securities Act) as the Shares and listed on
a national securities exchange registered under Section 6 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or quoted in a U.S.
automated inter-dealer quotation system;
(v) subsequent to the date of the Final Memorandum, and except as may
be otherwise stated in the Final Memorandum, there has not been (i) any
event, circumstance or change that has, or could reasonably be expected to
have, a Material Adverse Effect, (ii) any transaction, other than in the
ordinary course of business, which is material to the Company or any of the
Subsidiaries, contemplated, other than as discussed with FBR, or entered
into by the Company or any of the Subsidiaries, (iii) any obligation,
contingent or otherwise, directly or indirectly incurred by the Company or
any of the Subsidiaries, other than in the ordinary course of business,
which is material to the Company or such Subsidiary, (iv) any dividend or
distribution of any kind declared, paid or made by the Company on any class
of its capital stock, or any purchase by the Company of any of its
outstanding capital stock, or (v) other than with respect to the
reorganization of the Company as described in the Final Memorandum, any
change of the capital stock or indebtedness of the Company and the
Subsidiaries;
(w) neither the Company nor any of the Subsidiaries is, nor upon the
sale of the Shares as contemplated herein and the application of the net
proceeds therefrom as described in the Final Memorandum under the caption
"Use of Proceeds", will be, an "investment company" or is an entity
"controlled" by an "investment company", or will be, assuming that the sale
of the Shares does not result in any individual investment company to hold
over 25% of the stock outstanding after the offering, an entity
"controlled" by an "investment company" (as such terms are defined in the
Investment Company Act of 1940, as amended);
(x) as of the Closing Time, there will be no persons with registration
or other similar rights to have any securities registered by the Company or
any of the Subsidiaries under the Securities Act other than pursuant to the
Registration Rights Agreement;
(y) the Company has not relied upon FBR or legal counsel for FBR for
any legal, tax or accounting advice in connection with the offering and
sale of the Shares;
13
(z) INTENTIONALLY OMITTED
(aa) in connection with the offering of the Shares, neither the
Company, any of the Subsidiaries, nor any of their respective affiliates
(as defined in Section 501(b) of Regulation D) has, whether directly or
through any agent or person acting on its behalf (other than FBR): (i)
offered Common Stock of the Company or any other securities convertible
into or exchangeable or exercisable for such Common Stock in a manner in
violation of the Securities Act or the rules and regulations thereunder,
(ii) distributed any other offering material in connection with the offer
and sale of the Shares, other than as described in the Preliminary
Memorandum or Final Memorandum, or (iii) sold, offered for sale, solicited
offers to buy or otherwise negotiated in respect of any security (as
defined in the Securities Act) which is or will be integrated with the
offering and sale of the Shares in a manner that would require the
registration of the Shares under the Securities Act;
(bb) neither the Company nor any of its affiliates (i) is required to
register as a "broker" or "dealer" in accordance with the provisions of the
Exchange Act or the rules and regulations thereunder, or (ii) directly, or
indirectly through one or more intermediaries, controls or has any other
association with (within the meaning of Article 1 of the By-Laws of the
National Association of Securities Dealers, Inc. (the "NASD")) any member
firm of the NASD;
(cc) none of the Company, any Subsidiary or any of their respective
directors, officers, representatives or affiliates have taken, directly or
indirectly, any action intended, or which might reasonably be expected, to
cause or result, under the Securities Act, the Exchange Act or otherwise,
in, or which has constituted, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares;
(dd) each of the Company and the Subsidiaries carry, or are covered
by, insurance (issued by insurers of recognized financial responsibility to
the knowledge of the Company) in such amounts and covering such risks as is
adequate for the conduct of their respective businesses and the value of
the assets to be held by them upon the consummation of the transactions
contemplated by the Final Memorandum and as is customary for companies
engaged in the gas exploration and production industries, all of which
insurance is in full force and effect;
(ee) the financial statements, including the notes thereto, included
in the Final Memorandum fairly present in all material respects the
financial condition of the Company and the Subsidiaries as of the
respective dates thereof, and the results of their operations for the
periods then ended, correctly reflect and disclose all extraordinary items,
and have been prepared in conformity with U.S. generally accepted
accounting principles applied on a consistent basis;
(ff) Murrell, Hall, XxXxxxxx & Co., PLLP, who have certified certain
financial statements included in the Final Memorandum, whose report with
respect to such financial statements included in the Final Memorandum is
included in the Final
14
Memorandum and who have delivered the comfort letter referred to in Section
6(b) hereof, is an independent registered public accounting firm with
respect to the Company within the meaning of the Securities Act or the
Securities Act Regulations.
(gg) as of the Closing Time, except as disclosed in the Final
Memorandum and to the extent permitted by applicable law, no Subsidiary is
currently prohibited, directly or indirectly, from (i) paying any dividends
or distributions to the Company to the extent permitted by applicable law,
from making any other distribution on such Subsidiary's issued and
outstanding capital stock, (ii) repaying to the Company any loans or
advances to such Subsidiary from the Company or (iii) transferring any of
the property or assets of such Subsidiary to the Company;
(hh) neither the Company, nor any Subsidiary, nor to the Company's
knowledge, any employee or agent of the Company or its Subsidiaries, has
made any payment of funds of the Company or a Subsidiary or received or
retained any funds in violation of any law, rule or regulation, including
without limitation the "know your customer" and anti-money laundering laws
of any jurisdiction;
(ii) any certificate signed by any officer of the Company delivered to
FBR or to counsel for FBR pursuant to or in connection with this Agreement
shall be deemed a representation and warranty by the Company and each other
member of the Company Group to FBR as to the matters covered thereby;
(jj) except where such failure to file or pay an assessment or lien
would not in the aggregate reasonably be expected to have a Material
Adverse Effect or where such matters are the result of a pending bona fide
dispute with taxing authorities, (i) the Company has accurately prepared
and timely filed any and all federal, state, foreign and other tax returns
that are required to be filed by it, if any, and has paid or made provision
for the payment of all taxes, assessments, governmental or other similar
charges, including without limitation, all sales and use taxes and all
taxes which the Company is obligated to withhold from amounts owing to
employees, creditors and third parties, with respect to the periods covered
by such tax returns (whether or not such amounts are shown as due on any
tax return); (ii) no deficiency assessment with respect to a proposed
adjustment of the Company's federal, state, local or foreign taxes is
pending or, to the best of the Company's knowledge, threatened; (iii) since
the date of the most recent audited financial statements, the Company has
not incurred any liability for taxes other than in the ordinary course of
its business; and (iv) there is no tax lien, whether imposed by any
federal, state, foreign or other taxing authority, outstanding against the
assets, properties or business of the Company;
(kk) except as described in the Final Memorandum and except as would
not in the aggregate reasonably be expected to have a Material Adverse
Effect, (i) neither the Company nor any of the Subsidiaries is in violation
of any federal, state, local or foreign statute, law, rule, regulation,
ordinance, code, policy or rule of common law or any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution or
protection of human health, the environment (including, without limitation,
ambient air, surface water, groundwater,
15
land surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products, asbestos-containing
materials or mold (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials (collectively, "Environmental
Laws"), (ii) the Company and the Subsidiaries have all permits,
authorizations and approvals required under any applicable Environmental
Laws and are each in compliance with their requirements, (iii) there are no
pending or, to the knowledge of the Company, threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company, or any of the
Subsidiaries, and (iv) to the knowledge of the Company, there are no events
or circumstances that would reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of the Subsidiaries relating to Hazardous Materials or any
Environmental Laws;
(ll) the information underlying the estimates of the Company's proved
reserves that was supplied to Xxxxxx, Xxxxxxxxx & Associates, Inc. (the
"Reservoir Engineer") for the purposes of preparing the reserve reports and
estimates of the proved reserves of the Company disclosed in the Final
Memorandum, including production and costs of operation, was true and
correct in all material respects on the dates such estimates were made, and
such information was supplied and was prepared in accordance with customary
industry practices; other than normal production of the reserves, product
price fluctuations, and fluctuations of demand for such products, and
except as disclosed in the Final Memorandum, the Company is not aware of
any facts or circumstances that would result in a materially adverse change
in the aggregate net reserves, or the present value of the future net cash
flows therefrom as described in the Final Memorandum and as reflected in
the reserve report the Reservoir Engineer prepared; the estimates of such
reserves and present value as described in the Final Memorandum and
reflected in the reserve report referenced therein have been prepared in a
manner that complies with the applicable requirements of the rules under
the Securities Act with respect to proved reserves; and
(mm) the Reservoir Engineer is an independent petroleum engineer with
respect to the Company.
5. Certain Covenants of the Company. The Company hereby agrees with FBR
(and each other member of the Company Group agrees to take all actions within
their power to cause the Company):
(a) to furnish such information as may be required and otherwise to
cooperate in qualifying the Shares for offer and sale under the securities
or blue sky laws of such states and other jurisdictions as FBR may
designate or as required for the Private Placement and to maintain such
qualifications in effect as long as required by such laws for the
distribution of the Shares and for the Exempt Resales of the Resale Shares;
provided, however, that the Company shall not be required to qualify as a
foreign
16
corporation or to consent to the service of process under the laws of, or
subject itself to taxation as doing business in, any such state or other
jurisdiction (except service of process with respect to the offering and
sale of the Shares);
(b) to prepare the Final Memorandum in a form approved by FBR and to
furnish promptly (and with respect to the initial delivery of such Final
Memorandum, not later than 10:00 a.m. (New York City time) on the second
day following the execution and delivery of this Agreement) to FBR or to
purchasers upon the direction of FBR as many copies of the Final Memorandum
(and any amendments or supplements thereto) as FBR may reasonably request
for the purposes contemplated by this Agreement;
(c) to advise FBR promptly, confirming such advice in writing, of: (i)
the happening of any event known to the Company within the time during
which the Final Memorandum shall (in the view of FBR) be required to be
distributed by FBR in connection with an Exempt Resale (and FBR hereby
agrees to notify the Company in writing when the foregoing time period has
ended) which, in the judgment of the Company, would require the making of
any change in the Final Memorandum then being used so that the Final
Memorandum would not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are
made, not misleading; and (ii) the receipt of any notification with respect
to the modification, rescission, withdrawal or suspension of the
qualification of the Shares, or of any exemption from such qualification or
from registration of the Shares, for offering or sale in any jurisdiction,
or of the initiation or threatening of any proceedings for any of such
purposes and, if any government agency or authority should issue any such
order, to make every reasonable effort to obtain the lifting or removal of
such order as soon as possible;
(d) to furnish to FBR for a period of two years from the Closing Time
(i) copies of all annual, quarterly and current reports supplied to holders
of the Shares, (ii) if requested in writing by FBR, a copy of all reports
filed by the Company with the Commission, provided that any document filed
electronically with the Commission shall satisfy the above delivery
requirements with respect to such document, and (iii) such other
information as FBR may reasonably request regarding the Company or the
Subsidiaries, provided that FBR agrees to keep any non-public information
delivered to it confidential;
(e) not to amend or supplement the Final Memorandum prior to the
Closing Time or any Secondary Closing Time unless FBR shall previously have
been advised thereof and shall have consented thereto or not have
reasonably objected thereto (for legal reasons) in writing within a
reasonable time after being furnished a copy thereof;
(f) during any period in the two years (or such shorter period as may
then be applicable under the Securities Act regarding the holding period
for securities under Rule 144(k) under the Securities Act or any successor
rule) after the Closing Time in which the Company is not subject to Section
13 or 15(d) of the Exchange Act to furnish, upon request, to any holder of
such Shares the information ("Rule 144A Information")
17
specified in Rule l44A(d)(4) under the Securities Act, and any such Rule
l44A Information will not, at the date thereof, contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they are made, not misleading;
(g) to apply the net proceeds from the sale of the Shares in the
manner set forth under the caption "Use of Proceeds" in the Final
Memorandum, including the repayment of indebtedness owed to ArcLight Energy
Partners Fund I, L.P. contemporaneously with or immediately following the
Closing Time;
(h) that neither the Company, nor any of the Subsidiaries, nor any of
their respective affiliates (as defined in Section 501(b) of Regulation D)
will, whether directly or through any agent or person acting on its behalf
(other than FBR): (i) offer Common Stock of the Company or any other
securities convertible into or exchangeable or exercisable for such Common
Stock in a manner in violation of the Securities Act or the rules and
regulations thereunder, (ii) distribute any other offering material in
connection with the offer and sale of the Shares, other than as described
in the Preliminary Memorandum or Final Memorandum, or (iii) sell, offer for
sale, solicit offers to buy or otherwise negotiate in respect of any
security (as defined in the Securities Act), any of which will be
integrated with the offering and sale of the Shares in a manner that would
require the registration under the Securities Act of the sale to FBR or the
Eligible Purchasers of the Resale Shares or to the Accredited Investors of
the Private Placement Shares;
(i) that neither the Company nor any of its affiliates will take,
directly or indirectly, any action designed to, or that might be reasonably
expected to, cause or result in stabilization or manipulation of the price
of the Shares, provided that FBR may engage in stabilizing transactions as
contemplated in "Plan of Distribution" in the Final Memorandum;
(j) that, except as permitted by the Securities Act, neither the
Company nor any of its affiliates will distribute any offering materials in
connection with Exempt Resales;
(k) to pay all expenses, fees and taxes in connection with (i) the
preparation of the Preliminary Memorandum and the Final Memorandum, and any
amendments or supplements thereto, and the printing and furnishing of
copies of each thereof to FBR (including costs of mailing and shipment),
(ii) the preparation, issuance, sale and delivery of the Shares, including
any stock or other transfer taxes or duties payable upon the sale of the
Resale Shares to FBR, (iii) the printing of this Agreement and any dealer
agreements, and the reproduction and/or printing and furnishing of copies
of each thereof to dealers (including costs of mailing and shipment) (iv)
the qualification of the Shares for offering and sale under state laws and
the determination of their eligibility for investment under state law as
aforesaid (including any filing fees), and the printing and furnishing of
copies of any blue sky surveys or legal investment surveys to FBR and to
dealers, (v) all fees and disbursements of counsel and accountants for the
Company, (vi) the fees and expenses of any transfer agent or registrar for
the Common Stock,
18
(vii) costs of background investigations, (viii) the costs and expenses of
FBR (up to $30,000) and the Company incurred in connection with the
marketing of the Shares, including all "out of pocket" expenses, roadshow
costs (regardless of the form in which the roadshow is conducted) and
expenses, and expenses of Company personnel, including but not limited to
commercial or charter air travel, local hotel accommodations and
transportation, and (ix) performance of the Company's other obligations
hereunder;
(l) INTENTIONALLY OMITTED
(m) in connection with Resale Shares offered and sold in an offshore
transaction (as defined in Regulation S), not to register any transfer of
such Resale Shares not made in accordance with the provisions of Regulation
S;
(n) to furnish to FBR, during the period referred to in clause (i) of
paragraph 5(c) above, not fewer than two (2) business days before filing
with the Commission, a copy of the most current draft at such time of any
document proposed to be filed with the Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act, provided that with respect to any proposed
filing of a Current Report on Form 8-K, the Company shall use its
commercially reasonable efforts to furnish a copy to FBR as early as
reasonably practicable;
(o) to refrain during the period commencing on the date of this
Agreement and ending on the date that is 210 days after the Closing Time,
without the prior written consent of FBR (which consent may be withheld or
delayed in FBR's sole discretion), from (i) offering, pledging, selling,
contracting to sell, selling any option or contract to purchase, purchasing
any option or contract to sell, granting any option, right or warrant for
the sale of, lending or otherwise disposing of or transferring, directly or
indirectly, any equity securities of the Company or any securities
convertible into or exercisable or exchangeable for equity securities of
the Company, or filing any registration statement under the Securities Act
with respect to any of the foregoing, or (ii) entering into any swap or
other arrangement that transfers, in whole or in part, directly or
indirectly, any of the economic consequences of ownership of equity
securities of the Company, whether any such transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not
apply to (i) the Shares to be sold hereunder, (ii) the registration and
sale of the Shares in accordance with the terms of the Registration Rights
Agreement, (iii) any Shares of Common Stock issued by the Company upon the
exercise of an option outstanding on the date hereof and referred to in the
Final Memorandum, or (iv) issuances of options or grants of restricted
stock under the Company's 2005 Omnibus Stock Award Plan and the filing of a
registration statement Form S-8 under the Securities Act with respect to
such options or grants of restricted stock;
(p) if the Resale Shares are not delivered by the Company to FBR for
any reason other than the termination of this Agreement pursuant to clauses
(ii) through (v) of the first paragraph of Section 7 hereof or the default
by FBR in its obligations hereunder, to reimburse FBR for all of its
out-of-pocket expenses relating to the transactions
19
contemplated hereby, including the reasonable fees and disbursements of its
legal counsel;
(q) that, from and after the Closing Time, the Company shall have in
place and maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to maintain asset accountability, (iii) access to assets is permitted only
in accordance with management's general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to any
differences;
(r) that the Company will conduct its affairs and the affairs of the
Subsidiaries in such a manner so as to ensure that neither the Company nor
any of the Subsidiaries will be an "investment company" or agree to become
an entity "controlled" by an investment company within the meaning of the
Investment Company Act; and
(s) that, as soon as reasonably practicable following completion of
the transactions contemplated hereunder, to use commercially reasonable
efforts to cause the Company's board of directors to approve any changes to
the corporate governance policies and procedures that may be required by
law prior to filing any registration statement with the Commission.
6. Conditions of FBR's Obligations. The obligations of FBR hereunder are
subject to (i) the accuracy of the representations and warranties on the part of
the Company and each other member of the Company Group on the date hereof, at
the Closing Time and each Secondary Closing Time (which representations and
warranties (a) if qualified by materiality, shall be true and correct and (b) if
not qualified by materiality, shall be true and correct in all material
respects), (ii) the accuracy of the statements of the Company's officers made in
any certificate pursuant to the provisions hereof as of the date of such
certificate, (iii) the performance in all material respects by the Company and
each other member of the Company Group of all of their respective covenants and
other obligations hereunder and (iv) the following other conditions:
(a) The Company shall furnish to FBR at the Closing Time an opinion of
each of Xxxxxxx Xxxxxxxx Xxxxxx LLP and Xxxxxxx Brignone, counsel for the
Company, addressed to FBR and dated the Closing Time, in form and substance
satisfactory to FBR, covering the matters set forth on Exhibits B-1 and
B-2, respectively, hereto. Each such opinion shall indicate that it is
being rendered to FBR at the request of the Company.
(b) FBR shall have received from Murrell, Hall, XxXxxxxx & Co., PLLP a
"comfort" letter or letters dated, respectively, as of the date hereof and
the Closing Time, addressed to FBR and in form and substance satisfactory
to FBR, in substantially the form attached as Exhibit C hereto.
20
(c) FBR shall have received at the Closing Time a favorable opinion of
Akin Gump Xxxxxxx Xxxxx & Xxxx LLP, counsel for FBR, dated the Closing
Time, in form and substance satisfactory to XXX.
(x) XXX shall have received from the Reservoir Engineer letters dated,
respectively, as of the date hereof and the Closing Time, addressed to FBR
and in form and substance satisfactory to FBR.
(e) Prior to the Closing Time or any Secondary Closing Time, (i) no
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for
any of such purposes, shall have occurred and (ii) the Final Memorandum and
all amendments or supplements thereto, or modifications thereof, if any,
shall not contain an untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they are
made, not misleading.
(f) Between the time of execution of this Agreement and the Closing
Time or any Secondary Closing Time, (i) no event, circumstance or change
constituting a Material Adverse Effect shall have occurred or become known,
(ii) no transaction which is material to the Company and the Subsidiaries,
taken as a whole, shall have been entered into by the Company or any
Subsidiary that has not been fully and accurately disclosed in the Final
Memorandum, or any amendment or supplement thereto; and (iii) no order or
decree preventing the use of the Final Memorandum, or any amendment or
supplement thereto, or any order asserting that any of the transactions
contemplated by this Agreement are subject to the registration requirements
of the Securities Act shall have been issued.
(g) The Company shall have delivered to FBR a certificate, executed by
the secretary of the Company and dated as of the Closing Time, as to (i)
the resolutions adopted by the Company's board of directors in form and
substance reasonably acceptable to FBR, (ii) the Company's Articles of
Incorporation, as amended and (iii) the Company's bylaws, each as in effect
at the Closing Time.
(h) The Company shall have delivered to FBR a certificate of the
Company executed by its chief executive officer and chief financial officer
to the effect that the representations and warranties of the Company and
each other member of the Company Group set forth in this Agreement (i) if
qualified by materiality, shall be true and correct and (ii) if not
qualified by materiality, shall be true and correct in all material
respects, as of the date hereof and as of Closing Time as though made on
and as of such date (except to the extent that such representations and
warranties speak as of another date, in which case such representations and
warranties shall be true and correct as of such other date), the conditions
set forth in subsections (e) and (f) of this Section 6 shall have been
satisfied and be true and correct as of the Closing Time, and each of the
Company and each other member of the Company Group shall have complied in
all material respects with all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied under this Agreement at
or prior to the Closing Time.
21
(i) On or before the Closing Time, FBR shall have received (i) the
Registration Rights Agreement executed by the Company, and (ii) the Third
Amended and Restated Limited Liability Company Agreement of Quest Cherokee,
LLC, executed by certain of the Company's Subsidiaries, and each such
agreement shall be in full force and effect.
(j) At the time of execution and delivery of this Agreement, FBR shall
have received from each of the officers and directors of the Company a
written agreement (a "Lock-up Agreement") in substantially the form
attached hereto as Exhibit G.
(k) FBR shall have a received a duly executed copy of each of the
Transaction Agreements.
(l) At each Secondary Closing Time, FBR shall have received:
(i) a certificate, dated as of each Secondary Closing Time, of
the Company, substantially to the same effect as the certificate
delivered at Closing Time pursuant to subsection (h), of this Section
6, subject to any exceptions that, in the reasonable judgment of FBR,
are not material.
(ii) the opinions of Xxxxxxx Xxxxxxxx Xxxxxx LLP and Xxxxxxx
Brignone in form and substance satisfactory to FBR, dated as of each
Secondary Closing Time relating to the Regulation D Shares or the
Option Shares, as applicable, and otherwise substantially to the same
effect as the opinions required by subsection (a) of this Section 6.
(iii) a "comfort" letter from Murrell, Hall, XxXxxxxx & Co.,
PLLP, in form and substance satisfactory to FBR, dated as of each
Secondary Closing Time, substantially the same in scope and substance
as the letter furnished to FBR pursuant to subsection (b) of this
Section 6, except that the "specified date" in the letter furnished
pursuant to this subsection (l)(iii) shall be a date not more than
five days prior to such Secondary Closing Time.
In the event that any "comfort" letter referred to in subsection
(b) of this Section 6 or this subsection (l)(iii) sets forth any such
changes, decreases or increases that, in the reasonable discretion of
FBR, are likely to result in a Material Adverse Effect, it shall be a
further condition to the obligations of FBR that such letters shall be
accompanied by a written explanation of the Company as to the
significance thereof, unless FBR deems such explanation unnecessary.
References to the Final Memorandum with respect to any "comfort"
letter referred to in this Section 6 shall include any amendment or
supplement thereto at the date of such letter.
(iv) the opinion of Akin Gump Xxxxxxx Xxxxx & Xxxx LLP, dated as
of each Secondary Closing Time, relating to the Regulation D Shares or
the Option Shares, as applicable, and otherwise to the same effect as
the opinion required by subsection (c) of this Section 6.
22
(m) The Company shall have furnished to FBR such other documents and
certificates as to the accuracy and completeness of any statement in the
Final Memorandum or any amendment or supplement thereto, and any additional
matters as FBR may reasonably request, as of the Closing Time or any
Secondary Closing Time, or as FBR may reasonably request.
(n) Each Subscription Agreement shall remain in full force and effect
and no event shall have occurred giving any party the right to terminate
any Subscription Agreement pursuant to the terms thereof.
7. Termination. The obligations of FBR hereunder shall be subject to
termination in the absolute discretion of FBR, at any time prior to the Closing
Time or any Secondary Closing Time, if (i) any of the conditions specified in
Section 6 (other than Section 6(c)) shall not have been fulfilled when and as
required by this Agreement to be fulfilled, (ii) trading in securities in
general on any exchange or national quotation system shall have been suspended
or minimum prices shall have been established on such exchange or quotation
system, (iii) there has been a material disruption in the securities settlement,
payment or clearance services in the United States, (iv) a banking moratorium
shall have been declared either by the United States or New York State
authorities, or (v) if the United States shall have declared war in accordance
with its constitutional processes or there shall have occurred any material
outbreak or escalation of hostilities or other national or international
calamity or crisis or change in economic, political or other conditions of such
magnitude in its effect on the financial markets of the United States as, in the
judgment of FBR, to make it impracticable to market the Shares.
If FBR elects to terminate this Agreement as provided in this Section 7,
the Company shall be notified promptly by letter, fax or telegram.
If the sale to FBR of the Resale Shares, as contemplated by this Agreement,
is not carried out by FBR for any reason permitted under this Agreement or if
such sale is not carried out because the Company shall be unable to comply with
any of the terms of this Agreement, the Company shall not be under any
obligation or liability under this Agreement (except to the extent provided in
Sections 5(k), 5(p) and 8 hereof) and FBR shall be under no obligation or
liability to the Company under this Agreement (except to the extent provided in
Section 8 hereof).
8. Indemnity.
(a) Each of the Company and each other member of the Company Group,
jointly and severally, agrees to indemnify, defend and hold harmless FBR
and its affiliates, and their respective directors, officers, and any
person who controls FBR within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, from and against any loss, expense,
liability or claim (including the reasonable cost of investigation) which,
jointly or severally, FBR or any such controlling person may incur under
the Securities Act, the Exchange Act or otherwise, insofar as such loss,
expense, liability or claim arises out of or is based upon (i) any untrue
statement or alleged untrue statement made by the Company herein, (ii) any
breach by the Company
23
of any covenant set forth herein, or (iii) any untrue statement or alleged
untrue statement of a material fact contained in the Preliminary Memorandum
or the Final Memorandum, or arises out of or is based upon any omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, except insofar as
any such loss, expense, liability or claim arises out of or is based upon
any untrue statement or alleged untrue statement of a material fact
contained in and in conformity with information furnished in writing by FBR
to the Company expressly for use in such Preliminary Memorandum or Final
Memorandum (that information being limited to that described in the last
sentence of Section 8(b) hereof) or as a result of FBR's failure to send or
give a copy of the Final Memorandum to the person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Shares to such person if
such statement or omission was corrected in such Final Memorandum, unless
such failure to deliver such Final Memorandum was a result of noncompliance
by the Company with its obligations to furnish sufficient copies of the
Final Memorandum in accordance with this Agreement.
(b) FBR agrees to indemnify, defend and hold harmless the Company and
its directors, officers and any person who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any loss, expense, liability or claim (including the
reasonable cost of investigation) which, jointly or severally, the Company
or any such person may incur under the Securities Act, the Exchange Act or
otherwise, insofar as such loss, expense, liability or claim arises out of
or is based upon any untrue statement or alleged untrue statement of a
material fact contained in and made in reliance upon and in conformity with
information furnished in writing by FBR to the Company expressly for use in
the Preliminary Memorandum or Final Memorandum (or in any amendment or
supplement thereof by the Company), such information being limited to the
following: the penultimate paragraph on the cover page, and, under the
section heading `Plan of Distribution" in the Final Memorandum, the second
sentence of the first paragraph in the Final Memorandum, the second
paragraph and the eighth paragraph.
(c) If any action is brought against any person or entity (each an
"Indemnified Party"), in respect of which indemnity may be sought pursuant
to Section 8(a) or (b) above, the Indemnified Party shall
promptly notify the party(ies) obligated to provide such indemnity (each an
"Indemnifying Party") in writing of the institution of such action and the
Indemnifying Party shall assume the defense of such
action, including the employment of counsel and payment of expenses;
provided that the failure so to notify the Indemnifying Party will not
relieve the Indemnifying Party from any liability which the Indemnifying
Party may have to any Indemnified Party unless and to the extent the
Indemnifying Party did not otherwise know of such action and such failure
results in the forfeiture by the Indemnifying Party of rights and defenses
that would have had material value in the defense. The Indemnified
Party(ies) shall have the right to employ its or their own counsel in any
such case, but the fees and expenses of such counsel shall be at the
expense of the Indemnified Party unless the employment of such counsel
shall have been authorized in writing by the Indemnifying Party in
connection with the defense of such action or the Indemnifying Party shall
not have employed counsel to have charge of the defense of such
24
action within a reasonable time or such Indemnified Party(ies) shall have
reasonably concluded (based on the advice of counsel) that counsel selected
by the Indemnifying Party has an actual conflict of interest or there may
be defenses available to the Indemnified Party(ies) which are different
from or additional to those available to the Indemnifying Party (in which
case the Indemnifying Party shall not have the right to direct the defense
of such action on behalf of the Indemnified Party(ies)), in any of which
events such fees and expenses shall be borne by the Indemnifying Party and
paid as incurred (it being understood, however, that the Indemnifying Party
shall not be liable for the fees and expenses of more than one separate
firm of counsel (in addition to local counsel) for the Indemnified Party in
any one action or series of related actions in the same jurisdiction
representing the Indemnified Parties who are parties to such action).
Anything in this paragraph to the contrary notwithstanding, the
Indemnifying Party shall not be liable for any settlement of any such claim
or action effected without its written consent. The Indemnifying Party
shall have the right to settle any such claim or action for itself and any
Indemnified Party so long as the Indemnifying Party pays any settlement
payment and such settlement (i) includes a complete and unconditional
release of the Indemnified Party from all losses, expenses, claims,
damages, injunctions, liability and other obligations with respect to any
claims that are the subject matter of such action and (ii) does not include
a statement as to, or an admission of, fault, culpability or a failure to
act by or on behalf of the Indemnified Party.
(d) If the indemnification provided for in this Section 8 is
unavailable to an Indemnified Party under subsections (a) and (b) of this
Section 8 in respect of any losses, expenses, liabilities or claims
referred to therein, then each applicable Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, expenses,
liabilities or claims (i) in such proportion as is appropriate to reflect
the relative benefits received by the Company and each other member of the
Company Group, on the one hand, and FBR, on the other hand, from the
offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company and each other member
of the Company Group, on the one hand, and of FBR, on the other hand, in
connection with the statements or omissions which resulted in such losses,
expenses, liabilities or claims, as well as any other relevant equitable
considerations. The relative benefits received by the Company and each
other member of the Company Group, on the one hand, and FBR, on the other
hand, shall be deemed to be in the same proportion as the total proceeds
from the offering (net of initial purchaser discounts and commissions but
before deducting expenses) received by the Company bear to the discounts
and commissions received by FBR. The relative fault of the Company and each
other member of the Company Group, on the one hand, and of FBR, on the
other hand, shall be determined by reference to, among other things,
whether the untrue statement or alleged untrue statement of a material fact
or omission or alleged omission relates to information supplied by the
Company or by FBR and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages and liabilities referred to above shall be deemed to
include any
25
legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action.
(e) The parties hereto agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in subsection (d) above.
Notwithstanding the provisions of this Xxxxxxx 0, XXX shall not be required
to contribute any amount in excess of the amount by which the total price
at which the Shares were initially offered (either in the Exempt Resales or
to subscribers in the Private Placement) exceeds the amount of any damages
which FBR has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(f) The indemnity and contribution agreements contained in this
Section 8 and the covenants, warranties and representations of the Company
and each other member of the Company Group contained in this Agreement
shall remain in full force and effect regardless of any investigation made
by or on behalf of FBR or its affiliates, or their respective directors,
officers, representatives and agents, or any person who controls FBR within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, or by or on behalf of the Company and each other member of
the Company Group or their respective directors and officers or any person
who controls the Company or each other member of the Company Group within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, and shall survive any termination of this Agreement or the
sale and delivery of the Shares. Each of the parties to this Agreement
agree promptly to notify the other parties of the commencement of any
litigation or proceeding against it and, in the case of the Company or each
other member of the Company Group, against any of their respective officers
and directors, in connection with the sale and delivery of the Shares, or
in connection with the Final Memorandum.
9. Notices. Except as otherwise herein provided, all statements, requests,
notices and agreements shall be in writing delivered by facsimile (with receipt
confirmed), overnight courier or registered or certified mail, return receipt
requested, or by telegram and:
(a) if to FBR, shall be sufficient in all respects if delivered or
sent to Friedman, Billings, Xxxxxx & Co., Inc., 0000 Xxxxxxxxxx Xxxxxx
Xxxxx, Xxxxxxxxx, Xxxxxxxx 00000, Attention: Compliance Department,
(facsimile: 703-312-9698); with a copy to: Akin Gump Xxxxxxx Xxxxx & Xxxx,
LLP, 000 Xxxxxxx Xxxxxx, Xxx Xxxx, Xxx Xxxx 00000, Attention: Xxxx
Xxxxxxxxx (facsimile: 212-872-1002); and
(b) if to the Company or any other member of the Company Group, shall
be sufficient in all respects if delivered to the Company at the offices of
the Company at 0000 Xxxxx Xxx Xxxxxx, Xxxxx 000, Xxxxxxxx Xxxx, XX 00000,
Attention: Xxxxx X. Xxxx
26
(facsimile: 405-840-9897); with a copy to: Xxxxxxx Xxxxxxxx Xxxxxx LLP,
0000 Xxxxxx, Xxxxxx Xxxx, Xxxxxxxx 00000, Attention: Xxxxxxx X. Xxxxxxxxxx
(facsimile: 888-215-6170).
10. GOVERNING LAW; HEADINGS. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES THAT WOULD REQUIRE THE APPLICATION OF THE LAW OF
ANY OTHER STATE. The section headings in this Agreement have been inserted as a
matter of convenience of reference and are not a part of this Agreement.
11. Parties at Interest. The Agreement herein set forth has been and is
made solely for the benefit of FBR, the Company and each other member of the
Company Group, and the controlling persons, directors and officers referred to
in Section 8 hereof, and their respective successors, assigns, executors and
administrators. No other person, partnership, association or corporation
(including a purchaser, in its capacity as such, from FBR) shall acquire or have
any right under or by virtue of this Agreement.
12. Counterparts. This Agreement may be signed by the parties in
counterparts, which together shall constitute one and the same agreement among
the parties.
[SIGNATURE PAGE FOLLOWS]
27
If the foregoing correctly sets forth the understanding among the Company,
each other member of the Company Group and FBR, please so indicate in the space
provided below for the purpose, whereupon this letter shall constitute a binding
agreement between the Company, each other member of the Company Group and FBR.
Very truly yours,
QUEST RESOURCE CORPORATION
By: /s/ Xxxxx Xxxx
--------------------------------------------
Name: Xxxxx Xxxx
Title: Chairman and CEO
QUEST CHEROKEE, LLC
By: /s/ Xxxxx Xxxx
--------------------------------------------
Name: Xxxxx Xxxx
Title: CEO
BLUESTEM PIPELINE, LLC
By Quest Cherokee, LLC, its sole member
By: /s/ Xxxxx Xxxx
--------------------------------------------
Name: Xxxxx Xxxx
Title: CEO
QUEST CHEROKEE OILFIELD SERVICE, LLC
By Quest Cherokee, LLC, its sole member
By: /s/ Xxxxx Xxxx
--------------------------------------------
Name: Xxxxx Xxxx
Title: CEO
[SIGNATURE PAGE TO PURCHASE/PLACEMENT AGREEMENT]
28
Accepted and agreed to as
of the date first above written:
FRIEDMAN, BILLINGS, XXXXXX & CO., INC.
By: /s/ Xxxxx X. Xxxxxxxxx
-----------------------------------
Name: Xxxxx X. Xxxxxxxxx
Title: Senior Managing Director
[SIGNATURE PAGE TO PURCHASE/PLACEMENT AGREEMENT]
29
EXHIBIT A
REGISTRATION RIGHTS AGREEMENT
X-0
XXXXXXX X-0
SUBSTANCE OF OPINION OF XXXXXXX XXXXXXXX XXXXXX LLP
1. The execution, delivery and performance by each of Quest Cherokee, LLC,
Bluestem Pipeline, LLC and Quest Cherokee Oilfield Service, LLC (the "Quest
Cherokee Group") of each of the Purchase/Placement Agreement and the
Transaction Agreements, as applicable, have each been duly authorized by
all necessary limited liability company action of each member of the Quest
Cherokee Group, as applicable;
2. Each of the Purchase/Placement Agreement and the Transaction Agreements has
been duly executed and delivered on behalf of each member of the Quest
Cherokee Group, as applicable;
3. To our knowledge, after due inquiry, neither the Company nor any Subsidiary
has issued any outstanding securities convertible into or exchangeable for,
or outstanding options, warrants or other rights to purchase or to
subscribe for, any shares of stock or other securities of the Company,
except as described in the Final Memorandum;
4. The issuance, sale and delivery of the Shares by the Company is not subject
to any preemptive right, co-sale right, registration right, right of first
refusal or other similar right of stockholders under any contract,
agreement, instrument and other document filed as an exhibit to the
Company's Form 10-KSB for the transition period ended December 31, 2004 or
in any subsequent filings with the Commission (each, a "Material
Agreement");
5. The statements in the Final Memorandum under the captions "Risk
Factors--Risks Relating to the Offering and Our Common Stock - There might
be significant restrictions on your ability to resell shares of our common
stock and any attempt to circumvent such restrictions through a
registration statement could prove ineffective", and "Material U.S. Federal
Tax Considerations for Non-U.S. Holders of Our Common Stock" to the extent
that such statements constitute summaries of law or legal conclusions, have
been reviewed by us, and fairly, accurately and completely summarize such
laws or legal conclusions in all material respects. The description of the
Registration Rights Agreement in the Final Memorandum constitutes a fair,
accurate and complete summary of the material terms thereof;
6. To our knowledge, after due inquiry, the Company has no subsidiaries other
than Quest Cherokee, LLC, Bluestem Pipeline, LLC, Quest Cherokee Oil Field
Service, LLC, STP Cherokee, Inc., Quest Oil & Gas Corporation, Quest Energy
Service, Inc., Ponderosa Gas Pipeline Company, Inc., Producers Service,
Incorporated and X-X Gas Gathering, L.L.C. (each a "Subsidiary" and,
collectively, the "Subsidiaries"); each Subsidiary is validly existing as a
corporation or limited liability company, as applicable, and in good
standing as of the date of the applicable certificate specified in a
schedule to the opinion, under the laws of its jurisdiction of
organization, with all necessary corporate or limited liability company
power and authority to own, lease or operate its current property and to
conduct its business as described in the Offering Memorandum, and to
execute, deliver and perform the Purchase/Placement Agreement, as
applicable;
B-1
27
7. Each of the Company and each Subsidiary is duly qualified, and is in good
standing, as a foreign corporation or limited liability company, as
applicable, as of the dates of the applicable certificates specified on a
schedule to the opinion, in each jurisdiction in which it conducts its
business or in which it owns or leases property or maintains an office and
in which such qualification is necessary and in which the failure,
individually or in the aggregate, to be so qualified could reasonably be
expected to have a Material Adverse Effect;
8. All issued and outstanding membership interests of each of Quest Cherokee,
LLC, Quest Cherokee Oilfield Service, LLC and Bluestem Pipeline, LLC have
been duly authorized and validly issued, are fully paid and nonassessable,
and have not been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right of shareholders or members arising under the Delaware Limited
Liability Company Act, under the certificate of formation or limited
liability company agreement of such Subsidiary, or under any Material
Agreement, and (a) in the case of Quest Cherokee, LLC, based solely on our
review of the membership interest transfer records of Quest Cherokee, LLC,
are owned of record by Subsidiaries of the Company and (b) in the case of
Quest Cherokee Oilfield Service, LLC and Bluestem Pipeline, LLC, based
solely on our review of the membership interest transfer records of such
entities, are owned of record by Quest Cherokee, LLC, in each case, to our
knowledge, free and clear of any pledge, security interests, liens,
encumbrances, claims or equitable interests, other than those in favor of
the lenders under the Credit Facilities;
9. All issued and outstanding shares of capital stock of Quest Oil & Gas
Corporation, Quest Energy Service, Inc., Ponderosa Gas Pipeline Company,
Inc. and Producers Service, Incorporated have been duly authorized and
validly issued, are fully paid and nonassessable, and have not been issued
in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
shareholders or members arising under Kansas law, under the articles of
incorporation or by-laws of such Subsidiary or under any Material
Agreement, and, based solely on our review of the stock transfer records of
such Subsidiaries, are owned of record by the Company (or in the case of
Producers Service, Incorporated, by Ponderosa Gas Pipeline Company, Inc.),
to our knowledge, free and clear of any pledge, security interests, liens,
encumbrances, claims or equitable interests, other than those in favor of
the lenders under the Credit Facilities;
10. All issued and outstanding shares of capital stock STP Cherokee, Inc. have
been duly authorized and validly issued, are fully paid and nonassessable,
and have not been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right of shareholders or members arising under the Oklahoma General
Corporation Act, under the articles of incorporation or by-laws of such
Subsidiary or under any Material Agreement, and, based solely on our review
of the stock transfer records of such Subsidiary, are owned of record by
the Company, to our knowledge, free and clear of any pledge, security
interests, liens, encumbrances, claims or equitable interests, other than
those in favor of the lenders under the Credit Facilities;
11. All issued and outstanding membership interests of X-X Gas Gathering,
L.L.C. have been duly authorized and validly issued, are fully paid and
nonassessable, and have not been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right
B-2
of first refusal or other similar right of shareholders or members arising
under Kansas law, under the articles of formation or limited liability
company agreement of such Subsidiary or under any Material Agreement, and,
based solely on our review of the membership interest transfer records of
such Subsidiary, are owned of record by Producers Service, Incorporated, to
our knowledge, free and clear of any pledge, security interests, liens,
encumbrances, claims or equitable interests, other than those in favor of
the lenders under the Credit Facilities;
12. The execution, delivery and performance of the Purchase/Placement Agreement
and of the Transaction Agreements by the Company and each member of the
Quest Cherokee Group, as applicable, and of the Registration Rights
Agreement by the Company, and the issuance, sale and delivery of the Shares
by the Company and the consummation by the Company and each member of the
Quest Cherokee Group of the transactions contemplated hereby and, in the
case of the Company only, thereby, and compliance by the Company and each
member of the Quest Cherokee Group with the terms and provisions hereunder
and, in the case of the Company only, thereunder do not conflict with, or
breach or constitute a default under (nor constitute any event which with
notice, lapse of time, or both would constitute a breach of, or default
under), (i) any provision of the Charter Documents of any member of the
Quest Cherokee Group, (ii) any Material Agreement, (iii) under any federal
or State of Kansas law, regulation or rule or the Delaware Limited
Liability Company Act, or (iv) to our knowledge, any federal or state
decree, judgment or order applicable to the Company or any member of the
Quest Cherokee Group, except in the case of clauses (ii), (iii) or (iv) for
such conflicts, breaches or defaults which have been validly waived or
would not reasonably be expected to have a Material Adverse Effect or
result in the creation or imposition of any material lien, charge, claim or
encumbrance upon the properties and assets of the Company and the
Subsidiaries taken as a whole;
13. Assuming (i) the accuracy of the representations and warranties of the
Company and each other member of the Company Group and FBR set forth in the
Purchase/Placement Agreement, (ii) the accuracy of the representations and
warranties of the purchasers of the Resale Shares set forth in their
respective subscription agreements or purchaser's letters and (iii) that
the purchasers who buy the Resale Shares in Exempt Resales are Eligible
Purchasers, the sale of the Resale Shares to FBR as contemplated under the
Purchase/Placement Agreement and the Exempt Resales are exempt from the
registration requirements of the Securities Act;
14. Assuming (i) the accuracy of the representations and warranties of the
Company and each other member of the Company Group and FBR set forth in the
Purchase/Placement Agreement, (ii) the accuracy of the representations and
warranties of the purchasers of the Resale Shares set forth in their
respective subscription agreements or purchaser's letters and (iii) that
the purchasers who buy the Resale Shares in Exempt Resales are Eligible
Purchasers, no approval, authorization, consent or order of or filing with
any federal or State of Kansas governmental or regulatory commission,
board, body, authority or agency is required in connection with the
execution, delivery and performance by the Company and each other member of
the Company Group of the Purchase/Placement Agreement or, in the case of
the Company only, the Registration Rights Agreement, or the consummation by
the Company and each other member of the Company Group of the transactions
contemplated
B-3
hereby and, in the case of the Company, thereby, or the issuance, sale and
delivery of the Shares as contemplated hereby, other than (A) such as have
been obtained or made, or will have been obtained or made at the Closing
Time, (B) any necessary qualification under the securities or blue sky laws
of the various jurisdictions in which the Resale Shares are being offered
by FBR (as to which we express no opinion), (C) with or by federal or state
securities regulatory authorities in connection with or pursuant to the
Registration Rights Agreement, including without limitation the filing of
the registration statement(s) required thereby with the Commission (as to
which we express no opinion), and (D) the filing of a Form D with the
Commission and with the applicable state regulatory authorities (as to
which we express no opinion);
15. Neither the Company nor any of the Subsidiaries is, nor upon the sale of
the Shares as contemplated herein and the application of the net proceeds
therefrom as described in the Final Memorandum under the caption "Use of
Proceeds", will be, an "investment company" or is, immediately prior to the
sale of the Shares, an entity "controlled" by an "investment company" (as
such terms are defined in the Investment Company Act of 1940, as amended);
16. There are no persons with registration or other similar rights under any
Material Agreement to have any securities registered by the Company or any
of the Subsidiaries under the Securities Act other than pursuant to the
Registration Rights Agreement; the issuance, sale and delivery of the
Shares by the Company is not subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar right of
shareholders arising under any Material Agreement; the Shares satisfy the
requirements set forth in Rule 144A(d)(3) under the Securities Act;
17. Except as disclosed in the Final Memorandum, no Subsidiary is currently
prohibited under any Material Agreement, directly or indirectly, from
paying any dividends or distributions to the Company to the extent
permitted by applicable law, from repaying to the Company any loans or
advances to such Subsidiary from the Company or from transferring any of
the property or assets of such Subsidiary to the Company; and
18. To our knowledge, there are no actions, suits or proceedings pending or
overtly threatened in writing against the Company, any of the Subsidiaries
or any of their respective executive officers and directors (in their
capacity as such) or to which the properties, assets or rights of any such
entity are subject, at law or in equity, before or by any federal or state
government or regulatory commission, board, body, authority, arbitral panel
or agency, which in our judgment is reasonably likely to result in a
Material Adverse Effect, except as described in the Final Memorandum.
------------------------------
Because the primary purpose of our engagement was not to establish or
confirm financial or accounting matters and because of the wholly or partially
non-legal character of many of the statements contained in the Final Memorandum,
we are not passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Final Memorandum
(except as expressly set forth above) and we have not independently verified the
accuracy, completeness or fairness of such statements (except as aforesaid).
Without limiting the foregoing, we assume no responsibility for, have not
independently verified and have not been
B-4
asked to comment on the accuracy, completeness or fairness of the financial
statements and other financial, accounting or reserve data included in the Final
Memorandum and we have not examined the accounting, financial, geological or
other records from which such financial statements and other financial,
accounting or reserve data contained therein were derived. Furthermore, we are
not experts with respect to any portion of the Final Memorandum, including,
without limitation, such financial statements and other financial, accounting or
reserve data.
In connection with our representation of the Company in connection with the
offering of the Shares and during the course of the preparation of the Offering
Memorandum, we have participated in conferences with officers and other
representatives of the Company, representatives of the independent registered
public accounting firm of the Company, and representatives of FBR, including
counsel for FBR, at which the contents of the Final Memorandum and related
matters were discussed; and, based upon such participation and review, and
relying as to materiality in part upon the factual statements of officers and
other representatives of the Company and representatives of FBR, no facts have
come to our attention to cause us to believe that the Final Memorandum, as of
its date and as of the date hereof, included or includes an untrue statement of
a material fact or omitted or omits to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading (except in each case that we express no view as
to the financial statements and related data and other financial, accounting,
statistical or reserve data or exhibits included in or omitted from the Final
Memorandum).
Such opinion may state that the opinions set forth therein are expressly
limited to the effect on the subject transaction only of the federal laws of the
United States and the internal laws of the State of Kansas that, in our
experience, are customarily applicable to transactions of the type contemplated
by the Purchase/Placement Agreement, the Delaware Limited Liability Company Act
and the Oklahoma General Corporation Act and that such firm does not purport to
be experts on, or to express any opinion with respect to the applicability
thereto, or to the effect thereon, of, the laws of any other jurisdiction or as
to matters of local law or the laws of local governmental departments or
agencies within the State of Kansas.
B-5
EXHIBIT B-2
FORM OF NEVADA OPINION
1. Quest Resource Corporation (the "Company") is validly existing as a
corporation and in good standing under the laws of the State of Nevada, with
corporate power and authority to own, lease or operate its current property and
to conduct its business as described in the Final Memorandum, and to execute,
deliver and perform the Purchase/Placement Agreement, the Registration Rights
Agreement and the Transaction Agreements to which it is a party;
2. The execution, delivery and performance by the Company of each of the
Purchase/Placement Agreement, the Registration Rights Agreement and the
Transaction Agreements to which it is a party have each been duly authorized by
all necessary corporate action of the Company;
3. Each of the Purchase/Placement Agreement, the Registration Rights
Agreement and the Transaction Agreements to which the Company is a party has
been duly executed and delivered on behalf of the Company;
4. The authorized capital stock of the Company, as of November 7, 2005, was
as set forth under the caption "Capitalization" in the Final Memorandum;
5. The issuance and sale of the Shares have been duly authorized by all
necessary corporate action of the Company and, when issued in accordance with
the provisions of the Purchase/Placement Agreement, the Shares will be validly
issued, fully paid and non-assessable, free and clear of any pledge, lien,
encumbrance, security interest or other claim under or by virtue of the NRS1 or
the Governing Documents2, or, to our knowledge (without investigation or
inquiry) under or created by any agreement to which the Company is a party,
except for pledges, liens, encumbrances, security interests and claims created
by the Credit Facilities; the issuance, sale and delivery of the Shares by the
Company are not subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right of stockholders arising by
operation of the NRS or under the Governing Documents; the form of certificate
evidencing the Shares complies in all material respects with the requirements of
the NRS;
6. The statements in the Final Memorandum under the captions "Risk
Factors--Risks Relating to the Offering and Our Common Stock - The percentage
ownership evidenced
--------------------
1 "NRS" means the Nevada Revised Statutes as in effect on the date hereof. [NRS
Chapter 78 contains Nevada's statutes governing corporations.]
2 "Governing Documents" means the Articles of Incorporation and Bylaws of the
Company, each as amended to date.
B-6
by the common stock is subject to dilution," (except the statement that after
the offering, the Company "will not be prohibited from issuing additional shares
of such common stock"), and "- Provisions in Nevada law could delay or prevent a
change in control, even if that change would be beneficial to our stockholders,"
and "Description of Capital Stock - Anti-Takeover Provisions," to the extent
that such statements constitute summaries of matters of Nevada law or Nevada
legal conclusions concerning the Company, have been reviewed by us and fairly
and accurately summarize the information called for in all material respects.
Other than with respect to the number of shares of capital stock of the Company
that are issued and outstanding, the description of the rights and preferences
of the capital stock of the Company conform as to legal matters in all material
respects to the description thereof set forth in the Final Memorandum;
7. The execution and delivery by the Company of, and the performance by the
Company of its obligations under, the Purchase/Placement Agreement, the
Registration Rights Agreement and the Transaction Agreements to which it is a
party, the issuance, sale and delivery of the Shares by the Company, the
consummation by the Company of the transactions contemplated thereby, and the
compliance by the Company with the terms and provisions thereunder, do not
breach or constitute a default under, (i) any provision of the Governing
Documents, (ii) any Applicable Nevada Law3 or (iii) any Applicable Nevada
Order4;
8. Assuming the accuracy of the representations and warranties of the
parties to the Purchase/Placement Agreement, no approval, authorization, consent
or order of or filing with any Nevada Governmental Authority is required under
Applicable Nevada Law in connection with the execution and delivery by the
Company of, and the performance by the Company of its obligations under, the
Purchase/Placement Agreement or the Registration Rights Agreement, or the
consummation by the Company of the transactions contemplated thereby, including
the issuance, sale and delivery of the Shares, other than such as have been
obtained or made, or will have been obtained or made at the Closing Time.
Such opinion may state that local Nevada counsel, Xxxxxxx Brignone, is qualified
to practice law in the State of Nevada and that the opinions set forth therein
are expressly limited to the effect on the subject transaction only of the
internal laws of the State of Nevada and that such firm does not purport to be
experts on, or to express any opinion with respect to the applicability thereto,
or to the effect thereon, of, the laws of any other jurisdiction or as to
matters of local law or the laws of local governmental departments or agencies
within the State of Nevada. The opinion
--------------------
3 "Applicable Nevada Law" means the statutes, rules and regulations of the State
of Nevada that, in our experience, are customarily applicable both to
transactions of the type contemplated by the Purchase/Placement Agreement, the
Registration Rights Agreement and the Credit Facilities and to general
business entities that are not engaged in regulated business activities.
activities.
4 "Applicable Nevada Order" means any decree, judgment, permit or order issued
by any Nevada Governmental Authority under Applicable Nevada Law and known to
us to be applicable to the Company. "Nevada Governmental Authority" means any
governmental and regulatory authorities, bodies, instrumentalities and
agencies and courts of the State of Nevada, excluding its political
subdivisions and local agencies.
B-7
may also state that Xxxxxxx Xxxxxxxx expresses no opinion therein concerning,
and assumes no responsibility as to laws or judicial decisions related to, or
any orders, consents, authorizations, approvals or filings as may be required
by, any federal law, including any federal securities law or regulation, or any
state securities or "Blue Sky" laws or regulations.
B-8
EXHIBIT C
FORM OF "COMFORT" LETTER
C-1
EXHIBIT D
FORM OF LOCK-UP AGREEMENT
November [_], 2005
Friedman, Billings, Xxxxxx & Co., Inc.
0000 Xxxxxxxxxx Xxxxxx Xxxxx, 00xx Xxxxx
Xxxxxxxxx, Xxxxxxxx 00000
Ladies and Gentlemen:
The undersigned understands and agrees as follows:
1. Friedman, Billings, Xxxxxx & Co., Inc. ("FBR") proposes to enter into a
Purchase/Placement Agreement (the "Agreement") with Quest Resource Corporation,
a Nevada corporation (the "Company"), providing for (a) the initial purchase by
FBR of shares of the Company's common stock, $0.001 par value per share, and the
resale of such shares by FBR to certain eligible purchasers, (b) the direct sale
by the Company of shares of its common stock to certain accredited investors,
and (c) an option for FBR to purchase or place additional shares of the
Company's common stock either for resale by FBR to certain eligible purchasers
or for direct sale by the Company to certain accredited investors (all of such
shares of the Company's common stock are collectively referred to as the
"Shares" and the transactions referred to in (a), (b) and (c) above are
collectively referred to as the "Offering"), in each case, in transactions
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act").
2. In connection with the Offering and pursuant to the terms of a
Registration Rights Agreement to be entered into in connection with the closing
of the Offering, the Company has agreed to file with the Securities and Exchange
Commission one or more registration statements providing for the resale of the
Shares under the Securities Act.
3. In recognition of the benefit that the Offering will confer upon the
undersigned and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the undersigned, the undersigned
hereby agrees that, without the prior written consent of FBR (which consent may
be withheld or delayed in FBR's sole discretion), he, she or it will refrain
during the period commencing on the date of the Agreement and ending on the date
that is 210 days after the Closing Time (as defined in the Agreement) from (i)
offering, pledging, selling, contracting to sell, selling any option or contract
to purchase, purchasing any option or contract to sell, granting any option,
right or warrant for the sale of, lending or otherwise disposing of or
transferring, directly or indirectly, any equity securities of the Company, or
any securities convertible into or exercisable or exchangeable for equity
securities of the Company, or (ii) entering into any swap or other arrangement
that transfers to another, in whole or in part, directly or indirectly, any of
the economic consequences of ownership of equity securities of the Company,
whether any such transaction described in clause (i) or (ii) above is to
D-1
be settled by delivery of common stock of the Company or such other securities,
in cash or otherwise.
Notwithstanding the foregoing, subject to applicable securities laws and
the restrictions contained in the Company's charter, the undersigned may
transfer any securities of the Company (including, without limitation, common
stock) as follows: (i) pursuant to the exercise and issuance of options; (ii) as
a bona fide gift or gifts, provided that the donee or donees thereof agree to be
bound in writing by the restrictions set forth herein; (iii) to any trust for
the direct or indirect benefit of the undersigned or the immediate family of the
undersigned, provided that the trustee of the trust agrees to be bound in
writing by the restrictions set forth herein; (iv) as a distribution to
shareholders, partners or members of the undersigned, provided that such
shareholders, partners or members agree to be bound in writing by the
restrictions set forth herein; (v) any transfer required under any benefit plans
or the Company's bylaws; (vi) as collateral for any loan, provided that the
lender agrees in writing to be bound by the restrictions set forth in herein or
(vii) with respect to sales of securities acquired after the Closing Time in the
open market; in addition, during the period, if any, between the 181st day after
the Closing Time and the day immediately prior to the effective date of the
Company's shelf registration statement that provides for the resale of the
Shares under the Securities Act, subject to applicable securities laws and the
restrictions contained in the Company's charter, the undersigned (but not any
donee, trustee, shareholder, partner or member, lender, executor or heir of the
undersigned pursuant to clauses (i), (ii), (iii), (v) and (vii) above) may
transfer up to that number of securities of the Company (including, without
limitation, common stock) equal to one percent (1%) of the total number of
shares of common stock of the Company outstanding as of the Closing Time. For
purposes of this agreement, "immediate family" shall mean any relationship by
blood, marriage or adoption, not more remote than first cousin.
For the avoidance of doubt, nothing shall prevent the undersigned from, or
restrict the ability of the undersigned to, (i) purchase common stock on the
open market or (ii) exercise any options or other convertible securities granted
under any benefit plan of the Company.
4. The undersigned acknowledges that FBR is relying on the agreements of
the undersigned set forth herein in making its decision to enter into the
Agreement and to continue its efforts in connection with the Offering.
5. This Lock-Up Agreement shall be governed by and construed in accordance
with the laws of the State of New York without regard to principles of conflict
of laws.
6. This Lock-Up Agreement may be executed in one or more counterparts and
delivered by facsimile, each of which shall be deemed to be an original but all
of which shall constitute one and the same agreement.
[SIGNATURE PAGE FOLLOWS]
D-2
IN WITNESS WHEREOF, the undersigned has executed this Lock-Up Agreement, or
caused this Lock-Up Agreement to be executed, as of the date first written
above.
Very truly yours,
-----------------------------------
Name:
Title:
-----------------------------------
-----------------------------------
(Address)
D-3
