UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 6)
|
|
|
Filed by the Registrant
|
|
þ
|
|
|
|
Filed by a Party other than the Registrant
|
|
o
|
|
|
|
Check the appropriate box:
|
|
|
þ
|
|
Preliminary Proxy Statement
|
|
o
|
|
Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2)
)
|
|
o
|
|
Definitive Proxy Statement
|
|
o
|
|
Definitive Additional Materials
|
|
o
|
|
Soliciting Material Under Rule 14a-12
|
JK ACQUISITION CORP.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
o
|
|
No fee required.
|
|
þ
|
|
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
|
|
(1)
|
|
Title of each class of securities to which transaction applies:
|
|
|
|
|
Membership interests of Multi-Shot, LLC
|
|
|
(2)
|
|
Aggregate number of securities to which transaction applies:
|
|
|
|
|
Acquisition of all of the issued and outstanding membership interests of Multi-Shot,
LLC
|
|
|
(3)
|
|
Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rules 14a-6(i)(1) and 0-11 (set forth the amount on which the filing fee is calculated and
state how it was determined):
|
|
|
|
|
|
$20,000,000 in cash, 21,759,259 shares of common stock of the issuer valued at
$5.40 per share and
28,516,668 warrants (de minimis value) (pursuant to
Exchange Act Rule 0-11, the filing fee was based on $30.70 per
$1,000,000 of $55,806,137, which is the amount by which the maximum
value of the transaction has increased since Amendment No. 1 to
Schedule 14A was filed on May 8, 2007.)
|
|
|
|
(4)
|
|
Proposed maximum aggregate value of transaction:
|
|
|
|
|
|
$197,500,000 (including the assumption of $60,000,000 of third-party indebtedness)
|
|
|
|
(5)
|
|
Total fee paid:
|
|
|
|
|
|
$1,713.25
|
|
o
|
|
Fee paid previously with preliminary materials.
|
|
þ
|
|
Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
|
|
(1)
|
|
Amount Previously Paid: $12,414.91 ($11,309.90 on
November 22, 2006 and $1,105.01 on May 8, 2007)
|
|
|
(2)
|
|
Form, Schedule or Registration Statement No.:
Schedule 14A (File No. 001-32574) and Amendment No. 1
to Schedule 14A (File No. 001-32574)
|
|
|
(3)
|
|
Filing Party: JK ACQUISITION CORP.
|
|
|
(4)
|
|
Date Filed: November 22, 2006 and May 8, 2007
|
This information in this document is not complete and may be
changed.
PRELIMINARY DRAFT, DATED NOVEMBER 29, 2007
SUBJECT TO COMPLETION
JK ACQUISITION CORP.
4400 Post Oak Parkway, Suite 2530
Houston, Texas 77027
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
TO BE HELD ON
[ ],
2007
TO THE STOCKHOLDERS OF JK ACQUISITION CORP.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of
JK Acquisition Corp., a Delaware corporation (JKA),
will be held at 10:00 a.m. Central Time, on
[ ],
2007, at the offices of Patton Boggs, LLP, 2001 Ross
Avenue, Suite 3000, Dallas, Texas 75201, for the following
purposes:
|
|
|
|
|
the merger proposal
to approve the merger
with Multi-Shot, LLC, a Texas limited liability company,
pursuant to the Second Amended and Restated Agreement and Plan
of Merger, dated August 27, 2007, by and among JKA; Multi-Shot,
Inc., JKAs wholly-owned subsidiary; Multi-Shot, LLC;
Catalyst/Hall Growth Capital Management Co., LLC and the members
of Multi-Shot, LLC, and the transactions contemplated thereby,
whereby JKA will acquire all of the outstanding securities of
Multi-Shot, LLC in exchange for the initial merger consideration
of approximately $197,500,000, consisting of the
(i) $20,000,000 in cash from the trust account funds,
(ii) 21,759,259 shares of JKA common stock,
(iii) 28,516,668 warrants exercisable under certain
circumstances described in the merger agreement and the
accompanying proxy materials, and (iv) the assumption of
third-party indebtedness, which is expected to be approximately
$60,000,000.
|
|
|
|
the amendment to certificate of incorporation
proposal
to amend and restate our Amended and
Restated Certificate of Incorporation, as amended, to
(i) change our name from JK Acquisition Corp.
to MS Energy Services, Inc., (ii) increase the
number of authorized shares of common stock from 50,000,000 to
150,000,000, which when taking into account the number of
preferred shares authorized, will result in an increase of the
total number of authorized shares of capital stock from
51,000,000 to 151,000,000, and (iii) remove certain
provisions only applicable to us prior to our completion of a
business combination.
|
|
|
|
the nomination proposal
to elect five
directors to the Board of Directors.
|
|
|
|
the equity incentive plan proposal
to approve
the adoption of the 2007 Equity Incentive Plan.
|
|
|
|
the adjournment proposal
to approve any
adjournments or postponements of the meeting for the purposes of
soliciting additional proxies.
|
The board of directors of JKA has fixed the close of business on
[ ],
2007 as the date for which JKA stockholders are entitled to
receive notice of, and to vote at, the JKA special meeting and
any adjournments or postponements thereof. Only the holders of
record of JKA common stock on that date are entitled to have
their votes counted at the JKA special meeting and any
adjournments or postponements thereof. This Notice of Special
Meeting of Stockholders and the accompanying proxy materials and
proxy were first sent or given to the stockholders of JKA on
[ ],
2007.
By Order of the Board of Directors,
James P. Wilson
Chairman of the Board,
Chief Executive Officer
[ ],
2007
YOUR VOTE IS IMPORTANT
Please sign, date and return your proxy card as soon as
possible to make sure that your shares are represented at the
special meeting. If you are a stockholder of record of JKA
common stock, you may also cast your vote in person at the
special meeting. If your shares are held in an account at a
brokerage firm or bank, you must instruct your broker or bank on
how to vote your shares or obtain from your broker or bank a
written proxy that will allow you to vote your shares according
to your wishes.
JK ACQUISITION CORP.
4400 Post Oak Parkway, Suite 2530
Houston, Texas 77027
PROXY STATEMENT FOR SPECIAL
MEETING OF STOCKHOLDERS OF
JK ACQUISITION CORP.
APPROXIMATE DATE THAT THESE
MATERIALS WERE FIRST SENT TO THE
STOCKHOLDERS OF JK ACQUISITION
CORP.
[ ],
2007
The proxy furnished herewith is for use only at the special
meeting of the stockholders of JK Acquisition Corp., or JKA or
the Company, to be held at 10:00 a.m., Central Time, on
[ ],
2007, at the offices of Patton Boggs LLP,
2001 Ross Avenue, Suite 3000 Dallas, Texas 75201
(the Special Meeting). At this important Special
Meeting to which you are cordially invited, you will be asked to
consider and vote upon the following proposals:
|
|
|
|
|
the merger proposal
to approve the merger
with Multi-Shot, LLC, a Texas limited liability company,
pursuant to the Second Amended and Restated Agreement and Plan
of Merger, or merger agreement, dated August 27, 2007, by
and among, JKA; Multi-Shot, Inc., JKAs wholly-owned
subsidiary (Multi-Shot, Inc.), Multi-Shot, LLC
(Multi-Shot, LLC or Multi-Shot),
Catalyst/Hall Growth Capital Management Co., LLC
(Catalyst); and the members of Multi-Shot, and the
transactions contemplated thereby, whereby JKA will acquire all
of the outstanding securities of Multi-Shot, LLC in exchange for
the initial merger consideration of approximately $197,500,000,
consisting of the (i) $20,000,000 in cash from the trust account
funds, (ii) 21,759,259 shares of JKA common stock,
(iii) 28,516,668 warrants exercisable under certain
circumstances described in the merger agreement and this proxy
statement, and (iv) the assumption of third-party
indebtedness, which is expected to be approximately $60,000,000
(Proposal One).
|
|
|
|
the amendment to our certificate of incorporation
proposal
to amend and restate our Amended and
Restated Certificate of Incorporation, as amended, (i) to
change our name from JK Acquisition Corp. to
MS Energy Services, Inc., (ii) to increase the
number of authorized shares of common stock from 50,000,000 to
150,000,000, which when taking into account the number of
preferred shares authorized, will result in an increase of the
total number of authorized shares of capital stock from
51,000,000 to 151,000,000, and (iii) to remove certain
provisions only applicable to us prior to our completion of a
business combination (Proposal Two).
|
|
|
|
the nomination proposal
to elect five
directors to the Board of Directors
(Proposal Three).
|
|
|
|
the equity incentive plan proposal
to approve
the adoption of the 2007 Equity Incentive Plan
(Proposal Four).
|
|
|
|
the adjournment proposal
to approve any
adjournments or postponements of the meeting for the purposes of
soliciting additional proxies (Proposal Five).
|
The board of directors of JKA (the Board) has fixed
the close of business on
[ ],
2007, as the record date (the Record Date) for the
determination of stockholders entitled to notice of and to vote
at the Special Meeting and at any adjournment thereof. As of the
Record Date, there were 16,516,667 shares of our common
stock, $.0001 par value per share, outstanding and entitled
to vote. A list of stockholders entitled to vote as of the
Record Date at the Special Meeting will be open to the
examination of any JKA stockholder, for any purpose germane to
the Special Meeting, during ordinary business hours for a period
of ten calendar days before the Special Meeting at JKAs
offices at 4400 Post Oak Parkway, Suite 2530, Houston,
Texas 77027, and at the time and place of the meeting during the
duration of the meeting.
YOUR VOTE IS IMPORTANT. WHETHER YOU PLAN TO ATTEND THE SPECIAL
MEETING OR NOT, PLEASE COMPLETE, SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE ENVELOPE
PROVIDED. IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF
HOW YOU WISH TO VOTE, IT WILL BE VOTED (I)
FOR
THE
PROPOSAL TO MERGE WITH MULTI-SHOT, LLC; (II)
FOR
THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION;
(III)
FOR
THE ELECTION OF FIVE NEW DIRECTORS; (IV)
FOR
ADOPTION OF THE 2007 EQUITY INCENTIVE PLAN; AND (V) IF
NECESSARY,
FOR
THE ADJOURNMENT OF THE SPECIAL MEETING.
SEE THE SECTION TITLED RISK FACTORS BEGINNING
ON PAGE 45 FOR A DISCUSSION OF VARIOUS FACTORS THAT YOU
SHOULD CONSIDER IN CONNECTION WITH THE MERGER WITH MULTI-SHOT,
LLC SINCE, UPON THE MERGER WITH MULTI-SHOT, LLC, THE OPERATIONS
AND ASSETS OF JKA WILL LARGELY BE THOSE OF MULTI-SHOT, LLC.
ii
CONDITIONAL
NATURE OF PROPOSALS AND
SPECIAL VOTING PROVISIONS
Each of Proposals One, Two and Three are conditioned upon
the approval of the other respective proposals. In the event one
or more of Proposals One, Two or Three does not receive the
necessary vote to approve that proposal, then JKA will not
complete any of the transactions identified in any of the
proposals, including Proposal Four. In the event that
Proposals One, Two and Three are approved, but
Proposal Four is not approved, then we will complete the
transactions identified in Proposals One, Two and Three,
but not Proposal Four. Thus, Proposal Four is
conditioned upon approval of Proposals One, Two and Three.
In the event the Proposals are rejected and none of the
transactions are undertaken, JKA will likely look for another
suitable acquisition target.
If we need to consider and vote upon the proposal to adjourn the
special meeting to a later date or dates to permit further
solicitation of proxies in the event there are insufficient
votes at the time of the special meeting to approve the merger
agreement with Multi-Shot, the amendment to JKAs
certificate of incorporation or the election of directors, then
we will submit Proposal Five for stockholder approval at
the special meeting. Adoption of Proposal Five is not
conditioned upon the adoption of Proposal One, Two, Three
or Four.
In addition, each JKA stockholder who holds shares of common
stock issued in JKAs initial public offering or purchased
following such offering in the open market has the right to vote
against the merger proposal and, at the same time, demand that
JKA convert such stockholders shares into cash equal to a
pro rata portion of the proceeds in the trust account, including
interest, in which a substantial portion of the net proceeds of
JKAs initial public offering were and remain deposited,
which as of September 30, 2007 was equal to $79,721,079, or
$6.03 per share. If the holders of 2,711,667 or more shares
of common stock issued in JKAs initial public offering, an
amount equal to 20% or more of the total number of shares issued
in the initial public offering and private placement prior to
the initial public offering, vote against the merger and demand
conversion of their shares into a pro rata portion of the trust
account, then JKA will not be able to consummate the merger. If
the merger proposal is approved and the merger is consummated,
each stockholder that voted against the proposal and elected to
convert shares of stock to cash will be entitled to receive a
cash payment of the pro rata portion of the trust account upon
surrender of stock certificates representing the shares voted
against the merger proposal. A stockholder that votes against
the merger and elects to convert their shares to cash is not
required to tender their shares at or before the special
meeting. If the merger is not completed for any reason, no
shares will be converted to cash, even if you so elect.
JKAs initial stockholders, including all of its directors
and officers and their affiliates, who purchased or received
shares of common stock prior to JKAs initial public
offering, presently own an aggregate of approximately 19.93% of
the outstanding shares of JKA common stock. All of these
stockholders have agreed to vote the shares acquired prior to
the public offering in accordance with the vote of the majority
in interest of all other JKA stockholders voting on the merger
proposal.
Under the Delaware General Corporation Law, the holders of JKA
common stock do not have any right of dissent and appraisal with
respect to any of the proposals.
RECORD
DATE; WHO IS ENTITLED TO VOTE
We have fixed the close of business on
[ ],
2007, as the record date for determining JKA
stockholders entitled to notice of and to attend and vote at the
special meeting. As of the close of business on
[ ],
there were 16,516,667 shares of our common stock
outstanding and entitled to vote. Each share of our common stock
is entitled to one vote per share at the special meeting.
Holders of warrants are not entitled to vote at the special
meeting.
As of September 30, 2007, the JKA officers and directors,
either directly or beneficially, owned and were entitled to
vote 3,291,667 shares, or approximately 19.93% of
JKAs outstanding common stock. In connection with the
initial public offering, JKA and Ferris Baker Watts Incorporated
entered into agreements with the JKAs officers and
directors pursuant to which the JKA officers and directors
agreed to vote the shares owned by them immediately prior to the
initial public offering, including any shares purchased in the
private placement immediately prior to the initial public
offering, either for or against the adoption of the merger
proposal in the same manner that the majority of the shares
issued in the initial public offering are voted on such
proposal. They have also indicated that they
iii
intend to vote their shares FOR all other proposals
being presented at the special meeting, including, if necessary,
the adjournment proposal.
QUORUM
The presence, in person or by proxy, of a majority of all the
shares of common stock entitled to vote will constitute a quorum
at the special meeting.
REQUIRED
VOTE AND EFFECT OF
ABSTENTIONS, BROKER NON-VOTES AND FAILURES TO VOTE
Proposal One:
As provided for in our
Amended and Restated Certificate of Incorporation, as amended,
to be approved Proposal One requires (i) the
affirmative vote of a majority of the shares of JKA common stock
issued in the initial public offering as voted at the Special
Meeting; and (ii) holders of less than 20% of the aggregate
shares of JKAs common stock that were issued in JKAs
initial public offering and the private placement immediately
prior to the initial public offering vote against the merger and
demand conversion of their shares to cash. Abstentions, since it
is not an affirmative vote in favor of the proposal, will have
the same effect as a vote against Proposal One. Broker
non-votes (which may occur if you fail to give voting
instructions to your broker or bank) and failure to vote or
return your proxy will not count as a vote for or against
Proposal One. Both abstentions and broker non-votes are
counted for purposes of determining the presence of a quorum.
Broker non-votes, abstentions and failures to vote will not
constitute an election to convert a shareholders shares
into cash.
Proposal Two:
The affirmative vote of a
majority of the shares of JKAs common stock issued and
outstanding as of the Record Date is required to approve the
amendment to JKAs Amended and Restated Certificate of
Incorporation, as amended. Abstentions, broker non-votes and
failure to vote or return your proxy have the same effect as a
vote against Proposal Two. Both abstentions and broker
non-votes are counted for purposes of determining the presence
of a quorum.
Proposal Three:
The affirmative vote of a
plurality of the shares of JKAs common stock represented
in person or by proxy and entitled to vote at a meeting at which
a quorum is present is required to elect the five nominated
directors. Abstentions, broker non-votes and failure to vote or
return your proxy could result in the lack of a quorum but will
not affect the election of directors if a quorum is otherwise
present.
Proposal Four:
The affirmative vote of a
majority of the shares of JKAs common stock represented in
person or by proxy and entitled to vote at a meeting at which a
quorum is present is required to approve the 2007 equity
incentive plan. Abstentions are counted for the purpose of
determining whether a quorum is present and will have the effect
of a vote against the 2007 equity incentive plan. Broker
non-votes and failure to vote or return your proxy could result
in the lack of a quorum but will not have any effect on the
approval of the equity incentive plan if a quorum is otherwise
present because they will not be counted towards the vote total
for Proposal Four.
Proposal Five:
The affirmative vote of a
majority of the shares of JKAs common stock represented in
person or by proxy and entitled to vote at a meeting at which a
quorum is present is required to approve the adjournment
proposal. Abstentions are counted for the purpose of determining
whether a quorum is present and will have the effect of a vote
against the adjournment proposal. Broker non-votes and failure
to vote or return your proxy could result in the lack of a
quorum but will not have any effect on the approval of the
adjournment proposal if a quorum is otherwise present because
they will not be counted towards the vote total for
Proposal Five.
iv
RECOMMENDATION
BY THE DIRECTORS
After careful consideration of the terms and conditions of the
proposed merger with Multi-Shot, LLC, the amendment to the
certificate of incorporation, the nomination to elect five new
directors, and the adoption of the 2007 equity incentive plan,
the Board of JKA has determined that such proposals and the
transactions contemplated thereby are fair to and in the best
interests of JKA and its stockholders, and the proposed
transaction met the requirements of the JKAs initial
public offering, including the 80% net asset requirement. In
connection with the merger proposal, the Board of JKA has
received an opinion from RBC Capital Markets Corporation
(RBC), that as of the date of its opinion, and based
on conditions that existed as of that date and subject to the
assumptions, limitations and qualifications contained in its
opinion and based upon such other matters as RBC considered
relevant, (i) the consideration to be paid by JKA pursuant
to the merger agreement is fair, from a financial point of view,
to JKA and (ii) the fair market value of Multi-Shot, LLC is
equal to at least 80% of the net asset value of JKA. The Board
of JKA unanimously recommends that you vote or give instruction
to vote (i) FOR the proposal to merge with
Multi-Shot, LLC pursuant to the merger agreement;
(ii) FOR the proposal to approve an amendment
to the certificate of incorporation to change JKAs
corporate name; (iii) FOR the proposal to elect
five new directors; (iv) FOR the proposal to
adopt the 2007 equity incentive plan; and (v), if necessary,
FOR the proposal to adjourn the meeting to a later
date or dates to permit further solicitation and vote of proxies
in the event there are insufficient votes at the time of the
special meeting to adopt the merger proposal, the certificate
amendment proposal or, the nomination proposal; all as described
in Proposals One, Two, Three, Four and Five, respectively.
PERSONS
SOLICITING YOUR VOTE AND
COSTS OF SOLICITATION
We are soliciting the enclosed proxy on behalf of the Board. JKA
will pay all costs of preparing, assembling and mailing the
proxy materials. In addition to mailing the proxy materials, the
officers and other employees of JKA may solicit proxies by
telephone or fax without receiving any additional compensation
for their services. We have requested brokers, banks and other
fiduciaries to forward proxy materials to the beneficial owners
of JKA common stock. We have retained Morrow & Co., LLC to
aid in the solicitation of proxies. We will pay Morrow &
Co. a fee of $17,500 plus reimbursement for certain costs and
out-of-pocket expenses incurred by them in connection with their
services.
v
TABLE
OF CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
1
|
|
|
|
|
9
|
|
|
|
|
46
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
59
|
|
|
|
|
79
|
|
|
|
|
87
|
|
|
|
|
98
|
|
|
|
|
109
|
|
|
|
|
116
|
|
|
|
|
118
|
|
|
|
|
119
|
|
|
|
|
124
|
|
|
|
|
125
|
|
|
|
|
127
|
|
|
|
|
129
|
|
|
|
|
130
|
|
|
|
|
135
|
|
|
|
|
135
|
|
|
|
|
135
|
|
|
|
|
136
|
|
|
|
|
F-1
|
|
|
|
|
F-1
|
|
|
|
|
F-2
|
|
Annex A Second Amended and Restated Agreement
and Plan of Merger
|
|
|
|
|
Annex B-1 Example of Contingent Award
Calculation (Cashless Exercise)
|
|
|
|
|
Annex B-2 Example of Redemption Liability Shares and
Redemption Warrants Calculation
|
|
|
|
|
Annex C Form of Warrant
|
|
|
|
|
Annex D Form of Registration Rights Agreement
|
|
|
|
|
Annex E Form of Escrow Agreement
|
|
|
|
|
Annex F RBC Fairness Opinion
|
|
|
|
|
Annex G Amended and Restated Certificate of
Incorporation (as amended)
|
|
|
|
|
Annex H Fourth Amendment to the Certificate of
Incorporation
|
|
|
|
|
Annex I 2007 Equity Incentive Plan
|
|
|
|
|
Annex J Employment Agreement of Allen Neel
|
|
|
|
|
Annex K Employment Agreement of David Cudd
|
|
|
|
|
Annex L Employment Agreement of Paul Culbreth
|
|
|
|
|
vi
QUESTIONS
AND ANSWERS ABOUT THE PROPOSALS
Who may
vote?
Shareholders holding shares of JKA common stock of record as of
[ ],
2007 are entitled to notice of and to attend the special meeting
and to vote on the proposals. As of the record date there were
16,516,667 shares of JKA common stock outstanding. An
alphabetical list of the shareholders showing the number of
shares that they are entitled to vote will be available at the
offices of JKA for the ten days prior to the special meeting and
will be available at the time and place of the special meeting.
What is
being voted on?
There are four proposals on which you are being asked to vote.
The first proposal is to approve the merger with Multi-Shot, LLC
(Multi-Shot) pursuant to the merger agreement
whereby Multi-Shot will be merged with and into Multi-Shot,
Inc., a newly-formed, wholly-owned subsidiary of JKA. As
consideration for such merger and as further described herein,
the members of Multi-Shot, LLC will receive cash, JKA common
stock and other equity consideration with an aggregate value of
$197,500,000 (subject to adjustment for any outstanding
indebtedness of Multi-Shot, LLC at the time of the merger and
other closing date balance sheet adjustments) in exchange for
all of the membership interests of Multi-Shot, LLC. We refer to
this proposal as the merger proposal or Proposal One. The
second proposal is to approve an amendment to JKAs
certificate of incorporation increasing the authorized shares of
JKA common stock from 50,000,000 to 150,000,000, presuming the
consummation of the merger, to change JKAs name to
MS Energy Services, Inc. (referred to herein as
MSE) and to remove certain provisions that will not
be applicable to JKA following the consummation of the merger
with Multi-Shot, LLC. We refer to this proposal as the amendment
proposal or Proposal Two. The third proposal is to elect
Allen Neel, Ron Nixon, K. Rick Turner, James O.
Jacoby, Jr., and Kim Eubanks to the Board as required by
the merger agreement. We refer to this as the director election
proposal or Proposal Three. The fourth proposal is to
approve the adoption of the 2007 equity incentive plan, or the
Plan, pursuant to which 420,000 shares of common stock will
be reserved for issuance in accordance with the terms of the
Plan. We refer to this as the equity incentive plan proposal or
Proposal Four. It is important for you to note that each of
Proposal One, Two and Three is conditioned upon the
approval of the other, but not Proposal Four. In the event
the merger proposal, the amendment proposal or the director
election proposal does not receive the necessary votes to
approve such proposal, then JKA will not consummate any of these
proposals, including the incentive plan proposal regardless of
whether Proposal Four receives the necessary votes to
approve such proposal. However, in the event, the merger
proposal, the amendment proposal and the director election
proposal does each receive the necessary votes to approve such
proposal, but the incentive plan proposal does not receive the
necessary votes to approve such proposal, then JKA will
consummate the merger, amendment and director proposals, but not
the incentive plan proposal.
Why is
JKA proposing the merger, amendment to JKAs certificate of
incorporation, election of five new directors and the adoption
of the Plan?
JKA is a blank-check company formed specifically as a vehicle
for the acquisition of or merger with a business whose fair
market value is equal to at least 80% of the net assets of JKA.
In the course of JKAs search for a business combination
partner, JKA was introduced to Multi-Shot, LLC, a company the
Board of JKA believes has growth potential. The Board is
attracted to Multi-Shot because of its industry, growth
prospects and management team, among other factors. As a result,
JKA believes that the merger with Multi-Shot will provide JKA
stockholders with an opportunity to participate in a company
with growth potential in the directional drilling segment of the
energy production service industry.
Under the terms of its certificate of incorporation, JKA is
required to submit the terms of a proposed business combination
transaction to its stockholders for approval. JKA has negotiated
the terms of a business combination with Multi-Shot that are set
forth in the merger agreement. As a result, JKA is now
submitting the transaction to its stockholders for their
approval.
1
Multi-Shot provides directional drilling services to oil and gas
exploration companies, primarily in North America.
Multi-Shots business operations have grown substantially
since 2004 through organic growth. The following table shows the
growth on Multi-Shots revenues since 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
Net Income
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
Year
|
|
Amount
|
|
|
Increase
|
|
|
Amount
|
|
|
Increase
|
|
|
2006
|
|
$
|
74,000,000
|
|
|
|
94.3
|
%
|
|
$
|
11,100,000
|
|
|
|
136.0
|
%
|
2005
|
|
$
|
38,100,000
|
|
|
|
98.0
|
%
|
|
$
|
4,700,000
|
|
|
|
281.0
|
%
|
2004
|
|
$
|
19,000,000
|
|
|
|
|
|
|
$
|
(2,600,000
|
)
|
|
|
|
|
Multi-Shots business and financial results are more fully
described in Managements Discussion and Analysis of
Financial Condition and Results of Operations of Multi-Shot,
LLC on page 58 and Information About
Multi-Shot on page 78.
Oil and gas drilling activity in the U.S. has increased in
recent years. According to drilling rig data published by Baker
Hughes Incorporated, the number of onshore drilling rigs in the
U.S. increased by 488, from December 2004 through December
2006. This increase in drilling rigs and drilling activity has
led to increased demand for directional drilling services,
particularly with respect to unconventional natural gas wells
which are well-suited for directional drilling. The number of
directional drilling rigs increased by 463% from March 2002 to
November 2006 according to Baker Hughes. During the same period,
the U.S. land rig count grew by 127%. The Board expects
that if market conditions, including the price for natural gas
and onshore directional drilling activity, remain stable, the
demand for Multi-Shots services will remain strong.
The Board also believes that JKA will have an experienced
management team in place to operate and oversee the direction of
JKA following the merger. The management team of JKA after the
merger is described in Directors and Management of JKA
Following the Merger with Multi-Shot, LLC on page 108.
The amendment to the certificate of incorporation is being
undertaken to increase the number of shares of common stock
currently authorized, and upon completion of the merger,
management also desires the name of the business to reflect its
operations, and to remove certain provisions only applicable to
us prior to our completion of a business combination. The
adoption of the director election proposal is being undertaken
because the Board deems it beneficial for the combined company
going forward following the merger and because the election of
certain new directors is required by the terms of the merger
agreement. The adoption of the Plan is being undertaken because
the Board deems it beneficial for the combined company going
forward following the merger.
What vote
is required in order to approve the merger proposal?
The approval of the merger with Multi-Shot will require the
affirmative vote of a majority of the shares of JKAs
common stock that were issued in our initial public offering
voted at the Special Meeting (in person or by proxy). In
addition, each JKA stockholder who holds shares of common stock
issued in JKAs initial public offering or purchased
following such offering in the open market has the right to vote
against the merger proposal and, at the same time, demand that
JKA convert such stockholders shares into cash equal to a
pro rata portion of the trust account in which a substantial
portion of the net proceeds of JKAs initial public
offering were and remain deposited. These shares will be
converted into cash only if the merger is completed. Based on
the amount of cash held in the trust account as of
September 30, 2007, $79,721,079, without taking into
account any interest accrued after such date, stockholders who
vote against the merger proposal and elect to convert such
stockholders shares as described above will be entitled to
convert each share of common stock that it holds into
approximately $6.03 per share. However, if the holders of
2,711,667 or more shares of common stock issued in JKAs
initial public offering (an amount equal to 20% or more of the
total number of shares issued in the initial public offering and
the private placement immediately prior to the initial public
offering), vote against the merger and demand conversion of
their shares into a pro rata portion of the trust account, then
JKA will not be able to consummate the merger. JKAs
initial stockholders, including all of its directors and
officers, who purchased or received shares of common stock prior
to JKAs initial public offering, presently, together with
their affiliates, own an aggregate of approximately 19.93% of
the outstanding shares of JKA common stock. All of these persons
have agreed to vote all of these shares which
2
were acquired prior to the public offering in accordance with
the vote of the majority in interest of all other JKA
stockholders voting on the merger proposal.
No party to the merger agreement or any of their respective
representatives or agents has had, directly or indirectly, any
contact with a current or potential shareholder with the purpose
of altering an intended vote against the transaction. Other than
in connection with the solicitation of proxies as described
herein, no party to the merger agreement intends to contact a
shareholder with the purpose of altering an intended vote
against the transaction. In addition, no party to the merger
agreement intends to purchase any shares held by a shareholder
with the purpose of altering an intended vote against the
transaction.
What vote
is required in order to approve the amendment to the certificate
of incorporation?
The approval of the amendment to the certificate of
incorporation will require the affirmative vote of a majority of
the shares of JKAs common stock issued and outstanding as
of the Record Date. The officers and directors at JKA intend to
vote all of their shares of common stock in favor of this
proposal.
What vote
is required in order to approve the election of the new
directors?
The approval of the election of the five new directors will
require the affirmative vote of a plurality of the shares of
JKAs common sock represented in person or by proxy at the
Special Meeting. The five persons receiving the greatest number
of votes, though less than a majority, will be elected. The
officers and directors at JKA intend to vote all of their shares
of common stock in favor of the nominees listed in these proxy
materials.
What vote
is required in order to approve the equity incentive plan
proposal?
The approval of the Plan will require the affirmative vote of a
majority of the shares of JKAs common stock present in
person or by proxy at the special meeting. The officers and
directors at JKA intend to vote all of their shares of common
stock in favor of this proposal.
If I am
not going to attend the JKA special meeting of stockholders in
person, should I return my proxy card instead?
Yes. After carefully reading and considering the information
contained in this proxy statement, please complete and sign your
proxy card. Then return the enclosed proxy card in the return
envelope provided herewith as soon as possible, so that your
shares may be represented at the JKA special meeting and your
vote can be recorded. If you return your proxy but do not
indicate your vote on the proxy card, it will be voted FOR the
merger proposal, FOR the amendment proposal, FOR the election of
the director nominees listed in these proxy materials, FOR the
equity incentive plan, and, if necessary, FOR the adjournment
proposal.
What will
happen if I abstain from voting or fail to vote?
An abstention, since it is not an affirmative vote in favor of a
respective proposal but adds to the number of shares present in
person or by proxy, (i) will have the same effect as a vote
against the merger proposal but will not have the effect of
converting your shares into a pro rata portion of the trust
account in which a substantial portion of the net proceeds of
JKAs initial public offering are held, (ii) will have
the same effect as a vote against the amendment to the
certificate of incorporation proposal, (iii) will have the
same effect as a vote against the election of directors and
(iv) will have the same effect as a vote against the equity
incentive plan.
Broker non-votes and the failure to return your proxy card will
have the same effect as an abstention with respect to the
amendment proposal, but will have no effect with respect to the
merger proposal, election of directors or approval of the equity
incentive plan because they will not be counted towards the vote
totals for such proposals.
What do I
do if I want to change my vote?
If you wish to change your vote, please send a later-dated,
signed proxy card to James P. Wilson at JKA prior to the date of
the special meeting or attend the special meeting and vote in
person. You also may revoke your proxy by
3
sending a notice of revocation to James P. Wilson at the address
of JKAs corporate headquarters, provided such revocation
is received prior to the special meeting.
If my
shares are held in street name by my broker, will my
broker vote my shares for me?
No. Your broker can vote your shares only if you provide
instructions on how you wish your broker to vote. If your shares
are held by your broker as your nominee (that is, in
street name), you will need to obtain a proxy form
from the institution that holds your shares and follow the
instructions included on that form regarding how to instruct
your broker to vote your shares. If you do not give instructions
to your broker, your broker can vote your shares with respect to
discretionary items, but not with respect to
non-discretionary items. Discretionary items are
proposals considered routine under the rules of the American
Stock Exchange on which your broker may vote shares held in
street name in the absence of your voting instructions. On
non-discretionary items for which you do not give your broker
instructions, the shares will be treated as broker non-votes.
The adjournment proposal is the only discretionary item being
proposed at the special meeting.
Will I
receive anything in the merger?
If the merger is completed and you vote your shares for the
merger proposal, you will continue to hold the JKA securities
that you currently own. If the merger is completed but you have
voted your shares against the merger proposal and have elected a
cash conversion instead, your JKA shares will be cancelled and
you will receive cash equal to a pro rata portion of the trust
account, which, as of September 30, 2007, was equal to
approximately $6.03 per share. Because JKA is
acquiring all of the outstanding securities of Multi-Shot, LLC,
the members of Multi-Shot, LLC will receive shares of JKA common
stock and warrants to purchase shares of JKA common stock in
exchange for their membership interests of Multi-Shot, LLC.
How is
JKA paying for the merger?
At closing, the initial merger consideration for all the issued
and outstanding membership interests of
Multi-Shot
is expected to be approximately $197,500,000, consisting of the
following:
|
|
|
|
|
$20,000,000 in cash from the trust account.
|
|
|
|
21,759,259 shares of JKA common stock (Parent
Shares) and 28,516,668 warrants to purchase shares of JKA
common stock that may only be exercised if a Contingent Award is
determined to be due to the holder (Parent
Warrants). The Parent Shares and Parent Warrants are
collectively valued at approximately $117,500,000.
|
|
|
|
the payment or assumption of Third-Party Indebtedness of
Multi-Shot (as defined in the merger agreement), which is
expected to be approximately $60,000,000 on the closing date.
The agreement to pay or assume these obligations is valued at
the amount of the debt paid or assumed.
|
In addition to the initial consideration for the merger set
forth above, JKA has agreed to the following:
|
|
|
|
|
up to a maximum of 258,160 shares of JKA common stock
(Redemption Liability Shares) and 516,320
warrants to purchase shares of JKA common stock
(Redemption Warrants) will be issued to the
members of
Multi-Shot
if the amount paid by JKA to its stockholders from the trust
fund in connection with conversion rights exceeds $3,000,000.
The Redemption Liability Shares and the Redemption Warrants
is intended to compensate the members of Multi-Shot for the
reduction of the cash available to JKA from the trust fund after
the merger as a result of the exercise by JKA stockholders of
their conversion rights.
|
|
|
|
|
|
cancellation of 2,485,334 shares of JKA common stock
currently owned by the officers and directors of JKA
|
Parent Warrants.
The Parent Warrants may only
be exercised if a Contingent Award is determined to be due to
the holder pursuant to the merger agreement. Parent Warrants may
be exercised for shares of JKA common stock on a cashless
exercise basis (Contingent Award Shares) or for
replacement warrants to purchase JKA common stock for a cash
exercise price between $5.00 and $6.25 per share (Cash
Exercise Warrants). The Parent Warrants are intended to
compensate the members of Multi-Shot for the dilution that will
result from exercises of the
4
currently outstanding warrants to purchase JKA common stock,
including the warrants issued in connection with JKAs
initial public offering.
Redemption Warrants.
The
Redemption Warrants are issued in conjunction with
Redemption Liability Shares if the amount paid by JKA to
its stockholders from the trust fund in connection with
exercises of the conversion rights of JKA stockholders exceeds
$3,000,000. The Redemption Warrants (and the
Redemption Liability Shares) are intended to compensate the
members of Multi-Shot for reduction of the trust fund in excess
of $3,000,000 as a result of conversions by JKA stockholders
since such reduction in the trust fund will result in less
available cash from the trust fund for working capital
requirements of JKA following the merger. To the extent that
Redemption Liability Shares and Redemption Warrants
are issued, the members of Multi-Shot will receive increased
consideration pursuant to the merger. Under the scenario of
maximum conversion, we estimate the merger consideration would
be increased by $1,934,063 as a result of the issuance of the
Redemption Liability Shares and Redemption Warrants.
Like the Parent Warrants, the Redemption Warrants may only
be exercised if a Contingent Award is determined to be due to
the holder and may be exercised for Contingent Award Shares or
Cash Exercise Warrants.
Contingent Awards.
The Contingent Awards are
intended to provide a mechanism to compensate members of
Multi-Shot for dilution resulting from exercises of currently
outstanding warrants to purchase JKA common stock (Index
Warrants). There are 27,166,668 Index Warrants currently
outstanding, including 666,668 warrants held by
Messrs. Wilson and Spickelmier and 26,500,000 warrants
issued in JKAs initial public offering and held by public
warrant holders. If any Index Warrants are exercised during any
of the periods ending on three measurement dates (each is
referred to as a Determination Period),
June 30, 2008, June 30, 2009 and April 30, 2010,
Parent Warrants and Redemption Warrants may be exercised
for Contingent Award Shares on a cashless exercise basis or, in
some circumstances, Cash Exercise Warrants that are issued in
replacement of the exercised Parent Warrants or
Redemption Warrants. The amount of Contingent Award Shares
is calculated by a cashless exercise formula contained in
Section 2.06(d) of them merger agreement that considers
three factors: (i) the number of Index Warrants exercised
during the Determination Period, (ii) the trading price of
JKA common stock at the time of each exercise and (iii) the
weighted average exercise price of the Index Warrants exercised
during the Determination Period, which will range from $5.00 to
$6.25 per share. A detailed example calculation of such cashless
exercise is set forth on page 16. Cash Exercise Warrants
may be exercised for a number of shares of JKA common stock
equal based on the number of Index Warrants exercised during the
Determination Period. The cash exercise price of Cash Exercise
Warrants is also based on the exercise price of the Index
Warrants exercised during such Determination Period, which will
range from $5.00 to $6.25 per share.
If Third-Party Indebtedness is less than or equal to
$60,000,000, then JKA will pay to the Multi-Shot members the
amount of such difference in additional shares of JKA common
stock and Parent Warrants. If Third-Party Indebtedness is
greater than $60,000,000, then the Multi-Shot members will pay
to JKA the amount of such difference. The payment by the
Multi-Shot members to JKA will be satisfied by payment from the
Escrow Shares (as defined the merger agreement).
A portion of the cash currently being held in the trust fund
established in connection with JKAs initial public
offering will be used to (i) pay the transaction-related
expenses of JKA, (ii) pay the $20,000,000 cash portion of
the initial merger consideration, and (iii) repay
$15,000,000 in subordinated indebtedness incurred by Multi-Shot
in the private recapitalization, (such subordinated indebtedness
was provided by SG-Directional, LLC), and additional portions of
the cash being held in the trust fund may be used to repay all,
or a portion of the $45,000,000 of the other assumed Third Party
Indebtedness. As of September 30, 2007 we have accounts
payable and accrued liabilities of $584,090 and advances of
$500,000. Such amounts will be repaid with cash currently held
in trust if the merger is completed. As of September 30,
2007 we have cash in trust of $79,721,079. After consideration
of the accounts payable, accrued expenses and advances as of
September 30, 2007 and after consideration of the cash
merger consideration ($20,000,000), repayment of subordinated
debt ($15,000,000) and deferred non-accountable expenses due to
underwriters ($1,552,500), we estimate that $42,084,489 will be
available to the company assuming maximum conversion and
$26,148,245 will be available to the company assuming minimum
conversion.
If the merger is approved and the holders of less than
2,711,667 shares of common stock issued in JKAs
initial public offering, an amount equal to less than 20% or
more of the total number of shares issued in the initial public
5
offering and private placement prior to the initial public
offering, vote against the merger and demand conversion of their
shares into a pro rata portion of the trust account, then JKA
will use its trust funds to pay for such conversions.
Do I have
conversion rights in connection with the merger?
If you hold shares of common stock issued in JKAs initial
public offering that you acquired prior to the record date, then
you have the right to vote against the merger proposal and
demand that JKA convert your shares of common stock into a pro
rata portion of the trust account in which a substantial portion
of the net proceeds of JKAs initial public offering are
held. These rights to vote against the merger and demand
conversion of the shares into a pro rata portion of the trust
account are sometimes referred to herein as conversion rights.
An amount equal to the total estimated amount of this potential
obligation is reflected on the financial statements of JKA
contained herein as Common Stock Subject to
Redemption.
If I have
conversion rights, how do I exercise them?
If you wish to exercise your conversion rights, you must vote
against the merger and, at the same time, demand that JKA
convert your shares into cash. You are not required to tender
your shares of common stock at or before the special meeting if
you vote against the merger and demand that JKA convert your
shares into cash. If, notwithstanding your vote, the merger is
completed, then you will be entitled to receive a pro rata share
of the trust account in which a substantial portion of the net
proceeds of JKAs initial public offering are held,
including any interest earned thereon through the date of the
special meeting. Based on the amount of cash held in the trust
account as of September 30, 2007, $79,721,079, without
taking into account any interest accrued after such date, you
will be entitled to convert each share of common stock that you
hold into approximately $6.03 per share. If you exercise
your conversion rights, then you will be exchanging your shares
of JKA common stock for cash and will no longer own these shares
of common stock. You will only be entitled to receive cash for
these shares if you continue to hold these shares through the
closing date of the merger and then tender your stock
certificate to JKA. Prior to exercising your conversion rights,
JKA stockholders should verify the market price of JKAs
common stock as they may receive higher proceeds from the sale
of their common stock in the public market than from exercising
their conversion rights. JKAs shares of common stock are
listed on the American Stock Exchange under the symbol
JKA. If you convert your shares of common stock and
continue to hold warrants to purchase JKA common stock, you will
retain the right to exercise the warrants received as part of
the units purchased in the initial public offering or in the
after-market in accordance with the terms thereof. If the merger
is not completed, then your shares will not be converted to cash
at this time, even if you so elected.
No party to the merger agreement or any of their respective
representatives or agents has had, directly or indirectly, any
contact with a current or potential shareholder with the purpose
of altering an intended conversion election. Other than in
connection with the solicitation of proxies as described herein,
no party to the merger agreement intends to contact a
shareholder with the purpose of altering an intended conversion
election. In addition, no party to the merger agreement intends
to purchase any shares held by a shareholder with the purpose of
altering an intended conversion election.
What
happens to the funds deposited in the trust account after
completion of the merger?
Upon completion of the merger, any funds remaining in the trust
account after payment of amounts, if any, to stockholders
exercising their conversion rights will become operating capital
of JKA. The amount of the trust fund ($79,721,079 as of
September 30, 2007) will be used as working capital of
JKA after the merger.
Who will
manage JKA upon completion of the merger with Multi-Shot,
LLC?
Upon completion of the merger, JKA will be managed by Allen
Neel Chief Executive Officer and President.
Furthermore, upon completion of the merger, Multi-Shot, Inc.
will be managed by Allen Neel Chief Executive
Officer and President, David Cudd Vice President and
Paul Culbreth Vice President, each of whom currently
hold the same respective positions at Multi-Shot, LLC. It is
anticipated that the Board will consist of up to seven members.
We expect the Board of JKA following the consummation of the
merger, will consist of Allen Neel, Ron Nixon, K. Rick
Turner, James O. Jacoby, Jr. and Kim Eubanks.
6
Immediately after the consummation of the merger, assuming that
no JKA stockholders exercise any of the stockholders
conversion rights and no outstanding warrants or options are
exercised, the selling members of
Multi-Shot,
LLC will own approximately 60.75% of the outstanding JKA common
stock, the present public stockholders of JKA (or their
transferees) will own approximately 37.18% of the outstanding
JKA common stock and the present officers and directors of JKA
(or their transferees) will own approximately 2.07% of the
outstanding JKA common stock. As a result, a change of control
of JKA will occur upon consummation of the merger.
What
potential management conflicts exist if the proposal is
approved?
At the close of business on the record date, James P. Wilson,
Keith D. Spickelmier, Herbert C. Williamson and Michael H.
McConnell, who together comprise all of JKAs current
directors and officers, beneficially owned 3,291,667 shares
of JKA common stock, or 19.9% of the outstanding shares of JKA
common stock. 2,958,333 of these shares were purchased prior to
JKAs initial public offering for an aggregate purchase
price of $31,250 (approximately $0.01 per share). In addition,
Mr. Wilson purchased 183,334 units and
Mr. Spickelmier purchased 150,000 units in a private
placement immediately prior to the initial public offering for
an aggregate purchase price of $2,000,004 ($6.00 per unit). Each
unit consisted of one common share and two warrants.
Collectively, the 3,625,001 shares of JKA common stock held
by the officers and directors have a market value of
approximately $21,460,000 based on JKAs common stock price
of $5.92 per share as of September 28, 2007 (without taking
into account any discount that may be associated with the
restrictions on transfer of these shares).
The 666,668 warrants included in the units purchased by
Mr. Wilson and Mr. Spickelmier have a value of
approximately $247,000 based upon the warrant price of $0.37 per
warrant as of September 28, 2007 (without taking into
account any discount that may be associated with the
restrictions on transfer of these warrants). JKAs officers
and directors will not receive any value associated with their
common shares or warrant ownership in the event that a business
combination is not consummated.
Under the terms of the merger agreement, Messrs. Wilson,
Spickelmier, Williamson and McConnell have agreed to the
cancellation of 2,458,334 shares of JKA common stock they
currently own. Our officers and directors will receive no
compensation for the cancellation of the 2,458,334 shares.
Our officers and directors will also transfer 92,522 of their
remaining shares to Gibbs & Bruns, L.L.P. upon the
consummation of the merger with Multi-Shot pursuant to the terms
of the Settlement Agreement. Gibbs & Bruns is the law
firm that represented JKA in connection with the litigation
against Multi-Shot. The transfer of 92,522 shares from our
directors and officers to Gibbs & Bruns represents a
portion of the compensation payable to Gibbs & Bruns
for services rendered. The shares transferred to
Gibbs & Bruns remain subject to the escrow provisions
and transfer restrictions imposed on our officers and directors.
As a result of the cancellation of shares and transfer to
Gibbs & Bruns, Messrs. Wilson, Spickelmier,
Williamson and McConnell will own a total of 740,741 shares
of JKA common stock (including the 333,334 shares included
in the units separately acquired by Mr. Wilson and
Mr. Spickelmier immediately prior to JKAs initial
public offering) upon the consummation of the merger. These
740,741 shares had a market value of approximately
$4,385,000 based on JKAs common stock price of $5.92 per
share as of September 28, 2007 (without taking into account
any discount that may be associated with certain restrictions on
transfer these shares). Additionally, the 666,668 warrants
included in the units purchased separately by Mr. Wilson
and Mr. Spickelmier have a value of approximately $247,000
based upon the warrant price of $0.37 per warrant as of
September 28, 2007 (without taking into account any
discount that may be associated with the restrictions on
transfer of these warrants).
Mr. Wilson and Mr. Spickelmier have agreed to
indemnify JKA with respect to the due diligence, accounting,
legal and other expenses of JKA in connection with the merger in
the event the merger or another business combination is not
consummated before April 10, 2008. If the merger is
completed before April 10, 2008, this indemnity will
terminate. As of September 30, 2007 we estimate JKA had
unpaid accounts payable or accrued liabilities of $584,090 that
we believe could be covered by Mr. Wilsons and
Mr. Spickelmiers indemnity agreement. As of
September 30, 2007, JKA had approximately $90,492 in cash.
Mr. Wilson and Mr. Spickelmier have advanced JKA a
total of $500,000 to provide working capital (as described in
JKAs Current Reports on
Form 8-K
filed May 24, 2007, June 15, 2007, August 8, 2007
and September 6, 2007). None of the $500,000 advances are
included in the $584,090 of accounts payable and accrued
liabilities as of September 30, 2007. These
7
advances will be repaid upon the closing of the merger. If the
merger or another business combination is not consummated by
April 10, 2008, these advances will not be repaid. As a
result of the advances and the indemnification obligations, we
estimate that Mr. Wilson and Mr. Spickelmier will be
out of pocket approximately $1.1 million if the merger or
another business combination is not consummated by
April 10, 2008.
Upon consummation of the merger, certain members of management
and the board of directors will own Parent Warrants and may own
Redemption Warrants. The Parent Warrants and
Redemption Warrants are only exercisable to the extent that
holders of JKAs currently outstanding public warrants
exercise their warrants. Management and the board of directors
determine if Contingent Awards are paid under the merger
agreement to holders of the Parent Warrants and
Redemption Warrants. The Parent Warrants,
Redemption Warrants and Contingent Awards are discussed
more fully under Warrants and Contingent Awards on
page 14.
JKA has no right to redeem the public warrants unless JKAs
common stock trades at or above $8.50 per share on each of 20
trading days within any 30 trading day period. JKA has no plans
to attempt to redeem the warrants in an effort to trigger
Contingent Awards. JKA may evaluate various corporate finance
alternatives that involve voluntary warrant redemptions or a
reduction in the exercise price of the warrants to accelerate
the exercise of the public warrants. Management and the board of
directors would evaluate any such corporate finance alternatives
regarding the public warrants on behalf of JKA.
No current member of management of JKA or any of their
affiliates has any relationship with Multi-Shot, LLC, Catalyst,
or SG-Directional, LLC or any of their respective affiliates.
What
happens if the merger is not consummated?
If the merger is not consummated, JKAs certificate of
incorporation will not be amended, the additional directors will
not be elected and the equity incentive plan will not be
adopted. JKA will continue to search for a business to acquire.
However, JKA will be liquidated if (i) it does not
consummate a business combination by October 10, 2007 or,
(ii) if a letter of intent, agreement in principle or
definitive agreement is executed, but not consummated, by
October 10, 2007, then by April 10, 2008. In the event
the merger is not consummated, JKA will continue to search for
another suitable acquisition target. In the event of a
liquidation, the net proceeds of JKAs initial public
offering held in the trust account, plus any interest earned
thereon, will be distributed on a pro rata basis to the holders
of JKAs common stock that acquired their shares in the
initial public offering or in the open market.
Mr. Wilson and Mr. Spickelmier have agreed to indemnify JKA
related to certain expenses in the event a merger is not
consummated within a specified time frame. If a merger is
completed within the specified time frame such indemnity will
cease. As of September 30, 2007 we estimate JKA had unpaid
accounts payable or accrued liabilities of $584,090 that we
believe could be covered by Mr. Wilsons and Mr.
Spickelmiers indemnity agreement. As of September 30,
2007, JKA had approximately $90,492 in cash. Mr. Wilson and Mr.
Spickelmier have advanced JKA a total of $500,000 (as described
in JKAs current reports on Form 8-K filed May 24, 2007,
June 15, 2007, August 8, 2007 and September 6, 2007).
None of the $500,000 advances are included in the $584,090 of
accounts payable and accrued liabilities as of
September 30, 2007. Such advances would be repaid upon the
closing of the merger. If a merger is not consummated by April
10, 2008, these advances would not be repaid.
When do
you expect the proposals to be completed?
It is currently anticipated that the transactions and actions
contemplated discussed in the proposals will be completed as
promptly as practicable following the JKA special meeting of
stockholders to be held on
[ ],
2007, unless JKA and Multi-Shot, LLC agree to another date after
the special meeting.
Who can
help answer my questions?
If you have questions about any of the proposals, you may write
or call JK Acquisition Corp. at 4400 Post Oak Parkway,
Suite 2530, Houston, Texas 77027,
(713) 978-7557,
Attention: James P. Wilson.
8
THE
MERGER PROPOSAL
SUMMARY
This summary of the merger and the principal terms of the Second
Amended and Restated Agreement and Plan of Merger, dated
August 27, 2007, by and among: JKA; Multi-Shot, Inc.;
Multi-Shot, LLC; and each of Catalyst and
SG-Directional,
LLC, as members representative; and the members of
Multi-Shot, LLC, is subject to, and is qualified in its entirety
by reference to, the Second Amended and Restated Agreement and
Plan of Merger, a copy of which is attached as
Annex A,
and the more comprehensive discussion found beginning on
page 13 in these proxy materials.
|
|
|
Description of Merger: (See page 13)
|
|
Merger of Multi-Shot, LLC, a Texas limited liability company,
with and into Multi-Shot, Inc., a Delaware corporation and
wholly owned subsidiary of JKA.
|
|
Principal Business: (See page 11)
|
|
Multi-Shot, LLC provides directional drilling services with an
established presence in most major onshore oil &
natural gas producing basins in the U.S.
|
|
Initial Merger Consideration (See page 13
|
|
Approximately $197,500,000, consisting of:
|
|
|
|
$20,000,000 in cash from the trust account.
|
|
|
|
21,759,259 shares of JKA common stock
(Parent Shares) and 28,516,668 warrants to purchase
shares of JKA common stock that may only be exercised if a
Contingent Award is determined to be due to the holder
(Parent Warrants). The Parent Shares and Parent
Warrants are collectively valued at approximately $117,500,000.
|
|
|
|
the payment or assumption of Third-Party
Indebtedness of Multi-Shot (as defined in the merger agreement),
which is expected to be approximately $60,000,000 on the closing
date. The agreement to pay or assume these obligations is valued
at the amount of the debt paid or assumed.
|
|
Additional Consideration (See page 14)
|
|
In addition to the initial consideration for the merger set
forth above, JKA has agreed to the following:
|
|
|
|
up to a maximum of 233,045 shares of JKA common
stock (Redemption Liability Shares) and 466,091
warrants to purchase shares of JKA common stock
(Redemption Warrants) will be issued to the
members of Multi-Shot if the amount paid by JKA to its
stockholders from the trust fund in connection with conversion
rights exceeds $3,000,000. The Redemption Liability Shares
and the Redemption Warrants is intended to compensate the
members of Multi-Shot for the reduction of the cash available to
JKA from the trust fund after the merger as a result of the
exercise by JKA stockholders of their conversion rights.
|
|
|
|
cancellation of 2,485,334 shares of JKA common
stock currently owned by the officers and directors of JKA.
|
|
Additional Agreements:
|
|
Escrow Agreement securing the payment of post
closing adjustments and indemnity obligations, if any (see
page 20).
|
|
|
|
Employment Agreements with key employees (see
page 22).
|
9
|
|
|
|
|
Registration Rights Agreement relating to the shares
of JKA common stock and warrants issued as consideration (see
page 23).
|
|
Conditions: (See page 21)
|
|
The merger agreement is subject to customary conditions,
including:
|
|
|
|
no action, order or injunction prohibiting the
merger;
|
|
|
|
no statute, rule, order or decree shall have been
enacted or promulgated which would prohibit the merger or
otherwise make the merger illegal;
|
|
|
|
listing of the Parent Shares and Redemption
Liability Shares with the American Stock Exchange;
|
|
|
|
receipt of certain consents;
|
|
|
|
execution of employment agreements, registration
rights agreement and escrow agreement;
|
|
|
|
approval by stockholders of JKA and members of
Multi-Shot LLC;
|
|
|
|
expiration of waiting periods under the
Hart-Scott-Rodino
Antitrust Improvements Act.
|
|
Effect of Termination: (See page 22)
|
|
The merger agreement may be terminated on customary grounds
including:
|
|
|
|
by mutual agreement;
|
|
|
|
upon issuance of an order preventing the merger;
|
|
|
|
upon a material breach of any representation,
warranty or obligation;
|
|
|
|
by Multi-Shot if the aggregate liabilities and
indebtedness of JKA exceed $4,202,500 as of the closing date of
the merger; and
|
|
|
|
if 2007 annualized adjusted EBITDA is less than
$29,000,000 through the end of the most recently completed month
prior to the month in which the effective time occurs JKA may
waive this requirement pursuant to the terms to the Second
Amended and Restated Agreement and Plan of Merger, and JKA
would consider the amount by which Multi-Shot fell short of the
annualized adjusted EBITDA, its business prospects, any price
adjustments and any other relevant considerations at the time in
determining whether to terminate the merger agreement.
|
|
|
|
The merger agreement will be automatically terminated if:
|
|
|
|
JKA has failed to file with the SEC and mail to its
stockholders the definitive merger proxy statement prior to
December 31, 2007; or
|
|
|
|
the effective time of the merger has not occurred on
or before January 31, 2008.
|
|
Fairness Opinion (See page 27)
|
|
The Board has received a fairness opinion dated August 24,
2007 from RBC Capital Markets Corporation (RBC) in
conjunction with the merger agreement. The Board had previously
received a fairness opinion from KeyBanc Capital Markets, a
division of as McDonald Investments, Inc. (KeyBanc),
in conjunction with the First Amended and Restated Agreement and
Plan of Merger dated February 14, 2007 (Previous Merger
Agreement). The KeyBanc opinion was dated April 30, 2007.
The KeyBanc opinion resulted in a range of values for
|
10
|
|
|
|
|
Multi-Shot of $108 million to $177 million. The Board determined
that an updated fairness opinion would be requested in
conjunction with the merger agreement. JKA requested that
KeyBanc provide an updated fairness opinion based upon the terms
of the merger agreement. KeyBanc was unable to commit to provide
the updated fairness opinion sought by JKA within the time
period requested by JKA. JKA then interviewed and engaged RBC,
which had appropriate expertise and was able to complete the
fairness opinion within the time period requested by JKA. All
fees and expenses in connection with the KeyBanc opinion have
been paid by JKA. Certain differences between the RBC opinion
and the KeyBanc opinion are discussed in Fairness Opinion
Comparison on page 37.
|
|
|
|
Conversion Rights:
|
|
Any stockholder that votes against the merger and elects to
convert their shares to cash will receive payment of a pro rata
portion of the trust fund in which substantially all of the
proceeds from the initial public offering are deposited. A
stockholder that votes against the merger and elects to convert
their shares to cash is not required to tender their shares to
JKA at or before the special meeting. In connection with the
initial public offering, JKA agreed to pay the underwriters
additional non-accountable expenses of $1,552,500, but only in
the event of and upon the completion of the merger. If the
merger is approved, the conversion will result in the payment of
approximately $6.03 per share based on the value of the
trust fund as of September 30, 2007.
|
|
|
|
Required Vote: (See page 44)
|
|
The merger must be approved by a majority of the shares of JKA
common stock sold in the initial public offering voted at the
Special Meeting. Additionally, the merger shall not be
consummated if holders of 20% or more of the aggregate shares of
JKA common stock sold in the initial public offering and private
placement prior to the initial public offering vote against the
merger and demand conversion of their shares to cash.
|
|
Effective Date:
|
|
As soon as reasonably practical after the approval of the merger
agreement by the stockholders of JKA.
|
|
Effect of Disapproval: (See page 44)
|
|
No stockholder will be entitled to convert shares of JKA. JKA
will continue to seek a suitable acquisition candidate. However,
JKA will be liquidated if (i) it does not consummate a
business combination by October 10, 2007 or, (ii) if a
letter of intent, agreement in principle or definitive agreement
is executed, but not consummated, by October 10, 2007, then
by April 10, 2008, and will then distribute the funds held
in the trust account to all the holders of all shares of JKA
stock acquired in the public offering pro rata.
|
MULTI-SHOT,
LLC
Description
of Business
Multi-Shot, LLC provides directional drilling services with an
established presence in most major onshore oil &
natural gas producing basins in the U.S. Since inception of
its predecessor business in 1980, the company has developed into
a leading independent service provider that employs a skilled
and experienced labor force. (see page 84 for description
of experience of labor force). Multi-Shot provides downhole
drilling motors and labor which assist in drilling oil or gas
wells directionally as opposed to the standard vertical drilling
of wells. In connection with these services, Multi-Shot also
provides downhole surveying and measurement while drilling
services. These
11
services provide information on the location of the wellbore as
it is being drilled directionally and other critical feedback
from the wellbore. Multi-Shot owns and operates specialized
equipment used in directional drilling and directional surveying
and maintains a diversified customer base that includes large,
U.S. based independent exploration and production
companies. Furthermore, Multi-Shot, LLC has a veteran management
team focused on creating opportunities for continued growth. The
principal executive office of Multi-Shot, LLC is located at 2507
North Frazier, Suite 215, Conroe, Texas 77303,
(936) 441-6655,
which will be JKAs headquarters after the merger.
Private
Recapitalization of Multi-Shot, LLC
In late January 2007, principals of Catalyst contacted The
Stephens Group, a private equity firm, regarding their potential
interest in a possible transaction with Multi-Shot. The Stephens
Group manages, but does not own, a new entity named
SG Directional, LLC (SG-Directional) that was
organized to consider this investment. No officers of JKA,
Multi-Shot or any Multi-Shot members had any relationship with
The Stephens Group, SG-Directional or any of its affiliates
prior to the completion of the private recapitalization. Through
a series of negotiations between Multi-Shot and SG-Directional,
a recapitalization and purchase agreement was executed by and
among SG-Directional, Multi-Shot, its members and Catalyst. The
recapitalization was completed on April 2, 2007. Through
the private recapitalization, SG-Directional acquired 61.4% of
the membership interests of Multi-Shot directly from certain of
the members of
Multi-Shot
for $45.0 million. Additionally, SG-Directional provided a
subordinated debt loan to Multi-Shot in the amount of
$15 million. The implied gross enterprise value related to
the recapitalization was $122.3 million. The implied net
enterprise value on the recapitalization date was $73.3 million.
The difference between the gross enterprise value and net
enterprise value represents the debt level at the date of the
recapitalization, which totaled $49.4 million. See further
discussion on page 62. Neither SG-Directional nor any of
its affiliates received any fees (other than interest earned on
the subordinated debt investment) or other compensation as a
result of the private recapitalization.
SG-Directional
will have its subordinated debt loan to Multi-Shot repaid (along
with any unpaid and accrued interest) through the proceeds of
the JKA trust account at the merger date. SG-Directional will
receive an estimated $12.3 million in cash consideration at
the closing of the merger, and will receive JKA equity
consideration as a member of Multi-Shot. The private
recapitalization does not effect the proposed merger between
Multi-Shot and JKA, other than SG-Directional is now the
majority member of Multi-Shot.
Market
Price of and Dividend Policy on Multi-Shot, LLC
Interests
There is no established public market for ownership interests in
Multi-Shot. The ownership interests in Multi-Shot are currently
owned by (i) four (4) individuals that are part of
management or managers of Multi-Shot and (ii) six
(6) investment limited partnerships or limited liability
companies. Multi-Shot has not paid any dividends or distributed
any amounts to its members in the previous two years and does
not have any equity compensation plans, other than amounts
distributed to its Members with respect to (i) the private
recapitalization transaction with SG-Directional, LLC as
described on page 61 and (ii) federal income taxes and
interests awarded pursuant to incentive plans that terminate
upon the closing of the merger. Neither the income tax
distribution to Multi-Shots members in early 2007 nor the
distribution to Multi-Shots members in connection with the
private recapitalization impacted or will impact the merger
consideration.
LITIGATION
AND SETTLEMENT AGREEMENT
On July 9, 2007, Multi-Shot verbally notified JKA that if
JKA was unable to obtain stockholder approval of the
transactions contemplated by the Previous Merger Agreement prior
to July 31, 2007, then Multi-Shot would exercise its
termination rights on July 31, 2007 or soon thereafter
pursuant to Section 9.01(a) of the Previous Merger
Agreement. Based on the then current status of JKAs proxy
materials on Schedule 14A related to the Previous Merger
Agreement, as well as certain terms and provisions in the
Previous Merger Agreement and JKAs bylaws, as amended, JKA
did not believe that it would obtain the necessary stockholder
approval of the transactions contemplated by Previous Merger
Agreement prior to July 31, 2007. It was JKAs
position that any inability to obtain the necessary stockholder
approval prior to July 31, 2007 was the result of wrongful
acts and omissions by Multi-Shot. Multi-Shot disagreed with this
assessment.
On July 16, 2007, JKA filed suit in the state district
court of Harris County, Texas against Multi-Shot and twelve
other named defendants. JKA was seeking injunctive relief and
other damages related to various claims of
12
breach of contract in connection with the First Amended and
Restated Agreement and Plan of Merger dated February 14,
2007 (Previous Merger Agreement). On July 17,
2007 a temporary restraining order was issued by the court that
prohibited Multi-Shot and twelve other named defendants from
selling, transferring, encumbering, diluting, or otherwise
disposing of any asset of or interest in Multi-Shot other than
in the usual course of business. On August 27, 2007, a
Settlement Agreement between the parties to the suit was
executed simultaneously with the merger agreement. The merger
agreement includes substantially different terms than the
Previous Merger Agreement, including the following:
|
|
|
|
|
|
|
|
|
|
|
Previous
|
|
|
|
|
|
|
Merger
|
|
|
Merger
|
|
|
|
Agreement
|
|
|
Agreement
|
|
|
Total Initial Merger Consideration
|
|
$
|
120,750,000
|
|
|
$
|
197,500,000
|
|
Cash
|
|
$
|
0
|
|
|
$
|
20,000,000
|
|
JKA common stock
|
|
|
13,203,700
|
|
|
|
21,759,259
|
|
Contingent Warrants
|
|
|
26,407,400
|
|
|
|
28,516,668
|
|
Assumption or payment of Third-Party Indebtedness
|
|
$
|
49,400,000
|
|
|
$
|
60,000,000
|
|
Shares of JKA common stock currently owned by the officers and
directors of JKA to be cancelled
|
|
|
0
|
|
|
|
2,485,334
|
|
Minimum Multi-Shot EBITDA requirement
|
|
$
|
23,000,000
|
|
|
$
|
29,000,000
|
|
Additionally, Multi-Shot acquired certain operating assets of
Ulterra MWD, L.P. (Ulterra) effective July 1,
2007. The aggregate purchase price of the Ulterra assets was
$10,000,000 in cash with an earnout provision that provides for
additional payments to Ulterra based on the future economic
performance of the Ulterra assets. The acquisition of the
Ulterra assets is more fully described under Asset
Acquisition of Ulterra MWD, L.P. on page 63. The
Ulterra asset acquisition was not contemplated in the Previous
Merger Agreement merger consideration.
The Board met on August 26, 2007 and authorized the
execution of the Settlement Agreement and the merger agreement.
The Board believes the terms of the Settlement Agreement are
favorable to the JKA stockholders. The Settlement Agreement ends
the litigation process and enables JKA to complete the merger
with Multi-Shot. The Board reviewed the terms of the merger
agreement and analyzed the RBC fairness opinion and the results
of operations of Multi-Shot, LLC since February 14, 2007.
As more fully described in Reasons For The Merger
beginning on page 24, the Board concluded that the merger
with Multi-Shot is in the best interests of JKAs
stockholders.
SECOND
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
The following summary of the material provisions of the Second
Amended and Restated Agreement and Plan of Merger, or merger
agreement, is qualified by reference to the complete text of the
merger agreement, a copy of which is attached as
Annex A
to this proxy statement. All stockholders are encouraged to
read the merger agreement in its entirety for a more complete
description of the terms and conditions of the merger.
Structure
of the Merger
At the effective time of the merger, Multi-Shot, LLC will be
merged with and into Multi-Shot, Inc., a newly-formed,
wholly-owned subsidiary of JKA, and Multi-Shot, Inc. will
continue as the operating company and a wholly-owned subsidiary
of JKA. JKA will be renamed MS Energy Services, Inc.
Initial
Merger Consideration
At closing, the initial merger consideration for all the issued
and outstanding membership interests of Multi-Shot is expected
to be approximately $197,500,000, consisting of the following:
|
|
|
|
|
$20,000,000 in cash from the trust account.
|
|
|
|
21,759,259 shares of JKA common stock (Parent
Shares) and 28,516,668 warrants to purchase shares of JKA
common stock that may only be exercised if a Contingent Award is
determined to be due to the holder
|
13
|
|
|
|
|
(Parent Warrants). The Parent Shares and Parent
Warrants are collectively valued at approximately $117,500,000
(assuming a value of $5.40 per share of JKA common stock).
|
|
|
|
|
|
the payment or assumption of Third-Party Indebtedness of
Multi-Shot (as defined in the merger agreement), which is
expected to be approximately $60,000,000 on the closing date.
The agreement to pay or assume these obligations is valued at
the amount of the debt paid or assumed.
|
Initial
Merger Consideration issued to Multi-Shot Members:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Parent
|
|
|
|
Cash
|
|
|
Shares
|
|
|
Warrants
|
|
|
SG-Directional(1)
|
|
$
|
12,279,250
|
|
|
|
13,359,369
|
|
|
|
17,508,166
|
|
Catalyst/Hall Growth Capital, LP(2)
|
|
|
2,874,784
|
|
|
|
3,127,657
|
|
|
|
4,098,961
|
|
Catalyst/Hall Private Equity, LP(2)
|
|
|
825,757
|
|
|
|
898,393
|
|
|
|
1,177,392
|
|
Catalyst Capital Partners I, Ltd(2)
|
|
|
281,529
|
|
|
|
306,294
|
|
|
|
401,414
|
|
Catalyst Capital Partners II, Ltd(2)
|
|
|
677,063
|
|
|
|
736,620
|
|
|
|
965,380
|
|
CRF Air, LLC(2)
|
|
|
991,306
|
|
|
|
1,078,504
|
|
|
|
1,413,437
|
|
Robert P. Vilyus(2)
|
|
|
49,567
|
|
|
|
53,927
|
|
|
|
70,675
|
|
Allen Neel(2)
|
|
|
690,104
|
|
|
|
750,807
|
|
|
|
983,973
|
|
David Cudd(2)
|
|
|
665,320
|
|
|
|
723,844
|
|
|
|
948,636
|
|
Paul Culbreth(2)
|
|
|
665,320
|
|
|
|
723,844
|
|
|
|
948,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,000,000
|
|
|
|
21,759,259
|
|
|
|
28,516,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Shares not subject to merger escrow agreement
|
|
(2)
|
|
Shares subject to merger escrow agreement
|
Additional
Consideration
In addition to the initial consideration for the merger set
forth above, JKA has agreed to the following:
|
|
|
|
|
up to 233,045 shares of JKA common stock
(Redemption Liability Shares) and 466,091
warrants to purchase shares of JKA common stock
(Redemption Warrants) will be issued to the
members of Multi-Shot if the amount paid by JKA to its
stockholders from the trust fund in connection with conversion
rights exceeds $3,000,000. The Redemption Liability Shares and
the Redemption Warrants is intended to compensate the
members of Multi-Shot for the reduction of the cash available to
JKA from the trust fund after the merger as a result of the
exercise by JKA stockholders of their conversion rights.
|
|
|
|
cancellation of 2,485,334 shares of JKA common stock
currently owned by the officers and directors of JKA.
|
Warrants
and Contingent Awards
Parent Warrants.
The Parent Warrants may only
be exercised if a Contingent Award is determined to be due to
the holder pursuant to the merger agreement. The Parent Warrants
may be exercised for shares of JKA common stock on a cashless
exercise basis (Contingent Award Shares) or for
replacement warrants to purchase JKA common stock for a cash
exercise price between $5.00 and $6.25 per share (Cash
Exercise Warrants). The Parent Warrants are intended to
compensate the members of Multi-Shot for the dilution that will
result from exercises of the currently outstanding warrants to
purchase JKA common stock, including the warrants issued in
connection with JKAs initial public offering.
Redemption Warrants.
The
Redemption Warrants are issued in conjunction with
Redemption Liability Shares if the amount paid by JKA to
its stockholders from the trust fund in connection with
exercises of the conversion rights of JKA stockholders exceeds
$3,000,000. The Redemption Warrants (and the
Redemption Liability Shares) are intended to compensate the
members of Multi-Shot for reduction of the trust fund in excess
of
14
$3,000,000 as a result of conversions by JKA stockholders since
such reduction in the trust fund will result in less available
cash from the trust fund for working capital requirements of JKA
following the merger. To the extent that
Redemption Liability Shares and Redemption Warrants
are issued, the members of Multi-Shot will receive increased
consideration pursuant to the merger. Under the scenario of
maximum conversion, we estimate the merger consideration would
be increased by $1,288,455 as a result of the issuance of the
Redemption Liability Shares and Redemption Warrants.
Like the Parent Warrants, the Redemption Warrants may only
be exercised if a Contingent Award is determined to be due to
the holder and may be exercised for Contingent Award Shares or
Cash Exercise Warrants.
Contingent Awards.
The Contingent Awards are
intended to provide a mechanism to compensate members of
Multi-Shot for dilution resulting from exercises of currently
outstanding warrants to purchase JKA common stock (Index
Warrants). There are 27,166,668 Index Warrants
currently outstanding, including 666,668 warrants held by
Messrs. Wilson and Spickelmier and 26,500,000 warrants
issued in JKAs initial public offering and held by public
warrant holders. Contingent Awards are calculated at the end of
three periods (each is referred to as a Determination
Period):
|
|
|
|
|
from the merger closing date to June 30, 2008.
|
|
|
|
from July 1, 2008 to June 30, 2009.
|
|
|
|
from July 1, 2009 to April 30, 2010 (unless extended
to June 30, 2010 by mutual consent of JKA and the members
of Multi-Shot).
|
If any Index Warrants are exercised during any Determination
Period, Parent Warrants and Redemption Warrants may be
exercised for either:
|
|
|
|
|
shares of JKA common stock (Contingent Award Shares)
on a cashless exercise basis. The amount of Contingent Award
Shares is calculated by a cashless exercise formula contained in
Section 2.06(d) of the merger agreement that considers
three factors: (i) the number of Index Warrants exercised
during the Determination Period, (ii) the trading price of
JKA common stock at the time of each exercise and (iii) the
weighted average exercise price of the Index Warrants exercised
during the Determination Period, which will range from $5.00 to
$6.25 per share.
|
|
|
|
replacement warrants to purchase JKA common stock for a cash
exercise price between $5.00 and $6.25 per share (Cash
Exercise Warrants). Cash Exercise Warrants may be
exercised for a number of shares of JKA common stock equal based
on the number of Index Warrants exercised during the
Determination Period. The cash exercise price of Cash Exercise
Warrants is also based on the exercise price of the Index
Warrants exercised during such Determination Period, which will
range from $5.00 to $6.25 per share.
|
The Chief Financial Officer will be responsible for preparing
the Contingent Award calculation to be approved by the Board of
Directors. The Chief Financial Officer will not own, directly or
indirectly, any of the Parent Warrants subject to the Contingent
Award, however certain board members or their affiliates may own
Parent Warrants subject to the Contingent Award. See
page 6, What potential management conflicts exist if
the proposal is approved.
15
An example of a Contingent Award calculation is described below:
Contingent
Award Calculation Example (Cashless
Exercise)
(Based on the following assumptions: (i) 1,000,000
warrants exercised by public stockholders in the determination
period, (ii) weighted average stock price of $7.00 per
share for such warrant exercises by public stockholders in such
determination period and (iii) weighted average exercise
price of $5.00 per share)
|
|
|
|
|
|
|
Merger
|
|
|
|
|
|
Agreement
|
|
|
|
|
|
Section
|
|
|
|
|
|
|
2.06(d)(ii)(A)
|
|
Aggregate # of Index Warrants for Initial Determination Period
|
|
|
1,000,000
|
|
2.06(d)(ii)(B)
|
|
Aggregate Total Exercised Warrant Value for Initial Determinate
Period
|
|
$
|
7,000,000
|
|
2.06(d)(ii)(C)
|
|
Per share weighted average Total Exercised Warrant Value
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.06(d)(iii)(A)
|
|
# shares in 2.06(d)(ii)(A) above
|
|
|
1,000,000
|
|
2.06(d)(iii)(B)
|
|
multiply, # of shares in 2.06(d)(iii) A by $5.00
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
|
|
2.06(d)(iv)(A)
|
|
Subtract the amount determined in 2.06(d)(iii) from
|
|
$
|
5,000,000
|
|
2.06(d)(iv)(B)
|
|
the Total Exercised Warrant Value for Initial Determination
Period 2.06(d)(i)
|
|
$
|
7,000,000
|
|
|
|
Contingent Award amount
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.06(d)(v)(A)
|
|
Contingent Award amount per 2.06(d)(iv) divided by
|
|
$
|
2,000,000
|
|
2.06(d)(v)(B)
|
|
Amount determined in 2.06(d)(ii)(C): per share weighted average
Total Exercise Warrant Value for the Determination Period
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
|
Contingent Award Shares to be issued to Members
|
|
|
285,714
|
|
The Contingent Awards were designed to provide the members of
Multi-Shot with a partial anti-dilutive measure based on the
exercise of warrants by JKA public warrant holders. To the
extent that the Contingent Award results in additional common
shares issued to the Parent Warrant holders and Redemption
Warrant holders or the exercise of Cash Exercise Warrants
results in the issuance of additional common shares, other JKA
common shareholders will suffer dilution. The magnitude of the
potential dilution will be dependent upon the ultimate number of
Contingent Award Shares, if any, issued subject to the
Contingent Award calculation or the shares issued as a result of
the exercise of Cash Exercise Warrants.
The Parent Warrants and Redemption Warrants are not the
same warrants which were registered by JKA in connection with
its initial public offering. The form of Parent Warrant and
Redemption Warrant to be issued to the Members is attached
as
Annex C.
. The Parent Warrants and
Redemption Warrants may be exercised only pursuant to
Contingent Awards as determined based upon the exercise of
public warrants by JKA stockholders. The holders of such
warrants shall not be required to provide any additional
consideration upon the exercise of a Parent Warrant or a
Redemption Warrant unless the holder elects to replace Parent
Warrants or Redemption Warrants with a Cash Exercise Warrant.
Holders of Cash Exercise Warrants will be required to tender a
cash exercise price to exercise a Cash Exercise Warrant.
All Parent Shares, Parent Warrants, Cash Exercise Warrants
Redemption Warrants and JKA common stock issued pursuant to
the exercise of any Parent Warrant, Cash Exercise Warrant or
Redemption Warrant in connection with the Merger will be subject
to (i) a registration rights agreement, which is attached
to this proxy statement as
Annex D,
and
(ii) all such equity securities issued to the continuing
members of Multi-Shot (which excludes equity securities issued
to
SG-Directional,
LLC), an escrow agreement, which is attached to this proxy
statement as
Annex E.
16
Effect
of Redemption Liability Shares and Redemption
Warrants
The Members will also be eligible to receive Redemption
Liability Shares and Redemption Warrants if the cash
consideration paid by JKA to its stockholders with respect to
such stockholders exercising their conversion rights exceeds
$3,000,000. The Redemption Liability Shares and Redemption
Warrants were designed to address a concern of Multi-Shot that
the merged company would have more net debt than it had
bargained for to fund stockholder conversions. To the extent
that JKA shareholders convert shares representing cash payments
of greater than $3,000,000, then JKA will have either less cash
from the trust account or a higher debt level then contemplated
in the merger negotiations with Multi-Shot. Therefore,
Multi-Shot required additional shares as merger consideration in
this event. To the extent that Redemption Liability Shares and
Redemption Warrants are issued, the members of Multi-Shot will
receive increased consideration pursuant to the merger. Under
the scenario of maximum conversion, we estimate the merger
consideration would be increased by $1,394,063 as a result of
the issuance of the Redemption Liability Shares and Redemption
Warrants. As a result, the issuance of Redemption Liability
Shares and Redemption Warrants will have the effect of providing
additional stability regarding the value of the consideration
received by the members of Multi-Shot in light of the amount of
cash from the trust fund available for working capital of JKA
following the merger. The table below highlights and summarizes
the results of the Redemption Liability Shares and Redemption
Warrants formula under varying percentages of JKA stockholders
exercising conversion rights. Note that 19.99% conversion
represents the maximum allowable conversion.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Percentage of Shares Converted to Cash
|
|
|
19.99
|
%
|
|
|
15.00
|
%
|
|
|
10.00
|
%
|
|
|
5.00
|
%
|
Assumed Redemption Shares Number
|
|
|
2,710,311
|
|
|
|
2,033,750
|
|
|
|
1,355,833
|
|
|
|
677,917
|
|
Redemption Share Price as of September 30, 2007
|
|
$
|
6.03
|
|
|
$
|
6.03
|
|
|
$
|
6.03
|
|
|
$
|
6.03
|
|
Gross Redemption Dollar Amount
|
|
$
|
16,343,175
|
|
|
$
|
12,263,513
|
|
|
$
|
8,175,673
|
|
|
$
|
4,087,840
|
|
Redemption Value Safe Harbor
|
|
$
|
3,000,000
|
|
|
$
|
3,000,001
|
|
|
$
|
3,000,002
|
|
|
$
|
3,000,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Redemption Dollar Amount
|
|
$
|
13,343,175
|
|
|
$
|
9,263,512
|
|
|
$
|
5,175,671
|
|
|
$
|
1,087,837
|
|
Safe Harbor Shares
|
|
|
497,512
|
|
|
|
497,513
|
|
|
|
497,513
|
|
|
|
497,513
|
|
Shares in Excess of Safe Harbor
|
|
|
2,212,799
|
|
|
|
1,536,237
|
|
|
|
858,321
|
|
|
|
180,404
|
|
Exchange Value
|
|
$
|
5.40
|
|
|
$
|
5.40
|
|
|
$
|
5.40
|
|
|
$
|
5.40
|
|
Redemption Price Differential
|
|
$
|
0.63
|
|
|
$
|
0.63
|
|
|
$
|
0.63
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption Liability Amount
|
|
$
|
1,394,063
|
|
|
$
|
967,830
|
|
|
$
|
540,742
|
|
|
$
|
113,654
|
|
Redemption Liability Shares
|
|
|
258,160
|
|
|
|
179,228
|
|
|
|
100,137
|
|
|
|
21,047
|
|
Redemption Warrants
|
|
|
516,320
|
|
|
|
358,455
|
|
|
|
200,275
|
|
|
|
42,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
See below for a step by step description of this calculation.
The issuance of the Redemption Share Liability and Redemption
Warrants would cause dilution to JKA shareholders, offset by the
number of shares retired through conversion to cash.
Redemption Liability
Shares and Redemption Warrants
Calculation-Example
|
|
|
|
|
|
|
As per
2.08(c)(i) of the merger agreement
|
|
|
|
|
|
|
#1
Assumed Redemption Shares Number
|
|
|
|
|
2,710,311
|
|
#2
Redemption Share Price
(assumed)
|
|
|
|
$
|
6.03
|
|
#3
Gross Redemption Dollar Amount
|
|
= #1* #2
|
|
$
|
16,343,175
|
|
#4
Redemption Value Safe Harbor
|
|
|
|
$
|
3,000,000
|
|
#5
Net Redemption Dollar Amount
|
|
= #3 - #4
|
|
$
|
13,343,175
|
|
#6
Safe Harbor Shares
|
|
= #4 / #2
|
|
|
497,512
|
|
#7
Shares in Excess of Safe Harbor
|
|
= #5 / #2
|
|
|
2,212,799
|
|
#8
Exchange Value
|
|
|
|
$
|
5.40
|
|
#9
Redemption Price Differential
|
|
= #2 - #7
|
|
$
|
.63
|
|
#10
Redemption Liability Amount
|
|
= #7* #9
|
|
$
|
1,394,063
|
|
#11 Redemption Liability Shares
|
|
= #10 / #8
|
|
|
258,160
|
|
#12 Redemption Warrants
|
|
= #11* 2
|
|
|
516,320
|
|
Closing
of the Merger
Subject to the provisions of the merger agreement, the closing
of the merger will take place no later than January 31,
2008, or, as soon as practicable after all the conditions
described below under The Second Amended and Restated
Agreement and Plan of Merger Conditions to the
Completion of the Merger on page 21 have been
satisfied, unless JKA and Multi-Shot, LLC agree to another time.
Representations
and Warranties
The merger agreement contains customary representations and
warranties of each of JKA, Multi-Shot and the members of
Multi-Shot, as applicable, relating to, among other things:
|
|
|
|
|
proper corporate organization and similar corporate matters,
|
|
|
|
capitalization,
|
|
|
|
the authorization, performance and enforceability of the merger
agreement,
|
|
|
|
permits,
|
|
|
|
taxes,
|
|
|
|
absence of undisclosed liabilities,
|
|
|
|
real properties,
|
|
|
|
material contracts,
|
|
|
|
title and condition of assets,
|
|
|
|
absence of certain changes,
|
|
|
|
employee and employee benefit matters,
|
|
|
|
compliance with applicable laws,
|
|
|
|
absence of litigation,
|
18
|
|
|
|
|
environmental matters,
|
|
|
|
warranties, and
|
|
|
|
insurance.
|
The assertions embodied in the representations and warrants
contained in the merger agreement are qualified by information
in disclosure schedules to the merger agreement, which we
consider nonpublic information. However, any material
information contained in the schedules to the merger agreement
has been appropriately disclosed in this proxy statement.
Knowledge,
Materiality and Material Adverse Effect
Certain of the representations and warranties are qualified by
knowledge of the party, materiality or to the extent a breach
does not result in a material adverse effect. For the purposes
of the merger agreement, knowledge means, with respect to any
party to the merger agreement, actual or deemed knowledge of:
(i) in the case of Multi-Shot, its managers, as well as
Paul Culbreth, David Cudd, and Scott Bork, and (ii) in the
case of JKA, James P. Wilson, Keith D. Spickelmier, Michael H.
McConnell and Herbert C. Williamson, and such knowledge that
would be imputed to such persons upon reasonable inquiry or due
investigation. An individual will be deemed to have knowledge of
a particular fact, circumstance, event or other matter if
(i) such fact circumstance, event or other matter is
reflected in one or more documents, written or electronic, that
are or have been in such individuals possession or that
would reasonably be expected to be reviewed by an individual who
has the duties and responsibilities of such individual in the
customary performance of such duties and responsibilities, or
(ii) such knowledge could be obtained from reasonable
inquiry of those persons employed by an entity (as the case may
be) charged with administrative or operational responsibility
for such matter for such party by the person in the discharge of
his duties and responsibilities with regards to those persons.
For the purposes of the merger agreement, a material adverse
effect on an entity means any event, change, violation,
inaccuracy, circumstance or effect (regardless of whether or not
such events, changes, violations, inaccuracies, circumstances or
effects are inconsistent with the representations or warranties
made by the entity in the merger agreement) that has, or could
reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the business,
operations, condition (financial or otherwise), assets (tangible
or intangible), liabilities, employees, properties, prospects,
capitalization or results of operations of an entity, except for
any such events, changes, violations, inaccuracies,
circumstances or effects resulting from or arising in connection
with (i) any changes in general, political, global or other
national or worldwide events or changes in economic or business
conditions that do not disproportionately impact an entity as
compared to other entities similar in size and scope as that of
an entity and that are within its industry or (ii) any
changes or events affecting the industry in which an entity
operates that do not disproportionately impact an entity as
compared to other entities similar in size and scope as that of
an entity and that are within its industry.
Interim
Covenants Relating to Conduct of Business
Each of JKA and Multi-Shot has agreed to continue to operate its
business in the ordinary course prior to the closing of the
merger, to use reasonable efforts to preserve current
relationships with customers, employees and suppliers, and
additional material covenants including that (i) each party
shall obtain all necessary approvals, including stockholder and
governmental approvals; (ii) each party shall protect
confidential information and maintain the confidentiality of the
others proprietary information; and (iii) until
termination of the merger agreement (except as discussed below),
not to solicit or accept an offer to enter into a competing
transaction.
No
Solicitations by JKA or Multi-Shot
Multi-Shot has suspended or terminated, and has the legal right
to terminate or suspend, all negotiations and discussions of any
acquisition, merger, consolidation or sale of all or
substantially all of the assets or member interests of
Multi-Shot with parties other than JKA. Furthermore, Multi-Shot
has agreed, from the date of the merger agreement and until the
termination of the merger agreement, not to, directly or
indirectly through any officer, member, manager, employee,
representative or agent, solicit, initiate, entertain or
encourage any proposal or
19
offer from, or engage in any negotiations with any person other
than JKA, or agree to, approve or recommend, any proposal for a
competing transaction.
JKA is permitted to receive general inquiries from third parties
concerning potential transactions that would be in substitution
of or in addition to, the Merger as contemplated by the merger
agreement, and to conduct preliminary dialogue related thereto.
However, JKA may not negotiate, present, or propose terms with
any third party with respect to any such transaction until the
earlier of: (i) the closing of the merger, or (ii) the
termination of the merger agreement pursuant to the terms
provided therein.
Access
to Information
During the period prior to the closing, each of JKA and
Multi-Shot has agreed to give the other, its counsel,
accountants and other representatives, reasonable access during
normal business hours to the properties, books, records and
personnel of the other to obtain all information concerning the
business, including the status of product development efforts,
properties, results of operations and personnel of the other, as
such party may reasonably request.
Escrow
and Indemnification
Upon the closing of the merger, all of the shares of JKA common
stock and warrants issued to the original members of Multi-Shot
(all members of Multi-Shot except for SG-Directional,
LLC) will be transferred to an escrow agent to secure
(i) any post-closing adjustment in the purchase price in
JKAs favor and (ii) the indemnification obligations
of the members related to representations, warranties and other
agreements. The escrow agreement shall provide that so long as a
bona fide, good faith claim for indemnification has not been
made by JKA, that (i) the entirety of the escrow fund
remain with the escrow agent until December 31, 2008,
(ii) after December 31, 2008, the escrow amount and
that portion of escrow shares (and/or any proceeds or common
stock of JKA received by virtue of the sale of JKA common stock,
or the exercise of Parent Warrants and Redemption Warrants) in
excess of $3,000,000 in value based on the escrow per share
market value be released to the members as well as the entirety
of the escrow warrants, and (iii) upon completion of
thirty-six months after closing, the escrow account shall
be closed and all remaining escrow shares
and/or
proceeds shall be released to the members. Pursuant to the terms
and conditions of the merger agreement, none of the merger
consideration payable to SG-Directional, LLC, as a member of
Multi-Shot, LLC, will be held in escrow for indemnification
purposes. Only merger consideration payable to the other members
of Multi-Shot, LLC will be held in escrow for indemnification
purposes.
The members of Multi-Shot, jointly and severally, have agreed to
hold JKA and its representatives, successors and permitted
assigns harmless from any damages, whether as a result of any
third party or otherwise, and which arise from or in connection
with any breach by the members or Multi-Shot of any
representations, warranties, covenants or obligations under the
merger agreement. Subject to certain exceptions, claims made
against the members of Multi-Shot may be asserted only after the
aggregate amount of all claims exceeds $500,000. Additionally,
subject to certain exceptions, including fraud or willful
misrepresentation or misconduct, the aggregate indemnification
liability of the members will not exceed $10,000,000. Most of
the representations and warranties of the parties under the
merger agreement will survive the closing until
December 31, 2008; however, certain representations and
warranties will survive for longer periods, including, but not
limited to, organization, qualification, charter documents,
capitalization, authority, conflicts, environmental, taxes and
required vote.
JKA has agreed to hold harmless the members and Multi-Shot for
any breach of JKAs representations, warranties or
covenants under the merger agreement. Indemnification claims may
be made against JKA only after the aggregate amount of claims
exceeds $500,000. Subject to certain exceptions, including fraud
or willful misrepresentation or misconduct, the aggregate
indemnification liability of JKA will not exceed approximately
$14,616,631. Most of the representations and warranties of the
parties under the merger agreement will survive until
December 31, 2008; however, certain representations and
warranties will survive for longer periods, including but not
limited to organization, qualification, charter documents,
capitalization, authority, conflicts, SEC filings, board
approval , issuance of shares and taxes.
20
Multi-Shot has not agreed to waive any recourse against the
trust account in the event that the merger is not consummated
and JKA breaches its agreement with Multi-Shot.
Fees
and Expenses
Whether or not the merger is consummated, all fees and expenses
incurred in connection with the merger including, without
limitation, all legal, accounting, financial advisory,
consulting and all other fees and expenses of third parties
incurred by a party in connection with the negotiation and
effectuation of the terms and conditions of the merger agreement
and the transactions contemplated thereby, shall be the
obligation of the respective party incurring such fees and
expenses, except in such circumstances described in the merger
agreement in which JKA may be liable to Multi-Shot for the
expenses of Multi-Shot.
Public
Announcements
The parties have agreed to cooperate in good faith to jointly
prepare all press releases and public announcements pertaining
to the merger agreement and the related transactions, and no
party shall issue or otherwise make any public announcement or
communication pertaining to the merger agreement or the merger
without the prior consent of the other, except as required by
any legal requirement or by the rules and regulations of, or
pursuant to any agreement of, a stock exchange or trading
system. Each party has agreed not to unreasonably withhold
approval from the other with respect to any press release or
public announcement.
Pre-Closing
Confirmation
Not later than 48 hours prior to the closing:
|
|
|
|
|
JKA is required to give the trustee advance notice of the
anticipated consummation of the merger; and
|
|
|
|
JKA will cause the trustee to provide a written confirmation to
Multi-Shot confirming the dollar amount of the account balance
held by the trustee in the trust account to be released upon
consummation of the merger.
|
Conditions
to the Completion of the Merger
The obligations of JKA and Multi-Shot are subject to certain
customary closing conditions, including the following:
|
|
|
|
|
no order or injunction enjoining the merger;
|
|
|
|
no statute, rule, order or decree shall have been enacted or
promulgated which would prohibit the merger or otherwise make
the merger illegal;
|
|
|
|
listing of the Parent Shares and Redemption Liability Shares
with the American Stock Exchange;
|
|
|
|
receipt of certain consents;
|
|
|
|
entering into the registration rights agreement, escrow
agreement and certain other agreements;
|
|
|
|
termination of certain Multi-Shot existing plans and agreements;
|
|
|
|
the majority of voting JKA stockholders shall have approved the
transactions contemplated by the merger agreement and public JKA
stockholders owning not more than twenty percent (20%) of
JKAs shares of common stock issued in JKAs initial
public offering and the private placement and outstanding
immediately before the closing shall have exercised their rights
to convert their shares into a pro rata share of the trust fund
rather than approve the merger;
|
|
|
|
certain of the officers of Multi-Shot shall have entered into
employment agreements;
|
|
|
|
the members of Multi-Shot shall have approved the transactions
contemplated by the merger agreement;
|
|
|
|
all specified waiting periods under the
Hart-Scott-Rodino
Antitrust Improvements Act, if any, shall have
expired, and
|
|
|
|
the absence of any action, suit or proceeding challenging or
preventing the merger.
|
21
Effect
of Termination
In the event of termination, the merger agreement shall
forthwith become void, there shall be no liability under the
merger agreement on the part of JKA, Multi-Shot, Inc. or
Multi-Shot or any of their respective officers, managers or
directors, and all rights and obligations of each party hereto
shall cease.
Furthermore, if the merger agreement is terminated:
|
|
|
|
|
JKA and Multi-Shot, Inc. are obligated to return all documents
and work papers obtained from Multi-Shot or the members of
Multi-Shot;
|
|
|
|
all filings with any government agencies shall be withdrawn, to
the extent practicable;
|
|
|
|
certain confidentiality obligations will survive
closings; and
|
|
|
|
no party shall be relieved of any liability for willful breach
of the merger agreement.
|
Representatives
Multi-Shot has designated each of Catalyst and
SG-Directional,
LLC as its representatives with authority to make all decisions
and determinations and to take all actions required or permitted
under the merger agreement and the escrow agreement on behalf of
the members of Multi-Shot. Ron Nixon, acting through Catalyst,
and K. Rick Turner, acting through SG - Directional, will
jointly act as the representatives of Multi-Shot. Any such
action, decision or determination so made or taken shall be
deemed the action, decision or determination of the members of
Multi-Shot, and any notice, document, certificate or information
required to be given to any member of Multi-Shot shall be deemed
so given if given to the representative. As affiliates of such
representatives are also members of Multi-Shot, it is possible
that potential conflicts of interest may arise with respect to
its obligations as representative and its interests pertaining
to Multi-Shot member interests held by its affiliates.
EMPLOYMENT
AGREEMENTS
A condition to JKAs obligation to consummate the merger is
that each of Allen Neel, David Cudd and Paul Culbreth enter into
employment agreements with JKA, in form and substance reasonably
acceptable to JKA and such persons. Messrs. Neel, Cudd and
Culbreth are presently employed by Multi-Shot, LLC, and have
employment agreements with Multi-Shot, LLC. Each of such persons
has agreed in principle to enter into substantially identical
employment agreements with JKA, which become effective only upon
consummation of the merger. The following summary description of
such employment agreements describes the material terms of such
employment agreements and does not purport to describe all of
the terms and conditions of the employment agreements. The
current employment agreements of Messrs. Neel, Cudd and Culbreth
are attached as Annexes J-L.
Scope
and Term of Employment
The employment agreements will provide that, after the merger,
Allen Neel will be employed as President and Chief Executive
Officer of JKA and Multi-Shot, Inc. and David Cudd and Paul
Culbreth as Vice-Presidents of Multi-Shot, Inc.,
Messrs. Neel, Cudd and Culbreth are collectively sometimes
referred to as the employees. Other than these differences in
offices (and other requirements under applicable laws), the
employment agreements are substantially identical.
Compensation
Each employee:
|
|
|
|
|
will be entitled to a an annual base salary as provided for in
the agreements, which for Mr. Neel is $275,000, for
Mr. Cudd is $230,000 and for Mr. Culbreth is
$230,000; and
|
|
|
|
will be eligible for an annual cash bonus which will be equal to
a percentage of the base salary for each fiscal year. For each
of Mr. Neel, Mr. Cudd, and Mr. Culbreth, such
percentage is up to 75%, 75% and 75%, respectively. Any annual
bonus targets will be determined by the Compensation Committee
and approved by the Board for each fiscal year. Any bonus will
be upon recommendation of the Compensation Committee,
|
22
subject to Board approval. Such Compensation Committee is an
independent committee of the Board. Payment of the annual bonus
(if any) will occur within 90 days after the close of the
fiscal year, but in no event, prior to the delivery of the
annual audited financial statements; and
Each of Messrs. Neel, Cudd and Culbreth may also receive
long-term equity compensation in the form of restricted shares
or stock options, all as determined by the Compensation
Committee.
Fringe
Benefits, Reimbursement of Expenses
Each employee will be entitled to, among other things:
|
|
|
|
|
participate in all benefit programs, if any, established and
made available to executive officers of a similar level, if
any, and
|
|
|
|
reimbursement for reasonable expenses incurred or paid by the
employee in connection with, or related to the performance of
their duties, responsibilities or services, upon presentation by
the employee of documentation, expense statements, vouchers
and/or
such
other supporting information as may be reasonably requested.
|
ESCROW
AGREEMENT
Pursuant to the merger agreement, on the closing date of the
merger the parties involved in the merger will enter into an
escrow agreement (referred to in this proxy statement as the
Escrow Agreement) with the escrow agent to secure
certain post-closing obligations of the selling members. The
following description summarizes the material provisions of the
escrow agreement. Stockholders should read carefully the Escrow
Agreement, attached to this proxy statement as
Annex E
.
On the closing date of the merger, JKA will enter into an Escrow
Agreement with the selling members, who will be represented by
the selling members representative, and the escrow agent.
On the closing date, we will deposit with the escrow agent
8,399,890 shares of our common stock and
11,008,503 warrants (plus any shares of common stock and
warrants awarded with respect to the redemption liability
adjustment under the terms of the merger agreement awarded to
the members of Multi-Shot, excluding SG-Directional,
LLC) to secure (i) any post-closing Multi-Shot balance
sheet adjustments in the purchase price in our favor and
(ii) certain indemnification obligations of the selling
members under the merger agreement.
REGISTRATION
RIGHTS AGREEMENT
Upon the closing of the merger pursuant to the merger agreement,
JKA will enter into a registration rights agreement with the
selling members who will be represented by the selling
members representative. The following description of the
registration rights agreement describes the material terms of
the registration rights agreement but does not purport to
describe all the terms of the agreement. The complete text of
the registration rights agreement is attached as
Annex D
to this proxy statement and is incorporated by reference
into this proxy statement. We encourage all stockholders to read
the registration rights agreement in its entirety.
General
Pursuant to the merger agreement, the selling members will
receive 21,759,259 shares of our common stock and
28,516,668 warrants to obtain shares of our common stock
(plus shares of common stock and warrants awarded with respect
to the redemption liability adjustment under the terms of the
merger agreement) (collectively referred to in this proxy
statement as the registerable securities). We agreed
to provide the selling members certain registration rights in
relation to the registerable securities.
23
Demand
Registration Rights
At any time subsequent to six months after the effective time of
the merger, The holders of a
majority-in-interest
of the registerable securities, acting through their
representatives, Catalyst and SG - Directional, may make a
written demand for registration under the Securities Act of all
or part of their registerable securities. Additionally, if
elected by a
majority-in-interest
of the demanding stockholders, the registration shall be made
pursuant to an underwritten offering. We shall not be obligated
to affect more than an aggregate of two demand registrations
under the registration rights agreement.
Piggy-back
Registration Rights
If at any time after the date of the registration rights
agreement we propose to file a registration statement under the
Securities Act of 1933, as amended, with respect to an offering
of equity securities, either for our own account or for the
account of any of our stockholders, then the selling members,
acting through their representatives, shall have the right to
include their shares of common stock in the registration
statement, subject to specific limitations as set forth in the
registration rights agreement.
Form S-3
Registration Rights
The selling members, acting through their representatives, shall
have the right at any time on an unlimited number of occasions
to require that we register any or all of their shares of our
common stock on a
Form S-3
or any similar short-form registration which is available to us
at the time. In addition to any other limitations set forth in
the registration rights agreement, the aggregate offering to the
public must be at least $0.5 million.
Indemnification
Related to Registration Rights
JKA has agreed to indemnify the selling members, in such
capacity as a stockholder of JKA on a post-closing basis, from
and against any expenses, losses, judgments, claims, damages or
liabilities arising out of or based upon any untrue statement of
a material fact, or any omission to state a material fact
necessary to make statements in any registration statement filed
with the SEC as required pursuant to the Registration Rights
Agreement not misleading, or any violation by us of the
Securities Act of 1933, as amended, except if such statement or
omission was made by us in reliance upon and in conformity with
information furnished to us in writing by a selling member for
use in such registration statement. The indemnification in the
Registration Rights Agreement does not extend to any actions the
selling members may take as directors or officers of JKA
following the merger. The selling members, in such capacity as a
stockholder of JKA on a post-closing basis, have agreed to
indemnify us from and against any expenses, losses, judgments,
claims, damages or liabilities arising out of or based upon an
untrue statement of a material fact contained in any
registration statement filed with the SEC as required pursuant
to the Registration Rights Agreement, or any omission to state a
material fact necessary to make statement in such registration
statement not misleading, if the statement or omission was made
by us in reliance upon and in conformity with information
furnished in writing to us by the selling members for use in
such registration statement.
REASONS
FOR THE MERGER
The Board has concluded that the merger with Multi-Shot is in
the best interests of JKAs stockholders.
Each member of the Board is experienced in evaluating merger and
acquisition opportunities. In arriving at its determination to
approve the merger agreement with Multi-Shot, the Board relied
on information (including financial information) relating to
Multi-Shot, the regulatory environment, the industry dynamics,
the reports of outside due diligence consultants and the
Boards experience in building, managing and financing
companies.
JKA retained Ernst & Young to perform detailed
financial due diligence on Multi-Shot. Ernst & Young
prepared a detailed written report stating its findings. Due to
the size of the potential transaction and its complexity,
management retained the Ernst & Young Transactional
Advisory Services (E&Y) group to perform
specific due diligence procedures. In general E&Ys
procedures were designed to focus on quality of earnings;
quality of net assets; an understanding of the issues concerning
accounting, processes, policies and financial management;
quality of reported EBITDA; an understanding of the
companys historical cost structure, including key
profitability
24
drivers; an understanding of historical working capital and
capital expenditure trends and seasonality. Additionally,
E&Y reviewed the year to date (at the time of their report)
results and remaining budget for 2006 and projections for 2007
considering historical trends in revenues and expenses. JKA
hired Hein & Associates to perform an audit of three
years of Multi-Shots financials, which has been concluded.
JKA retained Longnecker & Associates to perform a
compensation survey to evaluate management compensation.
Longnecker provided a written report. JKA also had various
discussions with the investment banking community regarding the
oil and gas service industry. JKA also had numerous discussions
with members of the oil and gas industry regarding the industry
and specifically regarding Multi-Shot. All of this information
was considered by the Board in determining to pursue this merger.
During the due diligence process, the Board also discussed the
option of obtaining a fairness opinion of the proposed merger
between JKA and Multi-Shot. The Board decided to obtain such an
opinion as a condition to closing the merger. The opinion was
sought to confirm to the Board the consideration agreed upon was
fair, from a financial point of view, to JKA and its
shareholders. The opinion was also sought to provide guidance as
to the fair market value of Multi-Shot to satisfy the condition
that the fair market value of Multi-Shot is at least equal to
80% of the net asset value of JKA. The opinion was not required
in any way by the terms of our initial public offering as a
result of any conflict between management of JKA and Multi-Shot.
JKA received the fairness opinion prior to entering into the
merger agreement. The merger is conditioned on receipt of an
acceptable fairness opinion. The fairness opinion was delivered
on August 24, 2007 and is described below beginning on
page 27.
The Board considered a wide variety of factors in connection
with its evaluation of the merger. In light of the complexity of
those factors, the Board did not consider it practicable to, nor
did it attempt to, quantify or otherwise assign relative weights
to the specific factors it considered in reaching its decision.
In addition, individual members of the Board may have given
different weight to different factors.
The analysis of the Board in reaching this conclusion is
described in more detail below. In considering the merger, the
Board gave considerable weight, but did not attempt to assign
relative weight, to the following positive factors:
Multi-Shots
successful record of growth and high potential for future
growth
An important criteria to the Board in identifying an acquisition
target was that the target company have strong existing
operations, positive and growing EBITDA and possess the
opportunity for organic growth through customer development,
geographic development, and reinvestment in equipment, personnel
and facilities. The Board believes that Multi-Shot possesses a
high degree of name recognition and a positive reputation in the
oil and gas service market place and the infrastructure for
additional growth. JKA has confirmed Multi-Shots name
recognition and reputation through its due diligence with
financial and operational industry participants. Multi-Shot,
through its predecessors, commenced business operations in 1980
and grew its business to approximately $74.0 million in
revenue for the fiscal year ended December 31, 2006. For
the prior two fiscal years ended, the revenues were
approximately $38.1 million and $19.2 million,
respectively. This record of consistent growth was impressive to
the Board. The Board believes that Multi-Shot has the ability to
continue this rapid rate of growth because Multi-Shot:
|
|
|
|
|
can continue to increase revenues both with its existing
customer base and from the development of new customers;
|
|
|
|
has meaningful representation in most major land based oil and
gas basins;
|
|
|
|
can increase revenues in association with any increased numbers
of U.S. based horizontal directional drilling rigs;
|
|
|
|
can service the future exploration and development of
non-conventional gas basins in the U.S.; and
|
|
|
|
can potentially leverage the Multi-Shot customer base into
additional complimentary drilling services.
|
The
experience of Multi-Shots management
Another important criteria to the Board in identifying an
acquisition target was that the target company must have a
seasoned management team with specialized knowledge of the
markets within which it operates and the ability to
25
lead a growth company. Multi-Shots management is led by
its President and CEO, Allen Neel, who has significant oil and
gas service experience based upon his 26 years of
experience in the industry, including the past 17 years
with Multi-Shot and its predecessors. Mr. Paul Culbreth,
Vice President of Operations, has 31 years experience in
the drilling services industry, the last 19 of which with
Multi-Shot and its predecessor entities. Mr. David Cudd,
Vice President of Sales has 31 years experience in the oil
and gas services industry, the last 8 years with Multi-Shot
and its predecessors. Additionally, Multi-Shots 214
employees include 61 drillers as of December 31, 2006.
Diversification
of Customer Base
Multi-Shot has a diversified customer base. For the fiscal year
ended December 31, 2006, no customer accounted for more
than 10% of Multi-Shots revenues. This reduces
Multi-Shots exposure to events outside its control,
including events specific to a particular customer and not the
entire industry, such as mergers and acquisitions.
The
terms of the Settlement Agreement and the Merger
Agreement
The Board evaluated and considered the terms of the Settlement
Agreement and the merger agreement. The Board discussed the
terms of the Settlement Agreement with counsel. The Board
compared the terms of the merger agreement to the terms of the
Previous Merger Agreement. The Board reviewed and discussed the
year to date operations of Multi-Shot, which further confirmed
the Boards view of the successful record of growth and
high potential for future growth of Multi-Shot. Further, the
Board concluded that the RBC opinion confirmed the Boards
valuation analysis. The Board concluded that the merger
agreement and Settlement Agreement were in the best interests of
JKAs stockholders.
The Board also considered, but did not attempt to assign
relative weight, to the following potentially negative factors:
Decline
in commodity prices
The Board considered the fact that commodity prices for oil and
natural gas may decline. A significant decline in oil and gas
prices would likely reduce U.S. based drilling activity.
Such a reduction in drilling activity could negatively affect
Multi-Shots revenues. The Board believes that U.S. and
worldwide energy demand will continue to grow over the long
term. The Board factored in a short term decline in commodity
oil and gas prices in structuring the proposed merger and
believes MSE will be well-positioned to withstand a slow down in
the industry.
The
risk that its public stockholders would vote against the merger
and exercise their conversion rights.
The Board considered the risk that the current public
stockholders of JKA would vote against the merger and exercise
their conversion rights, thereby depleting the amount of cash
available to the combined company following the merger. Based on
the estimated opening balance sheet under a range of assumed
redemption levels, the Board deemed this risk to be less with
regard to Multi-Shot than it would be for other target companies
and believes that Multi-Shot will continue to be able to
implement its business plan even if the maximum number of public
stockholders exercised their conversion rights and the combined
company received only 80% of the funds deposited in the trust
account to complete the transaction.
Certain
officers and directors of JKA may have different interests in
the merger than the JKA stockholders.
The Board considered the fact that certain officers and
directors of JKA may have interests in the merger that are
different from, or are in addition to, the interests of JKA
stockholders generally, including the matters described under
Interests of JKA Directors and Officers in the
Merger below. However, this fact would exist with respect
to a merger with any target company.
26
The
limitations on indemnification set forth in the merger
agreement.
The Board considered the limitations on indemnification set
forth in the merger agreement, see The Second Amended and
Restated Agreement and Plan of Merger Escrow and
Indemnification, but determined that any definitive
agreement with any target company would contain similar
limitations.
After deliberation, the Board determined that these potentially
negative factors were outweighed by the potential benefits of
the merger, including the opportunity for JKA stockholders to
share in Multi-Shots future possible growth and
anticipated profitability.
FEDERAL
INCOME TAX CONSEQUENCES
As the stockholders of JKA are not receiving any consideration
or exchanging any of their outstanding securities in connection
with the merger with Multi-Shot, and are simply being asked to
vote on the matters, it is not expected that the stockholders
will have any tax related issues as a result of voting on these
matters. However, if you vote against the merger proposal and
elect a cash conversion of your shares of JKA into your pro-rata
portion of the trust account and as a result receive cash in
exchange for your JKA shares, there may be certain adverse tax
consequences. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS
REGARDING YOUR PARTICULAR TAX CONSEQUENCES.
CONSEQUENCES
IF MERGER IS NOT APPROVED
If the merger proposal is not approved by the stockholders, JKA
will not merge with Multi-Shot and JKA will continue to seek
other potential business combinations. In addition, JKA would
not consummate the other proposals discussed herein. In such an
event there is no assurance that JKA will have the time,
resources or capital available to find a suitable business
combination partner before (i) the proceeds in the trust
account are liquidated to holders of shares purchased in
JKAs initial public offering and (ii) JKA is
dissolved pursuant to the trust agreement and in accordance with
JKAs certificate of incorporation.
REGULATORY
MATTERS
The merger and the transactions contemplated by the merger
agreement are not subject to any federal or state regulatory
requirement or approval, except the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and except for filings
necessary to effectuate the transactions contemplated by the
merger proposal and the amendment to the certificate of
incorporation proposal with the Secretary of State of Delaware
and the Secretary of State of Texas, as applicable, and filings
with the American Stock Exchange.
FAIRNESS
OPINION
Opinion
of RBC
Pursuant to an engagement letter dated August 17, 2007, JKA
retained RBC Capital Markets Corporation (which we refer to as
RBC) to render an opinion to the Board as to
(1) the fairness to JKA, from a financial point of view, as
of the date of the opinion, of the consideration to be paid by
JKA in connection with the merger, and (2) whether the fair
market value of Multi-Shot, LLC is equal to at least 80% of the
net asset value of JKA. RBC did not provide any other investment
banking or advisory services related to this transaction.
On August 24, 2007, RBC delivered to the Board its oral
opinion, subsequently confirmed in writing, that, as of the date
of its opinion, based upon RBCs experience as investment
bankers and subject to the assumptions, limitations and
qualifications contained in its opinion, and other matters RBC
considers relevant, (1) the consideration to be paid by JKA
pursuant to the merger agreement is fair, from a financial point
of view, to JKA and (2) the fair market value of
Multi-Shot, LLC is equal to at least 80% of the net asset value
of JKA.
The full text of the written opinion of RBC is attached to this
Proxy Statement as
Annex F
and incorporated into
this proxy statement by reference. We urge you to read that
opinion carefully and in its entirety for the assumptions made,
procedures followed, other matters considered and limits of the
review undertaken in arriving at that opinion.
27
RBCs opinion was directed to the Board in connection with
the merger agreement, and is limited to only (1) the
fairness to JKA, from a financial point of view, as of the date
of the opinion, of the consideration to be paid by JKA pursuant
to the merger agreement, and (2) whether the fair market
value of Multi-Shot, LLC is equal to at least 80% of the net
asset value of JKA. RBCs opinion does not in any way
address other terms or arrangements of the merger or the merger
agreement, including, without limitation, the financial or other
terms of any voting agreement, escrow agreement or employment
agreement or the indemnification provisions of the merger
agreement. Furthermore, RBCs opinion does not address the
merits of the underlying decisions by JKA to engage in the
transactions contemplated by the merger agreement or the
relative merits of the transactions contemplated by the merger
agreement compared to any alternative business strategy or
transaction in which JKA might engage. All advice and opinions
(written and oral) rendered by RBC are intended for the use and
benefit of the Board. RBC expresses no opinion and makes no
recommendation to any JKA stockholder as to how such stockholder
should vote with respect to the merger, the merger agreement or
any other matter submitted to a vote of the JKA stockholders.
The consideration to be paid in the merger was determined in
arms-length negotiations between JKA and Multi-Shot, LLC
and not by RBC. RBC did not recommend the consideration to be
paid in the merger. The consideration was determined in
negotiations among the parties to the merger agreement, in which
RBC did not advise the Board. No restrictions or limitations
were imposed by the Board on RBC with respect to the
investigations made or the procedures followed by RBC in
rendering its opinion.
In rendering its opinion, RBC:
|
|
|
|
|
reviewed and analyzed the financial terms of the draft merger
agreement, dated August 22, 2007;
|
|
|
|
reviewed certain publicly available financial and other data
with respect to JKA and Multi-Shot, LLC and certain other
relevant historical operating data relating to JKA and
Multi-Shot, LLC made available to RBC from published sources and
from the internal records of JKA and Multi-Shot, LLC;
|
|
|
|
conducted discussions with members of the senior management of
JKA and Multi-Shot, LLC with respect to the business prospects
and financial outlook of JKA and Multi-Shot, LLC;
|
|
|
|
reviewed historical financial information relating to JKA and
Multi-Shot, LLC and estimates provided to RBC by JKA or
Multi-Shot, LLC; and
|
|
|
|
performed other studies and analyses RBC deemed appropriate.
|
In arriving at its opinion, RBC performed the following analyses
in addition to the review, inquiries, and analyses referred to
above:
|
|
|
|
|
compared the financial metrics of selected precedent
transactions, to the extent publicly available, with the
financial metrics implied by the consideration to be paid by JKA
pursuant to the terms of the merger agreement;
|
|
|
|
compared selected comparable publicly-traded companies with the
financial metrics implied by the consideration to be paid by JKA
pursuant to the terms of the merger agreement;
|
|
|
|
conducted a discounted cash flow analysis based on the projected
financials of Multi-Shot, LLC;
|
|
|
|
performed a leveraged buyout analysis of Multi-Shot,
LLC; and
|
|
|
|
calculated the net asset value of JKA.
|
You should note that in rendering its opinion, RBC assumed and
relied upon the accuracy and completeness of the financial,
legal, tax, operating and other information provided to RBC by
JKA and Multi-Shot, LLC (including, without limitation, the
financial statements, the capitalization tables, and related
notes thereto of JKA and Multi-Shot, LLC), and has not assumed
responsibility for independently verifying and has not
independently verified such information. For all forward-looking
financial information with respect to JKA, RBC has relied upon
the forecasts and estimates provided to RBC by JKA management.
For all forward-looking financial information with respect to
Multi-Shot, LLC, RBC has relied upon the forecasts and estimates
provided to RBC by Multi-Shot, LLC management. RBC has assumed
that all forecasts and estimates provided to it by JKA
management or Multi-
28
Shot, LLC management represent the best currently available
estimates and good faith judgments of such management as to the
applicable entitys financial performance, and RBC
expresses no opinion as to any aspect of such forecasts or
estimates.
Additionally, RBC did not perform an independent evaluation or
appraisal of any of the assets or liabilities of JKA or
Multi-Shot, LLC, and RBC has not been furnished with any such
valuations or appraisals. RBC has not investigated, and makes no
assumption regarding, any litigation or other claims affecting
JKA, Multi-Shot, LLC, or any other person or entity. RBCs
opinion relates to Multi-Shot, LLC as a going concern and,
accordingly, RBC expresses no opinion regarding the liquidation
value of Multi-Shot, LLC.
RBCs opinion speaks only as of the date of such opinion,
is based on the conditions as they existed and information which
RBC had been supplied as of the date of the opinion, and is
without regard to any market, economic, financial, legal, or
other circumstances or event of any kind or nature which may
exist or occur after such date. RBC has not undertaken to
reaffirm or revise its opinion or otherwise comment upon events
occurring after the date of the opinion and RBC does not have an
obligation to update, revise or reaffirm its opinion. RBC
expressed no opinion as to the prices at which JKA common stock
or warrants to purchase JKA common stock have traded or will
trade following the announcement or consummation of the merger.
For purposes of its opinion, RBC assumed, in all respects
material to its analysis, that all conditions to the
consummation of the merger agreement will be satisfied without
waiver thereof, that the representations and warranties of each
party contained in the merger agreement are true and correct and
that each party to the merger agreement and any documents
ancillary thereto will perform all covenants and agreements
required to be performed by it under the merger agreement and
such document, without amendment thereto. RBC also assumed that
the executed version of the Agreement will not differ, in any
respect material to its opinion, from the draft of the merger
agreement dated August 22, 2007 that RBC reviewed.
The following is a brief summary of the analyses performed by
RBC in connection with its opinion. This summary is not intended
to be an exhaustive description of the analyses performed by RBC
but includes all material factors considered by RBC in rendering
its opinion. RBC drew no specific conclusions from any
individual analysis, but subjectively factored its observations
from all of these analyses into its assessments.
Each analysis performed by RBC is a common methodology utilized
in determining valuations. Although other valuation techniques
may exist, RBC believes that the analyses described below, when
taken as a whole, provide the most appropriate analyses for RBC
to arrive at its opinion. Some of the information below is
provided in a tabular format. To understand fully the summary of
the financial analyses used by RBC, the tables must be read
together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses
conducted by RBC in rendering its opinion.
Overview
of Purchase Price Consideration
Pursuant to the merger agreement, the total consideration was
determined based on the agreed upon enterprise value of $197.5
million, calculated as the sum of:
|
|
|
|
|
6.25x multiplied by the agreed upon estimate of the trailing 12
months Adjusted EBITDA as of November 30, 2007
($30 million),
|
|
|
|
Plus $10 million,
|
In rendering its opinion, RBC assumed that the merger
consideration of $197.5 million would consist of
$20.0 million in cash, $60.0 million in assumed third-party
debt, and $117.5 million in JKA stock and warrants (including
all Contingent Award Shares and Warrants) per the merger
agreement.
Summary
of Ranges
As described above, RBC utilized numerous methodologies,
analyses and inquiries in rendering its opinion. The following
is a summary of the ranges resulting from the principal
analytical methods used by RBC in rendering its opinion. The
summary should be read in conjunction with the full description
of each of the analytical methods
29
provided elsewhere in this section, as well as the other
assumptions, qualifications and limitations described in this
section, and the opinion itself:
|
|
|
|
|
Precedent Transactions Analysis RBCs analysis
of the consideration paid in recent, publicly announced
transactions that RBC determined to be comparable to the
transaction proposed in the merger agreement provided a
valuation range for Multi-Shot, LLC of $145 million to $204
million. See Precedent Transactions Analysis.
|
|
|
|
Comparable Public Company Analysis RBCs
analysis of the publicly quoted stock price of a group of public
companies RBC believed to be comparable to Multi-Shot, LLC
provided a valuation range for Multi-Shot, LLC of $147 million
to $213 million. See Comparable Public Company
Analysis.
|
|
|
|
Discounted Cash Flow Analysis RBCs discounted
cash flow analysis of Multi-Shot, LLC managements
estimates of Multi-Shot, LLCs future free cash flows
provided a valuation range for Multi-Shot, LLC of
$159 million to $203 million. See Discounted
Cash-Flow Analysis.
|
|
|
|
Leveraged Buyout Analysis RBCs leveraged
buyout analysis does not result in a range of present values for
Multi-Shot, LLC, but rather seeks to analyze whether or not a
typical financial buyer would realize an internal rate of return
that RBC considers to be reasonable if that financial buyer were
to purchase Multi-Shot, LLC for an amount of cash equal to the
assumed aggregate merger consideration of $197.5 million.
RBCs analysis estimated that a typical financial buyer of
Multi-Shot, LLC could realize an internal rate of return of
between 25.4% to 29.1%. See Leveraged Buyout
Analysis.
|
The assumed aggregate merger consideration for Multi-Shot, LLC
of $197.5 was within each of the Precedent Transactions
Analysis, the Comparable Public Company Analysis and the
Discounted Cash Flow Analysis estimated transaction value ranges
calculated by RBC. RBC believes, based upon its experience as a
financial advisor, that the ranges stated in the above bulleted
points are typical for transactions the size of the one proposed
by the merger agreement given the assumptions utilized.
Precedent
Transactions Analysis
RBC reviewed certain publicly available financial data and
purchase prices paid or announced in 19 other comparable merger
and acquisition transactions. RBC selected these precedent
transactions based on (1) the recent period in which they were
completed (all were completed since January 1, 2002), (2) the
reported value of the precedent transaction (all were between
$30.0 million and $500.0 million), and (3) the similarity of the
target companies in certain respects to Multi-Shot, LLC,
including their participation in the oil services industry, the
similarity of the products and services they provide to those
offered by Multi-Shot, LLC and their similar end markets and
sizes. RBC did not deliberately exclude any identified
companies that fell within the selection criteria discussed
above.
30
Comparable
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Value
|
|
|
Transaction Value/
|
|
Announcement Date
|
|
Seller Name
|
|
Buyer Name
|
|
(Millions)(1)
|
|
|
LTM EBITDA
|
|
|
July 2007
|
|
Schooner Petroleum Services, Inc.
|
|
Oil States International, Inc.
|
|
$
|
67.0
|
|
|
|
3.1x
|
|
January 2007
|
|
JetStar Consolidated Holdings, Inc.
|
|
Basic Energy Services, Inc.
|
|
|
121.0
|
|
|
|
5.0x
|
|
December 2006
|
|
Triumph Drilling Tools, Inc. (Teal Supply Co.)
|
|
Flotek Industries
|
|
|
31.0
|
|
|
|
8.9x
|
|
November 2006
|
|
Pumpco Services, Inc.
|
|
Complete Production Services, Inc.
|
|
|
196.3
|
|
|
|
4.4x
|
|
October 2006
|
|
NQL Energy Services
|
|
National Oilwell Varco
|
|
|
253.8
|
|
|
|
5.5x
|
|
October 2006
|
|
Oil & Gas Rental Services, Inc.
|
|
Allis Chalmers Energy, Inc.
|
|
|
342.4
|
|
|
|
7.1x
|
|
October 2006
|
|
Petro-Rentals
|
|
Allis Chalmers Energy, Inc.
|
|
|
29.8
|
|
|
|
4.1x
|
|
October 2006
|
|
Anderson Group
|
|
Grant Prideco
|
|
|
155.6
|
|
|
|
6.0x
|
|
September 2006
|
|
Warrior Energy Service, Corp.
|
|
Superior Energy Services, Inc.
|
|
|
374.1
|
|
|
|
7.8x
|
|
April 2006
|
|
Bridas Corp./DLS Drilling Logistics & Services Corp.
|
|
Allis Chalmers Energy, Inc.
|
|
|
141.7
|
|
|
|
5.5x
|
|
December 2005
|
|
Specialty Rental Tools, Inc.
|
|
Allis Chalmers Energy, Inc.
|
|
|
96.0
|
|
|
|
4.4x
|
|
November 2005
|
|
Oil States International Inc.
|
|
Boots & Coots/Intl Control Inc.
|
|
|
44.8
|
|
|
|
11.2x
|
|
October 2005
|
|
Drillers Technology Corp.
|
|
Saxon Energy Services, Inc.
|
|
|
61.5
|
|
|
|
4.8x
|
|
September 2005
|
|
Diamond Energy Services Inc.
|
|
TerraVest Income Fund
|
|
|
29.0
|
|
|
|
5.7x
|
|
June 2005
|
|
Competition Wireline Services Ltd.
|
|
Peak Energy Services Trust
|
|
|
26.5
|
|
|
|
3.0x
|
|
February 2005
|
|
Elenburg Exploration Corp. Inc.
|
|
Oil States International Inc.
|
|
|
22.0
|
|
|
|
3.9x
|
|
August 2002
|
|
Ryan Energy Technologies Inc.
|
|
Nabors Industries Ltd.
|
|
|
38.1
|
|
|
|
7.6x
|
|
July 2002
|
|
ICO Incorporated
|
|
Varco International
|
|
|
136.7
|
|
|
|
9.2x
|
|
February 2002
|
|
Enserco Energy Service Co., Inc.
|
|
Nabors Industries Ltd.
|
|
|
285.5
|
|
|
|
4.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
$
|
374.1
|
|
|
|
11.2x
|
|
|
|
|
|
Mean
|
|
|
129.1
|
|
|
|
5.9x
|
|
|
|
|
|
Median
|
|
|
96.0
|
|
|
|
5.5x
|
|
|
|
|
|
Minimum
|
|
|
22.0
|
|
|
|
3.0x
|
|
|
|
|
(1)
|
|
Source: SEC and SEDAR filings, press releases, Herold M&A
database, Wall Street research, and company websites.
|
RBC obtained the total transaction value of the relevant
reported transaction involving the target company from publicly
available sources, and calculated the total transaction value as
a multiple of the target companys
EBITDA
(2)
,
as disclosed in public documents, for the last twelve months
ended on the last day of the period covered by the acquiring
companys
Form 10-K,
Form 10-Q,
or
Form 8-K
from the SEC, or interim financial from SEDAR as applicable,
last filed prior to the announcement of the relevant
transaction, using information in such
Form 10-K,
Form 10-Q,
or
Form 8-K
from the SEC, or interim financial from SEDAR, as applicable.
RBC then determined the maximum, mean, median and minimum
multiples of last twelve months EBITDA for the selected
precedent transactions. RBC did not make any adjustments in its
analysis to account for the differences in cost structure
between the public and private target companies.
Based on its experience in analyzing energy industry companies
and transactions and the precedent transactions analysis, RBC
selected a range of EBITDA multiples of 4.9x to 6.9x for
Multi-Shot, LLC. In selecting this representative valuation
multiple range, RBC took into consideration both, the mean
(5.9x) and median (5.5x) multiples provided by the precedent
transactions analysis.
(2) EBITDA as defined as Net Income + Taxes + Net Interest
Expense + Depreciation and Amortization
31
Utilizing the above mentioned EBITDA multiple range, RBC
estimated a range of EBITDA multiples (4.9x and 6.9x) for
Multi-Shot, LLC around the mean EBITDA (5.9x) multiple of the
precedent transactions. RBC then estimated a range of
transaction values for Multi-Shot, LLC by multiplying the
endpoints of EBITDA multiple ranges (4.9x to 6.9x) by
Multi-Shot, LLCs projected 2007 last twelve months
Adjusted EBITDA of approximately $29.5 million for the
period ended November 30, 2007. Multi-Shot, LLCs
projected Adjusted EBITDA for the twelve months ended
November 30, 2007 was calculated as follows:
|
|
|
|
|
|
|
($000s)
|
|
|
EBITDA Calculation
|
|
|
|
|
Net Income
|
|
$
|
10,831
|
|
Plus: Taxes
|
|
|
298
|
|
Plus: Interest Expense, Net
|
|
|
3,145
|
|
Plus: Depreciation and Amortization
|
|
|
6,209
|
|
|
|
|
|
|
EBITDA
|
|
$
|
20,483
|
|
Adjustments to EBITDA
|
|
|
|
|
Plus: Management
Fee
(3)
|
|
|
40
|
|
Plus: Commissions and
Bonuses
(4)
|
|
|
8,997
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
29,520
|
|
|
|
|
(3)
|
|
Catalyst management fee that ceased after the private
recapitalization, which closed on April 1, 2007.
|
|
(4)
|
|
Bonus and incentive plan that ceased following the private
recapitalization of Multi-Shot, LLC in April 2007.
|
RBC calculated Adjusted EBITDA for Multi-Shot,
LLC in its analysis to arrive at a measurement that RBC
believed, based upon its experience, was comparable to the
EBITDA utilized in the selected precedent transactions. Although
any adjustments to EBITDA necessarily require some subjective
determinations, the adjustments made in calculating Adjusted
EBITDA above were those that, in RBCs experience, were
appropriate to remove the effects of one-time or non-recurring
events or expenses. The fees, commissions and bonuses represent
cash distribution payments to management paid out based on the
former private company structure and have been terminated as of
the date of Multi-Shot, LLC private recapitalization in April
2007. Accordingly, the Adjusted EBITDA excludes one-time
management fees as well as commissions and bonuses that
Multi-Shot, LLC management does not anticipate will recur
following the proposed merger. However, the adjusted EBITDA
projections provided by Multi-Shot, LLC management and used by
RBC include the future compensation arrangements for Multi-Shot,
LLC personnel, including bonuses and commissions to be paid out
going forward. These aforementioned adjustments, if not
included, would materially alter the ranges calculated by RBC in
its analyses; however, RBC believed, based on its experience and
expertise, that the Adjusted EBITDA should be taken into account
in this case in order to increase the comparability to
normalized EBITDA figures used in the precedent transactions
analysis. RBC used the projected 2007 Adjusted EBITDA for twelve
months ended November 30, 2007 in its precedent transaction
analysis as it represents the last twelve months EBITDA that is
closest to the transactions date, which, in RBCs view and
based upon its expertise and experience, represents a method
commonly used in the financial advisory industry in similar
circumstances and an appropriate metric based on the precedent
transactions selected. If RBC had used the actual last twelve
months ended June 30, 2007 Adjusted EBITDA in its precedent
transactions analysis instead of the projected Adjusted EBITDA
for the twelve months ended November 30, 2007, then RBCs
analysis would not have taken into account Multi-Shot, LLC
managements projected growth of Multi-Shot, LLC between
June 30, 2007 and November 30, 2007.
In calculating EBITDA and Adjusted EBITDA above, RBC did take
into consideration the recapitalization of Multi-Shot, LLC that
occurred on April 1, 2007. RBC decided to not utilize the
recapitalization as a comparable transaction for the precedent
transactions analysis described above because it was a private
transaction and the terms were not publicly disclosed.
RBC noted that the assumed aggregate merger consideration for
Multi-Shot, LLC of $197.5 million was within the estimated
range of transaction values (approximately $145 million to
$204 million) calculated by RBC based on comparable
precedent transactions. The assumed aggregate merger
consideration of $197.5 million for Multi-Shot,
32
LLC is comprised of $20 million in cash, $60 million
in assumed third party debt, and $117.5 million in JKA
stock and warrants.
In the precedent transactions analysis above, if RBC had
utilized the actual last twelve months ended June 30, 2007
Adjusted EBITDA of $26.3 million instead of forecasted last
twelve months ended November 30, 2007 Adjusted EBITDA of $29.5
million, RBCs precedent transactions analysis would have
generated a range of transaction values of approximately $129
million to $182 million. The assumed aggregate merger
consideration for Multi-Shot, LLC of $197.5 million would fall
outside of this range. However, if RBC had used the actual last
twelve months ended June 30, 2007 Adjusted EBITDA in its
precedent transactions analysis, than such analysis would not
have taken into account Multi-Shot, LLC managements
projected growth of Multi-Shot, LLC between June 30, 2007
and November 30, 2007; RBC concluded, therefore, based upon
its expertise and experience, that the use of forecasted last
twelve months ended November 30, 2007 Adjusted EBITDA of
$29.5 million was appropriate in analyzing the merger. It should
be noted that, in its review of the transactions, RBC utilized
the precedent transaction analysis as one of several analytical
methods in determining the fairness to JKA, from a financial
point of view, as of the date of the opinion, of the
consideration to be paid by JKA in connection with the merger.
As stated above, RBC drew no specific conclusions from any
individual analysis, but subjectively factored its observations
from all of these analyses into its assessments.
No transaction utilized in the precedent transaction analysis is
identical to the merger. In evaluating the transactions, RBC
made judgments and assumptions with regard to industry
performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the
control of the parties to the merger agreement. Mathematical
analysis of comparable transaction data (such as determining
means and medians) in isolation from other analyses is not an
effective method of evaluating transactions.
Comparable
Public Company Analysis
RBC reviewed and compared publicly available selected financial
data and reported stock trading prices for nine publicly traded
companies chosen by RBC based on RBCs energy industry
knowledge and expertise. RBC believed these nine companies to be
comparable to Multi-Shot, LLC,because they are oilfield service
companies that provide similar services and product lines to
those offered by Multi-Shot, LLC. While there are no perfectly
comparable companies with identical products, services, or size
range, in its selection process, RBC included companies that,
based on RBCs experience and expertise in analyzing energy
industry companies, are comparable to Multi-Shot, LLC, RBC did
not deliberately exclude any companies which may have been
otherwise included. The comparable companies chosen by RBC
included:
Comparable
Companies
|
|
|
|
|
|
|
|
|
Company Name
|
|
LTM Revenues
|
|
|
Adjusted EBITDA
|
|
Allis-Chalmers Energy Inc.
|
|
$
|
477.3
|
|
|
$
|
148.2
|
|
Basic Energy Services, Inc.
|
|
|
814.2
|
|
|
|
257.5
|
|
Complete Production Services, Inc.
|
|
|
1,503.3
|
|
|
|
441.3
|
|
Key Energy Services, Inc.
|
|
|
1,645.6
|
|
|
|
438.2
|
|
Oil States International, Inc.
|
|
|
1,943.6
|
|
|
|
372.0
|
|
RPC, Inc.
|
|
|
656.6
|
|
|
|
245.1
|
|
Superior Energy Services, Inc.
|
|
|
1,369.3
|
|
|
|
557.7
|
|
Superior Well Services, Inc.
|
|
|
303.9
|
|
|
|
83.6
|
|
W-H Energy Services, Inc.
|
|
|
1,027.8
|
|
|
|
306.3
|
|
For each of the selected comparable companies, RBC calculated
the applicable companys total enterprise value as of
August 22, 2007 (based on its publicly reported market
capitalization as of August 22, 2007), as a multiple of
that companys publicly reported revenue and Adjusted
EBITDA
(5)
for
the last twelve months ended June 30, 2007. Comparable
company last twelve months revenue and Adjusted EBITDA were
calculated from
(5) Adjusted EBITDA as defined as EBITDA + Extraordinary
Items + Non-Recurring Expenses + Non-Cash Expenses
33
information set forth in the applicable companys SEC
filings, press releases, IBES, FactSet, Wall Street research and
company websites.
RBC calculated Adjusted EBITDA in its analysis for
Multi-Shot, LLC and the selected comparable companies to arrive
at a measurement that RBC believed, based upon its experience,
was comparable. The calculation of Multi-Shot, LLCs
Adjusted EBITDA was identical to the calculation of Adjusted
EBITDA described in RBCs Precedent Transactions Analysis.
Although any adjustments to EBITDA necessarily require some
subjective determinations, the adjustments made in calculating
Adjusted EBITDA above were those that, in RBCs experience,
were appropriate to remove the effects of one-time or
non-recurring events or expenses. RBC excluded one-time
management fees as well as commissions and bonuses that
Multi-Shot, LLC management does not anticipate will recur
following the proposed merger from Multi-Shot, LLCs
Adjusted EBITDA. These adjustments, if not included, would
materially alter the valuation range; however, RBC believed,
based on its experience and expertise, that the Adjusted EBITDA
should be taken into account in this case in order to increase
the comparability to the Adjusted EBITDA figures used in the
comparable company analysis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable
|
|
|
Comparable
|
|
|
Multi-Shot
|
|
|
|
|
|
|
Public Company
|
|
|
Public Company
|
|
|
June 30, 2007
|
|
|
Implied Range of
|
|
|
|
Multiple
|
|
|
Multiple Range
|
|
|
LTM Financials
|
|
|
Enterprise Values
|
|
|
|
|
|
|
|
|
|
($ millions)
|
|
|
($ millions)
|
|
|
Enterprise Value/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 LTM Revenues
|
|
|
1.87
|
x
|
|
|
1.7x - 2.3
|
x
|
|
$
|
88.3
|
(6)
|
|
$
|
160.1 - $213.1
(6
|
)
|
Enterprise Value/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 LTM Adjusted EBITDA
|
|
|
6.16
|
x
|
|
|
5.2x - 7.2
|
x
|
|
$
|
26.3
|
(6)
|
|
$
|
146.6 - $199.2
(6
|
)
|
|
|
|
(6)
|
|
June 30, 2007 actual last twelve months revenue and Adjusted
EBITDA are not pro forma for the Ulterra asset acquisition dated
July 1, 2007. Multi-Shot, LLC paid $10 million in
total consideration for Ulterra, hence, RBC added
$10 million in value to the implied enterprise value ranges.
|
Based on its experience in analyzing energy industry companies
and transactions and the comparable companies analysis, RBC
selected a range of revenue and Adjusted EBITDA multiples of
1.7x to 2.3x and 5.2x to 7.2x, respectively, for Multi-Shot,
LLC. In selecting these representative valuation multiple
ranges, RBC took into consideration both the revenue and
Adjusted EBITDA mean (1.9x and 6.2x, respectively) and median
(1.7 and 6.0x, respectively) multiples provided by the
comparable companies analysis.
Utilizing the above mentioned revenue and Adjusted EBITDA
multiple ranges, RBC then estimated a range of transaction
values for Multi-Shot, LLC by multiplying the endpoints of the
revenue (1.7x and 2.3x) and Adjusted EBITDA (5.2x and 7.2x)
multiple ranges by Multi-Shot, LLCs revenue and Adjusted
EBITDA of approximately $88.3 million and $26.3 million,
respectively, for the last twelve months ended June 30, 2007.
RBC noted that assumed aggregate merger consideration for
Multi-Shot, LLC of $197.5 million was within range of
implied enterprise values (approximately $160 million to
$213 million based on LTM revenues and $147 million to
$199 million based on LTM Adjusted EBITDA) calculated by
RBC based on comparable public company analyses.
No company utilized in the comparable public company analysis is
identical to Multi-Shot, LLC. Each of the comparable companies
analyzed are publicly traded, which generally have higher
valuations than private companies like Multi-Shot, LLC due to
their greater size and market penetration and the comparative
liquidity of their securities, among other reasons. RBC made
judgments and assumptions with regard to industry performance,
general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the
parties to the merger agreement. Mathematical analysis of
comparable public companies (such as determining means and
medians) in isolation from other analyses is not an effective
method of evaluating transactions.
34
Discounted
Cash Flow Analysis
RBC examined the value of Multi-Shot, LLC based on projected
future free cash flow estimates provided by Multi-Shot,
LLCs management. The free cash flow estimates were
generated utilizing financial projections for the years ending
December 31, 2008 through December 31, 2012 that were
prepared and furnished to RBC by Multi-Shot, LLCs
management. RBC did not perform any independent inquiry
regarding the reasonableness of any assumptions underlying the
financial projections provided by Multi-Shot, LLCs
management. The underlying projections were based on Multi-Shot,
LLC managements estimate of Multi-Shot, LLCs annual
revenue growth rate of approximately 17.5% in 2008 and
approximately 10% per year thereafter through 2012. Multi-Shot,
LLC management further assumed that forecasted margins would
remain consistent with historical margins throughout the
projection period. The projections provided by Multi-Shot, LLC
management did not take into consideration any acquisitions, new
financing transactions or any other material future events.
RBC discounted Multi-Shot LLC managements free cash flow
estimates using the half-year convention and with a discount
rate calculated by using the weighted average cost of capital
method, or WACC. WACC is calculated by multiplying
the cost of each capital component by its proportional weight
and then summing. RBC used the following formula for
calculating the WACC:
WACC = E/V * Re + D/V * Rd * (1−Tc)
Re = cost of equity
Rd = cost of debt
E = market value of the firms equity
D = market value of the firms debt V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
In calculating WACC, RBC utilized the following significant
assumptions:
|
|
|
|
|
a debt/equity ratio for Multi-Shot, LLC of 30%
|
|
|
|
an assumed 10% pre-tax weighted average cost of debt
|
|
|
|
an assumed annual risk free interest rate of 4.6% (based upon
the U.S. 10-Year Treasury Yield as of August 23, 2007)
|
|
|
|
an equity risk premium of 7.1% (as reported in the Morningstar
Risk Premia Report:2007)
|
|
|
|
an assumed effective tax rate for Multi-Shot, LLC of 35%
|
|
|
|
a size premium of 9.7% (Small Cap Company Premium in excess of
CAPM equity risk premium for a subset of stocks composing the
10
th
decile of the NYSE as reported in the Morningstar
Risk Premia Over Time Report: 2007)
|
The foregoing calculation resulted in a WACC of 20.6%.
Next, RBC calculated terminal values using a range of exit
EBITDA multiples (4.4x to 6.4x). which was estimated by RBC
based on its review of the precedent transactions analysis. The
exit multiple range was determined to be below the precedent
transactions multiple range based on the fact that it is a
forward looking multiple that requires a discount. The terminal
value was calculated by multiplying the terminal year EBITDA by
an EBITDA multiple using the following formula:
PV of Terminal Year = (Terminal Year EBITDA * EBITDA Multiple) /
(1 +
r)
4.5
Enterprise values for Multi-Shot, LLC resulting from RBCs
discounted cash flow analysis ranged from approximately
$159 million to approximately $203 million, as set
forth in the chart below.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit EBITDA Multiple
|
|
|
4.4x
|
|
5.4x
|
|
6.4x
|
|
|
($ in millions)
|
|
Discount Rate 20.6%
|
|
|
159.3
|
|
|
|
181.3
|
|
|
|
203.3
|
|
The following represents sensitivity of the discounted cash flow
analysis to fluctuations in the WACC discount rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WACC
|
|
|
|
|
|
|
19.6%
|
|
|
20.6%
|
|
|
21.6%
|
|
Exit EBITDA Multiple
|
|
|
4.4x
|
|
|
|
164.2
|
|
|
|
159.3
|
|
|
|
154.7
|
|
Exit EBITDA Multiple
|
|
|
5.4x
|
|
|
|
187.1
|
|
|
|
181.3
|
|
|
|
175.8
|
|
Exit EBITDA Multiple
|
|
|
6.4x
|
|
|
|
209.9
|
|
|
|
203.3
|
|
|
|
197.0
|
|
RBC noted that the assumed aggregate merger consideration for
Multi-Shot, LLC of $197.5 was within the estimated range of
implied enterprise values (approximately $159 million to
$203 million) calculated by RBC based on the discounted
cash flow analysis.
While discounted cash flow analysis is a widely accepted and
practiced valuation methodology, it relies on a number of
assumptions, including the above stated growth rates, terminal
multiples and discount rates. The valuation derived from the
discounted cash flow analysis is not necessarily indicative of
Multi-Shot, LLCs present or future value or results.
Discounted cash flow analysis in isolation from other analyses
is not an effective method of evaluating transactions.
Leveraged
Buyout Analysis
Using Multi-Shot, LLC managements financial projections
for the years ending December 31, 2008 through
December 31, 2012, RBC analyzed Multi-Shot, LLC from the
perspective of a potential financial buyer effecting a leveraged
buyout of Multi-Shot, LLC using leveraged capital structures
typically employed by financial buyers. Principal among the
assumptions RBC made regarding the leveraged capital structure
was that a financial buyer could, in addition to its equity
contribution, obtain debt financing in the amount of 3.0x
Multi-Shot, LLCs last twelve months Adjusted EBITDA to
finance the transaction. RBC further assumed that the first 2.0x
of the debt would bear a 9.25% annual interest rate and the
remaining 1.0x of debt would bear a 14.0% annual interest rate.
RBC made these debt and interest rate assumptions based on its
experience as a financial advisor and its knowledge of capital
markets.
RBC assumed that the buyer would value its investment in
Multi-Shot, LLC as of December 31, 2012 using a range of
exit EBITDA multiples (4.4x to 6.4x), which range was estimated
by RBC based on its review of the precedent transactions
analysis. The exit multiple range was determined to be below the
precedent transactions multiple range based on the fact that it
is a forward looking multiple that requires a discount. RBC then
calculated Multi-Shot, LLCs projected equity value as of
December 31, 2012 by multiplying the 2012 projected EBITDA
by the endpoints of the multiple range, adding its cash balance
projected by Multi-Shot, LLC management as of December 31,
2012 and subtracting its debt outstanding projected by
Multi-Shot, LLC management as of that same date. Based on these
and certain other assumptions, RBC calculated a range of
projected future equity values for Multi-Shot, LLC between
$324.5 and $375.7 million as of December 31, 2012, and
projected a range of enterprise values between $225.0 and
$327.3 million as of December 31, 2012.
RBC calculated that the foregoing equity and enterprise values
would result in a financial buyer realizing an internal rate of
return range of 25.4% to 29.1% by December 31, 2012 if it
purchased Multi-Shot, LLC for a purchase price equal to the
assumed aggregate merger consideration of $197.5 million
using the above described leveraged capital structure. Based on
RBCs experience with financial buyers, it believes that a
financial buyer would typically expect returns in the range of
20% to 25% on its equity investment. Accordingly, a $197.5
million acquisition of Multi-Shot, LLC would generate internal
rates of return of 25.4% to 29.1% by December 31, 2012, which
are within or above the expected range.
36
As previously stated, RBCs leveraged buyout analysis did
not seek to estimate a range of present values for Multi-Shot,
LLC, but instead provided a range of expected returns described
above and compared this range to the expected returns based on
past industry experience.
In conducting its leveraged buyout analysis, RBC made judgments
and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other
matters, many of which are beyond the control of the parties to
the merger agreement. Mathematical analysis of leveraged buyout
scenarios in isolation from other analyses is not an effective
method of evaluating transactions.
Net Asset
Value Test
RBC calculated that 80% of the JKAs pre-deal net assets
based on JKAs June 30, 2007 balance sheet is an
amount equal to $62.8 million based on:
|
|
|
|
|
JKA Net Assets (as of 6/30/07)
|
|
$
|
78.5 MM
|
|
|
|
|
X 80
|
%
|
|
|
|
|
|
|
|
$
|
62.8 MM
|
|
Based on the foregoing analyses, RBC concluded that the value of
Multi-Shot, LLC implied in the merger is greater than 80% of
JKAs net assets as of June 30, 2007.
Other
Considerations
The summary set forth above describes the principal analyses
performed by RBC in connection with its opinion delivered to the
Board on August 24, 2007. The preparation of a fairness
opinion is a complex process that involves the application of
subjective business judgment in determining the most appropriate
and relevant methods of financial analysis and the application
of those methods to the particular circumstances and, therefore,
is not necessarily susceptible to partial consideration of the
analyses or summary description. RBC believes that its analyses
must be considered as a whole and that selecting portions of the
analyses and of the factors considered, without considering all
of the factors and analyses, could create an incomplete or
misleading view of the processes underlying its opinion.
In view of the wide variety of factors considered in connection
with its evaluation of the fairness of the consideration to be
paid by JKA in connection with the merger, from a financial
point of view, RBC did not find it practicable to assign
relative weights to the factors considered in reaching its
opinion. No single company or transaction used in the above
analyses as a comparison is identical to JKA or Multi-Shot, LLC
or the proposed merger. The analyses were prepared solely for
purposes of RBC providing an opinion as to the fairness, from a
financial point of view, to JKA of the consideration proposed to
be paid by JKA in the merger and do not purport to be appraisals
or necessarily reflect the prices at which businesses or
securities actually may be sold, which are inherently subject to
uncertainty.
In connection with its analyses, RBC made, and was provided by
JKAs and Multi-Shot, LLCs managements, numerous
assumptions with respect to industry performance, general
business and economic conditions and other matters, many of
which are beyond JKAs or Multi-Shot, LLCs control.
Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by these
analyses. None of JKA, Multi-Shot, LLC, RBC, or any other person
assumes responsibility if future results or actual values are
materially different from these forecasts or assumptions as
these analyses are inherently subject to uncertainty, and are
based upon numerous factors or events beyond the control of JKA,
Multi-Shot, LLC, or their advisors.
Pursuant to the terms of an engagement letter dated
August 17, 2007, JKA agreed to pay RBC fees for rendering
its August 24, 2007 opinion to the Board that are customary
in transactions similar to the merger. The terms of the fee
arrangement with RBC were negotiated at arms-length
between the Board and RBC. In accordance with the terms of the
August 17, 2007 engagement letter, JKA paid RBC a fee of
$175,000 for the delivery of RBCs August 24, 2007
fairness opinion, which addresses the merger agreement. The fee
was payable without regard to whether or not the opinion was
accepted or the merger was consummated. JKA also agreed to
reimburse RBC for its
37
reasonable out-of-pocket expenses under certain circumstances,
and to indemnify RBC and related persons against liabilities in
connection with its engagement.
RBC has not provided any services to Multi-Shot, LLC or any
services to JKA other than in connection with the fairness
opinion summarized above. JKA selected RBC to render its opinion
based on RBCs experience in mergers and acquisitions and
in securities valuation generally. RBC is a nationally
recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with
mergers and acquisitions, corporate restructurings,
underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and
other purposes. In the ordinary course of its business, RBC and
its affiliates may act as a market maker and broker in the
publicly traded securities of JKA and receive customary
compensation, and may also actively trade securities (whether
debt or equity) of JKA for its own account and the accounts of
its customers, and accordingly, RBC and its affiliates, may hold
a long or short position in such securities.
Fairness
Opinion Comparison
The Board had previously received a fairness opinion from
KeyBanc in conjunction with the Previous Merger Agreement. The
KeyBanc opinion was dated April 30, 2007. The KeyBanc
opinion resulted in a range of values for Multi-Shot of
$108 million to $177 million. The Board determined
that an updated fairness opinion would be requested in
conjunction with the Merger Agreement. JKA requested that
KeyBanc provide an updated fairness opinion based upon the terms
of the Merger Agreement. KeyBanc was unable to commit to provide
the updated fairness opinion sought by the Board within the time
period requested by JKA. JKA then interviewed and engaged RBC,
which had appropriate expertise and was able to complete the
fairness opinion within the time period requested by JKA. All
fees and expenses in connection with the KeyBanc opinion have
been paid by JKA.
The following table summarizes what JKA believes to be certain
key differences between the KeyBanc fairness opinion
commissioned in conjunction with the Previous Merger Agreement
and the RBC fairness opinion commissioned in conjunction with
the merger agreement:
|
|
|
|
|
|
|
KeyBanc
|
|
RBC
|
|
Date of opinion
|
|
April 30, 2007
|
|
August 24, 2007
|
Range of value resulting from precedent transactions analysis
|
|
$127 million to $148 million
|
|
$145 million to $204 million
|
Range of value resulting from comparable public company analysis
|
|
$156 million to $177 million
|
|
$138 million to $213 million
|
Range of value resulting from discounted cash flow analysis
|
|
$114 million to $134 million
|
|
$159 million to $203 million
|
Range resulting from leveraged buyout analysis
|
|
$108 million to $128 million
|
|
Internal rate of return of 25.4% to
29.1%
(1)
|
|
|
(1)
|
RBCs leveraged buyout analysis did not seek to establish a
range of present values for Multi-Shot, LLC, but rather a range
of internal rates of return a financial buyer might realize if
it purchased Multi-Shot, LLC for the assumed aggregate merger
consideration of $197.5 million. See Opinion of
RBC Leveraged Buyout Analysis
|
The information stated above regarding the RBC fairness opinion
is merely a summary of the ranges resulting from certain of the
analytical methodologies and inquiries conducted by RBC in
rendering its opinion dated August 24, 2007. The summary
table above should be read in conjunction with, and we urge you
to refer to, RBCs opinion as well as the section entitled
Opinion of RBC for a more complete discussion of the
analyses, material assumptions, qualifications and limitations
underlying RBCs opinion. As described above, RBCs
opinion speaks only as of the date of such opinion and is based
on the conditions as they existed and information which RBC had
been supplied as of the date of the opinion. RBC did not
undertake to review or analyze, and has offered no analysis
38
or opinion regarding, the conclusions or analyses of KeyBanc
contained in KeyBancs opinion, or regarding the
assumptions, calculations, analyses, inquiries or methodologies
underlying KeyBancs opinion.
BACKGROUND
AND HISTORY OF NEGOTIATIONS
The terms of the merger agreement are the result of
arms-length negotiations between representatives of JKA,
Catalyst and Multi-Shot. The following is a brief discussion of
the background of the formation of JKA, the negotiations between
JKA and Multi-Shot, the merger and related transactions.
JKA was incorporated in Delaware on May 11, 2005, as a
blank check company formed to serve as a vehicle for the
acquisition, through a merger, capital stock exchange, asset
acquisition or other similar business combination with a then
currently unidentified operating business.
On April 10, 2006 JKA sold 333,334 units
(Private Placement Shares) of common stock to two
existing shareholders (James P. Wilson and Keith D. Spickelmier)
for $2,000,004.
A registration statement for JKAs initial public offering
was declared effective on April 10, 2006. On April 11,
2006, JKA consummated its initial public offering of
11,500,000 units and on April 17, 2006, consummated
the closing of an additional 1,725,000 units that were
subject to the underwriters over-allotment option. Each
unit consists of one share of common stock and two redeemable
common stock purchase warrants. Each warrant expires on
April 10, 2010, or earlier upon redemption, and entitles
the holder to purchase one share of our common stock at an
exercise price of $5.00 per share. The common stock and
warrants started trading separately as of May 11, 2006.
The net proceeds from the sale of the JKA units and private
placement shares were approximately $76,632,404. Of this amount,
$76,532,404 was deposited in trust and, in accordance with
JKAs amended and restated certificate of incorporation,
will be released either upon the consummation of a business
combination or upon the liquidation of JKA. The remaining
$100,000 was held outside of the trust for use to provide for
business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses
(working capital). Additionally, up to $900,000 of
working capital may be funded from the interest earned from the
trust account. As of December 31, 2006, approximately
$77,627,249 was held in deposit in the trust account.
During the period from April 12, 2006 through September
2006, JKA evaluated approximately 20 prospective businesses
regarding potential business combinations. Other than
Multi-Shot, none of these evaluations led to an offer by JKA to
pursue a business combination. JKA focused on companies that had
experienced management, a track record of growth in revenues and
cash flow that were involved in industries providing opportunity
for additional acquisitions, regulatory or technical barriers to
entry and growth prospects with a need for growth capital. These
companies were sourced from contact with prospective target
companies, private equity firms, investment firms, investment
banks, banks, lawyers, accountants and other professionals. JKA
chose to pursue Multi-Shot based on the terms it negotiated, its
familiarity with the reputation of Messrs. Hermann and
Nixon and because Multi-Shot met the investment parameters
discussed above.
In May 2006, Multi-Shot began exploring potential strategic
alternatives. On May 18, 2006, Multi-Shots Board of
Managers engaged Parks Paton Hoepfl & Brown
(PPHB), as its exclusive financial advisor to assist
it with determining a range of market values and to make contact
with certain agreed to prospective financing sources. PPHB and
Multi-Shots
Board of Managers, consisting of Messrs. Nixon, Neel and
Robert P. Vilyus, evaluated various potential strategic
alternatives, including an initial public offering of the
Multi-Shots stock both in the U.S. and in the U.K.
AIM markets, leveraged recapitalization
transactions, acquisition and merger transactions and the
continued execution of Multi-Shots strategic plan with its
existing levels of capitalization. With respect to evaluating
potential merger or sale alternatives, Multi-Shot requested that
PPHB approach a targeted group of strategic and financial
financing sources. Multi-Shot prepared a Confidential
Information Memorandum to facilitate those discussions. During a
period of approximately 60 days, PPHB approached a select
group of potential strategic investors, which process was
ongoing at the time when JKA approached Catalyst (which was then
Multi-Shots controlling equity member, but JKA was unaware
of this at such time).
On April 20, 2006 JKA sent a mass email to prospective
target companies, investment banks, banks, lawyers, accountants
and other professionals. The source of the email marketing
campaign was JKAs internal data base. Ron Nixon and Rick
Herrman of Catalyst were included in the JKA internal data base
and received the email from JKA.
39
Mr. Wilson has known Mr. Nixon and Mr. Herrman
professionally since approximately 1992. Mr. Wilsons
firm, RSTW Partners, provided a subordinated debt investment to
Messrs. Nixon and Herrmans firm, the Catalyst Group,
in 1994. The Catalyst Groups principals have been in
Mr. Wilsons contact data base since they met in 1992.
Prior to April 20, 2006 the most recent contact the
principals of JKA had with a person associated with the Catalyst
Group was in early 2004 when Mr. Spickelmier called upon
Mr. Herrman to discuss a potential investment opportunity
that was unrelated to JKA. No investment was completed as a
result of this contact. After the JKA email of April 20,
2006, Mr. Spickelmier contacted Mr. Herrman at
Catalyst in early May 2006 to inquire as to whether the
Catalyst investment vehicles might have any assets that met the
JKA investment parameters. At that time, JKA had no knowledge of
the existence of Multi-Shot. Mr. Herrman indicated to
Mr. Spickelmier that Catalyst may have assets in the form
of security holdings in certain private companies that could fit
the JKA investment parameters.
At the request of Catalyst, on May 12, 2006,
Messrs. Wilson and Spickelmier met with Messrs. Brown,
Hoepfl, Parks and Paton of PPHB to describe JKA and its
investment parameters, processes and procedures. At this meeting
PPHB informed Messrs. Wilson and Spickelmier that a
Catalyst portfolio company, Multi-Shot may be a candidate for a
transaction with JKA. PPHB indicated they would discuss this
opportunity with representatives of Catalyst.
During the week of May 15, 2006, Mr. Brown contacted
Mr. Spickelmier and described Multi-Shot in summary
fashion. Mr. Brown requested that JKA review and sign a
confidentiality agreement to review certain information related
to Multi-Shot. After review of the confidentiality agreement, a
meeting was scheduled for May 25, 2006 between JKA and
Multi-Shot.
On May 25, 2006, Messrs. Wilson and Spickelmier met,
at the offices of PPHB in Houston, Texas, with
Messrs. Brown and Nixon and Mr. Allen Neel, President
of Multi-Shot. This meeting was the first in-person meeting
between JKA, Catalyst and management of Multi-Shot. At the
outset of the meeting a confidentiality agreement was executed
between JKA and Multi-Shot. Messrs. Wilson and Spickelmier
provided a detailed explanation of the JKA entity and described
the process to complete a merger/acquisition transaction.
Messrs. Wilson and Spickelmier then received a memorandum
entitled Multi-Shot Executive Summary Discussion
Materials. Mr. Neel discussed the document and
provided answers to the initial questions posed by
Messrs. Wilson and Spickelmier.
On June 7, 2006 Mr. Wilson met with Mr. Brown to
review additional due diligence materials prepared by Multi-Shot
and PPHB.
On June 8, 2006 Mr. Wilson contacted Jon McCarty of
Ernst & Young, LLP (Ernst &
Young) to schedule an appointment to discuss the use of
Ernst & Youngs Oil & Gas Transactional
Services Group to provide due diligence assistance to JKA with
respect to the Multi-Shot transaction.
On June 9, 2006 Mr. Wilson visited Multi-Shots
headquarters and manufacturing facility in Conroe, Texas to meet
with Mr. Neel. Mr. Wilson toured the facilities and
held discussions with other members of the Multi-Shot management
team.
On June 12, 2006, Mr. Wilson met with Mr. McCarty
to describe a potential transaction with Multi-Shot and to
describe the due diligence procedures that JKA would require
Ernst & Young to perform.
On June 13, 2006, Messrs. Wilson, Herrman and Nixon
met in Catalysts offices. Mr. Spickelmier attended by
telephone. A series of due diligence questions raised by JKA
were discussed. Additionally, general parameters of a merger
agreement and terms of a transaction were discussed.
The officers and directors of JKA analyzed several potential
investments before agreeing to the Multi-Shot merger, including
companies in various manufacturing and service sectors.
Management reviewed five energy production service companies,
including Multi-Shot. In reviewing the energy production service
industry, management began to focus on the natural gas drilling
operations that management believed was one of the significant
causes of increased U.S. onshore drilling activity. In its
analysis, JKA management used information available regarding
publicly traded energy production service companies. Based on
this analysis, management believed that a drilling company
focused on directional drilling activities could be an
attractive public company due to the increasing need to drill
unconventional natural gas wells. Managements analysis
indicated the number of directional drilling rigs was increasing
at a higher rate, approximately 485%, than the rate of increase
of conventional drilling rigs, approximately 122%, over the
period from March 2002 to July 2006. Additionally,
40
natural gas exploration and production companies in the
U.S. are experiencing a significant first year production
decline rate with respect to their producing wells. Industry
reports indicate that decline rates have risen from
approximately 21% in 1997 to approximately 32% in 2006. The
increase in the production decline rates requires a higher
number of wells to be drilled to produce a similar amount of
natural gas. Drilling and other well service providers such as
Multi-Shot have benefited from the increase in drilling
activity. In addition, drilling companies with significant
directional drilling capability have benefited from the
increased use of unconventional drilling techniques to recover
less accessible natural gas fields. The initial assessment of
Multi-Shots management team by JKA was favorable and met
JKAs requirement of an experienced management team to
operate the business after the merger. As a result of its
analysis of the business and management of Multi-Shot, JKA began
exclusively focusing on a business combination with Multi-Shot.
On June 14, 2006, Mr. Wilson and Mr. Herrman met
in Catalysts offices to begin drafting an outline of a
proposed transaction. On the same day Mr. Wilson executed,
on behalf of JKA, an engagement letter with Ernst &
Young to perform certain agreed upon due diligence procedures
related to the proposed Multi-Shot merger transactions.
On June 16, 2006, Mr. Wilson visited Multi-Shots
headquarters to continue due diligence and meet with
Mr. Neel, Mr. Paul Culbreth, Vice President of
Operations and David Cudd, Vice President of Sales.
On June 20, 2006 Mr. Wilson and Mr. Spickelmier
held an informal conference call with Messrs. Michael
McConnell and Herb Williamson, both Board members of JKA to
discuss a proposed merger transaction with Multi-Shot along with
other potential opportunities that JKA was evaluating at that
time. Mr. Wilson indicated to the Board that after
additional due diligence a Board meeting would likely be called
to discuss formal action. The same day, after the conference
call with the Board, Messrs. Wilson and Spickelmier met
with Messrs. Herrman, Nixon and Neel in the offices of JKA
to further discuss and negotiate terms of a proposed transaction.
During the week of June 26, 2006 several conference calls
were held between JKA, Catalyst and Multi-Shot to continue due
diligence and to further develop the outline of a proposed
merger transaction. Also during this week, Multi-Shot delivered
its comprehensive overview of key accounting policies and
procedures and controls to assist in JKAs due diligence.
On July 5, 2006, Mr. Wilson visited Multi-Shots
headquarters to meet with Mr. Neel and to introduce the
Ernst & Young due diligence team, who began their
due diligence procedures per the terms of the engagement letter
with JKA.
On July 11, 2006 Messrs. Wilson and Spickelmier met
with Messrs. Herrman, Nixon and Neel to further negotiate
the outline of terms of the proposed merger transaction. The
same afternoon, Messrs. Wilson, Nixon and Neel met with
representative of Hein & Associates, LLP
(Hein) to discuss retaining Hein to perform certain
audit procedures necessary for the requirements of this proxy
statement. Subsequently, on July 13, 2006, Hein was engaged
by JKA to perform certain audit procedures related to Multi-Shot.
On July 13, 2006 a meeting of the Board was held in the
offices of JKA. Messrs. Wilson, Spickelmier and McConnell
attended in person and Mr. Williamson participated by
telephone. Mr. Wilson described the potential transaction
with Multi-Shot. Mr. Wilson gave a brief history of
Multi-Shot and its primary owner, Catalyst. Mr. Wilson
notified the Board that Ernst & Young had been
retained to perform due diligence and to prepare a report for
the Board and that Hein had been retained to perform the audits
of Multi-Shot necessary to meet the proxy requirements.
Mr. Wilson also noted that an investor relations firm would
be retained to assist JKA in preparing an investor presentation
and to prepare for investor meetings. Mr. Wilson also noted
that a compensation expert would be retained to evaluate the
terms of employment agreements and to offer guidance on director
compensation. During the meeting, the Board also discussed the
option of obtaining a fairness opinion for the proposed merger.
It was determined by the Board that a nationally recognized firm
would be retained after the signing of the merger agreement to
conduct a fairness opinion on behalf of the shareholders of JKA,
and that the merger agreement would contain a provision whereby,
prior to the closing of the merger, a fairness opinion would be
issued by a nationally recognized firm stating that (i) the
merger is fair, from a financial point of view, to JKA and
(ii) the fair market value of Multi-Shot is equal to at
least 80% of JKAs net assets. Mr. Wilson reviewed
with the Board an executive summary that described the business
of Multi-Shot. Mr. Wilson also discussed the internal
growth prospects of Multi-Shot, including the possibilities for
add-on acquisitions. Mr. Wilson also discussed the
management team of
41
Multi-Shot and the structure of the proposed merger transaction.
Mr. Wilson did not ask for formal Board action on the
transaction at this meeting.
On July 14, 2006, Messrs. Wilson and Spickelmier met
with representatives of Ernst & Young to review and
discuss the draft financial due diligence report.
From July 17, 2006 through August 2, 2006, JKA,
Multi-Shot and Catalyst and their respective counsel had a
series of conference calls, meetings and drafting sessions to
negotiate and document the terms of the merger agreement and
related documents.
On August 3, 2006, the Board met again to review the merger
with Multi-Shot and discussed in detail the draft merger
agreement. After a full discussion and review of the draft
merger agreement, the Board resolved for JKA to enter into the
merger transaction with Multi-Shot, as detailed in the draft
merger agreement, and the Board gave its officers the authority
to sign any documents necessary to carry out the resolution.
While no one factor determined the final agreed upon
consideration in the merger, the Board again reviewed various
industry and financial data, including certain valuation
analysis and metrics compiled by JKA and its consultants, in
order to determine that the consideration to be paid to the
members of Multi-Shot was fair to and in the best interest of
JKAs shareholders.
From August 3, 2006 through September 6, 2006, JKA,
Multi-Shot and Catalyst and the respective counsels for JKA and
Multi-Shot had a series of conference calls, meetings and
drafting sessions to further negotiate and document the terms of
the merger agreement and related documents. During this time, a
presentation regarding Multi-Shot and the proposed merger
transaction was drafted and filed with the SEC for use in
discussions with current and prospective investors after the
signing of the merger agreement.
On September 6, 2006, JKA, Multi-Shot and various other
parties entered into the Agreement and Plan of Merger
(Original Merger Agreement) and related agreements.
The Original Merger Agreement had a transaction value of
$107,500,000 based upon an estimated EBITDA of approximately
$17.6 million for the year ended December 31, 2006.
On September 7, 2006 JKA and Multi-Shot publicly announced
the Original Merger Agreement through a joint press release.
On September 10, 2006, JKA engaged KeyBanc to issue and
deliver a fairness opinion, and on October 23, 2006,
KeyBanc delivered a fairness opinion to the Board. This fairness
opinion addressed the Original Merger Agreement.
On November 22, 2006, JKA filed a preliminary proxy on
Schedule 14A with the Securities and Exchange Commission.
In January 2007, JKA and Multi-Shot began discussions to extend
the Original Merger Agreement past the January 31, 2007
deadline stipulated in the Original Merger Agreement. Through a
series of conversations and negotiations between JKA, Multi-Shot
and Catalyst, the Previous Merger Agreement was signed on
February 14, 2007 as described in the JKA
Form 8-K
filing on February 15, 2007.
On April 3, 2007, JKA filed a
Form 8-K
announcing the closing of the private recapitalization between
Multi-Shot and SG-Directional, LLC, a new entity managed by The
Stephens Group, LLC. PPHB did not contact The Stephens Group
regarding the private recapitalization and did not provide any
services in connection with the private recapitalization.
On May 8, 2007, JKA filed Amendment No. 1 to its
preliminary proxy statement on Schedule 14A with the SEC.
On July 9, 2007, Multi-Shot verbally notified JKA that if
JKA was unable to obtain stockholder approval of the
transactions contemplated by the amended and restated merger
agreement prior to July 31, 2007, then Multi-Shot intended
to exercise its termination rights on July 31, 2007 or soon
thereafter pursuant to Section 9.01(a) of the Previous
Merger Agreement. Based on the then current status of JKAs
proxy materials on Schedule 14A related to the Previous Merger
Agreement, as well as certain terms and provisions in the
Previous Merger Agreement and JKAs bylaws, as amended, JKA
did not believe that it would obtain the necessary stockholder
approval of the transactions contemplated by Previous Merger
Agreement prior to July 31, 2007. It was JKAs position
that any
42
inability to obtain the necessary stockholder approval prior to
July 31, 2007 was the result of wrongful acts and omissions by
Multi-Shot. Multi-Shot disagreed with this assessment.
On July 16, 2007, JKA filed suit in the state district
court of Harris County, Texas against Multi-Shot and twelve
other named defendants. JKA sought injunctive relief and other
damages related to various claims of breach of contract in
connection with the Previous Merger Agreement. On July 17, 2007
a temporary restraining order was issued by the court that
prohibited Multi-Shot and twelve other named defendants from
selling, transferring, encumbering, diluting, or otherwise
disposing of any asset of or interest in Multi-Shot other than
in the usual course of business.
On August 15, 2007, JKA and Multi-Shot began discussions to
extend the Previous Merger Agreement past the July 31, 2007
deadline stipulated in the Previous Merger Agreement. Multi-Shot
and JKA discussed a settlement proposal whereby Multi-Shot would
agree to an extension of the merger agreement based upon a
variety of factors, including a transaction price increase, a
cancellation of certain JKA officers and directors shares, an
agreement by JKA officers to fund up to an additional $500,000
in expenses related to completion of the merger transaction,
restructuring of the post-merger board of directors and mutual
releases related to the litigation. After extensive
negotiations, JKA reached a tentative agreement with Multi-Shot
on the terms of the merger.
On August 26, 2007, the Board held a board meeting to
discuss the terms of the settlement proposal. The Board
considered a variety of factors in connection with its
evaluation of the merger and the settlement agreement. In light
of the complexity of those factors, the Board did not consider
it practical to, nor did it attempt to, quantify or otherwise
assign relative weights to the specific factors it considered in
reaching its decision. In addition, individual members of the
Board may have given different weight to different factors.
The Board reviewed and discussed the economic terms of the
settlement proposal, including the proposed consideration paid
to the members of Multi-Shot pursuant to the Merger Agreement.
The Board reviewed the financial performance of Multi-Shot since
February 2007 and discussed its evaluation of the future
performance prospects of Multi-Shot. The Board also reviewed and
evaluated the fairness opinion supplied by RBC. The Board
concurs with RBCs analysis that the valuation is fair to
JKA shareholders. Further, the Board believes that Multi-Shot
continues to exhibit the growth prospects that originally
attracted JKA to propose the merger. Additionally, the Board
believes the long-term prospects of the directional drilling
industry remain attractive. The Board determined that
Multi-Shots 2007 financial performance through June 30 was
better than the performance levels contemplated in the Previous
Merger Agreement. The Board believes the increased performance
level justifies the increase in consideration paid to the
members of Multi-Shot pursuant to the Merger Agreement.
In addition to analyzing and discussing the economic terms of
the transaction, the Board discussed with Gibbs & Bruns,
JKAs special litigation counsel, the option of continuing
the litigation process. The Board was advised that the
litigation process is complex and lengthy. Furthermore, the
litigation process is inherently subject to uncertainties
regardless of the merits of the underlying claims. In addition
to monetary damages, JKA was seeking a ruling by the court that
would bar Multi-Shot from terminating the merger agreement. The
Board was informed by counsel that such rulings are more
difficult to obtain than monetary damages. The Board believed
that it would be very difficult to raise the additional capital
that JKA would require to complete a lengthy litigation process.
While the Board believed in the merits of JKAs claims, it
determined that there was no certainty that JKA would ultimately
be successful in the litigation. Based on its determination that
the terms of the transaction reflected in the merger agreement
were fair to JKAs shareholders and the uncertainties of
continuing the litigation process, the Board did not believe
that the litigation process would result in a better result for
JKAs shareholders than the settlement proposal.
The Board also considered the prospects of finding another
potential acquisition candidate before October 11, 2007.
Pursuant to JKAs certificate of incorporation, if JKA had
not entered into a letter of intent with respect to an
acquisition transaction on or before October 11, 2007, the
trust fund would be liquidated. The Board believed there was a
significant risk that JKA would not have the ability to find a
suitable acquisition candidate, perform appropriate due
diligence and enter into a letter of intent on or before
October 11, 2007. In addition, the Board was not confident
that any new acquisition candidate would represent a more
attractive transaction for JKAs shareholders. The Board
also reviewed the financial ability of JKA to complete a
transaction with a new acquisition candidate given JKAs
current financial situation and the projected future expenses of
JKA.
43
Based on the factors it considered, the Board concluded that it
was in the best interests of JKA and its shareholders to settle
the litigation under the terms of the settlement proposal and
complete the merger with Multi-Shot pursuant to the Merger
Agreement.
As a result, a Settlement Agreement was executed simultaneously
with the merger agreement on August 27, 2007. Pursuant to
the settlement agreement, JKA, Multi-Shot and other parties have
agreed to waive any prior claims any of the parties have, or may
have had against any and all parties to the Settlement Agreement
in exchange for, among other consideration, JKA and Multi-Shot
entering into the Merger Agreement.
On August 17, 2007, JKA engaged RBC Capital Markets
Corporation to issue and deliver a fairness opinion, and on
August 24, 2007, RBC Capital Markets Corporation
delivered a fairness opinion to the Board in connection with the
merger agreement.
INTEREST
OF JKA DIRECTORS AND OFFICERS IN THE MERGER
In considering the recommendation of the Board of JKA to vote
for the proposals to adopt the merger, you should be aware that
certain members of the Board have agreements or arrangements
that provide them with interests in the merger that differ from,
or are in addition to, those of JKA stockholders generally. In
particular, if the merger is not approved and JKA fails to
consummate an alternative business combination within the time
allotted pursuant to its amended and restated certificate of
incorporation and JKA is therefore required to liquidate, the
shares of common stock and warrants held by JKAs
executives and directors will be worthless because JKAs
executives and directors are not entitled to receive any of the
net proceeds of JKAs initial public offering held in trust
that will be distributed upon liquidation of JKA.
At the close of business on the record date, James P. Wilson,
Keith D. Spickelmier, Herbert C. Williamson and Michael H.
McConnell, who together comprise all of JKAs current
directors and officers, beneficially owned 3,291,667 shares
of JKA common stock, or 19.9% of the outstanding shares of JKA
common stock. 2,958,333 of these shares were purchased prior to
JKAs initial public offering for an aggregate purchase
price of $31,250 (approximately $0.01 per share). In addition,
Mr. Wilson purchased 183,334 units and
Mr. Spickelmier purchased 150,000 units in a private
placement immediately prior to the initial public offering for
an aggregate purchase price of $2,000,004 ($6.00 per unit). Each
unit consisted of one common share and two warrants.
Collectively, the 3,625,001 shares of JKA common stock held
by the officers and directors have a market value of
approximately $21,460,000 based on JKAs common stock price
of $5.92 per share as of September 28, 2007 (without taking
into account any discount that may be associated with the
restrictions on transfer of these shares).
The 666,668 warrants included in the units purchased by
Mr. Wilson and Mr. Spickelmier have a value of
approximately $247,000 based upon the warrant price of $0.37 per
warrant as of September 28, 2007 (without taking into
account any discount that may be associated with the
restrictions on transfer of these warrants).
Under the terms of the Merger Agreement, Messrs. Wilson,
Spickelmier, Williamson and McConnell have agreed to the
cancellation of 2,458,334 shares of JKA common stock they
currently own. Our officers and directors will receive no
compensation for the cancellation of the 2,458,334 shares.
Our officers and directors will also transfer 92,522 of their
remaining shares to Gibbs & Bruns upon the
consummation of the merger with Multi-Shot pursuant to the terms
of the Settlement Agreement. Gibbs & Bruns is the law
firm that represented JKA in connection with the litigation
against Multi-Shot. The transfer of 92,522 shares from our
directors and officers to Gibbs & Bruns represents a
portion of the compensation payable to Gibbs & Bruns
for services rendered. The shares transferred to
Gibbs & Bruns remain subject to the escrow provisions
and transfer restrictions imposed on our officers and directors.
As a result of the cancellation of shares and transfer to
Gibbs & Bruns, Messrs. Wilson, Spickelmier,
Williamson and McConnell will own a total of 740,741 shares
of JKA common stock (including the 333,334 shares included
in the units separately acquired by Mr. Wilson and
Mr. Spickelmier immediately prior to JKAs initial
public offering) upon the consummation of the merger. These
740,741 shares had a market value of approximately
$4,385,000 based on JKAs common stock price of $5.92 per
share as of September 28, 2007 (without taking into account
any discount that may be associated with certain restrictions on
transfer these shares). Additionally, the 666,668 warrants
included in the units purchased separately by Mr. Wilson
and Mr. Spickelmier have a value of
44
approximately $247,000 based upon the warrant price of $0.37 per
warrant as of September 28, 2007 (without taking into
account any discount that may be associated with certain
restrictions on transfer these warrants).
Mr. Wilson and Mr. Spickelmier have agreed to
indemnify JKA with respect to the due diligence, accounting,
legal and other expenses of JKA in connection with the merger in
the event the merger or another business combination is not
consummated before April 10, 2008. If the merger is
completed before April 10, 2008, this indemnity will
terminate. As of September 30, 2007 we estimate JKA had
unpaid accounts payable or accrued liabilities of $584,090 that
we believe could be covered by Mr. Wilsons and
Mr. Spickelmiers indemnity agreement. As of
September 30, 2007, JKA had approximately $90,492 in cash.
Mr. Wilson and Mr. Spickelmier have advanced JKA a
total of $500,000 to provide working capital (as described in
JKAs Current Reports on
Form 8-K
filed May 24, 2007, June 15, 2007, August 8, 2007
and September 6, 2007). None of the $500,000 advances are
included in the $584,090 of accounts payable and accrued
liabilities as of September 30, 2007. These advances will
be repaid upon the closing of the merger. If the merger or
another business combination is not consummated by
April 10, 2008, these advances will not be repaid. As a
result of the advances and the indemnification obligations, we
estimate that Mr. Wilson and Mr. Spickelmier will be
out of pocket approximately $1.1 million if the merger or
another business combination is not consummated by
April 10, 2008.
The management fee payable by JKA to 4350 Management LLC (wholly
owned by Mr. Wilson) totaling $7,500 per month will cease
at the closing date of the proposed merger.
REQUIRED
VOTE AND EFFECT OF DISAPPROVAL
Approval of the merger proposal will require the affirmative
vote of a majority of the shares of JKAs common stock
issued in JKAs initial public offering as voted at the
Special Meeting. In addition, each JKA stockholder that holds
shares of common stock issued in JKAs initial public
offering or purchased following such offering in the open market
has the right to vote against the merger proposal and, at the
same time, demand that JKA convert such stockholders
shares into cash equal to a pro rata portion of the trust
account into which a substantial portion of the net proceeds of
JKAs initial public offering were and remain deposited.
These shares will be converted into cash only if the merger is
completed and the stockholder requesting conversion holds such
shares until the date the merger is consummated. However, if the
holders of 20% or more of the aggregate shares of common stock
issued in JKAs initial public offering and the private
placement immediately prior to the initial public offering vote
against the merger and demand conversion of their shares into a
pro rata portion of the trust account, then JKA will not be able
to consummate the merger. Abstentions (not broker non-votes and
failures to vote) will have the same effect as a vote against
the proposal. Broker non-votes and abstentions are counted for
purposes of determining a quorum. Broker non-votes, abstentions
and failures to vote will not constitute an election to convert
a shareholders shares into cash.
RECOMMENDATION
After careful consideration, the Board has determined
unanimously that the merger proposal is fair to, and in the best
interests of, JKA and its stockholders. The Board has approved
and declared the merger proposal advisable and unanimously
recommends that you vote or give instructions to vote
FOR the proposal to approve the merger.
The foregoing discussion of the information and factors
considered by the Board is not meant to be exhaustive, but
includes the material information and factors considered by the
Board.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE MERGER PROPOSAL TO
MERGE WITH MULTI SHOT, LLC. VIA THE ACQUISITION OF ALL OF THE
OUTSTANDING SECURITIES OF MULTI-SHOT.
45
You should carefully consider the following risk factors,
together with all of the other information included in this
proxy statement, before you decide whether to vote or instruct
your vote to be cast to adopt the merger proposal. As JKAs
operations will be those of Multi-Shot, LLC
(Multi-Shot) upon completion of the merger, a number
of the following risk factors relate to the business and
operations of Multi-Shot and JKA, as the successor to
Multi-Shots business.
Risks
Associated with Multi-Shots Business and
Industry
Multi-Shots
business depends on the oil and gas industry, and particularly
on the level of activity for domestic gas exploration and
drilling. Multi-Shots markets may be adversely affected by
industry conditions that are beyond our control. The domestic
energy industry, has historically been highly
cyclical.
Multi-Shots revenues and profitability, as well as its
growth prospects depend primarily on the overall level of
drilling and exploration activity by its customers. This
activity depends on the willingness of our customers (and their
customers) to make operating and capital expenditures to explore
for, develop and produce oil and gas in the
U.S. Historically, oil and gas prices have been volatile
and are subject to fluctuation in response to changes in supply
and demand, market uncertainty, and a variety of other factors,
each beyond the control of Multi-Shot. The variety of other
factors include, but are not limited to:
|
|
|
|
|
Worldwide and domestic supplies of oil and natural gas;
|
|
|
|
Weather conditions;
|
|
|
|
The level of industrial and consumer demand for energy;
|
|
|
|
The ability of oil and gas producers to raise equity and debt
capital to fund their activities;
|
|
|
|
The expected rates of decline for existing production and
reserves;
|
|
|
|
The price and availability of alternative sources of energy;
|
|
|
|
The availability or equipment, people and capital to support
exploration activity;
|
|
|
|
The availability of transportation infrastructure for natural
gas (i.e., pipelines and storage, principally);
|
|
|
|
The price and volume of foreign imports;
|
|
|
|
Domestic and foreign governmental regulations, taxes, and
political instabilities;
|
|
|
|
The ability of the members of the Organization of Petroleum
Exporting Countries to function effectively as a
cartel;
|
|
|
|
Political instability in oil and gas producing
countries; and
|
|
|
|
The overall level of economic activity in the U.S. and around
the world.
|
Expected trends in oil and gas production activities may not
continue and demand for its services may not reflect the level
of industry activity. A material decline in oil and gas prices
or domestic drilling activity levels could have a material
adverse effect on Multi-Shots business, financial
condition and results of operations and cash flows.
Additionally, while it operates in numerous geographic regions,
and it believes, most of the more active regions, a decrease in
activity in such regions of service may adversely impact us,
irrespective of the price for oil and gas production.
Our
operating results may fluctuate, due to the cyclical nature of
the oil and gas industry.
Oil and gas prices are volatile. During the period of
Multi-Shots existence (since August, 2004), prices in
general have risen and somewhat dramatically, prompting oil and
gas companies to increase their levels of expenditures which has
benefited us. Over the time frame that includes the predecessors
to Multi-Shot (i.e., companies assembled and owned by the prior
owner of Multi-Shot) significant changes in the prices for oil
and gas
46
reserves have influenced the results and business of the
predecessors to Multi-Shot. Similar fluctuations prospectively
could be expected to have similar results on Multi-Shot.
Substantially all service and equipment revenues Multi-Shot
earns are based on charges for relatively short periods of time
(i.e., days, weeks, and occasionally several weeks on a single
job order), that correlates to the period of time the service
and equipment is provided to the customer. Short term services
tend to expose Multi-Shot to the risks of rapid declines in
market prices for oil and gas and hence, the activity levels of
our customers, while in the alternative, allowing Multi-Shot the
ability to participate in service price escalation should market
conditions accommodate price increases for its services.
Multi-Shots
success depends substantially upon the continued retention of
certain key personnel.
Multi-Shot believes that its success has depended on and
continues to depend to a significant extent on the efforts and
abilities of its senior management team, which is a group
including the four officers, but also includes a second level of
very key members who number between
10-15
persons, at present, and is expected to grow in correlation to
Multi-Shots ability to grow. The top three members of
Multi-Shots management team, as well as six persons
in its second level of key managers currently are employed
pursuant to employment agreements. In connection with the
merger, Allen Neel, President and Chief Executive Officer of JKA
and Multi-Shot, Inc., David Cudd and Paul Culbreth, each as
Vice-Presidents of Multi-Shot, Inc., will enter into employment
agreements with JKA
and/or
Multi-Shot, Inc. (as their respective agreements call for) that
are effective upon consummation of the merger. As well, the
existing contracts covering the six second
level Multi-Shot
key managers, will be assumed by Multi-Shot, Inc.
Multi-Shots failure to retain any of these individuals,
and to recruit and retain other similarly skilled individuals to
the extent growth so requires, could adversely affect our
ability to sustain or expand the size, scope, and results of
Multi-Shots historical business. Regarding potential new
hires, Multi-Shot typically reviews the candidates, including in
some instances, performing background checks and reference
checks. There is no assurance that the review and assessment of
these individuals will prove to be accurate, complete or
correct. These individuals may be unfamiliar with the
requirements of operating a public company as well as United
States securities laws, which could cause the combined company
to have to expend time and resources in assisting them become
familiar with such laws.
Multi-Shot
may not be able to source equipment on a timely basis, or at
all, to replace physically obsolete equipment, or equipment
necessary to support expanded activity.
A key component of Multi-Shots services is specialized
equipment used in directional drilling and directional
surveying. While the equipment is provided by third party
manufacturers, who Multi-Shot believes are reputable and
financially viable, the level of market demand, and its
potential effect on equipment pricing and the lead times for
order deliveries, fluctuates meaningfully. Multi-Shot attempts
to forecast its equipment needs to minimize negative scenarios
relating to its requirements for equipment and its available
inventory of equipment. When equipment is required that
Multi-Shot does not have available, it can, subject to the then
existing availability of such third party equipment, rent the
equipment from third parties. However, third party rentals do
have the effect of reducing the level of profitability of the
service revenues earned while utilizing such rented equipment.
Additionally, no guarantees exist that third party rental
equipment acceptable or appropriate for Multi-Shots
requirements will be available, should the need arise.
Consequently, Multi-Shot may not be able to capitalize on future
opportunities it may have and risks losing those opportunities
to their competitors.
Multi-Shots
operating history may not be sufficient for investors to
evaluate its business and prospects.
Multi-Shot, LLC was formed via an asset acquisition by
management and a private equity firm in August 2004. The assets
comprised a former division of a larger, public company, causing
Multi-Shot to develop and implement various elements of its
business to succeed as a stand alone entity. There are no
outstanding payment obligations from such transaction. While the
results would indicate the transition to a stand alone entity
has succeeded, the time frame for this evaluation is relatively
limited. The fiscal year ended December 31, 2005 was the
first year that Multi-Shot did not operate at a loss.
Multi-Shots future results depend on its ability to
continue to efficiently manage its personnel and equipment in
delivering services to its markets and customers, while focusing
on the design and
47
implementation of additional, and in some cases, new systems,
procedures, policies, and controls to continue to accommodate
growth and to succeed as a public entity.
Multi-Shot
may not be able to raise additional capital on acceptable
terms.
While expanding its revenue base, Multi-Shot invested
approximately $12.0 million in capital expenditures for
equipment in 2006 versus approximately $3.8 million in
2005. Multi-Shot expects capital expenditures to be in the range
of $11.0 million to $13.0 million in 2007 for new
survey, MWD, steering and directional drilling equipment. To
meet its capital needs, Multi-Shot expects to rely on its cash
flow from operations, the proceeds from JKAs trust
account, the possibility of the exercise of the existing JKA
public warrants, the potential ability for MS Energy Services,
Inc. to effect future public offerings of securities, and
potentially, third-party debt financing. Additional public
capital,
and/or
third-party debt financing may not, however, be available on
favorable terms, or at all. The ability to obtain additional
funding will be subject to various factors, including public
market conditions in general and specifically as it relates to
energy service companies, Multi-Shots operating
performance, lender sentiment and its ability to incur
additional debt in compliance with other contractual
restrictions, such as financial covenants under our credit
facility. These factors may make the timing, amount, terms and
conditions of additional financings unattractive or unavailable.
Our inability to raise capital could impede its growth, or under
extreme conditions, result in more negative outcomes for the
financial condition and solvency of Multi-Shot.
Failure
of Multi-Shots internal control over financial reporting
and its operations could harm its business and financial
results. The combined company will need to improve
and/or
expand its operations and financial systems and staff to fully
comply with the standards established for public companies and
if it cannot successfully achieve these improvements, the
companys operations and financial results may be
negatively impacted.
The management of Multi-Shot is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is a process to
provide reasonable assurance regarding the reliability of
financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States.
Internal control over financial reporting includes: maintaining
records that in reasonable detail accurately and fairly reflect
Multi-Shots transactions; providing reasonable assurance
that transactions are recorded as necessary for preparation of
the financial statements; providing reasonable assurance that
receipts and expenditures of Multi-Shots assets and the
incurrence of liabilities are made in accordance with
appropriate management authorization; and providing reasonable
assurance that unauthorized acquisition, use or disposition of
Multi-Shots assets or the incurrence of liabilities that
could have a material effect on the financial statements would
be prevented or detected on a timely basis. Because of its
inherent limitations, internal control over financial reporting
is not intended to provide absolute assurance that a
misstatement of Multi-Shots financial statements would be
prevented or detected. Any failure to maintain an effective
system of internal control over financial reporting could limit
Multi-Shots ability to report its financial results
accurately
and/or
timely or to detect and prevent fraud. To date, the management
at Multi-Shot has worked with its auditors to assess its
internal controls over financial reporting and have not found
any material weaknesses and have found the controls to be
adequate for a private company. Multi-Shot, has not yet
evaluated its adherence to Section 404 of the
Sarbanes-Oxley Act but it intends to hire experienced third
party consultants to help it assess its compliance with such
Section and other public company standards that may be
applicable. Multi-Shot is aware that making these disclosures
does not release management of its obligation with respect to
internal controls. In addition, Multi-Shots initial
operating and financial systems may not be adequate as it
implements its plans to expand and its attempts to improve these
systems may be ineffective. Multi-Shot must be able to operate
its financial and operations systems effectively, and to recruit
suitable employees as it expands its operations, or it may be
unable to effectively control and manage a larger operation.
Although it is impossible to predict the nature of the errors
that might occur as the result of inadequate controls,
Multi-Shot believes it is more difficult to oversee a sizable
operation than a smaller one and accordingly, more likely that
errors will occur as operations grow. As a result, additional
management infrastructure and systems will be required to
attempt to avoid such errors.
48
Multi-Shot,
Inc. will incur increased costs as a result of being a
wholly-owned subsidiary of a public company.
As a wholly-owned subsidiary of a public company, Multi-Shot
will incur significant legal, accounting and other expenses that
it did not incur as a private company, which may range from
$500,000 to $1,000,000 on an annual basis. The
U.S. Sarbanes-Oxley Act of 2002 and related rules of the
U.S. Securities and Exchange Commission, or SEC, and the
AMEX regulate corporate governance practices of public
companies. Multi-Shot expects that compliance with these public
company requirements will increase our costs and make some
activities more time-consuming. For example, new Board
committees and adopt new internal controls and disclosure
controls and procedures will be created. In addition, additional
expenses associated with our SEC reporting requirements will be
incurred. A number of those requirements necessitate Multi-Shot
to carry out activities it has not previously carried out. For
example, under Section 404 of the Sarbanes-Oxley Act, for
the annual report on
Form 10-K
for 2007, depending upon certain facts existing upon closing of
the merger, document and test our internal control procedures
may need to be tested. As a result, Multi-Shots management
will need to assess and report on its internal control over
financial reporting and its independent accountants will need to
issue an opinion on that assessment and the effectiveness of
those controls. Furthermore, if it identifies any issues in
complying with those requirements (for example, if it or its
accountants identify a material weakness or significant
deficiency in our internal control over financial reporting),
Multi-Shot could incur additional costs rectifying those issues,
and the existence of those issues could adversely affect
Multi-Shots reputation or investor perceptions of
Multi-Shot.
It is expected that, based on current insurance coverage and
investigation in regards to expanded coverage, especially in
light of being publicly traded, it will be difficult and
expensive to obtain expanded and appropriate director and
officer liability insurance. It may be necessary to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it
may be more difficult to attract and retain qualified persons to
serve on the Board or as executive officers. Advocacy efforts by
shareholders and third parties may also prompt even more changes
in governance and reporting requirements. The amount of
additional costs that may be incurred or the timing of such
costs cannot be predicted or estimated.
Multi-Shots
operations are subject to hazards inherent in the oil and gas
industry.
Risks inherent in its industry, such as equipment defects, human
error or accident, vehicle accidents, explosions and fires, and
uncontrolled flows of oil and gas well fluids, can cause
personal injury, loss of life, suspension of operations, claims
for damage to well formations or facilities, business
interruption, and damage to or destruction of property,
equipment and the environment. These risks can expose Multi-Shot
to substantial liability for related losses and damages. The
frequency, or severity of these types of events is, to some
extent, beyond Multi-Shots control, and the effect could
exceed the liability for loss or damages to the extent customers
elect to no longer do business with Multi-Shot due to a
perception of unacceptable safety programs, insurance, and
controls.
The industry and business are dangerous. Safety procedures and
training may not always prevent accidents and do not eliminate
the dangers. Adequate insurance for such risks may not be
attainable at rates considered reasonable, or the terms (rates,
coverage limits, deductible limits, etc.) for such coverage may
not be as favorable as current coverage. The incurrence of an
uninsured claim (a claim in excess of our coverage limits) could
have a material adverse effect on our operations and financial
condition. Although safety and training are a meaningful focus
and emphasis of management, these efforts may fail to
successfully mitigate the risks of the business to Multi-Shot.
A
terrorist attack or armed conflict could harm our
business.
Terrorist activities, anti-terrorist efforts and other armed
conflicts involving the U.S. or other countries may
adversely affect the U.S. and global economies and could
negatively affect the business. Any of these events could reduce
overall demand for oil and gas, causing reduced demand for
Multi-Shots services and therefore, lower revenues and
potentially, lower profitability. Attacks on the U.S.,
and/or
on
the U.S. energy industry infrastructure, may raise the cost
of insurance and make some types of insurance unavailable.
49
Conservation
measures and technological advances could reduce demand for oil
and gas.
Fuel and energy conservation measures, alternative fuel and
energy developments, technological advances in either
conservation
and/or
alternative sources of fuel and energy could all reduce demand
for oil and gas production. Major changes could negatively
impact the U.S. and worldwide energy industry, which would
likely negatively impact the companys business and
prospects.
If
third parties bring claims against Multi-Shot or if Multi-Shot
has breached any of its representations, warranties or covenants
set forth in the merger agreement, JKA may not be adequately
indemnified for any resulting losses related
thereto.
Although the merger agreement provides that the members of
Multi-Shot will jointly and severally indemnify JKA for losses
arising from a breach of the representations, warranties and
covenants by Multi-Shot, LLC and the members set forth in the
merger agreement, such indemnification is limited to an
aggregate amount of $10,000,000 (with an aggregate deductible of
$500,000), which corresponds to the merger consideration held in
escrow. In addition, the survival period for any claims under
the merger agreement relating to all but three representations
is limited to eighteen months after the closing of the merger,
whereupon the escrowed consideration relating to the maximum
liability of the Members is also reduced to $3,000,000. All
amounts, subject to outstanding claims at such time, will be
released and the escrow terminated sixty months after the
closing of the merger. Accordingly, JKA will be prevented from
seeking indemnification for any claims that aggregate less than
the deductible, and for claims in excess of the then applicable
aggregate threshold, and as it relates to all but three claims,
from seeking indemnification arising after the eighteen month
survival period.
Risks
Relating to the JKA Business
If 20%
or more of the holders of JKAs common stock issued in its
public offering and the private placement immediately prior to
the initial public offering vote against the merger and demand
conversion of their shares of JKA common stock, JKA may be
forced to liquidate, whereupon stockholders may receive less
than $6.00 per share and the warrants will expire
worthless.
Under the terms of JKAs corporate charter, if 20% or more
of shares issued in JKAs initial public offering and the
private placement immediately prior to the initial public
offering vote against the merger and demand conversion of their
shares to cash held in trust, JKA may ultimately be forced to
liquidate. While JKA will continue to search to acquire an
operating company, if (i) it does not consummate a business
combination by October 10, 2007, or, (ii) if a letter
of intent, agreement in principle or definitive agreement is
executed, but not consummated, by October 10, 2007, then by
April 10, 2008, it will be forced to liquidate. In any
liquidation, the net proceeds of JKAs initial public
offering held in the trust account, plus any interest earned
thereon (other than amounts distributed to JKA for working
capital not exceeding $0.9 million) will be distributed on
a pro rata basis to the holders of JKAs common stock
issued in its public offering. If JKA is forced to liquidate its
assets, the per-share liquidation will be the $76,532,404
deposited in the trust account at the time of the initial public
offering, plus interest accrued thereon until the date of any
liquidation (other than amounts distributed to JKA for working
capital not exceeding $0.9 million). As of
September 30, 2007, there was approximately $79,721,079, or
$6.03 per share, held in trust. Furthermore, there will be
no distribution with respect to JKAs outstanding warrants
and, accordingly, the warrants will expire worthless.
Stock
ownership of JKA after the merger will be concentrated and, as a
result, the principal stockholder will influence JKAs
affairs significantly.
SG Directional, LLC will, immediately after the merger, own
approximately 37.3% of JKAs outstanding common stock
(assuming that no JKA stockholders exercise their conversion
rights and that no warrants are exercised). SG-Directional is
managed by The Stephens Group, LLC. As a result,SG Directional,
LLC will have the voting power to significantly influence
JKAs policies, business and affairs, and the outcome of
any corporate transaction or other matter, including mergers,
consolidations and the sale of all, or substantially all, of its
assets. This concentration in control may have the effect of
preventing a change in control that otherwise could result in a
premium in the price of JKAs common stock.
50
If the
mergers benefits do not meet the expectations of financial
or industry analysts, the market price of JKAs common
stock may decline.
The market price of JKAs common stock may decline as a
result of the merger if:
|
|
|
|
|
JKA does not achieve the perceived benefits of the merger as
rapidly as, or to the extent anticipated by, financial or
industry analysts; or
|
|
|
|
the effect of the merger on JKAs financial results is not
consistent with the expectations of financial or industry
analysts.
|
Accordingly, investors may experience a loss as a result of a
decreasing stock price and JKA may not be able to raise future
capital, if necessary, in the equity markets.
Failure to complete the merger could negatively impact the
market price of JKAs common stock and may make it more
difficult for JKA to attract another acquisition candidate,
resulting, ultimately, in the disbursement of the trust
proceeds, causing investors to experience a loss on their
investment. If the merger is not completed for any reason, JKA
may be subject to a number of material risks, including:
|
|
|
|
|
the market price of JKAs common stock may decline to the
extent that the current market price of its common stock
reflects a market assumption that the merger will be consummated;
|
|
|
|
costs related to the merger, such as legal and accounting fees
and the costs of the fairness opinion, must be paid even if the
merger is not completed; and
|
|
|
|
charges will be made against earnings for transaction-related
expenses, which could be higher than expected.
|
Such decreased market price and added costs and charges of the
failed merger, together with the history of failure in
consummating a merger, may make it more difficult for JKA to
attract another acquisition candidate, resulting, ultimately, in
the disbursement of the trust proceeds, causing investors to
experience a loss on their investment.
If
Parent Warrants or Redemption Warrants are exercised, additional
shares of JKA common stock will be issued causing dilution to
current JKA stockholders.
In connection with the merger the members of Multi-Shot will
receive Parent Warrants. In addition, the members of Multi-Shot
may receive Redemption Warrants if the amount paid by JKA to its
stockholders from the trust fund in connection with exercises of
the conversion rights of JKA stockholders exceeds $3,000,000.
Parent Warrants and Redemption Warrants may only be exercised if
it is determined that a Contingent Award is due to the holder.
Contingent Awards are determined to be due to the extent that
currently outstanding warrants to purchase JKA common stock
other than Parent Warrants or Redemption Warrants, including the
warrants issued in connection with JKAs initial public
offering are exercised. If such currently outstanding warrants
are exercised during a Determination Period, the Parent Warrants
and Redemption Warrants may be exercised for either (i) shares
of JKA common stock on a cashless exercise basis or (ii)
replacement warrants to purchase JKA common stock for a cash
exercise price between $5.00 and $6.25 per share. The issuance
of shares of JKA common stock as a result of such cashless
exercise of Parent Warrants or Redemption Warrants would be
dilutive to current JKA stockholders. In addition, the exercise
of cash exercise warrants issued in replacement of Parent
Warrants or Redemption Warrants may be dilutive to current JKA
stockholders if the market value of the JKA common stock exceeds
the cash exercise price of such replacement warrants.
For a more complete discussion of Parent Warrants, Redemption
Warrants and Contingent Awards, see Warrants and
Contingent Awards on page 14.
Under
Delaware law, JKAs dissolution requires the approval of
the holders of a majority of its outstanding stock, without
which JKA will not be able to dissolve and liquidate and
distribute its assets to JKAs public
stockholders.
JKA has agreed with the trustee to promptly adopt a plan of
dissolution and liquidation and initiate procedures for our
dissolution and liquidation if JKA does not effect a business
combination within 18 months after
51
consummation of our initial public offering (or within
24 months after the consummation of our initial public
offering if a letter of intent, agreement in principle or
definitive agreement has been executed within 18 months
after consummation of our initial public offering and the
business combination related thereto has not yet been
consummated within such
18-month
period). However, pursuant to Delaware law, our dissolution
requires the affirmative vote of stockholders owning a majority
of our then outstanding common stock. Soliciting the vote of
JKAs stockholders will require the preparation of
preliminary and definitive proxy statements, which will need to
be filed with the Securities and Exchange Commission and could
be subject to their review. This process could take a
substantial amount of time.
As a result, the distribution of our assets to the public
stockholders could be subject to a considerable delay.
Furthermore, JKA may need to postpone the stockholders meeting,
and solicit our stockholders again or amend our plan of
dissolution and liquidation to obtain the required stockholder
approval, all of which would further delay the distribution of
our assets and result in increased costs. If we are not able to
obtain approval from a majority of our stockholders, JKA will
not be able to dissolve and liquidate and JKA will not be able
to distribute funds from our trust account to holders of our
common stock sold in our initial public offering and these funds
will not be available for any other corporate purpose. In the
event JKA seeks stockholder approval for a plan of dissolution
and liquidation and do not obtain such approval, JKA will
nonetheless continue to pursue stockholder approval for our
dissolution. However, JKA cannot predict whether our
stockholders will approve its dissolution in a timely manner or
will ever approve its dissolution. As a result, we cannot
provide our initial stockholders with assurances of a specific
timeframe for the dissolution and distribution. If our
stockholders do not approve a plan of dissolution and
liquidation and the funds remain in the trust account for an
indeterminate amount of time, JKA may be considered to be an
investment company under the Investment Company Act of 1940 (the
Investment Company Act).
If JKA
is deemed to be an investment company, JKA may be required to
institute burdensome compliance requirements and its activities
may be restricted, which may make it difficult for it to
complete a business combination.
In order not to be regulated as an investment company under the
Investment Company Act, unless JKA can qualify for an exclusion,
JKA must ensure that it is engaged primarily in a business other
than investing, reinvesting or trading of securities and that
its activities do not include investing, reinvesting, owning,
holding or trading investment securities. JKAs
business is to identify and consummate a business combination
and thereafter to operate the acquired business or businesses.
JKA invests the funds in the trust account only in treasury
bills issued by the United States having a maturity of
180 days or less or money market funds meeting the criteria
under
Rule 2a-7
under the Investment Company Act until it uses them to complete
a business combination. By limiting the investment of the funds
to these instruments, JKA believes that it will not be
considered an investment company under the Investment Company
Act. The trust account and the purchase of government securities
for the trust account is intended as a holding place for funds
pending the earlier to occur of either: (i) the
consummation of our primary business objective, which is a
business combination, or (ii) absent a business
combination, our dissolution, liquidation and distribution of
our assets, including the proceeds held in the trust account, as
part of our plan of dissolution and liquidation. If we fail to
invest the proceeds as described above or if we cease to be
primarily engaged in our business as set forth above (for
instance, if our stockholders do not approve a plan of
dissolution and liquidation and the funds remain in the trust
account for an indeterminable amount of time), we may be
considered to be an investment company and thus be required to
comply with the Investment Company Act.
If JKA is deemed to be an investment company under the
Investment Company Act, its activities may be restricted,
including:
|
|
|
|
|
restrictions on the nature of its investments; and
|
|
|
|
restrictions on the issuance of securities;
|
each of which may make it difficult for it to consummate a
business combination. JKA would also become subject to
burdensome regulatory requirements, including reporting, record
keeping, voting, proxy and disclosure requirements and the costs
of meeting these requirements would reduce the funds it has
available outside the trust account to consummate a business
combination.
52
If
third parties bring claims against us, the proceeds held in the
trust account could be reduced and the per share liquidation
price received by stockholders will be less than $6.03 per
share.
Our placing of funds in the trust account may not protect those
funds from third party claims against us. Pursuant to Delaware
General Corporation Law Sections 280 and 281, upon our
dissolution we will be required to pay or make reasonable
provision to pay all claims and obligations of the corporation,
including all contingent, conditional or claims not yet matured
or due and owing. While we intend to pay those amounts from our
funds not held in trust, we cannot assure you those funds will
be sufficient to cover such claims and obligations.
In addition, although James P. Wilson and Keith D. Spickelmier
have agreed to indemnify us for claims by any vendor that is
owed money by us for services rendered or products sold to us,
to the extent that such claims reduce the amounts in the trust
fund to be distributed to the public stockholders upon our
dissolution and liquidation, this indemnification is limited to
claims by vendors that do not execute a valid and enforceable
waiver of all rights, title, interest, and claim of any kind in
or to the monies held in the trust account. The indemnification
provided by our directors and officers would not cover claims by
target businesses or other entities and vendors that execute
such waivers. Based on representations made to us by our initial
directors and officers, we currently believe that they are of
substantial means and capable of funding a shortfall in our
trust account to satisfy their foreseeable indemnification
obligations, however, the indemnification may be limited as we
have not asked them to reserve for or escrow any amounts with
respect to such an eventuality. The indemnification obligations
may be substantially higher than our directors and officers
currently foresee or expect
and/or
their
financial resources may deteriorate in the future which could
also act as a limitation to this indemnification. Hence, we
cannot assure you that our initial directors and officers will
be able to satisfy those obligations or that the proceeds in the
trust account will not be reduced by such claims. Furthermore,
creditors may seek to interfere with the distribution of the
trust account pursuant to federal or state creditor and
bankruptcy laws, which could delay the actual distribution of
such funds or reduce the amount ultimately available for
distribution to our public stockholders. If we are forced to
file a bankruptcy case or an involuntary bankruptcy case is
filed against us and it is not dismissed, the funds held in our
trust account will be subject to applicable bankruptcy law and
may be included in our bankruptcy estate and subject to claims
of third parties with priority over the claims of our public
stockholders. To the extent bankruptcy claims deplete the trust
account, we cannot assure you we will be able to return to our
public stockholders the liquidation amounts due to them.
Accordingly, the actual per share amount distributed from the
trust account to our public stockholders could be significantly
less than approximately $6.03 per share, without taking
into account interest earned on the trust account, due to claims
of creditors. Any claims by creditors could cause additional
delays in the distribution of trust funds to the public
stockholders beyond the time periods required to comply with
Delaware General Corporation Law procedures and federal
securities laws and regulations.
As of September 30, 2007, we estimate that JKA had
$584,090, in outstanding accounts payable or accrued
liabilities. Of these liabilities, $584,090 represent amounts
payable or accrued liabilities to entities which have not waived
claims against the trust account. As of September 30, 2007,
JKAs cash balance was $90,491. To the extent there is a
shortfall, Messrs. Wilson and Spickelmier have agreed to
indemnify the trust for claims by any vendor for service
rendered or products provided, to the extent those claims reduce
the trust and that vendor has not executed a waiver as against
the trust. JKA believes Messrs. Wilson and Spickelmier are
capable of funding any foreseeable indemnity obligations, if any.
53
FORWARD-LOOKING
STATEMENTS
JKA believes that some of the information in this proxy
statement constitutes forward-looking statements. You can
identify these statements by forward-looking words such as
may, expect, anticipate,
contemplate, believe,
estimate, intends, and
continue or similar words. You should read
statements that contain these words carefully because they:
|
|
|
|
|
discuss future expectations;
|
|
|
|
contain projections of future results of operations or financial
condition; or
|
|
|
|
state other forward-looking information.
|
JKA believes it is important to communicate its expectations to
its stockholders. However, there may be events in the future
that JKA is not able to accurately predict or over which JKA has
no control. The risk factors and cautionary language discussed
in this proxy statement provide examples of risks, uncertainties
and events that may cause actual results to differ materially
from the expectations described by JKA in its forward-looking
statements, including among other things:
|
|
|
|
|
the number and percentage of JKA stockholders voting against the
merger proposal;
|
|
|
|
changing interpretations of generally accepted accounting
principles;
|
|
|
|
outcomes of government reviews, inquiries, investigations and
related litigation;
|
|
|
|
continued compliance with government regulations;
|
|
|
|
legislative or regulatory environments, requirements or changes
adversely affecting the businesses in which Multi-Shot is
engaged;
|
|
|
|
statements about industry trends;
|
|
|
|
general economic conditions; and
|
|
|
|
geopolitical events and regulatory changes.
|
You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of
this proxy statement.
All forward-looking statements including those herein
attributable to JKA, Multi-Shot or any person acting on either
partys behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to in this
section. Except to the extent required by applicable laws and
regulations, JKA undertakes no obligation to update these
forward-looking statements to reflect events or circumstances
after the date of this proxy statement or to reflect the
occurrence of unanticipated events.
Before you grant your proxy or instruct how your vote should be
cast or vote on the approval of the merger and the other
proposals, you should be aware that the occurrence of the events
described in the Risk Factors section and elsewhere
in this proxy statement could have a material adverse effect on
JKA upon completion of the merger.
54
SELECTED
HISTORICAL FINANCIAL INFORMATION MULTI-SHOT,
LLC
JKA is providing the following financial information to assist
you in the analysis of the financial aspects of the merger. We
derived Multi-Shot, LLCs historical information from the
audited financial statements of Multi-Shot, LLC as of and for
each of the years ended December 31, 2003, 2004, 2005 and
2006, and from unaudited financial statements as of and for
(i) the year ended December 31, 2002 and (ii) the
nine month periods ended September 30, 2006 and 2007. The
information is only a summary and should be read in conjunction
with the historical financial statements and related notes
contained elsewhere herein. The historical results included
below and elsewhere in this document are not indicative of the
future performance of Multi-Shot, LLC or JKA following the
merger.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Shot, LLC Historical Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor to
|
|
|
|
Multi-Shot, LLC(1)
|
|
|
Multi-Shot, LLC(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
from
|
|
|
from
|
|
|
Fiscal Year
|
|
|
Fiscal Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
August 6
|
|
|
January 1
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
August 5,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
72,579,370
|
|
|
$
|
52,747,344
|
|
|
$
|
73,971,064
|
|
|
$
|
38,080,254
|
|
|
$
|
8,658,814
|
|
|
$
|
10,543,184
|
|
|
$
|
20,031,937
|
|
|
$
|
22,489,270
|
|
Operating Expenses
|
|
|
65,759,853
|
|
|
|
44,502,796
|
|
|
|
61,710,629
|
|
|
|
32,577,368
|
|
|
|
7,691,387
|
|
|
|
13,531,336
|
|
|
|
23,778,265
|
|
|
|
22,932,543
|
|
Income (Loss) from Operations
|
|
|
6,819,517
|
|
|
|
8,244,548
|
|
|
|
12,260,435
|
|
|
|
5,502,886
|
|
|
|
967,427
|
|
|
|
(2,988,152
|
)
|
|
|
(3,746,328
|
)
|
|
|
(443,273
|
)
|
Interest Expense
|
|
|
(2,759,084
|
)
|
|
|
(882,179
|
)
|
|
|
(1,185,011
|
)
|
|
|
(857,952
|
)
|
|
|
(284,941
|
)
|
|
|
(328,771
|
)
|
|
|
(596,672
|
)
|
|
|
(471,212
|
)
|
Other Income
|
|
|
97,765
|
|
|
|
66,156
|
|
|
|
70,236
|
|
|
|
31,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,982
|
|
Net Income (Loss)
|
|
$
|
4,158,198
|
|
|
$
|
7,428,525
|
|
|
$
|
11,145,660
|
|
|
$
|
4,676,244
|
|
|
$
|
682,486
|
|
|
$
|
(3,316,923
|
)
|
|
$
|
(4,343,000
|
)
|
|
$
|
(872,503
|
)
|
|
|
|
(1)
|
|
Multi-Shot, LLC was formed via an asset acquisition by
management and a private equity firm in August 2004. Such assets
comprised the directional drilling division of Warrior Energy
Services (formerly Black Warrior Wireline Corp. hereafter
referred to as BWWC). There are no outstanding payment
obligations from such transaction. The results of operations for
the period January 1, 2004 to August 5, 2004 and the
years ended December 31, 2003 and 2002 were derived from
the historical books and records of the directional drilling
division of BWWC. Such directional division of BWWC was neither
a separate subsidiary of BWWC nor a separate legal entity for
financial reporting purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
67,012,026
|
|
|
$
|
43,945,614
|
|
|
$
|
27,068,706
|
|
|
$
|
17,916,623
|
|
|
$
|
16,733,638
|
|
|
$
|
22,032,558
|
|
Total Long-Term Debt (net of current maturities)
|
|
|
39,618,686
|
|
|
|
7,775,152
|
|
|
|
6,643,717
|
|
|
|
7,424,133
|
|
|
|
67,130
|
|
|
|
35,528
|
|
Members Equity (Deficit)
|
|
|
(8,685,961
|
)
|
|
|
20,052,595
|
|
|
|
8,878,730
|
|
|
|
4,757,486
|
|
|
|
N/A
|
|
|
|
N/A
|
|
55
SELECTED
HISTORICAL FINANCIAL INFORMATION JKA
JKA is providing the following selected financial information to
assist you in your analysis of the financial aspects of the
merger. The following selected financial and other operating
data should be read in conjunction with JKAs
Managements Discussion and Analysis of Financial Condition
and Results of Operations and its financial statements and
the related notes to those statements included elsewhere in this
proxy statement. The statement of operations data for the period
from May 11, 2005 (inception) through December 31,
2005 and the balance sheet data as of December 31, 2005
have been derived from JKAs audited financial statements
included elsewhere in this proxy statement. The statement of
operations data for the year ended December 31, 2006 and
the balance sheet data as of December 31, 2006 have been
derived from JKAs audited financial statements included
elsewhere in this proxy statement. The statements of operations
data for the period from May 11, 2005 (inception) through
December 31, 2006 has been derived from JKAs audited
financial statements included elsewhere in this proxy statement.
The statement of operations data for the nine months ended
September 30, 2007 and 2006 and for the period from
inception to September 30, 2007 and the balance sheet data
as of September 30, 2007 has been derived from JKAs
unaudited financial statements included elsewhere in this proxy
statement.
JK
Acquisition Corp. Historical Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period
|
|
|
For the Period
|
|
|
|
For the
|
|
|
For the
|
|
|
from
|
|
|
from
|
|
|
|
Nine Months
|
|
|
Fiscal Year Ended
|
|
|
Inception(1) to
|
|
|
Inception(1) to
|
|
|
|
Ended September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
1,701,990
|
(2)
|
|
|
152,993
|
|
|
$
|
292,378
|
|
|
$
|
4,994
|
|
|
$
|
1,999,442
|
(2)
|
Operating Loss
|
|
|
(1,701,990
|
)
|
|
|
(152,993
|
)
|
|
|
(292,378
|
)
|
|
|
(4,994
|
)
|
|
|
(1,999,442
|
)
|
Other Income
|
|
|
3,569,658
|
|
|
|
3,363,128
|
|
|
|
729,841
|
|
|
|
|
|
|
|
4,299,499
|
|
Net Income (Loss) Before Taxes
|
|
|
1,867,668
|
|
|
|
3,210,195
|
|
|
|
437,463
|
|
|
|
(4,994
|
)
|
|
|
2,300,057
|
|
Income Tax Expense
|
|
|
|
|
|
|
63,684
|
|
|
|
14,027
|
|
|
|
|
|
|
|
14,027
|
|
Net Income (Loss)
|
|
|
1,867,668
|
|
|
|
3,146,511
|
|
|
|
423,436
|
|
|
|
(4,994
|
)
|
|
|
2,286,033
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.28
|
|
|
$
|
0.03
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.25
|
|
|
$
|
0.03
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
Cash Dividends Per Share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
(1)
|
|
JKA incorporated on May 11, 2005 (its date of inception).
|
|
(2)
|
|
Includes $1,356,704 for impairment of deferred transaction costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds Held in Trust
|
|
$
|
79,721,079
|
|
|
$
|
77,627,249
|
|
|
$
|
|
|
Total Assets
|
|
|
79,813,183
|
|
|
|
78,637,200
|
|
|
|
618,953
|
|
Derivative Liabilities
|
|
|
|
|
|
|
15,636,834
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
62,784,437
|
|
|
|
47,167,169
|
|
|
|
26,256
|
|
Book Value Per Share
|
|
$
|
3.80
|
|
|
$
|
3.74
|
|
|
$
|
0.01
|
|
Weighted Average Number of Common Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,516,667
|
|
|
|
12,605,609
|
|
|
|
2,783,316
|
|
Diluted
|
|
|
20,019,364
|
|
|
|
14,212,584
|
|
|
|
2,783,316
|
|
56
SUMMARY
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following selected unaudited pro forma condensed combined
financial information is intended to provide you with a picture
of what JKAs business might have looked like had
Multi-Shot
and JKA actually been combined. The combined financial
information may have been different had
Multi-Shot
and JKA actually been combined. You should not rely on the
selected unaudited pro forma condensed combined financial
information as being indicative of the historical results that
would have occurred had the merger occurred or the future
results that may be achieved after the merger. The following
page selected unaudited pro forma condensed combined financial
information has been derived from, and should be read in
conjunction with, the unaudited pro forma condensed combined pro
forma financial statements and related notes thereto starting on
page 97 in this proxy statement.
The merger will be accounted for as a reverse acquisition,
equivalent to a recapitalization through the issuance of equity
by
Multi-Shot
for the net monetary assets of JKA. This determination was made
based on managements evaluation of the facts and
circumstances associated with the merger, including factors such
as continuity of
Multi-Shots
management, continuity of
Multi-Shots
operations and business plan, a larger
Multi-Shot
representation on the board of directors, ownership of the
combined company and potential changes to ownership, and
affiliations and ownership levels of minority stockholder
groups. The net monetary assets of JKA will be recorded as of
the merger date, at their respective historical cost, which is
considered to be the equivalent of fair value. No goodwill or
other intangible assets will be recorded as a result of the
acquisition.
The pro forma financial statements have been prepared using two
different levels of approval of the merger by the JKA
stockholders, as follows:
|
|
|
|
|
Maximum Approval:
this presentation assumes
that no stockholders elect to convert their shares into a pro
rata share of the trust account (100% of the shares held by
JKAs public stockholders as voted at the Special Meeting
approve the merger); and
|
|
|
Minimum Approval:
this presentation assumes
stockholders of JKA holding 2,711,666 of JKAs outstanding
shares of common stock elect to convert shares (majority of the
shares held by JKAs public stockholders as voted at the
Special Meeting approve the merger; less than 20% of the
aggregate shares of JKAs common stock issued in the
initial public offering and the private placement vote against
the merger and elect to convert).
|
If stockholders holding 20% (2,711,667) or more of the shares of
common stock issued in the IPO and private placement vote
against the adoption of the merger proposal and elect to convert
their shares, JKA will not complete the merger.
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
For the Year Ended
|
|
|
|
Ended September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
Maximum
|
|
|
Minimum
|
|
|
|
Approval
|
|
|
Approval
|
|
|
Approval
|
|
|
Approval
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$72,579,370
|
|
|
|
$72,579,370
|
|
|
$
|
88,677,843
|
|
|
$
|
88,677,843
|
|
Operating Expenses
|
|
|
67,461,843
|
|
|
|
67,461,843
|
|
|
|
76,244,050
|
|
|
|
76,244,050
|
|
Income from Operations
|
|
|
5,117,527
|
|
|
|
5,117,527
|
|
|
|
12,433,793
|
|
|
|
12,433,793
|
|
Interest Expense, net
|
|
|
(5,649,455
|
)
|
|
|
(5,649,455
|
)
|
|
|
(3,254,425
|
)
|
|
|
(3,254,425
|
)
|
Other Income (Expense), net
|
|
|
1,566,365
|
|
|
|
1,566,365
|
|
|
|
(1,190,165
|
)
|
|
|
(1,190,165
|
)
|
Net Income Before Income Taxes
|
|
|
1,034,437
|
|
|
|
1,034,437
|
|
|
|
7,719,203
|
|
|
|
7,719,203
|
|
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
3,369,078
|
|
|
|
3,369,078
|
|
Net Income
|
|
|
1,034,437
|
|
|
|
1,034,437
|
|
|
|
4,350,125
|
|
|
|
4,350,125
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$0.03
|
|
|
|
$0.03
|
|
|
$
|
0.17
|
|
|
$
|
0.18
|
|
Diluted
|
|
|
$0.02
|
|
|
|
$0.03
|
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
Cash Dividend Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,817,592
|
|
|
|
33,107,281
|
|
|
|
25,636,235
|
|
|
|
23,707,745
|
|
Diluted
|
|
|
41,432,637
|
|
|
|
38,722,326
|
|
|
|
28,746,225
|
|
|
|
26,496,714
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
$41,291,113
|
|
|
|
$25,354,869
|
|
|
|
|
|
|
|
|
|
Working Capital
|
|
|
48,752,422
|
|
|
|
32,816,178
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment (net)
|
|
|
36,766,701
|
|
|
|
36,766,701
|
|
|
|
|
|
|
|
|
|
Goodwill and Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
107,872,709
|
|
|
|
91,936,465
|
|
|
|
|
|
|
|
|
|
Long-Term Debt (excluding current maturities)
|
|
|
39,272,978
|
|
|
|
39,272,978
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
47,245,331
|
|
|
|
31,309,087
|
|
|
|
|
|
|
|
|
|
Book Value Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$1.32
|
|
|
|
$0.95
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$1.14
|
|
|
|
$0.81
|
|
|
|
|
|
|
|
|
|
58
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MULTI-SHOT,
LLC
Unless the context requires otherwise in this section
Managements Discussion and Analysis of Financial
Condition and Results of Operations of Multi-Shot, LLC,
the term the Company refers to Multi-Shot, LLC.
The following is a discussion of Multi-Shot, LLCs
financial condition and results of operations comparing the
fiscal years ended December 31, 2006, December 31,
2005 and December 31, 2004, each of which has been audited,
and the nine month periods ending September 30, 2007 and
2006, each of which are unaudited. Multi-Shots fiscal year
ends on December 31. This discussion begins with an
overview of the significant factors that have recently affected
the Company, including a discussion of industry market trends
and managements perspectives regarding 2007 and beyond.
Inclusive in this discussion are the recent investment and
subordinated financing from
SG-Directional,
LLC, an Arkansas limited liability company, resulting in a
partial recapitalization of the Company at the beginning of the
second quarter of 2007. Next we analyze the results of
operations for the past three years. A review of our cash flows
and liquidity, capital resources and contractual commitments
follows. Finally, we provide a summary of the critical
accounting judgments and estimates that we have made which we
believe are most important to an understanding of our
Managements Discussion and Analysis and our financial
statements, as well as recent and critical accounting
pronouncements.
The following discussion includes various forward-looking
statements about the markets in which we operate, the demand for
our products and services and our future results. These
statements are based on certain assumptions that we believe are
reasonable. For information about some of the risks that could
cause actual results to differ from these forward looking
statements please refer to the section entitled Risk
Factors.
You should consider the foregoing when reviewing
Multi-Shots consolidated financial statements and this
discussion. You should read this section together with
Multi-Shots consolidated financial statements including
the notes to those financial statements for the years and
periods referenced above.
GENERAL
Dollar amounts of $1.0 million or more are rounded to the
nearest one tenth of a million; all other dollar amounts are
rounded to the nearest one thousand and all percentages are
stated to the nearest one tenth of one percent.
The following managements discussion and analysis contains
industry specific terms that are defined below:
Bottom Hole Assembly
The portion of the
drilling assembly below the drill pipe. It provides force for
the drill bit to break the rock (weight on bit), survive a
hostile mechanical environment and provide the driller with
directional control of the well. Often times the assembly
includes a mud motor, directional drilling and measuring
equipment, measurements-while-drilling tools,
logging-while-drilling tools and other specialized devices.
Measurement while Drilling (MWD)
The
evaluation of physical properties, including wellbore trajectory
in three-dimensional space, while extending a wellbore. The
measurements are made downhole, stored in solid-state memory for
some time and later transmitted to the surface. Data
transmission methods involve digitally encoding data and
transmitting to the surface as pressure pulses in the mud system.
Positive Displacement Motor
A drilling motor
that uses hydraulic horsepower of the drilling fluid (Mud) to
drive the drill bit. Mud motors are used extensively in
directional drilling operations.
Reservoir Delineation
The drawing or survey
of a subsurface body of rock having sufficient porosity and
permeability to store and transmit fluids.
Wellbore
The open hole or uncased portion of
the well.
MULTI-SHOT,
LLC OVERVIEW
Multi-Shot provides directional drilling services in Texas,
Louisiana, Mississippi, New Mexico, Oklahoma, Wyoming, North
Dakota, South Dakota, Utah, Colorado and Montana, which
encompasses most of the major oil
59
and natural gas producing basins in the U.S., with the exception
of Alaska. Since its inception in 1980, the Company has
developed into a leading independent service provider that
employs a skilled and experienced labor force. The Company owns
and operates equipment and maintains a customer base that
includes large, independent exploration and production
companies, drilling contractors and other oilfield service
companies who operate in the U.S. The majority of the
Companys revenues are generated from charging customers
day rates based on the number of days the Companys
services
and/or
equipment is used. The Companys primary expenses include
salaries or other compensatory expenses, including benefits, for
personnel, costs associated with expendable parts and supplies,
repairs and maintenance of equipment, rental equipment, as well
as general operational costs. As a result of increased demand
and competition for skilled personnel, compensation costs to
attract and retain employees, including benefits, have been
increasing. Likewise, because of increased demand, the cost of
equipment and rental equipment is increasing as well. For a
further discussion of the services it provides, the manner in
which it markets its services and the way it charges its
customers, please refer to the discussion entitled
Information About Multi-Shot, LLC on page 78.
Prices for oil and natural gas are subject to large and often
unpredictable fluctuations in response to relatively minor
changes in the supply of and domestic
and/or
worldwide demand for oil and natural gas, market uncertainty and
a variety of other factors. Any prolonged increase or decrease
in oil and natural gas prices affects the activity levels of
exploration, development and production as well as the overall
financial performance of the oil and natural gas industry. The
demand for Multi-Shots services are directly and
materially related to the activity levels of exploration,
development and production of its customers, who are
predominantly exploration and production oil and natural gas
companies.
One of Multi-Shots primary growth strategies is to
continue to grow its customer base and market share in the oil
and natural gas basins in which it operates by using the
following strategies:
|
|
|
|
|
Multi-Shot intends to secure new and enhance existing strategic
relationships with certain targeted and existing customers.
Since Multi-Shot derives a substantial portion of business by
forming strategic alliances with exploration and production
companies known as follow-me rigs, these
relationships help the Company to sustain internal growth.
|
|
|
|
Multi-Shot intends to invest capital resources into our existing
equipment lines in order to further increase our capabilities of
servicing new customers and thus, increasing market share. Based
upon current utilization of our equipment, the Company will
require additional capital in order to fund the purchase of new
equipment. Please refer to the discussion of liquidity and
capital resources for details regarding plans to fund future
capital growth.
|
|
|
|
Multi-Shot plans to seek certain niche mergers or
acquisitions of complementary or competing business in an effort
to increase our existing customer base, increase the number of
service employees, and increase our equipment base to further
reduce our reliance on the availability of rental equipment.
|
|
|
|
Finally Multi-Shot plans to expand to other oil and natural gas
producing basins as its customers identify and then begin to
develop such other U.S. based exploration plays. The
Company operates in several distinct geographical areas
primarily in Texas, Louisiana, New Mexico, Oklahoma, and in the
Wyoming, North Dakota, Utah, Colorado and Montana regions which
are generally known in the industry as the Rockies.
The Company has firmly established itself in the Barnett Shale
(Texas) and Rockies (primarily Montana and North Dakota and to a
lesser extent the other states comprising the Rockies) areas
with continued efforts to gain additional market share in the
mid-continent (Oklahoma), Ark-La-Tex basin (Arkansas
and Louisiana) and elsewhere in the Rockies, especially Colorado
and Utah
|
Currently, the Company has its corporate headquarters including
a warehouse and shop facility in Conroe, Texas, as well as
facilities in Corpus Christi, Texas; Odessa, Texas; Grand
Junction, Colorado; Lafayette, Louisiana; Rock Springs, Wyoming;
and Baker, Montana. In addition, the Company has multiple sales
offices in Texas, Louisiana, Colorado, and Oklahoma. These
geographical regions served by Multi-Shot have seen substantial
growth in land drilling rig activity during the last year from
December 2005 to December 2006 as a result of the increase in
oil and gas prices and the economic viability of additional
drilling. According to Baker Hughes rig count
60
data, drilling activity in the above mentioned geographical
areas has accounted for approximately 70% of the growth in
U.S. land based drilling activity.
The majority of current land drilling activity in the United
States is comprised of drilling for natural gas. During 2003,
drilling activity began to recover from low historical drilling
activity in 2002 and 2001. Per the Baker Hughes rig count
survey, the United States land rig count has increased
approximately 164% from September 2002 through September 2007.
During this same period, the United States horizontal land rig
count has increased approximately 655%. This increase in
horizontal drilling rig count and drilling activity is a result
of increased exploration and production of natural gas in
unconventional natural gas reserves. Unconventional
gas refers to production of gas from shale and tight sands.
Drilling activity is largely dependent upon exploration and
production companies willingness to spend. So, the
fluctuations in natural gas prices tend to determine the level
and amount of spending by these companies. Natural gas prices
remained steady and drilling activity continued to grow
throughout 2006. However, this increase in drilling activity can
be attributable more to an increase in land-based rigs versus
strong natural gas prices. As utilization rates increase for
land rigs equipped to drill directionally, so do the
Companys efforts to create and sustain relationships with
operators. We refer to these efforts as having
follow-me rigs (meaning, Multi-Shot is prepared to
follow the rigs our customers utilize and have available
equipment and personnel to respond as the needs arise).
According to Baker Hughes rig count data, the domestic land rig
count increased by 235 rigs from December 2005 (1,391) to
December 2006 (1,626).
The increase in U.S. land based drilling rig count and
drilling activity has led to increased demand for directional
drilling services. Further, the demand in drilling activity
specifically for unconventional natural gas wells, which are
wells especially suited for directional drilling services like
those provided by Multi-Shot, increased substantially in 2006.
If market conditions, including the pricing for natural gas and
overall land based directional drilling activity remains stable,
we expect demand for Multi-Shots services will remain
strong.
Net revenue for Multi-Shot is comprised of revenue from
directional drilling services and equipment provided to oil and
gas exploration and production companies associated with their
oil and natural gas well exploration production services. The
Companys equipment and personnel assist the operator and
contract driller in guiding the bottom hole assembly to the
desired locations during the drilling process using positive
displacement motors which incorporate significant company
specific design enhancements in an attempt to provide a high
standard of equipment and operator performance. These
enhancements generate increased reliability, longer run times,
greater horsepower and torque, and improved penetration rates.
In addition, while drilling directionally, Multi-Shot provides
MWD services to transmit data to the surface. The Companys
MWD systems and its downhole steering tools assist in measuring
the three dimensional representation of the well bore while
drilling. Multi-Shots surveying equipment provides well
bore surveys, which allow precise targeting and reservoir
delineation, and help to prevent missed objectives and costly
well bore collisions in multi-well structures and allows a more
precise identification of the well bore location.
Revenues derived from these services are in direct correlation
with Multi-Shots ability to acquire and maintain the above
mentioned equipment and to retain and attract a skilled
workforce. The majority of Multi-Shots growth in revenues
has been due to the utilization of Multi-Shots positive
displacement motors and measurement while drilling tools. As
drilling activity has increased Multi-Shot has sought strategic
alliances with Multi-Shots vendors in an effort to offset
the current shortage and availability of raw materials and
component parts. These alliances, have allowed the Company to
develop more efficient and technologically advanced services and
tools enabling the Company to compete effectively with major
integrated oilfield service companies. Accordingly, Multi-Shot
has been able to attract and retain a skilled workforce by
offering industry competitive wage and benefit packages.
JKA
Merger Transaction
On September 6, 2006, JKA, Multi-Shot, Inc., Multi-Shot,
the members of Multi-Shot and Catalyst entered into the Original
Merger Agreement, pursuant to which Multi-Shot will merge with
and into Multi-Shot, Inc. and Multi-Shot will effectively become
a wholly-owned subsidiary of JKA. Following completion of the
merger, it is anticipated that JKA will change its name to MS
Energy Services, Inc. Because JKA will have no other operating
business following the merger, Multi-Shot will effectively
become a public company at the conclusion of the merger. On
February 14, 2007, the parties entered into the Previous
Merger Agreement which fully amended and restated the Original
Merger Agreement entered into on September 6, 2006. The
Previous Merger Agreement among other things, extended the
deadline to
61
complete the contemplated merger to July 31, 2007 (from
January 31, 2007) and provided that either party may
terminate the Previous Merger Agreement if the merger is not
completed by such date. Additionally, the Previous Merger
Agreement allowed Multi-Shot to enter into the private
recapitalization discussed below. On August 27, 2007, the
parties entered into the merger agreement which fully amended
the Previous Merger Agreement entered into on February 14,
2007. The merger agreement, among other things, extends the
deadline to complete the contemplated merger to January 31,
2008, and provides that either party may terminate the merger
agreement if the merger is not completed by such date.
Private
Recapitalization of Multi-Shot LLC
The Previous Merger Agreement was executed on February 14,
2007, replacing the Original Merger Agreement executed on
September 6, 2006. The Original Merger Agreement
contemplated a January 31, 2007 closing date. In January
2007, JKA and representatives of Multi-Shot determined that a
January 31, 2007 closing date could not be achieved. The
controlling members of Multi-Shot desired to seek a potential a
liquidity event. Through a series of negotiations, the parties
entered into the Previous Merger Agreement which, among other
things, contemplated a private recapitalization of Multi-Shot as
a first step to the contemplated merger with JKA.
In late January 2007, principals of Catalyst contacted The
Stephens Group, LLC, a private equity firm, regarding their
potential interest in a possible transaction with Multi-Shot. No
officers of JKA, Multi-Shot or any Multi-Shot members had any
relationship with The Stephens Group,
SG-Directional
or any of its affiliates prior to the completion of the private
recapitalization. Mr. Nixon of Catalyst had become
acquainted with Stephens in May 2006. Through a series of
negotiations between Multi-Shot and SG-Directional, a
recapitalization and purchase agreement was executed by and
among SG-Directional, Multi-Shot, its members and Catalyst. The
recapitalization was completed on April 2, 2007. Through
the private recapitalization, SG-Directional acquired 61.4% of
the membership interests of Multi-Shot directly from certain of
the members of Multi-Shot for $45.0 million. In connection
with the private recapitalization, on the same day Multi-Shot
distributed to its members a cash distribution of approximately
$39.8 million.
SG-Directional
owns no assets other than its investment in Multi-Shot.
Additionally, SG-Directional provided a subordinated debt loan
to Multi-Shot in the amount of $15 million. The
subordinated debt loan bears interest at 10% per annum payable
quarterly and is due on the earlier of the closing of the JKA
merger or 120 days following the third anniversary of the
note agreement. See Liquidity and Capital
Resources Subordinated Financing below. As
part of the private recapitalization, Multi-Shot refinanced its
senior debt facility, such that the senior debt balance
increased to $34.4 million. See the terms of the senior
debt facility included at page 72. The implied enterprise
value of Multi-Shot based upon the terms of the private
recapitalization is detailed below:
Implied Enterprise Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-
|
|
|
Post-
|
|
|
Members
|
|
|
|
Recapitalization
|
|
|
Recapitalization
|
|
|
Interest
|
|
|
MS Members
|
|
$
|
96,638,973
|
|
|
$
|
28,294,380
|
|
|
|
38.6
|
%
|
SG-Directional Cash Equity Investment
|
|
|
0
|
|
|
|
45,000,000
|
|
|
|
61.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Value
|
|
$
|
96,638,973
|
|
|
|
73,294,380
|
|
|
|
100.00
|
%
|
SG-Directional Subordinated Debt Investment
|
|
|
0
|
|
|
|
15,000,000
|
|
|
|
|
|
Senior Debt
|
|
|
8,561,057
|
|
|
|
34,394,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Enterprise Value
|
|
$
|
105,200,030
|
|
|
$
|
122,689,050
|
|
|
|
|
|
Neither SG-Directional nor any of its affiliates received any
fees (other than interest earned on the subordinated debt
investment) or other compensation as a result of the private
recapitalization. SG-Directional will have its subordinated debt
loan to Multi-Shot repaid (along with any unpaid and accrued
interest) through the proceeds of the JKA trust account at the
merger date. SG-Directional will receive an estimated
$12.3 million in cash consideration at the closing of the
merger, and will receive JKA equity consideration as a member of
Multi-
62
Shot as described in Proposal One The Merger.
The following table details SG-Directionals cash
investment in Multi-Shot and the initial estimated cash merger
consideration contemplated by the merger:
|
|
|
|
|
Cash Equity Investment
|
|
$
|
45,000,000
|
|
Subordinated Debt Loan to Multi-Shot
|
|
|
15,000,000
|
|
|
|
|
|
|
Total SG-Directional Cash Investment in Multi-Shot
|
|
$
|
60,000,000
|
|
|
|
|
|
|
Cash Merger Consideration to SG-Directional:
|
|
|
|
|
Repayment of Subordinated Debt
|
|
$
|
15,000,000
|
(1)
|
Cash Merger Consideration
|
|
|
12,279,250
|
|
|
|
|
|
|
|
|
$
|
27,279,250
|
|
|
|
|
|
|
Stock Merger Consideration to SG-Directional:
|
|
|
|
|
12,279,250 shares at $5.40 per share
|
|
$
|
66,307,950
|
|
|
|
(1)
|
Plus any accrued interest owed at the date of the merger.
|
The value of SG-Directionals investment will, on a
post-merger basis, increase or decrease based upon the rise or
decline in value of JKA common stock.
The private recapitalization does not effect the proposed merger
between Multi-Shot and JKA, other than
SG-Directional
is now one of the members of Multi-Shot who will receive JKA
stock as per the terms of the proposed merger. As described
above, SG-Directional is now the majority owner of Multi-Shot.
For accounting purposes the private recapitalization did not
result in any step-up to fair value of Multi-Shots assets
because SG-Directionals investment was less than 80% of
the outstanding member units.
In connection with the private recapitalization, the remaining
11.88 units in Multi-Shots 2004 Incentive Plan were
awarded, and the Plan was terminated. See Directors and
Management of JKA Following the Merger with Multi-Shot,
LLC Executive Compensation Long-Term
Incentive Awards.
Accounting
Acquiring Entity in Merger with JKA
The merger will be accounted for as a reverse acquisition,
equivalent to a recapitalization, through the issuance of equity
by Multi-Shot for the net monetary assets of JKA. The net
monetary assets of JKA will be recorded as of the merger date at
their respective historical costs, which is considered to be the
equivalent of fair value. No goodwill or intangible assets will
be recorded as a result of the merger.
The determination of Multi-Shot as the accounting acquirer has
been made based on consideration of all quantitative and
qualitative factors of the acquisition, including significant
consideration given to the following upon consummation of the
merger:
|
|
|
|
(i)
|
Multi-Shots management will continue in all the officer
and senior management positions of the combined company and,
accordingly, will have day-to-day authority to carry out the
business plan after the merger;
|
|
|
|
|
(ii)
|
Multi-Shots employees will continue on with no expected
disruption, while no JKA employees are anticipated to become
employees of the combined company;
|
|
|
(iii)
|
the current Multi-Shot business plan and operations will
continue as the business plan of the combined company with no
changes expected as a result of the merger;
|
|
|
|
|
(iv)
|
of the initial five member board of directors of the combined
company, two members will be independent directors. There will
not be any directors from the former JKA officer group;
|
|
|
(v)
|
the largest minority stockholder group of the combined company
will be comprised of members of Multi-Shot who will own
approximately 60.75% of the combined company after the
completion of the merger compared to an JKA minority stockholder
group comprised of its initial stockholders which would
|
63
|
|
|
|
|
represent approximately 39.25% ownership of the combined company
after the merger (or 34.74% if JKA public stockholders owning
19.99% of JKAs common stock vote against the merger); and
|
|
|
|
|
(vi)
|
one individual Multi-Shot member will have ownership of 37.30%
of the combined company immediately after the acquisition (or
40.07%, respectively of the combined company if JKA public
stockholders owning 19.99% of JKAs common stock vote
against the acquisition).
|
In addition to the factors described above, in reaching its
determination of Multi-Shot as the accounting acquirer,
management also contemplated (i) the substance and design
of the acquisition; (ii) the impact of potentially dilutive
securities on ownership of the combined company under varying
scenarios; and (iii) the size of Multi-Shot versus JKA,
considering total assets, revenues and operating expenses.
Asset
Acquisition of Ulterra MWD, L.P.
Effective July 1, 2007, Multi-Shot acquired certain
operating assets of Ulterra. Ulterra specializes in the
manufacture and provision of measurement-while-drilling
(MWD) tools and services primarily to directional
drillers as well as survey-while-drilling (SWD)
tools and services to exploration and production companies. The
Company designs and manufactures its own MWD and SWD tools
providing strategically secured in-house supply capability, and
offers an independent service to customers. Operating out of two
main locations at Fort Worth, Texas and Casper, Wyoming,
the Companys primary service lines are:
|
|
|
|
|
MWD and MWD with gamma services for the US onshore market
focused on directional drilling
|
|
|
|
QuikShot
®
survey-while-drilling tools
|
As a result of the asset acquisition of Ulterra, Multi-Shot
expects to increase and expand its MWD services. It also expects
to reduce costs through economies of scale. During the year
ended December 31, 2006, Ulterra generated service revenues
of $14.7 million, operating income of $1.3 million and
net income of $850 thousand.
The aggregate purchase price was $10,000,000 in cash and an
earnout provision. The earnout will be measured
intermittently over a three year period ending June 30,
2010. The earnout provision calls for up to an additional
aggregate $4,000,000 cash payment based upon certain levels of
earnings of the combined Multi-Shot MWD and Survey division. As
the earnout, if any, is contingent and based upon future
results, no amount has been included in the purchase price
accounting. See Liquidity and Capital
Resources 2007 Credit Facilities.
For accounting purposes, the acquisition of the operating assets
of Ulterra are treated as the acquisition of a business because,
among other things, the nature of the revenue-producing activity
will remain the same as before the transaction and Multi-Shot
retained the physical facilities, customer base, trade names and
most of the employees relating to the assets. Multi-Shot
recorded the acquired assets at their estimated fair value of
$10,000,000 on the balance sheet as follows:
|
|
|
|
|
Production Equipment
|
|
$
|
10,000,000
|
|
To finance the acquisition, Multi-Shot borrowed an additional
$10,000,000 under its existing term note with Wells Fargo. See
Liquidity and Capital Resources 2007 Credit
Facilities.
RESULTS
OF OPERATIONS NINE MONTH PERIOD ENDED
SEPTEMBER 30, 2007 COMPARED TO SEPTEMBER 30,
2006
Net revenue increased $19.8 million or 37.5% to
$72.6 million for the nine months ended September 30,
2007 from $52.7 million for the prior year period.
Approximately 10% of the increase in revenues is attributed to
increases in our pricing and the remainder of the increase is
attributed to increased demand for our services driven by
increased land drilling activity and increased demand for our
directional drilling services. See Multi-Shot,
LLC Overview.
Cost of revenues includes compensation for the Companys
drillers, surveyors, MWD hands and related personnel; third
party equipment rentals; costs recognized in recognition of
physical depreciation associated with the Companys motor
usage; as well as other direct and allocable indirect expenses
related to the Companys directional and surveying services
and equipment. Costs of revenues for the nine months ended
September 30, 2007
64
increased $11.5 million to $42.9 million from
$31.4 million in 2006 or 36.6%, which increase is
attributed to increased land drilling activity levels and
increased demand for our directional drilling services. Costs of
revenues as a percentage of revenue decreased to 59.0% for the
nine months ended September 30, 2007 from 59.5% for the
nine months ended September 30, 2006 primarily because of
the overall increase in revenues resulting from the increased
land-based directional drilling activity levels. Cost of
revenues includes compensation and other payroll expenses, which
were $21.8 million for the nine months ended
September 30, 2007 representing a $6.9 million, or
46.3%, increase from $14.9 million for the nine months
ended September 30, 2006. Compensation and other payroll
related expenses as a percentage of revenues increased slightly
to 30.0% for 2007 from 28.2% for 2006. The total compensation
and other payroll expenses were a higher percent of revenue for
the first nine months of 2007 because of the additional payroll
expenses related to the Ulterra acquisition which accounted for
an additional 53 employees. Third party equipment rental
expenses were $7.8 million for the nine months ended
September 30, 2007 which was a $0.2 million decrease
from $8.0 million for the nine months ended September 30,
2006. Third party equipment rental expenses as a percentage of
revenues decreased to 10.8% for 2007 from 15.3% for 2006. The
lower percent of revenue for the first nine months of 2007
resulted from the Company having more owned equipment available
for use as a result of capital expenditures during 2006 and the
first nine months of 2007. Expenses attributed to motor usage,
reline and equipment dispositions increased to $4.5 million
for the nine months ended September 30, 2007 from
$3.4 million for the nine months ended September 30, 2006
as a result of the increased demand for directional drilling
activity. These expenses as a percentage of revenues were 6.2%
for the nine months ended September 30, 2007 which
decreased from 6.4% for the first nine months of 2006.
General and administrative expenses include executive and
administrative salaries (including non-cash compensation expense
associated with the 2004 Incentive Plan), insurance costs, third
party accounting, legal and tax services, utilities, taxes, loan
administration costs, and other miscellaneous expenses. General
and administrative expenses increased $7.5 million to
$18.0 million for the nine months ended September 30,
2007 from $10.5 million for the nine months ended
September 30, 2006 or 71.4%. As a percentage of revenues,
general and administrative expenses were 24.7% for the nine
months ended September 30, 2007 and 19.9% for the nine
months ended September 30, 2006.
The increase in general and administrative expenses in the first
nine months of 2007 is partially due to increases in executive
and administrative cash bonuses and non-cash compensation
expense. As our financial performance improves, the expenses
associated with Multi-Shots cash bonus plans are expected
to increase, except that a ceiling or maximum exists on certain
of the elements of the bonus plans. All wages, including cash
bonuses, employee benefits, profit sharing contribution, and
sales commissions, increased to $5.4 million for the nine
months ended September 30, 2007 from $3.9 million for
the nine months ended September 30, 2006. Also, non-cash
compensation expense, consisting of non-cash charges associated
with Multi-Shots award of the remaining 11.88 membership
interest units to certain key employees pursuant to its 2004
Incentive Plan in connection with the private recapitalization
in April 2007, increased $4.1 million to $6.6 million
for the nine months ended September 30, 2007 from
$2.5 million for the nine months ended September 30,
2006. See Directors and Management of JKA following the
Merger with Multi-Shot, LLC Executive
Compensation Long-Term Incentive Awards.
Expenses associated with insurance, building lease expense,
utilities, property and franchise taxes, professional fees and
promotional and entertainment expense, increased
$1.3 million to $3.9 million for the nine months ended
September 30, 2007 from $2.6 million for the nine
months ended September 30, 2006 . These increases are
largely attributable to corresponding increases in revenues
(franchise taxes and promotional and entertainment expenses),
the acquisition of equipment (insurance, property taxes) and
additional costs incurred associated with the JKA transaction.
Depreciation and amortization increased $2.4 million from
$2.5 million in the nine months ended
September 30, 2006 to $4.9 million in the
nine months ended September 30, 2007 and increased as
a percentage of revenue from 4.7% to 6.8% from 2006 to 2007. The
increase in depreciation is due to Multi-Shots capital
expenditures for production equipment, which is necessary to
sustain the increase in revenues given the desire to reduce the
amount of third party equipment rental and as a result of the
acquisition of Ulterra assets. Capital expenditures for the
nine months ended September 30, 2006 were
$8.6 million compared to $10.8 million for the
nine months ended September 30, 2007, of which
$1.5 million was financed in 2006 and $1.0 million in
2007. Additionally, the Company financed the $10.0 million
acquisition of Ulterra assets with a $10.0 million note.
See Liquidity and Capital Resources. The
65
Companys credit institution maintains a perfected
security interest in all financed equipment. The largest
component of this $2.2 million increase relates to
increases in Multi-Shots motor fleet, as well as the
purchase of new MWD systems. As the Company continues to grow,
it has enacted an organic growth plan to increase Company-owned
production equipment while reducing its reliance on third party
rented equipment to further enhance service quality to its
customers and to reduce job costs. In order to consistently
expand business, management anticipates the Company will need to
spend between $12.0 and $15.0 million during the
2007 year. Correspondingly, as these capital expenditures
are undertaken, management expects maintenance expense
associated with our existing and new capital purchases to remain
constant as a percentage of revenue of approximately 2.0 to 3.0%
of revenues. Management does not expect the Company to
continuously expand without making these capital investments as
the current utilization rates of our current motor fleet and MWD
systems are at their maximum levels.
Interest expense was $2.8 million for the nine months
ended September 30, 2007, an increase of $1.9 million
compared to $0.9 million for the nine months ended
September 30, 2006. The increase in interest expense was a
result of increased debt levels after the private
recapitalization in April 2007, and the purchase of Ulterra
assets.
The Company is a limited liability company and for federal
income tax purposes has elected to be taxed as a partnership.
Accordingly, no provision has been made for federal income tax
purposes as the Company is a flow-through entity, and any taxes
are passed through to its members. On a quarterly basis the
Company provides discretionary tax distributions to its members
related predominantly to their taxable income. Distributions for
the nine months ended September 30, 2007 and 2006 were
$1.5 million and $1.6 million, respectively. Should
the Company not be considered a flow through entity, the Company
would be detrimentally impacted by charges for federal income
taxes and related deferrals. Based upon the Companys
capital expenditures, management estimates that the impact would
be partially offset by deferred tax effects associated with
accelerated cost recovery depreciation and amortization of the
Companys capital assets for federal income tax purposes.
Net income for the nine months ended September 30,
2007 was $4.2 million which was a decrease of
$3.2 million from $7.4 million for the
nine months ended September 30, 2006. As discussed
above, while the revenues increased by $19.8 million and
the cost of revenues increased by $11.5 million in the nine
months ended September 30, 2007 compared to the nine months
ended September 30, 2006, the increases in
(i) non-cash compensation, which resulted from the grant of
the remaining membership interest awards pursuant to the 2004
Incentive Plan in connection with the private recapitalization
and will not recur at those levels, (ii) depreciation and
amortization, and (iii) interest expense materially
affected the net income results for the nine months ended
September 30, 2007.
RESULTS
OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31,
2006 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2005
Net revenue increased $35.9 million or 94.3% to
$74.0 million for the year ended December 31, 2006
from $38.1 million for the prior year. Approximately 10% of
the increase in revenues is attributed to increases in our
pricing and the remainder of the increase is attributed to
increased demand for our services driven by increased land
drilling activity and increased demand for our directional
drilling services. See Multi-Shot, LLC
Overview.
Cost of revenues includes compensation for the Companys
drillers, surveyors, MWD hands and related personnel; third
party equipment rentals; costs associated with the
Companys motor usage; as well as other direct and
allocable indirect expenses related to the Companys
directional and surveying services and equipment. Costs of
revenues for the year ended December 31, 2006 increased
$21.5 million to $44.7 million from $23.2 million
in 2005 or 92.9%, which increase is attributed to our increased
activity levels. The percentage increase in cost of revenues is
consistent with the percentage increase in revenues, at 92.9%
versus 94.3%. Costs of revenues as a percentage of revenue
decreased slightly to 60.5% for 2006 from 60.9% for 2005.
Included in cost of revenues, compensation and other payroll
expenses were $20.7 million for the year ended
December 31, 2006 which was an $8.4 million increase
from $12.3 million for the year ended December 31,
2005. Compensation and other payroll related expenses as a
percentage of revenues decreased to 28.0% for 2006 from 32.2%
for 2005. The total was a higher percent of revenue for 2005
because the salary and other fixed components were a greater
percentage of revenues in the first quarter of 2005 before the
monthly revenues started an upward trend. Likewise, third party
equipment rental expenses were $11.4 million for the year
ended December 31, 2006 which was a $7.3 million
66
increase from $4.1 million for the year ended
December 31, 2005. Third party equipment rental expenses as
a percentage of revenues increased to 15.4% for 2006 from 10.9%
for 2005. The lower percent of revenue for 2005 resulted from
the Company not increasing its third party usage until the third
and fourth quarters of 2005 when the growth rate was outpacing
the Company owned equipment availability. Expenses attributed to
motor usage, reline and equipment dispositions increased to
$4.9 million in 2006 from $2.4 million in 2005. These
expenses as a percentage of revenues were 6.7% in 2006 which was
consistent with 6.2% in 2005.
General and administrative expenses include executive and
administrative salaries (including non cash compensation expense
associated with the 2004 Incentive Plan that no longer exists as
of the private recapitalization), insurance costs, third party
accounting, legal and tax services, utilities, taxes, loan
administration costs, and other miscellaneous expenses. General
and administrative expenses increased $5.8 million to
$13.3 million for the year ended December 31, 2006
from $7.5 million for the year ended December 31, 2005
or 78%. As a percentage of revenues, general and administrative
expenses were 18.0% for the year ended December 31, 2006
and 19.6% for the year ended December 31, 2005. General and
administrative expenses as a percentage of revenue decreased
because the rate of increase in the costs was less than the
associated rate of revenue increase. While cost of revenues
fluctuate relative to changes in revenues due to the more
variable nature of such costs, general and administrative costs
are relatively less variable in relationship to ranges of
revenue variability.
The increase in general and administrative costs from 2005 to
2006 is partially due to increases in executive and
administrative cash bonuses. As our financial performance
improves, the expense associated with Multi-Shots cash
bonus plans are expected to increase, except that a ceiling or
maximum exists on certain of the elements of the bonus plans.
Further, as the Company has expanded, the Company has hired
additional administrative and support personnel in an effort to
sustain a high level of customer service, and to maintain a high
standard of record keeping associated with the increase in
volume. As such all wages, including cash bonuses, employee
benefits, profit sharing contribution, and sales commissions,
increased $1.3 million to $4.9 million in 2006 from
$3.6 million in 2005.
Also, non-cash compensation expense, consisting of non-cash
charges associated with Multi-Shots grant of membership
interests to certain key employees pursuant to its 2004
Incentive Plan increased $2.8 million to $3.0 million
for the year ended December 31, 2006 from $0.3 million
for the year ended December 31, 2005. The increase in
non-cash compensation expense is a result of the increase in
fair market value of the membership interests, primarily due to
the increase in gross enterprise value attributed to the Company
in December 2006 from December 2005. This increase in gross
enterprise value is derived from two primary factors: the
greater level of revenues and profitability in 2006 over 2005;
and the use of the implicit value in the contemplated merger in
2006, which more closely approximated a public company valuation
than the private company valuation applied in 2005. This, and
other factors, were used in the fair market value computation in
2006, explaining the material increase in gross enterprise value
over 2005.
Expenses associated with insurance, building lease expense,
utilities, property and franchise taxes, professional fees and
promotional and entertainment expense, increased
$1.4 million from $2.6 million in 2005 to
$4.0 million in 2006. These increases are largely
attributable to corresponding increase in revenues (franchise
taxes and promotional and entertainment expenses), the
acquisition of equipment (insurance and property taxes) and
additional costs incurred associated with the JKA transaction.
Depreciation and amortization increased $1.8 million from
$1.9 million in the year ended December 31, 2005 to
$3.7 million in the year ended December 31, 2006 and
decreased as a percentage of revenue from 5.1% to 5.0% from 2005
to 2006. The increase in depreciation is due to
Multi-Shots increased capital expenditures for production
equipment, which are necessary to sustain the increase in
revenues given the desire to reduce the amount of third party
equipment rental.
Capital expenditures for 2005 were $4.9 million compared to
$12.0 million in 2006, of which $0.7 million was
financed in 2005 and $2.7 million in 2006. The
Companys credit institution maintains a perfected security
interest in all financed equipment. The largest component of
this $7.1 million increase relates to increases in
Multi-Shots motor fleet, as well as the refurbishment and
redeployment of several MWD systems that were previously out of
service, and the purchase of new MWD systems.
67
Interest expense increased $0.3 million from
$0.9 million for the year ended December 31, 2005 to
$1.2 million for the year ended December 31, 2006. The
increase is attributable both to financing our increased capital
expenditures and an increase in interest rates for the
respective periods.
The Company is a limited liability company and for federal
income tax purposes has elected to be taxed as a partnership.
Accordingly, no provision has been made for federal income tax
purposes as the Company is a flow-through entity, and any taxes
are passed through to its members. On a quarterly basis the
Company provides discretionary tax distributions to its members
related predominantly to their taxable income. Should the
Company not be considered a flow through entity, the Company
would be detrimentally impacted by charges for federal income
taxes and related deferrals. Based upon the Companys
capital expenditures, management estimates that the impact would
be partially offset by deferred tax effects associated with
accelerated cost recovery depreciation and amortization of the
Companys capital assets for federal income tax purposes.
Net income for the year ended December 31, 2006 was
$11.1 million which is an increase of $6.4 million
from $4.7 million for the year ended December 31, 2005.
RESULTS
OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31,
2005 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2004
Effective August 6, 2004, the Company acquired the assets
and assumed certain liabilities of the directional drilling
division of Warrior Energy Services Inc. (formerly Black Warrior
Wireline Corporation (BWWC)), for a purchase price of
$11.2 million. The Company borrowed $6.5 million from
a financial institution and $2.0 million from a member to
fund a portion of cash necessary to complete the acquisition.
The acquisition was recorded under the purchase method of
accounting whereby the acquired assets and liabilities assumed
were recorded in proportion their estimated fair values due to
the fact that the total estimated net amount of the fair value
of the net assets (assets, less liabilities assumed) exceeded
the purchase price. The following is a table of the purchase
price, borrowed funds, and net cash paid by the Multi-Shot to
BWWC for its directional drilling division:
|
|
|
|
|
|
|
|
|
Assets
Acquired
:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3,018,286
|
|
|
|
|
|
Inventory
|
|
|
2,142,246
|
|
|
|
|
|
Production equipment
|
|
|
8,774,747
|
|
|
|
|
|
Property and equipment
|
|
|
421,140
|
|
|
|
|
|
Other assets and deposits
|
|
|
95,548
|
|
|
$
|
14,451,967
|
|
|
|
|
|
|
|
|
|
|
Liabilities
Assumed
:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,511,479
|
|
|
|
|
|
Accrued expenses
|
|
|
1,720,758
|
|
|
|
4,232,237
|
|
|
|
|
|
|
|
|
|
|
Plus: working capital adjustment due from Seller
|
|
|
|
|
|
|
940,000
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Price
|
|
|
|
|
|
|
11,159,730
|
|
Less: notes payable issued
|
|
|
|
|
|
|
(8,500,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash paid
|
|
|
|
|
|
$
|
2,659,730
|
|
|
|
|
|
|
|
|
|
|
The statement of operations reflects the revenues and expenses
covering the period from January 1, 2004 through
August 5, 2004 for the predecessor directional drilling
division (predecessor), as well as from August 6, 2004 (the
date of the asset acquisition) to December 31, 2004 the
results of Multi-Shot, LLC (successor). The 2004 statement
of operations, as it relates to the predecessor period ended
August 5, 2004, includes an amount representing a corporate
allocation of costs and expenses of shared services including
certain executive and administrative salaries, insurance costs,
loan administration costs, legal and consulting expenses, among
others. Management believes the methods used to allocate or
reclassify these amounts are reasonable and allow the results
for the three calendar year ends to be comparable, as the
predecessors results (January 1, 2004 to
August 5, 2004) include costs comparable to those that
Multi-Shot, LLC (the successor, operating as a stand alone
company) incurred in its operations. Certain provisions for debt
and interest were recorded in order to reflect the necessary
68
interest expense and required debt obligations as if
the Company (the predecessor division and the Company, beginning
August 6, 2004) existed on a stand alone basis
throughout the reporting period. However, the financial
information for the period ended August 5, 2004 does not
necessarily reflect the financial position or results of
operations that would have resulted had the division operated as
a stand alone public entity during this period and may not be
indicative of future results of operations. For comparability
purposes, the following discussion will include predecessor and
successor results for 2004 as well as combine the two for
comparison purposes to 2005.
Net revenue increased $18.9 million, or 98% to
$38.1 million for the year ended December 31, 2005,
from a combined total for predecessor ($10.5 million) and
successor ($8.7 million) periods of $19.2 million in
2004. This increase is primarily attributed to increased demand
for our services which was driven primarily by increased land
drilling activity.
Costs of revenues increased $10.6 million or 84% to
$23.2 million for the year ended December 31, 2005
from $12.6 million for the combined predecessor and
successor periods in 2004, which increase is attributed to our
increased activity levels. Cost of revenues as a percentage of
revenue decreased to 60.8% for 2005 from 65.6% for the combined
predecessor and successor periods in 2004. The increase in total
amount of such direct costs is largely attributable to, and
consistent with the expansion of Multi-Shots revenues and
operations. The costs of revenues for the successor period in
2004 were $5.2 million or 60.0% of the successor period
revenues, which is consistent with the year ended 2005. The
costs of revenues for the predecessor period in 2004 were
$7.4 million or 70.3% of the predecessor period revenues.
The higher percentage of revenues in the predecessor period is
directly tied to higher salaries costs, third party rentals,
motor usage and freight. Salaries and other payroll related
expenses were $12.2 million or 32.2% of revenues for 2005.
They were $4.3 million for the predecessor,
$3.3 million for the successor and $7.6 million
combined, or 41.0%, 38.1% and 39.7% respectively. Third-party
equipment rental expenses were $4.1 million, or 10.9% of
revenues for 2005 compared to $1.0 million for the
predecessor, $0.6 million for the successor and
$1.6 million combined which is 9.5%, 7.0% and 8.4% of
revenues respectively. Motor usage, reline costs, and costs of
equipment lost in hole or damaged were $2.4 million or 6.2%
of revenues for 2005 compared to $1.0 million for the
predecessor, $0.5 million for the successor and
$1.5 million combined, or 9.4%, 5.3% and 7.5%,
respectively. Freight expense was $1.2 million or 3.1% of
revenues for 2005, compared to $0.3 million for the
predecessor, $0.2 million for the successor and
$0.5 million combined, or 2.4%, 1.9% and 2.2%, respectively.
General and administrative expenses increased $2.5 million
to $7.4 million for the year ended December 31, 2005
from $4.9 million for the combined predecessor and
successor periods in 2004 or an increase of 47.0%. As a
percentage of revenues general and administrative expenses were
19.6% in 2005 and 25.4% for the combined predecessor and
successor periods in 2004. General and administrative expenses
as a percentage of revenue decreased because the rate of
increase in the costs was less than the associated rate of
revenue increase. While cost of revenue fluctuates relative to
changes in revenues due to the more variable nature of such
costs, general and administrative costs are relatively less
variable in relationship to ranges of revenue variability. As
previously discussed, general and administrative expenses for
the predecessor period contain a corporate allocation for
certain costs previously incurred by and on behalf of Multi-Shot
by BWWC. Included in the allocation are certain executive and
administrative salaries, insurance costs, loan administration
costs, legal and consulting expenses, and other miscellaneous
expenses which represent managements best estimate of the
costs that would have been incurred if the directional division
had been a stand alone public entity for those periods, based in
part with reference to the comparable costs incurred by
Multi-Shot for the successor period. For the predecessor period
ended August 5, 2004 the corporate allocation totaled
$1.3 million.
As our financial performance improves, the expenses associated
with Multi-Shots cash bonus plans are expected to
increase, except that a ceiling or maximum exists on certain of
the elements of the bonus plans. Further, as the Company has
expanded, the Company has hired additional administrative and
support personnel in an effort to sustain a high level of
customer service, and to maintain a high standard of record
keeping associated with the increase in volume. As such all
wages, including cash bonuses, employee benefits, profit sharing
contribution, and sales commissions, increased $1.7 million
to $3.6 million in 2005 from $1.9 million for the
combined predecessor and successor periods in 2004. Also,
non-cash compensation expense, consisting of non-cash charges
associated with Multi-Shots grant of membership interests
to certain key employees pursuant to its 2004 Incentive Plan was
$0.3 million for the year ended December 31, 2005. The
amount of non-cash compensation expense is a result of the
69
increase in the fair market value of the membership interests,
using a private company valuation, with appropriate discounts
for lack of marketability and lack of control, at the date of
the grant in 2005. There were no grants of membership interests
in 2004. Expenses associated with insurance, building lease
expense, utilities, property and franchise taxes, professional
fees and promotional and entertainment expense, increased
$0.3 million from $2.3 million for the combined
predecessor and successor periods in 2004 to $2.6 million
in 2005 These increases are largely attributable to
corresponding increase in revenues (franchise taxes and
promotional and entertainment expenses) and the acquisition of
equipment (insurance, property taxes).
Depreciation and amortization decreased $0.5 million from
$2.4 million ($0.6 million successor and
$1.8 million predecessor) for the twelve months ended
December 31, 2004 to $1.9 million for the twelve
months ended December 31, 2005 and decreased as a
percentage of revenue from 12.5% to 5% from 2004 to 2005. As
previously mentioned the Company purchased the assets and
liabilities from BWWC on August 6, 2004. Consistent with
GAAP and purchase accounting rules, the acquired assets were
recorded at an amount less than the book value recorded on
BWWCs books. As a result, depreciation for the first
7 months of 2004 (January 1, 2004 through
August 5, 2004) calculated on a straight line basis
was greater than the amount calculated with reference to the
lower carrying value by Multi-Shot from August 6, 2004
until year end, because these assets carried a higher carrying
cost for 7 of the 12 months of 2004, and carried a reduced
carrying value for 5 of the 12 months of 2004, or from the
effective date of Multi-Shots formation of Multi-Shot as
of the asset acquisition. This reduced amount of carrying value
continued thereafter, and therefore the lower value partially
contributed to the reduced level of depreciation in 2005
compared to 2004.
During 2004, based upon the BWWCs plans to dispose of the
directional drilling services division, BWWC applied
SFAS 144 under the held for sale criteria,
causing it to analyze the recoverability of its long lived
assets, including the directional division which became
Multi-Shot. The analysis resulted in a charge to operating costs
and expenses for long-lived asset impairment for the year ended
December 31, 2004 (covering the period January 1, 2004
through August 5, 2004) in the amount of
$1.3 million. Subsequent to its acquisition and formation
Multi-Shot similarly assessed the recoverability of long lived
assets pursuant to the held and used criteria of
SFAS 144 and determined that no impairment exists for the
year ended December 31, 2005.
Interest expense increased $0.3 million from
$0.6 million ($0.3 million successor and
$0.3 million predecessor) for the year ended
December 31, 2004 to $0.9 million for the year ended
December 31, 2005. The increase is reflective of modestly
higher debt amounts and higher prevailing interest rates for the
respective periods.
Net income for the twelve months ended December 31, 2005
was $4.7 million which is an increase of $7.3 million
from a net loss of ($2.6 million) for the combined twelve
months ended December 31, 2004 or net income of
$0.7 million for the successor and a net loss of
$3.3 million for the predecessor periods.
LIQUIDITY
AND CAPITAL RESOURCES
Multi-Shots primary uses for cash are capital
expenditures, working capital, membership tax distributions, and
principal and interest payments on indebtedness.
Multi-Shots primary sources of liquidity are cash
reserves, cash generated by operations, and availability to be
drawn under its revolving credit facility. In such case that the
cash requirements exceed liquidity, we will be forced to seek
additional debt or equity financing activities, or to curtail
its expenditures on capital equipment. After the closing of the
merger, Multi-Shot will no longer make tax distributions to its
members.
Cash
Flow Requirements for 2007
Prospectively, the Company believes that cash flows from
operations, existing cash and cash equivalents including the
potential cash from the contemplated merger with JKA, and
borrowing capacity under its revolving credit facility and term
loans, should be sufficient to finance capital requirements for
its business for the foreseeable future. Significant expansion
in response to expanding market conditions in the U.S. land
based drilling and exploration for oil and natural gas as well
as the Company intentions to expand its geographic presence in
the U.S. and potentially North America,
and/or
acquiring or developing other business opportunities consistent
with its business plan, may require additional outside funding.
Such funding, provided the merger with JKA is completed, could
include the issuance of public debt
and/or
equity securities, as well as privately secured debt and equity
70
financing. Multi-Shot has no research and development costs at
this time, as it is not currently developing any new equipment
or services.
Other than normal operating expenses, cash requirements for
fiscal year 2007 are expected to consist primarily of capital
expenditures for new survey, MWD, steering and directional
drilling equipment. The Company expects capital expenditures to
be in the range of $12 million to $15 million for the
year ended December 31, 2007 which management anticipates
will mostly be funded through operations.
Additionally, the Company distributed $1.5 million to its
members in early 2007 to enable them to pay the income taxes
related to the flow through effect of Multi-Shots fiscal
2006 income. In connection with the private recapitalization,
Multi-Shot distributed to its members approximately
$39.8 million in cash. Our primary sources of cash are our
new credit facility (see 2007 Credit
Facilities below) as well as subordinated debt from the
new member, SG-Directional, LLC. Under the terms of the
contemplated JKA transaction all income tax distributions will
cease upon consummation of the merger.
Cash Flow
Comparisons nine months ended September 30,
2007 versus nine months ended September 30, 2006
Working capital was $8.9 million as of September 30,
2007 and $5.1 million as of September 30, 2006. The
increase in working capital is primarily due to our line of
credit no longer being reflected as a current liability and by
increases in activity levels across our business. This is
principally due to increases in accounts receivable and unbilled
receivables which are reflective of the Companys ability
to secure, sustain, and obtain customer relationships throughout
2007 as a result of increased drilling activity in the
geographical areas in which the Company operates. Prospectively,
as drilling activity remains at relatively high levels
management expects this trend to continue.
As of September 30, 2007 the Companys liquidity and
capital resources included cash and cash equivalents of
$0.4 million compared to $0.0 million as of
September 30, 2006. The increase in our net cash position
of approximately $430,000 in the first nine months of 2007 was
primarily due to $13.1 million in net cash provided by
operating activities resulting from increased business from land
drilling activity, partially offset by
(i) $20.9 million in net cash used in investing
activities such as the purchase of production equipment and the
purchase of Ulterra assets, and (ii) $7.6 million in
net cash provided in financing activities, all as further
described below.
Cash provided by operating activities totaled $13.1 million
for the nine months ended September 30, 2007 compared to
$8.3 million for the nine months ended September 30,
2006, and was generated primarily from net income of
$4.2 million plus non cash charges such as depreciation and
amortization of $4.9 million and non cash compensation
expense of $6.6 million, plus increases in accounts payable
and accruals of $2.6 million, offset by increases in
accounts receivable and inventory of $11.8 million. The
increases in accounts receivable, inventory, accounts payable
and accruals are reflective of increased activity in our
business. Further, the increase in non cash charges are
reflective of our increased capital expenditures and the vesting
of membership interest awards, resulting in the recording of
their fair market value.
Cash used in investing activities totaled $20.9 million in
2007 compared to $9.3 million in 2006 primarily due to
capital expenditures of $10.8 million for equipment as a
result of our continuing growth efforts to support our increased
business activity and the purchase of $10.0 million of
assets from Ulterra. We believe that continued capital
expenditures to maintain and increase our ability to service the
higher drilling activity is offset by the increased cash
provided by operating activities.
Cash used in financing activities totaled $7.6 million for
the nine months ended September 30, 2007 due to net
increases of $6.7 million under the Companys
line-of-credit agreement and net proceeds of $41.2 million
from term loans in excess of term loan repayments, the proceeds
of which were used to fund member distributions for tax purposes
and in connection with the private recapitalization. Multi-Shot
is a partnership for income tax purposes, and thus taxable
income and losses flow through to the members. In the first nine
months of 2007, Multi-Shot made distributions of
$1.5 million to its members in relation predominately to
their current year taxable income flow through. These payments
are made quarterly at the discretion of management. See
Information About Multi-Shot, LLC Market Price
of and Dividend Policy on Multi-Shot, LLC Interests.
Should the Company not maintain the
71
liquidity and cash provided through operations, these tax
distributions could be reduced or cease. Should the Company not
be considered a flow through entity for tax purposes, it would
have a detrimental impact on profitability and the amounts that
could be distributed to members. In connection with the private
recapitalization in April 2007, Multi-Shot distributed
$39.8 million in cash to its members. Neither the income
tax distribution to our members in early 2007 nor the
distribution to our members in connection with the private
recapitalization impacted or will impact the merger
consideration. Cash provided by financing activities for the
nine months ended September 30, 2006 totaled
$0.9 million primarily due to proceeds under the revolving
line of credit and under the term loans in excess of term loan
borrowings repaid during the period. Also, during the nine
months ended September 30, 2006 distributions of
$1.6 million were made in relation to the members
2005 and 2006 taxable income flow through.
Cash
Flow Comparisons 2006 versus 2005
Working capital was $7.1 million as of December 31,
2006 and $3.1 as of December 31, 2005. The increase in
working capital is largely attributable to increases in activity
levels across Multi-Shots business. This is principally
due to increases in accounts receivable and unbilled receivables
which are reflective of the Companys ability to secure,
sustain, and obtain customer relationships throughout 2006 as a
result of increased drilling activity in the geographical areas
in which the Company operates. Prospectively, as drilling
activity remains at relatively high levels management expects
this trend to continue.
As of December 31, 2006 the Companys liquidity and
capital resources included cash and cash equivalents of
$0.1 million compared to $0.0 and $0.1 million as of
December 31, 2005 and 2004. The change in total cash and
cash equivalents from December 31, 2004 2005 to
December 31, 2006 was primarily due to cash provided by
operating activities, proceeds from term loans and increased
draws on the Companys revolving credit facility, offset
partially by, an increases of $7.2 million in capital
expenditures from 2006 to 2005 and $2.1 million from 2005
to 2004, cash distributions to members of $2.4 million and
$0.8 million for the period ending December 31, 2006
and December 31, 2005 respectively, and certain loan
principal reductions during the periods, as well as the cash
effects of the asset acquisition as of August 6, 2004.
Cash provided by operating activities totaled $12.8 million
for the year ended December 31, 2006 compared to
$3.1 million for the year ended December 31, 2005 and
was generated primarily from net income of $11.1 million
plus non cash charges such as depreciation of $3.7 million
and non cash compensation expense of $3.0 million, plus
increases in accounts payable and accruals of $3.1 million,
offset by increases in accounts receivable and inventory of
$8.3 million. The increases in accounts receivable,
inventory, accounts payable and accruals are reflective of
increased activity in our business. Further, the increase in non
cash charges are reflective of our increased capital
expenditures and the increase in fair market value of the
membership interest awards.
Cash used in investing activities totaled $12.0 million in
2006 compared to $3.8 million in 2005 primarily due to
capital expenditures for equipment of $12.0 million as a
result of the Companys continuing growth efforts. The
increase in cash used from 2005 to 2006 was slightly offset in
early 2005 due to the collection of $0.9 million from BWWC
in consideration and in settlement of certain working capital
adjustments which related to the asset purchase agreement for
the August 6, 2004 acquisition of the directional drilling
division from BWWC.
Cash used in financing activities totaled $0.7 million the
year ended December 31, 2006 due to net increases under the
Companys
line-of-credit
agreement of $0.7 million and net proceeds from term loans
in excess of term loan repayments of $1.3 million, the
proceeds of which were used to provide financing for capital
expenditures. Multi-Shot is a partnership for income tax
purposes, and thus taxable income and losses flow through to the
members. In 2006, Multi-Shot made distributions of
$2.4 million to its members in relation predominately to
their current year taxable income flow through. These payments
are made quarterly at the discretion of management. See
Information About Multi-Shot LLC Market Price
of and Dividend Policy on Multi-Shot, LLC Interests.
Should the Company not maintain the liquidity and cash provided
through operations, these tax distributions could be reduced or
cease. Should the Company not be considered a flow through
entity for tax purposes, it would have a detrimental impact on
profitability and the amounts that could be distributed to
members. Cash provided by financing activities for the year
ended December 31, 2005 totaled $0.6 million primarily
due to proceeds under the
72
revolving line of credit and under the term loans in excess of
term loan borrowings during the period. Also, in 2005
distributions of $0.8 million were made in relation to the
members 2005 taxable income flow through.
Cash
Flow Comparisons 2005 versus 2004
Cash provided by operating activities for the year ended
December 31, 2005 and predecessor and successor periods of
2004 totaled $3.1 million and $0.4 million
respectively, primarily as a result of meaningful earnings of
$4.7 million before non cash charges for 2005 as opposed to
a net loss of $2.6 million for the predecessor and
successor combined in 2004, although $3.7 million of the
$2.6 million loss resulted from non cash charges,
specifically depreciation and impairment charges previously
discussed. For the predecessor and successor periods in 2004,
the Company had increases in accounts payable and accruals of
$1.7 million, and decreases in inventory levels of
$0.6 million offset by increases in accounts receivable of
$2.7 million. In 2005, the Company had increases in
accounts payable and accruals of $3.5 million, offset by
increases in accounts receivable and inventory of
$7.5 million. All third party liabilities of the former
division were settled upon closing of the acquisition by
Multi-Shot, LLC, either by virtue of the liability being
extinguished from the purchase proceeds, or by virtue of
Multi-Shot assuming the liabilities and retiring them according
to their terms.
Cash used in investing activities for the year ended
December 31, 2005 and the predecessor and successor periods
combined in 2004 totaled $3.8 million and
$5.3 million, respectively. The 2004 use of cash results
from $2.7 million paid by Multi-Shot, LLC to BWWC to
acquire BWWCs directional drilling division in August 2004
and the purchase of production equipment. Cash used for capital
expenditures to acquire the necessary capital assets to expand
the Companys services totaled $2.7 million for the
combined predecessor and successor periods in 2004 and
$4.8 million in 2005. As mentioned, in early 2005,
Multi-Shot received a $0.9 million cash settlement which
related to various purchase price adjustments owed by BWWC per
the terms of the asset purchase agreement.
Cash provided by financing activities totaled $0.6 million
and $5.1 million for the year ended December 31, 2005
and the predecessor and successor periods combined in 2004. The
primary factor resulting in a decrease year over year is
reflective of the $4.1 million in proceeds contributed by
Multi-Shots members in forming the entity, which was used
to partially fund the acquisition of the directional drilling
division of BWWC in August 2004. Primarily, the cash provided by
financing activities is generated from using the Companys
revolving and term debt credit facilities in the amount of
$1.5 million in 2005 and $0.3 million for the
predecessor and successor periods in 2004 to fund operations and
its acquisition of capital assets. As previously described, in
the last half of 2005, $0.8 million was distributed to
Multi-Shots members in relation to their taxable income
they recognize due to Multi-Shots flow through tax status
and for which they must pay the income taxes.
2007
Credit Facilities
In April 2007 the Company entered into a term note and revolving
line of credit with Wells Fargo that replaced the revolving line
of credit, term notes and CAPEX note. The revolving line of
credit includes a maximum borrowing capacity of up to
$10,000,000. Borrowings bear interest at the prime rate plus a
margin, which is currently .25%, and are secured by
substantially all of the assets of the Company. Interest
payments are due in monthly installments with the outstanding
principal balance becoming due in March 2010. Advances on the
line cannot exceed 85% of the Companys eligible accounts
receivable. Eligible accounts receivable means all unpaid
accounts arising from the sale or lease of goods or the
performance of services, net of any credits, but excluding any
such accounts having a balance greater than ninety days or that
are otherwise encumbered. The line of credit requires compliance
with certain financial and non financial covenants. These
covenants include, but are not limited to, the Company providing
financial statements on a monthly basis and other reporting
covenants, maintaining a total leverage ratio of no more than
3.50 to 1.0, maintaining a fixed charge coverage ratio of at
least 1.25 to 1.0, and limiting its annual capital expenditures
to no greater than $12,000,000 without the lenders
consent. The balance owed on the revolving line of credit was
$7,335,025 at September 30, 2007.
The term note is for $30,000,000, with principal due in
36 monthly installments of approximately $357,000 plus
interest at the prime rate plus a margin, which is currently
.25%, and is secured by substantially all of the assets of the
Company. Additionally, when the compliance certificate is
delivered to the lender for the fiscal year ending
December 31, commencing December 31, 2007, if the
leverage ratio is equal to or greater than 2.00 to 1.00, then
the
73
borrower shall prepay the term note in an amount equal to 50%
of Excess Cash Flow for such prior fiscal year. Excess Cash Flow
for a given period is the amount by which (a) EBITDA
exceeds (b) the sum of (i) cash tax payments (which
includes distributions to members for their tax liability),
(ii) interest expense paid for such period, (iii) all
scheduled principal payments made in respect of indebtedness
during such period, (iv) capital expenditures (to the
extent they were made in cash or due to be made in cash within
such period) and, plus if positive (or minus if negative),
(v) working capital. Assuming the merger with JKA is
approved and consummated, the trust fund process should not have
any effect on the Excess Cash Flow calculation for purposes of
the term note. The balance owed on the term note was $28,214,286
at September 30, 2007.
In July 2007 the Company entered into a term note for
$10,000,000 with principal due in 33 monthly installments of
approximately $119,000 plus interest at the prime rate plus a
margin, which is currently .25%, and is secured by substantially
all of the Ulterra assets. The original term loan was amended
to include the proceeds from this note to include the principal
amounts in the Excess Cash flow calculation as mentioned above
and is subject to all of the covenants included therein.
The board of directors of the Company will determine whether or
not these credit facilities will be repaid following the closing
of the merger. If they are repaid, it is expected that trust
funds will be used for these purposes.
2006
Credit Facilities
At the beginning of 2006, Multi-Shot had a term loan with a
maximum borrowing capacity of $6,500,000 which was secured by
substantially all the assets of the Company, and provided for
monthly payments of $93,403 in principal, plus interest at the
prime rate. In addition each July 31, with the next such
payment being July 31, 2007, a payment equal to 25% of the
Borrowers Excess Cash Flow as defined in the loan
agreement for the prior fiscal year is due. Borrowers
Excess Cash Flow for a given period is defined as operating cash
flow (an amount equal to (i) EBITDA minus (ii) capital
expenditures minus (iii) income tax expense which for a
pass-through entity means pass-through liability incurred during
such period for which distributions will be made) minus the sum
of (a) scheduled principal payments (including scheduled
payments on subordinated debt payable to the subordinated
creditor), (b) voluntary prepayments under all term notes
and (c) cash interest expense, for each such period. The
payment is applied to the principal balance of the loan. The
Company also had two term loans with the same bank, with a
borrowing capacity of $1,200,000 each, which were secured by
substantially all the assets of the Company, calling for monthly
principal payments of $18,621 and $25,000 respective, plus
interest at the prime rate. Proceeds from these loans were used
to finance capital expenditures on production and other property
and equipment.
These three loans were refinanced through an amendment in July
2006, in addition to a portion of the Companys vehicle
notes, and as a result the Company had a term note with a
balance of $6,750,575, which again was secured by substantially
all the assets of the Company, and provided for monthly
principal payments of $112,510 plus interest at the prime rate.
Additionally, the term note called for each July 31, with
the next such payment being July 31, 2007, a payment equal
to 25% of the Borrowers Excess Cash Flow.
The amendment provided for an additional capital expenditures
loan (CAPEX note) with a maximum borrowing of
$10,000,000 which further cannot exceed 75% of new eligible
equipment purchased. Payments on the CAPEX note were to have
begun on August 1, 2007 in monthly installments equal to
1/48th of the July 31, 2007 ending balance. The
Company borrowed $1,000,000 in October 2006 under the CAPEX
note. The term on all bank notes were to expire July 31,
2008.
During 2006 the Company maintained a revolving line of credit
that included a maximum borrowing capacity of up to $10,000,000.
Borrowings bore interest at the prime rate and were secured by
substantially all the assets of the Company. Interest payments
were due in monthly installments with the outstanding principal
balance becoming due in July 2008. During 2006 the Company made
$0.3 million in monthly interest payments on the revolving
line of credit. The bank required the Company to maintain a
lockbox and advances on the line cannot exceed 85% of the
Companys eligible accounts receivable. The line of credit
required compliance with certain financial and non financial
covenants. These covenants included, but were not limited to,
the Company providing financial statements on a monthly basis
and other reporting covenants, maintaining a debt service ratio
in excess of 1.10, maintaining a minimum net income in excess of
($0.1) million, and limiting its annual capital expenditures to
no greater than $10,750,000 without the lenders consent.
In July 2006 the Company refinanced its credit facility and upon
such
74
refinancing, the Company was in compliance with these covenants
or had obtained waivers for events of non-compliance.
Subordinated
Financing
During 2006, the Company had a subordinated note payable to a
member of $2.0 million that was unsecured, bore interest at
12% per annum that was due monthly, with the principal due
August 2009. This subordinated note was paid off at the time of
the private recapitalization with
SG-Directional.
In conjunction with the private recapitalization on
April 2, 2007, the Company entered into a new subordinated
note payable with SG-Directional, one of its members, in the
principal amount of $15.0 million This subordinated note is
secured by the assets of the Company, but is subordinated to the
term note and revolving line of credit discussed above. The
proceeds of the subordinated note were used to pay off the
Companys previous subordinated note and to provide funds
for member distributions until the completion of the merger. See
Cash Flow Requirements for 2007. The terms of the
subordinated note were negotiated by the Company at arms
length and the annual interest rate of 10% was considered the
market rate for a subordinated note of that level. Payments on
the subordinate note are due quarterly, with the principal due
on the earlier of the closing of the JKA merger or 120 days
following the third anniversary of the note agreement.
Other
Credit Facilities
From time to time, the Company enters into lending arrangements
with certain financing companies to finance the purchase of
certain vehicles and operating equipment. Typically, these loans
are for a term of 60 months with interest rates that range
from 6.74% to 8.99% and payments in the amounts ranging from
$695 to $1,197 per month. The terms on these loans extend
through January 15, 2010.
As previously discussed the debt reflected in the financial
statements for the periods covering the predecessor period in
2004 represent amounts resulting from an allocation of
BWWCs net investment in the Company at the time, as
further representative of the debt the Company would have
required in order to sustain operations as a stand alone public
company (the as if, or carve out basis
of presentation). Management believes these allocations to be
consistent with carve out accounting rules
consistent with generally accepted accounting principles in the
United States of America. Given the application of these
carve out accounting procedures for the historical
periods presented prior to the August 6, 2004 acquisition
date of the directional division of BWWC, any such related
estimates made by management are not intended to be reflective
of actual results for those periods.
Finally, in order to provide operating facilities and to
maintain certain administrative facilities for its operations,
the Company has entered into multiple operating leases in
addition to a single facility it owns in Midland, TX which
houses a relatively small field operation. Total rent expense
for the years ended December 31, 2006, 2005 and the
combined predecessor and successor periods in 2004 was
$0.4 million, $0.3 million, and $0.3 million
respectively.
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
Less
|
|
|
|
Than 1
|
|
|
1-3
|
|
|
4-5
|
|
|
Than 5
|
|
|
Than 1
|
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Year
|
|
|
|
(In thousands)
|
|
|
Long-term Debt obligation
|
|
$
|
1,534
|
|
|
$
|
7,775
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest Obligations
|
|
|
787
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
|
356
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open Purchase Commitments**
|
|
|
2,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,938
|
|
|
$
|
8,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
**
|
|
Open purchase obligations represent orders to purchase various
rental equipment, third part services to our equipment,
inventory items, and other supplies that have not yet been
delivered.
|
75
Accounts
Receivable Trade
As of December 31, 2006, the Companys trade accounts
receivable balance was $14,225,391 (net of allowance for
doubtful accounts of $380,000), which is consistent with its
revenue growth. The Company extends credit to customers in the
normal course of business and performs continuing credit
evaluations of its customers and generally does not require
collateral. The Company regularly reviews outstanding
receivables and provides for estimated losses through an
allowance for doubtful accounts. In evaluating the level of
established reserves, the Company makes judgments regarding its
customers ability to make required payments, economic
events and other factors. Accounts deemed uncollectible are
charged against the allowance for doubtful accounts.
Off
Balance Sheet Financing
With the exception of operating leases on real property the
Company has no off balance sheet debt or off balance sheet
financing arrangements. The Company does provide certain
indemnities to certain key employees and to its Managers for
third party claims assessed them resulting from their actions in
furtherance of Company interests in their respective capacities.
All such indemnities are customary and Multi Shot does maintain
what it believes is adequate insurance to assist in it
satisfying any such indemnities, should legitimate and
reimbursable claims arise.
Contingent
Liabilities
The Company has employment agreements with three officers, Allen
Neel, President and CEO; Paul Culbreth, Vice President of
Operations; and David Cudd, Vice-President of Sales, all of whom
are also members of the Company. As of December 31, 2006,
the aggregate commitment for future base salaries for the three
is approximately $0.5 million per year through July 2009,
subject to the employee satisfying all conditions and terms of
his employment agreement.
Prior to the private recapitalization with SG-Directional LLC in
2007, the Company had a consulting agreement with a member. The
aggregate commitment for future fees is $0.1 million per
year through August 6, 2007. Such consulting agreement was
terminated in connection with the private recapitalization.
COMMODITY
PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
As previously discussed, price levels in the oil and natural gas
industry have been at historically high levels for the past
three years, although those prices have moderated from their
high points beginning in the summer of 2006. Higher prices and
increasing demand has helped to facilitate increased drilling
activity and as a result, increased demand for our services.
Relatively minor changes in the supply and demand for oil and
natural gas, both domestically and globally, continue to affect
the activity levels for exploration and production companies.
Any slowing of demand, or expansion of supply could result in
declining prices for the production, which would have an adverse
affect on demand for our services and hence, a negative impact
on our financial results.
Multi-Shot believes that the overall long-term outlook for
domestic natural gas exploration and development activity
remains positive. Despite significant increases in drilling
activity in 2005 and 2006, natural gas production has only
increased nominally, in part due to a trend towards successful
wells having smaller average reserves than historically
completed wells, and in part due to the apparent fact of more
rapidly declining reserve levels for these wells that possess
reduced average total reserve levels. One impact of these
production and well characteristic trends in relation to
increasing demand appears to be that companies continue to
invest more capital, for more drilling, including alternative or
unconventional means of extracting natural gas.
Industrial gas consumption, gas powered electricity generation,
and a healthy economy will continue to produce natural gas
demand. Opinions vary in regards to natural gas prices for the
foreseeable future. Some forecasters expect pricing to be
suppressed based upon the volume on natural gas inventory in
storage, which as of April 27, 2007, per the Energy
Information Administration, was approximately 19.2% above the
five-year average storage numbers. However, as of May 4,
2007 the forward natural gas price quoted on NYMEX for June 2007
was $7.947 per thousand cubic feet versus the actual (per the
Energy Information Administration) June 2006 price of $7.22 per
thousand cubic feet.
76
SEASONALITY
AND QUARTERLY RESULTS
The U.S. land based drilling and exploration industry does
not experience material levels of seasonality, although certain
portions of the Rockies are subject to drilling slowdowns late
in the fourth and early in the first quarters of the year, due
to harsh winter weather. Occasionally, heavy rains will impede
activity for certain periods, but overall, these periods do not
materially impact the quarter to quarter results of the Company.
The Company performs limited services offshore, including in the
Gulf of Mexico, so the risks of business interruption resulting
from hurricanes that occur from May through November in the gulf
coast region of the United States, are minimal.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Multi-Shot, LLCs accounting policies are more fully
described in Note 3 Significant Accounting
Policies in the Notes to the Consolidated Financial
Statements, included elsewhere in this proxy. Multi-Shot,
LLC has identified the following critical accounting policies in
relation to its business and results:
Impairment
of Long-Lived Assets
In accordance with SFAS 144 Impairment of Long-Lived
Assets the Company recognizes impairment losses on long
lived assets used in operations when indicators of impairment
are present. The appearance of impairment results when, in the
opinion of management, the undiscounted cash flows over the life
of the assets are less than the assets carrying amount at
the time of the measurement. If any impairment exists, the
amount of such impairment is calculated based on projections of
future discounted cash flows from the asset. These projections
use a discount rate and terminal value multiple that would be
customary for evaluating current oil and gas service company
transactions. The Company considers external factors in making
its assessment. Specifically the following are considered, among
other factors: changes in oil and natural gas prices and other
economic conditions surrounding the industry; consolidation
within the industry; competition from other oil and gas well
service providers; the ability to employ and maintain a skilled
workforce, and other pertinent factors. During 2004, BWWCs
management, given its intention to divest the directional
drilling division, using the held for sale criteria,
applied SFAS 144 including an analysis of the
recoverability of long lived assets of its business segments.
The analysis resulted in a charge to operations for impairment
for the year ended December 31, 2004 in the amount of
$1.3 million
Management believes no impairment charges for long lived assets
or goodwill (none of the latter of which is carried on
Multi-Shots balance sheet) are appropriate for the period
ending December 31, 2006 and none are presently anticipated.
Revenue
Recognition and credit policy
The Company provides directional drilling services and rental
equipment to its customers at per day and per job rates, which
are agreed to in advance of the commencement of the activity,
and recognizes the related revenue as the work is performed, and
only if collection of the resulting receivable is reasonably
assured. Customers pay for equipment that is involuntarily
damaged or lost in the hole. Such payments are recorded as
revenues.
Property,
plant and equipment
Equipment held for production consists of drilling motors and
other equipment used primarily in directional drilling. Property
and equipment consists of office furniture and related
equipment, vehicles and all other property not directly
affecting directional drilling operations. All production
equipment and property and equipment are presented at cost. The
cost of ordinary maintenance, including relining and re-chroming
equipment, and repairs is charged to operations, while renewals
and replacements are capitalized. Depreciation is computed at
rates considered sufficient to amortize the cost of the assets
over their estimated useful lives, using the straight-line
method.
Income
taxes
Multi-Shot, LLC is treated as a partnership for income tax
purposes, and thus is treated as a pass-through
entity. Upon completion of the merger with JKA, Multi-Shot will
become a taxable entity for income tax purposes.
77
As noted above, presently Multi-Shot distributes cash to its
members in amounts reasonably determined to represent the tax
liabilities its member owe in the aggregate for the taxable
income of the Company, given that Multi-Shots taxable
income flows through to its members. This practice of permitted
tax distributions will cease upon the successful
completion of the merger, whereupon Multi-Shot, Inc. will
recognize and record a provision for income taxes and payments
to taxing authorities will replace the historical practice of
making tax distributions to members.
Recent
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 123R Shared Based Payment (SFAS 123R).
This statement is a revision of SFAS Statement No. 123
Accounting for Stock-Based Compensation and
supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation
guidance. SFAS 123R addresses all forms of share-based
compensation (SBP) awards, including shares issued under
employee stock purchase plans, stock options, restricted stock
and stock appreciation rights. Under SFAS 123R, SBP awards
result in a cost that will be measured at fair value on the
awards grant date, based on the estimated number of awards
that are expected to vest and will be reflected as compensation
cost in the historical financial statements. This statement is
effective for public entities that do not file as small business
issuers as of the beginning of the first interim or annual
reporting period that begins after June 15, 2005. The
Company adopted SFAS No. 123R effective
January 1, 2006.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4, which is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The
amendments made by SFAS No. 151 require that abnormal
amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) be recognized as current-period
charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production
facilities. The Companys adoption of
SFAS No. 151 did not have a material effect on the
financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, which supersedes APB Opinion
No. 20, Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements.
SFAS No. 154 changes the requirements for the
accounting for and reporting of changes in accounting
principles. The statement requires the retroactive application
to prior periods financial statements of changes in
accounting principles, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of
the change. SFAS No. 154 does not change the guidance
for reporting the correction of an error in previously issued
financial statements or the change in an accounting estimate.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Companys adoption of
SFAS No. 154 did not have a material impact on our
financial statements.
In June 2006, the FASB issued Financial Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes. This
Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109, Accounting
for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN No. 48 is effective
for financial statement issuers for fiscal years beginning after
December 15, 2006. The Company has elected to be taxed as a
pass-through entity (as more fully described in
Note 3), therefore the adoption of FIN No. 48 has
no impact on the Company.
Quantitative
and Qualitative Disclosures About Market Risk
The Company is exposed to market risks. Market risk is the
potential loss arising from adverse changes in market prices and
rates. As an energy services company, the Company could attempt
to minimize its exposure to declines in the price for oil and
natural gas, to the extent such declines negatively affect
drilling and activity levels of the Companys customers,
and therefore, negatively affect the Company. However, the
Company has not entered into any derivative or other financial
instruments for any reasons, including in an attempt to moderate
such market risks or otherwise for trading or speculative
purposes. Our market risk could arise from changes in interest
rates to the extent our revolving line and long term debt
fluctuates in regards to the interest rates charged in relation
to changes in market rates of interest.
Interest Rate Risk.
The Company is subject to
market exposure related to changes in interest rates.
78
INFORMATION
ABOUT MULTI-SHOT, LLC
Unless the context requires otherwise in this section
Information About Multi-Shot, LLC, the terms
company, we, us, and
our refer to Multi-Shot, LLC.
General
We are an oilfield service company that primarily provides
services, and selectively rents equipment, used in connection
with the drilling and completion of oil & natural gas
wells. We have operations on land in the U.S., principally in
TX, LA, OK, CO, MT, NM, WY, UT and ND. We were formed via an
asset acquisition of the directional drilling and surveying
division of Warrior Energy Services, Inc. (formerly Black
Warrior Wireline Corporation or
BWCC)(Warrior) in August 2004. We (and
our predecessor entities from which we were formed via a
combination of acquisitions and internal growth) deliver the
following lines of business through our product and service
offerings: drilling related products and services, which
include, directional drilling, measurement-while-drilling,
directional surveying, down-hole drilling motors, and to a
limited extent, rental equipment used in surveying.
We focus on products and services that provide our customers
with cost effective, but technologically comparable alternatives
to the integrated services typically marketed by the major
integrated oilfield service companies. We believe our business
approach enables us to compete successfully against these larger
oilfield service companies and against other smaller independent
service providers by: (a) emphasizing customer service,
responsiveness and reliability of equipment and personnel;
(b) offering technologically advanced and cost effective
products and services; (c) operating our business services
autonomously of other services; and (d) focusing on niche
geographic markets in which leading market positions can be
achieved.
Our customers principally include major, mid-major and
independent oil and natural gas companies and drilling
contractors and other oilfield service companies.
Business
Multi-Shot provides equipment and personnel to deliver
directional drilling services to the U.S. based
oil & natural gas drilling and exploration industry. A
directional well is simply a non vertical well. The two primary
measurements required to assist the driller in his awareness of
the drill bit in relationship to the targeted reservoir are:
inclination of the wellbore (the deviation from vertical), and
the azimuth (the direction from vertical, in relation to the
geographic grid in which the wellbore is running). Azimuth is
mechanically the more complicated of the two measurements, and
was initially successfully addressed by using gyroscopic
compasses used in aviation, which were adapted to downhole
drilling applications over sixty years ago. Generically, the
tools used to determine location are called surveying tools.
In addition to surveying equipment used to identify downhole
location, directional drilling requires specialized equipment
configurations known as the bottom hole assembly
(BHA). The major advancement in the industry that
improved the efficiency and effectiveness of directional
drilling occurred in the 1970s when downhole drilling motors
became common. These motors allowed the drill bit to
rotate while the drill pipe was held stationary. The
power to the motor is derived from the hydraulic
effect of the drilling fluid (mud) being pumped
though the drill pipe while drilling takes place. A bent metal
joint (bent sub) completes the BHA and joins the
bearing pack and bits to the drilling motor and allows the drill
bits direction to be altered from the surface by the
driller without the need to withdraw the BHA. These advances in
BHAs, coupled with advances in measurement while drilling (or
MWD) technologies (which employ mud pulse telemetry
or electronic measurement telemetry transmitted information to
the surface, communicating critical downhole data to the
drillers) have greatly aided the cost, effectiveness and
efficiency of directional drilling. None of this equipment is
proprietary to Multi-Shot.
A directionally completed well offers some or most of the
following potential advantages over a vertically completed well:
an enlarged area of reservoir exposure since the well intersects
the reservoir at an angle, exposing more feet of reservoir, than
a vertical well; enables the drilling of wells to a producing
reservoir where a vertical approach would be impossible or
impractical (e.g., under a structure or other structural
impediment); multiple reservoirs can be accessed from one
wellbore utilizing multiple laterals., which reduces costs and
enhances
79
efficiency; and in certain instances, wells drilled to relieve
dangerous or destructive excessive bottom hole pressures can
most optimally and safely be achieved via a vertically completed
relief well.
Therefore, our customers rely on our experienced well trained
personnel and specialized, high quality equipment to assist them
in their use of directional drilling in pursuit of their natural
gas discoveries.
Industry
Our business depends on the level of exploration, development
and production expenditures made by our customers. These
expenditures are driven by the current and expected future
prices for oil and gas, as well as the perceived stability and
sustainability of those current and expected prices. Our
business is predominantly driven by oil and natural gas drilling
activity in the United States, and particularly in the most
prolific producing basins. We believe the following two economic
factors will principally affect our industry in the coming years:
|
|
|
|
|
Expanding demand for natural gas in the U.S., given the
increasing popularity of this clean burning fuel, and
|
|
|
|
Supply constraints relating both to diminishing supplies and
limitations on transportation infrastructure.
|
These two factors (expanding demand and constrained supplies)
have led to higher prices for natural gas and increasing
drilling activity. Additionally, as more conventional reservoirs
have been discovered and depleted from years of production,
operators must increasingly turn to unconventional resources,
including tight sands, shales and coal-bed methane. Each of
these resources utilizes directional drilling equipment and
expertise. These resources characteristically require a greater
number of drilled wells to optimize their producible reserves.
Knowledge and experience in these areas
and/or
basins is becoming more critical. Technology is increasingly
important to pursue increased discovery and production rates,
and to lower costs, which will also favor companies like
Multi-Shot who continuously recruit, train and develop
professional personnel and invest in state of the art equipment.
While we believe the overall trends are favorable for us, oil
and gas markets have historically been volatile and this
volatility is beyond our control (see Risk Factors). Any
prolonged or substantial decline in the price for oil and
natural gas would likely negatively affect drilling levels and
therefore the demand for our services.
Business
Strategy
Our strategy is to grow revenues, cash flow and earnings by
providing our customers with an alternative to the major
integrated oilfield service companies, while preserving our
entrepreneurial culture. Our strategy consists of the following
key components:
Provide Leading Third Party Technology Solutions to Our
Customers.
We believe equipment technology,
especially when skillfully delivered by experienced personnel,
is an important aspect of our business. Innovations in equipment
and processes, developed by third parties, but normally readily
distributed within the service sector in which we compete, helps
us provide, to the extent we adopt the technology within our
equipment fleet and train our personnel to professionally
deliver the new developments, our customers with more efficient
and cost effective tools to find and produce oil and natural
gas. We believe our personnel and equipment, which in tandem
comprise our services, are among the best in the industry and
will provide us with the opportunity to grow our business and
service the needs of our customers.
Avoid Customer Concentration, While Performing Services for
the Industrys Largest Independent Exploration and
Production Operators and Their Contract
Drillers.
We believe that the value and stability
of our Company will be enhanced if we continue to broaden and
diversify our revenue base, both operationally and
geographically. However, we do provide services primarily used
in drilling, so we are vulnerable to revenue declines during
periods of low drilling activity when demand for our drilling
related products and services is reduced. We are very careful to
avoid becoming dependent on any single customer, or any single
region of exploration, in an attempt to mediate the risks of
customer or geographic concentration., We operate in the major
land based gas producing regions in the U.S. Our costumers are
exploration and production and or drilling companies that range
greatly in size. During 2006 our top ten customers (representing
approximately 52% of our revenue) included two companies with a
minimum of $10.0 billion each in reported revenue,
80
another three companies with a minimum of $2.0 billion each
in reported revenue, four companies with a minimum of
$160 million each in reported revenue, and one company with
$83 million in reported revenue.
Capitalize on the Growth of Select Emerging
Markets.
We believe that the longer-term domestic
outlook will continue to reflect upward pressure on oil and
natural gas prices as supply struggles to satisfy demand.
Industry data suggests that the size of the average completed
well in terms of proved and producing reserves continues to
decline, suggesting the continued growth of drilling activity to
the extent the goal remains to reduce the rate of decline in
net reserves. As a result, we expect the domestic
search for energy sources, and especially natural gas, to
continue its recent growth trend, recognizing that there will be
occasional interruptions in this trend when energy prices
decline as a result of events such as abnormally warm winters.
Our response to this expectation is to expand our geographic
coverage in North America. For example, we have, or are in
process of expanding our presence in the Rocky Mountain region.
We also plan to provide our products and services to our
customers as they pursue new geographic areas where the
geological research indicates other unconventional
gas reserves exist. An example of such a region that has become
a meaningful source of reserves is the Barnett Shale in north
central Texas. Other regions, possessing similar geological
profiles are likely to be pursued by our customers, prompting us
to expand to these regions in response thereto.
Capitalize on the Growth of Directional
Drilling.
Almost all of our drilling related
products and services are designed for use in directional
drilling and directional surveying. We believe that the
long-term trends in directional drilling are positive. We
provide directional drilling services only in the U.S., but may
explore expanding more broadly to North America. We believe that
providing directional drilling services will continue to
increase the utilization of our measurement-while-drilling and
down-hole drilling motors and rental surveying tools.
Selectively Acquire Complementary Businesses and
Technologies.
Multi-Shot expects to pursue
acquisitions of complementary businesses, which increase our
equipment, personnel and potentially our technological base and
expand the market reach of our product and service offerings. We
intend to focus on acquisitions that broaden our geographic
scope, increase our market share and sustain or improve our
ability to compete with the primary companies with whom we
compete. We intend, in these instances, to the extent we are
successful in acquisitions, to provide management and key
personnel of acquired businesses with stock-based incentives in
our Company, such as the 2007 Equity Incentive Plan, and very
likely to continue to market the products and services of these
companies under their established name. We design our equipment,
and purchase the components from third party manufacturers which
for the most part enable us to commercialize the latest in
equipment technology. We assemble our equipment to the
specifications we establish to ensure optimal performance in the
markets and under the conditions we anticipate the equipment
will be used. We own trade names and trademarks with respect to
our equipment and our Company. Some of these trademarks are
registered or are pending registration.
Competitive
Strengths
We believe were well positioned to execute our strategy
and capitalize on U.S. oil & natural gas market
opportunities based on the following competitive strengths:
Experienced senior management and basin-level
expertise:
We operate in several regional basins,
which we believe represent the most active and promising in the
U.S. We are committed to possessing the equipment and
experienced personnel to follow our customers and support their
drilling, exploration and development activities anywhere in the
U.S. that is commercially viable for us. Our managers,
sales professionals and drillers have extensive experience in
these local basins, most of which have unique and geologically
specific traits, and we therefore are able to understand our
customers needs and requirements and deliver a responsive,
effective, and competitive service. Some of our drillers are
independent contractors, that status of which allows us to
correlate the costs of a meaningful portion of our personnel to
direct revenue activities, which is a component of our overall
risk management strategies. As in the case of any independent
contractor environment, we cannot control the availability or
loyalty of these professionals and are at risk of their lack of
availability in times when our revenues are directly dependent
thereon.
81
One of the largest independent directional
drillers:
We are in the top ten (excluding the
major integrated oilfield service companies) of directional
drilling service companies, based on revenues for 2006. We
possess a considerable amount of equipment, personnel and
resources and serve the major basins in the U.S. and enjoy an
excellent reputation with many of the industrys largest
operators. The major directional drillers in the world are
subsidiaries of large, multi line service companies. As such,
most of these majors focus on delivering a complete or more full
package of services to the industry, and often times focus on
offshore and international plays, which provides us a
competitive advantage given our independent status (i.e., we
only provide these directional drilling services, independent of
any more expansive joint service strategy, which we believe
provides objectivity and focus) and given our sole commitment to
U.S., land based oil and natural gas plays.
Significant presence in major
U.S. basins:
We operate in the major oil and
gas producing regions of the U.S. Rocky Mountains, Texas,
New Mexico, Oklahoma, Louisiana, Mississippi, and Arkansas, with
concentrations in areas of key resource plays and in
unconventional basins. We have an excellent position in highly
active markets such as the Barnett Shale region of north Texas
and others. Operators increasingly focus on accelerating their
production rates, while reducing finding costs and increasing
discovery rates.
Experienced team with a proven record of growth and
success:
Each of our executive officers (except
our CFO) and most of our key operational management team has
over 20 years experience in the oil and gas services
industry, and predominantly in directional drilling. This
knowledge should allow us to operate successfully throughout
industry cycles, which have historically occurred with some
frequency. Each, along with the experience of numerous of our
directors, possesses experience in identifying, completing and
integrating acquisitions.
Our
Formation
Multi-Shot, LLC was formed by our executive officers and
Catalyst in August, 2004, when they acquired the net assets of
(assets, less certain assumed liabilities, including leases for
facilities, etc.) of the directional drilling division of
Warrior Energy Services, Inc. (formerly Black Warrior Wireline
Corporation, or BWWC). Effective August 6,
2004, the Company acquired the assets and assumed certain
liabilities of the directional drilling division of Warrior
Energy Services Inc. (formerly Black Warrior Wireline
Corporation (BWWC)) for a total net purchase price of
$11,159,730. The Company borrowed $6,500,000 from a financial
institution and $2,000,000 from a member to fund a portion of
cash necessary to complete the acquisition. The acquisition was
accounted for as a purchase whereby the assets acquired and the
liabilities assumed were recorded in proportion to their
estimated fair value as the total estimated net amount of the
fair values exceeded the purchase price. During 2005, the
Companys claim for working capital adjustments was settled
in exchange for it receiving $940,000 from BWWC. The following
is a table of the assets acquired, net of the liabilities
assumed and the referenced working capital adjustment, used to
determine the total net purchase price, funds borrowed, and net
cash paid by the Company:
|
|
|
|
|
|
|
|
|
Assets
Acquired:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3,018,286
|
|
|
|
|
|
Inventory
|
|
|
2,142,246
|
|
|
|
|
|
Production equipment
|
|
|
8,774,747
|
|
|
|
|
|
Property and equipment
|
|
|
421,140
|
|
|
|
|
|
Other assets and deposits
|
|
|
95,548
|
|
|
$
|
14,451,967
|
|
|
|
|
|
|
|
|
|
|
Liabilities
Assumed:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,511,479
|
|
|
|
|
|
Accrued expenses
|
|
|
1,720,758
|
|
|
|
4,232,237
|
|
|
|
|
|
|
|
|
|
|
Plus: working capital adjustment due from Seller
|
|
|
|
|
|
|
940,000
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Price
|
|
|
|
|
|
|
11,159,730
|
|
Less: notes payable issued
|
|
|
|
|
|
|
(8,500,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash paid
|
|
|
|
|
|
$
|
2,659,730
|
|
|
|
|
|
|
|
|
|
|
82
There are no outstanding payment obligations from this
transaction. This directional drilling division was the result
of numerous acquisitions by BWWC and its predecessors. The
original company named Multi-Shot was a surveying company formed
in 1980. BWWC acquired Multi-Shot and other companies that had
been assembled in 1997, or some 8 years prior to our
formation. Since August, 2004, we have operated as a stand alone
limited liability company, controlled by its Board of Managers.
Properties
As of December 31, 2006, we leased thirteen offices
and/or
facilities, of which eight are located in Texas, one is in
Louisiana; two are in Colorado; one is in Wyoming; and one is in
Montana. All are leases, with the exception of one office lease
with a monthly rent of less than $1,000, with third parties.
Moreover, all leases are on conventional terms and at market
rates. We own a facility (yard and office) in Midland, TX. We
believe our current facilities are adequate for our existing
operations, but we expect to require additional and expanded
facilities should our growth continue as we anticipate. We
believe such future facilities will be available on market lease
terms.
Sales and
Marketing
Most sales and marketing activities are performed through our
local operating offices and our professional personnel,
including 20 full time sales professionals, all under the
guidance and direction of our VP of Sales. These personnel (many
of whom generate revenue activity for us by virtue of their
expertise, experience and high quality, and consistently
delivered services) possess meaningful knowledge of their
selected basins and regions, as well as the primary operators
associated therewith and the issues and concerns of these
customers.
Customers
Our customers consist predominately of independent oil and gas
producers and operators such as Chesapeake Operating, Devon
Energy, XTO Energy, and Encore Operating, as well as some land
based drilling contractors, all of whom are operating in the
major U.S. oil & natural gas basins. For the
years ended December 31, 2006 and 2005, our top ten
customers accounted for 53% of our revenues. No single customer
represented more than 10% of our revenues for the year ended
December 31, 2006. No single customer represented more than
10% of our revenues for the year ended December 31, 2005
except for Encore Operating LP, who comprised 16% of our revenue
for the year ended December 31, 2005. At December 31,
2005 we had receivables from Encore Operating LP of $378,925. We
possess and emphasize this diversification feature as a
component of our overall risk management. We serve a broad
customer base across our various geographic regions, although we
serve many of our customers in more than a single region or
basin. We believe this partially insulates us from regional or
customer specific risks of sudden revenue erosion.
We typically enter into master service agreements with our
customers. These agreements govern the terms of our relationship
with our customers, but they generally do not create binding
commitments on the part of our customers to use our services or
on us to provide services. Specific jobs are created on a case
by case basis under the master service agreement, where we
generally provide our customers with our equipment and
specialized and skilled personnel to perform the desired
services, which include but are not limited to directional
drilling, measurement-while drilling, directional surveying,
down-hole drilling motors, and to a limited extent, rental
equipment used in surveying. When we are engaged, pursuant to a
specific job, we bill our customers a specified day rate based
on the number of days our services
and/or
equipment is used with ancillary charges for stand-by or
downtime and charges for lost or damaged equipment. An average
job will last less than one month. Our day rates are market
driven based upon job requirements. With respect to each
specific job, based upon the location of the job, the location
and availability of our personnel, and type of job, we determine
the level of Multi-Shot staffing for the job. Also, depending on
the location of the job, the location and availability of our
equipment, and type of job, we determine whether to allocate
company owned equipment or equipment that we have rented from a
third party.
Operating
Risk and Insurance
Our operations are subject to hazards inherent in the oil and
gas industry, such as accidents, blowouts, explosions, fires and
oil spills that can be the proximate cause of: personal injury
or loss of life; damage to or
83
destruction of property (include damage to the well formation),
equipment and the environment; and the suspension of operations.
If a serious accident occurs involving our personnel or
equipment, we could be named as a defendant in a lawsuit,
including a lawsuit asserting substantial claims. Our operations
also involve transportation of equipment and personnel, exposing
us to vehicular accidents, and related damages and injuries,
including the loss of life.
In spite of our rigorous safety standards and procedures and
training, we have historically suffered some accidents. We have
had very little lost time due to injury in 2004, 2005, and 2006.
All incidents have been covered under our workers compensation
insurance policy. We dont currently have any pending
claims or current liability associated with our activities. We
could experience future accidents. The frequency and severity of
accidents not only affects our potential for directly related
losses, but other affects could include our insurability (and
our costs of obtaining insurance, even if its available),
and relationships with our customers, employees and regulators.
These events could have a material adverse effect on our
financial condition and results of operations. To date we have
had no governmental investigations with regards to any accidents.
We maintain what we believe is reasonable and customary
insurance for these risks, both in type and coverage scope and
amounts of coverage. However, we do not profess to being fully
insured against any and all losses, either because such
insurance is not affordable or available. We do maintain
commercial general liability, workers compensation,
business auto, excess auto liability, commercial property,
umbrella liability, directors and officers, and commercial crime
insurance coverage. However, any insurance obtained by us may
not continue to be available at all or available at rates and
terms we find acceptable. Uninsured liabilities could have a
material adverse effect on us.
Competition
The markets in which we operate are highly competitive. A
successful company must provide services that meet the specific
requirements of oil and gas exploration companies and drilling
services contractors at competitive prices. We provide our
services in most of the major basins and regions in the U.S.,
and we compete against companies larger and smaller than we are.
Some of our larger competitors are affiliates of the largest
integrated oilfield services companies in the U.S. and the
world. The major integrated oilfield service companies that we
compete with are Schlumberger, Ltd, Baker Hughes Inc.
Halliburton Corp. and Weatherford International, all of which
are multinational corporations and provide a broad spectrum of
services including those services that we provide.
Government
Regulation
Our business is significantly affected by foreign, federal,
state and local laws and regulations relating to the oil and
natural gas industry, worker safety and environmental
protection. Changes in these laws, including more stringent
administrative regulations and increased levels of enforcement
of these laws and regulations, could affect our business. We
cannot predict the level of enforcement of, or the costs of
compliance with existing laws and regulations or how these laws
and regulations may be interpreted by enforcement agencies or
court rulings or the effect changes in these laws and
regulations may have on us or our businesses, our results of
operations, our cash flows or our financial condition. We also
are not able to predict whether additional laws and regulations
will be adopted.
We depend on the demand for our services from oil and natural
gas companies, drilling contractors and other oilfield service
companies. This demand is affected by changing taxes, price
controls and other laws and regulations relating to the oil and
natural gas industry. The adoption of laws and regulations
curtailing exploration and development drilling for oil and
natural gas in our areas of operation for economic,
environmental or other policy reasons could also adversely
affect our operations by limiting demand for our products and
services. We cannot determine the extent to which our future
operations and earnings may be affected by new laws or
legislation, new regulations or changes in existing laws,
regulations or enforcement.
Our operations, particularly our three locations where we
assemble equipment, including our MWD systems, drilling motors,
and surveying equipment, are subject to numerous, federal, state
and local laws and regulations governing the manufacture,
management
and/or
disposal of materials and wastes in the environment and
otherwise relating to environmental protection. Numerous
governmental agencies issue regulations to implement and enforce
84
these laws which are often difficult and costly to comply with
and the violation of which may result in the revocation of
permits, issuance of corrective action orders and assessment of
administrative, civil and even criminal penalties. For example,
state and federal agencies have issued regulations implementing
environmental laws that regulate environmental and safety
matters, such as restrictions on the types, quantities and
concentration of various substances that can be released into
the environment from certain field service operations, remedial
measures to prevent pollution arising from current and former
operations, and requirements for worker safety training and
equipment usage. While our management believes that we are in
compliance in all material respects with applicable
environmental laws and regulations, there can be no assurance
that future compliance with environmental laws and regulations
will not have a material effect on us.
We generate wastes (principally machine oils and lubricants used
in our machining and assembly operations and mercury batteries
used in certain of our equipment), including hazardous wastes,
which are subject to the federal Resource Conservation and
Recovery Act, or RCRA, and comparable state statutes. The
U.S. Environmental Protection Agency and state agencies
have limited the approved methods of disposal for some types of
hazardous and non-hazardous wastes. Furthermore, it is possible
that certain wastes handled by us in connection with our field
service activities that currently are exempt from treatment as
hazardous wastes may in the future be designated as
hazardous wastes under RCRA or other applicable
statutes and therefore be subject to more rigorous and costly
operating and disposal requirements.
The federal Comprehensive Environmental Response, Compensation
and Liability Act, or CERCLA, also known as the
Superfund law and comparable state statutes impose
liability, without regard to fault or legality of the original
conduct, on classes of persons that are considered to have
contributed to the release of a hazardous substance
into the environment. These persons include the owner or
operator of the disposal site or sites where the release
occurred and companies that disposed of or arranged for the
disposal of the hazardous substances at the site where the
release occurred. Under CERCLA, these persons may be subject to
strict joint and several liability for the costs of cleaning up
the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not
uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly
caused by the hazardous substances released into the
environment. We currently lease a number of properties upon
which activities involving the handling of hazardous substances
or wastes may have been conducted by third parties not under our
control and prior to our occupation of the subject property.
These properties may be subject to CERCLA, RCRA and analogous
state laws in the future. Under these laws and implementing
regulations, we could be required to remove or remediate
previously discarded hazardous substances and wastes or property
contamination that was caused by these third parties. These laws
and regulations may also expose us to liability for our acts,
including acts that were in compliance with applicable laws at
the time they were performed.
Labor
We are continuously in the process of trying to attract and
maintain a skilled labor force. None of our employees are
represented by a union, thus eliminating any risks associated
with strikes or work stoppages. The labor market in which the
Company operates is highly competitive and as is the case in any
highly competitive market the Company is subject to shortages in
the supply of these skilled personnel, specifically our
drillers, MWD service hands, and surveyors. Management feels
that our wage and benefit packages are in line with industry
standards and the independent nature of our business lends to
our ability to attract these skilled employees. Moreover, we
offer
on-the-job
training under the directions of our managers whose 20 plus
years of expertise optimizes our ability to maintain a high
level of quality in our services.
Related
Party Transactions
We have accrued expenses to three members (Messrs. Neel,
Culbreth, and Cudd), who are also officers of Multi-Shot, of
$0.1 million, $0.1 million and $0.1 million at
December 31, 2006, 2005 and 2004, respectively, for bonuses
and other compensation earned under the terms of their
employment agreements with Multi-Shot.
Multi-Shot had a $2.0 million subordinated note (interest
rate of 12% per annum) payable to a member, Catalyst. This
subordinated note was repaid in full on April 2, 2007.
Interest expense on this note for the year ended
85
December 31, 2006, 2005, and 2004, was $0.2 million,
$0.2 million and $0.1 million, respectively.
Additionally, consulting fees to this member were
$0.1 million, $0.1 million and $50,000 for the years
ended December 31, 2006, 2005 and 2004, respectively, of
which $20,000 was accrued at each of December 31, 2006,
2005 and 2004. The Catalyst consulting agreement was terminated
in conjunction with the private recapitalization on
April 2, 2007.
In connection with the private recapitalization, SG-Directional
provided a subordinated debt loan to Multi-Shot in the amount of
$15 million. The subordinated debt loan bears interest at
10% per annum payable quarterly and is due on the earlier of the
closing of the JKA merger or 120 days following the third
anniversary of such note agreement.
Finally, a member and key employee is a minority partner in a
real property partnership which is the landlord for a small
office Multi-Shot leases therein, where the monthly rent paid
for such facility is less than $1,000 and which is, in the
judgment of management and the Board of Managers, fair market
and on arms length terms. This lease is terminable with
30 days notice by Multi-Shot.
All ongoing and future transactions between Multi-Shot and any
of its officers and directors or their respective affiliates,
including loans by Multi-Shots officers and directors,
will be on terms believed by Multi-Shot to be no less favorable
than are available from unaffiliated third parties and such
transactions or loans, including any forgiveness of loans, will
require prior approval in each instance by a majority of
Multi-Shots directors who do not have an interest in the
transaction. Multi-Shot does not currently have a written policy
regarding related party transactions.
Legal
proceedings
From time to time, Multi-Shot
and/or
its
subsidiaries is a party to various legal proceedings incident to
their business. At September 30, 2007 there were no legal
proceedings to which either Multi-Shot or its subsidiaries was a
party, or to which any of their property was subject, which were
expected by management to result in a material loss to
Multi-Shot or its subsidiaries. There are no pending regulatory
proceedings to which Multi-Shot or its subsidiaries is a party
or to which their properties is subject which are currently
expected to result in a material loss.
See Background and History of Negotiations for
information related to the settlement agreement entered into on
August 27, 2007 by JKA, Multi-Shot and other parties with
respect to the suit filed by JKA on July 16, 2007.
Market
Price of and Dividend Policy on Multi-Shot, LLC
Interests
There is no established public market for ownership interests in
Multi-Shot. The ownership interests in Multi-Shot are currently
owned by (i) four (4) individuals that are part of
management or managers of Multi-Shot and (ii) six
(6) investment limited partnerships or limited liability
companies. Multi-Shot has not paid any dividends or distributed
any amounts to its members in the previous two years and does
not have any equity compensation plans, other than amounts
distributed to its Members with respect to (i) the private
recapitalization transaction with SG-Directional, LLC as
described on page 61 and (ii) federal income taxes and
interests awarded pursuant to incentive plans that terminate
upon the closing of the merger. Neither the income tax
distribution to our members in early 2007 nor the distribution
to our members in connection with the private recapitalization
impacted or will impact the merger consideration.
86
Business
of JKA
General
We were incorporated in Delaware on May 11, 2005, as a
blank check company formed to serve as a vehicle for the
acquisition, through a merger, capital stock exchange, asset
acquisition or other similar business combination with an
operating business whose fair market value is at least equal to
80% of our net assets at the time of such acquisition.
A registration statement for our initial public offering was
declared effective on April 10, 2006. On April 17,
2006, we consummated our initial public offering of
13,225,000 units, including 1,725,000 units that were
subject to the underwriters over-allotment option. Each
unit consists of one share of common stock and two redeemable
common stock purchase warrants. Each warrant entitles the holder
to purchase from us one share of our common stock at an exercise
price of $5.00 per share. Our common stock and warrants
started trading separately as of May 11, 2006.
Our net proceeds from the sale of our units were approximately
$76,632,404. Of this amount, $76,532,404 was deposited in trust
and the remaining $100,000 was held outside of the trust. The
proceeds held outside the trust are available to be used by us,
and are being used by us, to provide for business, legal and
accounting due diligence on prospective acquisitions and
continuing general and administrative expenses. Up to $900,000
of working capital may be funded from the interest earned from
the trust account. On September 30, 2007, the amount in the
trust account was $79,721,079. We evaluated a number of
candidates before moving forward, including executing the merger
agreement, with Multi-Shot, LLC. If the merger with Multi-Shot,
LLC is not consummated, we may not have enough time or resources
to continue searching for an alternative target. However, we
intend to continue to conduct a search for a possible candidate
in accordance with the criteria as previously disclosed in our
publicly available filings with the Securities and Exchange
Commission.
Employees
We have two officers, each of whom are also members of our
Board. These individuals are not obligated to contribute any
specific number of hours per week and intend to devote only as
much time as they deem necessary to our affairs. The amount of
time they will devote in any time period will vary based on the
availability of suitable target businesses to investigate. We do
not intend to have any full time employees prior to the
consummation of a business combination.
Properties
We maintain our executive offices at 4400 Post Oak Parkway,
Suite 2530, Houston, Texas 77027. 4350 Management,
LLC, a wholly-owned entity owned by James P. Wilson, agreed
that, commencing on April 17, 2006 through the acquisition
of a target business, it will make available to us certain
limited administrative, technology and secretarial services, as
well as the use of certain limited office space, including a
conference room, in Houston, Texas, each as we may require from
time to time. We have agreed to pay 4350 Management, LLC
$7,500 per month for these services and facilities. James
P. Wilson is the sole owner of 4350 Management, LLC and, as a
result, has benefited from the transaction to the extent of his
interest in or position with 4350 Management, LLC. We believe,
based on rents and fees for similar services in the Houston,
Texas area, that the fee charged by 4350 Management, LLC is at
least as favorable as we could obtain from an unaffiliated
person.
Periodic
Reporting and Audited Financial Statements
JKA has registered its securities under the Securities Exchange
Act of 1934 and has reporting obligations, including the
requirement to file annual and quarterly reports with the
Securities and Exchange Commission. In accordance with the
requirements of the Securities Exchange Act of 1934, JKAs
annual reports will contain financial statements audited and
reported on by JKA independent accountants. JKA has filed a
Form 10-Q
with the Securities and Exchange Commission covering the fiscal
quarters ended March 31, 2006, June 30, 2006,
87
September 30, 2006, March 31, 2007, June 30,
2007, and September 30, 2007, respectively. JKA has filed a
Form 10-K
with the Securities and Exchange Commission covering the fiscal
year ended December 31, 2006.
Legal
Proceedings
To the knowledge of management, other than the Multi-Shot
litigation described below, there is no litigation currently
pending or contemplated against us or any of our officers or
directors in their capacity as such.
See Background and History of Negotiations for
information related to the settlement agreement entered into on
August 27, 2007 by JKA, Multi-Shot and other parties with
respect to the suit filed by JKA on July 16, 2007.
Managements
Discussion and Analysis of Financial Condition and Results of
Operations of JKA
The following discussion should be read in conjunction with
JKAs financial statements and related Notes thereto
included elsewhere in this proxy statement.
JKA was formed on May 11, 2005, to serve as a vehicle to
effect a merger, capital stock exchange, asset acquisition or
other similar business combination with an operating business
headquartered in North America, focusing in the manufacturing,
distribution or service sectors, though JKA may acquire an
operating business in any industry that it chooses. JKAs
initial business combination must be with a target business or
businesses whose fair market value is at least equal to 80% of
JKAs net assets at the time of such acquisition. JKA has
the ability to use the cash derived from the proceeds of its
public offering, its capital stock, debt or a combination of
cash, capital stock and debt, in effecting a business
combination.
As discussed in greater detail in the section The Merger
Proposal Background of the Merger, prior to
entering into the Original Merger Agreement, JKA was engaged in
the process of sourcing suitable business combination candidates
from which a viable candidate could be identified. JKA had met
with target companies, service professionals and other
intermediaries to discuss JKA with them, including the
background of JKAs management and JKAs combination
preferences. In the course of these discussions, JKA also spent
time explaining the capital structure of the initial public
offering, the combination approval process, and the timeline
under which JKA was operating before the proceeds of the
offering are returned to its common shareholders.
Overall, JKA would conclude that the environment for target
companies has been competitive and believes that private equity
firms and strategic buyers represented its biggest competition.
JKAs management believes that many of the fundamental
features of alternative investment vehicles like JKA are
becoming more accepted by investors and potential business
combination targets; including a difficult IPO environment, a
cash-rich investment community looking for differentiated
opportunities for incremental yield, and business owners seeking
new ways to maximize their shareholder value while remaining
invested in their businesses.
RESULTS
OF OPERATIONS
Comparison
of Three Months Ended September 30, 2007 and
2006
For the three months ended September 30, 2007, we had net
income of $229,222, compared to net income of $57,168 for the
three months ended September 30, 2006. For the three months
ended September 30, 2007, we wrote off $381,286 of deferred
transaction costs, due to the uncertainty of completing our
proposed merger with Multi-Shot. In addition, we incurred
$108,292 of general and administrative expenses, offset by
interest income on the trust fund investments of $718,800 as
compared to the three months ended September 30, 2006, when
we incurred $85,268 of general and administrative expenses,
offset by loss on derivative liabilities of $548,690 and
interest income on the trust fund investments of $725,534.
Comparison
of Nine Months Ended September 30, 2007 with Nine Months
Ended September 30, 2006
For the nine months ended September 30, 2007 we had net
income of $1,867,591, compared to $3,146,511 for the nine months
ended September 30, 2006. For the nine months ended
September 30, 2007, we incurred $345,286 of general and
administrative expenses and the impairment of deferred
transaction costs of $1,356,704, offset by gain on derivative
liabilities of $1,468,600 and interest income on the trust fund
investments of $2,101,058, compared to the nine months ended
September 30, 2006 when we incurred $152,933 of general and
administrative
88
expenses, offset by gain on derivative liabilities of
$2,046,025 and interest income on the trust fund investment of
$1,317,103.
Comparison
of Fiscal Year Ended December 31, 2006 with Period from
Inception to December 31, 2005
For the fiscal year ended December 31, 2006, we had net
income of $423,436. For the period from May 11, 2005 (our
date of inception) to December 31, 2005, we had a net loss
of $4,994. For the fiscal year ended December 31, 2006, we
incurred $292,378 of general and administrative expenses, a loss
of $1,265,004 on derivative liabilities of the Companys
warrants as a result of the change in valuation of the
derivative liabilities (see Notes to the Financial Statements
for more information) and $14,027 of income tax expense, offset
by interest income on the trust fund investments of $1,994,845,
as compared to the period from May 11, 2005 to
December 31, 2005 when we incurred only $4,994 of general
and administrative expenses in connection with our formation.
As of September 30, 2007 we had impaired deferred
acquisition costs (an expense item) of $975,419 related to the
Multi-Shot merger. Of this amount $379,510 was accrued but
unpaid.
CHANGES
IN FINANCIAL CONDITION
Liquidity
and Capital Resources
On April 10, 2006, we entered into an agreement with
certain of our directors for the sale of 333,334 units in a
private placement. Each unit consists of one share of common
stock and two warrants. Each warrant entitles the holder to
purchase from us one share of our common stock at an exercise
price of $5.00.
On April 17, 2006, we consummated our initial public
offering of 13,225,000 units, including
1,725,000 units that were attributable to the full exercise
of the underwriters over-allotment option. Each unit
consists of one share of common stock and two warrants. Each
warrant entitles the holder to purchase from us one share of our
common stock at an exercise price of $5.00. Our common stock and
warrants started trading separately as of May 11, 2006.
Our net proceeds from the sale of our units, including the
exercise of the underwriters over-allotment option, after
deducting certain offering expenses of approximately $750,100
and underwriting discounts of approximately $3,967,000, were
approximately $76,632,404. Of this amount, $76,532,404 is being
held in a trust account at J.P. Morgan Chase Bank
maintained by Continental Stock Transfer & Trust
Company, New York, New York, as trustee. The remaining proceeds
of $100,000 are not being held in trust and are available to be
used by us for working capital purposes to provide for business,
legal and accounting due diligence on prospective acquisitions
and continuing general and administrative expenses. We expect to
use substantially all of the net proceeds of this offering to
acquire a target business, including identifying and evaluating
prospective acquisition candidates, selecting the target
business, and structuring, negotiating and consummating the
business combination.
The proceeds held in the trust account may be used as
consideration to pay the sellers of a target business with which
we complete a business combination. The underwriters have agreed
to defer approximately $1,552,500 of the proceeds attributable
to their non-accountable expense allowance until the
consummation of a business combination. Upon the consummation of
a business combination, we will pay such deferred
non-accountable expense allowance to the underwriters out of the
proceeds held in trust. Any amounts not paid as consideration to
the sellers of the target business or to the underwriters for
deferred underwriting fees and expenses may be used to finance
operations of the target business. We expect that the operating
expenses of a target business may include some or all of the
following: capital expenditures, expenditures for future
projects, general ongoing expenses including supplies and
payroll, expanding markets and strategic acquisitions or
alliances. To the extent that our capital stock is used in whole
or in part as consideration to effect a business combination,
the proceeds held in the trust account as well as any other net
proceeds not expended will be used to finance the operations of
the target business. At the time of our initial public offering,
we expected that funds available to us outside of the trust
account would be sufficient to allow us to operate for through
April 2009, assuming that a business combination is not
consummated during that time. Over such time period, and
exclusive of the expenses related to our public offering, we
anticipated approximately $200,000 of expenses for the due
diligence and investigation of a target business, $300,000 of
expenses for legal, accounting and other expenses attendant to
the due diligence investigations, structuring and negotiating of
a business combination, $180,000 for the administrative fee
payable to 4350 Management, LLC ($7,500 per month for two
years), $100,000 of expenses in legal and accounting fees
relating to our SEC reporting
89
obligations and $220,000 for general working capital that will
be used for miscellaneous expenses and reserves, including
approximately $50,000 for director and officer liability
insurance premiums. However, our actual costs through
September 30, 2007 have exceeded the anticipated costs as
described above (see table below). We believe that the funds
currently available to us outside of the trust account are not
sufficient to allow us to operate until the proposed merger with
Multi-Shot is consummated within the agreed upon time period
however, Messrs. Wilson and Spickelmier have agreed to
advance to us up to an additional $500,000 to allow us to
operate until the proposed merger with Multi-Shot is consumated.
In the event the proposed merger with Multi-Shot is not
consummated within the agreed upon time period, we believe that
we will not have sufficient funds to operate through April 2008,
assuming a business combination is not consummated by that time,
unless we receive advances from Messrs. Wilson and
Spickelmier, or other interested parties sufficient to continue
operations. Alternatively, we may need to raise additional funds
to the extent such financing is required to consummate a
business combination, in which case we may issue additional
securities or incur debt in connection with such business
combination. We expect that we would only consummate such a
financing simultaneously with the consummation of a business
combination.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anticipated
|
|
|
Actual Costs
|
|
|
|
|
|
|
Costs
|
|
|
Through
|
|
|
|
|
|
|
per Form S-1
|
|
|
9/30/07
|
|
|
Variance
|
|
|
Due diligence expenses(1)
|
|
$
|
200,000
|
|
|
$
|
807,824
|
|
|
$
|
(607,824
|
)
|
Legal, accounting and other expense(2)
|
|
|
300,000
|
|
|
|
677,850
|
|
|
|
(377,850
|
)
|
Administrative Fee(3)
|
|
|
180,000
|
|
|
|
112,500
|
|
|
|
67,500
|
|
Legal and accounting for SEC reporting(4)
|
|
|
100,000
|
|
|
|
47,252
|
|
|
|
52,748
|
|
Miscellaneous expenses and reserves(5)
|
|
|
220,000
|
|
|
|
169,207
|
|
|
|
50,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,000,000
|
|
|
$
|
1,814,632
|
|
|
$
|
(814,632
|
)
|
|
|
|
(1)
|
|
Detail of Actual Due Diligence Related Costs:
|
|
|
|
|
|
Fairness Opinion(a)
|
|
$
|
146,813
|
|
Fairness Opinion(b)
|
|
|
54,138
|
|
Fairness Opinion(c)
|
|
|
197,253
|
|
Third party financial and operating due diligence costs
|
|
|
106,755
|
|
Third pary audit and review costs(d)
|
|
|
256,854
|
|
Third pary compensation study
|
|
|
27,000
|
|
Travel expenses
|
|
|
19,011
|
|
|
|
|
|
|
|
|
$
|
807,824
|
|
|
|
|
(a)
|
|
Fairness opinion cost related to merger agreement signed
September 6, 2006
|
|
(b)
|
|
Fariness opinion update to include revised transaction related
to the Previous Merger Agreement dated February 14, 2007
|
|
(c)
|
|
Fairness opinion dated August 27, 2007 related to the
merger agreement
|
|
(d)
|
|
Third party audit cost years ended 2004 and 2005 and review of
2002 and 2003 unaudited supplemental financial information
|
90
|
|
|
(2)
|
|
Detail of legal, accounting and other expense:
|
|
|
|
|
|
Legal cost related to proxy preperation
|
|
|
363,087
|
|
Non target audit related accounting expenses
|
|
|
0
|
|
Proxy printing costs
|
|
|
85,793
|
|
Transaction sourcing expenses
|
|
|
24,910
|
|
American Stock Exchange filing fees
|
|
|
24,500
|
|
Litigation Expense
|
|
|
100,000
|
|
Third party corporate relations firm fees
|
|
|
78,759
|
|
PCAOB fees
|
|
|
800
|
|
|
|
|
|
|
|
|
|
677,850
|
|
|
|
|
(3)
|
|
Timing difference. Administrative Fee calculated over
24 month period in
Form S-1
filing.
|
|
(4)
|
|
Timing difference. Legal and accounting for SEC reporting was
calculated over a 24 month period in
Form S-1
filings.
|
|
(5)
|
|
Detail of actual miscellaneous expense:
|
|
|
|
|
|
Directors and Officers Insurance
|
|
|
110,865
|
|
Third party trust account fees and expenses
|
|
|
14,440
|
|
Printing costs related to JKA filings (10Qs, 10K,
8Ks)
|
|
|
21,511
|
|
Franchise taxes
|
|
|
3,275
|
|
Other miscellaneous
|
|
|
19,116
|
|
|
|
|
|
|
|
|
|
169,208
|
|
|
|
|
|
|
|
|
Detail of Costs by Significant
Vendor
(1)
|
|
Service Provided
|
|
|
|
|
4350 Management, L.L.C.
|
|
Monthly administrative fee
|
|
$
|
112,500
|
|
American Stock Exchange
|
|
Listing and filing fees
|
|
|
24,500
|
|
Bowen Miclette
|
|
Directors and officers insurance
|
|
|
110,865
|
|
Bowne
|
|
Printing fees
|
|
|
85,793
|
|
Continental Trust
|
|
Trust account fees and expenses
|
|
|
14,440
|
|
Ernst & Young
|
|
Third party due diligence
|
|
|
106,755
|
|
Franklin Cardwell Jones
|
|
Legal services related to proxy statement
|
|
|
88,217
|
|
Fulbright & Jaworski
|
|
Legal services related to fairness opinion
|
|
|
14,566
|
|
Gibbs & Bruns
|
|
Litigation Expense
|
|
|
100,000
|
|
Hein Associates
|
|
Audit
|
|
|
249,354
|
|
Integrated Corporate Relations
|
|
Investor relations services
|
|
|
78,759
|
|
Jones Day
|
|
Legal services related to fairness opinion
|
|
|
17,486
|
|
Key Banc
|
|
Fairness Opinion
|
|
|
183,465
|
|
Longnecker Associates
|
|
Compensation study
|
|
|
27,000
|
|
Malone & Bailey
|
|
Audit and proxy review
|
|
|
43,700
|
|
Patton Boggs
|
|
Legal services related to proxy statement
|
|
|
285,922
|
|
RBC
|
|
Fairness Opinion
|
|
|
182,687
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,726,009
|
|
|
|
|
(1)
|
|
Represents all third party vendors/service providers with over
$10,000 in invoices paid or accrued.
|
NOTE: No compensation has been, or will be, paid to any
party affiliated with JKAs current officers or
directors.
91
Commencing on April 10, 2006 and ending upon the
acquisition of a target business, we began incurring a fee of
$7,500 per month for office space and certain
administrative, technology and secretarial services from
4350 Management, LLC, an affiliate of James P. Wilson, our
chairman of the board and chief executive officer. In addition,
on May 18, 2005 and December 20, 2005,
Messrs. Wilson and Spickelmier advanced us an aggregate of
$329,000 for payment of offering expenses on our behalf. These
advances were repaid following our initial public offering from
the proceeds of the offering. As of September 30, 2007, we
have received an aggregate of $500,000 in advances for expenses
from Messrs. Wilson and Spickelmier. Proceeds from each of
the advances have funded the Companys ongoing continuing
operating expenses. Under the terms of the advances, the Company
will: (i) pay no interest on such advances and
(ii) the amounts of the advances are due to be reimbursed
upon the consummation of a business combination. In the event
the Company fails to complete a business combination with any
entity (I) by October 10, 2007 or, (II) if a
letter of intent, agreement in principle or definitive agreement
is executed, but not consummated, by October 10, 2007, then
by April 10, 2008, then the Company shall not be required
to repay the advances. Messrs. Wilson and Spickelmier have
waived any recourse against the Companys trust account
with respect to the advances in the event that a business
combination is not consummated by the Company in a timely manner
as described herein above.
We currently have no operating business, but have selected
Multi-Shot, LLC as a target business with which we are seeking
to consummate a business combination. If we are unable to secure
stockholder approval for (i) the merger with Multi-Shot,
LLC by January 31, 2008 or (ii) a business combination
with another suitable target business by October 10, 2007
(or April 10, 2008 if a letter of intent, agreement in
principle or a definitive agreement has been executed by
October 10, 2007), we will be forced to liquidate. If we
are forced to liquidate, the per-share liquidation amount may be
less than the price at which public stockholders purchased their
shares because of the expenses related to our initial public
offering, our general and administrative expenses and the
anticipated costs of seeking a business combination.
Additionally, if third parties make claims against us, the
offering proceeds held in the trust account could be subject to
those claims, potentially resulting in a further reduction to
the per-share liquidation price, as well as a delay in the
liquidation process and effective date. Under Delaware law, our
stockholders who have received distributions from us may be held
liable for claims by third parties to the extent such claims are
not been paid by us. Furthermore, our warrants will expire
worthless if we liquidate before the completion of a business
combination.
As of September 30, 2007, JKA had $584,090 in outstanding
accounts payable or accrued liabilities. Of these liabilities,
$584,090 represent amounts payable or accrued liabilities to
entities which have not waived claims against the trust account.
As of September 30, 2007, JKAs cash balance was
$90,492. To the extent there is a shortfall, Messrs. Wilson
and Spickelmier have agreed to indemnify the trust for claims by
any vendor for service rendered or products provided, to the
extent those claims reduce the trust and that vendor has not
executed a waiver as against the trust. JKA believes Messrs
Wilson and Spickelmier are capable of funding any foreseeable
indemnity obligations, if any. JKA believes it, based on the
agreement by Messrs. Wilson and Spickelmier to advance up to an
additional $500,000, does have adequate funds to complete the
proposed merger with Multi-Shot, LLC. In the event the proposed
merger with Multi-Shot is not consummated within the agreed upon
time period, we believe that we will not have sufficient funds
to operate through April 10, 2008, assuming a business
combination is not consummated by that time, unless we receive
advances from Messrs. Wilson and Spickelmier, or other
interested parties sufficient to continue operations.
Alternatively, we may need to raise additional funds to the
extent such financing is required to consummate a business
combination, in which case we may issue additional securities or
incur debt in connection with such business combination. We
expect that we would only consummate such a financing
simultaneously with the consummation of a business combination.
Off-Balance
Sheet Arrangements; Commitments and Contractual
Obligations
As of December 31, 2006, JKA did not have any off-balance
sheet arrangements as defined in Item 303(a)(4)(ii) of
Regulation S-K
and did not have any commitments or contractual obligations
other than our payments to 4350 Management LLC as described
above.
In connection with our initial public offering, we agreed to pay
the underwriters a deferred non-accountable expense allowance of
$1,552,500 upon the consummation of our initial business
combination. We expect that such
92
allowance will be paid out of the proceeds in the trust account.
Other than contractual obligations incurred in the ordinary
course of business, we do not have any other long-term
contractual obligations.
Quantitative
and Qualitative Disclosures About Market Risk.
Market risk is a broad term for the risk of economic loss due to
adverse changes in the fair value of a financial instrument.
These changes may be the result of various factors, including
interest rates, foreign exchange rates, commodity prices
and/or
equity prices. Our exposure to market risk is limited to
interest income sensitivity with respect to the funds placed in
the trust account. However, the funds held in our trust account
have been invested only in U.S. government
securities, defined as any Treasury Bill issued by the
United States having a maturity of one hundred and eighty days
or less or in money market funds meeting certain conditions
under
Rule 2a-7
promulgated under the Investment Company Act of 1940, so we are
not deemed to be an investment company under the Investment
Company Act. Thus, we are subject to market risk primarily
through the effect of changes in interest rates on government
securities. The effect of other changes, such as foreign
exchange rates, commodity prices
and/or
equity prices, does not pose significant market risk to us.
Dissolution
and Liquidation if No Business Combination
We have agreed with the trustee to promptly adopt a plan of
dissolution and liquidation and initiate procedures for our
dissolution and liquidation if we do not effect a business
combination within 18 months after consummation of our
initial public offering (or within 24 months after the
consummation of the offering if a letter of intent, agreement in
principle or definitive agreement has been executed within
18 months after consummation of our initial public offering
and the business combination related thereto has not been
consummated, but is in process, within such
18-month
period). The plan of dissolution will provide that we liquidate
all of our assets, including the trust account, and after
reserving amounts sufficient to cover our liabilities and
obligations and the costs of dissolution and liquidation,
distribute those assets (net of any liabilities and obligations)
solely to our public stockholders. As discussed below, the plan
of dissolution and liquidation will be subject to stockholder
approval.
Upon the approval by our stockholders of our plan of dissolution
and liquidation, we will liquidate our assets, including the
trust account, and after reserving amounts sufficient to cover
our liabilities and obligations and the costs of dissolution and
liquidation, distribute those assets solely to our public
stockholders. Our initial stockholders, including all of our
officers and directors, have waived their rights to participate
in any liquidating distributions occurring upon our failure to
consummate a business combination with respect to those shares
of common stock acquired by them prior to completion of our
initial public offering and have agreed to vote all of their
shares in favor of any such plan of dissolution and liquidation.
On September 30, 2007, the amount in the trust account was
$79,721,079. We estimate that, in the event we liquidate the
trust account, our public stockholders will receive
approximately $6.03 (as of September 30, 2007) per
share (net of taxes payable on such interest and assuming no
liabilities and liquidation costs). We expect that all costs
associated with implementing a plan of dissolution and
liquidation as well as payments to any creditors will exceed our
assets not held in the trust account.
As required under Delaware law, we will seek stockholder
approval for any plan of dissolution and liquidation. We
currently believe that any plan of dissolution and liquidation
subsequent to the expiration of the 18 and 24 month
deadlines would proceed in approximately the following manner
(subject to our agreement to take earlier action as described
below):
|
|
|
|
|
our Board will, consistent with its obligations described in our
certificate of incorporation to dissolve, prior to the passing
of such deadline, convene and adopt a specific plan of
dissolution and liquidation, which it will then vote to
recommend to our stockholders; at such time we will also prepare
a preliminary proxy statement setting out such plan of
dissolution and liquidation as well as the Boards
recommendation of such plan;
|
|
|
|
upon such deadline (or earlier date if voluntarily elected as
described below), we would file our preliminary proxy statement
with the Securities and Exchange Commission (the
SEC);
|
|
|
|
if the SEC does not review the preliminary proxy statement,
then, 10 days following the filing date, we will file a
definitive proxy statement with the SEC and will mail the
definitive proxy statement to our
|
93
|
|
|
|
|
stockholders, and 30 days following the mailing, we will
convene a meeting of our stockholders, at which they will either
approve or reject our plan of dissolution and
liquidation; and
|
|
|
|
|
|
if the SEC does review the preliminary proxy statement, we
currently estimate that we will receive their comments
approximately 30 days following the filing of the
preliminary proxy statement. We will mail a definitive proxy
statement to our stockholders following the conclusion of the
comment and review process (the length of which we cannot
predict with any certainty, and which may be substantial) and we
will call and convene a meeting of our stockholders as soon as
permitted thereafter.
|
In addition, if we seek approval from our stockholders to
consummate a business combination within 90 days of the
expiration of the 18 and 24 month deadlines after the
consummation of our initial public offering, the proxy statement
related to such business combination will also seek stockholder
approval for our Boards recommended plan of dissolution
and liquidation, in the event our stockholders do not approve
such business combination. If no proxy statement seeking the
approval of our stockholders for a business combination has been
filed 30 days prior to the date that is either 18 or
24 months after the consummation of our initial public
offering, our Board will, prior to such date, convene, adopt and
recommend to our stockholders a plan of dissolution and
liquidation and, on such date, file a proxy statement with the
SEC seeking stockholder approval for such plan.
In the event that we seek stockholder approval for a plan of
dissolution and liquidation and do not obtain such approval, we
will nonetheless continue to take all reasonable actions to
obtain stockholder approval for our dissolution. Pursuant to the
terms of our certificate of incorporation, our purpose and
powers following the expiration of the permitted time periods
for consummating a business combination will automatically be
limited to acts and activities relating to dissolving and
winding up our affairs, including liquidation. Following the
expiration of such time periods, the funds held in our trust
account may not be distributed except upon our dissolution and,
unless and until such approval is obtained from our
stockholders, the funds held in our trust account will not be
released. Consequently, holders of a majority of our outstanding
stock must approve our dissolution in order to receive the funds
held in our trust account, and the funds will not be available
for any other corporate purpose. Our initial stockholders have
agreed to vote all the shares of common stock held by them in
favor of the dissolution. We cannot assure you that our
stockholders will approve our dissolution in a timely manner or
will ever approve our dissolution. As a result, we cannot
provide investors with assurances of a specific time frame for
our dissolution and distribution.
We estimate that our total costs and expenses for implementing
and completing our dissolution and stockholder approved plan of
distribution of our assets will be in the range of $50,000 to
$75,000. This amount includes all costs of our certificate of
dissolution in the State of Delaware, the winding up of our
company and the cost of a proxy statement and meeting relating
to the approval by our stockholders of our plan of dissolution.
If the funds outside the trust are insufficient to cover the
costs of dissolution and liquidation, we expect that the
indemnification provided by our officers would cover these costs
to the extent the dissolution and liquidation expenses relate to
vendor claims.
Under Delaware General Corporation Law, stockholders may be held
liable for claims by third parties against a corporation to the
extent of distributions received by them in a dissolution. If we
complied with certain procedures set forth in Section 280
of the Delaware General Corporation Law intended to ensure that
a corporation makes reasonable provision for all claims against
it, including a
60-day
notice period during which any third-party claims can be brought
against the corporation, a
90-day
period during which the corporation may reject any claims
brought, and an additional
150-day
waiting period before any liquidating distributions are made to
stockholders, any liability of a stockholder with respect to a
liquidating distribution is limited to the lesser of such
stockholders pro rata share of the claim or the amount
distributed to the stockholder. Further, any liability of the
stockholder would be barred after the third anniversary of the
dissolution. However, it is our intention to make liquidating
distributions to our public stockholders as soon as reasonably
possible after dissolution and, therefore, we do not intend to
comply with those procedures. As such, our public stockholders
could potentially be liable for any claims to the extent of
distributions received by them in a dissolution and any such
liability of our public stockholders will likely extend beyond
the third anniversary of such dissolution. Because we will not
be complying with Section 280, we will seek stockholder
approval to comply with Section 281(b) of the Delaware
General Corporation Law, requiring us to
94
adopt a plan of dissolution that will provide for our payment,
based on facts known to us at such time, of (i) all
existing claims, (ii) all pending claims, and
(iii) all claims that may be potentially brought against us
within the subsequent 10 years. However, because we are a
blank check company rather than an operating company, and our
operations will be limited to searching for prospective target
businesses to acquire, the only likely claims to arise would be
from our vendors (such as accountants, lawyers, investment
bankers, etc.) or potential target businesses. As described
above, we seek to have all vendors and prospective target
businesses execute valid and enforceable agreements with us
waiving any right, title, interest or claim of any kind in or to
any monies held in the trust account and to date have entered
into such agreements with Multi-Shot, LLC. As a result, we
believe the claims that could be made against us will be
significantly reduced and the likelihood that any claim that
would result in any liability extending to the trust will be
limited.
Officer
Indemnification
Each of Messrs. Wilson and Spickelmier executed agreements
in connection with our initial public offering pursuant to which
each agreed to indemnify and hold harmless JKA against any and
all loss, liability, claims, damage and expense whatsoever
(including, but not limited to, any and all legal or other
expenses reasonably incurred in investigating, preparing or
defending against any litigation, whether pending or threatened,
or any claim whatsoever) which JKA may become subject to as a
result of any claim by any vendor that is owed money by JKA for
services rendered or products sold but only to the extent
necessary to ensure that such loss, liability, claim, damage or
expenses does not reduce the amount in the trust fund. However,
as we previously disclosed in our initial public offering, we
cannot assure you that Messrs. Wilson and Spickelmier will
be able to satisfy those obligations; though we expect they will
be able to satisfy such obligations based on JKAs
third-party liabilities as of September 30,
2007 ($584,090). However, JKA will take such action
necessary to enforce the obligations of Messrs. Wilson and
Spickelmier as required. Because Messrs. Spickelmier and
Wilsons indemnification agreement only applies to any
claim by any vendor that is owed money by JKA for services
rendered or products sold, it does not extend any claims that
may be made by (i) a target company that does not execute
such waivers or (ii) other entities and vendors that
execute such waivers of claims against the trust fund.
Multi-Shot, LLC has not executed a waiver against the trust
funds.
Accounting
for Warrants and Derivative Instruments
Unit
Purchase Option
On April 17, 2006, JKA consummated its initial public
offering of 13,225,000 units, including
1,725,000 units that were subject to the underwriters
over-allotment option. Each unit consists of one share of common
stock and two redeemable common stock purchase warrants. Each
warrant entitles the holder to purchase from JKA one share of
its common stock at an exercise price of $5.00.
Statement of Financial Accounting Standard (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, requires all derivatives
to be recorded on the balance sheet at fair value. Furthermore,
paragraph 11(a) of SFAS No. 133 precludes
contracts issued or held by a reporting entity that are both
(1) indexed to its own stock and (2) classified as
stockholders equity in its statement of financial position
from being treated as derivative instruments. We have determined
that the option issued to our underwriters in connection with
our initial public offering to purchase 700,000 units, each
unit consisting of two warrants and one share of common stock,
is a derivative that also contains an embedded derivative. The
option to purchase 700,000 shares of common stock and the
warrants to purchase an additional 1,400,000 shares, the
latter being the embedded derivative, are separately valued and
accounted for on our balance sheet. While the warrants to
purchase the additional 1,400,000 shares is indexed to our
common stock, the fact that the shares underlying the warrants
require future registration in accordance with the warrant
agreement, requires us to classify these instruments as a
liability in accordance with EITF
00-19,
paragraph 14.
95
As such, the option to purchase 700,000 units is considered
an equity instrument, as the underlying shares do not need to be
registered, and all other criteria in EITF
00-19
required for the instrument to be accounted for as an equity
instrument have been fulfilled. The embedded derivative which is
the warrant to purchase 1,400,000 shares for $6.25 each,
follows the same accounting guidelines as the warrants sold in
the public offering and is considered a liability. These
derivative liabilities have been, and will continue to be
adjusted to fair value in our quarterly filings.
Upon the consummation of our initial public offering, we
performed a valuation of the option to purchase
700,000 units, and then allocated its fair value to its two
components, the underlying 700,000 shares and the embedded
warrants to purchase an additional 1,400,000 shares. The
fair value at inception was calculated at $4,201,277, of which
$1,218,448 was allocated to the purchase option of
700,000 shares and $2,982,829 was allocated to the warrants
to purchase an additional 1,400,000 shares, according to
their respective fair values.
The fair value of the warrants was $13,287,167 as of
December 31, 2006, an amount greater than initially
recorded. Therefore, a loss on derivative liability of
$1,898,166 was reported in the accompanying statement of
operations resulting from the change in valuation of the
derivative liability related to these warrants for the fiscal
year ended December 31, 2006.
The pricing model we use for determining fair values of the
purchase option and the embedded derivative is the Black Scholes
Pricing Model. Valuations derived from this model are subject to
ongoing internal and external verification and review. The model
uses market-sourced inputs such as interest rates, market prices
and volatilities. Selection of these inputs involves
managements judgment and may impact net income.
In particular, we use volatility rates based upon a sample of
comparable companies in our industry, which are special purpose
acquisition corporations. At the time a company to be acquired
has been identified and agreements to acquire are in place (as
is the case for JKA as it related to Multi-Shot, LLC), the
volatility rates used for such valuations will shift and will be
based on comparable companies to the acquired company (which, in
the case of Multi-Shot, LLC, are energy service companies). We
use a risk-free interest rate, which is the rate on
U.S. Treasury instruments, for a security with a maturity
that approximates the estimated remaining contractual life of
the derivative. The volatility factor used in Black Scholes has
a significant effect on the resulting valuation of the
derivative liabilities on our balance sheet. The volatility for
the calculation of the embedded derivatives was approximated at
38.6%, this volatility-rate will likely change in the future. We
use the closing market price of its common stock at the end of a
quarter when a derivative is valued at fair value. Our stock
price will also change in the future. To the extent that our
stock price increases or decreases, our derivative liabilities
will also increase or decrease triggering the recognition of
gains or losses, absent any change in volatility rates and
risk-free interest rates.
Derivative
Liability
Under EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
(EITF
No. 00-19),
the fair value of the warrants issued in our initial public
offering have been reported as a liability. The warrant
agreement provides for JKA to register the shares underlying the
warrants and is silent as to the penalty to be incurred in the
absence of the Companys ability to deliver registered
shares to the warrant holders upon warrant exercise. Under EITF
No. 00-19,
registration of the common stock underlying the warrants is not
within the Companys control. As a result, JKA must assume
that it could be required to settle the warrants on a net-cash
basis, thereby necessitating the treatment of the potential
settlement obligation as a liability. Further EITF
No. 00-19,
requires the Company to record the potential settlement
liability at each reporting date using the current estimated
fair value of the warrants, with any changes being recorded
through the statement of income and expenses. The potential
settlement obligation will continue to be reported as a
liability until such time as the warrants are exercised, expire,
or JKA is otherwise able to modify the registration requirements
in the warrant agreement to remove the provisions which require
this treatment. The fair value of the warrant liability at the
date of issuance in the accompanying balance sheets was
estimated using the initial trading value of the warrants after
they were separated from the initial units and began to trade.
The fair value of the warrants as of December 31, 2006 was
determined by the trading value of the securities on that date.
The values
96
assigned to the warrant liability at April 17, 2006 (the
date of issuance) and December 31, 2006 were $11,389,001
and $13,287,167, respectively.
Loss on derivative liability resulting from the change in
valuation of the derivative liability related to these warrants
was $1,898,166 for the year ended December 31, 2006. For
the nine months ended September 30, 2007, gain on
derivative liability resulting from the change in valuation of
the derivative liability related to these warrants was
$1,355,833.
On January 10, 2007, JKA entered into a Warrant
Clarification Agreement to clarify the terms of the Warrant
Agreement, dated as of April 10, 2006 (the Warrant
Agreement) by and between JKA and Continental Stock
Transfer & Trust Company, as Warrant Agent. The Warrant
Clarification Agreement clarified, consistent with the terms of
the Warrant Agreement and the disclosure contained in the
JKAs prospectus, dated April 11, 2006, that if JKA is
unable to deliver securities pursuant to the exercise of a
warrant because a registration statement under the Securities
Act of 1933, as amended, with respect to the common stock is not
effective, then in no event would JKA be obligated to pay cash
or other consideration to the holders of warrants or otherwise
net-cash settle any warrant exercise.
97
UNAUDITED
PRO FORMA CONDENSED FINANCIAL STATEMENTS
On August 27, 2007, JKA, Multi-Shot, Inc., Multi-Shot, the
members of Multi-Shot and Catalyst, entered into the merger
agreement, pursuant to which Multi-Shot will merge into
Multi-Shot, Inc. and Multi-Shot will effectively become a
wholly-owned subsidiary of JKA. Following completion of the
merger, it is anticipated that JKA will change its name to MS
Energy Services, Inc. Because JKA will have no other operating
business following the merger, Multi-Shot will effectively
become a public company at the conclusion of the merger.
The accompanying unaudited pro forma condensed balance sheet
combines the historical balance sheets of Multi-Shot, LLC as of
September 30, 2007 and JK Acquisition Corp. as of
September 30, 2007, giving effect to (i) the
acquisition of certain operating assets of Ulterra MWD, LLP
effective July 1, 2007 (the Ulterra
Acquisition) and (ii) the transaction described in
the merger agreement (the Transaction), accounted
for as a reverse acquisition, as if both had occurred on
September 30, 2007.
The accompanying unaudited pro forma condensed statements of
operations combine the historical statements of operations of
Multi-Shot for the periods from January 1, 2006 to
December 31, 2006 and January 1, 2007 to
September 30, 2007, and JKA for the periods from
January 1, 2006 to December 31, 2006 and
January 1, 2007 to September 30, 2007, giving effect
to the partial recapitalization transaction Multi-Shot and its
members entered into with SG-Directional, LLC, effective
April 1, 2007, in which SG-Directional, LLC acquired a
majority equity investment in Multi-Shot and provided
subordinated debt financing to Multi-Shot, the Ulterra
Acquisition and the Transaction as if they had occurred in the
beginning of the respective period.
The unaudited pro forma condensed balance sheet at
September 30, 2007 and the statement of operations for the
period ended September 30, 2007 have been prepared using
two different levels of approval of the Transaction by the JKA
stockholders, as follows:
|
|
|
|
|
Maximum Approval:
this presentation assumes
that no stockholders elect to convert their shares into a pro
rata share of the trust account (100% of the shares held by
JKAs public stockholders as voted at the Special Meeting
approve the merger); and
|
|
|
|
Minimum Approval:
this presentation assumes
stockholders of JKA holding 2,711,666 of JKAs outstanding
shares of common stock elect to convert shares (majority of the
shares held by JKAs public stockholders as voted at the
Special Meeting approve the merger; less than 20% of the
aggregate shares of JKAs common stock issued in the
initial public offering and the private placement vote against
the merger and elect to convert).
|
If stockholders holding 20% (2,711,667) or more of the shares of
common stock issued in the IPO and the private placement vote
against the adoption of the merger proposal and elect to convert
their shares, JKA will not complete the merger. The unaudited
pro forma condensed combined financial statements should be read
in conjunction with the notes thereto beginning on page 103.
The historical financial information has been adjusted to give
effect to pro forma events that are related and/or directly
attributable to the Ulterra Acquisition and the Transaction, and
factually supportable and are expected to have a continuing
impact on the combined results. Accordingly the adjustments
presented on the pro forma condensed combined financial
statements have been identified and presented in accordance with
their timing to provide relevant information necessary for an
accurate understanding of the combined company upon consummation
of the Ulterra Acquisition and the Transaction.
We are providing the following information to aid you in your
analysis of the financial aspects of the Transaction. We derived
the historical financial information of
Multi-Shot
for the year ended December 31, 2006 from the audited
financial statements of
Multi-Shot
for the year ended December 31, 2006 included elsewhere in
this proxy statement. We derived the historical financial
information of JKA from the December 31, 2006 audited
financial statements of JKA included elsewhere in this proxy
statement. We derived the historical financial information of
Ulterra from the December 31, 2006 audited financial
statements of Ulterra included elsewhere in
98
this proxy statement. We derived the pro forma information for
the nine months ended September 30, 2007 from the unaudited
financial statements of
Multi-Shot
and JKA for the nine months ended September 30, 2007
included elsewhere in this proxy statement. This information
should be read together with
Multi-Shots
and JKAs audited and unaudited financial statements and
related notes, Managements Discussion and Analysis
of Financial Condition and Results of Operations of
Multi-Shot
and JKA and other financial information included elsewhere in
this proxy statement.
The unaudited pro forma condensed combined financial information
is for illustrative purposes only. The financial results may
have been different had the companies always been combined. You
should not rely on the unaudited pro forma condensed combined
financial information as being indicative of the historical
results that would have been achieved had the companies always
been combined or the future results that the combined company
will experience.
Multi-Shot
and JKA have not had any historical relationships prior to the
Transaction. Accordingly, no pro forma adjustments were required
to eliminate activities among the companies.
In the Transaction, JKA intends to purchase all the issued and
outstanding member units of
Multi-Shot
from its members in exchange for consideration consisting of
21,759,259 shares of JKA common stock and 28,516,668 warrants.
The shares issuable are subject to adjustment if the Third Party
indebtedness is greater than $60,000,000. Immediately after the
Transaction the
Multi-Shot
members will own approximately 60.75% of the then issued and
outstanding common stock of the combined company and the
existing JKA stockholders will own approximately 39.25% of the
then issued and outstanding common stock of the combined
company, assuming 100% of the public stockholders of JKA vote
for the transaction. If public holders of 19.99% of JKAs
common stock seek cash payment, the
Multi-Shot
stockholders would own approximately 65.26% of the outstanding
shares of common stock of the combined company compared to
approximately 34.74% for JKA stockholders.
Additionally, warrants to acquire common shares of the combined
company may be issued to
Multi-Shot
members based on the future exercises of warrants by JKA public
stockholders. See Annex B-1 for example of Contingent Award
calculation
Multi-Shot
members are eligible to receive additional warrants if the cash
consideration paid by JKA to its stockholders with respect to
such stockholders exercising their conversion exceeds
$3,000,000. See Annex B-2, for example of such calculation.
JKA and
Multi-Shot
plan to complete the Transaction promptly after the special
meeting, provided that:
|
|
|
|
|
holders of a majority of JKAs common stock have approved
the Transaction;
|
|
|
|
holders of less than 20% of the shares of common stock issued in
JKAs initial public offering vote against the Transaction
and elect conversion of their shares into cash; and
|
|
|
|
other conditions specified in the purchase documents have been
satisfied or waived.
|
The Transaction will be accounted for as a reverse acquisition,
equivalent to a recapitalization, through the issuance of equity
by
Multi-Shot
for the net monetary assets of JKA. The net monetary assets of
JKA will be recorded as of the Transaction date at their
respective historical costs, which is considered to be the
equivalent of fair value. No goodwill or intangible assets will
be recorded as a result of the Transaction.
The determination of
Multi-Shot
as the accounting acquirer has been made based on consideration
of all quantitative and qualitative factors of the Transaction,
including significant consideration given to the following upon
consummation of the Transaction that
(i) Multi-Shots
management will continue in all the officer and senior
management positions of the combined company and, accordingly,
will have
day-to-day
authority to carry out the business plan after the Transaction;
(ii) Multi-Shots
employees will continue on with no expected disruption, while no
JKA employees are anticipated to become employees of the
combined company; (iii) the current
Multi-Shot
business plan and operations will continue as the business plan
of the combined company with no changes expected as a result of
the Transaction; (iv) of the five member board of directors
of the combined company, two members will be independent
directors; (v) the largest minority stockholder group is
comprised of members of
Multi-Shots
who will own approximately 60.75% of the combined company after
the completion of the Transaction compared to
99
an JKA minority stockholder group comprised of its initial
stockholders which would represent approximately 39.25%
ownership of the combined company after the Transaction (or
34.74% if JKA public stockholders owning 19.99% of JKAs
common stock vote against the Transaction); and (vi) one
individual
Multi-Shot
stockholders will have ownership of 37.30% of the combined
company immediately after the Transaction (or 40.35,
respectively of the combined company if JKA public stockholders
owning 19.99% of JKAs common stock vote against the
Transaction).
In addition to the factors described above, in reaching its
determination of
Multi-Shot
as the accounting acquirer, management also contemplated
(i) the substance and design of the Transaction;
(ii) the impact of potentially dilutive securities on
ownership of the combined company under varying scenarios; and
(iii) the size of
Multi-Shot
versus JKA, considering total assets, revenues and operating
expenses
100
Unaudited
Pro Forma Condensed Combined Balance Sheet With Maximum and
Minimum Approval September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Merger
|
|
|
(Assuming Maximum
|
|
|
for minimum
|
|
|
(Assuming Minimum
|
|
|
|
Multi-Shot, LLC
|
|
|
JKA
|
|
|
Adjustments
|
|
|
Approval)
|
|
|
Approval
|
|
|
Approval)
|
|
|
CURRENT ASSETS:
|
Cash and cash equivalents
|
|
$
|
432,043
|
|
|
$
|
90,491
|
|
|
$
|
79,721,079
|
(a)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000,000
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,952,500
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,000,000
|
)(c)
|
|
|
41,291,113
|
|
|
|
(15,936,244
|
)(h)
|
|
|
25,354,869
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade (net of allowance for doubtful accounts)
|
|
|
18,794,537
|
|
|
|
|
|
|
|
|
|
|
|
18,794,537
|
|
|
|
|
|
|
|
18,794,537
|
|
Unbilled receivables
|
|
|
2,722,604
|
|
|
|
|
|
|
|
|
|
|
|
2,722,604
|
|
|
|
|
|
|
|
2,722,604
|
|
Employee advances
|
|
|
16,163
|
|
|
|
|
|
|
|
|
|
|
|
16,163
|
|
|
|
|
|
|
|
16,163
|
|
Inventory
|
|
|
6,572,173
|
|
|
|
|
|
|
|
|
|
|
|
6,572,173
|
|
|
|
|
|
|
|
6,572,173
|
|
Deferred Tax Asset
|
|
|
|
|
|
|
1,613
|
|
|
|
|
|
|
|
1,613
|
|
|
|
|
|
|
|
1,613
|
|
Prepaid expenses
|
|
|
1,526,021
|
|
|
|
|
|
|
|
|
|
|
|
1,526,021
|
|
|
|
|
|
|
|
1,526,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
30,063,541
|
|
|
|
92,104
|
|
|
|
40,768,579
|
|
|
|
70,924,224
|
|
|
|
(15,936,244
|
)
|
|
|
54,987,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Production Equipment (net)
|
|
|
35,365,244
|
|
|
|
0
|
|
|
|
0
|
|
|
|
35,365,244
|
|
|
|
|
|
|
|
35,365,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Property and Other Equipment (net)
|
|
|
1,401,457
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,401,457
|
|
|
|
|
|
|
|
1,401,457
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Fund
|
|
|
|
|
|
|
79,721,079
|
|
|
|
(79,721,079
|
)(a)
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Deferred offering costs
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Deferred transaction costs
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Other assets
|
|
|
181,784
|
|
|
|
0
|
|
|
|
|
|
|
|
181,784
|
|
|
|
|
|
|
|
181,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181,784
|
|
|
|
79,721,079
|
|
|
|
(79,721,079
|
)
|
|
|
181,784
|
|
|
|
|
|
|
|
181,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
67,012,026
|
|
|
$
|
79,813,183
|
|
|
|
(38,952,500
|
)
|
|
$
|
107,872,709
|
|
|
|
(15,936,244
|
)
|
|
$
|
91,936,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
817,402
|
|
|
|
0
|
|
|
|
|
|
|
|
817,402
|
|
|
|
|
|
|
|
817,402
|
|
Current maturities of long-term debt
|
|
|
5,727,022
|
|
|
|
|
|
|
|
|
|
|
|
5,727,022
|
|
|
|
|
|
|
|
5,727,022
|
|
Accounts payable trade
|
|
|
10,746,993
|
|
|
|
584,090
|
|
|
|
|
|
|
|
11,331,083
|
|
|
|
|
|
|
|
11,331,083
|
|
Accrued expenses
|
|
|
3,787,883
|
|
|
|
|
|
|
|
|
|
|
|
3,787,883
|
|
|
|
|
|
|
|
3,787,883
|
|
Advances from Stockholders
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
500,000
|
|
Federal income tax payable
|
|
|
|
|
|
|
8,412
|
|
|
|
|
|
|
|
8,412
|
|
|
|
|
|
|
|
8,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,079,300
|
|
|
|
1,092,502
|
|
|
|
0
|
|
|
|
22,171,802
|
|
|
|
0
|
|
|
|
22,171,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Payable long term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Deferred non accountable expenses due underwriters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Derivative liabilities
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Long-Term Debt
|
|
|
39,618,687
|
|
|
|
0
|
|
|
|
(1,163,111
|
)(d)
|
|
|
38,455,576
|
|
|
|
|
|
|
|
38,455,576
|
|
Subordinated Long-term Debt
|
|
|
15,000,000
|
|
|
|
0
|
|
|
|
(15,000,000
|
)(c)
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
75,697,987
|
|
|
|
1,092,502
|
|
|
|
(16,163,111
|
)
|
|
|
60,627,378
|
|
|
|
0
|
|
|
|
60,627,378
|
|
Common stock subject to redemption
|
|
|
0
|
|
|
|
15,936,244
|
|
|
|
(15,936,244
|
)(e)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
Common stock
|
|
|
0
|
|
|
|
1,652
|
|
|
|
2,547
|
(i)
|
|
|
4,199
|
|
|
|
|
|
|
|
4,199
|
|
Paid-in-capital
|
|
|
0
|
|
|
|
60,496,752
|
|
|
|
(13,255,620
|
)(g)
|
|
|
47,241,132
|
|
|
|
(15,936,244
|
)(i)
|
|
|
31,304,888
|
|
Accumulated Earnings (deficit)
|
|
|
0
|
|
|
|
2,286,033
|
|
|
|
(2,286,033
|
)(g)
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders equity
|
|
|
0
|
|
|
|
62,784,437
|
|
|
|
(15,539,106
|
)
|
|
|
47,245,331
|
|
|
|
(15,936,244
|
)
|
|
|
31,309,087
|
|
Members equity
|
|
|
(8,685,961
|
)
|
|
|
|
|
|
|
8,685,961(g
|
)
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
67,012,026
|
|
|
$
|
79,813,183
|
|
|
$
|
(38,952,500
|
)
|
|
$
|
107,872,709
|
|
|
$
|
(15,936,244
|
)
|
|
$
|
91,936,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Pro Forma Financial Statements
101
Unaudited
Pro Forma Condensed Combined Statement of Operations With
Maximum and Minimum Approval
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
Multi-Shot,
|
|
|
Multi-Shot
|
|
|
Multi-Shot, LLC
|
|
|
|
|
|
Merger
|
|
|
(Maximum
|
|
|
for Minimum
|
|
|
(Minimum
|
|
|
|
LLC
|
|
|
Adjustments
|
|
|
Adjusted
|
|
|
JKA
|
|
|
Adjustments
|
|
|
Approval)
|
|
|
Approval
|
|
|
Approval)
|
|
|
Revenues
|
|
$
|
72,579,370
|
|
|
|
|
|
|
$
|
72,579,370
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
72,579,370
|
|
|
$
|
0
|
|
|
$
|
72,579,370
|
|
Operating Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
42,850,569
|
|
|
|
|
|
|
|
42,850,569
|
|
|
|
|
|
|
|
|
|
|
|
42,850,569
|
|
|
|
0
|
|
|
|
42,850,569
|
|
General and administrative
|
|
|
17,963,105
|
|
|
|
|
|
|
|
17,963,105
|
|
|
|
345,286
|
|
|
|
|
|
|
|
18,308,391
|
|
|
|
0
|
|
|
|
18,308,391
|
|
Non-cash compensation expense
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Impairment of deferred transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,356,704
|
|
|
|
|
|
|
|
1,356,704
|
|
|
|
0
|
|
|
|
1,356,704
|
|
Depreciation and amortization
|
|
|
4,946,179
|
|
|
|
|
|
|
|
4,946,179
|
|
|
|
0
|
|
|
|
|
|
|
|
4,946,179
|
|
|
|
0
|
|
|
|
4,946,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
65,759,853
|
|
|
|
0
|
|
|
|
65,759,853
|
|
|
|
1,701,990
|
|
|
|
0
|
|
|
|
67,461,843
|
|
|
|
0
|
|
|
|
67,461,843
|
|
Income (Loss) from Operations
|
|
|
6,819,517
|
|
|
|
0
|
|
|
|
6,819,517
|
|
|
|
(1,701,990
|
)
|
|
|
0
|
|
|
|
5,117,527
|
|
|
|
0
|
|
|
|
5,117,527
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
2,101,058
|
|
|
|
(2,101,058
|
)(k)
|
|
|
0
|
|
|
|
(2,101,058
|
)
|
|
|
0
|
|
Gain on derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
1,468,600
|
|
|
|
0
|
|
|
|
1,468,600
|
|
|
|
0
|
|
|
|
1,468,600
|
|
Interest expense
|
|
|
(2,759,084
|
)
|
|
|
(2,890,371
|
)(j)
|
|
|
(5,649,455
|
)
|
|
|
0
|
|
|
|
0
|
|
|
$
|
(5,649,455
|
)
|
|
|
0
|
|
|
|
(5,649,455
|
)
|
Other
|
|
|
97,765
|
|
|
|
|
|
|
|
97,765
|
|
|
|
0
|
|
|
|
|
|
|
|
97,765
|
|
|
|
0
|
|
|
|
97,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(2,661,319
|
)
|
|
|
(2,890,371
|
)
|
|
|
(5,551,690
|
)
|
|
|
3,569,658
|
|
|
|
(2,101,058
|
)
|
|
|
(4,083,090
|
)
|
|
|
(2,101,058
|
)
|
|
|
(4,083,090
|
)
|
Net Income (Loss) Before Income Taxes
|
|
|
4,158,198
|
|
|
|
(2,890,371
|
)
|
|
|
1,267,827
|
|
|
|
1,867,668
|
|
|
|
(2,101,058
|
)
|
|
|
1,034,437
|
|
|
|
(2,101,058
|
)
|
|
|
1,034,437
|
|
Income tax expense
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(1,177,521
|
) k
|
|
|
(1,177,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Taxes
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
(1)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
4,158,198
|
|
|
$
|
(2,890,371
|
)
|
|
$
|
1,267,827
|
|
|
$
|
1,867,668
|
|
|
$
|
(2,101,058
|
)
|
|
$
|
1,034,437
|
|
|
$
|
(2,101,058
|
)
|
|
$
|
1,034,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share of Common Stock(m):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.11
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.03
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
|
|
|
$
|
0.02
|
|
|
|
|
|
|
$
|
0.03
|
|
Weighted-Average Shares Outstanding(m):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,516,667
|
|
|
|
|
|
|
|
35,817,592
|
|
|
|
|
|
|
|
33,107,281
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,019,364
|
|
|
|
|
|
|
|
41,432,637
|
|
|
|
|
|
|
|
38,722,326
|
|
See Notes to Unaudited Pro Forma Financial Statements
102
Unaudited
Pro Forma Condensed Combined Statement of Operations With
Maximum and Minimum Approval
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Multi-Shot, LLC
|
|
|
|
|
|
|
|
|
Total
|
|
|
Adjustments
|
|
|
Total
|
|
|
|
Multi-Shot,
|
|
|
Multi-Shot
|
|
|
(post-
|
|
|
|
|
|
Merger
|
|
|
(Maximum
|
|
|
for Minimum
|
|
|
(Minimum
|
|
|
|
LLC
|
|
|
Adjustments
|
|
|
Acquisition)
|
|
|
JKA
|
|
|
Adjustments
|
|
|
Approval)
|
|
|
Approval
|
|
|
Approval)
|
|
|
Revenues
|
|
$
|
73,971,064
|
|
|
$
|
14,706,779
|
(i)
|
|
$
|
88,677,843
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
88,677,843
|
|
|
$
|
|
|
|
$
|
88,677,843
|
|
Operating Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
|
|
|
44,720,803
|
|
|
|
9,939,153
|
(i)
|
|
|
54,659,956
|
|
|
|
|
|
|
|
|
|
|
|
54,659,956
|
|
|
|
|
|
|
|
54,659,956
|
|
General and administrative
|
|
|
13,285,913
|
|
|
|
2,301,890
|
(i)
|
|
|
15,587,803
|
|
|
|
292,378
|
|
|
|
|
|
|
|
15,880,181
|
|
|
|
|
|
|
|
15,880,181
|
|
Impairment of deferred transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,703,913
|
|
|
|
2,000,000
|
(i)
|
|
|
5,703,913
|
|
|
|
|
|
|
|
|
|
|
|
5,703,913
|
|
|
|
|
|
|
|
5,703,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
61,710,629
|
|
|
|
14,241,043
|
|
|
|
75,951,672
|
|
|
|
292,378
|
|
|
|
|
|
|
|
76,244,050
|
|
|
|
|
|
|
|
76,244,050
|
|
Income (Loss) from Operations
|
|
|
12,260,435
|
|
|
|
465,736
|
|
|
|
12,726,171
|
|
|
|
(292,378
|
)
|
|
|
|
|
|
|
12,433,793
|
|
|
|
|
|
|
|
12,433,793
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,994,845
|
|
|
|
(1,994,845
|
)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on derivative liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,265,004
|
)
|
|
|
|
|
|
|
(1,265,004
|
)
|
|
|
|
|
|
|
(1,265,004
|
)
|
Interest expense
|
|
|
(1,185,011
|
)
|
|
|
(2,339,414
|
)(j)
|
|
|
(3,524,425
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,524,425
|
)
|
|
|
|
|
|
|
3,524,425
|
|
Other
|
|
|
70,236
|
|
|
|
4,603
|
(i)
|
|
|
74,839
|
|
|
|
|
|
|
|
|
|
|
|
74,839
|
|
|
|
|
|
|
|
74,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(1,114,775
|
)
|
|
|
(2,334,811
|
)
|
|
|
(3,449,586
|
)
|
|
|
729,841
|
|
|
|
(1,994,845
|
)
|
|
|
(4,714,590
|
)
|
|
|
|
|
|
|
(4,714,590
|
)
|
Net Income (Loss) Before Income Taxes
|
|
|
11,145,660
|
|
|
|
(1,869,075
|
)
|
|
|
9,276,585
|
|
|
|
437,463
|
|
|
|
(1,994,845
|
)
|
|
|
7,719,203
|
|
|
|
|
|
|
|
7,719,203
|
|
Total Income Taxes
|
|
|
|
|
|
|
457,926
|
|
|
|
457,926
|
|
|
|
14,027
|
|
|
|
3,369,078
|
(l)
|
|
|
3,369,078
|
|
|
|
|
|
|
|
3,369,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
11,145,660
|
|
|
$
|
(2,327,001
|
)
|
|
$
|
8,818,659
|
|
|
$
|
423,436
|
|
|
$
|
(5,363,923
|
)
|
|
$
|
4,350,125
|
|
|
$
|
(1,994,845
|
)
|
|
$
|
4,350,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share of Common Stock(m):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
|
$
|
0.18
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.03
|
|
|
|
|
|
|
$
|
0.15
|
|
|
|
|
|
|
$
|
0.16
|
|
Weighted-Average Shares Outstanding(m):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,605,609
|
|
|
|
|
|
|
|
25,636,235
|
|
|
|
|
|
|
|
23,707,745
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,212,584
|
|
|
|
|
|
|
|
28,746,225
|
|
|
|
|
|
|
|
26,496,714
|
|
See notes to Unaudited Pro Forma Financial Statements.
103
NOTES TO
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
AS OF SEPTEMBER 30, 2007
Multi-Shot
Adjustments Related to Transaction
The pro forma condensed combined balance sheet reflects the
Transaction as a recapitalization through the issuance of equity
by
Multi-Shot
in exchange for the net monetary assets of JKA, assuming that
the transaction had been completed as of September 30,
2007. The historical balance sheets used in the preparation of
the pro forma financial statements have been derived from
Multi-Shots
unaudited financial statements as of September 30, 2007 and
JKAs unaudited financial statements as of
September 30, 2007.
The unaudited pro forma condensed combined statement of
operations for the twelve months ended December 31, 2006
combines the audited consolidated and combined statement of
operations of
Multi-Shot,
JKA and Ulterra for the year ended December 31, assuming
that the transaction occurred at the beginning of the period
presented.
The unaudited pro forma condensed combined statement of
operations for the nine months ended September 30, 2007
combines the unaudited condensed statement of operations of
Multi-Shot
for the nine months ended September 30, 2007 with the
unaudited condensed statement of operation of JKA and the
unaudited condensed statement of operations for Ulterra for the
nine months ended September 30, 2007 assuming that the
acquisition occurred at the beginning of the period presented.
The asset acquisition will be treated as a business combination
for accounting purposes. The Company will include the results of
operations related to the assets acquired from July 1, 2007
forward. The historical statements of operations of
Multi-Shot
and JKA for the nine months ended September 30, 2007 have
been derived from the companies respective historical
unaudited statements of operations for such period included
elsewhere in this proxy statement.
The pro forma combined provision for income taxes does not
reflect the amounts that would have resulted had JKA and
Multi-Shot
filed consolidated income tax returns during the periods
presented.
On August 27, 2007, JKA, Multi-Shot, Inc., Multi-Shot, the
members of Multi-Shot and Catalyst, entered into the merger
agreement, pursuant to which Multi-Shot will merge into
Multi-Shot, Inc. and Multi-Shot will effectively become a
wholly-owned subsidiary of JKA. Following completion of the
merger, it is anticipated that JKA will change its name to MS
Energy Services, Inc. Because JKA will have no other operating
business following the merger, Multi-Shot will effectively
become a public company at the conclusion of the merger. The
initial merger consideration to be paid is approximately
$197,500,000. For purposes of these unaudited pro forma
condensed financial statements, JKA has assumed the total cash
payments by JKA from the trust account at the completion of the
merger to be $23,952,500.
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
|
Approval
|
|
|
Approval
|
|
|
Calculation of merger cash consideration payable at closing(i):
|
|
|
|
|
|
|
|
|
Total merger consideration (in the case of minimum approval
includes issuance of redemption shares)(iv)
|
|
$
|
197,500,000
|
|
|
$
|
198,894,063
|
|
Assumption of third party indebtedness
|
|
|
(45,000,000
|
)
|
|
|
(45,000,000
|
)
|
Retirement of Subordinated Debt
|
|
|
(15,000,000
|
)
|
|
|
(15,000,000
|
)
|
Issuance of JKA common stock and warrants(iv)
|
|
|
(117,500,000
|
)
|
|
|
(117,500,000
|
)
|
Issuance of JKA common stock redemption shares(v)
|
|
|
|
|
|
|
(1,394,063
|
)
|
|
|
|
|
|
|
|
|
|
Merger cash consideration payable at closing
|
|
$
|
20,000,000
|
|
|
$
|
20,000,000
|
|
Estimated fees and expenses of JKA(ii)
|
|
|
2,400,000
|
|
|
|
2,400,000
|
|
Deferred non-accountable expenses(iii)
|
|
|
1,552,500
|
|
|
|
1,552,500
|
|
|
|
|
|
|
|
|
|
|
Total Cash Consideration
|
|
$
|
23,952,500
|
|
|
$
|
23,952,500
|
|
|
|
|
(i)
|
|
For purposes of the unaudited pro forma condensed combined
financial statements, JKA has assumed no working capital
adjustments.
|
104
NOTES TO
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
(ii)
|
|
Estimated fees and expenses include fees of consultants, legal
fees and expenses, printing and mailing costs for this proxy
statement, SEC and HSR filing fees, and other miscellaneous
expenses directly related to the merger.
|
|
(iii)
|
|
In connection with the IPO, JKA agreed to pay the underwriters
additional non-accountable expenses of $1,552,500 upon the
completion of the merger.
|
|
(iv)
|
|
The Contingent Awards are contingent upon the occurrence of
future events including but not limited to the following:
|
|
|
|
(i) The Contingent Awards are not exercisable by the
Holders unless and until public warrant holders choose to
exercise warrants. Public warrant holders will likely exercise
their warrants only if the price of JKA (or MS Energy Services
on a post-closing basis) common stock is at a price above the
$5.00 exercise price as of the warrant expiration date of
April 10, 2010. There can be no assurance the price of JKA
common stock will be above the $5.00 exercise price at this
future warrant expiration date.
|
|
|
|
(ii) JKA only has the right to call and thus
force the exercise of the public warrants (and thus
ultimately the Contingent Awards) if the JKA common stock trades
at or above $8.50 on each of twenty (20) trading days
within any thirty (30) day trading period. There can be no
assurance that the JKA stock will reach or maintain the $8.50
price per share level before the warrant expiration date of
April 10, 2010. Further, JKA is
not required
to call the warrants at the $8.50 per share price level.
|
|
|
|
Additionally, the Contingent Awards are not tradable by the
holders of such awards. These Holders merely have a right to
convert the Contingent Awards to JKA common stock (based upon a
formula as described in
Annex B-1)
if and when public warrant holders exercise their warrants
in the future. Further, the Contingent Awards are not registered
securities. In summary, the Contingent Awards are a contingent,
unregistered, non-tradable security, subject to contractual
restrictions, with the ultimate value, if any, based upon the
performance of JKA in the future.
|
|
|
|
(v)
|
|
In the case of minimum approval, assumes conversion price per
share of $6.03, resulting in a redemption price differential of
$0.63 per share and 258,160 redemption shares issued to
Multi-Shot members.
|
JKA has assumed that the cash payments to be made upon the
completion of the merger will be funded as follows:
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
|
Approval
|
|
|
Approval
|
|
|
Amounts in trust account
|
|
$
|
79,721,079
|
|
|
$
|
63,784,835
|
|
Cash to Working Capital(i)
|
|
|
(55,049,779
|
)
|
|
|
(39,832,335
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,671,300
|
|
|
$
|
23,952,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(i)
|
|
JKA expects, in the event of minimum approval, to use cash from
the Trust Account to fund redemptions.
|
Pro forma adjustments are necessary to record (i) certain
events related or attributable to the Transaction which have
occurred at
Multi-Shot
prior to closing and (ii) the accounting upon consummation
of the Transaction. No pro forma adjustments were required to
conform
Multi-Shots
accounting policies to JKAs accounting policies.
Descriptions of the adjustments included in the unaudited pro
forma condensed combined balance sheet are as follows:
Transaction
Balance Sheet Adjustments
(a) Reflects the release of JKAs restricted cash held
in trust and the transfer of the balance to cash and cash
equivalents, assuming no holders of JKA common stock sold in its
initial public offering exercise their right to have their
shares redeemed upon the consummation of the Transaction.
105
NOTES TO
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
(b) Gives effect to the payment of $20,000,000 in cash
merger consideration and $3,952,500 of estimated costs payable
in cash directly attributable to the Transaction. Estimated fees
and expenses include fees of consultants, legal fees and
expenses, printing and mailing costs for this proxy, SEC and HSR
filing fees and other miscellaneous expenses directly related to
the merger. In addition, in connection with the IPO, JKA agreed
to pay the underwriters additional non-accountable expenses of
$1,552,000 upon completion of the merger which is included in
this estimated cash payment of costs.
(c) Reflects the payment of $15,000,000 of
Multi-Shots
Senior Subordinated Debt held by
Multi-Shots
members per the merger agreement.
(d) Reflects the estimated assumed debt per the merger
agreement.
(e) Reflects reclass of liability to additional paid in
capital because the common stock will no longer be subject to
redemption.
(f) Reflects the adjustment to conform the equity of
Multi-Shot
to that of the combined company after the Transaction.
(g) Reflects the transaction through the elimination of
JKAs retained earnings, the reclassification of the
Multi-Shot undistributed loss against Paid-in-Capital in
accordance with SAB Topic 4.B. and the issuance of
21,759,259 shares of common stock $.0001 par value.
(h) To reflect the payment of cash to the maximum amount of
dissenting JKA stockholders as consideration for the return and
cancellation of their shares of common stock.
Multi-Shot
Statement of Operations Adjustments Related to Ulterra
Acquisition
(i) Reflects the audited income statement of Ulterra for
the year ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audited
|
|
|
|
|
|
|
Year Ended
|
|
Reconciliation of Pro forma financials:
|
|
|
|
|
December 31, 2006
|
|
|
Cost of Revenues
|
|
|
|
|
|
$
|
11,101,133
|
|
Depreciation Expense
|
|
|
|
|
|
|
1,161,980
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Cost of Revenues
|
|
|
|
|
|
|
9,939,153
|
|
Depreciation expense
|
|
|
|
|
|
|
1,161,980
|
|
Incremental Pro forma Depreciation
|
|
|
|
|
|
|
838,020
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Depreciation
|
|
|
|
|
|
|
2,000,000
|
|
Incremental Depreciation:
|
|
|
|
|
|
|
|
|
Asset value acquired
|
|
|
10,000,000
|
|
|
|
|
|
Depreciable Life
|
|
|
60 months
|
|
|
|
|
|
Pro forma Depreciation
|
|
|
|
|
|
|
2,000,000
|
|
(j) Reflects additional interest expense related to the
promissory note issued related to the Ulterra asset purchase
plus the additional interest expense for the year ended
December 31, 2006 and for the period January 1, 2007
through March 31, 2007 related to the additional debt which
was incurred by Multi-Shot during the SG-Recapitalization. 8.25%
was used for the additional term loans with the bank debt
with an offsetting reduction in interest expense associated with
the payoff of the subordinated debt using a rate of 15%.
Transaction
Statement of Operations Adjustments
(k) Reflects elimination of interest income on the funds in
the trust account, as the trust account would not have existed
if the transaction had been consummated on the first day of the
period.
106
NOTES TO
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
(l) Reflects the pro-forma adjustment to record the tax
provision as if Multi-Shot, LLC had been a corporation since the
first day of the period. We have used an estimated tax rate of
37.5% in the tax calculation. Reflects the elimination of the
provision for tax related to JKA investment income.
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
|
Approval
|
|
|
Approval
|
|
|
September 30, 2007 Net Income before income taxes
|
|
$
|
(1,034,437
|
)
|
|
$
|
(1,034,437
|
)
|
Gain on derivative liabilities
|
|
|
(1,468,600
|
)
|
|
|
(1,468,600
|
)
|
|
|
|
|
|
|
|
|
|
Net (Loss) before income taxes
|
|
|
(434,163
|
)
|
|
|
(434,163
|
)
|
Estimated federal tax rate
|
|
|
37.50
|
%
|
|
|
37.50
|
%
|
|
|
|
|
|
|
|
|
|
Tax Provision
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
|
Approval
|
|
|
Approval
|
|
|
December 31, 2006 Net Income
|
|
$
|
7,719,203
|
|
|
$
|
7,719,203
|
|
Loss on derivative liabilities
|
|
|
1,265,004
|
|
|
|
1,265,004
|
|
|
|
|
|
|
|
|
|
|
Net Income before income taxes
|
|
|
8,984,207
|
|
|
|
8,984,207
|
|
Estimated federal tax rate
|
|
|
37.50
|
%
|
|
|
37.50
|
%
|
|
|
|
|
|
|
|
|
|
Tax Provision
|
|
|
3,369,078
|
|
|
|
3,369,078
|
|
(m) After the consummation of the merger, historical
earnings per share of Multi-Shot will be retroactively restated
to reflect the effect of the exchange ratio established in the
merger agreement. Pro forma net income per share was calculated
by dividing pro forma net income by the weighted average number
of shares outstanding as follows:
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
|
Approval
|
|
|
Approval
|
|
|
Nine Months Ended September 30, 2007:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,516,667
|
|
|
|
13,806,356
|
|
Shares issued in connection with the transaction
|
|
|
21,759,259
|
|
|
|
21,759,259
|
|
Shares cancelled in connection with the transaction
|
|
|
(2,458,334
|
)
|
|
|
(2,458,334
|
)
|
|
|
|
|
|
|
|
|
|
Basic-Total
|
|
|
35,817,592
|
|
|
|
33,107,281
|
|
Incremental shares on exercise of warrants:
|
|
|
|
|
|
|
|
|
JKA Warrantholders
|
|
|
3,502,699
|
|
|
|
3,502,699
|
|
Multi-Shot warrantholders
|
|
|
2,112,346
|
|
|
|
2,112,346
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
41,432,637
|
|
|
|
38,722,326
|
|
Treasury method calculation of incremental fully diluted shares
September 30, 2007 (maximum and minimum approval):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Date
|
|
|
Shares/
|
|
|
Strike
|
|
|
Avg Stock
|
|
|
Proceeds
|
|
|
Shares
|
|
|
Net Shares
|
|
|
|
Issued
|
|
|
Units
|
|
|
Price
|
|
|
Price(1)
|
|
|
from Exercise
|
|
|
Repurchased
|
|
|
Outstanding
|
|
|
Outstanding Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement Shares
|
|
|
4/10/2006
|
|
|
|
666,668
|
|
|
$
|
5.00
|
|
|
$
|
5.74
|
|
|
|
3,333,340
|
|
|
|
580,554
|
|
|
|
86,114
|
|
IPO Shares
|
|
|
4/17/2006
|
|
|
|
26,450,000
|
|
|
$
|
5.00
|
|
|
$
|
5.74
|
|
|
|
132,250,000
|
|
|
|
23,033,415
|
|
|
|
3,416,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JKA Warrantholders
|
|
|
|
|
|
|
27,116,668
|
|
|
$
|
5.00
|
|
|
$
|
5.74
|
|
|
|
135,583,340
|
|
|
|
23,613,969
|
|
|
|
3,502,699
|
|
Multi-Shot Warrantholders
|
|
|
4/17/2006
|
(2)
|
|
|
28,516,668
|
|
|
$
|
5.00
|
|
|
$
|
5.40
|
|
|
|
142,583,340
|
|
|
|
26,404,322
|
|
|
|
2,112,346
|
|
|
|
|
(1)
|
|
Average stock price for the nine months ended September 30,
2007
|
|
|
|
(2)
|
|
Pro forma issuance date
|
107
NOTES TO
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
Reconciliation
to JKA Financial Statements(3)
|
|
|
|
|
September 30, 2007 JKA Financials:
|
|
|
|
|
Basic Shares
|
|
|
16,516,667
|
|
Fully Diluted Shares
|
|
|
20,165,053
|
|
|
|
|
|
|
JKA Warrantholders
|
|
|
3,648,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
|
Approval
|
|
|
Approval
|
|
|
Twelve Months Ended December 31, 2006(1):
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,612,019
|
|
|
|
10,683,529
|
|
Shares issued in connection with the transaction
|
|
|
15,482,550
|
|
|
|
15,482,550
|
|
Shares cancelled in connection with the transaction
|
|
|
(2,458,334
|
)
|
|
|
(2,458,334
|
)
|
|
|
|
|
|
|
|
|
|
Basic-Total
|
|
|
25,636,235
|
|
|
|
23,707,745
|
|
Incremental shares on exercise of warrants:
|
|
|
|
|
|
|
|
|
JKA Warrantholders
|
|
|
1,606,975
|
|
|
|
1,606,975
|
|
Multi-Shot warrantholders
|
|
|
1,503,015
|
|
|
|
1,503,015
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
28,746,225
|
|
|
|
26,817,735
|
|
|
|
|
(1)
|
|
Shares calculated on a weighted average basis since the IPO date
of April 17, 2006 through December 21, 2006
|
Treasury method calculation of incremental fully diluted shares
December 31, 2006 (maximum and minimum approval):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Date
|
|
|
Shares/
|
|
|
Strike
|
|
|
Avg Stock
|
|
|
Proceeds
|
|
|
Shares
|
|
|
Net Shares
|
|
|
Days
|
|
|
Avg. Shares
|
|
|
|
Issued
|
|
|
Units
|
|
|
Price
|
|
|
Price(1)
|
|
|
from Exercise
|
|
|
Repurchased
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Outstanding Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Placement Shares
|
|
|
4/10/2006
|
|
|
|
666,668
|
|
|
$
|
5.00
|
|
|
$
|
5.45
|
|
|
|
3,333,340
|
|
|
|
611,180
|
|
|
|
55,488
|
|
|
|
266
|
|
|
|
40,549
|
|
IPO Shares
|
|
|
4/17/2006
|
|
|
|
26,450,000
|
|
|
$
|
5.00
|
|
|
$
|
5.45
|
|
|
|
132,250,000
|
|
|
|
24,248,536
|
|
|
|
2,201,464
|
|
|
|
259
|
|
|
|
1,566,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JKA Warrant holders
|
|
|
|
|
|
|
27,116,668
|
|
|
$
|
5.00
|
|
|
$
|
5.45
|
|
|
|
135,583,340
|
|
|
|
24,859,716
|
|
|
|
2,256,952
|
|
|
|
|
|
|
|
1,606,975
|
|
Multi-Shot Warrantholders
|
|
|
4/17/2006
|
(2)
|
|
|
28,516,668
|
|
|
$
|
5.00
|
|
|
$
|
5.40
|
|
|
|
142,583,340
|
|
|
|
26,404,322
|
|
|
|
2,112,346
|
|
|
|
259
|
|
|
|
1,503,015
|
|
|
|
|
(1)
|
|
Average stock price for the six months ended December 31,
2006
|
|
(2)
|
|
Pro forma issuance date
|
Reconciliation
to JKA Financial Statements(3)
|
|
|
|
|
December 31, 2006 JKA Financials:
|
|
|
|
|
Basic Shares
|
|
|
12,605,609
|
|
Fully Diluted Shares
|
|
|
14,212,584
|
|
|
|
|
|
|
JKA Warrantholders
|
|
|
1,606,975
|
|
|
|
|
|
|
108
DIRECTORS
AND MANAGEMENT OF JKA
FOLLOWING THE MERGER WITH MULTI-SHOT, LLC
As of the completion of the merger, the Board, executive
officers and significant employees will be as set forth below.
Directors serve for terms of one year unless they die, retire or
are removed by our stockholders. Officers serve at the
discretion of the Board, subject to any rights under employment
contracts
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Allen Neel
|
|
|
49
|
|
|
Chief Executive Officer, President and Director
|
David Cudd
|
|
|
53
|
|
|
Vice President
|
Paul Culbreth
|
|
|
48
|
|
|
Vice President
|
Ron Nixon
|
|
|
51
|
|
|
Director
|
K. Rick Turner
|
|
|
49
|
|
|
Director
|
James O. Jacoby, Jr.
|
|
|
44
|
|
|
Director
|
Kim Eubanks
|
|
|
50
|
|
|
Director
|
Allen Neel
has been President of Multi-Shot, LLC since
August 2004. Mr. Neel was with Warrior Energy Services
(formerly Black Warrior Wireline Corp.) from 1990 until August
2004. Mr. Neel held management positions including Vice
President Operations for Black Warrior Drilling and
Completions, Vice President of Black Warrior Mideast, Vice
President of Black Warrior Wireline Corp. and most recently
Executive Vice President and Secretary of Black Warrior Wireline
Corp. Prior to joining Black Warrior he was a District Manager
for Graves Well Drilling. Mr. Neel began his career with
Halliburton Services. He received his BS in Mineral Engineering
(Petroleum Option) from the University of Alabama in 1981.
David Cudd
has been Vice President of Multi-Shot, LLC
since August 2004. Mr. Cudd was with Warrior Energy
Services (formerly known as Black Warrior Wireline Corp.) from
2002 until 2004. During that time he was the sales manager for
the directional drilling division. In 1998 he founded Sales
Management Group which he owned and operated until 2002.
Mr. Cudd began his career with Smith International in 1978
where he held various sales positions, including Director of
Sales and Regional VP-Southern U.S. and Latin America.
Paul Culbreth
has been Vice President of Multi-Shot, LLC
since August 2004. Mr. Culbreth was with the Multi-Shot
Division of Warrior Energy Services (formerly known as Black
Warrior Wireline Corp.) from 2000 until August 2004 where he was
the Vice President of Operations. From 1998 until 2000 he was a
founder and owner of Houston Directional Services.
Mr. Culbreth was with Phoenix Drilling Services and its
predecessors from 1987 until 1998 where he held various
operations and management positions, most recently Vice
President of Operations. He began his career with Ocean Drilling
and Exploration Company where he worked from 1977 until 1987.
Ron Nixon
will serve as a member of the Board of JKA upon
consummation of the merger. Mr. Nixon is a principal at
Catalyst, having co-founded Catalyst in 1990. Ron has operating
experience in manufacturing, distribution and service businesses
in mid-market companies, including energy service companies. He
has owned or operated mid-market businesses that were sold to
larger industry or strategic buyers prior to forming Catalyst.
Mr. Nixon holds a B.S. in Mechanical Engineering from the
University of Texas at Austin and is a registered Professional
Engineer in the State of Texas. Ron serves on the boards of
numerous privately held corporations, the Board of LHC Group,
Inc. (a NASDAQ-listed company), and various civic boards. It is
anticipated that Mr. Nixon will be considered an
independent director under the AMEX Company Guide.
K. Rick Turner
will serve as a member of the Board
of JKA upon consummation of the merger. Mr. Turner has been
employed by Stephens family entities since 1983. He is
currently Senior Managing Principal of The Stephens Group, LLC.
He first became a private equity principal in 1990 after serving
as the Assistant to the Chairman, Jackson T. Stephens. His areas
of focus have been oil and gas exploration, natural gas
gathering, processing industries and power technology.
Mr. Turner currently serves as a director of Atlantic Oil
Corporation, SmartSignal Corporation, JV Industrials, LLC, JEBCO
Seismic LLC, North American Energy Partners, Inc. (NOA),
Seminole Energy Services, LLC, BTEC Turbines LP, Multi-Shot and
Vestcom, and the general partner of Energy Transfer Partners, LP
(ETP) and the general partner of Energy Transfer Equity, LP
(ETE). Prior to joining Stephens, he was employed by Peat,
Marwick, Mitchell and Company. Mr. Turner earned his B.B.A.
from the University of Arkansas
109
and is a non-practicing CPA. Mr. Turner is an investor in
SG-Directional, which will own approximately 37.3% of JKAs
outstanding common stock immediately after the merger (assuming
that no JKA stockholders exercise their conversion rights and
that no warrants are exercised).
James O. Jacoby, Jr.
will serve as a member of the
Board of JKA upon consummation of the merger. Mr. Jacoby is
a principal at The Stephens Group LLC. Prior to joining The
Stephens Group, he was a Managing Director and Head of the
Healthcare Investment Banking Group within the Corporate Finance
department at Stephens Inc, where he served as a board member or
had oversight of companies such as United Medical, Inc.,
Vascular Solutions, Inc., Neucoll, Inc.; and Precision
Therapeutics, Inc. Before joining Stephens in 1994, he was a
Vice President in the Mergers and Acquisitions Group at Chemical
Bank in its New York and London offices. He has served as
advisor on over $4 billion of mergers and acquisitions and
financing transactions, and has helped identify a number of
private equity investments in the healthcare sector. While many
of his relationships have focused on earlier stage
opportunities, later stage situations have also benefited from
his experience in building sales teams, and his assistance in
expanding a companys product or service offerings.
Mr. Jacoby received a B.B.A. in Finance from the University
of Notre Dame, and an M.B.A. from Harvard Business School. Mr.
Jacoby is an investor in
SG-Directional,
which will own approximately 37.3% of JKAs outstanding
common stock immediately after the merger (assuming that no JKA
stockholders exercise their conversion rights and that no
warrants are exercised).
Kim Eubanks
will serve as a member of the Board of JKA
upon consummation of the merger. Mr. Eubanks founded
CamWest Limited Partnership in March 1992 with the financial
backing of the Stephens Group of Little Rock, Arkansas. He
served as President of CamWest, Inc., the Managing Partner for
CamWest Limited Partnership. In March 2002 Mr. Eubanks and
his partner bought the majority of the key fields owned by
CamWest L.P. and rolled them into CamWest II L. P. Prior to
forming CamWest, Mr. Eubanks served as VP of Leede
Exploration (Denver, Colorado) and Operations Manager for Leede
Oil & Gas, Inc. where he was responsible for all
drilling and completion operations with particular emphasis on
horizontal drilling technologies throughout North America.
Mr. Eubanks earned his BS degree in Petroleum Engineering
from Texas A&M and his MBA from the University of
Houston Clear Lake where he graduated with Honors.
It is anticipated that Mr. Eubanks will be considered an
independent director under the AMEX Company Guide.
Other than their respective relationships with Multi-Shot, LLC,
none of these individuals has been a principal of or affiliated
with a public company or blank check company that executed a
business plan similar to our business plan, and none of these
individuals is currently affiliated with such an entity.
After the merger, the officers and employee directors will
devote their full time and attention to the ongoing operations
of JKA and the non-employee directors will devote such time as
is necessary and required to satisfy their duties as a director
of a public company.
Board of
Directors and Committees of the Board
All directors are expected to attend each annual meeting of
stockholders. After the merger with Multi-Shot, our Board will
consist of up to seven members, and it is anticipated that a
majority of the members will be considered
independent. The determination of whether a director
is independent will be made pursuant to the standards required
by the AMEX Company Guide. It is anticipated that one additional
independent director may be appointed within three months of the
consummation of the merger. Stockholders may communicate with
the Board or any individual director by written communication
addressed at the principal office of JKA. All written
communications are delivered to the individual addressee or to
all members of the Board.
We do not currently have a Compensation Committee. Pursuant to
Section 805 of the AMEX Company Guide, compensation of our
chief executive officer, if any, will be determined, or
recommended to the Board for determination, by a majority of the
independent directors on our Board. The chief executive officer
will not be present during voting or deliberations. Compensation
for all other officers, if any, will be determined, or
recommended to the Board for determination, by a majority of the
independent directors on our Board. None of the JKA officers
currently receive compensation. We do not expect to pay any
compensation to any of our officers until following the
consummation of the merger with Multi-Shot, LLC. Following the
consummation of the merger, we plan to establish a Compensation
Committee comprised of independent directors to handle such
duties as approving executive compensation and administering the
2007 Equity Incentive Plan.
110
The Board had four meetings during 2006. The Board has
established a Nominating and Governance Committee and an Audit
Committee to devote attention to specific subjects and to assist
the Board in the discharge of its responsibilities. The
functions of these committees and their current members, as well
as anticipated membership, are set forth below.
Nominating
and Governance Committee
The Nominating and Governance Committee is responsible for
identifying and recommending qualified candidates for director
nominees to the Board, and leading the Board in its annual
review of the Boards performance. All members of the
Nominating Committee qualify as independent under the definition
promulgated by the American Stock Exchange. The Nominating and
Governance Committee had no meetings during 2006. Michael
McConnell and Herbert Williamson are the current members of the
Nominating and Governance Committee and following the
acquisition of Multi-Shot, LLC, it is anticipated that the
Nominating and Governance Committee will consist of additional
Board members who will be appointed to such committee prior to
or simultaneous with the closing of the merger. The Nominating
and Governance Committee may consider candidates recommended by
stockholders as well as from other sources such as other
directors or officers, third party search firms or other
appropriate sources. For all potential candidates, the
Nominating and Governance Committee may consider all factors is
deems relevant, such as a candidates personal integrity
and sound judgment, business and professional skills and
experience, independence, knowledge of the industry in which we
operate, possible conflicts of interest, diversity, the extent
to which the candidate would fill a present need in the Board,
and concern for the long-term interests of the stockholders. In
general, persons recommended by stockholders will be considered
on the same basis as candidates from other sources. If a
stockholder wishes to nominate a candidate to be considered for
election as a director at the 2007 Annual Meeting of
Stockholders using the procedures set forth in the
Companys Bylaws, it must follow the procedures described
in Section 3.3 entitled Nominations. If a
stockholder wishes simply to propose a candidate for
consideration as a nominee by the Nominating and Governance
Committee, it should submit any pertinent information regarding
the candidate to the Nominating and Governance Committee by mail
at our address. A copy of the Nominating Committees
written charter is available at
www.jkacq.com
. Upon
consummation of the merger, it is anticipated that
Mr. McConnell and Mr. Williamson will resign from the
Board of JKA and will no longer serve on the Nominating
Committee.
Audit
Committee
The Audit Committee recommends to the Board the appointment of
the firm selected to serve as our independent auditors and our
subsidiaries and monitors the performance of such firm; reviews
and approves the scope of the annual audit and evaluates with
the independent auditors our annual audit and annual financial
statements; reviews with management the status of internal
accounting controls; evaluates issues having a potential
financial impact on us which may be brought to the Audit
Committees attention by management, the independent
auditors or the Board; evaluates our public financial reporting
documents; reviews the non-audit services to be performed by the
independent auditors, if any; and considers the effect of such
performance on the auditors independence. Keith
Spickelmier, Michael McConnell and Herbert Williamson are the
current members of the Audit Committee and following the merger
with Multi-Shot, LLC, as well as Messrs. Spickelmier,
Williamson and McConnells respective resignations in
connection therewith, it is anticipated that the Audit Committee
will consist of Board members who will be appointed to such
committee prior to or simultaneous with the closing of the
merger. All members of the Audit Committee, except for
Mr. Spickelmier, satisfy the current independence standards
promulgated by the Securities and Exchange Commission and by the
American Stock Exchange, as such standards apply specifically to
members of audit committees. Although Mr. Spickelmier is
temporarily serving on our audit committee, he currently does
not qualify as an independent director as a result of his
present position as President of JKA. A copy of the Audit
Committees written charter is available at
www.jkacq.com
. The board has determined that
Mr. Williamson is an audit committee financial
expert, as the Securities and Exchange Commission has
defined that term in Item 401 of
Regulation S-K.
The Audit Committee had one meeting during 2006. Upon
consummation of the merger, Messrs. Spickelmier, Williamson
and McConnell will resign from the Board of JKA and will no
longer serve on the Audit Committee. Moreover, upon consummation
of the merger, Mr. Nixon will serve on the Audit Committee
as its chairman.
111
Code of
Conduct and Ethics
We have adopted a code of conduct and ethics applicable to our
directors, officers and employees in accordance with applicable
federal securities laws and the rules of the American Stock
Exchange. A copy of the JKA Code of Ethics and any amendments
thereto is available at
www.jkacq.com
.
Director
Compensation
It is anticipated that immediately after the closing of the
merger with Multi-Shot, LLC, the compensation to be paid to
members of the Board of JKA will be established and such
compensation will be reasonable and customary for the industry.
Executive
Compensation JKA
No executive officer of JKA has received any cash compensation
for services rendered. No compensation of any kind, including
finders and consulting fees, will be paid to any of our
existing stockholders, including our officers and directors, or
any of their respective affiliates, for services rendered prior
to or in connection with the merger with Multi-Shot, LLC.
However, these individuals will be reimbursed for any
out-of-pocket
expenses incurred in connection with activities on our behalf,
such as identifying potential target businesses and performing
due diligence on suitable business combinations. There is no
limit on the amount of these
out-of-pocket
expenses, and there will be no review of the reasonableness of
the expenses by anyone other than our Board, which includes
persons who may seek reimbursement, or a court of competent
jurisdiction if such reimbursement is challenged. If all of
JKAs directors are not deemed independent, JKA
will not have the benefit of independent directors examining the
propriety of expenses incurred on JKAs behalf and subject
to reimbursement.
Upon completion of the merger, it is anticipated that employment
agreements with Allen Neel, David Cudd and Paul Culbreth will
become effective with Multi-Shot, Inc., such agreements to be
substantially identical to the current amended and restated
employment agreements. A summary of the employment agreements
can be found under Employment Agreements on
page 22. In addition, upon completion of the merger, it is
anticipated that most of the employees of Multi-Shot, LLC will
continue their employment with Multi-Shot, Inc.
Executive
Compensation Multi-Shot
Compensation
Discussion and Analysis
Multi-Shots executive compensation program is administered
by Multi-Shots full board of directors, as Multi-Shot does
not currently maintain a separate compensation committee. The
primary components of the
Multi-Shot
executive compensation program for 2006 were base salary,
participation in Multi-Shots annual cash bonus plan and
long-term incentive compensation, all as set forth in employment
agreements as discussed below.
The members of the Multi-Shot board of directors serve on the
boards of other private companies, and participate in
organizations that make portfolio investments in many different
private companies. As such, they know that salaries for
executives in private companies are generally lower than
similarly sized public companies, but that incentive bonus
arrangements and equity ownership opportunities are critical in
attracting and retaining the executive talent in private
companies. The Board further believes that the structure and
amounts payable under the compensation program, including the
allocation of the compensation among base salary, annual cash
bonus and long-term incentive awards, provide appropriate
financial certainty to the Multi-Shot executives, while at the
same time properly incentivizing the executives to increase
Multi-Shots profitability and shareholder return, thereby
aligning their interests with those of the
Multi-Shot
shareholders.
Multi-Shots current executive officers are Allen Neel,
President and Chief Executive Officer, Scott Bork, Chief
Financial Officer, David Cudd, Vice President Sales
and Marketing, and Paul Culbreth, Vice President
Operations.
Messrs. Neel, Culbreth and Cudd have had employment agreements
since August 2004. Pursuant to those employment agreements, each
of these executive officers was entitled to receive a base
salary, a monthly cash bonus as a supplement to the base salary,
an annual cash bonus, and long-term incentive compensation in
the form of
112
membership units in Multi-Shot, all as more fully discussed
below. In August 2005, the Multi-Shot board of directors
established the base salary levels that existed during 2006 by
increasing the initial salaries in the employment agreements by
10%. With respect to base salary determinations, the chief
executive officer recommended to the Multi-Shot board of
directors the base salary level of the other executive officers
in August 2005, with the Multi-Shot board of directors
considering such recommendations and then making its own
determinations as to the base salary of the chief executive
officer and the other executive officers. The base salary
increase effective August 2005 was in response to the strong
performance by the Company for the prior twelve months and an
acknowledgement of the skill, talent and experience of the
executive officers.
These employment agreements also provided for incentives in the
form of monthly and annual EBITDA targets to achieve in order
for the executive officers to receive monthly and annual cash
bonuses, which are set forth below. In August 2005, the
Multi-Shot board of directors considered, but made no changes
to the monthly and annual cash bonus target levels or award
amounts from what is set forth in the employment agreements.
In connection with the private recapitalization in April 2007,
Messrs. Neel, Culbreth and Cudd executed amended and
restated employment agreements, each providing for increased
base salaries, a termination of the monthly cash bonuses and
different standards for annual cash bonuses, all as more fully
discussed below.
Base
Salary
Base salaries provide executives with a set level of monthly
cash income, which levels are based on factors including
individual performance and level and scope of responsibility.
For 2006, Multi-Shots executive officers received the
following base salaries: Mr. Neel $181,500, Mr.
Culbreth $171,600, Mr. Cudd $132,000 and
Mr. Bork $89,600. In connection with the
private recapitalization and the execution of amended and
restated employment agreements in April 2007, the executive
officers base salaries were increased to the following
levels: Mr. Neel $275,000,
Mr. Culbreth $230,000,
Mr. Cudd $230,000, and
Mr. Bork $100,000. As discussed below, the
monthly cash bonus awards were terminated and a portion of that
expected amount was added to the base salary levels for
Messrs. Neel, Culbreth and Cudd.
Cash
Bonus
Annual cash bonuses are designed to encourage exceptional
corporate and individual performance for any given year. For
2006, pursuant to the terms of the employment agreements,
Messrs. Neel, Culbreth, and Cudd participated in a bonus
pool that equally divided an annual cash bonus in an amount
equal to 15% of the EBITDA of the Company that exceeded
$4.0 million in 2006, with such aggregate annual cash bonus
amount capped at $175,000 each. Because the Company had 2006
EBITDA of $20.4 million, each of Messrs. Neel,
Culbreth, and Cudd received an annual cash bonus amount of
$175,000 for 2006.
In addition, pursuant to the terms of the employment agreements,
Multi-Shot provided monthly cash bonuses as a salary supplement
to Messrs. Neel and Culbreth in an amount equal to one
percent of Multi-Shots monthly EBITDA, and to
Mr. Cudd in an amount equal to one-half percent of monthly
gross sales. The aggregate monthly bonus and commission amounts
paid during the year resulting from the achievement of these
measurements for Messrs. Neel, Culbreth and Cudd were
$173,909, $173,909, and $319,090, respectively. Mr. Bork
received an aggregate of $54,553 in quarterly discretionary
bonuses during 2006.
In connection with the private recapitalization in April 2007
and the execution of amended and restated employment agreements
with the executive officers, the monthly cash bonus awards were
terminated and new annual cash bonus awards were established.
For 2007, annual cash bonus amounts will be a maximum of 75% of
base salary and will be based on two criteria. Approximately
two-thirds of the bonus amount (equal to 50% of the base salary)
will be based upon the percentage variance of actual EBITDA of
the Company versus budgeted 2007 EBITDA of the Company of
$27.5 million, which we refer to as the Objective
Component. If the Company does not achieve the budgeted EBITDA,
then the Objective Component bonus amount is reduced. For
example, for each one percent negative variance of actual EBITDA
versus budgeted EBITDA, four percent (4%) of the possible
maximum amount that could be earned under the Objective
Component is forfeited, meaning if the potential Objective
Component bonus amount is $137,500 and the actual EBITDA is 5%
below budgeted EBITDA, an aggregate of 20% would be deducted
from the potential Objective Component bonus amount. If the
actual EBITDA is 25%
113
below budgeted EBITDA, the executive would receive no Objective
Component bonus amount. The remainder of the potential annual
cash bonus amount (equal to 25% of the base salary) will be
based on the employees individual contributions to the
business of the Company, which may or may not necessarily
manifest themselves in the financial performance for the given
year, which we refer to as the Subjective Component. The
ultimate bonus amount in a given year for the Subjective
Component will be at the discretion of the Multi-Shot board of
directors.
Long-Term
Incentive Awards
Multi-Shots Long-Term Incentive Awards are intended to
focus the executive officers on the long-term performance of
Multi-Shot, directly linking the executive officers
interests with those of Multi-Shots other members.
Pursuant to the terms of the employment agreements and
Multi-Shots 2004 Incentive Plan, during 2006, an aggregate
of 5.06 units representing 23% of the total potential unit
awards under the Plan and valued at $2.5 million were
awarded equally to Messrs. Neel, Culbreth, and Cudd.
The Company previously adopted the 2004 Incentive Plan (the
Plan) that could award membership interests in the
Company to eligible persons. The total number of units of
membership interest that could have been issued to the eligible
persons under the Plan could not exceed 22 units or 22% of
the Company, fully diluted, if all such units were ultimately
awarded. The awards were determined annually on the Plans
anniversary of July 31 and were based upon the
Companys average EBITDA (Earnings before Interest, Taxes,
Depreciation and Amortization for all years since the date
Company operations commenced) exceeding annual predetermined
amounts. The Plan was administered by the Board of Managers of
Multi-Shot and carried an anniversary of July 31 of each
year (e.g., July 31, 2005 was the first anniversary of the
Plan). During 2005 for the first anniversary ending
July 31, 2005, 5.06 of the 22 units were awarded and
were valued at $0.3 million, representing 23% of the total
potential awards as stated in the Plan. For the second plan
year, ending July 31, 2006, an additional 5.06 units
also representing 23% of the total potential unit awards and
valued at $2.5 million were awarded. For the remaining
3 years of the Plan (for the years ended July 31,
2007, 2008 and 2009) 3.96 units could have been
awarded (each representing 18% of the total of 22 maximum units
subject to such award). The remaining 11.88 units in the
Plan were awarded in connection with the private
recapitalization with SG-Directional LLC, whereupon the Plan was
terminated.
In connection with the private recapitalization in April 2007
and the execution of amended and restated employment agreements
with the executive officers, new long-term incentives in the
form of gain share awards were included. These gain share awards
are designed to tie the executives incentive to realized
increases in the gross enterprise value of Multi-Shot. The gain
share award vests equally over four years beginning
April 1, 2008, with payment of the gain share award
becoming due upon a realization event (as defined in the award
agreements). The amounts due under the gain share award are
based upon a calculation of the increase in gross enterprise
value of Multi-Shot from April 1, 2007 to a realization
event, and the extent to which such increase in gross enterprise
value exceeds the initial equity investment in Multi-Shot and
any additional equity investments, compounded at a
15% annual rate. Messrs. Neel, Culbreth and Cudd are
each eligible to receive an amount equal to 2% of such gain
share award amount. The transaction with JKA is not a
realization event (as defined in the award agreements) under the
gain share awards.
Perquisites
and Other Compensation
In addition to base salary, annual cash bonuses and long-term
incentive awards, Messrs. Neel, Culbreth and Cudd receive a car
allowance of $9,000 per year. Each of the executive officers
also participate in Multi-Shots various benefit and
welfare plans.
Employment
Agreements and Payments upon Termination
Each of the executive officers is a party to an amended and
restated employment agreement dated April 1, 2007, the initial
term of which expires on December 31, 2009, and is automatically
renewed for successive one year terms thereafter, unless earlier
terminated. These employment agreements set forth each
executive officers duties and compensation as discussed
above.
In addition, the employment agreements contain certain
termination provisions. If Multi-Shot terminates any executive
for cause or misconduct (each as defined in the employment
agreements) or any executive voluntarily terminates his
employment, Multi-Shot shall have no further obligation to such
executive, other than payment of accrued but unpaid base salary
and vacation time.
114
If Multi-Shot terminates any executive without cause, including
any constructive termination (as defined in the employment
agreements), such executive shall be entitled to payment of all
accrued and prorated but unpaid base salary, bonus, any vested
incentive award and vacation time, and shall also be entitled to
a severance payment equal to $500,000, payable at
Multi-Shots option, either in a lump sum or over a period
of twelve months.
The executive officers will not receive a change in control
payment in connection with this transaction. As noted above,
upon completion of the merger, it is anticipated that the
executive officers will enter into new employment agreements, as
described on page 22 hereof.
Summary
Compensation Table for 2006
The table below summarizes the total compensation paid to or
earned by each of the executive officers in 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Incentive Plan
|
|
All Other
|
|
|
Name and Principal Position
|
|
Salary
|
|
Bonus
|
|
Awards(1)
|
|
Compensation(2)
|
|
Compensation
|
|
Total
|
|
Allen Neel
|
|
$
|
181,500
|
|
|
|
|
|
|
$
|
825,000
|
|
|
$
|
348,909
|
|
|
|
|
|
|
$
|
1,355,409
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Bork
|
|
$
|
89,600
|
|
|
$
|
54,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
144,153
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Cudd
|
|
$
|
132,000
|
|
|
|
|
|
|
$
|
825,000
|
|
|
$
|
494,040
|
|
|
|
|
|
|
$
|
1,451,040
|
|
Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Culbreth
|
|
$
|
171,600
|
|
|
|
|
|
|
$
|
825,000
|
|
|
$
|
348,909
|
|
|
|
|
|
|
$
|
1,345,509
|
|
Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts in this column represent the award of units in
Multi-Shot, LLC under the Multi-Shot 2004 Incentive Plan. See
Long Term Incentive Awards.
|
|
(2)
|
|
Amounts in this column represent performance-based bonuses
earned in 2006. See Cash Bonus.
|
Grants
of Plan-Based Award Table for 2006
The table below sets forth the grants of awards for annual cash
bonuses and monthly cash bonuses, and the long-term incentive
awards under Multi-Shots 2004 Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under
|
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
|
Non-Equity Incentive Plan Awards
|
|
Estimated Future Payouts Under Equity Incentive Plan
Awards
|
|
Value of Unit
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Awards
|
Name
|
|
Grant Date
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Allen Neel
|
|
1/01/06
|
|
$0
|
|
|
|
$175,000(1)
|
|
|
|
|
|
|
|
|
|
|
1/01/06
|
|
$0
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
7/31/06
|
|
|
|
|
|
|
|
|
|
|
|
$825,000(3)
|
|
$825,000(3)
|
Scott Bork
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Cudd
|
|
1/01/06
|
|
$0
|
|
|
|
$175,000(1)
|
|
|
|
|
|
|
|
|
|
|
1/01/06
|
|
$0
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
7/31/06
|
|
|
|
|
|
|
|
|
|
|
|
$825,000(3)
|
|
$825,000(3)
|
Paul Culbreth
|
|
1/01/06
|
|
$0
|
|
|
|
$175,000(1)
|
|
|
|
|
|
|
|
|
|
|
1/01/06
|
|
$0
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
7/31/06
|
|
|
|
|
|
|
|
|
|
|
|
$825,000(3)
|
|
$825,000(3)
|
|
|
|
(1)
|
|
Represents the annual cash bonus amount pursuant to the terms of
the employment agreements, which aggregate amount is equally
divided among Messrs. Neel, Culbreth, and Cudd in an amount
equal to 15% of the EBITDA of the Company that exceeds
$4.0 million in 2006, with such aggregate annual cash bonus
amount capped at $175,000 each.
|
|
(2)
|
|
Pursuant to the terms of their employment agreements, the
executive officers are entitled to monthly cash bonuses, which
amount is equal to 1% of the Companys monthly EBITDA for
Messrs. Neel and Culbreth and 0.5% of monthly gross sales
for Mr. Cudd. No threshold target or maximum for such
monthly cash bonus is established in the employment agreements.
|
|
(3)
|
|
Represents the award of long-term incentive compensation
pursuant to the terms of the employment agreements, which
aggregate amount was 5.06 units and valued at
$2.475 million and equally divided among Messrs. Neel,
Culbreth, and Cudd.
|
As of December 31, 2006, there are no unexercised options
or unvested units for the named executive officers.
115
AMENDMENT
TO CERTIFICATE OF INCORPORATION PROPOSAL
The discussion in this proxy statement of the amendment to our
Amended and Restated Certificate of Incorporation, as amended,
which is attached hereto as
Annex G
, is subject to,
and qualified in its entirety by reference to, the Fourth
Amendment, a copy of which is attached as
Annex H
to
this proxy statement and is incorporated in this proxy statement
by reference.
Background
We are seeking your approval to authorize the Board, to amend
our certificate of incorporation to (i) increase the number
of authorized shares of common stock from 50,000,000 shares
to 150,000,000 shares, which will result in an increase of
the total number of authorized shares of capital stock from
51,000,000 to 151,000,000; (ii) change our name from
JK Acquisition Corp. to MS Energy Services,
Inc and (iii) to remove certain provisions that will
no longer be applicable to JKA following the consummation of the
merger with Multi-Shot. The management of JKA has not reserved
or determined to set aside any securities of the increased
amount of authorized common stock pursuant to this proposal.
The increase in the number of authorized shares of common stock
and the name change are being undertaken as a result of and in
conjunction with the merger with Multi-Shot, LLC. As a result of
the issuance of shares of common stock and adoption of a new
equity incentive plan, as described in the equity incentive plan
proposal, we will require additional shares of common stock to
be reserved in our Amended and Restated Certificate of
Incorporation. In addition, in the event that the merger is
completed, we will change our name to MS Energy Services,
Inc. Accordingly, this proposal to amend our certificate
of incorporation is conditioned upon and subject to the approval
of the merger proposal and the election of directors
proposal, but not the equity incentive plan proposal.
Of the 50,000,000 shares of common stock currently
authorized, as of September 30, 2007,
16,516,667 shares were issued and outstanding,
26,450,000 shares were reserved for issuance upon exercise
of our currently outstanding publicly traded warrants,
666,668 shares were reserved for issuance upon the exercise
of the warrants underlying the units purchased in the private
placement immediately prior to our initial public offering, and
2,100,000 shares were reserved for issuance for the shares
underlying the underwriters purchase option to purchase
700,000 units. As a result, only 4,266,665 shares of
common stock remain available for future issuance. It is
anticipated that pursuant to the proposed financing of the
merger, the incentive plan proposal as described in
Proposal Four, and the transactions conditioned on such
issuances, that we will issue or reserve for future issuance
420,000 shares of our common stock. Accordingly, an
increase in the number of authorized shares of common stock is
necessary in order to insure a sufficient number of shares are
available for issuance upon the transactions described in
Proposals One and Four. Accordingly, this proposal to
increase the authorized number of shares of common stock is
conditioned upon the approval of Proposals One and Three,
and the Board, even if this proposal is approved, will not
undertake to amend our certificate of incorporation if
Proposals One and Three are not approved. Additionally, our
current name will not adequately reflect our business operations
in the event the merger with Multi-Shot, LLC is consummated.
Accordingly, we believe that changing our name to MS
Energy Services, Inc. in connection with the consummation
of the merger will better reflect our operating business after
the merger.
Proposal
Under the proposed amendment, Article I of our certificate
of incorporation would be amended as follows:
The name of the corporation is MS Energy Services, Inc.
(the Corporation).
Further, under the proposed amendment, Article IV,
Section A of our certificate of incorporation would be
amended as follows:
A: This Corporation is authorized to issue two classes of
stock to be designated, respectively, Common Stock
and Preferred Stock. The total number of shares the
Corporation is authorized to issue is one hundred fifty one
million (151,000,000) shares, one hundred fifty million
(150,000,000) shares of which shall be Common Stock
116
(the Common Stock) and one million (1,000,000)
shares of which shall be Preferred Stock (the Preferred
Stock). The Preferred Stock shall have a par value of
$0.0001 per share and the Common Stock shall have a par
value of $0.0001 per share.
Further, under the proposed amendment, Article V(A) of our
certificate of incorporation would be deleted in its entirety.
The proposed amendment does not change the number of authorized
shares of preferred stock. Our Board has recommended that our
stockholders approve the amendment to the certificate of
incorporation. The proposed amendment would provide a sufficient
number of available shares to enable us to close the transaction
discussed in Proposal One and issue awards under the equity
incentive plan discussed in Proposal Four and would provide
the Board with the ability to issue additional shares of common
stock without requiring stockholder approval of such issuances
except as otherwise may be required by applicable law or the
rules of any stock exchange or trading system on which the
securities may be listed or traded, including the American Stock
Exchange. Other than as previously disclosed, our Board does not
intend to issue any common stock except on terms that the Board
deems to be in the best interest of JKA and our stockholders.
Required
Vote
The approval of the amendment to the certificate of
incorporation requires the affirmative vote of holders of at
least a majority of the outstanding shares of our common stock.
Abstentions and broker non-votes, as well as failing to vote by
not returning your proxy card, because they are not affirmative
votes, will have the same effect as a vote against this
proposal.
APPROVAL OF PROPOSALS ONE AND THREE ARE
CONDITIONED UPON APPROVAL OF THIS PROPOSAL.
Recommendation
The Board believes that it is in the best interests of JKA that
the stockholders approve the proposal to authorize the Board, in
its discretion (based on stockholder approval), to amend our
certificate of incorporation in such manner as described herein.
However, the Boards discretion is limited to what
JKAs stockholders actually vote for which is
described in full in this section.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF
JKA VOTE FOR THIS PROPOSAL TWO TO AUTHORIZE THE
BOARD OF DIRECTORS, AS AUTHORIZED HEREIN, TO AMEND JKAS
CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK FROM 50,000,000 TO
150,000,000, TO CHANGE OUR NAME TO MS ENERGY SERVICES,
INC AND TO DELETE ARTICLE V IN ITS ENTIRETY.
117
APPROVAL
OF THE ELECTION OF THE NOMINEES TO OUR BOARD OF
DIRECTORS
General
Description of the Nomination Proposal
Our Board presently is comprised of four directors. Upon the
consummation of the merger, we expect that James P. Wilson,
Keith D. Spickelmier, Herbert C. Williamson III and Michael
H. McConnell will resign from the Board. At the special meeting,
our Board will be increased to seven members and five new
directors are to be elected to serve until their successors are
duly elected and qualified. Two vacancies will exist on our
Board following the Special Meeting.
Our Board has approved the nomination of Allen Neel, Ron Nixon,
K. Rick Turner, James O. Jacoby, Jr. and Kim Eubanks to
serve as directors of the Board. These nominees have consented
to being named in this proxy statement and to serve if elected.
The election of the nominees is required under the merger
agreement. As a result, this proposal to elect additional
directors is conditioned upon the approval of the merger
proposal, and the amendment proposal, but not the equity
incentive plan proposal.
Required
Vote
For election as a director, a nominee must receive, at a meeting
at which a quorum exists, the affirmative vote of a plurality of
the shares of our common stock present in person or represented
by proxy at the special meeting and entitled to vote on the
election of directors. Failure to return your proxy and broker
non-votes will have no effect on the election of directors if a
quorum is present. Cumulative voting for directors is not
permitted by our Bylaws.
APPROVAL OF PROPOSAL ONE AND
TWO ARE CONDITIONED UPON APPROVAL OF THIS PROPOSAL.
Additional
Information
For additional information about our Board and committees
thereof, please see Directors and Management of JKA
Following the Merger with Multi-Shot, LLC on page 108.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THIS PROPOSAL THREE
REGARDING THE ELECTION OF ALLEN NEEL, RON NIXON, K. RICK TURNER,
JAMES O. JACOBY, JR. AND KIM EUBANKS AS DIRECTORS.
118
THE 2007
EQUITY INCENTIVE PLAN PROPOSAL
The discussion in this proxy statement of the JKA 2007 Equity
Incentive Plan (the Plan) is subject to, and
qualified in its entirety by reference to, the Plan, a copy of
which is attached as
Annex I
to this proxy statement
and incorporated in this proxy statement by reference.
Background
We are seeking your approval on the adoption of the Plan
providing for the issuance of a maximum of 420,000 shares
of common stock in connection with the grant of options,
restricted stock
and/or
other
stock-based or stock-denominated awards.
On
[ ],
2007, our Board approved the Plan, and recommended that the Plan
be submitted to the stockholders for approval at the special
meeting. If approved by the stockholders at the special meeting,
the Plan will become effective as of the closing of the merger.
A copy of the Plan is attached as
Annex I.
This
proposal is conditioned upon approval of the merger proposal,
amendment proposal and election of directors proposal.
The Plan being submitted under this proposal does not have any
securities issued pursuant to it and, no future issuances which
may be awarded have been determined, approved or granted. JKA
does not presently have any other equity compensation plans.
The Plan includes the following features that protect the
interests of our stockholders:
|
|
|
|
|
Administration by a Compensation Committee composed entirely of
independent directors;
|
|
|
|
Exercise prices for stock options and certain stock-based awards
must be at least 100% of fair market value on the grant date of
the award;
|
|
|
|
The Plan sets the maximum number of options, stock grants or
stock-based awards to any one employee during any fiscal year of
JKA at 100,000;
|
|
|
|
Awards may not be re-priced; and
|
|
|
|
No material amendments will be made to the Plan without the
approval of JKA stockholders.
|
Description
of the JKA 2007 Equity Incentive Plan
The following is a brief description of certain important
features of the Plan, the full text of which is attached as
Annex I.
This summary does not purport to be
complete and is qualified in its entirety by reference to
Annex I.
If the proposal to adopt the Plan is
approved, we intend to promptly file a registration statement on
Form S-8
under the Securities Act of 1933, as amended, registering the
shares available for issuance under the Plan. If
Proposals One, Two and Three are not approved, then JKA
will not adopt the Plan.
General.
The Plan is intended to encourage
ownership of shares by employees and directors of and certain
consultants to JKA in order to attract and retain such people
and to induce them to provide services for the benefit of JKA or
of an Affiliate of JKA (as defined in the Plan). The Plan
provides for the granting of incentive stock options,
non-qualified options, restricted stock grants and stock-based
awards.
Administration.
The Plan will be administered
by the Compensation Committee (the Administrator),
except to the extent the Compensation Committee delegates its
authority to the Board. All members of the Compensation
Committee must satisfy the requirements for independence of SEC
Rule 16b-3
and remain qualified as outside directors within the
meaning of Section 162(m) of the Code. The Administrator
has the authority to administer and interpret the Plan, to
determine the employees to whom awards will be granted under the
Plan and, subject to the terms of the Plan, the type and size of
each award, the terms and conditions for vesting, cancellation
and forfeiture of awards and the other features applicable to
each award or type of award. The Administrator may accelerate or
defer the vesting or payment of awards, cancel or modify
outstanding awards, waive any conditions or restrictions imposed
with respect to awards or the stock issued pursuant to awards
and make any and all other determinations that it deems
appropriate, subject to the limitations contained in the Plan,
including minimum vesting requirements, prohibitions against
re-pricing, and provisions designed to maintain compliance with
the
119
requirements of Sections 422 (for incentive stock options),
162(m) and 409A of the Code, as well as other applicable laws
and stock exchange rules.
Eligibility.
All employees of JKA,
defined by the Plan to include any employee of JKA or of an
Affiliate, including employees who are also serving as an
officer or director of JKA or of an Affiliate, are eligible to
receive awards under the Plan. Incentive stock options may be
granted only to employees. All other awards may be granted to
any participant in the Plan. Participation is discretionary, and
awards are subject to approval by the Administrator. As of
[ ],
2007, there were no employees that would be eligible to
participate in the plan because JKA did not have any employees.
Shares Subject to the Plan.
The maximum
number of shares of common stock that may be subject to awards
during the term of the Plan is 420,000 shares. The AMEX
closing price of a share of JKAs common stock on
[ ]
[ ], 2007, was $[ ].
The maximum number of shares of common stock that may be issued
under the Plan will not be affected by or awards that are
granted through the assumption of, or in substitution for,
outstanding awards previously granted to individuals who have
become employees as a result of a merger, consolidation, or
acquisition or other corporate transaction involving JKA or a
subsidiary. No awards are contemplated as part of the merger.
Additionally, shares used by a participant to exercise an
option, and shares withheld by JKA to cover the withholding tax
liability associated with the exercise of an option, are not
counted toward the maximum number of shares that may be issued
under the Plan and, accordingly, will not reduce the number of
shares that will be available for future awards.
Shares of common stock issued in connection with awards under
the Plan may be shares that are authorized but unissued, or
previously issued shares that have been reacquired, or both. If
an award under the Plan is forfeited, canceled, terminated or
expires prior to the issuance of shares, the shares subject to
the award will be available for future grants under the Plan.
Shares subject to outstanding awards granted under other plans
shall not be subject to future issuance under the Plan, if such
awards are forfeited, canceled, terminated or expire prior to
the issuance of shares.
Limits on Awards.
The aggregate number of
shares of common stock subject to awards that may be granted to
any one participant during any fiscal year of JKA may not exceed
100,000.
Types of Awards.
The following types of awards
may be granted under the Plan. All of the awards described below
are subject to the conditions, limitations, restrictions,
vesting and forfeiture provisions determined by the
Administrator, in its sole discretion, subject to such
limitations as are provided in the Plan. The number of shares
subject to any award is also determined by the Administrator, in
its discretion. At the discretion of the Administrator, awards
may be made subject to or may vest on an accelerated basis upon
the achievement of performance related criteria, which may be
established on a Company-wide basis or with respect to one or
more business units or divisions or subsidiaries, and may be
based upon the attainment of criteria as may be determined by
the Administrator and set forth in the participants award
agreement. None of the awards available under the Plan may be
granted to any participant who is not subject to United States
federal income tax, unless such grant would not constitute
deferred compensation within the meaning of Section 409A of
the Code.
Stock Grants.
A stock grant is an award of
outstanding shares of common stock that does not vest until
after a specified period of time, or upon the satisfaction of
other vesting conditions as determined by the Administrator, and
which may be forfeited if conditions to vesting are not met.
Participants generally receive dividend payments on the shares
subject to a restricted stock grant award during the vesting
period, and are also generally entitled to vote the shares
underlying their awards.
Non-Qualified Stock Options.
An award of a
non-qualified stock option under the Plan grants a participant
the right to purchase a certain number of shares of common stock
during a specified term in the future, after a vesting period,
at an exercise price equal to at least 100% of the fair market
value of the common stock on the grant date. The term of a
non-qualified stock option may not exceed 10 years from the
date of grant. The exercise price may be paid by any of the
means described below under Payment of Exercise
Price. A non-qualified stock option is an option that does
not qualify under Section 422 of the Code.
Incentive Stock Options.
An incentive stock
option is a stock option that meets the requirements of
Section 422 of the Code, which include an exercise price of
no less than 100% of fair market value on the grant
120
date, a term of no more than 10 years, and that the option
be granted from a plan that has been approved by stockholders.
Additional requirements apply to an incentive stock option
granted to a participant who beneficially owns stock
representing more than 10% of the total voting power of all
outstanding stock of JKA on the date of grant. If certain
holding period requirements are met and there is no
disqualifying disposition of the shares, the participant will be
able to receive capital gain (rather than ordinary income)
treatment under the Code with respect to any gain related to the
exercise of the option.
Stock-Based Awards.
A stock-based award is a
grant by JKA under the Plan of an equity award or an equity
based award which is not a non-qualified stock option, an
incentive stock option, or a stock grant. The Administrator has
the right to grant stock-based awards having such terms and
conditions as the Administrator may determine, including,
without limitation, the grants of shares based upon certain
conditions, the grant of securities convertible into shares and
the grant of stock appreciation rights, phantom stock awards or
stock units. The principal terms of each stock-based award will
be set forth in the participants award agreement, in a
form approved by the Administrator and shall contain terms and
conditions which the Administrator determines to be appropriate
to be appropriate and in the best interests of JKA.
Payment of Exercise Price.
Payment of the
exercise price of a non-qualified stock option or incentive
stock option may be made in cash or, if permitted by the
Administrator, by tendering shares of common stock owned by the
participant and acquired at least six (6) months prior to
exercise, having a fair market value equal to the exercise
price, by a combination of cash and shares of common stock or by
authorizing the sale of shares otherwise issuable upon exercise,
with the sale proceeds applied towards the exercise price.
Additionally, the Administrator may provide that stock options
can be net exercised that is exercised by issuing
shares having a value approximately equal to the difference
between the aggregate value of the shares as to which the option
is being exercised and the aggregate exercise price for such
number of shares.
Prohibition Against Re-pricing.
The Plan
prohibits the issuance of awards in substitution for outstanding
awards or any other adjustment that would constitute a
re-pricing (within the meaning of U.S. generally accepted
accounting principles or any applicable stock exchange rule) of
awards.
Additional Forfeiture Provisions.
Awards
granted under the Plan are subject to forfeiture if, after a
termination of employment, the participant engages in certain
activities that breach an obligation or duty of the participant
to JKA, or that are materially injurious to or in competition
with JKA.
Deferrals.
Subject to the limitation described
below, the Administrator may postpone the exercise of awards, or
the issuance or delivery of shares or cash pursuant to any award
for such periods and upon such terms and conditions as the
Administrator determines. In addition, the Administrator may
determine that all or a portion of a payment to a participant,
whether in cash
and/or
shares, will be deferred in order to prevent JKA or any
subsidiary from being denied a United States federal income tax
deduction under Section 162(m) of the Code with respect to
an award granted under the Plan. If any of such deferrals,
however, would cause the Plan to become subject to
Section 409A of the Code, the Administrator generally may
not take such actions unless it affirmatively determines to
subject the Plan to all of the requirements of Section 409A.
Non-Transferability.
By its terms, awards
granted under the Plan are not transferable other than
(i) by will or the laws of descent and distribution or
(ii) as approved by the Administrator in its discretion and
set forth in the applicable agreement with the participant.
Notwithstanding the foregoing, an incentive stock option
transferred except in compliance with clause (i) above will
no longer qualify as an incentive stock option. During a
participants lifetime, all rights with respect to an award
may be exercised only by the participant (or by his or her legal
representative) and cannot be assigned, pledged or hypothecated
in any way (whether by operation of law or otherwise) and cannot
be subject to execution, attachment or similar process.
Adjustments.
Subject to certain limitations,
the maximum number of shares available for issuance under the
Plan, the number of shares covered by outstanding awards, the
exercise price applicable to outstanding awards and the limit on
awards to a single employee may be adjusted by the Administrator
if it determines that any stock split, extraordinary dividend,
stock dividend, distribution (other than ordinary cash
dividends), recapitalization, merger, consolidation,
reorganization, combination or exchange of shares or other
similar event equitably requires such an adjustment.
121
Corporate Transaction.
Upon the occurrence of
a Corporate Transaction, as defined in the Plan, the
Administrator, may, in its discretion and as it deems
appropriate as a consequence of such Corporate Transaction,
accelerate, purchase, adjust, modify or terminate awards or
cause awards to be assumed by the surviving corporation in the
transaction that triggered such Corporate Transaction. Any such
actions that would cause the Plan to become subject to
Section 409A of the Code, however, generally may not be
taken unless the Administrator affirmatively determines to
subject the Plan to all of the requirements of Section 409A.
Amendment and Termination.
The Plan will
terminate ten years after adoption, the date which is ten years
from the earlier of the date of its adoption by the Board and
the date of its approval by the stockholders of JKA. The Plan
may be amended or terminated by the Administrator at an earlier
date, provided that no amendment that would require stockholder
approval under any applicable law or regulation (including the
rules of any exchange on which JKAs shares are then listed
for trading) or under any provision of the Code, may become
effective without stockholder approval, and, provided further,
that no amendments to the Plan will permit JKA to re-price any
outstanding awards. A termination, suspension or amendment of
the Plan may not adversely affect the rights of any participant
with respect to a previously granted award, without the
participants written consent; provided, however, that any
award may be amended, revised or revoked as deemed necessary by
the Administrator to avoid penalties under Code
Section 409A. Additionally, the Board has the power,
without further approval of JKAs stockholders, to amend
the Plan in any respect necessary at any point in time to permit
the Plan, and awards granted thereunder, to continue to comply
with
Rule 16b-3
under the 1934 Act and with Code Section 422.
Certain
United States Federal Income Tax Consequences
The following is a brief summary of the principal United States
federal income tax consequences of transactions under the Plan,
based on current United States federal income tax laws. This
summary is not intended to be exhaustive, does not constitute
tax advice and, among other things, does not describe state,
local or foreign tax consequences, which may be substantially
different.
Stock Grants.
A participant generally will not
be taxed at the time a stock grant is awarded, but will
recognize taxable income when the award vests or otherwise is no
longer subject to a substantial risk of forfeiture. The amount
of taxable income recognized will equal the fair market value of
the shares subject to the award (or the portion of the award
that is then vesting) at that time. Participants may elect to be
taxed based on the fair market value of the shares at the time
of grant by making an election under Section 83(b) of the
Code within 30 days of the award date. If an award with
respect to which a participant has made such an election under
Section 83(b) is subsequently canceled, no deduction or tax
refund will be allowed for the amount previously recognized as
income. Unless a participant makes a Section 83(b)
election, dividends paid to a participant on shares of an
unvested restricted stock grant will be taxable to the
participant as ordinary income. If the participant made a
Section 83(b) election, the dividends will be taxable to
the participant as dividend income, which generally is subject
to the same rate as capital gains income.
Except as provided under Certain Limitations on
Deductibility of Executive Compensation below, JKA will
ordinarily be entitled to a deduction at the same time and in
the same amounts as the ordinary income recognized by the
participant with respect to a stock grant award. Unless a
participant has made a Section 83(b) election, JKA will
also be entitled to a deduction, for federal income tax
purposes, for dividends paid on awards of unvested restricted
stock grants when the restrictions lapse.
Non-Qualified Stock Options.
Generally, a
participant will not recognize taxable income on the grant of a
non-qualified stock option provided the exercise price of the
option is equal to the fair market value of the underlying stock
at the time of grant. Upon the exercise of a non-qualified stock
option, a participant will recognize ordinary income in an
amount equal to the difference between the fair market value of
the common stock received on the date of exercise and the option
cost (number of shares purchased multiplied by the exercise
price per share). The participant will recognize ordinary income
upon the exercise of the option even though the shares acquired
may be subject to further restrictions on sale or
transferability. Except as provided under Certain
Limitations on Deductibility of Executive Compensation
below, JKA will ordinarily be entitled to a deduction on the
exercise date equal to the ordinary income recognized by the
participant upon exercise.
Generally, upon a subsequent sale of shares acquired in an
option exercise, the difference between the sale proceeds and
the cost basis of the shares sold will be taxable as a capital
gain or loss.
122
Incentive Stock Options (ISOs).
No taxable
income is recognized by a participant on the grant of an ISO. If
a participant exercises an ISO in accordance with the terms of
the ISO and does not dispose of the shares acquired within two
years from the date of the grant of the ISO, nor within one year
from the date of exercise, the participant will be entitled to
treat any gain or loss related to the exercise of the ISO as
capital gain or loss (instead of ordinary income), and JKA will
not be entitled to a deduction by reason of the grant or
exercise of the ISO. The amount of the gain or loss upon a
subsequent sale will be long-term capital gain or loss equal to
the difference between the amount realized on the sale and the
participants basis in the shares acquired. If a
participant sells or otherwise disposes of the shares acquired
without satisfying the required minimum holding period, such
disqualifying disposition will give rise to ordinary
income equal to the excess of the fair market value of the
shares acquired on the exercise date (or, if less, the amount
realized upon disqualifying disposition) over the
participants tax basis in the shares acquired.
Additionally, the exercise of an ISO will give rise to an item
of tax preference that may result in alternative minimum tax
liability for the participant. Except as provided under
Certain Limitations on Deductibility of Executive
Compensation below, JKA will ordinarily be entitled to a
deduction equal to the amount of the ordinary income taxable to
a participant as a result of any disqualifying disposition.
Stock-Based Awards.
A participant will
recognize taxable income on the grant of unrestricted stock, in
an amount equal to the fair market value of the shares on the
grant date. Except as provided under Certain Limitations
on Deductibility of Executive Compensation below, JKA will
ordinarily be entitled to a deduction at the same time and in
the same amounts as the ordinary income recognized by the
participant with respect to such a stock award. Other rules
apply with regard to other forms of stock-based awards.
Withholding.
JKA retains the right to deduct
or withhold, or require the participant to remit to his or her
employer, an amount sufficient to satisfy federal, state and
local and foreign taxes, required by law or regulation to be
withheld with respect to any taxable event as a result of the
Plan.
Certain Limitations on Deductibility of Executive
Compensation.
With certain exceptions,
Section 162(m) of the Code limits the deduction to JKA for
compensation paid to certain executive officers to
$1 million per executive per taxable year unless such
compensation is considered qualified
performance based compensation within the
meaning of Section 162(m) or is otherwise exempt from
Section 162(m). The Plan is designed so that options and
SARs qualify for this exemption, and it permits the Committee to
grant other awards designed to qualify for this exemption.
Treatment of Excess Parachute
Payments.
The accelerated vesting of awards
under the Plan upon a change of control of JKA could result in a
participant being considered to receive excess parachute
payments (as defined in Section 280G of the Code),
which payments are subject to a 20% excise tax imposed on the
participant. JKA would not be able to deduct the excess
parachute payments made to a participant.
Required
Vote
To be approved by the stockholders, the proposal to approve the
adoption of JKAs 2007 Equity Incentive Plan must receive
the affirmative vote of a majority of the votes cast, in person
or by proxy, at the Special Meeting. Abstentions are treated as
shares present or represented and entitled to vote at the
Special Meeting and will have the same effect as a vote against
this proposal. Broker non-votes are not deemed to be present and
represented and are not entitled to vote, and, therefore, will
have no effect on the outcome of this proposal. A failure to
vote by not returning a signed proxy will have no impact on the
proposal.
THIS PROPOSAL IS CONDITIONED UPON THE APPROVAL
OF PROPOSALS ONE, TWO AND THREE.
Recommendation
The Board believes that it is in the best interests of, and fair
to, JKA and its stockholders that the stockholders approve
JKAs 2007 Equity Incentive Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THIS PROPOSAL FOUR
REGARDING THE ADOPTION OF THE 2007 EQUITY INCENTIVE PLAN.
123
ADJOURNMENT
OF THE SPECIAL MEETING
General
Description of the Adjournment Proposal
The adjournment proposal allows our Board to submit a proposal
to adjourn the special meeting to a later date or dates, if
necessary, to permit further solicitation of proxies in the
event there are not sufficient votes at the time of the special
meeting to approve Proposals One, Two, Three and Four.
Consequences
if Adjournment Proposal is Not Approved
If the adjournment proposal is not approved by the stockholders,
our Board may not be able to adjourn the special meeting to a
later date in the event there are not sufficient votes at the
initially scheduled time of the special meeting to approve the
acquisition.
Required
Vote
Adoption of the adjournment proposal requires the affirmative
vote of a majority of the shares of our common stock present in
person or by proxy at the special meeting and entitled to vote
on the proposal. No vote of the warrant holders is necessary to
adopt the adjournment proposal, and we are not asking the
warrant holders to vote on the adjournment proposal. Adoption of
the adjournment proposal is not conditioned upon the adoption of
Proposal One, Two, Three and Four.
Recommendation:
The Board believes that it is in the best interests of JKA and
its stockholders that the stockholders approve this proposal to
adjourn the special meeting in the event that there are not
sufficient votes at the initially scheduled time of the special
meeting to approve Proposals One, Two, Three and Four.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS VOTE FOR THE ADJOURNMENT PROPOSAL.
124
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
As of September 30, 2007, directors and officers of JKA
owned 3,291,667 shares of our common stock, including:
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Name
|
|
Shares
|
|
|
Relationship to Us
|
|
James P. Wilson(1)
|
|
|
1,781,130
|
|
|
Chairman of the Board, CEO and Secretary
|
Keith D. Spickelmier(2)
|
|
|
1,457,287
|
|
|
President and Director
|
Michael H. McConnell
|
|
|
26,625
|
|
|
Director
|
Herbert C. Williamson
|
|
|
26,625
|
|
|
Director
|
|
|
|
(1)
|
|
Mr. Wilson also owns 366,668 warrants issued in the private
placement immediately prior to the initial public offering. Each
warrant entitles the holder to purchase one share of common
stock at $5.00 per share. The warrants will become
exercisable on the later of the completion of (i) a
business combination by JKA and (ii) April 10, 2007,
and will expire on April 10, 2010.
|
|
(2)
|
|
Mr. Spickelmier also owns 300,000 warrants issued in the
private placement immediately prior to the initial public
offering. Each warrant entitles the holder to purchase one share
of common stock at $5.00 per share. The warrants will
become exercisable on the later of the completion of (i) a
business combination by JKA and (ii) April 10, 2007,
and will expire on April 10, 2010.
|
The holders of the majority of these shares are entitled to make
up to two demands that we register these shares pursuant to a
registration rights agreement executed on April 10, 2006.
The holders of the majority of these shares may elect to
exercise these registration rights at any time after the date on
which these shares of common stock are released from escrow. In
addition, these stockholders have certain piggy-back
registration rights on registration statements filed subsequent
to the date on which these shares of common stock are released
from escrow. We will bear the expenses incurred in connection
with the filing of any such registration statements.
On April 10, 2006, the Board approved and declared the
issuance of a stock dividend of 0.183333 shares of common
stock on each share of common stock currently issued and
outstanding, after which the existing stockholders held, in the
aggregate, 2,958,333 shares. The stock dividend was paid
prior to the private placement pursuant to which Mr. Wilson
and Mr. Spickelmier purchased in the aggregate
333,334 units prior to the initial public offering at a
price equal to the price of our initial public offering
($6.00 per unit). Each unit consists of one share of common
stock and two warrants. Each warrant entitles the holder to
purchase one share of common stock. The existing stockholders
agreed to waive their respective rights to participate in any
liquidation distribution occurring upon our failure to
consummate a business combination, but only with respect to
those shares of common stock acquired by them prior to the
initial public offering, and the 333,334 shares included in
the units they purchased in the private placement. Therefore,
they will only participate in any liquidation distribution with
respect to any shares of common stock acquired in connection
with, or open market purchases following, our initial public
offering. In addition, in connection with the vote required for
our initial business combination, all of our existing
stockholders, including all of our officers, directors and
special advisors, have agreed to vote all of the shares of
common stock owned by them, including those acquired in the
private placement or during or after our initial public
offering, in accordance with the majority of the shares of
common stock voted by the public stockholders.
Per the terms of the merger agreement, at the effective date of
the merger, 2,458,334 of the shares described in the table above
will be cancelled, and 92,522 shares described above will be
transferred to Gibbs & Bruns, L.L.P., which is not an
affiliate of JKA or JKAs officers and directors. If the
merger occurs, the current directors and officers of JKA will
own 740,741 shares our common stock including:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Name
|
|
Shares
|
|
|
Relationship to Us
|
|
James P. Wilson
|
|
|
403,375
|
|
|
|
Chairman of the Board, CEO and Secretary
|
|
Keith D. Spickelmier
|
|
|
330,033
|
|
|
|
President and Director
|
|
Michael McConnell
|
|
|
3,667
|
|
|
|
Director
|
|
Herb D. Williamson
|
|
|
3,667
|
|
|
|
Director
|
|
125
4350 Management, LLC, a wholly-owned entity owned by James P.
Wilson, agreed that, commencing on April 17, 2006 through
the acquisition of a target business, it will make available to
us certain limited administrative, technology and secretarial
services, as well as the use of certain limited office space,
including a conference room, in Houston, Texas, each as we may
require from time to time. We have agreed to pay
4350 Management, LLC $7,500 per month for these services
and facilities. James P. Wilson is the sole owner of 4350
Management, LLC and, as a result, has benefitted from the
transaction to the extent of his interest in or position with
4350 Management, LLC. However, this arrangement is, and remains,
solely for our benefit and is not intended to provide James P.
Wilson compensation in lieu of a salary. We believe, based on
rents and fees for similar services in the Houston, Texas area,
that the fee charged by 4350 Management, LLC is at least as
favorable as we could obtain from an unaffiliated person.
James P. Wilson and Keith D. Spickelmier previously advanced a
total of $329,000, on a non-interest bearing basis, to us to
cover expenses related to the initial public offering. The
advances were repaid upon the consummation of the initial public
offering with the proceeds of such offering.
On May 23, 2007, June 14, 2007, July 19, 2007,
September 6, 2007 and October 3, 2007 we received an
aggregate of $700,000 in advances for expenses from two
shareholders, Messrs. Wilson and Spickelmier. Proceeds from
each of the advances will fund the Companys ongoing
continuing operating expenses. Under the terms of the advances,
the Company will: (i) pay no interest on such advances and
(ii) the amounts of the advances are due to be reimbursed
upon the consummation of a business combination. In the event
the Company fails to complete a business combination with any
entity (I) by October 10, 2007 or, (II) if a
letter of intent, agreement in principle or definitive agreement
is executed, but not consummated, by October 10, 2007, then
by April 10, 2008, then the Company shall not be required
to repay the advances. The two shareholders who advanced such
funds, Messrs. Wilson and Spickelmier, have waived any
recourse against the Companys trust account with respect
to the advances in the event that a business combination is not
consummated by the Company in a timely manner as described
herein above.
We will reimburse our officers and directors for any reasonable
out-of-pocket
business expenses incurred by them in connection with certain
activities on our behalf such as identifying and investigating
possible target businesses and business combinations. The limit
on the amount of accountable
out-of-pocket
expenses reimbursable to our officers and directors by us is
$800,000. As of September 30, 2007, JKA has reimbursed its
officers and directors for $30,545 of such out-of-pocket
business expenses incurred by them.
Other than the $7,500 per-month administrative fee payable to
4350 Management LLC and reimbursable
out-of-pocket
expenses payable to our officers and directors, no compensation
or fees of any kind, including finders and consulting
fees, will be paid to any of our initial stockholders, officers
or directors who owned our common stock prior to the public
offering, or to any of their respective affiliates for services
rendered to us prior to or with respect to the business
combination.
All ongoing and future transactions between JKA and any of its
officers and directors or their respective affiliates, including
loans by JKAs officers and directors, will be on terms
believed by JKA to be no less favorable than are available from
unaffiliated third parties and such transactions or loans,
including any forgiveness of loans, will require prior approval
in each instance by a majority of JKAs uninterested
independent directors (to the extent we have any) or
the members of the Board who do not have an interest in the
transaction, in either case who had access, at JKAs
expense, to JKAs attorneys or independent legal counsel.
In addition, JKAs management will gather pricing
information, estimates or fairness opinions from unaffiliated
third parties with respect to similar transactions undertaken by
JKA. JKA does not currently have a written policy regarding
related party transactions.
Please see Related Party Transactions on
page 84 for information about such transactions as related
to Multi-Shot, LLC.
Section 16(a)
Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Securities Act of 1934,
JKAs directors and executive officers, and any persons
holding 10% or more of its common stock, are required to report
their beneficial ownership and any changes therein to the SEC
and JKA. Specific due dates for those reports have been
established, and JKA is required to report herein
126
any failure to file such reports by those due dates. Based on
JKAs review of Forms 3, 4 and 5 filed by such
persons, it believes that during the fiscal year ended
December 31, 2006, all Section 16(a) filing
requirements applicable to such persons were met in a timely
manner.
BENEFICIAL
OWNERSHIP OF SECURITIES
The following table sets forth information regarding the
beneficial ownership of the common stock of JKA as of
September 30, 2007, which amounts include shares of common
stock which may be acquired by such persons within 60 days
from September 30, 2007 by:
|
|
|
|
|
each person known by JKA to be the beneficial owner of more than
5% of its outstanding shares of common stock based solely upon
the amounts and percentages as are contained in the public
filings of such persons as of September 30, 2007;
|
|
|
|
|
|
each of JKAs officers and directors; and
|
|
|
|
all of JKAs officers and directors as a group.
|
Unless otherwise indicated, JKA believes that all persons named
in the table have sole voting and investment power with respect
to all shares of common stock beneficially owned by them.
Based solely upon information contained in public filings, as of
September 30, 2007, the following stockholders beneficially
own greater than five (5%) percent of JKAs issued and
outstanding common stock as such amounts and percentages (based
on 16,516,667 shares outstanding on September 30,
2007) are reflected in the public filings of such
stockholder:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
and Nature
|
|
|
Percentage
|
|
|
|
of Beneficial
|
|
|
of Outstanding
|
|
Name and of Beneficial Owner(1)
|
|
Ownership
|
|
|
Common Stock
|
|
|
James P. Wilson(2)(4)
|
|
|
1,781,130
|
|
|
|
10.78
|
%
|
Keith D. Spickelmier(3)(4)
|
|
|
1,457,287
|
|
|
|
8.79
|
%
|
Herbert C. Williamson II(4)
|
|
|
26,625
|
|
|
|
*
|
|
Michael H. McConnell(4)
|
|
|
26,625
|
|
|
|
*
|
|
Staley Capital Advisers, Inc.(5)
|
|
|
1,720,300
|
|
|
|
10.42
|
%
|
The Baupost Group, LLC(6)
|
|
|
1,453,300
|
|
|
|
8.80
|
%
|
D.B. Zwirn & Co, L.P.(7)
|
|
|
1,388,985
|
|
|
|
8.41
|
%
|
State Teachers Retirement Board of Ohio(8)
|
|
|
1,100,000
|
|
|
|
6.66
|
%
|
All directors and executive officers as a group (4
individuals)
|
|
|
3,291,667
|
|
|
|
19.93
|
%
|
|
|
|
(1)
|
|
Unless otherwise indicated, the business address of each of the
individuals is 4400 Post Oak Parkway, Suite 2530, Houston,
Texas 77027.
|
|
(2)
|
|
Mr. Wilson is our Chairman of the Board and Chief Executive
Officer. Mr. Wilson also owns 366,668 warrants issued in
the private placement immediately prior to the initial public
offering. Each warrant entitles the holder to purchase one share
of common stock at $5.00 per share. The warrants will
become exercisable on the later of the completion of (i) a
business combination by us and (ii) April 10, 2007,
and will expire on April 10, 2010.
|
|
(3)
|
|
Mr. Spickelmier is our President and Secretary.
Mr. Spickelmier also owns 300,000 warrants issued in the
private placement immediately prior to the initial public
offering. Each warrant entitles the holder to purchase one share
of common stock at $5.00 per share. The warrants will
become exercisable on the later of the completion of (i) a
business combination by us and (ii) April 10, 2007,
and will expire on April 10, 2010.
|
|
(4)
|
|
Each of these individuals is a director.
|
|
|
|
(5)
|
|
Based upon information contained in the Schedule 13G filed
by Staley Capital Advisers, Inc. on November 14, 2007.
|
127
|
|
|
(6)
|
|
Based upon information contained in the Schedule 13G filed
by The Baupost Group, LLC on November 13, 2007.
|
|
|
|
(7)
|
|
Based upon information contained in the Schedule 13G/A
filed on November 14, 2007. D.B. Zwirn & Co.,
L.P., DBZ GP, LLC, Zwirn Holdings, LLC, and Daniel B. Zwirn may
each be deemed the beneficial owner of
(i) 317,699 shares owned by D.B. Zwirn Special
Opportunities Fund, L.P. and (ii) 546,201 shares owned
by D.B. Zwirn Special Opportunities Fund, Ltd. (each entity
referred to in (i) and (ii) is herein referred to as a
Fund and, collectively, as the Funds).
D.B. Zwirn & Co., L.P. is the manager of each of the
Funds, and consequently has voting control and investment
discretion over the shares held by each of the Funds. Daniel B.
Zwirn is the managing member of and thereby controls Zwirn
Holdings, LLC, which in turn is the managing member of and
thereby controls DBZ GP, LLC, which in turn is the general
partner of and thereby controls D.B. Zwirn & Co.,
L.P. The foregoing should not be construed in and of itself as
an admission by any Reporting Person as to beneficial ownership
of shares owned by another Reporting Person. In addition, each
of D.B. Zwirn & Co., L.P., DBZ GP, LLC, Zwirn
Holdings, LLC, and Daniel B. Zwirn disclaims beneficial
ownership of the Shares held by the Funds.
|
|
|
|
(8)
|
|
Based on information contained in the Schedule 13G/A filed by
the State Teachers Retirement Board of Ohio on November 14,
2007.
|
Beneficial
Ownership following the Merger:
As a result of the merger and assuming that no JKA stockholders
exercise any of the stockholders conversion rights and no
outstanding warrants or options are exercised, immediately after
the consummation of the merger, the selling members of
Multi-Shot, LLC will own approximately 60.75% of the outstanding
JKA common stock, the present public stockholders of JKA (or
their transferees) will own approximately 39.25% of the
outstanding JKA common stock and the present officers and
directors of JKA (or their transferees) will own
approximately 2.07% of the outstanding JKA common stock. As
a result, a change of control of JKA will occur upon
consummation of the merger. Upon the consummation of the merger,
assuming that no JKA stockholders exercise any of the
stockholders conversion rights and no outstanding warrants
or options are exercised, SG-Directional, LLC and Catalyst/Hall
Growth Capital, LP and its affiliates will each hold more than
5% of the outstanding shares of JKA common stock. The percentage
ownership of the selling members of Multi-Shot, LLC will be
increased and that of JKAs stockholders will be decreased
upon issuances of the contingent shares to be issued pursuant to
the provisions of the merger agreement or upon the issuances of
shares upon exercise of the warrants to be delivered to the
selling members of Multi-Shot, LLC at the consummation of the
merger or upon the election of JKA stockholders to convert
shares to cash.
Upon the consummation of the merger and cancellation of
2,458,334 shares held by our officers and directors, assuming
that no JKA stockholders exercise any of the stockholders
conversion rights and no outstanding warrants or options are
exercised, the directors and officers of JKA will own
approximately 57.59% of JKA common stock (based on
35,817,592 shares issued and outstanding):
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
and Nature
|
|
|
Percentage
|
|
|
|
of Beneficial
|
|
|
of Outstanding
|
|
|
|
Ownership
|
|
|
Common Stock
|
|
|
Allen Neel
|
|
|
750,807
|
|
|
|
2.22
|
%
|
Paul Culbreth
|
|
|
723,844
|
|
|
|
2.14
|
%
|
David Cudd
|
|
|
723,844
|
|
|
|
2.14
|
%
|
Ron Nixon(1)
|
|
|
5,068,964
|
|
|
|
14.15
|
%
|
K. Rick Turner(2)
|
|
|
13,359,369
|
|
|
|
37.30
|
%
|
James O. Jacoby, Jr.(3)
|
|
|
13,359,369
|
|
|
|
37.30
|
%
|
Kim Eubanks
|
|
|
|
|
|
|
|
%
|
All directors and executive officers as a group (7
individuals)
|
|
|
20,626,828
|
|
|
|
57.59
|
%
|
128
|
|
|
(1)
|
|
Includes 4,659,133 shares to be held by the Catalyst Group
through its affiliates, Catalyst/Hall Growth Capital, LP,
Catalyst/Hall Private Equity, LP, Catalyst Capital Partners I,
Ltd. and Catalyst Capital Partners II, Ltd. Mr. Nixon
intends to disclaim ownership of these shares.
|
|
(2)
|
|
Includes 13,359,369 shares to be held by SG-Directional,
LLC, which is managed by the Stephens Group. Mr. Turner
intends to disclaim ownership of these shares.
|
|
(3)
|
|
Includes 13,359,369 shares to be held by SG-Directional,
LLC, which is managed by the Stephens Group. Mr. Jacoby
intends to disclaim ownership of these shares.
|
Per the terms of the merger agreement, at the effective date of
the merger, 2,458,334 of the shares described in the table above
will be cancelled, and 92,522 shares described above will be
transferred to Gibbs & Bruns, L.L.P., which is not an
affiliate of JKA or JKAs officers and directors. If the
merger occurs, the current directors and officers of JKA will
own 740,741 shares our common stock including:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Name
|
|
Shares
|
|
|
Relationship to Us
|
|
James P. Wilson
|
|
|
403,375
|
|
|
|
Chairman of the Board, CEO and Secretary
|
|
Keith D. Spickelmier
|
|
|
330,033
|
|
|
|
President and Director
|
|
Michael McConnell
|
|
|
3,667
|
|
|
|
Director
|
|
Herb D. Williamson
|
|
|
3,667
|
|
|
|
Director
|
|
PRICE
RANGE OF SECURITIES AND DIVIDENDS
The shares of JKA common stock, warrants and units are currently
quoted on the American Stock Exchange under the symbols JKA,
JKA.WS and JKA.U, respectively. The closing prices per share of
common stock, warrant and unit of JKA on August 27, 2007,
the last trading day before the announcement of the execution of
the merger agreement, were $5.75, $0.21 and $5.95 (the closing
price on August 24, 2007). Each unit of JKA consists of one
share of JKA common stock and two redeemable common stock
purchase warrants. JKA warrants became separable from JKA common
stock on May 11, 2006. Each warrant entitles the holder to
purchase from JKA one share of common stock at an exercise price
of $5.00 commencing the later of the completion of a business
combination or April 10, 2007. The JKA warrants will expire
at 5:00 p.m., New York City time, on April 10,
2010, or earlier upon redemption. Prior to April 17, 2006,
there was no established public trading market for our common
stock.
The closing price per share of JKA common stock, warrants and
units as reported on the American Stock Exchange on
September 28, 2007, was $5.92, $0.37 and $6.54,
respectively.
Except for the Plan contemplated herein, JKA does not currently
have any authorized or outstanding equity compensation plans.
The following table sets forth, for the calendar quarter
indicated, the quarterly high and low sales prices of our units,
common stock and warrants as reported on the American Stock
Exchange since our units commenced public trading on
April 18, 2006 and since our common stock and warrants
commenced public trading on May 11, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Warrants
|
|
|
Units
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
June 30, 2006
|
|
$
|
5.45
|
|
|
$
|
5.31
|
|
|
$
|
0.55
|
|
|
$
|
0.32
|
|
|
$
|
6.28
|
|
|
$
|
6.02
|
|
September 30, 2006
|
|
$
|
5.65
|
|
|
$
|
5.31
|
|
|
$
|
0.46
|
|
|
$
|
0.28
|
|
|
$
|
6.35
|
|
|
$
|
5.80
|
|
December 31, 2006
|
|
$
|
5.65
|
|
|
$
|
5.40
|
|
|
$
|
0.52
|
|
|
$
|
0.24
|
|
|
$
|
6.57
|
|
|
$
|
5.89
|
|
March 31, 2007
|
|
$
|
5.80
|
|
|
$
|
5.58
|
|
|
$
|
0.54
|
|
|
$
|
0.37
|
|
|
$
|
6.57
|
|
|
$
|
6.25
|
|
June 30, 2007
|
|
$
|
5.89
|
|
|
$
|
5.65
|
|
|
$
|
0.85
|
|
|
$
|
0.54
|
|
|
$
|
7.40
|
|
|
$
|
6.55
|
|
September 30, 2007
|
|
$
|
5.92
|
|
|
$
|
5.70
|
|
|
$
|
0.43
|
|
|
$
|
0.17
|
|
|
$
|
7.40
|
|
|
$
|
5.95
|
|
129
Holders
As of September 30, 2007, there was one holder of record of
our units, five holders of record of our common stock and one
holder of record of our warrants.
Dividends
We have not paid any cash dividends on our common stock to date
and do not intend to pay dividends prior to the completion of a
business combination. The payment of dividends in the future,
assuming we successfully complete a business combination, will
be contingent upon our revenue and earnings, if any, capital
requirements and general financial condition subsequent to
completion of a business combination. The payment of any
dividends subsequent to a business combination will be within
the discretion of our Board of Directors at such time. It is the
present intention of our Board to retain all earnings, if any,
for use in our business operations and, accordingly, our Board
does not anticipate declaring any dividends in the foreseeable
future.
Multi-Shot,
LLC
There is no established public trading market for the membership
interests of Multi-Shot, LLC. There are currently 10 holders of
the membership interests of Multi-Shot, LLC. Multi-Shot, LLC had
two authorized and outstanding equity (or equity-oriented)
compensation plans, the 2004 Incentive Plan and the Special
Bonus Plan, as previously described, both of which were
terminated effective April 1, 2007. Upon consummation of
the merger, all of the outstanding membership interests of
Multi-Shot, LLC will be held by JKAs wholly-owned
subsidiary,
Multi-Shot, Inc.
Dividends
Upon Completion of the Merger
Upon completion of the merger with Multi-Shot, JKA does not
intend to pay any dividends on its shares of common stock.
Rather, it intends to reinvest any earnings back into the
combined company. At this time, the combined company anticipates
that it will retain any earnings and will not pay dividends in
the foreseeable future. The combined company also expects that
any loan or credit facilities into which it enters will limit
its ability to pay dividends.
DESCRIPTION
OF SECURITIES
General
We are authorized to issue 50,000,000 shares of common
stock, par value $.0001 per share, and
1,000,000 shares of preferred stock, par value
$.0001 per share. If the proposals in these proxy materials
are approved, we will be authorized to issue up to
150,000,000 shares of common stock. As of
September 30, 2007, 16,516,667 shares of common stock
are outstanding, held by five record holders. No shares of
preferred stock are currently outstanding.
Units
Each unit consists of one share of common stock and two
warrants. Each warrant entitles the holder to purchase one share
of common stock. The common stock and warrants began to trade
separately on May 11, 2006.
Common
stock
As of September 30, 2007, we have 16,516,667 shares of
common stock outstanding.
Our stockholders are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. In
connection with the vote required for any business combination,
all of our initial stockholders, including all of our officers
and directors, have agreed to vote their respective shares of
common stock owned by them immediately prior to our public
offering in accordance with the majority of the shares of common
stock voted by the public stockholders. Additionally, our
initial stockholders, officers and directors will vote all of
their shares
130
in any manner they determine, in their sole discretion, with
respect to any other items that come before a vote of our
stockholders.
We will proceed with the business combination only if a majority
of the shares of common stock voted at the Special Meeting by
the public stockholders are voted in favor of the business
combination and public stockholders owning less than 20% of the
shares issued in our initial public offering and the private
placement immediately prior to the initial public offering
exercise their conversion rights discussed below.
If we are forced to liquidate prior to a business combination,
our public stockholders are entitled to share ratably in the
trust account, inclusive of any interest, and any net assets
remaining available for distribution to them after payment of
related costs, expenses and liabilities. Our initial
stockholders have agreed to waive their rights to share in any
distribution with respect to common stock owned by them prior to
the initial public offering, including units purchased in the
private placement immediately prior to such offering, if we are
forced to liquidate.
Our stockholders have no conversion, preemptive or other
subscription rights and there are no sinking fund or redemption
provisions applicable to the common stock, except that public
stockholders have the right to have their shares of common stock
converted to cash equal to their pro rata share of the trust
account if they vote against the business combination and the
business combination is approved and completed. Public
stockholders, who purchased and still own units or common stock,
and who convert their stock into their share of the trust
account still have the right to exercise the warrants that they
received as part of the units in our initial public offering or
subsequently purchased.
Preferred
stock
Our certificate of incorporation, as amended, authorizes the
issuance of 1,000,000 shares of blank check preferred stock
with such designation, rights and preferences as may be
determined from time to time by our Board. No shares of
preferred stock have been issued or registered. Accordingly, our
Board is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting
or other rights which could adversely affect the voting power or
other rights of the holders of common stock, although the
underwriting agreement prohibits us, prior to a business
combination, from issuing preferred stock which participates in
any manner in the proceeds of the trust account, or which votes
as a class with the common stock on a business combination.
Although no preferred stock issuances are involved in the
proposed merger with Multi-Shot, LLC, we may issue some or all
of the preferred stock to effect a business combination. In
addition, the preferred stock could be utilized as a method of
discouraging, delaying or preventing a change in control of us.
Although we do not currently intend to issue any shares of
preferred stock, we cannot assure you that we will not do so in
the future.
Warrants
We currently have 26,450,000 outstanding warrants. Each warrant
entitles the registered holder to purchase one share of our
common stock at a price of $5.00 per share, subject to
adjustment as discussed below, at any time commencing on the
later of:
|
|
|
|
|
the completion of a business combination, and
|
|
|
|
April 10, 2007.
|
The warrants expire on April 10, 2010 at 5:00 p.m.,
New York City local time or earlier upon redemption.
We may call the warrants for redemption:
|
|
|
|
|
in whole and not in part;
|
|
|
|
at a price of $.01 per warrant;
|
|
|
|
at any time after the warrants become exercisable;
|
|
|
|
upon not less than 30 days prior written notice of
redemption to each warrant holder;
|
|
|
|
at such time an effective registration statement covering the
exercise of warrants is available; and
|
131
|
|
|
|
|
if, and only if, the reported last sale price of the common
stock equals or exceeds $8.50 per share for any 20 trading
days within a 30 trading day period ending on the third business
day prior to the notice of redemption to warrant holders.
|
The warrants were issued in registered form under a warrant
agreement between Continental Stock Transfer & Trust
Company, as warrant agent, and us. We may not call the warrants
for redemption at any time an effective registration statement
covering the warrant exercise is unavailable. You are urged to
review a copy of the warrant agreement, which was filed as an
exhibit to the registration statement in connection with our
initial public offering, for a complete description of the terms
and conditions applicable to the warrants.
The exercise price and number of shares of common stock issuable
on exercise of the warrants may be adjusted in certain
circumstances, including in the event of a stock dividend, or
our recapitalization, reorganization, merger or consolidation.
However, the warrants will not be adjusted for issuances of
common stock at a price below their respective exercise prices.
The warrants may be exercised upon surrender of the warrant
certificate on or prior to the expiration date at the offices of
the warrant agent, with the exercise form on the reverse side of
the warrant certificate completed and executed as indicated,
accompanied by full payment of the exercise price, by certified
check payable to us, for the number of warrants being exercised.
The warrant holders do not have the rights or privileges of
holders of common stock, including any voting rights until they
exercise their warrants and receive shares of common stock.
After the issuance of shares of common stock upon exercise of
the warrants, each holder will be entitled to one vote for each
share held of record on all matters to be voted on by
stockholders.
No warrants will be exercisable unless at the time of exercise a
prospectus relating to common stock issuable upon exercise of
the warrants is current and the common stock has been registered
or qualified or deemed to be exempt under the securities laws of
the state of residence of the holder of the warrants. Under the
terms of the warrant agreement, we have agreed to meet these
conditions and use our best efforts to maintain a current
prospectus relating to common stock issuable upon exercise of
the warrants until the expiration of the warrants. However, we
cannot assure you that we will be able to do so. The warrants
may be deprived of any value and the market for the warrants may
be limited if the prospectus relating to the common stock
issuable upon the exercise of the warrants is not current or if
the common stock is not qualified for sale as a result of JKA
registering such shares, or unless the shares are exempt from
qualification in the jurisdictions in which the holders of the
warrants reside.
No fractional shares will be issued upon exercise of the
warrants. If, upon exercise of the warrants, a holder would be
entitled to receive a fractional interest in a share, we will,
upon exercise, round up or down to the nearest whole number the
number of shares of common stock to be issued to the warrant
holder.
Dividends
On April 10, 2006, the Board declared a stock dividend of
0.183333 shares of common stock on each share of common
stock then issued and outstanding. The stock dividend was paid
prior to the private placement and initial public offering. We
have not paid any other dividends on our common stock to date
and do not intend to pay any other dividends prior to the
completion of a business combination nor are dividends a
component of the proposed multi-shot transaction. The payment of
dividends in the future will be contingent upon our revenues and
earnings, if any, capital requirements and general financial
condition subsequent to completion of a business combination.
The payment of any dividends subsequent to a business
combination will be within the discretion of our then current
Board. It is the present intention of our Board to retain all
earnings, if any, for use in our business operations and,
accordingly, our Board does not anticipate declaring any
dividends in the foreseeable future.
Our
transfer agent and warrant agent
The transfer agent for our securities and warrant agent for our
warrants is Continental Stock Transfer & Trust
Company, 17 Battery Place, New York, New York 10004.
132
Shares
eligible for future sale
As of September 30, 2007, we have 16,516,667 shares of
common stock outstanding. Of these shares,
13,225,000 shares are freely tradable without restriction
or further registration under the Securities Act, except for any
shares purchased by one or any of our affiliates within the
meaning of Rule 144 under the Securities Act. The
333,334 shares included in the units purchased in the
private placement on April 10, 2006 by our officers and
directors are restricted securities as defined in
Rule 144 and cannot be resold to the public without
registration for a period of one year from the closing of the
initial public offering. These units are also subject to a
lock-up
agreement with the holders, us and the representative of the
underwriters until we complete a business combination. All of
the remaining 2,958,333 shares are restricted securities
under Rule 144, in that they were issued in private
transactions not involving a public offering. Currently, each
holder of these shares is our affiliate. These
2,958,333 shares became eligible for sale under
Rule 144 commencing on May 19, 2006, subject to the
restrictions set forth in Rule 144 regarding sales by our
affiliates. If one of the holders of these shares ceases to be
our affiliate, the shares held by such holder could be sold,
without restrictions, on the later of (i) May 19, 2007
or (ii) 90 days after such holder ceases to be our
affiliate. In addition, all of those shares have been placed in
escrow until six months after we consummate a business
combination and will only be released prior to that date subject
to certain limited exceptions. The 2,958,333 shares are
subject to a cancellation provision, if the merger transaction
is approved, whereby 2,458,334 of such shares will be cancelled.
Additionally, in connection with the merger with Multi-Shot, we
will issue 21,759,259 shares of JKA common stock to the members
of Multi-Shot. Such shares of JKA common stock will not be
freely tradable without restriction or registration under the
Securities Act. Moreover, these shares are subject to the terms
and conditions of the Registration Rights Agreement included
herewith as Annex D. Under the Registration Rights
Agreement, the members of Multi-Shot may demand that we register
their shares under the Securities Act for resale six months
after the closing date of the merger. If immediately after the
merger JKA is eligible to use certain less burdensome
registration forms, the members of Multi-Shot may demand
registration using such less burdensome registration forms
immediately after the merger. The 21,759,259 shares issued
to members of Multi-Shot become eligible for sale under
Rule 144 commencing on the date that is one year after the
closing date of the merger, subject to the restrictions set
forth in Rule 144 regarding sales by our affiliates.
Rule 144
In general, under Rule 144 as currently in effect, a person
who has beneficially owned restricted shares of our common stock
for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of either of the following:
|
|
|
|
|
1% of the number of shares of common stock then outstanding,
which equals approximately 165,167 shares as of
December 31, 2006, and
|
|
|
|
the average weekly trading volume of the common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
|
Sales under Rule 144 are also limited by manner of sale
provisions and notice requirements and to the availability of
current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at the time of or at any time during the
three months preceding a sale, and who has beneficially owned
the restricted shares proposed to be sold for at least two
years, including the holding period of any prior owner other
than an affiliate, is entitled to sell their shares without
complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Availability
of Rule 144 to Resales of Stock of Blank Check
Companies
The Securities and Exchange Commission has taken the position
that promoters or affiliates of a blank check company and their
transferees, both before and after a business combination, would
act as an underwriter under
133
the Securities Act when reselling the securities of a blank
check company. Accordingly, Rule 144 may not be available
for the resale of those securities despite technical compliance
with the requirements of Rule 144, in which event the
resale transactions would need to be made through a registered
offering.
Registration
Rights
The holders of our 2,958,333 issued and outstanding shares of
common stock prior to our initial public offering are entitled
to registration rights pursuant to an agreement effective as of
April 10, 2006. The 333,334 units purchased by such
persons or their designees in the private placement are also
entitled to registration rights pursuant to the same agreement.
The holders of the majority of these shares are entitled to make
up to two demands that we register these shares. Beginning
180 days following the effective date of a business
combination, the holders of the majority of these shares can
elect to exercise these registration rights at any time after
the date on which these shares of common stock are released from
escrow. All of the above stockholders also have certain
piggy-back registration rights on registration
statements filed subsequent to the date on which certain of
these shares of common stock are released from escrow. In
addition, the holders of the units underlying warrants for
1,400,000 shares of common stock and 700,000 shares of
common stock issuable under the Ferris, Baker Watts, Inc.
purchase option are entitled to make one demand that we register
these securities at the election of the holders of 51% of such
securities. In addition, these holders have certain
piggy-back registration rights. We will bear the
expenses incurred in connection with the filing of any such
registration statements.
Additionally, in connection with the merger with Multi-Shot, we
will issue 21,759,259 shares of JKA common stock to the members
of Multi-Shot. Such shares of JKA common stock will not be
freely tradable without restriction or registration under the
Securities Act. Moreover, these shares are subject to the terms
and conditions of the Registration Rights Agreement included
herewith as Annex D.
Delaware
Anti-Takeover Law.
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
This section prevents certain Delaware corporations, under
certain circumstances, from engaging in a business
combination with:
|
|
|
|
|
a stockholder who owns 15% or more of our outstanding voting
stock (otherwise known as an interested stockholder);
|
|
|
|
an affiliate of an interested stockholder; or
|
|
|
|
an associate of an interested stockholder,
|
for three years following the date that the stockholder became
an interested stockholder. A business combination
includes a merger or sale of more than 10% of our assets.
However the above provisions of Section 203 do not apply if:
|
|
|
|
|
our Board approves the transaction that made the stockholder an
interested stockholder, prior to the date of the
transaction;
|
|
|
|
after the completion of the transaction that resulted in the
stockholder becoming an interested stockholder, that stockholder
owned at least 85% of our voting stock outstanding at the time
the transaction commenced, other than statutorily excluded
shares; or
|
|
|
|
on or subsequent to the date of the transaction, the business
combination is approved by our Board and authorized at a meeting
of our stockholders, and not by written consent, by an
affirmative vote of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.
|
This statute could prohibit or delay mergers or other change in
control attempts, and thus may discourage attempts to acquire us.
134
JKA stockholders do not have appraisal rights in connection the
merger under the DGCL.
INDEPENDENT
PUBLIC ACCOUNTANTS
The financial statements of Multi-Shot, LLC at December 31,
2005 and December 31, 2006, and for each of the two years
ended December 31, 2006 and December 31, 2005, the
five months ended December 31, 2004, and the seven months
ended August 5, 2004 appearing in this proxy statement have
been audited by Hein & Associates LLP, independent
registered public accounting firm, as set forth in their report
appearing elsewhere herein.
The financial statements of Ulterra MWD, L.P. at
December 31, 2006 and for the year ended December 31,
2006 appearing in this proxy statement have been audited by
Pustorino, Puglisi & Co., LLP, independent accounting
firm, as set forth in their report appearing elsewhere herein.
The financial statements of JKA at December 31, 2005 and
December 31, 2006, and the periods from May 11, 2005
(inception) to December 31, 2005 and May 11, 2005
(inception) to December 31, 2006, and the year ended
December 31, 2006, included in this proxy statement have
been audited by Malone & Bailey, PC, independent
registered public accounting firm, as set forth in their report
appearing elsewhere herein.
Malone & Bailey, PC is currently JKAs
independent registered public accounting firm. Representatives
of Malone & Bailey, PC will not be present at the
Special Meeting.
Fees
of the Independent Registered Public Accounting
Firm
The fees billed by Malone & Bailey, PC for services
rendered to us in 2005 and 2006 were as follows (JKA did not pay
any fees to Malone & Bailey, PC for services that fall
under the categories Audit-Related Fees, Tax
Fees or All Other Fees, as such categories are
defined in the rules promulgated by the Securities and Exchange
Commission):
Audit
Fees
Fees incurred in connection with our initial public offering,
the review of our quarterly financial statements, and services
provided in connection with the our statutory and regulatory
filings in respect of year ended December 31, 2005 and
December 31, 2006 were $26,700 and $34,700, respectively.
Pre-Approval
of Fees
The Board of Directors granted to the Audit Committee the
authority to pre-approve all auditing services and all non-audit
services (including the fees and terms thereof) to be performed
by the independent auditors. The Audit Committee pre-approved
all auditing services and all non-audit services (including the
fees and terms thereof) performed by the independent auditors in
2005 and 2006. Substantially all hours expended by the
independent registered public accounting firm to audit the
Companys financial statement for the years ended
December 31, 2005 and December 31, 2006 were
attributed to work performed by persons that were full-time,
permanent employees of the independent registered public
accounting firm.
Regardless of whether the merger with Multi-Shot, LLC is
consummated, the JKA 2007 annual meeting of stockholders will be
held on or
about ,
2007, unless the date is changed by the Board. If you are a
stockholder and you want to include a proposal in the proxy
statement for the 2007 annual meeting, you need to provide it to
us by no later
than ,
2007. Any proposal to be considered by the stockholders at our
Annual Meeting must be received by us on or
before ,
2007.
135
WHERE
YOU CAN FIND MORE INFORMATION
JKA files reports, proxy statements and other information with
the Securities and Exchange Commission as required by the
Securities Exchange Act of 1934, as amended.
You may read and copy reports, proxy statements and other
information filed by JKA with the Securities and Exchange
Commission at the Securities and Exchange Commission public
reference room located at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549.
You may obtain information on the operation of the Public
Reference Room by calling the Securities and Exchange Commission
at
1-800-SEC-0330.
You may also obtain copies of the materials described above at
prescribed rates by writing to the Securities and Exchange
Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549.
JKA files its reports, proxy statements and other information
electronically with the Securities and Exchange Commission. You
may access information on JKA at the Securities and Exchange
Commission web site containing reports, proxy statements and
other information at: http://www.sec.gov.
Information and statements contained in this proxy statement, or
any annex to this proxy statement, are qualified in all respects
by reference to the copy of the relevant contract or other annex
filed as an exhibit to this proxy statement.
All information contained in this proxy statement relating to
JKA has been supplied by JKA, and all such information relating
to Multi-Shot, LLC has been supplied by Multi-Shot, LLC.
Information provided by either of JKA or Multi-Shot does not
constitute any representation, estimate or projection of the
other.
If you would like additional copies of this proxy statement, or
if you have questions about the acquisition or the financing,
you should contact:
JK
Acquisition Corp.
Attn: James P. Wilson
4400 Post Oak Parkway, Suite 2530
Houston, Texas 77027
(713) 978-7557
136
Multi-Shot,
LLC
Index to Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-3
|
|
Financial
Statements
:
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
|
|
|
F-21
|
|
|
|
|
F-22
|
|
Index to Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-28
|
|
Financial
Statements
:
|
|
|
|
|
|
|
|
F-29
|
|
|
|
|
F-30
|
|
|
|
|
F-31
|
|
|
|
|
F-32
|
|
|
|
|
F-35
|
|
|
|
|
F-36
|
|
|
|
|
F-37
|
|
|
|
|
F-38
|
|
F-1
Index to Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-40
|
|
Financial
Statements
:
|
|
|
|
|
|
|
|
F-41
|
|
|
|
|
F-42
|
|
|
|
|
F-43
|
|
|
|
|
F-44
|
|
|
|
|
F-45
|
|
|
|
|
F-51
|
|
|
|
|
F-52
|
|
|
|
|
F-53
|
|
|
|
|
F-54
|
|
F-2
Report
of Independent Registered Public Accounting Firm
To the Members of
Multi-Shot, LLC
Conroe, Texas
We have audited the accompanying balance sheets of Multi-Shot,
LLC as of December 31, 2006 and 2005 and the related
statements of operations, members equity and cash flows
for the years ended December 31, 2006 and 2005 and for the
five months ended December 31, 2004. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company has determined that
it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Multi-Shot, LLC as of December 31, 2006 and 2005, and
the results of its operations and its cash flows for the years
ended December 31, 2006 and 2005 and the five months ended
December 31, 2004, in conformity with U.S. generally
accepted accounting principles.
/s/
Hein &
Associates LLP
Houston, Texas
March 16, 2007, except for note 13, as to which the date is
August 27, 2007.
F-3
Report
of Independent Registered Public Accounting Firm
To the Members of
Multi-Shot, LLC
Conroe, Texas
We have audited the accompanying statements of operations,
members equity and cash flows for the seven months ended
August 5, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company has determined that
it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our
audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of its
operations and its cash flows for the seven months ended
August 5, 2004, in conformity with U.S. generally
accepted accounting principles.
/s/
Hein &
Associates LLP
Houston, Texas
March 16, 2007
F-4
Balance
Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current
Assets
:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
104,589
|
|
|
$
|
|
|
Restricted cash
|
|
|
455,813
|
|
|
|
107,204
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade, net of allowance for doubtful accounts of approximately
$380,000, and $90,000 in 2006 and 2005, respectively
|
|
|
14,605,391
|
|
|
|
8,978,049
|
|
Unbilled receivables
|
|
|
2,655,483
|
|
|
|
1,736,800
|
|
Employee advances
|
|
|
12,574
|
|
|
|
5,574
|
|
Inventory
|
|
|
4,776,539
|
|
|
|
3,339,398
|
|
Prepaid expenses
|
|
|
590,676
|
|
|
|
461,193
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,201,065
|
|
|
|
14,628,218
|
|
|
|
|
|
|
|
|
|
|
Production
Equipment
, net
|
|
|
19,057,043
|
|
|
|
11,494,184
|
|
Property and
Equipment
, net
|
|
|
1,626,780
|
|
|
|
874,328
|
|
Other
Assets
, net
|
|
|
60,726
|
|
|
|
71,976
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
43,945,614
|
|
|
$
|
27,068,706
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY
|
Current
Liabilities
:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
3,994,017
|
|
|
$
|
3,178,876
|
|
Current maturities of long-term debt
|
|
|
1,533,684
|
|
|
|
1,414,456
|
|
Accounts payable
|
|
|
7,223,536
|
|
|
|
5,408,680
|
|
Accrued expenses
|
|
|
3,366,630
|
|
|
|
1,544,247
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
16,117,867
|
|
|
|
11,546,259
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
5,775,152
|
|
|
|
4,643,717
|
|
Subordinated
Note Payable to Member
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
23,893,019
|
|
|
|
18,189,976
|
|
Commitments and
Contingencies
(Notes 8, 11, 12 and 13)
|
|
|
|
|
|
|
|
|
Members
Equity
|
|
|
20,052,595
|
|
|
|
8,878,730
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Members Equity
|
|
$
|
43,945,614
|
|
|
$
|
27,068,706
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these financial statements.
F-5
Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MS, LLC
|
|
|
|
MS, LLC
|
|
|
|
Successor
|
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Five
|
|
|
|
Seven
|
|
|
|
|
|
|
|
|
|
Months Ended
|
|
|
|
Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
December 31,
|
|
|
|
August 5,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
2004
|
|
Revenues
|
|
$
|
73,971,064
|
|
|
$
|
38,080,254
|
|
|
$
|
8,658,814
|
|
|
|
$
|
10,543,184
|
|
Operating Costs and
Expenses
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
44,720,803
|
|
|
|
23,177,863
|
|
|
|
5,190,792
|
|
|
|
|
7,416,929
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary and other payroll expenses
|
|
|
10,260,664
|
|
|
|
4,709,052
|
|
|
|
844,253
|
|
|
|
|
1,175,509
|
|
Other
|
|
|
3,025,249
|
|
|
|
2,737,536
|
|
|
|
1,078,588
|
|
|
|
|
1,783,179
|
|
Depreciation and amortization
|
|
|
3,703,913
|
|
|
|
1,952,917
|
|
|
|
577,754
|
|
|
|
|
1,838,668
|
|
Long lived asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,317,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,710,629
|
|
|
|
32,577,368
|
|
|
|
7,691,387
|
|
|
|
|
13,531,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from
Operations
|
|
|
12,260,435
|
|
|
|
5,502,886
|
|
|
|
967,427
|
|
|
|
|
(2,988,152
|
)
|
Other Income
(Expense)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,185,011
|
)
|
|
|
(857,952
|
)
|
|
|
(284,941
|
)
|
|
|
|
(328,771
|
)
|
Other income
|
|
|
70,236
|
|
|
|
31,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,114,775
|
)
|
|
|
(826,642
|
)
|
|
|
(284,941
|
)
|
|
|
|
(328,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
(Loss)
|
|
$
|
11,145,660
|
|
|
$
|
4,676,244
|
|
|
$
|
682,486
|
|
|
|
$
|
(3,316,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these financial statements.
F-6
Statements
of Members Equity
Years Ended
December 31, 2006 and 2005, the Five Months Ended
December 31, 2004
and Seven Months Ended
August 5, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MS, LLC
|
|
|
MS, LLC
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Members Equity
|
|
|
Members Equity
|
|
|
Total
|
|
|
Balances
,
December 31, 2003
|
|
$
|
|
|
|
$
|
(688,039
|
)
|
|
$
|
(688,039
|
)
|
Intercompany charges
|
|
|
|
|
|
|
(1,643,559
|
)
|
|
|
(1,643,559
|
)
|
Recapitalization
|
|
|
|
|
|
|
5,648,521
|
|
|
|
5,648,521
|
|
Net loss
|
|
|
|
|
|
|
(3,316,923
|
)
|
|
|
(3,316,923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
,
August 6, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash contributions
|
|
|
4,075,000
|
|
|
|
|
|
|
|
4,075,000
|
|
Net income
|
|
|
682,486
|
|
|
|
|
|
|
|
682,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
,
December 31, 2004
|
|
|
4,757,486
|
|
|
|
|
|
|
|
4,757,486
|
|
Issuance of membership interests
|
|
|
273,000
|
|
|
|
|
|
|
|
273,000
|
|
Cash distributions
|
|
|
(828,000
|
)
|
|
|
|
|
|
|
(828,000
|
)
|
Net income
|
|
|
4,676,244
|
|
|
|
|
|
|
|
4,676,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
,
December 31, 2005
|
|
|
8,878,730
|
|
|
|
|
|
|
|
8,878,730
|
|
Issuance of membership interests
|
|
|
2,475,000
|
|
|
|
|
|
|
|
2,475,000
|
|
Cash distributions
|
|
|
(2,446,795
|
)
|
|
|
|
|
|
|
(2,446,795
|
)
|
Net income
|
|
|
11,145,660
|
|
|
|
|
|
|
|
11,145,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
,
December 31, 2006
|
|
$
|
20,052,595
|
|
|
$
|
|
|
|
$
|
20,052,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these financial statements.
F-7
Multi-Shot,
LLC
Statements
of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MS, LLC
|
|
|
|
MS, LLC
|
|
|
|
Predecessor
|
|
|
|
Successor
|
|
|
|
Seven
|
|
|
|
|
|
|
|
|
|
Five Months
|
|
|
|
Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
Ended December 31,
|
|
|
|
August 5,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
2004
|
|
Cash Flows From
Operating Activities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
11,145,660
|
|
|
$
|
4,676,244
|
|
|
$
|
682,486
|
|
|
|
$
|
(3,316,923
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived asset impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,317,481
|
|
Depreciation and amortization
|
|
|
3,677,163
|
|
|
|
1,928,584
|
|
|
|
567,962
|
|
|
|
|
1,838,668
|
|
Amortization of loan costs
|
|
|
26,750
|
|
|
|
24,333
|
|
|
|
9,792
|
|
|
|
|
|
|
Bad debt expense (recovery)
|
|
|
306,519
|
|
|
|
316,478
|
|
|
|
43,000
|
|
|
|
|
(10,625
|
)
|
Membership issued for compensation
|
|
|
2,475,000
|
|
|
|
273,000
|
|
|
|
|
|
|
|
|
|
|
Accrued membership interest awards
|
|
|
519,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of business
combination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,859,544
|
)
|
|
|
(6,481,900
|
)
|
|
|
(1,579,715
|
)
|
|
|
|
(1,089,046
|
)
|
Inventory
|
|
|
(1,437,141
|
)
|
|
|
(1,042,698
|
)
|
|
|
(154,454
|
)
|
|
|
|
712,541
|
|
Deposits
|
|
|
(9,500
|
)
|
|
|
18,545
|
|
|
|
(23,098
|
)
|
|
|
|
33,167
|
|
Prepaid expenses
|
|
|
(129,483
|
)
|
|
|
(91,289
|
)
|
|
|
(369,904
|
)
|
|
|
|
37,633
|
|
Accounts payable
|
|
|
1,814,856
|
|
|
|
3,257,589
|
|
|
|
(1,798,086
|
)
|
|
|
|
2,955,043
|
|
Accrued expenses
|
|
|
1,303,383
|
|
|
|
265,426
|
|
|
|
995,761
|
|
|
|
|
(493,274
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
12,832,663
|
|
|
|
3,144,312
|
|
|
|
(1,626,256
|
)
|
|
|
|
1,984,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From
Investing Activities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of production equipment
|
|
|
(10,904,103
|
)
|
|
|
(4,285,099
|
)
|
|
|
(770,320
|
)
|
|
|
|
(1,749,995
|
)
|
Purchase of property and equipment
|
|
|
(1,103,771
|
)
|
|
|
(473,232
|
)
|
|
|
(140,520
|
)
|
|
|
|
(10,244
|
)
|
Proceeds from sale of vehicles
|
|
|
|
|
|
|
15,400
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for acquisition of certain assets from Warrior
Energy Services, Inc (Seller)
|
|
|
|
|
|
|
|
|
|
|
(2,659,730
|
)
|
|
|
|
|
|
Collection of receivable from Seller
|
|
|
|
|
|
|
940,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(11,992,474
|
)
|
|
|
(3,818,331
|
)
|
|
|
(3,570,570
|
)
|
|
|
|
(1,760,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From
Financing Activities
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net receipts under
line-of-credit
agreement
|
|
|
744,448
|
|
|
|
1,906,849
|
|
|
|
996,310
|
|
|
|
|
|
|
Payments on debt
|
|
|
(2,502,442
|
)
|
|
|
(1,748,707
|
)
|
|
|
(655,726
|
)
|
|
|
|
|
|
Proceeds of debt
|
|
|
3,823,798
|
|
|
|
1,349,682
|
|
|
|
888,641
|
|
|
|
|
|
|
Payment of loan costs
|
|
|
(6,000
|
)
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
Transfer to restricted cash
|
|
|
(348,609
|
)
|
|
|
(107,204
|
)
|
|
|
|
|
|
|
|
|
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
4,075,000
|
|
|
|
|
|
|
Distributions paid
|
|
|
(2,446,795
|
)
|
|
|
(828,000
|
)
|
|
|
|
|
|
|
|
|
|
Payments to parent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(224,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(735,600
|
)
|
|
|
566,620
|
|
|
|
5,304,225
|
|
|
|
|
(224,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase
(Decrease) in Cash and Cash Equivalents
|
|
|
104,589
|
|
|
|
(107,399
|
)
|
|
|
107,399
|
|
|
|
|
|
|
Cash and Cash
Equivalents at Beginning of Period
|
|
|
|
|
|
|
107,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash
Equivalents at End of Period
|
|
$
|
104,589
|
|
|
$
|
|
|
|
$
|
107,399
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
1,170,442
|
|
|
$
|
838,019
|
|
|
$
|
242,887
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these financial statements.
F-8
Multi-Shot,
LLC
Notes
to Financial Statements
December 31,
2006, 2005, and 2004
|
|
1.
|
Description
of Business and Basis of Presentation
|
Multi-Shot, LLC (the Company or MS, LLC)
was formed in the state of Texas on April 21, 2004 as a
limited liability company to acquire certain assets and
liabilities of the directional drilling division of Warrior
Energy Services, Inc. (formerly Black Warrior Wireline
Corporation) which occurred on August 6, 2004. The Company
had no operations prior to the acquisition. The operations of
the division up to the acquisition on August 6, 2004 are
presented in these financial statements as MS, LLC
Predecessor. The Company is a domestic energy services
company providing directional drilling, downhole surveying,
measurement while drilling (MWD), steering tools and motor
rentals to independent oil and gas operators operating in the
oil and gas producing regions of the Gulf Coast, Rocky Mountains
and Mid Continent regions of the United States.
The Company operates from facilities located in Odessa, Texas;
Lafayette, Louisiana; Grand Junction, Colorado; Baker, Montana;
Rock Springs, Wyoming; Corpus Christi, Texas and Conroe, Texas.
The Company also has sales offices located in Midland, Texas;
Houston, Texas; Dallas, Texas and Denver, Colorado. The
Companys corporate offices are located in Conroe, Texas.
The preparation of these financial statements includes the use
of carve out accounting procedures for the
predecessor presentation wherein certain expenses historically
recorded or incurred at the Warrior Energy Services, Inc. level,
which related to or were incurred on behalf of the Company, have
been identified and allocated as appropriate to reflect the
stand-alone financial results of the Company, in accordance with
the accounting principles generally accepted in the United
States of America. The operations of the acquired division from
January 1, 2004 through August 5, 2004 (seven
months ended) have been carved out of the consolidated
financial statements of Warrior Energy Services, Inc. and are
presented in these financial statements as MS, LLC Predecessor.
The statements of operations for the carve-out periods include
allocations of certain expenses primarily consisting of the
expenses associated with executive compensation, administrative
salaries, insurance costs, legal and consulting expenses and
interest expense. These expense allocations totaled $1,643,559
for the seven months ended August 5, 2004.
The preparation of these carve-out financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these
estimates.
2.
Significant
Accounting Policies
The Company maintains its accounts on the accrual method of
accounting in accordance with accounting principles generally
accepted in the United States of America. Accounting principles
followed by the Company and the methods of applying those
principles which materially affect the determination of
financial position, results of operations and cash flows are
summarized below:
Revenue Recognition
The Company
provides directional drilling and surveying services and rental
equipment to its customers at agreed upon per day and per job
rates and recognizes the related revenue as the work is
performed and when collectibility is reasonably assured.
Payments from customers for the cost of equipment that is
involuntarily damaged by the customer or
lost-in-hole
are reflected as revenues.
Allowance for Doubtful Accounts
The
Company extends credit to customers in the normal course of
business and performs continuing credit evaluations of its
customers and generally does not require collateral. The Company
regularly reviews outstanding receivables and provides for
estimated losses through an allowance for doubtful accounts. In
evaluating the level of established reserves, the Company makes
judgments regarding its customers ability to make required
payments, economic events and other factors. Accounts deemed
uncollectible are charged against the allowance for doubtful
accounts.
F-9
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
Financial Instruments
Financial
instruments consist of cash and cash equivalents, accounts
receivable and payable, and debt. The carrying value of cash and
cash equivalents and accounts receivable and payable approximate
fair value due to their short-term nature. The Company believes
the fair values and the carrying value of its debt would not be
materially different due to the debts interest rates
approximating market rates for similar obligations at
December 31, 2006, and 2005.
Cash and Cash Equivalents
The Company
considers all short-term investments with an original maturity
of three months or less to be cash equivalents. As of
December 31, 2006 and December 31, 2005 the Company
had deposits with a financial institution in excess of federally
insured limits. Cash includes cash in bank at December 31,
2006 and 2005. The Company has a cash management system under
which a cash overdraft exists for uncleared checks that have
been issued but not yet presented to the banks of record for the
Companys primary disbursement accounts. Accordingly, there
was a negative book balance of $.2 million at
December 31, 2005 that is reclassified to accounts payable
in the accompanying balance sheets.
Restricted Cash
Restricted cash
consists of deposits in the Companys lock-box account that
will be automatically applied by the lender against the
outstanding balance of the line of credit within forty-eight
hours of the deposit.
Inventory
Inventory consists of tool
components, subassemblies and expendable parts for the
Companys equipment used in directional oil and gas well
drilling activities. Inventory is recorded at the lower of cost
(first-in,
first-out) or market to establish its net realizable value.
Appropriate consideration is given to obsolescence, excess
quantities, and other factors in evaluating net realizable value.
Production Equipment and Property and
Equipment
Production equipment consists of
drilling motors and other equipment used primarily in
directional drilling and surveying. Property and equipment
consists of office furniture and related equipment, vehicles and
all other property not directly affecting directional drilling
operations. All production equipment and property and equipment
are presented at cost. The cost of ordinary maintenance,
including relining and rechroming equipment, and repairs is
charged to operations, while renewals and replacements are
capitalized.
Depreciation is computed at rates considered sufficient to
amortize the cost of the assets over their estimated useful
lives, using the straight-line method. Depreciation is based on
the following estimated useful lives:
|
|
|
|
|
|
|
Years
|
|
|
Production equipment
|
|
|
5 10 years
|
|
Motor shop equipment
|
|
|
7 years
|
|
Vehicles
|
|
|
5 years
|
|
Office furniture and fixtures
|
|
|
5 years
|
|
Computer software and hardware
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
2 3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Production equipment
|
|
$
|
24,665,577
|
|
|
$
|
13,829,080
|
|
Less: accumulated depreciation
|
|
|
(5,608,534
|
)
|
|
|
(2,334,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,057,043
|
|
|
$
|
11,494,184
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
2,112,535
|
|
|
$
|
1,035,215
|
|
Less: accumulated depreciation
|
|
|
(485,755
|
)
|
|
|
(160,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,626,780
|
|
|
$
|
874,328
|
|
|
|
|
|
|
|
|
|
|
F-10
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
Depreciation expense for the years ended December 31, 2006
and 2005 totaled approximately $3,677,000 and $1,929,000,
respectively. Depreciation expense for the five months ended
December 31, 2004 and seven months ended August 5,
2004 totaled approximately $568,000 and $1,839,000, respectively.
Long-Lived Assets
In accordance with
SFAS 144 Impairment of Long-Lived Assets the
Company recognizes impairment losses on long lived assets used
in operations when indicators of impairment are present and the
undiscounted cash flows over the life of the assets are less
than the assets carrying amount. If an impairment exists,
the amount of such impairment is calculated based on projections
of future discounted cash flows. These projections use a
discount rate and terminal value multiple that would be
customary for evaluating current oil and gas service company
transactions. The Company considers external factors in making
its assessment.
Specifically, changes in oil and natural gas prices and other
economic conditions surrounding the industry, consolidation
within the industry, competition from other oil and gas well
service company providers, the ability to employ and maintain a
skilled workforce and other pertinent factors are among the
items that could lead management to reassess the realizability
and/or
amortization periods of its long-lived assets.
During 2004, based upon its plans to dispose of the directional
drilling services division, management of Warrior Energy
Services, Inc., applying SFAS 144, analyzed the
recoverability of long lived assets of its business segments
including that which comprised the assets that, once acquired,
formed the Company. The analysis resulted in a charge to
operations for impairment for the seven months ended
August 5, 2004 in the amount of $1,317,481.
Loan Costs
The Company records
cost associated with establishing its debt facilities as loan
costs and amortizes such costs over the terms of the respective
loans. Amortization expense of loan costs for the years ended
December 31, 2006 and 2005 and the five months ended
December 31, 2004 totaled $26,750, $24,333, and $9,792,
respectively.
Federal Income Taxes
The Company is a
limited liability company and treated as a
pass-through entity for federal income tax purposes.
Each member reports its respective share of the taxable income
or loss of the Company. Accordingly, no provisions for federal
income taxes are included in the accompanying financial
statements. A provision for federal income taxes for the periods
presented prior to acquisition by the Company is not included in
order to present those periods on a consistent basis with the
Company.
Reclassifications
Certain 2005 amounts
have been reclassified to conform with 2006 presentation with no
effect on net income.
Use of Estimates
The preparation of
the financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and certain assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
3.
Recent
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 123R Shared Based Payment (SFAS 123R).
This statement is a revision of SFAS Statement No. 123
Accounting for Stock-Based Compensation and
supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation
guidance. SFAS 123R addresses all forms of share-based
compensation (SBP) awards, including shares issued under
employee stock purchase plans, stock options, restricted stock
and stock appreciation rights. Under SFAS 123R, SBP awards
result in a cost that will be measured at fair value on the
awards grant date, based on the estimated number of awards
that are expected to vest and will be reflected as compensation
cost in the historical financial statements. This statement is
effective for
F-11
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
public entities that do not file as small business issuers as of
the beginning of the first interim or annual reporting period
that begins after June 15, 2005. The Company adopted
SFAS No. 123R effective January 1, 2006.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of ARB No. 43,
Chapter 4, which is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The
amendments made by SFAS No. 151 require that abnormal
amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) be recognized as current-period
charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production
facilities. The Companys adoption of
SFAS No. 151 did not have a material effect on the
financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, which supersedes APB Opinion
No. 20, Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements.
SFAS No. 154 changes the requirements for the
accounting for and reporting of changes in accounting
principles. The statement requires the retroactive application
to prior periods financial statements of changes in
accounting principles, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of
the change. SFAS No. 154 does not change the guidance
for reporting the correction of an error in previously issued
financial statements or the change in an accounting estimate.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Companys adoption of
SFAS No. 154 did not have a material impact on our
financial statements.
In June 2006, the FASB issued Financial Interpretation (FIN)
No. 48, Accounting for Uncertainty in Income Taxes. This
Interpretation clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109, Accounting
for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN No. 48 is effective
for financial statement issuers for fiscal years beginning after
December 15, 2006. The Company has elected to be taxed as a
pass-through entity (as more fully described in
Note 3), therefore the adoption of FIN No. 48 has
no impact on the Company.
F-12
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
4.
Acquisition
Effective August 6, 2004, the Company acquired the assets
and assumed certain liabilities of the directional drilling
division of Warrior Energy Services Inc. (formerly Black Warrior
Wireline Corporation (BWWC)) for a total net purchase price of
$11,159,730. The Company borrowed $6,500,000 from a financial
institution and $2,000,000 from a member to fund a portion of
cash necessary to complete the acquisition. The acquisition was
accounted for as a purchase whereby the assets acquired and the
liabilities assumed were recorded in proportion to their
estimated fair value as the total estimated net amount of the
fair values exceeded the purchase price. The operations have
been included in these accompanying financial statements from
the date of acquisition. (See Note 5 and 6 for additional
discussion of the short and long term debt obligations.) During
2005, the Companys claim for working capital adjustments
was settled in exchange for it receiving $940,000 from BWWC as
reflected in the 2005 Statement of Cash Flows. The following is
a table of the assets acquired, net of the liabilities assumed
and the referenced working capital adjustment, used to determine
the total net purchase price, funds borrowed, and net cash paid
by the Company:
|
|
|
|
|
|
|
|
|
Assets
Acquired
:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
3,018,286
|
|
|
|
|
|
Inventory
|
|
|
2,142,246
|
|
|
|
|
|
Production equipment
|
|
|
8,774,747
|
|
|
|
|
|
Property and equipment
|
|
|
421,140
|
|
|
|
|
|
Other assets and deposits
|
|
|
95,548
|
|
|
$
|
14,451,967
|
|
|
|
|
|
|
|
|
|
|
Liabilities
Assumed
:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
2,511,479
|
|
|
|
|
|
Accrued expenses
|
|
|
1,720,758
|
|
|
|
4,232,237
|
|
|
|
|
|
|
|
|
|
|
Plus: working capital adjustment due from Seller
|
|
|
|
|
|
|
940,000
|
|
|
|
|
|
|
|
|
|
|
Total Purchase Price
|
|
|
|
|
|
|
11,159,730
|
|
Less: notes payable issued
|
|
|
|
|
|
|
(8,500,000
|
)
|
|
|
|
|
|
|
|
|
|
Net cash paid
|
|
|
|
|
|
$
|
2,659,730
|
|
|
|
|
|
|
|
|
|
|
5.
Short-Term
Debt
Short-term debt at December 31, 2006 and 2005, is comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$10,000,000, as amended in March 2006, revolving
line-of-credit
with a bank secured by substantially all assets of the Company,
bearing interest at the prime rate (8.25% at December 31,
2006 and 7.25% at December 31, 2005), due monthly,
principal due July 2008; however, classified as short-term debt
due to lock box arrangement and other provisions in the debt
agreement; advances on the line are based on 85% of the
Companys eligible accounts receivable.
|
|
$
|
3,647,607
|
|
|
$
|
2,903,159
|
|
Notes payable to a premium finance company, due in monthly
installments of $87,828, including interest at 6.77%, maturing
April 2007.
|
|
|
346,410
|
|
|
|
|
|
Notes payable to a premium finance company, paid in full in
2006, including interest at 3.14%, maturing April 2006.
|
|
|
|
|
|
|
275,717
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,994,017
|
|
|
$
|
3,178,876
|
|
|
|
|
|
|
|
|
|
|
F-13
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
6.
Long-Term
Debt and Subordinated Note Payable to a
Member
Long-term debt at December 31, 2006 and 2005, is comprised
of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$6,750,575 term note with a bank, secured by substantially all
assets of the Company, payable in monthly installments of
$112,510 plus interest at the prime rate (8.25% at
December 31, 2006), maturing July 2008. Also, beginning
July 31, 2007 and each July 31st thereafter, the
Company may owe a payment equal to 25% of Borrowers Excess
Cash Flow as defined in the loan agreement, for the prior fiscal
year.
|
|
$
|
6,071,004
|
|
|
$
|
|
|
$10,000,000 term note with a bank, borrowings which cannot
exceed seventy-five percent of new eligible equipment purchased,
secured by substantially all assets of the company with payments
beginning on August 1, 2007 in monthly installments equal
to 1/48th of the July 31, 2007 ending balance plus
interest at the prime rate (8.25% at December 31,
2006) and maturing July 2008.
|
|
|
996,637
|
|
|
|
|
|
$6,500,000 term note with a bank, refinanced in 2006, under the
term note above.
|
|
|
|
|
|
|
5,039,931
|
|
$1,200,000 term note with a bank, refinanced in 2006, under the
term note above.
|
|
|
|
|
|
|
800,684
|
|
Notes payable to financing companies, secured by vehicles, due
in monthly installments ranging from $695 to $1,197, bearing
interest at rates ranging from 6.74% to 8.99%, and maturing at
various dates through January 15, 2010.
|
|
|
241,195
|
|
|
|
217,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,308,836
|
|
|
|
6,058,173
|
|
Less: current maturities
|
|
|
1,533,684
|
|
|
|
1,414,456
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,775,152
|
|
|
$
|
4,643,717
|
|
|
|
|
|
|
|
|
|
|
Subordinated note payable to a member of $2,000,000 at
December 31, 2006 and 2005 is unsecured, bears interest at
12% per annum due monthly, and principal is due August 2009.
Future maturities of long-term debt and subordinated note
payable are as follows:
|
|
|
|
|
Years Ending
December 31,
|
|
|
|
|
2007
|
|
$
|
1,533,684
|
|
2008
|
|
|
5,702,405
|
|
2009
|
|
|
2,072,747
|
|
|
|
|
|
|
|
|
$
|
9,308,836
|
|
|
|
|
|
|
The Companys debt obligations to banks contain certain
financial covenants and restrictions, which include a minimum
debt service coverage ratio, minimum monthly net income, limits
on capital expenditures as well as requirements to deliver
monthly financial statements within 30 days after month
end, annual audited financial statements within 120 days
after year end, and annual projections 30 days before year
end. The Company was in compliance with these covenants or had
obtained waivers for events of non-compliance, which included
violation of the limit on capital expenditures for the years
ended December 31, 2006 and 2005 and a shortfall regarding
the minimum debt services coverage ratio as of June 30,
2006.
F-14
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
7.
Members
Equity
The regulations of the Company stipulate that income, expenses,
gains and losses are allocated among the members, first to the
members until the cumulative profits equal the amount of
cumulative losses previously allocated, and then according to
the members percentage interests. Distributions are made
in proportion to the members percentage interests. The
Companys regulations provide that minimum distributions of
the Companys Net Cash Flow, as defined, are to be made to
its members quarterly. Such distributions are in an amount equal
to the members estimated tax liability based on the
highest individual tax rate in effect for the applicable fiscal
year and are subject to certain restrictions and reserves as
determined by the Companys Board of Managers.
In 2004, the Company adopted an Incentive Plan (the
Plan) that will award membership interests in the
Company to eligible persons annually on the July 31
anniversary date of the Plan, beginning July 31, 2005. The
total number of units of membership interest that may be issued
to the eligible persons under the Plan shall not exceed
22 units or 22% of the Company. The award will be
determined annually and is based upon the Companys average
earnings before interest, taxes, depreciation and amortization
(EBITDA) for all years since the date Company
operations commenced) exceeding annual predetermined amounts.
During 2005, 5.06 of the 22 units, which represented 23% of
the total potential awards as stated in the Plan, were awarded
to the eligible persons, valued at $273,000, using an estimated
fair market value for the Company, based upon trailing twelve
months EBITDA. During 2006, 5.06 of the 22 units, which
represented 23% of the total potential awards as stated in the
Plan, were awarded to the eligible persons, valued at
$2,475,000, using an estimated fair market value for the
Company, based upon the Merger Agreement that was entered into
with JK Acquisition Corp. (see Note 13), net of discounts
applied for lack of marketability and lack of control. In
addition, the Company has accrued $519,000 for the ratable
portion of the 3.96 membership interests earned between
August 1, 2006 through December 31, 2006 that are
eligible to be awarded in 2007.
8.
Operating
Leases
The Company has real property and equipment lease agreements
expiring through 2009. The following is a schedule of future
minimum rental payments under these noncancelable agreements:
|
|
|
|
|
For the Years Ending
December 31,
|
|
|
|
|
2007
|
|
$
|
356,000
|
|
2008
|
|
|
228,000
|
|
2009
|
|
|
32,000
|
|
|
|
|
|
|
|
|
$
|
616,000
|
|
|
|
|
|
|
Total rent expense for the years ended December 31, 2006
and 2005 was $459,317 $346,323, respectively. Rent expense was
$103,455 and $170,876 for the five month period ended
December 31, 2004 and the seven month period ended
August 4, 2004, respectively.
9.
Related
Party Transactions
The Company has accrued expenses to members, who are also
officers of the Company, of $130,781 and $98,656 at
December 31, 2006 and 2005, respectively, for bonuses and
other compensation earned under the terms of their employment
agreements with the Company.
As further described in Note 6, the Company has a
$2,000,000 subordinated note payable to a member. Interest
expense on this note for the years ended December 31, 2006,
2005, and five months ended December 31, 2004 was $243,333,
$243,333 and $99,523, respectively. Additionally, consulting
fees to this member were $120,000, $120,000 and $50,000 for the
years ended December 31, 2006 and 2005 and five months
ended December 31, 2004, respectively, of which $20,000 was
accrued at December 31, 2006 and 2005.
F-15
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
10.
Major
Customers
During the years ended December 31, 2005 and 2004 the
Company recognized revenues from one customer during the normal
course of business in the amount of approximately $6,104,000,
and $6,302,000 representing 16%, and 33% of the Companys
revenues, respectively. At December 31, 2005 and 2004 the
Company had receivables from this customer in the amount of
$378,925 and $1,077,000, representing 4% and 24% of the
Companys trade accounts receivable (billed and unbilled),
respectively. No other customer accounted for more than 10% of
the Companys revenues for the years ending
December 31, 2006, 2005 or periods ended December 31,
2004 and August 4, 2004.
11.
Commitments
and Contingencies
The Company has employment agreements with three officers, who
are also members of the Company. As of December 31, 2006,
the aggregate commitment for future base salaries for these
three officers is approximately $485,100 per year through
July 2009, subject to the employee satisfying all conditions and
terms of the employment agreement.
The Company has a consulting agreement with a member. The
aggregate commitment for future fees is $120,000 per year
through the earlier of August 6, 2007, or the date in which
a change of control of the Companys membership interests
occurs.
The Company has a special bonus plan whereby certain employees
may receive discretionary bonuses. No bonuses have been granted,
thus no amounts have been included in the accompanying financial
statements related to these potential bonuses.
12.
Employee
Benefit Plan
The Company has an employee benefit plan under
Section 401(k) of the Internal Revenue Code for all
eligible employees who are permitted to defer compensation up to
a maximum of 15% of their income subject to limitations imposed
by the Internal Revenue Code. The Company may make matching
contributions or discretionary contributions. The Company
accrued $352,000 and $181,000 in matching and discretionary
contributions for years ended December 31, 2006 and 2005,
respectively. Total expenses for the years ended
December 31, 2006 and 2005 and from August 2004 to
December 31, 2004 were $352,000, $181,000, and $62,263,
respectively.
13.
Subsequent
Events
Recapitalization and purchase
agreement
On April 2, 2007 the Company
and its members, executed a private recapitalization
purchase agreement with SG-Directional LLC
(recapitalization), a privately held Arkansas
limited liability company controlled by The Stephens Group,
LLC., whereby S-G Directional, LLC purchased 61.4% of the
membership interests of the Company from its members for
$45,000,000.
In addition, as described in the recapitalization agreement the
selling members of the Company received a distribution of
$39,883,139. The distribution was funded by a new senior term
loan with a financing institution and a new subordinated debt
agreement with The Stephens Group, LLC as noted below.
The amount received by the members was equal to 75% of the
closing net enterprise value of the Company as determined by a
pre-determined multiple, which was consistent with existing
market conditions, of adjusted earnings before interest, taxes,
depreciation, and amortization (EBITDA), as defined in the
agreement, less third party indebtedness.
Under the terms of a 2004 Incentive Plan, in the event, of a
change in control of the Company, certain employees, members of
management and the Companys 401k Plan could receive a
discretionary contribution. The Company elected to make the
contributions which totaled $1,371,000.
F-16
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
Short Term Debt, Long-Term Debt and
subordinated note payable
On April 2,
2007, the Company refinanced its revolving line of credit. The
Company has a $10,000,000 revolving line of credit with a bank.
The line of credit is secured by substantially all assets of the
Company and bears interest at the prime rate (8.25% at
June 30, 2007) plus a margin (1% at June 30,
2007) which is due monthly. Principle is due March 30,
2010. The previous revolving line of credit was previously
classified as short-term due to a lock box arrangement. The
current revolving facility does not have a mandatory lockbox
arrangement and thus is will be shown as long term. Advances on
the line are based on 85% of the Companys eligible
accounts receivable.
Also on April 2, 2007, the Company refinanced its long-term
bank notes. The Company obtained a $30,000,000 term note,
whereby the remaining balances under the old term notes were
paid off, with the remaining amounts being loaned to the
Company. The borrowing under this term note is secured by
substantially all assets of the Company, payable in monthly
installments of $357,143 plus interest at the prime rate (8.25%
at June 30, 2007) plus a margin (1% at June 30,
2007). Principle is due March 30, 2010.
On April 2, 2007 the Company obtained subordinated
unsecured notes payable from the new member equal to $15,000,000
bearing interest at 10% monthly to be paid in quarterly
installments with the principal balance becoming due
July 30, 2010.
Members Equity
Related to the
2004 Incentive Plan (see Note 7) that awards
membership interests in the Company to eligible persons , during
2007, the Company accrued $693,000 for the ratable portion of
the 3.96 membership interests earned between January 1,
2007 through March 31, 2007 that are eligible to be awarded
in 2007. On April 2, 2007, upon completion of the
Recapitalization with Stephens Group LLC, the 3.96 membership
interests that would have been earned in July 2007, as well as
the 3.96 membership interests that would have been earned in
July 2008 and the 3.96 membership interests that would have been
earned July 2009 were immediately vested, for a total of 11.88
membership interests, or 54% of the total potential awards and
the remaining balance. The 11.88 membership awards were valued
at $7,115,353, with $1,212,000 being previously recognized in
the fourth quarter of 2006 and the first quarter of 2007, with
the remaining, $5,903,353 being recognized in the second quarter
of 2007. The valuation was based upon the estimated fair market
value of the Company, based upon the First Amended and Restated
Merger Agreement with JK Acquisition Corp. and the
Recapitalization and Repurchase Agreement with Stephens Group
LLC, net of discounts applied for lack of marketability and lack
of control.
The Company made distributions of $41,383,139 of which
$1,500,000 for the members ratable portion of the tax
liability and the remaining $39,883,139 in accordance with the
recapitalization and purchase agreement as noted above.
Employment agreements
The Company
amended its employment agreements with three officers, who are
also members of the Company as a result of the recapitalization.
The initial term of the agreements expire December 31, 2009
and is automatically renewed for successive one year terms
thereafter, unless earlier terminated. The employment agreements
contain certain terminations provisions whereby if the Company
terminates any of the officers without cause, as defined in the
agreement, the Company will be required to pay the officers all
accrued and prorated unpaid base salary, bonus and vacation
time. In addition, the Company would be required to pay a one
time severance payment of $500,000.
Asset Acquisition
In July 2007, the
Company entered into an Asset Purchase Agreement whereby the
Company purchased the operating assets of Ulterra MWD, L.P., a
subsidiary of Ulterra Drilling Technologies, for a total
purchase price of $10 million. Ulterra MWD, L.P.
specializes in the manufacture and provision of MWD tools and
services to exploration and production companies in the oil and
gas industry.
The Company has recorded the assets at their estimated fair
value on their balance sheet as of July 31, 2007 as follows:
|
|
|
|
|
Production equipment
|
|
$
|
10,000,000
|
|
F-17
Multi-Shot,
LLC
Notes
to Financial
Statements
(Continued)
The Company financed the purchase of the assets under a new
financing arrangement with its financial institution for
$10,000,000 secured by the purchased assets, due in 33
installments of $119,048, plus interest at the prime rate plus a
margin with the balance due March, 2010.
The allocation of the purchase prices is based on preliminary
data and could change when a final analysis is obtained.
Merger with a Public Company
In August
2007, the Company entered into a Second and Restated Merger
Agreement with JK Acquisition Corp. (JKA) and
Multi-Shot, Inc. (MSI), a Delaware corporation and
wholly-owned subsidiary of JKA pursuant to which the Company
will merge with and into MSI (the Merger). The
Second and Restated Merger Agreement fully amends and restates
the Agreement and Plan of Merger, dated September 6, 2006
and its first amendment dated February 14, 2007, by and
among JKA, MSI, and the Company and the Companys members.
Following completion of the Merger, it is anticipated that JKA
will change its name to MS Energy Services, Inc. The Board of
Directors of MS Energy Services, Inc. and Multi-Shot, Inc. will
have representation from the former members of Multi-Shot, LLC.
The acquisition will be accounted for as a reverse acquisition,
equivalent to a recapitalization through the issuance of stock
by the Company for the net monetary assets of JKA. This
determination was made based on managements evaluation of
the facts and circumstances associated with the acquisition,
including factors such as continuity of the Companys
management, continuity of the Companys operations and
business plan, representation on the board of directors,
ownership of the combined company and potential changes to
ownership, and affiliations and ownership levels of minority
stockholder groups. The net monetary assets of JKA will be
recorded as of the acquisition date, at their respective
historical cost, which is considered to be the equivalent of
fair value. No goodwill or other intangible assets will be
recorded as a result of the Merger.
F-18
Multi-Shot,
LLC
Unaudited Condensed Balance Sheet
|
|
|
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
ASSETS
|
Current
Assets
:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
392,992
|
|
Restricted cash
|
|
|
39,051
|
|
Accounts receivable:
|
|
|
|
|
Trade, net of allowance for doubtful accounts of approximately
$1,096,000
|
|
|
18,794,537
|
|
Unbilled receivables
|
|
|
2,722,604
|
|
Employee advances
|
|
|
16,163
|
|
Inventory
|
|
|
6,572,173
|
|
Prepaid expenses
|
|
|
1,526,021
|
|
|
|
|
|
|
Total current assets
|
|
|
30,063,541
|
|
|
|
|
|
|
Production
Equipment
, net
|
|
|
35,365,244
|
|
Property and
Equipment
, net
|
|
|
1,401,457
|
|
Other
Assets
, net
|
|
|
181,784
|
|
|
|
|
|
|
Total Assets
|
|
$
|
67,012,026
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS DEFICIT
|
Current
Liabilities
:
|
|
|
|
|
Short-term Borrowings
|
|
|
817,402
|
|
Current maturities of long-term debt
|
|
|
5,727,022
|
|
Accounts payable
|
|
|
10,746,993
|
|
Accrued expenses
|
|
|
3,787,884
|
|
|
|
|
|
|
Total current liabilities
|
|
|
21,079,301
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
39,618,686
|
|
Subordinated Note
Payable to Member
|
|
|
15,000,000
|
|
|
|
|
|
|
Total liabilities
|
|
|
75,697,987
|
|
Commitments and
Contingencies
|
|
|
|
|
Members
Deficit
|
|
|
(8,685,961
|
)
|
|
|
|
|
|
Total Liabilities and
Members deficit
|
|
$
|
67,012,026
|
|
|
|
|
|
|
See accompanying notes to these unaudited condensed financial
statements.
F-19
Multi-Shot,
LLC
Unaudited Condensed Statements of
Operations
Nine Months Ended
September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
72,579,370
|
|
|
$
|
52,747,344
|
|
Operating Costs and
Expenses
:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
42,850,569
|
|
|
|
31,414,490
|
|
Selling, general and administrative:
|
|
|
|
|
|
|
|
|
Salary and other payroll expenses
|
|
|
11,981,393
|
|
|
|
6,344,919
|
|
Other
|
|
|
5,981,712
|
|
|
|
4,229,241
|
|
Depreciation and amortization
|
|
|
4,946,179
|
|
|
|
2,514,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,759,853
|
|
|
|
44,502,796
|
|
|
|
|
|
|
|
|
|
|
Income from
Operations
|
|
|
6,819,517
|
|
|
|
8,244,548
|
|
Other Income
(Expense)
:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,759,084
|
)
|
|
|
(882,179
|
)
|
Other income
|
|
|
97,765
|
|
|
|
66,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,661,319
|
)
|
|
|
(816,023
|
)
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,158,198
|
|
|
$
|
7,428,525
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these unaudited condensed financial
statements.
F-20
Multi-Shot,
LLC
Unaudited Condensed Statements of Cash
Flows
Nine Months Ended
September 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows From
Operating Activities
:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,158,198
|
|
|
$
|
7,428,525
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,868,285
|
|
|
|
2,494,521
|
|
Amortization of loan costs
|
|
|
77,894
|
|
|
|
19,625
|
|
Bad debt expense
|
|
|
964,672
|
|
|
|
428,172
|
|
Membership issued for compensation
|
|
|
6,596,353
|
|
|
|
2,475,000
|
|
Changes in operating assets and liabilities, net of business
combination:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,224,528
|
)
|
|
|
(7,452,914
|
)
|
Inventory
|
|
|
(1,795,634
|
)
|
|
|
(1,154,266
|
)
|
Deposits
|
|
|
|
|
|
|
(35,622
|
)
|
Prepaid expenses
|
|
|
(935,483
|
)
|
|
|
(525,385
|
)
|
Accounts payable
|
|
|
3,523,457
|
|
|
|
2,937,753
|
|
Accrued expenses
|
|
|
940,253
|
|
|
|
1,732,606
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,173,467
|
|
|
|
8,348,015
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From
Investing Activities
:
|
|
|
|
|
|
|
|
|
Purchase of production equipment
|
|
|
(10,833,143
|
)
|
|
|
(8,595,948
|
)
|
Purchase of property and equipment
|
|
|
(118,020
|
)
|
|
|
(681,977
|
)
|
Investment in Ulterra MWD, L.P. (See note 3)
|
|
|
(10,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(20,951,163
|
)
|
|
|
(9,277,925
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From
Financing Activities
:
|
|
|
|
|
|
|
|
|
Net receipts under line-of-credit agreement
|
|
|
6,708,975
|
|
|
|
2,132,177
|
|
Payments on debt
|
|
|
(5,152,716
|
)
|
|
|
(1,814,889
|
)
|
Proceeds of debt
|
|
|
46,303,999
|
|
|
|
2,211,417
|
|
Payment of loan costs
|
|
|
(198,815
|
)
|
|
|
(6,000
|
)
|
Transfer to restricted cash
|
|
|
(39,051
|
)
|
|
|
|
|
Capital contributions
|
|
|
1,371,033
|
|
|
|
|
|
Distributions paid
|
|
|
(41,383,139
|
)
|
|
|
(1,592,795
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
7,610,286
|
|
|
|
929,910
|
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash
and Cash Equivalents
|
|
|
(167,410
|
)
|
|
|
|
|
Cash and Cash
Equivalents at Beginning of Period
|
|
|
560,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash
Equivalents at End of Period
|
|
$
|
392,992
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
2,489,001
|
|
|
$
|
862,882
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these unaudited condensed financial
statements.
F-21
Multi-Shot,
LLC
Notes to Unaudited Condensed Financial
Statements
Operations
Multi-Shot, LLC (the Company or MS, LLC)
was formed in the state of Texas on April 21, 2004 as a
limited liability company to acquire certain assets and
liabilities of the directional drilling division of Warrior
Energy Services, Inc. (formerly Black Warrior Wireline
Corporation) which occurred on August 6, 2004. The Company
is a domestic energy services company providing directional
drilling, downhole surveying, measurement while drilling (MWD),
steering tools and motor rentals to independent oil and gas
operators operating in the oil and gas producing regions of the
Gulf Coast, Rocky Mountains and Mid Continent regions of the
United States.
The Company operates from facilities located in Odessa, Texas;
Lafayette, Louisiana; Grand Junction, Colorado; Baker, Montana;
Rock Springs, Wyoming; Corpus Christi, Texas and Conroe, Texas.
The Company also has sales offices located in Midland, Texas;
Houston, Texas; Dallas, Texas and Denver, Colorado. The
Companys corporate offices are located in Conroe, Texas.
General
The accompanying unaudited interim Condensed Financial
Statements were prepared in accordance with accounting
principles generally accepted in the United States of America
and the interim financial statement rules and regulations of the
Securities and Exchange Commission. In the opinion of
management, these statements include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair
presentation of the Condensed Financial Statements. The interim
operating results are not necessarily indicative of the results
for a full year or any interim period.
Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules
and regulations relating to interim financial statements. These
Condensed Financial Statements should be read in conjunction
with the Companys Financial Statements and Notes thereto
included in the Companys Fiscal Year 2006, 2005 and 2004
Audited Financial Statements included in the Companys
Proxy filed on August 29, 2007.
|
|
2.
|
Recent
Accounting Pronouncements
|
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (FAS 159). This statement allows
the option to report selected financial assets and liabilities
at fair value and establishes presentation and disclosure
requirements. The fair value option established by FAS 159
permits the Company to elect to measure eligible items at fair
value on an
instrument-by-instrument
basis and then report unrealized gains and losses for those
items in the Companys earnings. FAS 159 is effective
for fiscal years beginning after November 15, 2007. The
Company has not yet determined the impact, if any, on its
financial statements.
In May 2007, the FASB issued FASB Staff Position
(FSP)
FIN 48-1,
an amendment to FIN 48, which provides guidance on how an
entity is to determine whether a tax position has effectively
settled for purposes of recognizing previously unrecognized tax
benefits. Specifically, this guidance states that an entity
would recognize a benefit when a tax position is effectively
settled using the following criteria: (1) the taxing
authority has completed its examination including all appeals
and administrative reviews; (2) the entity does not plan to
appeal or litigate any aspect of the tax position; and
(3) it is remote that the taxing authority would examine or
reexamine any aspect of the tax position, assuming the taxing
authority has full knowledge of all relevant information
relative to making their assessment on the position. The
adoption of
FIN 48-1
did not have a material impact on the Companys financial
statements.
F-22
Multi-Shot,
LLC
Notes to Unaudited
Condensed Financial Statements
(Continued)
In June 2007, the FASB executive task force issued EITF-07-3
Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development
Activities. The EITF provides guidance for entities that
may make nonrefundable advance payments for goods or services
that will be used in future research and development activities
and whether the advance payment should be expensed when the
advance payment is made or when the research and development
activity has been performed.
EITF 07-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2007. The Company is
evaluating the impact on its financial statements, if any.
Acquisition
of Ulterra MWD, L.P.
In July 2007, the Company entered into an Asset Purchase
Agreement whereby the Company purchased the operating assets of
Ulterra MWD, L.P., a subsidiary of Ulterra Drilling
Technologies, for a total purchase price of $10 million.
Ulterra MWD, L.P. specializes in the manufacture and provision
of MWD tools and services to exploration and production
companies in the oil and gas industry.
The Company has recorded the assets at their estimated fair
value on their balance sheet as of July 31, 2007 as follows:
|
|
|
Production equipment
|
|
$10,000,000
|
The allocation of the purchase price is based on preliminary
data and could change when a final analysis is obtained. The
acquisition will be treated as a business combination for
accounting purposes and included in operations since
July 1, 2007.
Merger
with Public Company
In August 2007, the Company entered into a Second and Restated
Merger Agreement with JKA Acquisition Corp. (JKA)
and Multi-Shot, Inc. (MSI), a Delaware corporation
and wholly-owned subsidiary of JKA pursuant to which the Company
will merge with and into MSI (the Merger). The
Second and Restated Merger Agreement fully amends and restates
the Agreement and Plan of Merger, dated September 6, 2006
and its first amendment dated February 14, 2007, by and
among JKA, MSI, and the Company and the Companys members.
Following completion of the Merger, it is anticipated that JKA
will change its name to MS Energy Services, Inc. The Board of
Directors of MS Energy Services, Inc. and Multi-Shot, Inc. will
have representation from the former members of Multi-Shot, LLC.
The acquisition will be accounted for as a reverse acquisition,
equivalent to a recapitalization through the issuance of stock
by the Company for the net monetary assets of JKA. This
determination was made based on managements evaluation of
the facts and circumstances associated with the acquisition,
including factors such as continuity of the Companys
management, continuity of the Companys operations and
business plan, representation on the board of directors,
ownership of the combined company and potential changes to
ownership, and affiliations and ownership levels of minority
stockholder groups. The net monetary assets of JKA will be
recorded as of the acquisition date, at their respective
historical cost, which is considered to be the equivalent of
fair value. No goodwill or other intangible assets will be
recorded as a result of the merger.
|
|
4.
|
Recapitalization
and purchase agreement
|
On April 2, 2007 the Company and its members,
executed a private recapitalization purchase agreement with S-G
Directional LLC, a privately held Arkansas limited liability
company controlled by The Stephens Group, LLC., whereby S-G
Directional, LLC purchased 61.4% of the membership interests of
the Company from its members for $45,000,000
(Recapitalization).
F-23
Multi-Shot,
LLC
Notes to Unaudited
Condensed Financial Statements
(Continued)
In addition, as described in the Recapitalization agreement the
selling members of the Company received a distribution of
$39,883,139. The distribution was funded by a new senior term
loan with a financing institution and a new subordinated debt
agreement with the Stephens Group, LLC (see footnote 5).
The amount received by the members was equal to 75% of the
closing net enterprise value of the Company as determined by a
pre-determined multiple, which was consistent with existing
market conditions, of adjusted earnings before interest, taxes,
depreciation, and amortization (EBITDA), as defined in the
agreement, less third party indebtedness.
Under the terms of a 2004 Incentive Plan, in the event, of a
change in control of the Company, certain employees, members of
management and the Companys 401k Plan could receive a
discretionary contributions. The Company elected to make the
contributions which totaled $1,371,000.
|
|
5.
|
Short-Term
Debt, Long-Term Debt and subordinated note payable
|
On September 30, 2007 Long-Term Debt consisted of the
following:
|
|
|
|
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
Short-term Borrowings
|
|
$
|
817,402
|
|
|
|
|
|
|
Senior Credit Facility:
|
|
|
|
|
Term Loans
|
|
$
|
37,976,190
|
|
Revolving Credit Facility
|
|
|
7,335,025
|
|
Other
|
|
|
34,493
|
|
Less Current Maturities
|
|
|
(5,727,022
|
)
|
|
|
|
|
|
|
|
$
|
39,618,686
|
|
|
|
|
|
|
On April 2, 2007, the Company refinanced its revolving line
of credit. The Company has a $10,000,000 revolving line of
credit with a bank. The line of credit is secured by
substantially all assets of the Company and bears interest at
the prime rate (7.75% at September 30, 2007) plus a
margin (.25% at September 30, 2007) which is due
monthly. Principle is due March 30, 2010. The previous
revolving line of credit was previously classified as short-term
due to a lock box arrangement. The current revolving facility
does not have a mandatory lockbox arrangement and thus will be
shown as long term. Advances on the line are based on 85% of the
Companys eligible accounts receivable.
Also on April 2, 2007, the Company refinanced its long-term
bank notes. The Company obtained a $30,000,000 term note,
whereby the remaining balances under the old term notes were
paid off, with the remaining amounts being loaned to the
Company. The borrowing under this term note is secured by
substantially all assets of the Company, payable in monthly
installments of $357,143 plus interest at the prime rate (7.75%
at September 30, 2007) plus a margin (.25% at
September 30, 2007). Principal is due March 30, 2010.
Additionally, on April 2, 2007 the Company obtained
subordinated unsecured notes payable from the new member equal
to $15,000,000 bearing interest at 10% monthly to be paid in
quarterly installments with the principal balance becoming due
July 30, 2010.
On July 6, 2007 the Company financed the purchase of the
assets of Ulterra MWD, L.P. under a new financing arrangement
with its financial institution for $10,000,000 secured by the
purchased assets, due in 33 installments of 119,048, plus
interest at the prime rate (7.75% at September 30,
2007) plus a margin (.25% at September 30,
2007) with the balance due March, 2010.
On August 6, 2007 the company had a note payable of
$1,016,069 due in monthly installments of $104,786, including
interest at 6.77% maturing in April 2008. The note payable
relates to the financing of the companys
F-24
Multi-Shot,
LLC
Notes to Unaudited
Condensed Financial Statements
(Continued)
insurance premiums attributable to workers compensation, general
liability, directors & officers, and auto liability
insurance policies. The balance on this note was $817,402 as of
September 30, 2007.
The regulations of the Company stipulate that income, expenses,
gains and losses are allocated among the members, first to the
members until the cumulative profits equal the amount of
cumulative losses previously allocated, and then according to
the members percentage interests. Distributions are made
in proportion to the members percentage interests. The
Companys regulations provide that minimum distributions of
the Companys Net Cash Flow, as defined, are to be made to
its members quarterly. Such distributions are in an amount equal
to the members estimated tax liability based on the
highest individual tax rate in effect for the applicable fiscal
year and are subject to certain restrictions and reserves as
determined by the Companys Board of Managers.
In 2004, the Company adopted an Incentive Plan (the
Plan) that will award membership interests in the
Company to eligible persons annually on the July 31 anniversary
date of the Plan, beginning July 31, 2005. The total number
of units of membership interest that may be issued to the
eligible persons under the Plan shall not exceed 22 units
or 22% of the Company. The award will be determined annually and
is based upon the Companys average earnings before
interest, taxes, depreciation and amortization EBITDA for all
years since the date Company operations commenced) exceeding
annual predetermined amounts.
During 2005, 5.06 of the 22 units, which represented 23% of
the total potential awards as stated in the Plan, were awarded
to the eligible persons, valued at $273,000, using an estimated
fair market value for the Company, based upon trailing twelve
months EBITDA. In addition, the Company accrued $2,268,750 for
the ratable portion of the 3.96 membership interests earned
between August 1, 2005 and June 30, 2006.
During 2006, 5.06 of the 22 units, which represented 23% of
the total potential awards as stated in the Plan, were awarded
to the eligible persons, valued at $2,475,000, using an
estimated fair market value for the Company, based upon the
Merger Agreement that was entered into with JK Acquisition Corp.
(see Note 3), net of discounts applied for lack of
marketability and lack of control. In addition, the Company
accrued $519,000 for the ratable portion of the 3.96 membership
interests earned between August 1, 2006 through
December 31, 2006.
Related to the 2004 Incentive Plan, the Company accrued $693,000
for the ratable portion of the 3.96 membership interests earned
between January 1, 2007 through March 31, 2007 that
are eligible to be awarded in 2007. On April 2, 2007, upon
completion of the Recapitalization with Stephens Group LLC, the
3.96 membership interests that would have been earned in July
2007, as well as the 3.96 membership interests that would have
been earned in July 2008 and the 3.96 membership interests that
would have been earned July 2009 were immediately vested, for a
total of 11.88 membership interests, or 54% of the total
potential awards and the remaining balance. The 11.88 membership
awards were valued at $7,115,353, with $1,212,000 being
previously recognized in the fourth quarter of 2006 and the
first quarter of 2007, with the remaining, $5,903,353 being
recognized in the second quarter of 2007. The valuation was
based upon the estimated fair market value of the Company, based
upon the First Amended and Restated Merger Agreement with JK
Acquisition Corp. and the Recapitalization and Repurchase
Agreement with Stephens Group LLC, net of discounts applied for
lack of marketability and lack of control.
The Company made distributions of $41,383,139 of which
$1,500,000 for the members ratable portion of the tax
liability and the remaining $39,883,139 in accordance with the
recapitalization and purchase agreement (See Note 4).
|
|
7.
|
Related
Party Transactions
|
The Company has accrued expenses to members, who are also
officers of the Company, of $145,885 and $625,059 at
September 30, 2007 and 2006, respectively, for bonuses and
other compensation earned under the terms of their employment
agreements with the Company.
F-25
Multi-Shot,
LLC
Notes to Unaudited
Condensed Financial Statements
(Continued)
As further described in Note 5, the Company has a
$15,000,000 subordinated note payable to a member. Interest
expense on this note for the six months ended September 30,
2007, was $743,836.
The Company had a $2,000,000 subordinated note payable to a
member that was paid off in March of 2007. Interest expense on
this note was $58,000 for the period from January 1, 2007
thru the date the note was paid off and $182,000 for the nine
months ended September 30, 2006. Additionally, consulting
fees to this member were $30,000 and $90,000 for the nine months
ended September 30, 2007 and 2006, respectively. The
agreement expired upon the change of control that resulted from
the Recapitalization and Purchase Agreement in footnote 4.
During the nine months ended September 30, 2007 the Company
recognized revenues from two customers during the normal course
of business in the amount of approximately $23,868,000
representing 32.8%, of the Companys revenues. At
September 30, 2007 the Company had receivables from these
customers in the amount of approximately $7,223,000 representing
33.5% of the Companys trade accounts receivable (billed
and unbilled), respectively. No other customer accounted for
more than 10% of the Companys revenues for the nine months
ending September 30, 2007.
|
|
9.
|
Commitments
and Contingencies
|
The Company amended its employment agreements with three
officers, who are also members of the Company as a result of the
recapitalization. The initial term of the agreements expire
December 31, 2009 and are automatically renewed for
successive one year terms thereafter, unless earlier terminated.
The employment agreements contain certain termination provisions
whereby if the Company terminates any of the officers without
cause, as defined in the agreement, the Company will be required
to pay the officers all accrued and prorated unpaid base salary,
bonus and vacation time. In addition, the Company would be
required to pay a one time severance payment of $500,000. As of
September 30, 2007, the aggregate commitment for future
base salaries for these three officers is approximately $735,000
per year through December 31 2009, subject to the employees
satisfying all conditions and terms of the employment agreements.
On July 16, 2007, the Company received notice that JKA
filed suit in the state district court of Harris County, Texas
against the Company and twelve other named defendants. JKA
sought injunctive relief and other damages related to various
claims of breach of contract in connection with the Amended
Merger Agreement that was previously entered into on
February 14, 2007. On August 27, 2007 the Company and
JKA entered into a settlement agreement and subsequently entered
into a second and amended restated merger agreement, as
previously described in Note 3. As of September 30,
2007 there were no outstanding liabilities as a result of this
litigation.
F-26
ULTERRA
MWD, L.P.
FINANCIAL
STATEMENTS
AND
INDEPENDENT AUDITORS REPORT
DECEMBER
31, 2006
F-27
INDEPENDENT
AUDITORS REPORT
To the Partners of Ulterra MWD, L.P.
We have audited the accompanying balance sheet of Ulterra MWD,
L.P., as of December 31, 2006 and the related statements of
operations, partners capital and cash flows for the year
then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose for expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Ulterra MWD, L.P. as of December 31, 2006, and the
results of its operations and cash flows for the year then ended
in conformity with accounting principles generally accepted in
the United States of America.
PUSTORINO, PUGLISI & CO., LLP
New York, New York
March 2, 2007, except for Note 8, as to which the date
is May 31, 2007.
F-28
ULTERRA
MWD, L.P.
BALANCE
SHEET
DECEMBER 31, 2006
|
|
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
Accounts receivable
|
|
$
|
3,404,423
|
|
Parts and supply inventory
|
|
|
964,210
|
|
Prepaid expenses
|
|
|
124,473
|
|
|
|
|
|
|
Total Current Assets
|
|
|
4,493,106
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
Leasehold improvements
|
|
|
128,446
|
|
MWD rental equipment
|
|
|
8,409,332
|
|
Office furniture and equipment
|
|
|
56,616
|
|
Vehicles
|
|
|
702,465
|
|
|
|
|
|
|
Total Property and Equipment
|
|
|
9,296,859
|
|
Less: accumulated depreciation and amortization
|
|
|
1,525,497
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,771,362
|
|
|
|
|
|
|
Total Assets
|
|
$
|
12,264,468
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS CAPITAL
|
Current Liabilities:
|
|
|
|
|
Bank Overdraft
|
|
$
|
233,019
|
|
Accounts payable
|
|
|
907,949
|
|
Accrued expenses
|
|
|
556,795
|
|
Income taxes payable
|
|
|
457,926
|
|
|
|
|
|
|
Total Current Liability
|
|
|
2,155,689
|
|
|
|
|
|
|
Long-Term Liabilities:
|
|
|
|
|
Due to parent
|
|
|
6,480,140
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
6,480,140
|
|
|
|
|
|
|
Total Liabilities
|
|
|
8,635,829
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
Partners Capital
|
|
|
3,628,639
|
|
|
|
|
|
|
Total Liabilities and Partners Capital
|
|
$
|
12,264,468
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-29
ULTERRA
MWD, L.P.
STATEMENT
OF OPERATIONS AND PARTNERS CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2006
|
|
|
|
|
Service revenues
|
|
$
|
14,706,779
|
|
Cost of services
|
|
|
11,101,133
|
|
|
|
|
|
|
Gross Profit
|
|
|
3,605,646
|
|
Selling, general and administrative expenses
|
|
|
2,301,890
|
|
|
|
|
|
|
Income From Continuing Operations
|
|
|
1,303,756
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
Other income
|
|
|
4,603
|
|
|
|
|
|
|
Total Other Income
|
|
|
4,603
|
|
|
|
|
|
|
Net income before provision for income taxes
|
|
|
1,308,359
|
|
Provision for income taxes
|
|
|
457,926
|
|
|
|
|
|
|
Net income
|
|
|
850,433
|
|
Partners capital at December 31, 2005
|
|
|
2,778,206
|
|
|
|
|
|
|
Partners capital at December 31, 2006
|
|
$
|
3,628,639
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-30
ULTERRA
MWD, L.P.
FOR THE
YEAR ENDED DECEMBER 31, 2006
|
|
|
|
|
Operating Activities:
|
|
|
|
|
Net income
|
|
$
|
850,433
|
|
Adjustment to reconcile net income to net cash used by operating
activities:
|
|
|
|
|
Gain on sale of property and equipment
|
|
|
(4,603
|
)
|
Depreciation and amortization
|
|
|
1,161,980
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
|
(1,027,121
|
)
|
Inventories
|
|
|
(267,920
|
)
|
Prepaid expenses
|
|
|
(53,642
|
)
|
Accounts payable and accrued expenses
|
|
|
393,329
|
|
Due to parent
|
|
|
1,510,870
|
|
Income taxes payable
|
|
|
(38,474
|
)
|
|
|
|
|
|
Net Cash Used By Operating Activities
|
|
|
2,524,852
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
Purchases of MWD rental equipment
|
|
|
(2,373,627
|
)
|
Purchases of other fixed assets
|
|
|
(368,633
|
)
|
Proceeds from sale of property and equipment
|
|
|
33,752
|
|
|
|
|
|
|
Net Cash Used by Investing Activities
|
|
|
(2,708,508
|
)
|
|
|
|
|
|
Net decrease in cash equivalents
|
|
|
(183,656
|
)
|
Cash and cash equivalents at December 31, 2005
|
|
|
(49,363
|
)
|
|
|
|
|
|
Cash and cash equivalents at December 31, 2006
|
|
$
|
(233,019
|
)
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-31
ULTERRA
MWD, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER
31, 2006
Note 1
Nature of Operations:
Ulterra MWD, L.P., (formerly known as No-Drift Tech Systems,
L.P.) (MWD) is a subsidiary of Ulterra Drilling
Technologies. MWD, a Texas limited partnership that has elected
to be treated as a C Corporation for income taxes,
was formed in May 2000. The company is in the business of
providing measurement while drilling services to the oil and gas
industries.
The Companys corporate offices and primary facilities are
located in Fort Worth, Texas.
Note 2
Summary of Significant Accounting Policies:
A summary of the Companys significant accounting policies
consistently applied in the preparation of the accompanying
financial statements follows:
a. Basis
of Accounting:
The accounts are maintained and the financial statements have
been prepared using the accrual basis of accounting in
accordance with accounting principles generally accepted in the
United States of America.
b. Use
of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect certain amounts reported in the financial statements
and accompanying notes. Accordingly, actual results could differ
from these estimates.
c. Cash
and Cash Equivalents:
The Company considers all short-term investments with an
original maturity of three months or less when purchased to be
cash equivalents. The Company has no such investments at
December 31, 2006.
d. Accounts
Receivable:
The Company performs ongoing credit evaluations of its
customers financial condition and extends credit to
virtually all of its customers on an uncollaterized basis. The
Company has a world wide customer base. The Company maintains
allowances for potential credit losses which, when realized,
have been within managements expectations. In the event of
complete non-performance of the Companys customers, the
maximum exposure to the Company is the outstanding accounts
receivable balance at the date of non-performance.
f. Inventories:
Parts and supplies inventories are stated at the lower of cost
or market, with cost being determined on the
first-in,
first-out (FIFO) basis. During 2006 the company
reclassed assets of $728,858 held in inventory to property and
equipment.
g. Property
and Equipment:
Property and equipment are recorded at cost and depreciation
expense is computed using the straight-line method over the
estimated useful lives of the assets. Expenditures for major
renewals and betterments that extend the useful lives of
property and equipment are capitalized. Repairs and maintenance
costs are charged to expense as incurred. The cost and
accumulated deprecation for assets retired or sold are
eliminated from the respective accounts and any gains or losses
thereon are reflected in the accompanying statements of
operations and changes in partners capital of the
respective period.
F-32
ULTERRA
MWD, L.P.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Estimated useful lives of the major classes of property and
equipment are as follows:
|
|
|
Leasehold improvements
|
|
Life of the Lease
|
MWD rental equipment
|
|
3-10 years
|
Office furniture and equipment
|
|
3-10 years
|
Vehicles
|
|
3 years
|
Depreciation expense on property and equipment totaled
approximately $1,161,980.
i. Revenue
Recognition:
The Company recognizes revenue upon the completion of the
service being provided to its customers. Rental revenue is
recorded when the rental process is completed.
j. Advertising:
Advertising costs are expensed when incurred and totaled
approximately $138,000.
k. Income
Taxes:
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, which
requires the use of the liability method of
accounting for income taxes. Accordingly, deferred tax assets
and liabilities are determined based on the difference between
the financial statement basis and tax basis of assets and
liabilities as well as net operating loss or other tax credit
carryforwards, if any. Current income taxes are based on the
years income taxable for federal and state income tax
reporting purposes. A valuation allowance is established to
reduce deferred tax assets if it is more likely than not that
the related tax benefits will not be realized.
Note 3
Impairment of Long-Lived Assets:
In accordance with the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, management reviews long-lived assets for
impairment when circumstances indicate the carrying amount of an
asset may not be recoverable based on the undiscounted future
cash flows of the asset. If the carrying amount of an asset may
not be recoverable, a write-down to fair value is recorded. Fair
values are determined based on the discounted cash flows, quoted
market values, or external appraisals, as applicable. Long-lived
assets are reviewed for impairment at the individual asset or
the asset group level for which the lowest level of independent
cash flows can be identified.
No impairment charge was necessary for the period ended
December 31, 2006.
Note 4
Income Taxes:
Components of the provision for income taxes consist of the
following:
|
|
|
|
|
Federal tax provision
|
|
$
|
444,842
|
|
State tax provisions
|
|
|
13,084
|
|
|
|
|
|
|
Current tax provision
|
|
$
|
457,926
|
|
|
|
|
|
|
Note 5
Commitments and Contingencies:
The Company is involved in various suits and claims arising in
the normal course of business. In managements opinion, the
ultimate outcome of these items will not have a material adverse
effect on the Companys results of operations or financial
position.
F-33
ULTERRA
MWD, L.P.
NOTES TO
FINANCIAL STATEMENTS (Continued)
Debt held on the books of MWDs parent entity, Ulterra
Drilling Technologies, L.P., is collateralized with the assets
of MWD in addition to the parents assets.
Note 6
Operating Leases:
The Company leases manufacturing and administrative facilities
that are located in the states of Texas and Wyoming for periods
ranging up to fifteen years.
At December 31, 2006, the future minimum lease payments
required are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
151,556
|
|
|
|
|
|
2008
|
|
|
129,356
|
|
|
|
|
|
2009
|
|
|
129,356
|
|
|
|
|
|
2010
|
|
|
129,356
|
|
|
|
|
|
2011
|
|
|
137,288
|
|
|
|
|
|
Thereafter
|
|
|
594,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,271,623
|
|
|
|
|
|
|
|
|
|
|
Rent expense for December 31, 2006 was approximately
$106,000.
Note 7
Concentration of Risk:
The Company maintains all of its cash in financial institutions,
which at times may exceed federally insured limits. The Company
has not experienced any losses in such accounts and believes it
is not subject to any significant credit risk on cash.
Note 8
Subsequent Events:
On March 21, 2007, MWD received a letter of intent from
certain investment partners and management of Multi-Shot, LLC
(MSIP) to purchase all of the assets and intellectual property
of MWD. The transaction will be effected pursuant to a
definitive asset purchase agreement the terms of which are under
discussion by the parties. Excluded from the transaction are
trade accounts receivable and payable as of the closing date,
which will be retained by Ulterra MWD, L.P. until liquidation.
F-34
Ulterra
MWD, L.P.
June 30,
2007
|
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of
approximately $31,000
|
|
$
|
2,068,866
|
|
Parts and supply inventory
|
|
|
985,193
|
|
Prepaid expenses
|
|
|
93,777
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,147,836
|
|
|
|
|
|
|
Property and Equipment:
|
|
|
|
|
Leasehold improvements
|
|
|
128,446
|
|
MWD rental equipment
|
|
|
8,603,227
|
|
Office furniture and equipment
|
|
|
56,616
|
|
Vehicles
|
|
|
595,023
|
|
|
|
|
|
|
Total Property and Equipment
|
|
|
9,383,313
|
|
Less: accumulated depreciation and amortization
|
|
|
2,297,630
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,085,683
|
|
|
|
|
|
|
Total Assets
|
|
$
|
10,233,519
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS CAPITAL
|
Current Liabilities:
|
|
|
|
|
Bank overdraft
|
|
$
|
106,991
|
|
Accounts payable
|
|
|
401,429
|
|
Accrued expenses
|
|
|
457,927
|
|
Income taxes payable
|
|
|
30,738
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
997,085
|
|
Long-Term Liabilities:
|
|
|
|
|
Due to parent
|
|
|
6,401,145
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
6,401,145
|
|
|
|
|
|
|
Total Liabilities
|
|
|
7,398,230
|
|
Commitments and contingencies
|
|
|
|
|
Partners Capital
|
|
|
2,835,289
|
|
|
|
|
|
|
Total Liabilities and Partners Capital
|
|
$
|
10,233,519
|
|
|
|
|
|
|
F-35
Ulterra
MWD, L.P.
Unaudited Statement of Operations & Partners
Capital
Six
Months ended June 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Service revenues
|
|
$
|
6,006,021
|
|
|
|
7,199,275
|
|
Cost of services
|
|
|
5,999,995
|
|
|
|
4,911,968
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,026
|
|
|
|
2,287,307
|
|
Selling, general and administrative expenses
|
|
|
1,113,377
|
|
|
|
969,847
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
(1,107,351
|
)
|
|
|
1,317,460
|
|
|
|
|
|
|
|
|
|
|
Other income & expense:
|
|
|
|
|
|
|
|
|
Other income
|
|
|
5,791
|
|
|
|
2,603
|
|
Other expense
|
|
|
(118,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(113,187
|
)
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
|
Net income before provision for income taxes
|
|
|
(1,220,538
|
)
|
|
|
1,320,063
|
|
Provision for income taxes
|
|
|
(427,188
|
)
|
|
|
462,022
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(793,350
|
)
|
|
|
858,041
|
|
Partners income at December 31, 2006
|
|
|
3,628,639
|
|
|
|
2,778,206
|
|
|
|
|
|
|
|
|
|
|
Partners income at June 30, 2007
|
|
|
2,835,289
|
|
|
|
3,636,247
|
|
|
|
|
|
|
|
|
|
|
F-36
Ulterra
MWD, L.P.
Unaudited Statement of Cash Flows
Six
Months ended June 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(793,350
|
)
|
|
|
858,041
|
|
Adjustment to reconcile net income to net cash provided/(used)
by operating activities:
|
|
|
|
|
|
|
|
|
Gain on sale of property and equipment
|
|
|
5,791
|
|
|
|
2,603
|
|
Depreciation and amortization
|
|
|
772,133
|
|
|
|
498,581
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,335,556
|
|
|
|
(424,123
|
)
|
Inventories
|
|
|
(20,982
|
)
|
|
|
(365,216
|
)
|
Prepaid expenses
|
|
|
30,696
|
|
|
|
(22,693
|
)
|
Accounts payable and accrued expenses
|
|
|
(731,416
|
)
|
|
|
(364,504
|
)
|
Due to parent Income taxes payable
|
|
|
(78,995
|
)
|
|
|
(659,206
|
)
|
Income taxes payable
|
|
|
(427,188
|
)
|
|
|
462,022
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided/(Used) by Operating Activities
|
|
|
92,245
|
|
|
|
(14,495
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of MWD rental equipment
|
|
|
(118,245
|
)
|
|
|
(185,544
|
)
|
Purchases of other fixed assets
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
26,000
|
|
|
|
200,039
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities
|
|
|
(92,245
|
)
|
|
|
14,495
|
|
Net decrease in cash equivalents
|
|
|
|
|
|
|
|
|
Cash and cash equivalents Beginning of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
Ulterra
MWD L.P.
Notes To
Unaudited Financial Statements
Operations
Ulterra MWD, L.P. (formerly known as No-Drift Tech Systems,
L.P.) (MWD) is a subsidiary of Ulterra Drilling
Technologies. MWD, a Texas limited partnership that MWD is in
the business of providing measurement while drilling services to
the oil and gas industries.
MWDs corporate offices and primary facilities are located
in Fort Worth, Texas.
General
The accompanying unaudited interim Condensed Financial
Statements were prepared in accordance with accounting
principles generally accepted in the United States of America
and the interim financial statement rules and regulations of the
Securities and Exchange Commission. In the opinion of
management, these statements include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair
presentation of the Condensed Financial Statements. The interim
operating results are not necessarily indicative of the results
for a full year or any interim period.
Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules
and regulations relating to interim financial statements. These
Condensed Financial Statements should be read in conjunction
with MWDs Financial Statements and Notes thereto included
in MWDs Fiscal Year 2006 Audited Financial Statements
included in JKA Acquisition Corporations Proxy filed on
November 1, 2007. The June 30, 2006 balance sheet has
been derived from the audited financial statements.
The auditor of MWD has not performed a review of the unaudited
interim Condensed Financial Statements for the six months ended
June 30, 2007 and 2006.
2.
Recent
Accounting Pronouncements
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (FAS 159). This statement allows
the option to report selected financial assets and liabilities
at fair value and establishes presentation and disclosure
requirements. The fair value option established by FAS 159
permits MWD to elect to measure eligible items at fair value on
an
instrument-by-instrument
basis and then report unrealized gains and losses for those
items in MWDs earnings. FAS 159 is effective for
fiscal years beginning after November 15, 2007. MWD has not
yet determined the impact, if any, on its financial statements.
In May 2007, the FASB issued FASB Staff Position
(FSP)
FIN 48-1,
an amendment to FIN 48, which provides guidance on how an
entity is to determine whether a tax position has effectively
settled for purposes of recognizing previously unrecognized tax
benefits. Specifically, this guidance states that an entity
would recognize a benefit when a tax position is effectively
settled using the following criteria: (1) the taxing
authority has completed its examination including all appeals
and administrative reviews; (2) the entity does not plan to
appeal or litigate any aspect of the tax position; and
(3) it is remote that the taxing authority would examine or
reexamine any aspect of the tax position, assuming the taxing
authority has full knowledge of all relevant information
relative to making their assessment on the position. The
adoption of
FIN 48-1
did not have a material impact on MWDs financial
statements.
3.
Commitments
and Contingencies
MWD is involved in various suits and claims arising in the
normal course of business. In managements opinion, the
ultimate outcome of these items will not have a material adverse
effect on MWDs results of operations or financial position.
F-38
Ulterra
MWD L.P.
Notes To
Unaudited Financial Statements (Continued)
Debt held on the books of MWDs parent entity, Ulterra
Drilling Technologies, L.P. is collateralized with the assets of
MWD in addition to the parents assets.
4.
Subsequent
Events
In March 2007, MWD entered into an Asset Purchase Agreement
whereby the operating assets of MWD were purchased by Multishot,
LLC, for a total purchase price of $10 million.
F-39
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
JK Acquisition Corp.
(A Development Stage Company)
Houston, Texas
We have audited the accompanying balance sheets of JK
Acquisition Corp. as of December 31, 2006 and 2005, and the
related statements of operations, stockholders equity and
cash flows for the year ended December 31, 2006, the period
from May 11, 2005 (inception) to December 31, 2005 and
the period from May 11, 2005 (inception) to
December 31, 2006. These financial statements are the
responsibility of JK Acquisition Corp.s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of JK Acquisition Corp. as of December 31, 2006 and 2005,
and the results of its operations and its cash flows for the
periods described above in conformity with accounting principles
generally accepted in the United States of America.
Houston, Texas
www.malone-bailey.com
March 22, 2007
F-40
JK
ACQUISITION CORP.
(A Development Stage Company)
BALANCE
SHEETS
As of December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
220,104
|
|
|
$
|
26,137
|
|
|
|
|
|
Deferred tax asset
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
221,717
|
|
|
|
26,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust fund
|
|
|
77,627,249
|
|
|
|
|
|
|
|
|
|
Deferred offering costs
|
|
|
|
|
|
|
592,816
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
788,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
78,637,200
|
|
|
$
|
618,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
299,870
|
|
|
$
|
263,697
|
|
|
|
|
|
Federal income tax payable
|
|
|
15,640
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
15,636,834
|
|
|
|
|
|
|
|
|
|
Advances payable
|
|
|
|
|
|
|
329,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
15,952,344
|
|
|
|
592,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock subject to redemption, 2,710,311 shares
|
|
|
15,517,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 1,000,000 shares
authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 50,000,000 shares
authorized, 16,516,667 and 2,958,333 shares issued and
outstanding, respectively (including 2,710,311 and 0 shares
subject to redemption, respectively)
|
|
|
1,652
|
|
|
|
296
|
|
|
|
|
|
Paid-in capital
|
|
|
46,747,075
|
|
|
|
30,954
|
|
|
|
|
|
Earnings (deficit) accumulated during the development stage
|
|
|
418,442
|
|
|
|
(4,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
47,167,169
|
|
|
|
26,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
78,637,200
|
|
|
$
|
618,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-41
JK
ACQUISITION CORP.
(A Development Stage Company)
STATEMENTS
OF OPERATIONS
Year ended December 31, 2006,
Period from May 11, 2005 (Inception) to December 31,
2005 and
Period from May 11, 2005 (Inception) to December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Period From
|
|
|
Period from
|
|
|
|
Ended
|
|
|
Inception to
|
|
|
Inception to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative
|
|
$
|
292,378
|
|
|
$
|
4,994
|
|
|
$
|
297,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(292,378
|
)
|
|
|
(4,994
|
)
|
|
|
(297,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,994,845
|
|
|
|
|
|
|
|
1,994,845
|
|
Loss on derivative liabilities
|
|
|
(1,265,004
|
)
|
|
|
|
|
|
|
(1,265,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
729,841
|
|
|
|
|
|
|
|
729,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income tax expense
|
|
|
437,463
|
|
|
|
(4,994
|
)
|
|
|
432,469
|
|
Income tax expense
|
|
|
14,027
|
|
|
|
|
|
|
|
14,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
423,436
|
|
|
$
|
(4,994
|
)
|
|
$
|
418,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,605,609
|
|
|
|
2,783,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,212,584
|
|
|
|
2,783,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-42
JK
ACQUISITION CORP.
(A Development Stage Company)
STATEMENTS
OF CHANGES IN STOCKHOLDERS EQUITY
Year ended December 31, 2006 and
Period from May 11, 2005 (Inception) to December 31,
2005 and
Period from May 11, 2005 (Inception) to December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
During the
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Development
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stage
|
|
|
Total
|
|
|
Stock issued for cash
|
|
|
2,958,333
|
|
|
$
|
296
|
|
|
$
|
30,954
|
|
|
|
|
|
|
$
|
30,954
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,994
|
)
|
|
|
(4,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
2,958,333
|
|
|
|
296
|
|
|
|
30,954
|
|
|
|
(4,994
|
)
|
|
$
|
26,256
|
|
Stock issued for cash, net of offering costs
|
|
|
13,558,334
|
|
|
|
1,356
|
|
|
|
76,605,538
|
|
|
|
|
|
|
|
76,606,894
|
|
Proceeds subject to redemption
|
|
|
|
|
|
|
|
|
|
|
(15,299,099
|
)
|
|
|
|
|
|
|
(15,299,099
|
)
|
Sale of underwriter option
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Derivative liability
|
|
|
|
|
|
|
|
|
|
|
(14,371,830
|
)
|
|
|
|
|
|
|
(14,371,830
|
)
|
Increase in value of common stock subject to redemption
|
|
|
|
|
|
|
|
|
|
|
(218,588
|
)
|
|
|
|
|
|
|
(218,588
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423,436
|
|
|
|
423,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
16,516,667
|
|
|
$
|
1,652
|
|
|
$
|
46,747,075
|
|
|
$
|
418,442
|
|
|
$
|
47,167,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-43
JK
ACQUISITION CORP.
(A Development Stage Company)
STATEMENTS
OF CASH FLOWS
Year ended December 31, 2006 and
Period from May 11, 2005 (Inception) to December 31,
2005 and
Period from May 11, 2005 (Inception) to December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Period from
|
|
|
Period from
|
|
|
|
Ended
|
|
|
Inception to
|
|
|
Inception to
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
423,436
|
|
|
$
|
(4,994
|
)
|
|
$
|
418,442
|
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income on trust fund
|
|
|
(1,994,845
|
)
|
|
|
|
|
|
|
(1,994,845
|
)
|
Gain on derivative liabilities
|
|
|
1,265,004
|
|
|
|
|
|
|
|
1,265,004
|
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
(1,613
|
)
|
|
|
|
|
|
|
(1,613
|
)
|
Account payable and accrued liabilities
|
|
|
299,870
|
|
|
|
|
|
|
|
299,870
|
|
Federal income tax payable
|
|
|
15,640
|
|
|
|
|
|
|
|
15,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
7,492
|
|
|
|
(4,994
|
)
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
(788,234
|
)
|
|
|
|
|
|
|
(788,234
|
)
|
Payment to trust account
|
|
|
(76,532,404
|
)
|
|
|
|
|
|
|
(76,532,404
|
)
|
Disbursements from trust account
|
|
|
900,000
|
|
|
|
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(76,420,638
|
)
|
|
|
|
|
|
|
(76,420,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds from public offering
|
|
|
79,350,000
|
|
|
|
|
|
|
|
79,350,000
|
|
Gross proceeds from private placement
|
|
|
2,000,004
|
|
|
|
|
|
|
|
2,000,004
|
|
Proceeds from sale of stock
|
|
|
|
|
|
|
31,250
|
|
|
|
31,250
|
|
Proceeds from sale of underwriter option
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Proceeds from advances from stockholders
|
|
|
|
|
|
|
329,000
|
|
|
|
329,000
|
|
Payments on advances from stockholders
|
|
|
(329,000
|
)
|
|
|
|
|
|
|
(329,000
|
)
|
Cash paid for offering costs
|
|
|
(4,413,991
|
)
|
|
|
(329,119
|
)
|
|
|
(4,743,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
76,607,113
|
|
|
|
31,131
|
|
|
|
76,638,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
193,967
|
|
|
|
26,138
|
|
|
|
220,104
|
|
Cash at beginning of period
|
|
|
26,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
220,104
|
|
|
$
|
26,138
|
|
|
$
|
220,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Cash paid for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock subject to redemption
|
|
$
|
15,299,099
|
|
|
$
|
|
|
|
$
|
15,299,099
|
|
Increase in value of common stock subject to redemption
|
|
|
218,588
|
|
|
|
|
|
|
|
218,588
|
|
Derivative liabilities
|
|
|
15,636,834
|
|
|
|
|
|
|
|
15,636,834
|
|
See notes to financial statements.
F-44
JK
ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of business
JK Acquisition Corp.
(also hereinafter
referred to as JK Acquisition or the
Company) was incorporated in Delaware on
May 11, 2005 for the purpose of acquiring an operating
business. JK Acquisitions year end is December 31.
Development
stage company
JK Acquisition Corp.
has had no operations
since inception and is a development stage company.
Use of
Estimates
In preparing financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and
liabilities in the balance sheet and revenue and expenses in the
income statement and disclosures of contingent assets and
liabilities. Actual results could differ from those estimates.
Cash
and equivalents
JK Acquisition considers all highly liquid investments with an
original maturity of three months or less at the time of
purchase to be cash equivalents.
Investment
securities
Investment securities in the trust fund are classified as
trading securities and are carried at fair value, with gains or
losses resulting from changes in fair value recognized currently
in earnings.
Deferred
offering costs
Certain costs associated with the proposed initial public
offering of $592,816 were deferred as of December 31, 2005
until the offering was effective in April 2006. The deferred
offering costs were charged to equity against the proceeds
raised.
Deferred
acquisition costs
Deferred acquisition costs consist primarily of accounting fees,
legal fees, due diligence fees and other fees incurred through
the balance sheet that are related to the proposed merger
discussed in Note 10.
Income
taxes
JK Acquisition recognizes deferred tax assets and liabilities
based on differences between the financial reporting and tax
bases of assets and liabilities using the enacted tax rates and
laws that are expected to be in effect when the differences are
expected to be recovered. JK Acquisition provides a valuation
allowance for deferred tax assets for which it does not consider
realization of such assets to be more likely than not.
Basic
and diluted net income (loss) per share
The basic net income (loss) per common share is computed by
dividing the net income (loss) by the weighted average number of
common shares outstanding. The diluted net income per common
share reflects the potential dilution that could occur if
securities or other contracts to issue common shares were
exercised or converted into common shares or resulted in the
issuance of common shares that then shared in the earnings.
F-45
JK
ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
Recently
issued accounting pronouncements
JK Acquisition Corp. does not expect the adoption of recently
issued accounting pronouncements to have a significant impact on
the Companys results of operations, financial position or
cash flow.
NOTE 2
INITIAL PUBLIC OFFERING
On April 17, 2006, JK Acquisition sold
13,225,000 units to the public at a price of $6.00 per
unit. Each unit consists of one share of common stock and two
redeemable common stock purchase warrants. JK Acquisition
received proceeds of $74,606,890, net of offering costs of
$4,743,110. On May 11, 2006, the warrants and common stock
were separated from the units and began to trade separately. JK
Acquisition has recorded 2,710,311 of these units as common
stock subject to redemption under the terms of the initial
public offering. These units have a redemption value of
$15,313,257.
Each warrant entitles the holder to purchase one share of common
stock at an exercise price of $5.00. The warrants have a life of
four years after which they will expire. JK Acquisition has a
right to call the warrants, provided the common stock has traded
at a closing price of at least $8.50 per share for any 20
trading days within a 30 trading day period ending on the third
business day prior to the date on which notice of redemption is
given. If JK Acquisition calls the warrants, the holder will
either have to redeem the warrants by purchasing the common
stock from JK Acquisition for $5.00 or the warrants will expire.
In connection with the initial public offering, JK Acquisition
has committed to pay to the underwriters a non-accountable
expense allowance equal to 5% of the gross offering proceeds
upon the consummation of the initial public offering. The
underwriters have agreed to defer approximately $1,552,500
attributable to their non-accountable expense allowance (equal
to 2.25% of the gross proceeds of the offering) until the
consummation of a business combination. Upon the consummation of
a business combination, JK Acquisition will pay such deferred
non-accountable expense allowance to the underwriters out of the
proceeds of our initial public offering held in trust.
NOTE 3
ADVANCES FROM SHAREHOLDERS
On May 18, 2005 and December 20, 2005, JK Acquisition
Corp. received an aggregate of $329,000 as advances for expenses
from two shareholders. These advances bear no interest and were
repaid from the proceeds of the Companys initial public
offering.
NOTE 4
DERIVATIVE LIABILITY
Under EITF
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own Stock
(EITF
No. 00-19),
the fair value of the warrants have been reported as a
liability. The warrant agreement provides for JK Acquisition to
register the shares underlying the warrants and is silent as to
the penalty to be incurred in the absence of the Companys
ability to deliver registered shares to the warrant holders upon
warrant exercise. Under EITF
No. 00-19,
registration of the common stock underlying the warrants is not
within the Companys control. As a result, JK Acquisition
must assume that it could be required to settle the warrants on
a net-cash basis, thereby necessitating the treatment of the
potential settlement obligation as a liability. Further, EITF
No. 00-19
requires the Company to record the potential settlement
liability at each reporting date using the current estimated
fair value of the warrants, with any changes being recorded
through the statement of income and expenses. The potential
settlement obligation will continue to be reported as a
liability until such time as the warrants are exercised, expire,
or JK Acquisition is otherwise able to modify the registration
requirements in the warrant agreement to remove the provisions
which require this treatment. The fair value of the warrant
liability at the date of issuance in the accompanying balance
sheets was estimated using the initial trading value of the
warrants after they were separated from the initial units and
began to trade. The fair value of the warrants as of
F-46
JK
ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
December 31, 2006 was determined by the trading value of
the securities on that date. The value assigned to the warrant
liability at April 17, 2006 (the date of issuance) and
December 31, 2006 was $11,389,001 and $13,287,167,
respectively.
Loss on derivative liability reported in the accompanying
statement of operations resulting from the change in valuation
of the derivative liability related to these warrants was
$1,898,166 for the year ended December 31, 2006.
On January 10, 2007, JK Acquisition entered into a Warrant
Clarification Agreement to clarify the terms of the warrants.
The Warrant Clarification Agreement clarified that if JK
Acquisition is unable to deliver securities pursuant to the
exercise of a warrant because a registration statement under the
Securities Act of 1933, as amended, with respect to the common
stock is not effective, then in no event would JK Acquisition be
obligated to pay cash or other consideration to the holders of
warrants or otherwise net-cash settle any warrant
exercise. Accordingly, in the first quarter of 2007, JK
Acquisition will reverse the derivative liability on the balance
sheet as of December 31, 2006.
NOTE 5
EQUITY
On April 10, 2006, JK Acquisition declared a stock dividend
of 0.1833332 shares for each share outstanding. After the
stock dividend, there were 2,958,333 shares outstanding.
All transactions and disclosures in the financial statements,
related to the Companys common stock, have been adjusted
to reflect the results of the stock dividend.
On April 10, 2006, JK Acquisition sold 333,334 shares
of common stock to two existing shareholders for $2,000,004 in a
private placement.
NOTE 6
STOCK OPTION
JK Acquisition sold to Ferris Baker, Watts, Inc. for $100, an
option to purchase up to a total of 700,000 units. This
option was issued upon closing of the initial public offering.
The units that would be issued upon exercise of this option are
identical to those sold in the initial public offering, except
that each of the warrants underlying this option entitles the
holder to purchase one share of our common stock at a price of
$6.25. This Underwriters Purchase Option (UPO)
is exercisable at $7.50 per unit at the latter of one year
from the effective date, or the consummation of a business
combination and may be exercised on a cashless basis. The UPO
will have a life of four years from the effective date.
Statement of Financial Accounting Standard (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended, requires all derivatives
to be recorded on the balance sheet at fair value. Furthermore,
paragraph 11(a) of SFAS No. 133 precludes
contracts issued or held by a reporting entity that are both
(1) indexed to its own stock and (2) classified as
stockholders equity in its statement of financial position
from being treated as derivative instruments. We have determined
that the option to purchase 700,000 units, each unit
consisting of one warrant and one share of common stock, is a
derivative that also contains an embedded derivative. The option
to purchase 700,000 shares of common stock and the warrant
to purchase an additional 1,400,000 shares, the latter
being the embedded derivative, are separately valued and
accounted for on JK Acquisitions balance sheet. While the
warrant to purchase the additional 1,400,000 shares is
indexed to JK Acquisitions common stock, the fact that the
shares underlying the warrants require future registration in
accordance with the warrant agreement, requires JK Acquisition
to classify these instruments as a liability in accordance with
EITF
00-19,
paragraph 14.
As such, the option to purchase 700,000 units is considered
an equity instrument, as the underlying shares do not need to be
registered, and all other criteria in EITF
00-19
required for the instrument to be accounted for as an equity
instrument have been fulfilled. The embedded derivative which is
the warrant to purchase 1,400,000 shares for $6.25 each,
follows the same accounting guidelines as the warrants sold in
the public offering and is considered a liability. These
derivative liabilities have been, and will continue to be
adjusted to fair value in our quarterly filings.
F-47
JK
ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
JK Acquisition performed a valuation of the option to purchase
700,000 units, and then allocated its fair value to its two
components, the underlying 700,000 shares and the embedded
warrant to purchase an additional 1,400,000 shares. The
fair value at inception was calculated at $4,201,277, of which
$1,218,448 was allocated to the purchase option of
700,000 shares and $2,982,829 was allocated to the warrants
to purchase an additional 1,400,000 shares, according to
their respective fair values.
The fair value of the warrants was $2,349,666 as of
December 31, 2006. Gain on derivative liability reported in
the accompanying statement of operations resulting from the
change in valuation of the derivative liability related to these
warrants was $633,163 for the year ended December 31, 2006.
The pricing model JK Acquisition uses for determining fair
values of the purchase option and the embedded derivative is the
Black Scholes Pricing Model. Valuations derived from this model
are subject to ongoing internal and external verification and
review. The model uses market-sourced inputs such as interest
rates, market prices and volatilities. Selection of these inputs
involves managements judgment and may impact net income.
In particular, JK Acquisition uses volatility rates based upon a
sample of comparable companies in its industry, special purpose
acquisition corporations. At the time a company to be acquired
has been identified and agreements to acquire are in place, the
volatility rates will be based on comparable companies to the
acquired company. JK Acquisition uses a risk-free interest rate,
which is the rate on U.S. Treasury instruments, for a
security with a maturity that approximates the estimated
remaining contractual life of the derivative. The volatility
factor used in Black Scholes has a significant effect on the
resulting valuation of the derivative liabilities on JK
Acquisitions balance sheet. The volatility for the
calculation of the embedded derivatives was approximated at
38.6%, this volatility-rate will likely change in the future. JK
Acquisition uses the closing market price of its common stock at
the end of a quarter when a derivative is valued at fair value.
JK Acquisitions stock price will also change in the
future. To the extent that JK Acquisitions stock price
increases or decreases, its derivative liabilities will also
increase or decrease, absent any change in volatility rates and
risk-free interest rates.
NOTE 7
RELATED PARTY TRANSACTION
JK Acquisition has agreed to pay 4350 Management, LLC, a related
party and privately-held company owned by JK Acquisitions
chief executive officer, an administrative fee of
$7,500 per month for office space and administrative,
technology and secretarial services from the effective date of
the initial public offering through the acquisition date of a
target business. For the year ended December 31, 2006,
$67,500 has been expensed for the administrative fee.
NOTE 8
INCOME TAXES
The provision for income taxes for the year ended
December 31, 2006 of $14,027 was comprised of:
|
|
|
|
|
Current U.S. federal income tax expense
|
|
$
|
15,640
|
|
Deferred U.S. federal income tax benefit
|
|
|
(1,613
|
)
|
|
|
|
|
|
Total Tax Expense
|
|
$
|
14,027
|
|
|
|
|
|
|
F-48
JK
ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
The provision for income taxes differs from the amount computed
by applying the U.S. statutory income tax rate to net
income for the reasons set forth below:
|
|
|
|
|
Tax At Statutory Rate
|
|
$
|
148,736
|
|
Tax Effected Permanent Differences:
|
|
|
|
|
Unrealized loss on derivatives
|
|
|
430,101
|
|
Non-taxable investment income
|
|
|
(554,164
|
)
|
Other-net
|
|
|
(10,646
|
)
|
|
|
|
|
|
Total Tax Expense
|
|
$
|
14,027
|
|
|
|
|
|
|
Deferred tax assets as of December 31, 2006 and 2005
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Amortization of organizational costs
|
|
$
|
1,613
|
|
|
$
|
1,698
|
|
Less: valuation allowance
|
|
|
|
|
|
|
(1,698
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
1,613
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A valuation allowance is recorded when it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of the deferred tax assets
depends on the ability to generate sufficient taxable income of
the appropriate character in the future.
NOTE 9
EARNINGS PER SHARE
A reconciliation of the number of shares used for the basic and
diluted earnings per share computations is as follows for the
year ended December 31, 2006:
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
12,605,609
|
|
Effect of dilutive securities warrants
|
|
|
1,606,975
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
14,212,584
|
|
|
|
|
|
|
The effect of the 700,000 units issued with the
Underwriters Purchase Option (Note 6) on the
number weighted average shares outstanding was anti-dilutive and
therefore not included in the calculation.
NOTE 10
PROPOSED MERGER
On February 14, 2007, JK Acquisition and Multi-Shot, Inc.,
a Delaware corporation and wholly-owned subsidiary of JK
Acquisition (MSI), entered into the First Amended
and Restated Agreement and Plan of Merger (the Amended
Merger Agreement) with Multi-Shot, LLC, a Texas limited
liability company (Multi-Shot), Catalyst/Hall Growth
Capital Management Co., LLC, as Members representative,
and the members of Multi-Shot (the Members),
pursuant to which Multi-Shot will merge with and into MSI. The
Amended Merger Agreement fully amends and restates the Agreement
and Plan of Merger dated September 6, 2006. Following
completion of the merger, it is anticipated that JK Acquisition
will change its name to MS Energy Services, Inc. The Board of
Directors of MS Energy Services, Inc. and Multi-Shot, Inc. will
have representation from the management of JK Acquisition and
the members of Multi-Shot, LLC.
Based in Conroe, Texas, Multi-Shot provides directional drilling
services with an established presence in most major onshore
producing basins in the U.S. Since its inception in 1980,
Multi-Shot has developed into a leading independent service
provider that employs a highly skilled and experienced labor
force. Multi-Shot owns and
F-49
JK
ACQUISITION CORP.
(A Development Stage Company)
NOTES TO FINANCIAL
STATEMENTS (Continued)
operates equipment of the highest standards and maintains a
diversified customer base that includes large,
U.S. independent exploration and production companies.
NOTE 11
SELECTED QUARTERLY INFORMATION (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar. 31
|
|
|
Jun. 30
|
|
|
Sept. 30
|
|
|
Dec. 31
|
|
|
Total
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
$
|
(4,954
|
)
|
|
$
|
3,123,573
|
|
|
|
91,576
|
|
|
|
(2,772,732
|
)
|
|
$
|
437,463
|
|
Net income (loss)
|
|
|
(4,954
|
)
|
|
|
3,094,297
|
|
|
|
57,168
|
|
|
|
(2,723,075
|
)
|
|
|
423,436
|
|
Earnings (loss) per share basic
|
|
|
(0.00
|
)
|
|
|
0.22
|
|
|
|
0.00
|
|
|
|
(0.16
|
)
|
|
|
0.03
|
|
Earnings (loss) per share diluted
|
|
|
(0.00
|
)
|
|
|
0.20
|
|
|
|
0.00
|
|
|
|
(0.16
|
)
|
|
|
0.03
|
|
Period from May 11, 2005 (inception) to December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
N/A
|
|
|
|
(3,213
|
)
|
|
|
(1,294
|
)
|
|
|
(487
|
)
|
|
$
|
(4,994
|
)
|
Net income (loss)
|
|
|
N/A
|
|
|
|
(3,213
|
)
|
|
|
(1,294
|
)
|
|
|
(487
|
)
|
|
|
(4,994
|
)
|
Earnings (loss) per share basic
|
|
|
N/A
|
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
Earnings (loss) per share diluted
|
|
|
N/A
|
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
|
|
(0.00
|
)
|
F-50
JK
ACQUISITION CORP.
(A Development Stage Company)
BALANCE
SHEETS
As of September 30, 2007 and December 31, 2006
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
90,491
|
|
|
$
|
220,104
|
|
Deferred tax asset
|
|
|
1,613
|
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
92,104
|
|
|
|
221,717
|
|
|
|
|
|
|
|
|
|
|
Trust fund
|
|
|
79,721,079
|
|
|
|
77,627,249
|
|
Deferred acquisition costs
|
|
|
|
|
|
|
788,234
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
79,813,183
|
|
|
$
|
78,637,200
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
584,090
|
|
|
$
|
299,870
|
|
Federal income tax payable
|
|
|
8,412
|
|
|
|
15,640
|
|
Advances from stockholders
|
|
|
500,000
|
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
|
|
15,636,834
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,092,502
|
|
|
|
15,952,344
|
|
|
|
|
|
|
|
|
|
|
Common stock subject to redemption, 2,710,311 shares
|
|
|
15,936,244
|
|
|
|
15,517,687
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 1,000,000 shares
authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value, 50,000,000 shares
authorized, 16,516,667 shares issued and outstanding at
September 30, 2007 and December 31, 2006 (including
2,710,311 shares subject to redemption)
|
|
|
1,652
|
|
|
|
1,652
|
|
Paid-in capital
|
|
|
60,496,752
|
|
|
|
46,747,075
|
|
Earnings accumulated during the development stage
|
|
|
2,286,033
|
|
|
|
418,442
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
62,784,437
|
|
|
|
47,167,169
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
79,813,183
|
|
|
$
|
78,637,200
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-51
JK
ACQUISITION CORP.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Three Months ended September 30, 2007 and 2006,
Nine
Months ended September 30, 2007 and 2006 and
Period from May 11, 2005 (Inception) to September 30,
2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception to
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General & administrative
|
|
$
|
108,292
|
|
|
|
85,268
|
|
|
|
345,286
|
|
|
|
152,933
|
|
|
|
642,738
|
|
Impairment of deferred transaction costs
|
|
|
381,286
|
|
|
|
|
|
|
|
1,356,704
|
|
|
|
|
|
|
|
1,356,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
|
|
|
489,578
|
|
|
|
85,268
|
|
|
|
1,701,990
|
|
|
|
152,933
|
|
|
|
1,999,442
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
718,800
|
|
|
|
725,535
|
|
|
|
2,101,058
|
|
|
|
1,317,103
|
|
|
|
4,095,903
|
|
Gain (loss) on derivative liabilities
|
|
|
|
|
|
|
(548,690
|
)
|
|
|
1,468,600
|
|
|
|
2,046,025
|
|
|
|
203,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
718,800
|
|
|
|
176,844
|
|
|
|
3,569,658
|
|
|
|
3,363,128
|
|
|
|
4,299,499
|
|
Net income before income tax expense
|
|
|
229,222
|
|
|
|
91,576
|
|
|
|
1,867,668
|
|
|
|
3,210,195
|
|
|
|
2,300,057
|
|
Income tax expense
|
|
|
|
|
|
|
34,408
|
|
|
|
77
|
|
|
|
63,684
|
|
|
|
14,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
229,222
|
|
|
|
57,168
|
|
|
|
1,867,591
|
|
|
|
3,146,511
|
|
|
|
2,286,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.11
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
$
|
0.09
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,516,667
|
|
|
|
16,516,667
|
|
|
|
16,516,667
|
|
|
|
11,252,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
20,165,053
|
|
|
|
18,579,358
|
|
|
|
20,019,364
|
|
|
|
12,515,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
F-52
JK
ACQUISITION CORP.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2007 and 2006 and
Period from May 11, 2005 (Inception) to September 30,
2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Inception to
|
|
|
|
Nine Months Ended September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,867,591
|
|
|
|
(3,146,511
|
)
|
|
|
2,286,033
|
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
(2,101,058
|
)
|
|
|
(1,317,103
|
)
|
|
|
(4,095,903
|
)
|
Gain on derivative liabilities
|
|
|
(1,468,600
|
)
|
|
|
(2,046,025
|
)
|
|
|
(203,596
|
)
|
Impairment of deferred transaction costs
|
|
|
1,356,704
|
|
|
|
|
|
|
|
1,356,704
|
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Asset
|
|
|
|
|
|
|
|
|
|
|
(1,613
|
)
|
Accrued liabilities and accounts payable
|
|
|
284,220
|
|
|
|
98,285
|
|
|
|
584,090
|
|
Federal income tax payable
|
|
|
(7,228
|
)
|
|
|
|
|
|
|
8,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(68,371
|
)
|
|
|
(118,332
|
)
|
|
|
(65,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred transaction costs
|
|
|
(568,470
|
)
|
|
|
(220,755
|
)
|
|
|
(1,356,704
|
)
|
Payment to trust account
|
|
|
|
|
|
|
(76,532,404
|
)
|
|
|
(76,532,404
|
)
|
Disbursements from trust account
|
|
|
7,228
|
|
|
|
400,000
|
|
|
|
907,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(561,242
|
)
|
|
|
(76,353,159
|
|
|
|
(76,981,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds from public offering
|
|
|
|
|
|
|
79,350,000
|
|
|
|
79,350,000
|
|
Gross proceeds from private placement
|
|
|
|
|
|
|
2,000,004
|
|
|
|
2,000,004
|
|
Proceeds from sale of stock
|
|
|
|
|
|
|
|
|
|
|
31,250
|
|
Proceeds from sale of underwriter option
|
|
|
|
|
|
|
100
|
|
|
|
100
|
|
Proceeds from advances from stockholders
|
|
|
500,000
|
|
|
|
|
|
|
|
829,000
|
|
Payments on advances from stockholders
|
|
|
|
|
|
|
(329,000
|
)
|
|
|
(329,000
|
)
|
Cash paid for offering costs
|
|
|
|
|
|
|
(4,413,991
|
)
|
|
|
(4,743,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
500,000
|
|
|
|
76,607,113
|
|
|
|
77,138,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(129,613
|
)
|
|
|
135,622
|
|
|
|
90,491
|
|
Cash at beginning of period
|
|
|
220,104
|
|
|
|
26,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
90,491
|
|
|
|
165,759
|
|
|
|
90,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
|
7,228
|
|
|
|
|
|
|
|
7,228
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock subject to redemption
|
|
$
|
15,936,244
|
|
|
|
15,417,082
|
|
|
|
15,299,099
|
|
Increase in value of common stock subject to redemption
|
|
|
418,556
|
|
|
|
117,983
|
|
|
|
638,588
|
|
Inception of warrants accounted for as derivative liabilities
|
|
|
|
|
|
|
12,325,805
|
|
|
|
15,636,834
|
|
Elimination of derivatives at fair value warrants
|
|
|
14,168,233
|
|
|
|
|
|
|
|
14,168,233
|
|
See notes to financial statements.
F-53
JK
ACQUISITION CORP.
(A Development Stage Company)
NOTES TO
FINANCIAL STATEMENTS
(Unaudited)
NOTE 1
BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of JK
Acquisition Corp. (also hereinafter referred to as JK
Acquisition or the Company) have been prepared
in accordance with accounting principles generally accepted in
the United States of America and the rules of the Securities and
Exchange Commission (SEC), and should be read in
conjunction with the audited financial statements and notes
thereto contained in the JK Acquisitions annual report
filed with the SEC on
Form 10-K
for the year ended December 31, 2006. In the opinion of
management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods
presented have been reflected herein. The results of operations
for interim periods are not necessarily indicative of the
results to be expected for the full year. Notes to the financial
statements which would substantially duplicate the disclosures
contained in the audited financial statements for the year ended
December 31, 2006 and the period from May 11, 2005
(inception) to December 31, 2005 as reported in the
Form 10-K
have been omitted.
NOTE 2
INITIAL PUBLIC OFFERING
On April 17, 2006, JK Acquisition sold
13,225,000 units to the public at a price of $6.00 per
unit. Each unit consists of one share of common stock and two
redeemable common stock purchase warrants. JK Acquisition
received proceeds of $74,606,890, net of offering costs of
$4,743,110. On May 11, 2006, the warrants and common stock
were separated from the units and began to trade separately.
Each warrant entitles the holder to purchase one share of common
stock at an exercise price of $5.00. The warrants have a life of
four years after which they will expire. JK Acquisition has a
right to call the warrants, provided the common stock has traded
at a closing price of at least $8.50 per share for any 20
trading days within a 30 trading day period ending on the third
business day prior to the date on which notice of redemption is
given. If JK Acquisition calls the warrants, the holder will
either have to redeem the warrants by purchasing the common
stock from JK Acquisition for $5.00 or the warrants will expire.
In connection with the initial public offering, JK Acquisition
has committed to pay to the underwriters a non-accountable
expense allowance equal to 5% of the gross offering proceeds
upon the consummation of the initial public offering. The
underwriters have agreed to defer approximately $1,552,500
attributable to their non-accountable expense allowance (equal
to 2.25% of the gross proceeds of the offering) until the
consummation of a business combination. Upon the consummation of
a business combination, JK Acquisition will pay such deferred
non-accountable expense allowance to the underwriters out of the
proceeds of this offering held in trust.
NOTE 3
TRUST FUND
Investment securities in the trust fund are held in tax exempt
municipal obligations and are classified as trading securities.
Such funds are carried at fair value, with gains or losses
resulting from changes in fair value recognized currently in
earnings.
NOTE 4
ADVANCES FROM SHAREHOLDERS
On May 18, 2005 and December 20, 2005, JK Acquisition
received an aggregate of $329,000 as advances for expenses from
two shareholders. These advances did not bear any interest and
were repaid from the proceeds of the Companys initial
public offering.
On May 23, 2007, June 14, 2007, July 19, 2007 and
September 6, 2007 JK Acquisition received an aggregate of
$500,000 in advances for expenses from two shareholders,
Messrs. Wilson and Spickelmier. On October 9, 2007, JK
Acquisition received an additional $200,000 in advances from the
two shareholders. Proceeds from each of the advances will
fund JK Acquisitions ongoing continuing operating
expenses. Under the terms of the advances, JK
F-54
Acquisition will: (i) pay no interest and (ii) the
amounts of the advances are due to be reimbursed upon the
consummation of a business combination. In the event JK
Acquisition fails to complete a business combination with any
entity (I) by October 10, 2007 or, (II) if a
letter of intent, agreement in principle or definitive agreement
is executed, but not consummated, by October 10, 2007, then
by April 10, 2008, then JK Acquisition shall not be
required to repay the advances. The two shareholders who
advanced such funds, Messrs. Wilson and Spickelmier have
waived any recourse against JK Acquisitions trust account
with respect to the advances in the event that a business
combination is not consummated by JK Acquisition in a timely
manner as described herein above.
NOTE 5
DERIVATIVE LIABILITY
On January 10, 2007, JK Acquisition entered into a Warrant
Clarification Agreement to clarify the terms of the Warrant
Agreement, dated as of April 10, 2006 (the Warrant
Agreement) by and between JK Acquisition and Continental
Stock Transfer & Trust Company, as Warrant Agent.
The Warrant Clarification Agreement clarified, consistent with
the terms of the Warrant Agreement and the disclosure contained
in JK Acquisitions Prospectus, dated April 11, 2006,
that if JK Acquisition is unable to deliver securities pursuant
to the exercise of a warrant because a registration statement
under the Securities Act of 1933, as amended, with respect to
the common stock is not effective, then in no event would JK
Acquisition be obligated to pay cash or other consideration to
the holders of warrants or otherwise net-cash settle
any warrant exercise. As of January 10, 2007, JK
Acquisition determined that net cash settlement of the warrants
could no longer be required; therefore, the warrants should not
be treated as derivative liabilities. The fair value of these
warrants was marked to market on January 10, 2007 and
derivative gain was recorded. The balance of the derivative
liability was then recorded as a contribution to paid-in capital
on that date. The fair value of the warrants as of
January 10, 2007 was determined by the trading value of the
securities on that date.
Gain on derivative liability reported in the accompanying
statement of operations through January 10, 2007 resulting
from the change in valuation of the derivative liability related
to these warrants was $1,468,600 for the nine months ended
September 30, 2007.
NOTE 6
STOCK OPTION
JK Acquisition sold to Ferris Baker, Watts, Inc. for $100, an
option to purchase up to a total of 700,000 units. This
option was issued upon closing of the initial public offering.
The units that would be issued upon exercise of this option are
identical to those sold in the initial public offering, except
that each of the warrants underlying this option entitles the
holder to purchase one share of our common stock at a price of
$6.25. This Underwriters Purchase Option (UPO)
is exercisable at $7.50 per unit at the latter of one year from
the effective date, or the consummation of a business
combination and may be exercised on a cashless basis. The UPO
will have a life of four years from the effective date.
NOTE 7
RELATED PARTY TRANSACTION
JK Acquisition has agreed to pay 4350 Management, LLC, a related
party and privately-held company owned by JK Acquisitions
chief executive officer, an administrative fee of $7,500 per
month for office space and administrative, technology and
secretarial services from the effective date of the initial
public offering through the acquisition date of a target
business. For the nine months ended September 30, 2007,
$67,500 has been expensed for the administrative fee.
NOTE 8
DEFERRED ACQUISITION COSTS
Deferred acquisition costs consist primarily of accounting fees,
legal fees, due diligence fees and other fees incurred through
the balance sheet date that are related to the proposed merger
discussed in Note 9. Due to the uncertainty of the proposed
merger, as further described in Note 11, the deferred
acquisition costs were written off to impairment expense during
the quarter ended June 30, 2007, and deferred acquisition
costs incurred during the quarter ended September 30, 2007
were expensed as impaired costs.
F-55
NOTE 9
PROPOSED MERGER
On August 27, 2007, JK Acquisition and Multi-Shot, Inc., a
Delaware corporation and wholly-owned subsidiary of JK
Acquisition (MSI), entered into the Second Amended
and Restated Agreement and Plan of Merger (the Amended
Merger Agreement) with Multi-Shot, LLC, a Texas limited
liability company (Multi-Shot), Catalyst/Hall Growth
Capital Management Co., LLC, as Members Representative
(Members Representative), and the members of
Multi-Shot (the Members), pursuant to which
Multi-Shot will merge with and into MSI (the
Merger). The Amended Merger Agreement fully amends
and restates the First Amended and Restated Agreement and Plan
of Merger, dated February 14, 2007, by and among JK
Acquisition, MSI, Multi-Shot, Members Representative and
the Members. Following completion of the Merger, it is
anticipated that JK Acquisition will change its name to MS
Energy Services, Inc. Based in Conroe, Texas, Multi-Shot
provides directional drilling services with an established
presence in most major onshore producing basins in the
U.S. Since its inception in 1980, Multi-Shot has developed
into a leading independent service provider that employs a
highly skilled and experienced labor force. Multi-Shot owns and
operates equipment of the highest standards and maintains a
diversified customer base that includes large,
U.S. independent exploration and production companies.
The Merger is expected to be consummated by January 31,
2008, after the required approval by JK Acquisitions
stockholders and the fulfillment of certain other conditions, as
discussed in greater detail herein and in the Amended Merger
Agreement.
The Amended Merger Agreement will terminate automatically if
either (1) JK Acquisition fails to file its definitive
proxy materials with the SEC and mail such materials to its
stockholders prior to December 31, 2007, or (2) the
merger is not completed on or before January 31, 2008
At closing, the initial Merger consideration for all the issued
and outstanding membership interests of Multi-Shot is expected
to be approximately $197,500,000 (assuming the Third-Party
Indebtedness, as such term is defined in the Merger Agreement,
of Multi-Shot does not exceed $60,00,000 on the closing date),
consisting of the following:
|
|
|
|
|
21,759,259 shares of JK Acquisition common stock;
|
|
|
|
|
|
28,516,668 contingent warrants (each contingent warrant may be
exchanged for one share of JK Acquisition common stock solely
pursuant to the grant of an Earnout Award (as defined in the
Merger Agreement) pursuant to the Merger Agreement); and
|
|
|
|
|
|
the assumption of third-party indebtedness, which is expected to
be approximately $60,000,000.
|
|
|
|
|
|
the cancellation of 2,458,334 shares of JK Acquisition
common stock owned by the current officers and directors of JK
Acquisition.
|
NOTE 10
LIQUIDITY
JK Acquisitions cash position as of September 30,
2007 is approximately $90,492. JK Acquisition has outstanding
payables of approximately $584,090 as of September 30,
2007. As of September 30, 2007, advances from shareholders
was $500,000. As described in Note 4, such shareholders
have waived any recourse against JK Acquisitions trust
account with respect to the advances in the event that a
business combination is not consummated by JK Acquisition in a
timely manner as described herein above. Approximately $363,000
of the outstanding payables represent legal expense incurred in
conjunction with the proposed merger and will be due at the
close of the proposed merger described in Note 9. If we
liquidate before the completion of a business combination and
distribute the proceeds of the trust to our public stockholders,
Messrs. Wilson and Spickelmier have agreed to indemnify us
against any claims by any vendor or other entities that are owed
money by us for services rendered or products sold to us that
would otherwise reduce the amounts of the funds in the trust.
However, we cannot assure you that Messrs. Wilson and
Spickelmier will be able to satisfy those obligations.
F-56
In the event the proposed merger is not consummated within the
agreed upon time period, JK Acquisition believes it will not
have sufficient funds to operate through April 2008 unless we
receive additional advances from Messrs. Wilson and
Spickelmier, or other interested parties sufficient to continue
operations.
NOTE 11
OTHER CONTINGENCIES
On July 16, 2007, JK Acquisition filed suit in the state
district court of Harris County, Texas against Multi-Shot, LLC
and twelve other named defendants. JK Acquisition was seeking
injunctive relief and other damages related to various claims of
breach of contract in connection with the First Amended and
Restated Agreement and Plan of Merger previously entered into
with Multi-Shot, LLC and other parties on February 14,
2007. Pursuant to a Settlement Agreement, JK Acquisition,
Multi-Shot and the other parties thereto agreed to abate the
current lawsuit among the parties pending in the
234
th
Judicial
District Court of Harris County, Texas (the Court)
in exchange for, among other consideration, entering into the
Amended Merger Agreement. The parties to the Settlement
Agreement have also agreed to waive any prior claims the parties
have, or may have had, on the date of the Settlement Agreement
against any of the other parties to the Settlement Agreement.
The parties to the Settlement Agreement have agreed that the
Court will retain continuing jurisdiction over any dispute filed
regarding the Settlement Agreement, and that any such dispute
will be submitted to the Court for resolution. In addition, the
parties have agreed that any dispute regarding the Amended
Merger Agreement will be tried in the district courts in Harris
County, Texas. None of the parties to the Settlement Agreement
have admitted any liability or violation.
F-57
ANNEX A
SECOND
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
among
JK ACQUISITION CORP.,
MULTI-SHOT, INC.,
MULTI-SHOT, LLC,
And Each of
CATALYST/HALL GROWTH CAPITAL MANAGEMENT CO., LLC,
And
SG-DIRECTIONAL, LLC, as
MEMBERS REPRESENTATIVE
Dated as of August 27, 2007
A-1
TABLE
OF CONTENTS
|
|
|
|
|
ARTICLE I THE MERGER
|
|
|
A-7
|
|
Section 1.01
The
Merger
|
|
|
A-7
|
|
Section 1.02
Effective
Time; Closing
|
|
|
A-7
|
|
Section 1.03
Effect
of the Merger
|
|
|
A-7
|
|
Section 1.04
Certificate
of Incorporation and Bylaws of the Surviving Corporation
|
|
|
A-7
|
|
Section 1.05
Directors
and Officers
|
|
|
A-7
|
|
|
|
|
|
|
ARTICLE II MERGER CONSIDERATION; EXCHANGE OF CERTIFICATES
|
|
|
A-8
|
|
Section 2.01
Initial
Merger Consideration
|
|
|
A-8
|
|
Section 2.02
Closing
Balance Sheet; Indebtedness; Working Capital
|
|
|
A-9
|
|
Section 2.03
Post-Closing
Adjustment
|
|
|
A-10
|
|
Section 2.04
Exchange
of Certificates
|
|
|
A-12
|
|
Section 2.05
Membership
Interest Transfer Books
|
|
|
A-15
|
|
Section 2.06
Contingent
Awards
|
|
|
A-15
|
|
Section 2.07
Securities
Laws Issues
|
|
|
A-17
|
|
Section 2.08
Redemption Shares
Issuance
|
|
|
A-18
|
|
|
|
|
|
|
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
|
|
|
A-20
|
|
Section 3.01
Organization
and Qualification
|
|
|
A-21
|
|
Section 3.02
Articles
of Organization and Regulations
|
|
|
A-21
|
|
Section 3.03
No
Subsidiaries
|
|
|
A-21
|
|
Section 3.04
Capitalization
|
|
|
A-22
|
|
Section 3.05
Authority
Relative to This Agreement
|
|
|
A-22
|
|
Section 3.06
No
Conflict; Required Filings and Consents
|
|
|
A-23
|
|
Section 3.07
Permits;
Compliance
|
|
|
A-23
|
|
Section 3.08
Financial
Statements
|
|
|
A-24
|
|
Section 3.09
Absence
of Certain Changes or Events
|
|
|
A-24
|
|
Section 3.10
Absence
of Litigation
|
|
|
A-24
|
|
Section 3.11
Employee
Benefit Plans; Labor Matters
|
|
|
A-25
|
|
Section 3.12
Contracts
|
|
|
A-27
|
|
Section 3.13
Environmental
Matters
|
|
|
A-29
|
|
Section 3.14
Intellectual
Property
|
|
|
A-30
|
|
Section 3.15
Taxes
|
|
|
A-32
|
|
Section 3.16
Vote
Required
|
|
|
A-34
|
|
Section 3.17
Assets;
Absence of Liens and Encumbrances
|
|
|
A-34
|
|
Section 3.18
Real
Property
|
|
|
A-34
|
|
Section 3.19
Certain
Interests
|
|
|
A-35
|
|
Section 3.20
Insurance
Policies
|
|
|
A-35
|
|
Section 3.21
Restrictions
on Business Activities
|
|
|
A-35
|
|
Section 3.22
Brokers
|
|
|
A-35
|
|
Section 3.23
Intentionally
Omitted
|
|
|
A-36
|
|
Section 3.24
Customers
and Suppliers
|
|
|
A-36
|
|
Section 3.25
Inventory
|
|
|
A-36
|
|
Section 3.26
Accounts
Receivable; Bank Accounts
|
|
|
A-36
|
|
Section 3.27
Intentionally
Omitted
|
|
|
A-36
|
|
A-2
|
|
|
|
|
Section 3.28
Offers
|
|
|
A-36
|
|
Section 3.29
Warranties
|
|
|
A-36
|
|
Section 3.30
Books
and Records
|
|
|
A-36
|
|
Section 3.31
Intentionally
Omitted
|
|
|
A-37
|
|
Section 3.32
Proxy
Statement
|
|
|
A-37
|
|
Section 3.33
No
Misstatements
|
|
|
A-37
|
|
|
|
|
|
|
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MEMBERS
|
|
|
A-37
|
|
Section 4.01
Ownership;
Accredited Status
|
|
|
A-37
|
|
Section 4.02
Power;
Authorization; Enforceability
|
|
|
A-38
|
|
|
|
|
|
|
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB
|
|
|
A-38
|
|
Section 5.01
Organization
and Qualification
|
|
|
A-38
|
|
Section 5.02
Authority
Relative to This Agreement
|
|
|
A-39
|
|
Section 5.03
Capital
Structure
|
|
|
A-39
|
|
Section 5.04
No
Conflict; Required Filings and Consents
|
|
|
A-39
|
|
Section 5.05
SEC
Filings; Financial Statements
|
|
|
A-40
|
|
Section 5.06
Interim
Operations of Merger Sub
|
|
|
A-40
|
|
Section 5.07
Board
Approval
|
|
|
A-40
|
|
Section 5.08
Valid
Issuance of Parent Shares
|
|
|
A-40
|
|
Section 5.09
Brokers
|
|
|
A-40
|
|
Section 5.10
Intentionally
Omitted
|
|
|
A-41
|
|
Section 5.11
Financial
Statements
|
|
|
A-41
|
|
Section 5.12
Absence
of Certain Changes or Events
|
|
|
A-41
|
|
Section 5.13
Absence
of Litigation
|
|
|
A-41
|
|
Section 5.14
Taxes
|
|
|
A-41
|
|
Section 5.15
Assets;
Absence of Liens and Encumbrances
|
|
|
A-43
|
|
Section 5.16
Proxy
Statement
|
|
|
A-43
|
|
Section 5.17
Registration
Rights Agreement
|
|
|
A-43
|
|
Section 5.18
Offers
|
|
|
A-43
|
|
Section 5.19
Undisclosed
Liabilities
|
|
|
A-43
|
|
Section 5.20
No
Misstatements
|
|
|
A-44
|
|
|
|
|
|
|
ARTICLE VI CONDUCT OF BUSINESSES PENDING THE MERGER
|
|
|
A-44
|
|
Section 6.01
Conduct
of Business by the Company Pending the Merger
|
|
|
A-44
|
|
Section 6.02
Conduct
of Business by Parent Pending the Merger
|
|
|
A-46
|
|
Section 6.03
Litigation
|
|
|
A-48
|
|
Section 6.04
Notification
of Certain Matters
|
|
|
A-48
|
|
|
|
|
|
|
ARTICLE VII ADDITIONAL AGREEMENTS
|
|
|
A-49
|
|
Section 7.01
Proxy
Statement; Stockholder Approval. Proxy Statement; Parent
Stockholders Meeting; Name Change
|
|
|
A-49
|
|
Section 7.02
Members
Approval; Exemption from Registration
|
|
|
A-50
|
|
Section 7.03
Access
to Information; Confidentiality
|
|
|
A-51
|
|
Section 7.04
No
Solicitation of Transactions
|
|
|
A-51
|
|
Section 7.05
Employee
Benefits Matters
|
|
|
A-52
|
|
Section 7.06
Further
Action; Consents; Filings
|
|
|
A-53
|
|
Section 7.07
Intentionally
Omitted
|
|
|
A-54
|
|
A-3
|
|
|
|
|
Section 7.08
No
Public Announcement
|
|
|
A-54
|
|
Section 7.09
Expenses
|
|
|
A-54
|
|
Section 7.10
Affiliate
Agreements
|
|
|
A-54
|
|
Section 7.11
Intentionally
Omitted
|
|
|
A-54
|
|
Section 7.12
AMEX
Listing
|
|
|
A-54
|
|
Section 7.13
Intentionally
Omitted
|
|
|
A-55
|
|
Section 7.14
Key
Employees
|
|
|
A-55
|
|
Section 7.15
WARN
Act
|
|
|
A-55
|
|
Section 7.16
Conversion
Schedule
|
|
|
A-55
|
|
Section 7.17
Litigation
Support
|
|
|
A-55
|
|
Section 7.18
Director
and Officer Insurance
|
|
|
A-56
|
|
Section 7.19
Schedules
Bring Down
|
|
|
A-56
|
|
|
|
|
|
|
ARTICLE VIII CONDITIONS TO THE MERGER
|
|
|
A-57
|
|
Section 8.01
Conditions
to the Obligations of Each Party
|
|
|
A-57
|
|
Section 8.02
Conditions
to the Obligations of Parent and Merger Sub
|
|
|
A-57
|
|
Section 8.03
Conditions
to the Obligations of the Company
|
|
|
A-60
|
|
|
|
|
|
|
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER
|
|
|
A-62
|
|
Section 9.01
Termination
|
|
|
A-62
|
|
Section 9.02
Effect
of Termination
|
|
|
A-63
|
|
Section 9.03
Amendment
|
|
|
A-63
|
|
Section 9.04
Waiver
|
|
|
A-63
|
|
Section 9.05
Automatic
Termination
|
|
|
A-63
|
|
|
|
|
|
|
ARTICLE X INDEMNIFICATION
|
|
|
A-64
|
|
Section 10.01
Survival
of Representations and Warranties
|
|
|
A-64
|
|
Section 10.02
Indemnification
by the Members
|
|
|
A-64
|
|
Section 10.03
Indemnification
by Parent and Merger Sub
|
|
|
A-65
|
|
Section 10.04
Indemnification
Procedures
|
|
|
A-66
|
|
Section 10.05
Members
Representative
|
|
|
A-67
|
|
Section 10.06
Taxes
|
|
|
A-68
|
|
Section 10.07
Reduction
of Indemnified Amounts
|
|
|
A-68
|
|
Section 10.08
Exclusive
Rights and Remedies
|
|
|
A-68
|
|
|
|
|
|
|
ARTICLE XI GENERAL PROVISIONS
|
|
|
A-69
|
|
Section 11.01
Notices
|
|
|
A-69
|
|
Section 11.02
Certain
Definitions
|
|
|
A-70
|
|
Section 11.03
Severability
|
|
|
A-78
|
|
Section 11.04
Assignment;
Binding Effect; Benefit
|
|
|
A-78
|
|
Section 11.05
Incorporation
of Exhibits
|
|
|
A-78
|
|
Section 11.06
Specific
Performance
|
|
|
A-78
|
|
Section 11.07
Governing
Law; Forum
|
|
|
A-78
|
|
Section 11.08
Time
of the Essence
|
|
|
A-79
|
|
Section 11.09
Waiver
of Jury Trial
|
|
|
A-79
|
|
Section 11.10
Construction
and Interpretation
|
|
|
A-79
|
|
Section 11.11
Further
Assurances
|
|
|
A-80
|
|
A-4
|
|
|
|
|
Section 11.12
Headings
|
|
|
A-80
|
|
Section 11.13
Counterparts
|
|
|
A-80
|
|
Section 11.14
Entire
Agreement
|
|
|
A-80
|
|
|
|
|
Schedule 2.03(g)
|
|
Target Working Capital Calculation Example
|
Schedule 2.04(a)
|
|
Holders of Escrow Securities
|
Schedule 2.06(d)
|
|
Contingent Award Calculation Example
|
Schedule 6.01(k)
|
|
Conduct of Business by the Company
|
Schedule 6.02(s)
|
|
Bonus Payments to Officers or Employees
|
Schedule 7.05(b)
|
|
Individuals Entering Into Employment Agreement
|
Schedule 7.05(c)
|
|
Individuals Entering Into Non-Solicitation Agreement
|
Schedule 8.02(r)
|
|
Company Employees to be Employed at Closing
|
Schedule 8.02(t)
|
|
Existing Employment Agreements
|
|
|
|
Exhibit A
|
|
Form of Parent Warrant
|
Exhibit B
|
|
Form of Escrow Agreement
|
Exhibit C
|
|
Form of Registration Rights Agreement
|
Exhibit D
|
|
Form of Company Counsel Legal Opinion
|
Exhibit E
|
|
Form of Parent Counsel Legal Opinion
|
Exhibit F
|
|
Form of GB Agreement
|
Exhibit G
|
|
Form of PB Agreement
|
Company Disclosure Schedules
Parent Disclosure Schedules
A-5
SECOND
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER,
dated as of August 27, 2007 (the
Execution
Date
), among JK ACQUISITION CORP., a Delaware
corporation (
Parent
), MULTI-SHOT, INC., a
Delaware corporation and a wholly owned subsidiary of Parent
(
Merger Sub
), MULTI-SHOT, LLC, a Texas
limited liability company (the
Company
), and
each of CATALYST/HALL GROWTH CAPITAL MANAGEMENT CO., LLC, a
Texas limited liability company (
CHGCM
) and
SG-DIRECTIONAL, LLC, an Arkansas limited liability company
(
SGD
), collectively as Members
Representative (as defined in
Section 10.05
hereof).
W I T N E
S S E T H
WHEREAS,
that certain First Amended and Restated
Agreement and Plan of Merger dated as of February 14, 2007
was executed by and among the Parent, Merger Sub, the Company,
and the Members that are parties thereto (the
Second
Agreement
), which Second Agreement amended and
restated in its entirety that certain Agreement and Plan of
Merger dated as of September 6, 2006 (the
Original
Agreement
), executed by and among the Parent, Merger
Sub, the Company, and the Members that were parties thereto;
WHEREAS,
the parties thereto desire to enter into this
Agreement to fully supersede and replace the Second Agreement;
WHEREAS,
upon the terms and subject to the conditions of
this Agreement, Parent and the Company will enter into a
business combination transaction pursuant to which the Company
will merge with and into the Merger Sub (the
Merger
);
WHEREAS,
as of the Execution Date, the Board of Managers
of the Company has (i) determined that the Merger is fair
to, and in the best interests of, the Company and the Members,
and (ii) approved and adopted this Agreement, the Merger,
and the other transactions contemplated by this Agreement;
WHEREAS,
the Boards of Directors of each of Parent and
Merger Sub have (i) determined that the Merger is
consistent with and in furtherance of the long-term business
strategy of Parent and fair to, and in the best interests of,
Parent, Merger Sub and their respective stockholders,
(ii) unanimously approved and adopted this Agreement, the
Merger, and the other transactions contemplated by this
Agreement, and (iii) determined to unanimously recommend
that the stockholders of Parent approve and adopt this Agreement
and the Merger;
WHEREAS,
the Members of the Company currently own the
membership interests of the Company (the
Company
Interests
) as is set forth opposite each such
Members name in
Section 1.01
of the Company
Disclosure Schedule (as defined in Article III) (such
members being referred to herein as the
Members
);
WHEREAS,
pursuant to the Merger, each outstanding share
of Company Interest shall be converted into the right to receive
shares of Parents authorized common stock, par value
$0.0001 per share (
Parent Common Stock
) and
Parent Warrants (as defined herein), at the rate determined in
this Agreement;
WHEREAS,
Parent has agreed to grant the Members the
registration rights set forth in the Registration Rights
Agreement (as defined herein);
WHEREAS,
all of the Parent Common Stock otherwise
issuable by Parent in connection with the Merger to the Original
Members (as defined in
Section 11.02(a)
herein), who
own approximately 38.6% of the Company prior to the Merger shall
be placed in escrow by Parent, the release of which amount shall
be contingent upon certain events and conditions, all as set
forth in this Agreement and the Escrow Agreement (as defined in
Section 2.04(b)
);
WHEREAS,
as a condition and inducement to Parents
willingness to enter into this Agreement, each individual listed
on Schedule 7.05(b) shall enter into an Employment
Agreement (as defined in
Section 7.05(b)
);
WHEREAS,
as a condition and inducement to Parents
willingness to enter into this Agreement, each individual listed
on Schedule 7.05(c) shall enter into a Non-Solicitation
Agreement (as defined in
Section 7.05(c)
); and
A-6
WHEREAS,
certain capitalized terms used in this Agreement
are defined in
Section 11.02(a) and (b)
of this
Agreement.
NOW, THEREFORE,
in consideration of the foregoing and the
mutual covenants and agreements herein contained, and intending
to be legally bound hereby, Parent, Merger Sub, the Company, the
Members Representative and the Members, for the limited
purposes stated herein, hereby agree as follows:
ARTICLE I
THE
MERGER
Section
1.01
The
Merger
.
Upon the terms of this Agreement and
subject to the conditions set forth in this Agreement, and in
accordance with the Delaware General Corporation Law
(
DGCL
) and Texas Limited Liability Company
Act (
TLLCA
), at the Effective Time (as
defined in
Section 1.02
), Company shall be merged
with and into the Merger Sub. As a result of the Merger, the
separate legal existence of Company shall cease, and the Merger
Sub shall continue as the surviving corporation of the Merger
(the
Surviving Corporation
).
Section
1.02
Effective
Time; Closing
.
As promptly as practicable
following the satisfaction or, if permissible by the express
terms of this Agreement, waiver of the conditions set forth in
Article VIII (or such other date as may be agreed by each
of the parties hereto), the parties hereto shall cause the
Merger to be consummated by (i) filing a certificate of
merger (the
Certificate of Merger
) with the
Secretary of States of (A) the State of Delaware and
(B) the State of Texas in such forms as is required by, and
executed in accordance with, the relevant provisions of the DGCL
and the TLLCA, respectively, and (ii) making all other
filings and recordings required under the DGCL and the TLLCA.
Parent will prepare and file all proxy materials in accordance
with Schedule 14A under the Exchange Act that set forth,
among other things, the proposed officers and directors of
Parent and Merger Sub after the Closing. The term
Effective Time
means the date and time of the
filing of the Certificate of Merger (or such later time as may
be agreed by each of the parties hereto and specified in the
Certificate of Merger). Immediately prior to the filing of the
Certificate of Merger, a closing (the
Closing
) will be held at the offices of
Patton Boggs LLP (
Patton Boggs
), 2001 Ross
Avenue, Suite 3000, Dallas, Texas (or such other place as
the parties may agree). The date on which the Closing shall
occur is referred to herein as the
Closing
Date.
Section
1.03
Effect
of the Merger
.
At and after the Effective
Time, the Merger shall have the effects as set forth in the
applicable provisions of the DGCL and TLLCA. Without limiting
the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and
franchises of each of the Company and Merger Sub shall vest in
the Surviving Corporation, and all debts, liabilities,
obligations, restrictions, disabilities and duties of each of
the Company and Merger Sub shall become the debts, liabilities,
obligations, restrictions, disabilities and duties of the
Surviving Corporation.
Section
1.04
Certificate
of Incorporation and Bylaws of the Surviving Corporation
.
(a) At the Effective Time, the Certificate of Incorporation
of Merger Sub as currently in effect shall be the Certificate of
Incorporation of the Surviving Corporation, except that
Section 1 of the amended and restated Certificate of
Incorporation of the Surviving Corporation, instead of reading
the same as Section 1 of the Certificate of Incorporation
of Merger Sub, shall read as follows: The name of this
corporation is Multi-Shot, Inc.
(b) At the Effective Time, the Bylaws of the Surviving
Corporation shall be the same as the Bylaws of Merger Sub as in
effect immediately prior to the Effective Time, except that all
references to Merger Sub in the Bylaws of the Surviving
Corporation shall be changed to refer to Multi-Shot, Inc.
Section
1.05
Directors
and Officers
.
(a) The directors of Merger Sub immediately prior to the
Effective Time shall be the initial directors of the Surviving
Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving
Corporation, and the officers of Merger Sub immediately prior to
the Effective Time shall be the initial officers of the
Surviving Corporation, in each case until their respective
successors are duly elected or appointed and qualified.
A-7
(b) Effective as of the Effective Time, the directors of
Parent and the Surviving Corporation shall be Ron Nixon
(Chairman), Allen Neel, Richard Turner, James Jacoby and Kim
Eubanks, and up to two (2) other designees of the Members,
such designees to be designated by the Members
Representative at least ninety (90) days prior to the
Effective Time, each to hold office in accordance with the
Certificate of Incorporation, as amended, and Bylaws, as
amended, of Parent and the Surviving Corporation, and the
initial officers of the Surviving Corporation shall be Allen
Neel Chief Executive Officer, President and
Secretary; David Cudd Vice President; and Paul
Culbreth Vice President. Effective as of the
Effective Time, the officers of Parent shall be Allen
Neel Chief Executive Officer and President, and
Scott Bork Secretary. In each case, the foregoing
officers shall serve until their respective successors are duly
elected or appointed and qualified.
ARTICLE II
MERGER
CONSIDERATION; EXCHANGE OF CERTIFICATES
Section
2.01
Initial
Merger Consideration
.
(a) At the Effective Time, by virtue of the Merger and
without any action on the part of Parent, Merger Sub, the
Company or the holders of any of the following securities:
(i) each unit of Company Interest issued and outstanding
immediately prior to the Effective Time shall be converted into
the right to receive the following consideration, payable in the
form of:
(1) such number of shares of Parent Common Stock equal to
the Company Interest to Parent Common Stock Exchange
Ratio; and
(2) such number of Parent Warrants equal to the Company
Interest to Parent Warrant Exchange Ratio; and
(3) a cash amount equal to the Company Interest to Cash
Exchange Ratio;
(ii) each share of common stock, par value $0.001 per
share, of Merger Sub issued and outstanding immediately prior to
the Effective Time, all of which shall be held by Parent, shall
be converted into and exchanged for one validly issued, fully
paid and nonassessable share of common stock, par value $0.001
per share, of the Surviving Corporation. The stock certificate
evidencing shares of common stock of Merger Sub shall then
evidence ownership of the outstanding shares of common stock of
the Surviving Corporation.
(b) As used in this Agreement, the following terms have the
following meanings (except as noted in this Agreement):
(i)
Gross Enterprise Value
means
the enterprise value of the Company, such enterprise value of
which is calculated as the sum of (A) (x) 6.25 multiplied
by (y) the forecasted trailing 12 months Adjusted
EBITDA as of November 30, 2007,
plus
(B) $10,000,000, which such Gross Enterprise Value is
estimated to be $197,500,000.
(ii)
Estimated Net Enterprise Value
means Gross Enterprise Value less Estimated Third Party
Indebtedness as of the Closing Date.
(iii)
Estimated Third Party
Indebtedness
means the Indebtedness (as defined in
Section 2.01(b)(iv)
).
(iv)
Indebtedness
means all
indebtedness or other obligations of the Company for borrowed
money, including, without limitation, all obligations under
capital leases which under GAAP are required to be shown as a
liability and all indebtedness of a third party for which the
Company is liable pursuant to a guaranty or otherwise.
(v)
Intentionally omitted.
(vi)
Parent Stock Consideration
means one hundred percent (100%) of the remainder of
Estimated Net Enterprise Value, less the Cash Consideration.
A-8
(vii)
Parent Shares
means the
number of shares of Parent Common Stock equal to the quotient of
(A) Parent Stock Consideration divided by (B) $5.40,
rounded to the nearest whole share.
(viii)
Parent Warrants
means the
28,516,668 warrants issued by Parent pursuant to
Section 2.01(a)(i)(2)
, subject to the provisions in
Section 2.06
hereof, substantially in the form
attached hereto as
Exhibit A.
(ix)
Escrow Shares
means all of
the Parent Shares issued as Parent Stock Consideration to the
Original Members pursuant to
Section 2.01
hereto,
all of the Redemption Liability Shares to the Original
Members, if any, issued pursuant to
Section 2.08
,
and any Parent Common Stock issued to the Original Members
pursuant to the exchange of any Escrow Warrants.
(x)
Cash Consideration
means
$20,000,000.00.
(xi)
Company Interest to Cash Exchange
Ratio
means the quotient (calculated to five
decimal places) obtained by dividing (x) the Cash
Consideration by (y) the Fully Diluted Company Interest
Amount (as defined below).
(xii)
Company Interest to Parent Common Stock
Exchange Ratio
means the quotient (calculated to
five decimal places) obtained by dividing (x) the Parent
Shares by (y) the Fully Diluted Company Interest Amount.
(xiii)
Fully Diluted Company Interest
Amount
means a number of units of Company
Interests equal to the sum of (x) the number of units of
Company Interests issued and outstanding immediately prior to
the Effective Time and (y) the number of units of Company
Interests issuable upon exercise, conversion
and/or
exchange of all securities issued and outstanding immediately
prior to the Effective Time that are exercisable, convertible
and/or
exchangeable for units of Company Interests.
(xiv)
Company Interest to Parent Warrant
Exchange Ratio
means the quotient (calculated to
five decimal places) obtained by dividing (x) the Parent
Warrants by (y) the Fully Diluted Company Interest Amount.
(c) If, during the period between the date hereof and the
Effective Time, any change in the capital stock of Parent shall
occur by reason of reclassification, recapitalization, stock
split or combination, exchange or readjustment of shares, or any
stock dividend thereon with a record date during such period or
any similar event, all of the stock-based items that require
adjustment so as to properly reflect the action taken,
including, but not limited to, the Initial Merger Consideration,
the Parent Shares, the Company Interest to Cash Exchange Ratio,
the Company Interest to Parent Common Stock Exchange Ratio, the
Parent Warrants, the Redemption Liability Shares (as
defined in
Section 2.08
) and
Redemption Warrants (as defined in
Section 2.08
) shall be correspondingly adjusted to
the extent appropriate to reflect such stock dividend,
subdivision, reclassification, recapitalization, split,
combination, exchange or readjustment of shares. The parties
recognize that the 2004 Incentive Plan has, in 2005 and 2006,
and will most likely in 2007 give rise to a Transaction-Related
Members Equity Charges (defined below). For the purposes
of this Agreement and the Adjusted EBITDA will not include any
transaction-related charge to Company earnings as required by
GAAP (the
Transaction-Related Members Equity
Charges
).
(d) If any units of Company Interests outstanding
immediately prior to the Effective Time are unvested or are
subject to a repurchase option, risk of forfeiture or other
condition under any applicable restricted stock purchase
agreement, stock option exercise agreement or other agreement
with the Company, then the Parent Shares issued in exchange for
such units of Company Interests will also be unvested
and/or
subject to the same repurchase option, risk of forfeiture or
other condition, and the certificates representing such Parent
Shares may accordingly be marked with appropriate legends.
(e) The aggregate consideration payable to the holders of
Company Interests in accordance with this
Section 2.01(a)
is referred to in this Agreement as the
Initial Merger Consideration
. The Initial
Merger Consideration is subject to adjustment in accordance with
Sections 2.02 and 2.03
.
Section
2.02
Closing
Balance Sheet; Indebtedness; Working Capital
.
(a) (i)
Intentionally omitted
.
A-9
(ii) For purposes of this
Section 2.02
,
Working Capital
shall mean the amount that is
the difference between (i) Companys Current Assets
and (ii) Companys Current Liabilities, calculated in
accordance with United States generally accepted accounting
principles (
GAAP
) and in a manner consistent
with the Company Financial Statements (as defined in
Section 3.08(a)
).
Current Assets
,
as used in the definition of Working Capital, shall mean cash on
hand or in deposit accounts, cash equivalents, accounts
receivable (net of all reserves), prepaid project costs, prepaid
expenses, and any other current assets as defined under GAAP,
plus
any Transaction Expenses previously paid by the
Company.
Current Liabilities
, as used in the
definition of Closing Working Capital, shall mean accounts
payable, accrued expenses, advanced customer payments and any
other current liabilities (excluding any accrued but unpaid
Transaction Expenses and current portions of Indebtedness) as
defined under GAAP.
(b) The Company will prepare and deliver to Parent at least
one (1) business day before the Closing Date an unaudited
balance sheet of the Company prepared on an estimated basis as
of midnight the day prior to the Closing Date (the
Estimated Closing Balance Sheet
), which shall
include detailed supporting calculations of (i) the
estimated Indebtedness of the Company as of the Closing Date
(the
Estimated Indebtedness
); and
(ii) the estimated Working Capital of the Company at the
Closing Date (the
Estimated Closing Working
Capital
). The Estimated Closing Balance Sheet will be
prepared in accordance with GAAP, subject to reasonable
exceptions such as the absence of footnotes and customary
year-end audit adjustments, in a manner consistent with the
methods and practices used to prepare the audited balance sheet
as of December 31, 2006 (the
2006 Balance
Sheet
). The Company will deliver with the Estimated
Closing Balance Sheet, including the Estimated Indebtedness and
Estimated Closing Working Capital, a certification executed by
the Chief Executive Officer and the Chief Financial Officer that
the Estimated Closing Balance Sheet is being delivered in good
faith and fairly presents, in all material respects, the
financial condition of the Company as of 12:01 a.m. the day
before the Closing Date, prepared in accordance with GAAP,
subject to reasonable exceptions such as the absence of
footnotes and customary year-end audit adjustments. For example,
assuming a Closing Date of December 3, 2007, the Company
shall deliver the Estimated Closing Balance Sheet on the morning
of November 30, 2007 reflecting business activities as of
and through November 29, 2007.
Section
2.03
Post-Closing
Adjustment
.
(a) Within 75 days after the Closing Date, Parent will
prepare and deliver to the Members Representative written
notice (the
Adjustment Notice
) containing an
unaudited consolidated balance sheet of the Company as of the
close of business on the Closing Date (the
Closing
Balance Sheet
), including detailed supporting
calculations of (i) the Indebtedness of the Company as of
the Closing Date less any Parent Expense Excess (the
Closing Indebtedness
), (ii) the Working
Capital of the Company as of the Closing Date (
Closing
Working Capital
) and (iii) Parents
calculation of the amount of any Initial Merger Consideration
adjustment required pursuant to
Section 2.03(i)
(
Adjustment Amount
), if any. If Parent
represents that no Adjustment Amount is due and required, the
Adjustment Notice shall so state. The Closing Balance Sheet,
including the Closing Indebtedness and Closing Working Capital,
will be prepared in accordance with GAAP (subject to any
adjustments that relate to Transaction Expenses as permitted
herein) in a manner consistent with the methods and practices
used to prepare the Estimated Balance Sheet, Estimated
Indebtedness and Estimated Working Capital.
(b) Within 30 days after delivery of the Adjustment
Notice, the Members Representative will deliver to Parent
a written response in which the Members Representative
will either:
(i) agree in writing with the Closing Balance Sheet as set
forth in the Adjustment Notice, in which case such calculations
of Closing Indebtedness, Closing Working Capital and Adjustment
Amount, if any, will be final and binding on the parties for
purposes of
Section 2.03(i)
; or
(ii) dispute Parents determination that no Adjustment
Amount is due and required or Parents calculation of
Closing Indebtedness, Closing Working Capital or Adjustment
Amount, if any, as set forth in the Adjustment Notice by
delivering to Parent a written notice (a
Dispute
Notice
) setting forth in reasonable detail the basis
for each such disputed item and certifying that all such
disputed items are being disputed in good faith.
(c) If the Members Representative fails to take
either of the foregoing actions within 30 days after
delivery of the Adjustment Notice, then the Company will be
deemed to have irrevocably accepted Parents calculation of
A-10
Closing Indebtedness, Closing Working Capital
and/or
Adjustment Amount, if any, as set forth in the Adjustment
Notice, in which case such calculation of Closing Indebtedness,
Closing Working Capital and Adjustment Amount will be final and
binding on the parties for purposes of
Section 2.03(i)
.
(d) If the Members Representative delivers a Dispute
Notice to Parent within 30 days after delivery of the
Adjustment Notice, then Parent and the Members
Representative will attempt in good faith, for a period of
30 days, to agree on the calculations of Closing
Indebtedness, Closing Working Capital and Adjustment Amount for
purposes of
Section 2.03(i)
. Any resolution by
Parent and the Members Representative during such
30-day
period as to any disputed items will be final and binding on the
parties for purposes of
Section 2.03(i)
. If Parent
and the Members Representative do not resolve all disputed
items by the end of 30 days after the date of delivery of
the Dispute Notice, then Parent and the Members
Representative will submit the remaining items in dispute to
Hein & Associates, LLP, or if that firm is unwilling
or unable to serve, Parent and the Members Representative
will engage another mutually agreeable independent accounting
firm of recognized national standing, which is not the regular
auditing firm of Parent or the Company. If Parent and the
Members Representative are unable to jointly select such
independent accounting firm within 10 days after such
30-day
period, Parent and the Members Representative will each
select an independent accounting firm of recognized national
standing and each such selected accounting firm will select a
third independent accounting firm of recognized national
standing, which is not the regular auditing firm of Parent or
the Company (such selected independent accounting firm, whether
pursuant to this sentence or the preceding sentence, the
Independent Accounting Firm
). The Independent
Accounting Firm will act as arbitrator to determine (based
solely upon presentations made by Parent and the Members
Representative and not by independent audit or review) only
those items still in dispute. The Purchaser and the
Members Representative will instruct the Independent
Accounting Firm to render its determination with respect to the
items in dispute in a written report that specifies the
conclusions of the Independent Accounting Firm as to each item
in dispute and the resulting calculations and determination of
the Closing Indebtedness, Closing Working Capital and the
Adjustment Amount. The Parent and the Members
Representative will each use their commercially reasonable
efforts to cause the Independent Accounting Firm to render its
determination within 30 days after referral of the items to
such firm or as soon thereafter as reasonably practicable. The
determinations of the Independent Accounting Firm with respect
to the Closing Indebtedness, Closing Working Capital and
Adjustment Amount will be final and binding on the parties for
purposes of
Section 2.03(i)
. Parent and the
Members Representative will revise the Closing Balance
Sheet and the calculation of the Closing Indebtedness, Closing
Working Capital and Adjustment Amount as appropriate to reflect
the resolution of the issues in dispute pursuant to this
Section 2.03
. The procedures for payment of an
Adjustment Amount, whether in favor of Parent or in favor of
Members, are as set forth in
Section 2.03(i)
hereof.
The fees and expenses of the Independent Accounting Firm will be
shared by Parent and the Members in inverse proportion to the
relative amounts of the disputed amount (as ultimately resolved)
determined to be for the account of Parent and the Members,
respectively. For example, if the final Adjustment Amount is
forty percent (40%) of the Parents original Adjustment
Amount as determined in accordance with
Section 2.03(a)
, the Members shall pay forty percent
(40%) of the fees and expenses of the Independent Accounting
Firm and Parent shall pay the remaining sixty percent (60%) of
such fees and expenses.
(e) For purposes of complying with this
Section 2.03
, Parent and the Members
Representative will furnish to each other and to the Independent
Accounting Firm such work papers and other documents and
information relating to the disputed issues as the Independent
Accounting Firm may request and as are available to that party
(or its independent public accountants) and each such party will
be afforded the opportunity to present to the Independent
Accounting Firm any material related to the disputed items and
to discuss the items with the Independent Accounting Firm.
Parent must require that the Independent Accounting Firm enter
into a customary form of confidentiality agreement with respect
to the work papers and other documents and information regarding
the matters, including financial information contained in the
Adjustment Notice and Dispute Notice, provided to the
Independent Accounting Firm pursuant to this
Section 2.03
.
(f) If the Closing Indebtedness as finally determined in
accordance with this
Section 2.03
is equal to
$60,000,000, then no adjustment shall be made. If the Closing
Indebtedness as finally determined pursuant to this
Section 2.03
is less than the $60,000,000, then the
Parent shall pay the Members the amount of such difference
pursuant to
Section 2.03(i)
below. If the Closing
Indebtedness as finally determined pursuant to this
Section 2.03
is
A-11
greater than the $60,000,000, then the Members will pay to
Parent the amount of such difference pursuant to
Section 2.03(i)
below.
(g) If the Closing Working Capital is less than 13.0% of
the average annualized monthly revenues of the Company using the
three (3) completed months immediately preceding the
Closing Date (the
Target Working Capital
), an
example of the calculation of which is set forth on
Schedule 2.03(g)
for the period ending June 30,
2006, then the Members will pay to Parent the amount of such
difference pursuant to
Section 2.03(i)
below.
(h) All payments required to be made by the Members, on a
pro rata basis in proportion to each Members share
(carried to five decimal places) of the Company Interests,
pursuant to
Sections 2.03(f) and 2.03(g)
will be
satisfied by payment from the Escrow Shares (based on the Escrow
Per Share Market Value (as defined below) of the Parent Common
Stock at such time) in accordance with the terms of the Escrow
Agreement or otherwise as permitted by
Section 2.03(d)
above. The Members will be
severally, but not jointly, liable for any amount by which any
payments required under
Sections 2.03(f) or 2.03(g)
exceed the Escrow Fund. All payments to be made by the Parent
pursuant to
Section 2.03(f)
will be satisfied by
issuance of additional shares of Parent Common Stock and Parent
Warrants to the Members, issued and distributed to the Members
on a pro rata basis in proportion to each Members share
(carried to five decimal places) of the Company Interests based
upon the Exchange Value. All adjustments to the Initial Merger
Consideration pursuant to this
Section 2.03
will be
applied to the Initial Merger Consideration to be received by
each Member pro-rata based in proportion to each Members
share (carried to five decimal point places) of the Initial
Merger Consideration. The term
Escrow Per Share
Market Value
shall mean for any date, the price
determined by calculating the average of the closing per share
prices of the Parent Common Stock on the American Stock Exchange
(
AMEX
) (as reported on AMEX) or such other
stock exchange on which Parent Common Stock may then be trading
(based on a Trading Day closing at 4:02 p.m. New York
City time) for the twenty days prior to any distribution date as
described in the Escrow Agreement.
(i) To the extent that there is an Adjustment Amount, the
Company, the Parent and the Members Representative agree
as follows:
(i) If an Adjustment Amount is in favor of Parent, then
such Adjustment Amount shall be payable from the Escrow Fund and
any such payment from the Escrow Fund for an Adjustment Amount
shall be payable in Escrow Shares;
provided
,
that
,
the Members Representative may elect to have an Adjustment
Amount paid from Proceeds (as defined in the Escrow Agreement)
or in other cash provided by the Members in lieu of Escrow
Shares. The Parent, the Company and the Members
Representative will provide instructions to the Escrow Agent
consistent with the foregoing; and
(ii) If an Adjustment Amount is in favor of the Members,
then the Parent Stock Consideration shall be recalculated under
Section 2.01(b)(vi)
; provided that for purposes of
such recalculation the term Actual Net Enterprise
Value shall be substituted in place of the term
Estimated Net Enterprise Value (the result of such
recalculation being the
Actual Parent Stock
Consideration
). Then, Parent will issue such number of
Parent Shares and such number of Parent Warrants to the Members
as would have originally been issued to the Members under
Section 2.01(a)(i)(1)
and
Section 2.01(a)(i)(2)
, respectively, had the term
Actual Parent Stock Consideration been substituted
for the term Parent Stock Consideration under
Section 2.01
at the time such calculations were
made. For purposes of this Agreement the term Actual Net
Enterprise Value means Gross Enterprise Value less Closing
Indebtedness as agreed to between Parent and Members
Representative or as determined pursuant to
Section 2.03(d)
.
Section
2.04
Exchange
of Certificates
.
(a)
Exchange Procedures.
From and after
the Effective Time, a bank or trust company to be designated by
Parent shall act as exchange agent (the
Exchange
Agent
) in effecting the exchange of the applicable
Parent Shares, Parent Warrants, Redemption Liability
Shares, if any, and Redemption Warrants, if any, for
certificates which immediately prior to the Effective Time
represented outstanding membership interests of Company
Interests (
Company Interest Certificates
) and
which were converted into the right to receive the applicable
Parent Shares, Parent Warrants, Redemption Liability
Shares, if any, and Redemption Warrants, if any, pursuant
to
Sections 2.01, 2.03 and 2.08
. As promptly as
practicable after the Effective Time, Parent and the Exchange
Agent shall mail to each record holder of Company Interest
Certificates a letter of transmittal (the
Letter of
Transmittal
) in a form
A-12
approved by Parent and the Company and will include instructions
for use in surrendering such Company Interest Certificates and
receiving the applicable Parent Shares, Parent Warrants,
Redemption Liability Shares, if any, and
Redemption Warrants, if any, pursuant to
Sections 2.01, 2.03 and 2.08
. Promptly after the
Effective Time, but in no event later than ten
(10) business days following the delivery to Parent of the
Final Conversion Schedule, Parent shall cause to be deposited in
escrow with the Escrow Agent all of the Escrow Shares and Escrow
Warrants in the names set forth on
Schedule 2.04(a)
(collectively, the
Escrow Securities
). As
used in this Agreement,
Escrow Warrants
shall
refer to all Parent Warrants and Redemption Warrants, if
any, issued to the Original Members and deposited in escrow with
the Escrow Agent.
Upon the surrender of each Company Interest Certificate for
cancellation to the Exchange Agent, together with a properly
completed Letter of Transmittal and such other documents as may
reasonably be required by Parent:
(i) Parent shall cause to be issued to the holder of such
Company Interest Certificate in exchange therefor separate
certificates representing the Parent Shares, Parent Warrants,
Redemption Liability Shares, if any, and
Redemption Warrants, if any, to which such holder is
entitled pursuant to
Sections 2.01, 2.03 and 2.08
;
(ii) all Escrow Securities shall be delivered to the Escrow
Agent to be held as Escrow Shares pursuant to the Escrow
Agreement; and
(iii) the Company Interest Certificates so surrendered
shall forthwith be cancelled.
(b)
Escrow Fund
.
(i) Prior to or simultaneously with the Closing, the
Members Representative and Parent shall enter into an
escrow agreement substantially in the form of
Exhibit B
hereto (the
Escrow
Agreement
) with the Escrow Agent, or if the Escrow
Agent is unwilling or unable to serve, then such other financial
institution of at least $500,000,000 in total assets mutually
acceptable to the Members Representative and Parent.
Pursuant to the terms of the Escrow Agreement, Parent shall
deposit with the Escrow Agreement (i) one or more stock
certificates representing the Escrow Shares, and (ii) one
or more warrants representing the Escrow Warrants issued to the
Original Members at Closing and related irrevocable stock powers
in the name of the Original Members representing the Escrow
Securities, which account is to be managed by the Escrow Agent
(the
Escrow Account
). Any Escrow Securities
and Proceeds in the Escrow Account are collectively referred to
herein as the
Escrow Fund
. The Escrow
Agreement shall provide that so long as a bona fide, good faith
claim for indemnification has not been made by Parent, that
(i) the entirety of the Escrow Fund remain with the Escrow
Agent until December 31, 2008, (ii) after
December 31, 2008, that portion of Escrow Shares (and/or
any Proceeds or common stock of Parent received by the Original
Members by virtue of the exercise of Parent Warrants and
Redemption Warrants) in excess of $3,000,000 in value based
on the Escrow Per Share Market Value be released to the Original
Members as well as the entirety of the Escrow Warrants and
(iii) upon completion of (36) thirty-six months after
Closing, the Escrow Account shall be closed and all remaining
Escrow Shares and any and all other assets of the Original
Members held in the Escrow Fund shall be released to the
Original Members. In connection with such deposit of the Escrow
Securities with the Escrow Agent and as of the Effective Time,
each Original Member holder of Company Interests will be deemed
to have constructively received and deposited with the Escrow
Agent each Original Members pro rata interest in the
Escrow Fund as determined as of Closing by reference to such
Original Members ownership of Company Interests (plus any
additional shares as may be issued upon any stock split, stock
dividend or recapitalization effected by Parent after the
Effective Time with respect to shares constituting the Escrow
Fund) as reflected on the Company Interest Certificates, without
any further action by the Original Members. Distributions of any
Escrow Securities or the Escrow Fund or Proceeds from the Escrow
Account shall be governed by the terms and conditions of the
Escrow Agreement, but shall occur no later than the end of the
indemnity periods as set forth in
Section 10.01
. The
adoption of this Agreement and the approval of the Merger by the
Members shall constitute approval of the Escrow Agreement and of
all the arrangements relating thereto, including, without
limitation, the placement of the Escrow Securities and Proceeds
in the Escrow Fund and the appointment of the Members
Representative. No Escrow Securities contributed to the Escrow
Fund shall be unvested or subject to any right of repurchase,
risk of forfeiture or other condition in favor of Parent, the
Surviving Corporation or other entity.
(ii) In the event a Parent Indemnified Party (as defined in
Section 10.02
) is entitled to indemnification from a
Member under
Article X
(
Indemnification
Claim
) for any breach by the Company of any
representations and
A-13
warranties made by the Company under
Article III
hereof, Parent shall seek payment first out of the Escrow Fund.
Such Indemnification Amounts shall be payable in Escrow Shares;
provided, that the Members Representative may elect to
have an Indemnification Amount paid from the Proceeds or in
other cash provided by the Members in lieu of Escrow Shares. If
the Escrow Fund has been reduced to zero, Parent shall then be
entitled to seek payment for an unsatisfied Indemnification
Amount directly from the Members, subject to the terms and
conditions set forth in
Article X
.
(c)
Distributions
.
No dividends or
other distributions declared or made after the Effective Time
with respect to Escrow Shares comprising part of the Initial
Merger Consideration with a record date after the Effective Time
shall be paid to the holder of any unsurrendered Company
Interest Certificate with respect to the Escrow Shares
represented thereby until the holder of such Company Interest
Certificate shall surrender such Company Interest Certificate in
accordance with this
Section 2.04
. Dividends or
other distributions declared or made after the Effective Time
with respect to Escrow Shares comprising part of the Merger
Consideration with a record date after the Effective Time shall
be paid to the record owners of the Escrow Shares.
(d)
No Further Rights in Company
Interests
.
Except as otherwise specifically
provided herein, the Parent Shares, the Parent Warrants, the
Redemption Liability Shares and the
Redemption Warrants issued upon the conversion of Company
Interests in accordance with the terms hereof, including the
registration rights applicable thereto, shall be deemed to have
been issued in full satisfaction of all rights pertaining to
such Company Interests.
(e)
No Fractional
Shares
.
Notwithstanding any other provision
of this Agreement, no fractional shares of Parent Common Stock
shall be issued upon the conversion and exchange of Company
Interest Certificates, and no holder of Company Interest
Certificates shall be entitled to receive a fractional share of
Parent Common Stock. In the event that any holder of Company
Interest would otherwise be entitled to receive a fractional
share of Parent Common Stock (after aggregating all shares and
fractional shares of Parent Common Stock issuable to such
holder), then such holder will receive an aggregate number of
shares of Parent Common Stock rounded up or down to the nearest
whole share (with amounts equal to 0.5 and greater being rounded
up).
(f)
No Liability
.
Neither Parent
nor the Surviving Corporation shall be liable to any holder of
shares of Company Interest for any such shares of Parent Common
Stock (or dividends or distributions with respect thereto) or
cash properly and legally delivered to a public official
pursuant to any abandoned property, escheat or similar Law (as
defined in
Section 3.06(a)
);
provided,
however
, that Parent shall promptly give the Members
Representative written notice of any such occurrence and such
holder of Company Interests shall have the opportunity to
dispute the abandonment and reclaim the shares of Parent Common
Stock and all related rights as if such occurrence had not
occurred, provided such dispute is fairly determined for the
benefit of the Member or Members affected.
(g)
Withholding Rights
.
Each of
the Exchange Agent, the Surviving Corporation and Parent shall
be entitled to deduct and withhold from the Merger Consideration
otherwise payable pursuant to this Agreement to any holder of
shares of Company Interest such amounts as it is required to
deduct and withhold with respect to the making of such payment
under the United States Internal Revenue Code of 1986, as
amended (the
Code
), or any provision of
state, local or foreign Tax (as defined in
Section 3.15(c)
) Law, including but not limited to
federal and state withholdings as related to the compensatory
component of the Merger Consideration that relates to the
Companys 2004 Incentive Plan. To the extent that amounts
are so withheld by the Exchange Agent, the Surviving Corporation
or Parent, as the case may be, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid
to the holder of the shares of Company Interest in respect of
which such deduction and withholding were made by the Exchange
Agent, the Surviving Corporation or Parent, as the case may be.
Any amounts so withheld shall be properly and timely transmitted
to the appropriate parties.
(h)
Lost Certificates
.
If any
Company Interest Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the
person claiming such Company Interest Certificate to be lost,
stolen or destroyed and, if required by the Surviving
Corporation, the posting by such person of a bond, in such
reasonable amount as the Surviving Corporation may direct, as
indemnity against any claim that may be made against it with
respect to such Company Interest Certificate, Parent shall issue
in exchange for such lost, stolen or destroyed Company Interest
Certificate, the applicable Parent Shares (and dividends or
other distributions pursuant to
Section 2.04(c)
),
Parent Warrants, Redemption Liability Shares (and dividends
or other distributions pursuant to
A-14
Section 2.04(c)
), and Redemption Warrants to
which such person is entitled pursuant to the provisions of this
Article II.
Section
2.05
Membership Interest Transfer Books
. Commencing
on the date hereof, the membership interest transfer books of
the Company shall be closed and there shall be no further
registration or transfers of shares of Company Interest
thereafter on the records of the Company other than as required
to comply with the terms of this Agreement and the Plans. From
and after the Effective Time, each holder of a Company Interest
Certificate shall cease to have any rights as a member of the
Company, except as otherwise provided in this Agreement or by
Law.
Section
2.06
Contingent
Awards
.
(a) From time to time after the Effective Time, the Members
shall be entitled to a contingent award payable in shares of
Parent Common Stock (
Contingent Award
)
pursuant to the terms of this
Section 2.06
.
(b) On the date on which any holder (an
Index
Warrant Holder
) of a warrant (other than a Parent
Warrant and a Redemption Warrant) to purchase Parent Common
Stock (an
Index Warrant
), elects to exercise
such Index Warrant (each a
Measurement Date
),
Parent shall calculate and record the average Trading Price
(each a
Contingent Award Per Share Market
Value
) of the Parent Common Stock for each of the 3
trading days prior to such Measurement Date (each a
Measurement Period
). As used herein, the term
Trading Price
shall mean the closing trading
price per share of Parent Common Stock for such date (or the
nearest preceding date) on the American Stock Exchange (as
reported on AMEX) or such other stock exchange on which the
Parent Common Stock may then be trading.
(c) On June 30, 2008 (the
Initial
Determination Date
), Parent shall determine the
initial Contingent Award payable to the Members for the period
beginning on the Closing Date and ending on June 30, 2008
(the
Initial Determination Period
).
Subsequent Contingent Awards shall be determined on:
(i) June 30, 2009 (the
Second Determination
Date
) for the period beginning on July 1, 2008
and ending on June 30, 2009 (the
Second
Determination Period
); and
(ii) April 30, 2010 (unless extended to June 30,
2010 by the mutual written consent of the parties hereto) (the
Third Determination Date
, and together with
the Initial Determination Date and the Second Determination
Date, each a
Determination Date
) for the
period beginning on July 1, 2009 and ending on
April 30, 2010 (or June 30, 2010) (the
Third
Determination Period
, and together with the Initial
Determination Period and the Second Determination Period, each a
Determination Period
).
(d) On each Determination Date, Parent shall calculate the
respective Contingent Award as follows (an example of such
calculation is set forth on
Schedule 2.06(d)
attached hereto):
(i) first, for each exercise of an Index Warrant during
such Determination Period, multiply (A) the respective
Contingent Award Per Share Market Value for such exercise by
(B) the number of shares issued pursuant to such Index
Warrant exercise (the
Total Exercised Warrant
Value
);
(ii) second, calculate (A) the aggregate number of
shares issued pursuant to all Index Warrant exercises during
such Determination Period, (B) the aggregate Total
Exercised Warrant Values from all exercises for such
Determination Period and (C) the per share weighted average
amount of the Total Exercised Warrant Values for all Index
Warrant exercises during such Determination Period;
(iii) third, multiply (A) the number of shares
calculated in
Section 2.06(d)(ii)(A)
by (B) the
weighted average of the exercise price of all Index Warrants
exercised during such Determination Period (the
Weighted Average Index Warrant Exercise
Price
);
(iv) fourth, subtract (A) the number determined in
Section 2.06(d)(iii)
from (B) the aggregate
Total Exercised Warrant Values for such Determination Period;
(v) if the amount determined in
Section 2.06(d)(iv)
above is greater than zero,
Parent shall issue to the Members shares of Parent Common Stock
equal to the quotient of (A) the amount determined in
Section 2.06(d)(iv)
above divided by (B) the
amount determined in
Section 2.06(d)(ii)(C)
(
Contingent
A-15
Award Shares
). Any such Contingent Award Shares
shall be allocated on a pro rata basis amongst the holders of
all Parent Warrants (as compared to all other Parent Warrant
holders based upon the number of originally issued Parent
Warrants).
(e) Within fifteen (15) days of each Determination
Date, Parent shall provide written notice to the Members
Representative as to the number of Index Warrants exercised and
the number of Contingent Award Shares, if any, (a
Contingent Award Notice
). Such Contingent
Award Notice shall also contain Parents calculation of
such Contingent Award Shares pursuant to
Section 2.06(d)
.
(f) Within 15 days after delivery of a Contingent
Award Notice, the Members Representative will deliver to
Parent a written response in which the Members
Representative will either:
(i) agree in writing with the contents of the Contingent
Award Notice, in which case such calculations of the Contingent
Award Shares (the
Contingent Award
Calculation
), if any, will be final and binding on the
parties for purposes of
Section 2.06
; or
(ii) dispute Parents determination of the Contingent
Award Calculations, if any, as set forth in a written notice (a
Contingent Award Dispute Notice
) setting
forth in reasonable detail the basis for each such disputed item
and certifying that all such disputed items are being disputed
in good faith.
(g) If the Members Representative fails to take
either of the foregoing actions within 15 days after
delivery of the Contingent Award Notice, then the Company and
Members will be deemed to have irrevocably accepted
Parents determination of such Contingent Award Notice, in
which case such determination of the Contingent Award
Calculation will be final and binding on the parties for
purposes of
Section 2.06(j)
.
(h) If the Members Representative delivers a
Contingent Award Dispute Notice to Parent within 15 days
after delivery of the Contingent Award Notice, then Parent and
the Members Representative will attempt in good faith, for
a period of 15 days, to agree on the calculations for
purposes of
Section 2.06
. Any resolution by Parent
and the Members Representative during such
15-day
period as to any disputed items will be final and binding on the
parties for purposes of
Section 2.06
. If Parent and
the Members Representative do not resolve all disputed
items by the end of 15 days after the date of delivery of
the Contingent Award Dispute Notice, then Parent and the
Members Representative will submit the remaining items in
dispute to the Independent Accounting Firm and the procedures
set forth in
Section 2.03(d)
shall be utilized to
resolve the disputed items. The determinations of the
Independent Accounting Firm with respect to the Contingent Award
Calculation will be final and binding on the parties for
purposes of
Section 2.06
. Parent will
revise all of the affected changes in the Contingent Award
Calculation as appropriate to reflect the resolution of the
issues in dispute pursuant to this
Section 2.06
.
(i) For purposes of complying with this
Section 2.06
, Parent and the Members
Representative will furnish to each other and to the Independent
Accounting Firm such work papers and other documents and
information relating to the disputed issues as the Independent
Accounting Firm may request and as are available to that party
(or its independent public accountants) and each party will be
afforded the opportunity to present to the Independent
Accounting Firm any material related to the disputed items and
to discuss the items with the Independent Accounting Firm.
Parent must require that the Independent Accounting Firm enter
into a customary form of confidentiality agreement with respect
to the work papers and other documents and information regarding
the matters, including financial information contained in the
Contingent Award Notice and Contingent Award Dispute Notice,
provided to the Independent Accounting Firm pursuant to this
Section 2.06
.
(j) Once the Contingent Award Calculation is finalized,
Parent shall notify each Parent Warrant holder of such
Contingent Award Shares issuable to the Members as determined by
the Contingent Award Calculation pursuant to
Section 2.06(d)
herein, and each Parent Warrant
holder shall have the option, within ten (10) days of its
receipt of the finalized Contingent Award Calculation, to accept
its pro rata share of the Contingent Award Shares or accept a
Cash Exercise Warrant in the amount of its pro rata share of the
number of shares issued pursuant to the aggregate Index Warrants
exercised during such Determination Period. If the amount
determined in
Section 2.06(d)(iv)
above is zero or
less than zero, Parent shall not issue any Contingent Award
Shares to the Members, but each Member shall automatically be
deemed to have elected to receive a Cash Exercise Warrant in the
amount of the aggregate Index Warrants exercised during such
Determination Period, if any. Parent shall promptly prepare and
file with AMEX a Notification Form for Listing Additional Shares
with respect to any Contingent Award Shares or shares underlying
A-16
any Cash Exercise Warrants (
Cash Exercise Warrant
Shares
) to be issued pursuant to
Section 2.06
and shall use its commercially
reasonable efforts to obtain, prior to such issuance of any
Contingent Award Shares and Cash Exercise Warrant Shares,
approval for the listing of such Contingent Award Shares,
subject to official notice to AMEX of issuance.
(k) In the event that prior to the expiration of eighteen
(18) months after the Closing Date, the Members are issued
Contingent Award Shares or Cash Exercise Warrant Shares, any of
such Contingent Award Shares issued to the Original Members and
the possession thereof shall be given by the Original Members to
the Escrow Agent as soon as practicable. All of the rights,
duties and obligations with respect to said Contingent Award
Shares and Cash Exercise Shares shall be equivalent to the
rights, duties and obligations with respect to the Parent
Shares, except as otherwise specifically provided herein,
including but not limited to the rights granted to the Members
under the Registration Rights Agreement.
(l)
Return of Parent Warrants and
Redemption Warrants
.
In exchange for a
Contingent Award or Cash Exercise Warrants, each Member shall
surrender a number of Parent Warrants
and/or
Redemption Warrants exercisable for an amount of Parent
Common Stock equal to its pro rata share of the number of shares
issued pursuant to the aggregate Index Warrant exercises during
such Determination Period to Parent, together with such other
documents as may reasonably be required by Parent.
(m)
No Fractional
Shares
.
Notwithstanding any other provision
of this Agreement, no fractional shares of Common Stock shall be
issued pursuant to this
Section 2.06
, and no Member
shall be entitled to receive a fractional share of Common Stock
pursuant to this
Section 2.06
. In the event that any
Member would otherwise be entitled to receive a fractional share
of Common Stock pursuant to this
Section 2.06
, then
such Member will receive an aggregate number of shares of Common
Stock rounded up or down to the nearest whole share (with
amounts greater than 0.5 being rounded up). If the Parent
Warrant or Redemption Warrant shall have been exercised in
part, Parent shall, at the time of delivery of the certificate
or certificates representing Parent Warrants or
Redemption Warrants, deliver to holder a new Parent Warrant
or new Redemption Warrant, as the case may be, evidencing
the rights of holder to acquire shares of Parent Common Stock
called for by the Parent Warrant or the Redemption Warrant,
which new Parent Warrant or Redemption Warrant, as the case
may be, shall in all other respects be identical with the
original Parent Warrant or the original Redemption Warrant.
(n)
Parent Warrant Cash
Exercise
.
Pursuant to the provisions of
Section 2.06(j)
, each holder of a Parent Warrant
shall have the right to accept, in lieu of the Contingent Award
Share, a warrant exercisable for cash (each, a
Cash
Exercise Warrant
) that provides the holder the option
to exercise such warrant for $5.00 per share (or $6.50 per share
to the extent issued upon exercise of the FBW Warrants) for a
number of shares in the amount of its pro rata share of the
number of shares issued pursuant to the aggregate Index Warrant
exercises during such Determination Period. Thereafter, and at
any time prior to the expiration of such Cash Exercise Warrant,
the holder of such Cash Exercise Warrant shall have the right to
exercise such Cash Exercise Warrant for cash as set forth in
such warrant;
provided
,
however
, that in order for
the holder of such Cash Exercise Warrant to make such election,
such Cash Exercise Warrant holder shall be required to
(i) notify Parent that such Cash Exercise Warrant holder is
making such election at or prior to its or his exercise of such
Cash Exercise Warrant and (ii) tender payment of the
exercise price stated in such Cash Exercise Warrant to Parent in
cash or other readily available funds at the time of its or his
exercise of such Cash Exercise Warrant. The Cash Exercise
Warrant shall have the same terms as the Parent Warrant,
including termination provisions, except that it shall be
exercisable only for cash as set forth above.
(o)
Expiration of Parent
Warrants
.
The parties agree that the Parent
Warrants and the Cash Exercise Warrants shall not expire, but
shall survive in full force and effect, until the later of
(i) April 10, 2010, (ii) fifteen (15) days
following the final determination of the Contingent Award
Calculation with respect to the Third Determination Period, or
(iii) such time as all Index Warrants have expired, been
exercised or have been terminated in accordance with their
respective terms.
Section
2.07
Securities Laws Issues
.
Parent shall
issue the Parent Shares and Parent Warrants as provided in
Section 2.01
, the shares of Parent Common Stock as
provided in
Section 2.06
of this Agreement and the
Redemption Liability Shares and Redemption Warrants
pursuant to a private placement exemption or
exemptions from registration under Section 4(2) of the
Securities Act of 1933, as amended (the
Securities
Act
)
and/or
Regulation D promulgated under the Securities Act and an
exemption from qualification under the laws of the State
A-17
of Texas and other applicable state securities laws
notwithstanding that the Parent Shares, Parent Warrants,
Redemption Liability Shares, Redemption Warrants, and
Parent Common Stock issuable pursuant to a Contingent Award
shall be entitled to their respective rights specified in the
Registration Rights Agreement. Parent and the Company shall
comply with all applicable provisions of, and rules under, the
Securities Act and applicable state securities laws in
connection with the offering and issuance of the shares of
Parent Common Stock pursuant to this Agreement. Such Parent
Shares, Parent Warrants, Redemption Liability Shares,
Redemption Warrants and Parent Common Stock issuable
pursuant to a Contingent Award will be restricted
securities under the Federal and state securities laws and
cannot be offered or resold except pursuant to registration
under the Securities Act or an available exemption from
registration.
Section
2.08
Redemption Shares
Issuance
.
(a) As used in this Agreement, the following terms have the
following meanings (except as noted in this Agreement):
(i)
Exchange Value
means $5.40
per share of Parent Common Stock.
(ii)
Gross Redemption Dollar
Amount
means the Redemption Shares Number
multiplied by the Redemption Share Price.
(iii)
Net Redemption Dollar
Amount
means difference between the Gross
Redemption Dollar Amount and the Redemption Value Safe
Harbor.
(iv)
Redemption Calculations
has the meaning set forth in
Section 2.08(c)(i)
.
(v)
Redemption Dispute Notice
has the meaning set forth in
Section 2.08(c)(ii)
.
(vi)
Redemption Liability Amount
means the Shares in Excess of Safe Harbor multiplied by the
Redemption Price Differential.
(vii)
Redemption Liability
Shares
means the number of shares of Parent Common
Stock, to be issued to the Members, if any, determined by
dividing the Redemption Liability Amount by the Exchange
Value.
(viii)
Redemption Option
means the option that each holder of Parent Common Stock has
to require the Parent to redeem or convert his, her or its
ownership of Parent Common Stock prior to the Closing in
accordance with the governing documents of Parent.
(ix)
Redemption Notice
has
the meaning set forth in
Section 2.08(b).
(x)
Redemption Share Price
means the price per share of Parent Common Stock that Parent
is required to pay to any holder of Parent Common Stock
exercising their Redemption Option.
(xi)
Redemption Price
Differential
means the difference between the
Redemption Share Price and the Exchange Value.
(xii)
Redemption Shares Number
means the aggregate number of shares of Parent Common Stock
which are required to be redeemed by Parent from the holders of
such Parent Common Stock prior to the Closing in accordance with
the governing documents of Parent based on those holders who
exercise their Redemption Option.
(xiii)
Redemption Value Safe
Harbor
means $3,000,000.
(xiv)
Redemption Warrant
means the warrants issued by Parent pursuant to this
Section 2.08
.
(xv)
Safe Harbor Shares
means the
Redemption Value Safe Harbor divided by the
Redemption Share Price.
(xvi)
Shares in Excess of Safe Harbor
means the Net Redemption Dollar Amount divided by the
Redemption Share Price.
(b) Parent and Merger Sub covenant and agree that they
shall comply with all of the requirements of their respective
governing documents in connection with timely execution relating
to the holders of Parent Common
A-18
Stock and their collectively held Redemption Option. Once
the expiration date for any holders of Parent Common Stock to
exercise the Redemption Option has occurred, Parent shall
promptly provide written notice to the Members
Representative as to the amount of the Redemption Shares
Number, if any, and the Redemption Share Price paid
therefore (the
Redemption Notice
). Such
Redemption Notice shall also contain Parents
calculation of the amount of the Redemption Liability
Amount and the aggregate amount of Redemption Liability
Shares and Redemption Warrants as follows:
(i) First, determine the Gross Redemption Dollar
Amount by multiplying the Redemption Shares Number by the
Redemption Share Price;
(ii) Second, determine the Net Redemption Dollar
Amount by subtracting the Redemption Value Safe Harbor from
the Gross Redemption Dollar Amount, and if the resulting
amount is negative, stop; if the resulting amount is positive,
continue;
(iii) Third, determine the Safe Harbor Shares by dividing
the Redemption Value Safe Harbor by the
Redemption Share Price;
(iv) Fourth, determine the Shares in Excess of Safe Harbor
by dividing the Net Redemption Dollar Amount by the
Redemption Share Price;
(v) Fifth, determine the Redemption Price Differential
by subtracting the Exchange Value from the Redemption Share
Price;
(vi) Sixth, determine the Redemption Liability Amount
by multiplying the Redemption Price Differential by Shares
in Excess of Safe Harbor; and
(vii) Lastly, determine the number of
Redemption Liability Shares by dividing the
Redemption Liability Amount by the Exchange Value.
(c) Within 15 days after delivery of the
Redemption Notice, the Members Representative will
deliver to Parent a written response in which the Members
Representative will either:
(i) agree in writing with the contents of the
Redemption Notice, in which case such calculations of the
Redemption Shares Number, Redemption Share Price,
Redemption Liability Amount and the aggregate amount of
Redemption Liability Shares and Redemption Warrants
(collectively, the
Redemption Calculations
), if any, will
be final and binding on the parties for purposes of
Section 2.08
; or
(ii) dispute Parents determination of the
Redemption Calculations, if any, as set forth in a written
notice (a
Redemption Dispute Notice
)
setting forth in reasonable detail the basis for each such
disputed item and certifying that all such disputed items are
being disputed in good faith.
(d) If the Members Representative fails to take
either of the foregoing actions within 15 days after
delivery of the Redemption Notice, then the Company and
Members will be deemed to have irrevocably accepted
Parents determination of the Redemption Notice, in
which case such determination of the Redemption Calculation
will be final and binding on the parties for purposes of
Section 2.08(g)
.
(e) If the Members Representative delivers a
Redemption Dispute Notice to Parent within 15 days
after delivery of the Redemption Notice, then Parent and
the Members Representative will attempt in good faith, for
a period of 15 days, to agree on the calculations for
purposes of
Section 2.08.
Any resolution by Parent
and the Members Representative during such
15-day
period as to any disputed items will be final and binding on the
parties for purposes of
Section 2.08
. If Parent and
the Members Representative do not resolve all disputed
items by the end of 15 days after the date of delivery of
the Redemption Dispute Notice, then Parent and the
Members Representative will submit the remaining items in
dispute to the Independent Accounting Firm and the procedures
set forth in
Section 2.03(d)
shall be utilized to
resolve the disputed items. The determinations of the
Independent Accounting Firm with respect to the
Redemption Calculations will be final and binding on the
parties for purposes of
Section 2.08
. Parent will
revise all of the affected changes in the
Redemption Calculations as appropriate to reflect the
resolution of the issues in dispute pursuant to this
Section 2.08
.
A-19
(f) For purposes of complying with this
Section 2.08
, Parent and the Members
Representative will furnish to each other and to the Independent
Accounting Firm such work papers and other documents and
information relating to the disputed issues as the Independent
Firm may request and as are available to that party (or its
independent public accountants) and each party will be afforded
the opportunity to present to the Independent Accounting Firm
any material related to the disputed items and to discuss the
items with the Independent Accounting Firm. Parent must require
that the Independent Accounting Firm enter into a customary form
of confidentiality agreement with respect to the work papers and
other documents and information regarding the matters, including
financial information contained in the Redemption Notice
and Redemption Dispute Notice, provided to the Independent
Accounting Firm pursuant to this
Section 2.08
.
(g) Once the Redemption Calculations are finalized,
Parent shall issue the Redemption Liability Shares and
Redemption Warrants to the Members pro rata based in
proportion to each Members share (carried to five decimal
point places) of the Company Interests. Notwithstanding anything
to the contrary contained herein, if the amount of
Redemption Liability Shares is zero (0) or negative,
then the Members shall not be entitled to receive any additional
shares of Parent Common Stock under this
Section 2.08
. If there are any
Redemption Liability Shares to be issued to the Members, on
or about the Closing pursuant to this
Section 2.08
,
such Redemption Liability Shares shall be issued to each of
the Members together with two Redemption Warrants,
substantially in the identical form of the Parent Warrants, for
each Redemption Liability Share issued pursuant to this
Section 2.08(g)
.
(h) Distributions, dividends or other distributions
declared or made after the Effective Time with respect to
Redemption Liability Shares with a record date after the
Effective Time shall be paid to the record owners of
Redemption Liability Shares.
(i) Notwithstanding any other provision of this Agreement,
no fractional shares or Redemption Liability Shares shall
be issued. In the event that any Member would otherwise be
entitled to receive a fractional share of a
Redemption Liability Share (after aggregating all shares
and fractional shares of Parent Common Stock issuable to such
holder under this
Section 2.08
and otherwise under
this Agreement), then such holder will receive an aggregate
number of shares of Parent Common Stock rounded up or down to
the nearest whole share (with amounts equal to 0.5 and greater
being rounded up).
(j) If prior to December 31, 2008, the Original
Members are issued Redemption Liability Shares and
Redemption Warrants, all of such Redemption Liability
Shares and Redemption Warrants and the possession thereof
shall be given to the Escrow Agent as soon as practicable. All
of the rights, duties and obligations with respect to said
Redemption Liability Shares and Redemption Warrants
shall be equivalent to the rights, duties and obligations with
respect to the Parent Shares and Parent Warrants, except as
otherwise specifically provided herein, including but not
limited to the rights granted to the Members under the
Registration Rights Agreement and the rights specified in
Section 2.06
pertaining to Contingent Awards.
(k) Any issuance of Redemption Liability Shares and
Redemption Warrants pursuant to this Section 2.08 will
be treated by the parties as an adjustment to the Initial Merger
Consideration and the Initial Merger Consideration as so
adjusted is referred to in this Agreement as the
Merger
Consideration
.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger
Sub that the statements contained in this Article III are
true and correct except as set forth in the disclosure schedules
delivered by the Company to Parent and Merger Sub (the
Company Disclosure Schedule
). The Company
Disclosure Schedule shall initially be as of June 30, 2007
with respect to the representations and warranties set forth in
Section 3.07
through
Section 3.33
, and
as of the Execution Date with respect to the representations and
warranties contained in
Section 3.01
through
Section 3.06
, except where any schedule specifically
purports to be as of a different date in which case such
schedule shall be as of the date on the schedule. The Company
Disclosure Schedules may be updated pursuant to
Section 7.19 hereof, and shall be updated as of the Closing
Date. The Company Disclosure Schedule shall be arranged and
cross-referenced to specific sections in this Article III
and shall provide exceptions to, or otherwise qualify in
reasonable detail, only the specific corresponding section in
this Article III.
A-20
Section 3.01
Organization
and Qualification
.
The Company is a limited
liability company duly organized, validly existing and in good
standing under the laws of the State of Texas and has all
requisite limited liability company power and authority to own,
lease and otherwise hold and operate its properties and other
assets and to carry on its business as it is now being conducted
and as currently proposed to be conducted, except where the
failure to be so organized, existing or in good standing or to
have such limited liability company power and authority has not
had, and could not reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect (as
defined below). The Company is duly qualified or licensed as a
foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes
such qualification or licensing necessary, except where the
failure to be so qualified or licensed and in good standing has
not had, and could not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse
Effect.
Section 3.01
of the Company Disclosure
Schedule sets forth each jurisdiction where the Company is
qualified or licensed as a foreign corporation and each other
jurisdiction in which the Company owns, uses, licenses or leases
real property or has employees or engages independent
contractors. The term
Company Material Adverse
Effect
means any event, change, violation, inaccuracy,
circumstance or effect (regardless of whether or not such
events, changes, violations, inaccuracies, circumstances or
effects are inconsistent with the representations or warranties
made by the Company in this Agreement) that has, or could
reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the business,
operations, condition (financial or otherwise), assets (tangible
or intangible), liabilities, employees, properties, prospects,
capitalization or results of operations of the Company, except
for any such events, changes, violations, inaccuracies,
circumstances or effects resulting from or arising in connection
with (i) any changes in general, political, global or other
national or worldwide events or changes in economic or business
conditions that do not disproportionately impact the Company as
compared to other entities similar in size and scope as that of
the Company and that are within its industry or (ii) any
changes or events affecting the industry in which the Company
operates that do not disproportionately impact the Company as
compared to other entities similar in size and scope as that of
the Company and that are within its industry.
Section 3.02
Articles
of Organization and Regulations
.
The Company
has heretofore made available to Parent a complete and correct
copy of (a) the Articles of Organization and Regulations of
the Company (together, the
Company Charter
Documents
) including all amendments thereto,
(b) the minute books containing all consents, actions and
meetings of the Members of the Company and the Companys
Board of Managers and any committees thereof, to the extent they
exist, and (c) the Member Interest transfer books of the
Company setting forth all issuances or transfers of any
interests of the Company. Such Company Charter Documents are in
full force and effect. No such revisions or amendments to the
Company Charter Documents will conflict with this Agreement. The
Company is not in violation of any of the provisions of the
Company Charter Documents. The minute books, membership
interests transfer books, stock registers and other records of
the Company are complete and accurate, and the signatures
appearing on all documents contained therein are the true or
facsimile signatures of the persons purported to have signed the
same.
Section
3.03
No
Subsidiaries
.
(a) The Company does not own, of record or beneficially, or
control any direct or indirect equity or other interest, or any
right (contingent or otherwise) to acquire the same, in any
corporation, partnership, limited liability company, joint
venture, association or other entity. The Company is not a
member of (nor is any part of the Companys business
conducted through) any partnership, nor is the Company a
participant in any joint venture or similar arrangement. There
are no contractual obligations of the Company to provide funds
to, or make any investment in (whether in the form of a loan,
capital contribution or otherwise), any other person.
(b) The Company does not control, directly or indirectly,
or have any direct or indirect equity participation or similar
interest in any corporation, partnership, limited liability
company, joint venture, trust or other business association
which is not a Subsidiary. Except as provided in the Regulations
of the Company, there are no contractual obligations of the
Company to provide funds to, or make any investment in (whether
in the form of a loan, capital contribution or otherwise), any
other person.
A-21
Section
3.04
Capitalization
.
Without
regard to any disclosure in the Company Disclosure Schedule
(except as specifically mentioned below):
(a) The Company Interests set forth in
Section 3.04(a)
of the Company Disclosure Schedule
will represent all of the outstanding member or other equity
ownership interests of the Company on the Closing Date. The
Members hold 100% of the Company Interests. The Company has no
securities or other instruments convertible into or exercisable
for membership or other equity ownership interests of the
Company that have not already been converted as of the Closing
Date. All of the Company Interests have been duly authorized and
validly issued and are fully paid and non-assessable.
(b) As of the Closing Date, there are no options, warrants
or other rights, agreements, arrangements or commitments of any
character, whether or not contingent, relating to the issued or
unissued capital stock of the Company or obligating the Company
to issue or sell any share of capital stock of, or other equity
interest in, the Company. All shares of Company Interest so
subject to issuance, upon issuance in accordance with the terms
and conditions specified in the instruments pursuant to which
they are issuable, will be duly authorized, validly issued,
fully paid and nonassessable.
(c) The Company does not have outstanding any bonds,
debentures, notes or other obligations the holders of which have
the right to vote (or which are convertible into or exercisable
for securities having the right to vote) with the Members of the
Company on any matter (other than the consent rights of the
Companys lender as disclosed in
Section 3.06(a)
of the Company Disclosure Schedule).
(d) All of the securities offered, sold or issued by the
Company (i) have been offered, sold or issued in compliance
with the requirements of the Federal securities laws and any
applicable state securities or blue sky laws, and
(ii) are not subject to any preemptive right, right of
first refusal, right of first offer or right of rescission.
(e) Except as set forth in
Section 3.04(e)
of
the Company Disclosure Schedule, the Company has never
repurchased, redeemed or otherwise reacquired any shares of
capital stock or other securities of the Company, other than
unvested securities in the ordinary course upon termination of
employment or consultancy. There are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise
acquire any share of capital stock of, or other equity interest
in, the Company. Other than as set forth in
Section 3.04(e)
of the Company Disclosure Schedule,
there are no member agreements, voting trusts or other
agreements or understandings to which the Company is a party, or
of which the Company is aware, that (i) relate to the
voting, registration or disposition of any securities of the
Company, (ii) grant to any person or group of persons the
right to elect, or designate or nominate for election, a manager
to the Board of Managers of the Company, or (iii) grant to
any person or group of persons information rights.
(f) Each of the 2004 Incentive Plans and the Special Bonus
Plan were terminated in connection with the Recapitalization and
no further awards or other obligations of the Company remain
outstanding with respect to either thereunder.
Section
3.05
Authority
Relative to This Agreement.
(a) The Company has the legal power, capacity and authority
to execute this Agreement and all other agreements and documents
contemplated hereby to which it is a party. The execution and
delivery of this Agreement and such other agreements and
documents by the Company, to the extent a party thereto, and the
consummation by the Company of the transactions contemplated
hereby have been validly authorized by the Company and the
Members and no other action on the part of the Company or the
Members is necessary to validly authorize the transactions
contemplated hereby (other than the approval and adoption of
this Agreement and the Merger by the Members as described in
Section 3.16
hereof and the filing and recordation
of appropriate merger documents as required by the DGCL and
TLLCA). This Agreement has been duly and validly executed and
delivered by the Company and, assuming the due authorization,
execution and delivery by Parent and Merger Sub, constitutes a
legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, subject to the
effect of any applicable bankruptcy, reorganization, insolvency,
moratorium or similar Laws affecting creditors rights
generally and subject, as to enforceability, to the effect of
general principles of equity.
A-22
(b) Without limiting the generality of the foregoing, the
Board of Managers of the Company, at a meeting duly called and
held, has unanimously (i) determined that the Merger and
the other transactions contemplated hereby are fair to, and in
the best interests of, the Company and Members,
(ii) approved and adopted the Merger, this Agreement and
the other transactions contemplated hereby in accordance with
the provisions of the DGCL and TLCCA and the Companys
charter documents, and (iii) directed that this Agreement
and the Merger be submitted to the Members for their approval
and adoption and (iv) resolved to recommend that the
Members vote in favor of the approval and adoption of this
Agreement.
Section
3.06
No
Conflict; Required Filings and Consents.
(a) Except as set forth in
Section 3.06(a)
of
the Company Disclosure Schedule, the execution and delivery of
this Agreement by the Company do not, and the performance of
this Agreement by the Company will not, (i) conflict with
or violate the Company Charter Documents, (ii) assuming
that all consents, approvals, authorizations and other actions
described in
Section 3.06(b)
have been obtained and
all filings and obligations described in
Section 3.06(b)
have been made or complied with,
conflict with or violate any material foreign or domestic
(Federal, state or local) law, statute, ordinance, franchise,
permit, concession, license, writ, rule, regulation, order,
injunction, judgment or decree (
Law
)
applicable to the Company or by which any property or asset of
the Company is bound or affected, or (iii) conflict with,
result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a
default) under, require consent, approval or notice under, give
to others any right of termination, amendment, acceleration or
cancellation of, require any payment under, or result in the
creation of a lien or other encumbrance on any property or asset
of the Company pursuant to, any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company
is a party or by which any property or asset of the Company is
bound or affected.
(b) Except as set forth in
Section 3.06(b)
of
the Company Disclosure Schedule, the execution and delivery of
this Agreement by the Company do not, and the performance of
this Agreement by the Company will not, require any consent,
approval, order, permit or authorization from, or registration,
notification or filing with, any domestic or foreign
governmental, regulatory or administrative authority, agency or
commission, any court, tribunal or arbitral body, or any
quasi-governmental or private body exercising any regulatory,
taxing, importing or other governmental authority (a
Governmental Entity
), except (i) for the
pre-merger notification requirements of the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules
and regulations promulgated thereunder (the
HSR
Act
), if applicable, and (ii) for the filing and
recordation of appropriate merger documents as required by the
DGCL or the TLLCA, and (iii) for such other consents,
approvals, orders, permits, authorizations, registrations,
notifications or filings, which if not obtained or made could
not reasonably be expected, individually or in the aggregate, to
prevent or materially delay the consummation of the transactions
contemplated by this Agreement.
Section
3.07
Permits;
Compliance.
(a) The Company is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances,
exceptions, consents, certificates, approvals and orders of any
Governmental Entity necessary for the Company to own, lease and
otherwise hold and operate its properties and other assets and
to carry on its business as it is now being conducted and as
currently proposed to be conducted (the
Company
Permits
). All Company Permits are in full force and
effect and will remain so after the Closing and no suspension or
cancellation of any Company Permit is pending or, to the
Knowledge of the Company, threatened. The Company has not
received any notice or other communication from any Governmental
Entity regarding (i) any actual or possible violation of or
failure to comply with any term or requirement of any Company
Permit, or (ii) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or
modification of any Company Permit.
(b) The Company is not in conflict with, or in default or
violation of (i), to the Knowledge of the Company, any Law
applicable to the Company or by which any property or asset of
the Company is bound or affected, (ii) any material note,
bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the
Company is a party or by which the Company or any property or
asset of the Company is bound or affected, or (iii), to the
Knowledge of the Company, any Company Permit.
A-23
Section
3.08
Financial
Statements.
(a) True and complete copies of (i) the audited
balance sheets, the statements of operations, changes in
members equity and changes in cash flows for the years
ended December 31, 2005 and 2006, together with all related
notes and schedules thereto (collectively referred to herein as
the
Audited Financial Statements
), and
(ii) the unaudited balance sheet of the Company as of
June 30, 2007 (the
Reference Balance
Sheet
), and the related statements of operations,
changes in members equity and changes in cash flows for
the six month period ended June 30, 2007 (and together with
the Reference Balance Sheet, the
Interim Financial
Statements
), are attached as
Section 3.08(a)
of the Company Disclosure Schedule.
The Audited Financial Statements and the Interim Financial
Statements (including, in each case, any notes
thereto)(collectively, the
Company Financial
Statements
) were prepared in accordance with GAAP
applied on a consistent basis throughout the periods indicated
(except as may be indicated in the notes thereto or, in the case
of unaudited statements, as permitted by GAAP) and each present
fairly, in all material respects, the financial position of the
Company as at the respective dates thereof and for the
respective periods indicated therein, except as otherwise noted
therein (subject, in the case of the Interim Financial
Statements, to normal and recurring year-end adjustments which
were not and are not expected, individually or in the aggregate,
to be material).
(b) To the Knowledge of the Company, except as set forth in
Section 3.08(b)
of the Company Disclosure Schedule,
the Company does not have any debts, liabilities or obligations
of any nature (whether accrued or fixed, absolute or contingent,
matured or unmatured, determined or determinable, or as a
guarantor or otherwise) (
Liabilities
), other
than Liabilities (i) recorded or reserved against on the
Reference Balance Sheet or (ii) incurred in the ordinary
course of business, consistent with past practice, since
June 30, 2007 plus up to an aggregate amount of $100,000
incurred since June 30, 2007 not in the ordinary course of
the business, consistent with past practice. Except as set forth
in
Section 3.08(b)
of the Company Disclosure
Schedule, reserves are reflected on the Reference Balance Sheet
and on the books of account and other financial records of the
Company against all Liabilities of the Company in amounts that
have been established on a basis consistent with the past
practice of the Company and in accordance with GAAP. To the
Knowledge of the Company and except as set forth in
Section 3.08(b)
of the Company Disclosure Schedule,
there are no outstanding warranty claims against the Company. To
the extent any specific representation or warranty in this
Agreement is otherwise qualified as to the partys
knowledge or as to materiality; the definition of
Liabilities used in this
Section 3.08(b)
does not undermine or modify any other representation contained
herein, and the Company shall not be deemed in violation of this
Section 3.08(b)
for any Liabilities governed by
other specific representations and warranties in this Agreement.
Section
3.09
Absence
of Certain Changes or Events.
Since
January 1, 2007, except as contemplated by or as disclosed
in this Agreement and except for the Settlement Agreement, the
Ulterra Acquisition and the Recapitalization, the Company has
conducted its business only in the ordinary course and in a
manner consistent with past practice and, since such date,
(a) there has not been any Company Material Adverse Effect
and (b) the Company has not taken or legally committed to
take any of the actions specified in
Section 6.01(a)
through (z).
Section
3.10
Absence
of Litigation.
Except for the Dispute and the
matters addressed in the Settlement Agreement, and as otherwise
set forth in
Section 3.10
of the Company Disclosure
Schedule, there is no litigation, suit, claim, action,
proceeding or investigation (a
Legal
Proceeding
) pending or, to the Knowledge of the
Company, threatened against the Company, or any property or
asset owned or used by the Company or any person whose liability
the Company has or may have assumed, either contractually or by
operation of Law, before any arbitrator or Governmental Entity
that could reasonably be expected, if resolved adversely to the
Company, to (i) impair the operations of the Company as
currently conducted, including, without limitation, any claim of
infringement of any intellectual property right,
(ii) collectively result in losses to the Company in excess
of $250,000, (iii) impair the ability of the Company to
perform its obligations under this Agreement or
(iv) prevent, delay or make illegal the consummation of the
transactions contemplated by this Agreement. To the
Companys Knowledge, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that could
reasonably be expected to give rise to or serve as a basis of
the commencement of any Legal Proceeding involving the Company
(as set forth above). Neither the Company nor the officers or
managers thereof in their capacity as such, or any property or
asset of the Company is subject to any continuing order of,
consent decree, settlement agreement or other similar written
agreement with, or, to the Knowledge of the Company, continuing
investigation by, any Governmental Entity, or any order, writ,
judgment, injunction, decree, determination or award of any
court,
A-24
arbitrator or Governmental Entity. Except as disclosed in
Section 3.10
of the Company Disclosure Schedule, the
Company has no plans to initiate any Legal Proceeding against
any third party.
Section
3.11
Employee
Benefit Plans; Labor Matters.
(a)
Section 3.11(a)
of the Company Disclosure
Schedule lists (i) all employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended (
ERISA
)) and all
bonus, stock option, stock purchase, stock appreciation right,
restricted stock, phantom stock, incentive, deferred
compensation, retiree medical, disability or life insurance,
cafeteria benefit, dependent care, disability, director or
employee loan, fringe benefit, sabbatical, supplemental
retirement, severance or other benefit plans, programs or
arrangements, and all employment, termination, severance or
other contracts or agreements (whether legally enforceable or
not, whether formal or informal and whether in writing or not)
to which the Company is a party, with respect to which the
Company has any obligation or which are maintained, contributed
to or sponsored by the Company for the benefit of any current or
former employee, officer or manager of the Company,
(ii) each employee benefit plan for which the Company could
incur liability under Section 4069 of ERISA in the event
such plan has been or were to be terminated, (iii) any plan
in respect of which the Company could incur liability under
Section 4212(c) of ERISA, and (iv) any employment
agreements, offer letters or other contracts, arrangements or
understandings between the Company and any key employee of the
Company (whether legally enforceable or not, whether formal or
informal and whether in writing or not) including, without
limitation, any contracts, arrangements or understandings
relating to a sale of the Company (each, a
Plan
, and collectively, the
Plans
).
(b) Each Plan is in writing and the Company has furnished
Parent with a true and complete copy of each Plan (or a written
summary where the Plan is not in writing) and a true and
complete copy of each material document, if any, prepared in
connection with each such Plan, including, without limitation,
(i) a copy of each trust or other funding arrangement,
(ii) each summary plan description and summary of material
modifications, (iii) the two (2) most recent annual
reports (Form 5500 series and all schedules and financial
statements attached thereto), if any, required under ERISA or
the Code in connection with each Plan, (iv) the most
recently received Internal Revenue Service determination letter
for each Plan intended to qualify under ERISA or the Code,
(v) the most recently prepared actuarial report and
financial statement in connection with each such Plan,
(vi) any correspondence with the Internal Revenue Service
or the Department of Labor with respect to each such Plan and
(vii) each form of notice of grant and stock option
agreement used to document Company Options. Except as disclosed
on
Section 3.11(a)
of the Company Disclosure
Schedule, there are no other employee benefit plans, programs,
arrangements or agreements, whether formal or informal, whether
in writing or not, to which the Company is a party, with respect
to which the Company has any obligation or which are maintained,
contributed to or sponsored by the Company for the benefit of
any current or former employee, officer or manager of the
Company. The Company has no express or implied commitment,
whether legally enforceable or not, (x) to create, incur
liability with respect to, or cause to exist, any other employee
benefit plan, program or arrangement, (y) to enter into any
contract or agreement to provide compensation or benefits to any
individual, or (z) to modify, change or terminate any Plan,
other than with respect to a modification, change or termination
required by ERISA or the Code.
(c) None of the Plans is a multi-employer plan (within the
meaning of Section 3(37) or 4001(a)(3) of ERISA) (a
Multi-employer Plan
) or a single employer
pension plan (within the meaning of Section 4001(a)(15) of
ERISA) for which the Company could incur liability under
Section 4063 or 4064 of ERISA (a
Multiple Employer
Plan
). Each Plan is subject only to the Laws of the
United States or a political subdivision thereof.
(d) Except as set forth in
Section 3.11(d)
of
the Company Disclosure Schedule, none of the Plans provides for
the payment of separation, severance, termination or similar
benefits to any person or obligates the Company to pay
separation, severance, termination or similar-type benefits
solely or partially as a result of any transaction contemplated
by this Agreement or as a result of a change in ownership
or control, within the meaning of such term under
Section 280G of the Code. Neither the execution and
delivery of this Agreement nor the consummation of the
transactions contemplated hereby, either alone or together with
another event, will (i) result in any payment (including,
without limitation, severance, unemployment compensation, golden
parachute, forgiveness of indebtedness or otherwise) becoming
due under any Plan, whether or not such payment is contingent,
(ii) increase any benefits otherwise payable under any Plan
or other arrangement, (iii) result in the acceleration of
the time of payment, vesting or funding of any benefits
including, but not limited to, the acceleration of the vesting
A-25
and exercisability of any Company Option, whether or not
contingent, or (iv) affect in any material respects any
Plans current treatment under any Laws including any Tax
or social contribution Law. No Plan provides, or reflects or
represents any liability to provide, retiree health, disability,
or life insurance benefits to any person for any reason, except
as may be required by the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended
(
COBRA
), or other applicable statute, and the
Company has never represented, promised or contracted (whether
in oral or written form) to any employee (either individually or
to employees as a group) or any other person that such employee
or other person would be provided with retiree health,
disability, or life insurance benefits, except to the extent
required by statute.
(e) Each Plan is now and always has been operated in all
material respects in accordance with its terms and the
requirements of all applicable Laws, regulations and rules
promulgated thereunder including, without limitation, ERISA and
the Code. The Company has performed all obligations required to
be performed by it under, is not in any respect in default under
or in violation of, and to the Knowledge of the Company, there
is not any default or violation by any party to, any Plan. No
action, claim or proceeding is pending or, to the Knowledge of
the Company, threatened with respect to any Plan (other than
claims for benefits in the ordinary course) and no fact or event
exists that could give rise to any such action, claim or
proceeding. Neither the Company nor any person that is a member
of the same controlled group as the Company or under common
control with the Company within the meaning of Section 414
of the Code (each, an
ERISA Affiliate
) is
subject to any penalty or Tax with respect to any Plan under
Section 502(i) of ERISA or Sections 4975 through 4980
of the Code. Each Plan can be amended, terminated or otherwise
discontinued at any time without material liability to Parent,
the Company or any of their ERISA Affiliates (other than
ordinary administration expenses). Neither the Company nor any
Affiliate has, prior to the Effective Time and in any material
respect, violated any of the health care continuation
requirements of COBRA, the requirements of the Family Medical
Leave Act of 1993, the requirements of the Health Insurance
Portability and Accountability Act of 1996, the requirements of
the Womens Health and Cancer Rights Act of 1998, the
requirements of the Newborns and Mothers Health
Protection Act of 1996, or any amendment to each such act, or
any similar provisions of state Law applicable to its employees.
(f) Each Plan intended to qualify under Section 401(a)
or Section 401(k) of the Code and each trust intended to
qualify under Section 501(a) of the Code (i) has
received a favorable determination, opinion, notification or
advisory letter from the Internal Revenue Service with respect
to each such Plan as to its qualified status under the Code,
including all amendments to the Code effected by the Tax Reform
Act of 1986 and subsequent legislation, and no fact or event has
occurred since the date of such determination letter or letters
from the Internal Revenue Service to adversely affect the
qualified status of any such Plan or the exempt status of any
such trust, or (ii) has remaining a period of time under
applicable Treasury regulations or Internal Revenue Service
pronouncements in which to apply for such a letter and make any
amendments necessary to obtain a favorable determination as to
the qualified status of each such Plan.
(g) Neither the Company nor any ERISA Affiliate has
incurred any liability under, arising out of or by operation of
Title IV of ERISA (other than liability for premiums to the
Pension Benefit Guaranty Corporation arising in the ordinary
course), including, without limitation, any liability in
connection with (i) the termination or reorganization of
any employee benefit plan subject to Title IV of ERISA or
(ii) the withdrawal from any Multi-employer Plan or
Multiple Employer Plan, and no fact or event exists which could
give rise to any such liability.
(h) The Company has not, since its inception, terminated,
suspended, discontinued contributions to or withdrawn from any
employee pension benefit plan, as defined in Section 3(2)
of ERISA, including, without limitation, any Multi-employer
Plan. All contributions, premiums or payments required to be
made or accrued with respect to any Plan have been made on or
before their due dates. All such contributions have been fully
deducted for income tax purposes and no such deduction has been
challenged or disallowed by any Governmental Entity and no fact
or event exists which could give rise to any disallowance.
(i) Except as set forth in
Section 3.11(i)
of
the Company Disclosure Schedule, (i) the Company is not a
party to any collective bargaining agreement or other labor
union contract applicable to persons employed by the Company or
in the Companys business, and currently, to the Knowledge
of the Company, there are no organizational campaigns, petitions
or other unionization activities seeking recognition of a
collective bargaining unit that could affect the Company;
(ii) there are no controversies, strikes, slowdowns or work
stoppages pending or, to the
A-26
Knowledge of the Company, threatened between the Company and any
of its employees, and the Company has not experienced any such
controversy, strike, slowdown or work stoppage within the past
three years; (iii) the Company has not breached or
otherwise failed to comply with the provisions of any collective
bargaining or union contract and there are no grievances
outstanding against the Company under any such agreement or
contract; (iv) the Company has not engaged in any unfair
labor practice, and there are no unfair labor practice
complaints pending against the Company before the National Labor
Relations Board or any other Governmental Entity or any current
union representation questions involving employees of the
Company; (v) the Company is currently in compliance with
all applicable Laws relating to the employment of labor,
including those related to wages, hours, worker classification
(including the proper classification of independent contractors
and consultants), collective bargaining, workers
compensation and the payment and withholding of Taxes and other
sums as required by the appropriate Governmental Entity and has
withheld and paid to the appropriate Governmental Entity or is
holding for payment not yet due to such Governmental Entity all
amounts required to be withheld from employees of the Company
and is not liable for any arrears of wages, Taxes, penalties or
other sums for failure to comply with any of the foregoing;
(vi) the Company has paid in full to all employees or
adequately accrued for in accordance with GAAP consistently
applied all wages, salaries, commissions, bonuses, benefits and
other compensation due to or on behalf of such employees,
including, if required, accruals related to compensation
pursuant to the incentive plans on the Closing Balance Sheet,
including with respect to the Transaction-Related Members
Equity Charge; (vii) there is no claim with respect to
payment of wages, salary, overtime pay, workers compensation
benefits or disability benefits that has been asserted or
threatened against the Company or that is now pending before any
Governmental Entity with respect to any person currently or
formerly employed by the Company; (viii) the Company is not
a party to, or otherwise bound by, any consent decree with, or
citation by, any Governmental Entity relating to employees or
employment practices; (ix) the Company is in compliance
with all Laws and regulations relating to occupational safety
and health Laws and regulations, and there is no charge or
proceeding with respect to a violation of any occupational
safety or health standards that has been asserted or is now
pending or threatened with respect to the Company; (x) the
Company is in compliance with all Laws and regulations relating
to discrimination in employment, and there is no charge of
discrimination in employment or employment practices for any
reason, including, without limitation, age, gender, race,
religion or other legally protected category, which has been
asserted or, to the Knowledge of the Company, threatened against
the Company or that is now pending before the United States
Equal Employment Opportunity Commission or any other
Governmental Entity; and (xi) each employee of the Company
who is located in the United States and is not a United States
citizen has all approvals, authorizations and papers necessary
to work in the United States in accordance with applicable Law.
(j)
Section 3.11(j)
of the Company Disclosure
Schedule contains a true and complete list of all individuals
who serve as employees of or consultants to the Company as of
the date set forth on such schedule whose annual compensation
from the Company and positions with the Company have been
previously detailed to Parent, and whose annual compensation has
not been modified in any material manner other than as permitted
hereby, and for which a Company representation of such fact will
be provided at Closing.
(k) To the Companys Knowledge, no employee of or
consultant to the Company has been injured in the workplace or
in the course of his or her employment or consultancy, except
for injuries which are covered by insurance or for which a claim
has been made under workers compensation or similar Laws.
Section
3.12
Contracts.
(a)
Section 3.12(a)
of the Company Disclosure
Schedule lists (under the appropriate subsection) each of the
following written contracts and agreements of the Company (such
contracts and agreements being the
Material
Contracts
):
(i) each contract and agreement for the purchase or lease
of personal property with any supplier or for the furnishing of
services to the Company with payments greater than $100,000 per
year;
(ii) all broker, exclusive dealing or exclusivity,
distributor, dealer, manufacturers representative,
franchise, agency, sales promotion, market research, marketing,
consulting and advertising contracts and agreements to which the
Company is a party or any other contract that compensates any
person based on any sales by the Company;
A-27
(iii) all leases and subleases of real property;
(iv) all contracts and agreements relating to Indebtedness
other than trade indebtedness of the Company, including any
contracts and agreements in which the Company is a guarantor of
Indebtedness;
(v) all contracts and agreements with any Governmental
Entity to which the Company is a party;
(vi) all contracts and agreements that limit or purport to
limit the ability of the Company to compete in any line of
business or with any person or in any geographic area or during
any period of time;
(vii) all contracts containing confidentiality requirements
(including all nondisclosure agreements);
(viii) all contracts and agreements between or among the
Company and any Member of the Company or any Affiliate of such
person, other than contracts or agreements that will have no
force and effect after the Closing Date;
(ix) all contracts and agreements (x) relating to the
voting and any rights or obligations of a Member of the Company,
other than contracts or agreements that will have no force and
effect after the Closing Date, (y) that restrict the
voting, acquisition, issuance or transfer of Parent Common Stock
following the Effective Time;
(x) all contracts to manufacture for, supply to or
distribute to any third party any products or components;
(xi) all contracts regarding the acquisition, issuance or
transfer of any securities and each contract affecting or
dealing with any securities of the Company, including, without
limitation, any restricted stock agreements or escrow agreement
or any securities issuances pursuant to any existing incentive
plans;
(xii) all contracts providing for indemnification of any
officer, manager, employee or agent of the Company;
(xiii) all contracts related to or regarding the
performance of consulting, advisory or other services or work of
any type by any third party, other than contracts or agreements
that will have no force and effect after the Closing Date;
(xiv) all other contracts that have a term of more than
180 days and that may not be terminated by the Company,
without any material penalty, within 30 days after the
delivery of a termination notice by the Company;
(xv) any agreement of the Company that is terminable upon
or prohibits assignment or a change of ownership or control of
the Company;
(xvi) all other contracts and agreements, excluding master
service agreements or contracts for services to be provided by
the Company, whether or not made in the ordinary course of
business, that contemplate an exchange of consideration with an
aggregate value greater than $200,000; and
(xvii) any agreement of guarantee, assumption or
endorsement of, or any similar commitment with respect to, the
obligations, liabilities (whether accrued, absolute, contingent
or otherwise) or indebtedness of any person other than software
licenses or professional services contracts entered into in the
ordinary course of business.
(b) Each Material Contract and master service agreement or
contract for services to be provided by the Company (i) is
valid and binding on the Company, as the case may be, and, to
the Knowledge of the Company, on the other parties thereto, and
is in full force and effect, and (ii), other than contracts
which will have no force or effect after the Closing Date upon
consummation of the transactions contemplated by this Agreement,
shall continue in full force and effect without penalty or other
adverse consequence. The Company is not in breach or violation
of, or default under, any Material Contract and, to the
Knowledge of the Company, no other party to any Material
Contract is in breach or violation thereof or default thereunder.
(c) The Company has delivered or made available to Parent
accurate and complete copies of all Material Contracts
identified in
Section 3.12(a)
of the Company
Disclosure Schedule, including all amendments thereto.
A-28
(d) To the Companys Knowledge, the Company does not
have any oral contracts.
(e) Except as set forth in
Section 3.12(e)
of
the Company Disclosure Schedule, to the Companys
Knowledge, no event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time)
will, or could reasonably be expected to, (i) result in a
breach or violation of, or default under, any Material Contract,
(ii) give any entity the right to declare a default, seek
damages or exercise any other remedy under any Material
Contract, (iii) give any entity the right to accelerate the
maturity or performance of any Material Contract or
(iv) give any entity the right to cancel, terminate or
modify any Material Contract.
Section
3.13
Environmental
Matters.
Except as disclosed on
Section 3.13
of the Company Disclosure Schedule:
(a) The Company and, to the Knowledge of the Company, all
third-party vendors of the Company have obtained all
Environmental Permits required by Environmental Laws and
necessary for the conduct of its business. The Company and, to
the Knowledge of the Company, all third-party vendors of the
Company are in compliance with such permits and, in connection
with its Business, applicable Environmental Laws, and there is
no past material non-compliance which has not been resolved
(including the payment of any fines and penalties related
thereto).
(b) The Company as a direct result of it actions alone, in
the conduct of its business, and not as a result of the actions
of others, has not incurred or become liable for or subject to
any Environmental Liabilities in connection with the Real
Property or the Business.
(c) The Company has not received any written notice from
any Governmental Entity or other third party of a violation of
or liability under any Environmental Laws in connection with the
Real Property or the Business, which notice has not been
resolved.
(d) The Company has not received any written notice, claim,
or request for information alleging that the Company, to the
extent related to the Business, or the Business are or may be
liable for damages, remediation or cost recovery as a result of
a Release or threatened Release of Hazardous Substances.
(e) Neither the Company nor its respective predecessors or
Affiliates has treated, stored, disposed of, arranged for or
permitted the disposal of, handled, or Released any Hazardous
Substances on, at, or from the Real Property or owned or
operated any real property in a manner so as to give rise to
liabilities of such parties for Remedial Action pursuant to
Environmental Laws.
(f) The Company has furnished to Parent all final,
non-privileged environmental audits and reports prepared by or
for the Company and all correspondence or orders from any
Governmental Entity alleging responsibility for Environmental
Liabilities or violations of Environmental Laws and relating to
the current and former operations and facilities of the Company
or any of its Affiliates with respect to the Business, which are
in the Companys possession, custody or control.
(g) The Company has not received any written request for
information, or been notified that it is a potentially
responsible party, under CERCLA or any similar Law of any state,
locality or any other jurisdiction. The Company has not entered
into or agreed to any consent decree or order or is subject to
any judgment, decree or judicial order relating to compliance
with Environmental Laws, Environmental Permits or the
investigation, sampling, monitoring, treatment, remediation,
removal or cleanup of Hazardous Substances and, no
investigation, litigation or other proceeding is pending or
threatened in writing with respect thereto.
For purposes of this Agreement:
Business
means the business of the Company as
conducted on the date of this Agreement, including, without
limitation, providing directional drilling and surveying
services primarily to the oil and gas industry.
CERCLA
means the U.S. Comprehensive
Environmental Response, Compensation and Liability Act of 1980,
as amended as of the date hereof.
A-29
Environmental Laws
shall mean all Legal
Requirements relating to pollution, the protection of the
environment or the use, handling, Release or management of
Hazardous Substances, including CERCLA, the Federal Solid Waste
Disposal Act, as amended by the RCRA and Hazardous and Solid
Waste Amendments thereto, the Clean Air Act, the Clean Water
Act, the Toxic Substances Control Act, the Safe Drinking Water
Act, and any similar or analogous Legal Requirements of any
Governmental Entity, as each of the foregoing is in effect on or
prior to the date hereof.
Environmental Liabilities
shall mean any and
all damages, claims or liabilities (whether known or unknown,
foreseen or unforeseen, contingent or otherwise), including,
without limitation, liability for response costs, personal
injury to Persons, the Company with respect to the Business,
property damage, natural resource damage or any investigatory,
corrective or remedial obligation, which arise under or relate
to any Environmental Laws in effect at the time of such
liability.
Environmental Permits
means any permit,
approval, identification number, license and other authorization
required under any applicable Environmental Law.
Hazardous Substance
shall mean any hazardous
substance as that term is defined in CERCLA, including
petroleum, crude oil or any fraction thereof, asbestos, and
natural gas in its various forms, and any hazardous waste as
defined or regulated under RCRA.
Legal Requirement
means any material
requirement arising under any action, law, treaty, rule or
regulation, manual, guidance, advisory, alert, determination,
order or direction of a Governmental Entity and any binding
arbitration award or order.
Real Property
means the real property
described on
Section 3.18
of the Company Disclosure
Schedule and the leased real property subject to the leases
described in
Section 3.12(a)(iii)
of the Company
Disclosure Schedule.
Release
shall have the meaning set forth in
CERCLA.
Remedial Action
shall mean all actions to
investigate, clean up, remove or treat a Release(s) of Hazardous
Substances (including required remedial investigations,
feasibility studies, corrective actions, closures and
post-remedial or post-closure studies, operations and
maintenance and monitoring).
RCRA
means the Resource Conservation and
Recovery Act.
Section
3.14
Intellectual
Property.
(a) The Company owns or is licensed for, and in any event
possess sufficient and legally enforceable rights with respect
to, all Company Intellectual Property (as defined below)
relevant to their respective businesses, as previously,
presently or proposed to be conducted, or necessary to conduct
any such business without any conflict with or infringement or
misappropriation of any rights or property of any person
(
Infringement
). Such ownership, licenses and
rights are exclusive except with respect to standard, generally
commercially available, off-the-shelf third party
products that are not part of any previous, current or proposed
product, service or Intellectual Property offering of the
Company.
Intellectual Property
means
(i) inventions (whether or not patentable); trade names,
trade and service marks, logos, domains, URLs, websites,
addresses and other designations (
Marks
);
works of authorship; mask works; data; technology, know-how,
trade secrets, ideas and information; designs; formulas;
algorithms; processes; methods; schematics; computer software
(in source code
and/or
object code form); and all other intellectual property of any
sort (
Inventions
) and (ii) patent
rights; Mark rights; copyrights; mask work rights;
sui
generis
database rights; trade secret rights; moral rights;
and all other intellectual and industrial property rights of any
sort throughout the world, and all applications, registrations,
issuances and the like with respect thereto (
IP
Rights
).
Company Intellectual
Property
means all Intellectual Property that was or
is used, exercised, or exploited (
Used
) or
proposed to be Used in any business of the Company, or that may
be necessary to conduct any such business as previously or
presently conducted or proposed to be conducted; this term will
also include all other Intellectual Property owned by or
licensed to the Company now or in the past. All copyrightable
matter within Company Intellectual Property that is relevant to
the Company has been created by persons who were employees of
the Company at the time of creation and no third party has or
will have moral rights or rights to terminate any
A-30
assignment or license with respect thereto. With respect to
patent rights, moral rights and Mark rights, the representations
and warranties of this
Section 3.14(a)
are made only
to the Companys Knowledge.
(b) To the extent included in Company Intellectual
Property,
Section 3.14(b)
of the Company Disclosure
Schedule lists (by name, number, jurisdiction and owner) all
patents and patent applications; all registered and unregistered
Marks; and all registered and material unregistered copyrights
and mask works; and all other issuances, registrations,
applications and the like with respect to those or any other IP
Rights. All the foregoing (i) are valid, enforceable and
subsisting to the extent such concepts are applicable, and
(ii) along with all related filings, registrations and
correspondence, have been provided to Parent. No cancellation,
termination, expiration or abandonment of any of the foregoing
(except natural expiration or termination at the end of the full
possible term, including extensions and renewals) is anticipated
by the Company. Except as referenced in written documentation
previously provided to Parent (including without limitation file
wrappers), the Company is not aware of any questions or
challenges (or any potential basis therefor) with respect to the
patentability or validity of any claims of any of the foregoing
patents or patent applications or the validity (or any other
aspect or status) of any such IP Rights.
(c)
Section 3.14(c)
of the Company Disclosure
Schedule lists: (i) all licenses, sublicenses and other
agreements to which the Company is a party (or by which it or
any Company Intellectual Property is bound or subject) which
involve annual payments or expected receipt of funds in an
amount greater than $50,000 and pursuant to which any person has
been or may be assigned, authorized to Use, granted any lien or
encumbrance regarding, or given access to any Company
Intellectual Property other than distribution of standard object
code product pursuant to a standard form end-user, object code,
internal-use software license and support/maintenance agreements
entered into in the ordinary course of business; and
(ii) all licenses, sublicenses and other agreements
pursuant to which the Company has been or may be assigned or
authorized to Use, or has incurred or may incur any obligation
in connection with, (A) any third party Intellectual
Property be incorporated or embodied in, or form all or any part
of any previous, current or proposed product, service or
Intellectual Property offering of the Company or (B) any
Company Intellectual Property and (iii) each agreement
pursuant to which the Company has deposited or is required to
deposit with an escrowholder or any other person, all or part of
the source code (or any algorithm or documentation contained in
or relating to any source code) of any Company Intellectual
Property (
Source Materials
). The Company has
not entered into any agreement to indemnify, hold harmless or
defend any other person with respect to any assertion of
Infringement or warranting the lack thereof. Any standard form
referred to above in this section has been clearly identified as
such and provided to Parent.
(d) No event or circumstance has occurred, exists or is
contemplated (including, without limitation, the authorization,
execution or delivery of this Agreement or the consummation of
any of the transactions contemplated hereby) that (with or
without notice or the lapse of time) could result in
(i) the breach or violation of any license, sublicense or
other agreement required to be listed in
Section 3.14
of the Company Disclosure Schedule or
(ii) the loss or expiration of any right or option by the
Company (or the gain thereof by any third party) under any such
license, sublicense or other agreement or (iii) the
release, disclosure or delivery to any third party of any part
of the Source Materials. Further, the Company makes all the same
representations and warranties with respect to each license,
sublicense and agreement listed on
Section 3.14
of
the Company Disclosure Schedule as are made with respect to
Material Contracts elsewhere in this Agreement.
(e) There is, to the Knowledge of the Company, no
unauthorized Use, disclosure, or Infringement of any Company
Intellectual Property by any third party, including, without
limitation, any employee or former employee of the Company. The
Company has not brought or threatened any action, suit or
proceeding against any third party for any Infringement of any
Company Intellectual Property or any breach of any license,
sublicense or agreement involving Company Intellectual Property.
(f) The Company has taken all reasonably necessary and
appropriate steps to protect and preserve the confidentiality of
all Company Intellectual Property not otherwise disclosed in
published patents or patent applications or registered
copyrights (
Company Confidential
Information
). All use by and disclosure to employees
or others of Company Confidential Information has been pursuant
to the terms of valid and binding written confidentiality and
nonuse/restricted-use agreements or agreements that contain
similar obligations. The
A-31
Company has not disclosed or delivered to any third party, or
permitted the disclosure or delivery to any escrow agent or
other third party, any part of the Source Materials.
(g) Substantially all of the current employees of the
Company and substantially all of the current independent
contractors or consultants who devote substantially all of their
business time to performing services for the Company as set
forth in
Section 3.11(j)
of the Company Disclosure
Schedule have executed and delivered (and to the Companys
Knowledge, is in compliance with) an agreement in substantially
the form of the Companys standard Confidentiality
Agreement, which is attached to
Section 3.14(g)
of
the Company Disclosure Schedule.
(h) The Company has not received any communication alleging
or suggesting that or questioning whether the Company has been
or may be (whether in its past, current or proposed business or
otherwise) engaged in, liable for or contributing to any
Infringement, nor does the Company have any reason to expect
that any such communication will be forthcoming.
(i) The Company has no Knowledge that any of its employees
or contractors is obligated under any agreement, commitment,
judgment, decree, order or otherwise (an
Employee
Obligation
) that could interfere with the use of his
or her commercially reasonable best efforts to promote the
interests of the Company or that could conflict with any of
their businesses as conducted or proposed to be conducted.
Neither the execution nor delivery of this Agreement nor the
conduct of the Companys business as conducted or proposed
to be conducted, will conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default
under, any Employee Obligation. The Company is not Using, and it
will not be necessary to Use, (i) any Inventions of any of
their past or present employees or contractors (or people
currently intended to be hired) made prior to or outside the
scope of their employment by the Company or (ii) any
confidential information or trade secret of any former employer
of any such person.
(j) To the Knowledge of the Company, all Software is free
of all viruses, worms, trojan horses and other infections or
harmful routines and does not contain any bugs, errors, or
problems that, to the Companys Knowledge, could disrupt
its operation or have an adverse impact on the operation of
other software programs or operating systems.
Software
means software, programs, databases
and related documentation, in any form (including Internet
sites, Internet content and links) that is (i) material to
the operation of the business of the Company, including, but not
limited to, that operated by the Company on its web sites or
used by the Company in connection with processing customer
orders, storing customer information, or storing or archiving
data, or (ii) manufactured, distributed, sold, licensed or
marketed by the Company.
(k) The Company has obtained all approvals and agreements
necessary or appropriate (including, without limitation,
assurances from customers regarding further export) for
exporting any Company Intellectual Property outside the United
States and importing any Company Intellectual Property into any
country in which they are or have been disclosed, sold or
licensed for Use, and all such export and import approvals in
the United States and throughout the world are valid, current,
outstanding and in full force and effect.
Section
3.15
Taxes.
(a) All Tax (as defined below) returns, statements,
reports, declarations and other forms and documents (including
without limitation estimated Tax returns and reports and
material information returns and reports) required to be filed
with any Tax Authority (as defined below) with respect to any
Taxable (as defined below) period ending on or before the
Closing, by or on behalf of the Company (collectively,
Tax Returns
and individually, a
Tax
Return
), have been or will be completed and filed when
due (including any extensions of such due date) and all amounts
shown due on such Tax Returns on or before the Effective Time
have been or will be paid on or before such date. The Interim
Financial Statements (i) fully accrue or record all actual
and contingent liabilities for Taxes or Permitted Tax
Distributions (as defined below) with respect to all periods
through June 30, 2007 and the Company has not and will not
incur any Tax liability in excess of the amount reflected
(excluding any amount thereof that reflects timing differences
between the recognition of income for purposes of GAAP and for
Tax purposes) on the Reference Balance Sheet included in the
Interim Financial Statements with respect to such periods, and
(ii) properly accrue or record in accordance with GAAP all
material liabilities for Taxes or Permitted Tax Distributions
payable after June 30, 2007, with respect to all
transactions and events occurring on or prior to such date. All
information set forth in the notes to the Interim Financial
Statements relating to Tax matters is true,
A-32
complete and accurate in all material respects. The Company has
not incurred any material Tax liability since June 30, 2007
other than in the ordinary course of business and the Company
has made adequate provisions for all Taxes since that date in
accordance with GAAP on at least a quarterly basis.
(b) The Company has withheld and paid to the applicable
financial institution or Tax Authority all amounts required to
be withheld. To the Knowledge of the Company, no Tax Returns
filed with respect to Taxable years through the Taxable year
ended December 31, 2005 in the case of the United States,
have been examined and closed. The Company (or any member of any
affiliated or combined group of which the Company has been a
member) has not granted any extension or waiver of the
limitation period applicable to any Tax Returns that is still in
effect and there is no material claim, audit, action, suit,
proceeding, or (to the Knowledge of the Company) investigation
now pending or threatened against or with respect to the Company
in respect of any Tax or assessment. No notice of deficiency or
similar document of any Tax Authority has been received by the
Company, and there are no liabilities for Taxes (including
liabilities for interest, additions to Tax and penalties thereon
and related expenses) with respect to the issues that have been
raised (and are currently pending) by any Tax Authority that
could, if determined adversely to the Company, materially and
adversely affect the liability of the Company for Taxes. There
are no liens for Taxes (other than for current Taxes not yet due
and payable) upon the assets of the Company. The Company has
never been a member of an affiliated group of corporations,
within the meaning of Section 1504 of the Code. The Company
is in full compliance with all the terms and conditions of any
Tax exemption or other Tax-sharing agreement or order of a
foreign government, and the consummation of the Merger will not
have any adverse effect on the continued validity and
effectiveness of any such Tax exemption or other Tax-sharing
agreement or order. Neither the Company nor any person on behalf
of the Company has entered into or will enter into any agreement
or consent pursuant to the collapsible corporation provisions of
Section 341(f) of the Code (or any corresponding provision
of state, local or foreign income tax Law) or agreed to have
Section 341(f)(2) of the Code (or any corresponding
provision of state, local or foreign income tax Law) apply to
any disposition of any asset owned by the Company. None of the
assets of the Company is property that the Company is required
to treat as being owned by any other person pursuant to the
so-called safe harbor lease provisions of former
Section 168(f)(8) of the Code. None of the assets of the
Company directly or indirectly secures any debt the interest on
which is tax exempt under Section 103(a) of the Code. None
of the assets of the Company is tax-exempt use
property within the meaning of Section 168(h) of the
Code. The Company has not made and will not make a deemed
dividend election under Treas. Reg.
§ 1.1502-32(f)(2)
or a consent dividend election under Section 565 of the
Code. The Company has never been a party (either as a
distributing corporation, a distributed corporation or
otherwise) to any transaction intended to qualify under
Section 355 of the Code or any corresponding provision of
state Law. The Company has not participated in (and will not
participate in) an international boycott within the meaning of
Section 999 of the Code. No Member is other than a United
States person within the meaning of the Code. The Company does
not have and has not had a permanent establishment in any
foreign country, as defined in any applicable Tax treaty or
convention between the United States of America and such foreign
country and the Company has not engaged in a trade or business
within any foreign country. The Company has never elected to be
treated as an
S-corporation
under Section 1362 of the Code or any corresponding
provision of Federal or state Law. All material elections with
respect to the Companys Taxes made during the fiscal years
ending December 31, 2004 and 2005 are reflected on the
Companys Tax Returns for such periods, copies of which
have been provided to Parent. After the date of this Agreement
but prior to the Effective Time, no material election with
respect to Taxes will be made without the prior written consent
of Parent, which consent will not be unreasonably withheld or
delayed. The Company is not party to any joint venture,
partnership, or other arrangement or contract that could be
treated as a partnership for Federal income tax purposes other
than that the Company itself is taxed as a partnership for
Federal income tax purposes. The Company is not currently and
never has been subject to the reporting requirements of
Section 6038A of the Code. There is no agreement, contract
or arrangement to which the Company is a party that could,
individually or collectively, result in the payment of any
amount that would not be deductible by reason of
Sections 280G (as determined without regard to
Section 280G(b)(4)), 162 (other than 162(a)) or 404 of the
Code. The Company is not a party to or bound by any Tax
indemnity, Tax sharing or Tax allocation agreement (whether
written or unwritten or arising under operation of Federal Law
as a result of being a member of a group filing consolidated Tax
Returns, under operation of certain state Laws as a result of
being a member of a unitary group, or under comparable Laws of
other states or foreign jurisdictions) that includes a party
other than the Company nor does the Company owe any amount under
any such agreement. The Company has previously provided or made
available to Parent true and
A-33
correct copies of all income, franchise, and sales Tax Returns,
and, as reasonably requested by Parent, prior to or following
the date hereof, presently existing information statements and
reports. The Company is not, and has not been, a United States
real property holding corporation (as defined in
Section 897(c)(2) of the Code) during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code. Other
than by reason of the Merger, the Company has not been and will
not be required to include any material adjustment in Taxable
income for any Tax period (or portion thereof) pursuant to
Section 481 or 263A of the Code or any comparable provision
under state or foreign Tax Laws as a result of transactions,
events or accounting methods employed prior to the Merger.
(c) For purposes of this Agreement, the following terms
have the following meanings:
Tax
(and, with
correlative meaning,
Taxes
and
Taxable
) means any and all taxes including,
without limitation, (i) any net income, alternative or
add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, transfer (except transfer taxes that may or may not be
applicable to this Transaction, which if applicable will be
accrued on the Estimated Closing Balance Sheet), franchise,
profits, value added, net worth, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium,
property, environmental or windfall profit tax, custom, duty or
other tax, governmental fee or other like assessment or charge
of any kind whatsoever, together with any interest or any
penalty, addition to tax or additional amount imposed by any
Governmental Entity responsible for the imposition of any such
tax (domestic or foreign) (a
Tax Authority
),
(ii) any liability for the payment of any amounts of the
type described in (i) above as a result of being a member
of an affiliated, consolidated, combined or unitary group for
any taxable period or as the result of being a transferee or
successor thereof and (iii) any liability for the payment
of any amounts of the type described in (i) or
(ii) above as a result of any express or implied obligation
to indemnify any other person
and/or
as it
relates to any Permitted Tax Distribution. As used in this
Section 3.15
, the term Company means the
Company and any entity included in, or required under GAAP to be
included in, any of the Audited Financial Statements or the
Interim Financial Statements.
Section 3.16
Vote
Required.
The only vote necessary to approve
and adopt this Agreement, the Merger and the other transactions
contemplated by this Agreement is the affirmative vote of the
holders of at least
66
2
/
3
%
of the Company Interests in favor of the approval and adoption
of this Agreement and the Merger.
Section 3.17
Assets;
Absence of Liens and Encumbrances.
Except as
set forth in
Section 3.17
of the Company Disclosure
Schedule, the Company owns, leases or has the legal right to use
all of the assets, properties and rights of every kind, nature,
character and description, including, without limitation, real
property and personal property (other than Intellectual
Property, which is covered by
Section 3.14
hereof),
used or intended to be used in the conduct of the business of
the Company or otherwise owned or leased by the Company and,
with respect to contract rights, is a party to and enjoys the
right to the benefits of all contracts, agreements and other
arrangements used or intended to be used by the Company in or
relating to the conduct of the business of the Company (all such
properties, assets and contract rights being the
Assets
). Other than with respect to the
Permitted Liens, the Company has good and indefeasible title to,
or, in the case of leased or subleased Assets, valid and
subsisting leasehold interests in, all the Assets, free and
clear of all mortgages, liens, pledges, charges, claims, defects
of title, restrictions, infringements, security interests or
encumbrances of any kind or character
(
Liens
). The equipment of the Company used in
the operations of its business is, taken as a whole, in good
operating condition and repair, ordinary wear and tear excepted.
Section 3.18
Real
Property.
Section 3.18
of the
Company Disclosure Schedule lists all real property that the
Company owns or leases. With respect to each parcel of such Real
Property that is owned, the Company has good and clear record
title to such parcel, free and clear of any Lien, easement,
covenant or other restriction, except for recorded easements,
covenants or other restrictions which do not impair the use,
occupancy or value of such parcel. Except as disclosed in
Section 3.18
of the Company Disclosure Schedule,
with respect to each parcel of Real Property that is leased:
(a) such lease is valid, legal, binding and enforceable by
the lessee, and in full force and effect; (b) such lease
will continue to be legal, valid, binding, enforceable and in
full force and effect following the Closing Date; (c) the
lessee is not in material breach or default under any such
lease, and to the Knowledge of the Company, no other party to
such lease is in material breach or default, and no event has
occurred that, with notice or lapse of time, would constitute a
material breach or default by the lessee or, to the Knowledge of
the Company, any other party thereto, or permit termination,
modification or acceleration by the lessor thereunder;
(d) the lessee has not repudiated and, to the Knowledge of
the Company, no other party to any such lease has repudiated any
provision thereof; (e) the lessee has not received any
information from which a reasonable person would conclude that
there
A-34
are any disputes with respect to any such lease; and
(f) all Real Property subject to such lease has been
operated and maintained in all material respects in accordance
with applicable laws.
Section 3.19
Certain
Interests.
(a) Except as set forth on
Section 3.19(a)
of
the Company Disclosure Schedule, no holder of greater than 1% of
the voting power of the Company or its Affiliates or any officer
or, to the Knowledge of the Company, any manager of the Company
or any immediate relative or spouse (or immediate relative of
such spouse) who resides with, or is a dependent of, any such
officer or manager:
(i) has any direct or indirect financial interest in any
creditor, competitor, supplier, manufacturer, agent,
representative, distributor or customer of the Company;
provided
,
however
, that the ownership of
securities representing no more than 1% of the outstanding
voting power of any creditor, competitor, supplier,
manufacturer, agent, representative, distributor or customer,
and which are listed on any national securities exchange or
traded actively in the national over-the-counter market, shall
not be deemed to be a financial interest as long as
the person owning such securities has no other connection or
relationship with such creditor, competitor, supplier,
manufacturer, agent, representative, distributor or customer;
(ii) owns, directly or indirectly, in whole or in part, or
has any other interest in, any tangible or intangible property
that the Company uses in the conduct of its business (except for
any such ownership or interest resulting from the ownership of
securities in a public company);
(iii) has any claim or cause of action against the
Company; or
(iv) has outstanding any indebtedness of or to the Company,
other than the Stephens Group Debt.
(b) Except as set forth on
Section 3.19(b)
of
the Company Disclosure Schedule and for the payment of employee
compensation or remuneration in the ordinary course of business,
consistent with past practice, the Company has no liability or
any other obligation of any nature whatsoever to any Member or
any Affiliate thereof or to any officer or manager of the
Company or, to the Knowledge of the Company, to any immediate
relative or spouse (or immediate relative of such spouse) of any
such officer or manager.
Section 3.20
Insurance
Policies.
Section 3.20
of the
Company Disclosure Schedule sets forth (i) a true and
complete list of all insurance policies to which the Company is
a party or is a beneficiary or named insured and (ii) any
claims made thereunder or made under any other insurance policy
since August 6, 2004. True and complete copies of all such
policies have been provided to Parent. All premiums due on such
policies have been paid and the Company is otherwise in
compliance with the terms of such policies. The Company has not
failed to give any notice or present any claim under any such
policy in a timely fashion. Such insurance to the date hereof
has been maintained in full force and effect and not been
canceled or changed, except to extend the maturity dates
thereof. Except as set forth on
Section 3.20
of the
Company Disclosure Schedule, since August 6, 2004, the
Company has not received any notice or other communication
regarding any actual or possible (i) cancellation or
threatened termination of any insurance policy,
(ii) refusal of any coverage or rejection of any claim
under any insurance policy or (iii) adjustment in the
amount of the premiums payable with respect to any insurance
policy.
Section
3.21
Restrictions
on Business Activities.
There is no
agreement, commitment, judgment, injunction, order or decree
binding upon the Company or to which the Company is a party
which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice
material to the Company, any acquisition of property by the
Company or the conduct of business by the Company as currently
conducted or as proposed to be conducted.
Section 3.22
Brokers.
Except
as set forth in
Section 3.22
of the Company
Disclosure Schedule, no broker, finder or investment banker is
entitled to any brokerage, finders or other fee or
commission in connection with the origination, negotiation or
execution of this Agreement, the Merger or the other
transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company. The Company
has heretofore furnished to Parent a complete and correct copy
of all agreements between the Company and those entities set
forth in
Section 3.22
of the Company Disclosure
Schedule pursuant to which such advisor would be entitled to any
payment in relation to the Merger or the transactions
contemplated by this Agreement. The Original Members are
responsible for any such fees paid or payable by the Company.
A-35
Section 3.23
Intentionally
Omitted.
Section 3.24
Customers
and Suppliers.
Section 3.24
of
the Company Disclosure Schedule contains a complete list of all
customers who individually accounted for more than 2% of the
Companys gross revenues during the fiscal years ended
December 31, 2005 and 2006 and the six month period ended
June 30, 2007. No customer listed on
Section 3.24
of the Company Disclosure Schedule has,
within the past 12 months, cancelled or otherwise
terminated, or, to the Knowledge of the Company, made any threat
to cancel or terminate, its relationship with the Company, or
decreased materially its usage of the Companys services or
products. Except as set forth in
Section 3.24
of the
Company Disclosure Schedule, since January 1, 2007, no
material supplier of the Company has cancelled or otherwise
terminated any contract with the Company prior to the expiration
of the contract term, or, to the Knowledge of the Company, made
any threat to the Company to cancel, reduce the supply or
otherwise terminate its relationship with the Company. The
Company has not (i) breached (so as to provide a benefit to
the Company that was not intended by the parties) any agreement
with or (ii) engaged in any fraudulent conduct with respect
to, any customer or supplier of the Company.
Section
3.25
Inventory.
All
inventory of the Company, whether or not reflected on the
Reference Balance Sheet, consists of a quality and quantity
usable and saleable in the ordinary course of business, except
for obsolete items and items of below-standard quality, all of
which have been written-off or written-down to net realizable
value on the Reference Balance Sheet pursuant to the
Companys policies and the best estimates of the
Companys management in accordance with GAAP. All
inventories not written-off have been priced at the lower of
cost or market on a
first-in,
first-out basis. The value of each type of inventory, whether
raw materials,
work-in-process
or finished goods, are not excessive in the present
circumstances of the Company in the best estimate of the
Companys management in accordance with GAAP.
Section
3.26
Accounts
Receivable; Bank Accounts.
Except as set
forth in
Section 3.26
of the Company Disclosure
Schedule, all accounts receivable of the Company reflected on
the Reference Balance Sheet are valid receivables properly
reflected pursuant to the Companys policies and practices
and the best estimates of the Companys management in
accordance with GAAP, and subject to no material setoffs or
counterclaims and are current and collectible (within
90 days after the date on which they first became due and
payable), net of the applicable reserve for bad debts on the
Reference Balance Sheet. Except as set forth in
Section 3.26
of the Company Disclosure Schedule, all
accounts receivable reflected in the financial or accounting
records of the Company that have arisen since the date of
Reference Balance Sheet are valid receivables subject to no
material setoffs or counterclaims and are current and
collectible (within 90 days after the date on which they
first became due and payable), net of a reserve for bad debts in
an amount reasonably proportionate to the reserve shown on the
Reference Balance Sheet.
Section 3.26
of the Company
Disclosure Schedule describes each account maintained by or for
the benefit of the Company at any bank or other financial
institution.
Section
3.27
Intentionally
Omitted.
Section
3.28
Offers.
The
Company has suspended or terminated, and has the legal right to
terminate or suspend, all negotiations and discussions of any
acquisition, merger, consolidation or sale of all or
substantially all of the assets or member interests of the
Company with parties other than Parent.
Section
3.29
Warranties.
No
product or service manufactured, sold, leased, licensed or
delivered by the Company is subject to any guaranty, warranty,
right of return, right of credit or other indemnity other than
(i) the applicable standard terms and conditions of sale or
lease of the Company, which are set forth in
Section 3.29
of the Company Disclosure Schedule and
(ii) manufacturers warranties for which the Company
has no liability.
Section 3.29
of the Company
Disclosure Schedule sets forth the aggregate expenses incurred
by the Company in fulfilling its obligations under its guaranty,
warranty, right of return and indemnity provisions during each
of the Companys fiscal years ended December 31, 2005
and 2006 covered by the Audited Financial Statements and the
Company represents that such expense has not increased as a
percentage of sales since December 31, 2006 and the Company
does not reasonably expect such expenses to increase in the
future.
Section
3.30
Books
and Records.
The minute books and other
similar records of the Company contain complete and accurate
records of all actions taken at any meetings of the
Companys members, Board of Managers or any committee
thereof and of all written consents executed in lieu of the
holding of any such meeting. The books
A-36
and records of the Company accurately reflect in all material
respects the assets, liabilities, business, financial condition
and results of operations of the Company and have been
maintained in accordance with good business and bookkeeping
practices consistent with GAAP.
Section
3.31
Intentionally
Omitted.
Section
3.32
Proxy
Statement.
The information previously
supplied or to be supplied by the Company for inclusion in
Parents proxy statement in connection with the
transactions contemplated by this Agreement (such proxy
statement as amended or supplemented is referred to herein as
the
Proxy Statement
) shall not contain at the
time the Proxy Statement is filed with the SEC and at the time
it becomes effective under the Securities Act, any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading. The information to be
supplied by the Company for inclusion in the proxy statement to
be delivered to Parents stockholders in connection with
the meeting of Parents stockholders to consider the
approval of this Agreement (the
Parent
Stockholders Meeting
) shall not contain, on the
date the Proxy Statement is first mailed to Parents
stockholders, and at the time of the Parent Stockholders
Meeting, any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary in order to make the information and, accordingly, the
resulting statements therein, in light of the circumstances
under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any information
provided by the Company in any earlier communication with
respect to the solicitation of proxies for the Parent
Stockholders Meeting which has become false or misleading.
If at any time prior to the Effective Time, any event relating
to the Company or any of its Affiliates, officers or managers
should be discovered by the Company which should be, in the
reasonable opinion of the Company, set forth in a supplement to
the Proxy Statement, the Company shall promptly inform Parent.
Section
3.33
No
Misstatements.
No representation or warranty
made by the Company in this Agreement, the Company Disclosure
Schedule or any certificate delivered or deliverable pursuant to
the terms hereof contains or will contain any untrue statement
of a material fact, or omits, or will omit, when taken as a
whole, to state a material fact, necessary in order to make the
statements made, in light of the circumstances under which they
were made, not misleading; provided, however, that any
representations and warranties made by the Company herein that
are qualified by the Companys Knowledge or
materiality shall be incorporated into the representation and
warranty made by this sentence of this
Section 3.33.
To the Knowledge of the Company, the Company has disclosed to
Parent all material information relating to the business of the
Company or the transactions contemplated by this Agreement.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF MEMBERS
Each Member hereby severally, and not jointly, represents and
warrants to Parent and Merger Sub only with respect to itself
and not with respect to any other Member that the statements
contained in this Article IV are true and correct.
Section
4.01
Ownership;
Accredited Status.
(a) Except as provided in the FARMITA referenced in
Section 3.04(e)
of the Company Disclosure Schedule,
which will be terminated as of Closing, Member is the record and
beneficial owner of, or is the trustee of a trust that is the
record holder of, and whose beneficiaries are the beneficial
owners of, and has good and indefeasible title to, the Company
Interests as set forth in
Sections 1.01
and
3.04(a)
of the Company Disclosure Schedule, which as of
the date hereof are, and at all times prior to the Closing Date,
such Company Interests shall be, free and clear of any liens,
claims, options, charges or other encumbrances other than to the
extent such circumstances do not impair Members ability to
comply with its obligations hereunder. Except as provided in the
FARMITA referenced in
Section 3.04(e)
of the Company
Disclosure Schedule, which will be terminated as of Closing,
Member has the sole right to vote the Company Interests with
respect to the Merger, and except as contemplated by this
Agreement, none of the Company Interests is subject to any
voting trust or other agreement, arrangement or restriction with
respect to the voting of such Company Interests with respect to
the Merger.
A-37
(b) As of the Closing Date, Member shall not own, either
beneficially or of record, any equity interests of the Company
other than the Company Interests set forth in
Sections 1.01
and
3.04(a)
of the Company
Disclosure Schedule.
(c) Such Member is an accredited investor as
such term is defined in Rule 501(a) of Regulation D as
promulgated under the Securities Act.
Section
4.02
Power;
Authorization; Enforceability
.
Member has all
requisite power, authority and legal capacity to execute this
Agreement, to perform its obligations hereunder, and to
consummate the transactions contemplated hereby. Member has duly
executed and delivered this Agreement, and this Agreement
constitutes a legal, valid and binding obligation of Member,
enforceable against Member in accordance with its terms, subject
to the effect of any applicable bankruptcy, reorganization,
insolvency, moratorium or similar Laws affecting creditors
rights generally and subject, as to enforceability, to the
effect of general principles of equity. Except as provided in
the FARMITA referenced in
Section 3.04(e)
of the
Company Disclosure Schedule, which will be terminated as of
Closing, the execution and delivery by Member of this Agreement
do not, and the consummation of the transactions contemplated
hereby and compliance with the terms hereof will not, result in
any material breach of or constitute a material default (or an
event that with notice or lapse of time or both would become a
default) under, or give to others any right to terminate,
materially amend, accelerate or cancel any right or obligation
under, or result in the creation of any lien or encumbrance on
any Company Interests pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license permit,
franchise or other instrument or obligation to which Member is a
party or by which Member or the Company Interests are or will be
bound or affected. If Member is a natural person and is married
and the Company Interests constitute community property of
Member or otherwise need spousal or other approval for this
Agreement to be legal, valid and binding, this Agreement has
been duly authorized, executed and delivered by, and constitutes
a valid and binding agreement of, Members spouse,
enforceable against such spouse in accordance with its terms.
ARTICLE V
REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby represent and warrant to the
Company that the statements contained in this Article V are
true and correct except as set forth in the disclosure schedule
delivered by Parent to the Company concurrently with the
execution of this Agreement (the
Parent Disclosure
Schedule
). The Parent Disclosure Schedules may be
updated pursuant to
Section 7.19
hereof, and shall
be updated as of the Closing Date. The Parent Disclosure
Schedule shall be arranged according to specific sections in
this Article V and shall provide exceptions to, or
otherwise qualify in reasonable detail, only the corresponding
section in this Article V.
Section
5.01
Organization
and Qualification
.
(a) Parent is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to
own, lease and otherwise hold and operate its properties and
other assets and to carry on its business as it is now being
conducted, except where the failure to be so organized, existing
or in good standing or to have such corporate power and
authority have not had, and could not reasonably be expected to
have, individually or in the aggregate, a Parent Material
Adverse Effect (as defined below). Parent is duly qualified or
licensed as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its
business makes such qualification or licensing necessary, except
where the failure to be so qualified or licensed and in good
standing has not had, and could not reasonably be expected to
have, individually or in the aggregate, a Parent Material
Adverse Effect. The term
Parent Material Adverse
Effect
means any event, change or effect that is
materially adverse to the business, operations, condition
(financial or otherwise), assets (tangible or intangible),
liabilities, prospects or results of operations of Parent and
its subsidiaries taken as a whole, except for any such events,
changes or effects resulting from or arising in connection with
(i) any changes in general, political, global or other
national or worldwide events or changes in economic or business
conditions that do not disproportionately impact Parent as
compared to other entities similar in size and scope as that of
Parent and that are within its industry or (ii) any changes
or events affecting the industry in which Parent operates that
do not disproportionately impact Parent as
A-38
compared to other entities similar in size and scope as that of
Parent and that are within its industry, (iii) any decline
in the trading price of Parent Common Stock, or (iv) any
adverse change in the United States securities market that does
not disproportionately impact Parent, on or after the date of
this Agreement and prior to the Closing Date.
(b) Merger Sub is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware.
Section
5.02
Authority
Relative to This Agreement
. Each of Parent
and Merger Sub has all necessary corporate power and authority
to execute and deliver this Agreement, and, subject to obtaining
the necessary approvals of the stockholders of Parent, to
perform its obligations hereunder and to consummate the Merger
and the other transactions contemplated by this Agreement. The
execution and delivery of this Agreement by each of Parent and
Merger Sub and the consummation by each of Parent and Merger Sub
of the Merger and the other transactions contemplated by this
Agreement have been duly and validly authorized by all necessary
corporate action, and no other corporate proceedings on the part
of Parent or Merger Sub are necessary to authorize this
Agreement or to consummate the Merger and the other transactions
contemplated by this Agreement (other than with respect to the
Merger, the filing and recordation of appropriate merger
documents as required by the DGCL and the TLLCA). This Agreement
has been duly and validly executed and delivered by each of
Parent and Merger Sub and, assuming the due corporate
authorization, execution and delivery by the Company,
constitutes a legal, valid and binding obligation of each of
Parent and Merger Sub, enforceable against each of Parent and
Merger Sub in accordance with its terms, subject to the effect
of any applicable bankruptcy, reorganization, insolvency,
moratorium or similar Laws affecting creditors rights
generally and subject, as to enforceability, to the effect of
general principles of equity.
Section
5.03
Capital
Structure
.
(a) As of the Execution Date, the authorized capital stock
of Parent consists of (i) 50,000,000 shares of Parent
Common Stock and (ii) 1,000,000 shares of preferred
stock, par value $0.001 per share, of Parent (
Parent
Preferred Stock
). As of the Execution Date,
(i) 16,516,667 shares of Parent Common Stock were
issued and outstanding, all of which are duly authorized,
validly issued, fully paid and non-assessable,
(ii) 2,100,000 shares of Parent Common Stock were
reserved for future issuance pursuant to a unit purchase option
issued by Parent to the underwriters in connection with its
initial public offering, and (iii) warrants to purchase
28,516,668 shares of Parent Common Stock were outstanding,
an equal number of which shares were reserved for issuance
pursuant thereto. As of the date hereof, no shares of Parent
Preferred Stock were issued and outstanding.
(b) As of the Execution Date, except for outstanding
options and warrants referred to in clauses (ii) and
(iii) of the second sentence of
Section 5.03(a)
and otherwise as disclosed in the Parent SEC Reports (as defined
below), there are no outstanding options, warrants, or other
agreements relating to the issuance of capital stock of Parent
or obligating Parent to issue or sell any shares of its capital
stock.
Section
5.04
No
Conflict; Required Filings and Consents
.
(a) The execution and delivery of this Agreement by each of
Parent and Merger Sub do not, and the performance of this
Agreement by each of Parent and Merger Sub will not,
(i) conflict with or violate their respective
organizational documents, (ii) assuming that all consents,
approvals, authorizations and other actions described in
Section 5.04(b)
have been obtained and all filings
and obligations described in
Section 5.04(b)
have
been made or complied with, conflict with or violate in any
material respect any Law applicable to Parent or Merger Sub or
by which any property or asset of Parent or Merger Sub is bound
or affected, or (iii) conflict with, result in any breach
of or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to
others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other
encumbrance on any property or asset of Parent or Merger Sub
pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Parent or Merger Sub is a
party, except, with respect to clauses (ii) and (iii), for
any such conflicts, violations, breaches, defaults, or other
occurrences that could not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse
Effect.
(b) Except as set forth in
Section 5.04(b)
of
the Parent Disclosure Schedule, the execution and delivery of
this Agreement by each of Parent and Merger Sub do not, and the
performance of this Agreement by each of Parent and Merger Sub
will not, require any consent, approval, order, authorization,
registration or permit of, or filing with or
A-39
notification to, any Governmental Entity, except (i) for
the pre-merger notification requirements of the HSR Act, if
applicable, (ii) for the filing and recordation of
appropriate merger documents as required by the DGCL or the
TLLCA, (iii) for applicable requirements, if any, of the
Securities Exchange Act of 1934, as amended (the
Exchange Act
), Federal and state securities
laws and AMEX, and (iv) for such other consents, approvals,
orders authorizations, registrations or permits, filings or
notifications that if not obtained or made could not reasonably
be expected, individually or in the aggregate, to prevent or
materially delay the consummation of the transactions
contemplated by this Agreement.
Section
5.05
SEC
Filings; Financial Statements
.
(a) Parent has correctly, accurately and timely in all
material respects filed all forms, reports and documents
required to be filed by it with the Securities and Exchange
Commission (the
SEC
) since its inception date
through the date of this Agreement (collectively, the
Parent SEC Reports
). As of the respective
dates they were filed (and if amended or superseded by a filing
prior to the date of this Agreement, then on the date of such
filing), (i) the Parent SEC Reports complied in all
material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and (ii) none of the
Parent SEC Reports contained any untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were
made, not misleading.
(b) Each of the Parent Audited Financial Statements (as
defined in
Section 5.11(a))
and Parent Interim
Financial Statements (as defined in
Section 5.11(a)
)
(including, in each case, any notes thereto) contained in the
Parent SEC Reports was prepared in accordance with GAAP applied
on a consistent basis throughout the periods indicated (except
as may be indicated in the notes thereto or, in the case of
unaudited statements, as permitted by
Form 10-Q
or
8-K
promulgated by the SEC) and each presented fairly, in all
material respects, the consolidated financial position of Parent
and its consolidated subsidiaries as at the respective dates
thereof and for the respective periods indicated therein, except
as otherwise noted therein (subject, in the case of unaudited
statements, to normal and recurring year-end adjustments which
were not and are not expected, individually or in the aggregate,
to have a Parent Material Adverse Effect).
Section
5.06
Interim
Operations of Merger Sub
. Merger Sub was
formed by Parent solely for the purpose of engaging in the
transactions contemplated by this Agreement, has engaged in no
other business activities and has conducted its operations only
as contemplated by this Agreement. Merger Sub has no liabilities
and, except for a subscription agreement pursuant to which all
of its authorized capital stock was issued to Parent, is not a
party to any agreement other than this Agreement and agreements
with respect to the appointment of registered agents and similar
matters.
Section
5.07
Board
Approval
. Subject to certain conditions
contained in
Sections 8.01 and 8.02
, including, but
not limited to receiving a third party fairness opinion, dated
as of the date of this Agreement (the
Opinion
), the Board of Directors of Parent
(including any required committee or subgroup of the Board of
Directors of Parent) has, as of the date of this Agreement,
unanimously (i) declared the advisability of the Merger and
approved this Agreement and the transactions contemplated
hereby, (ii) determined that the Merger is in the best
interests of the stockholders of Parent, and
(iii) determined that the fair market value of the Company
is equal to at least 80% of Parents net assets.
Section
5.08
Valid
Issuance of Parent Shares
. The shares of
Parent Common Stock to be issued pursuant to this Agreement and
pursuant to the Parent Warrants and Redemption Warrants
will, when issued, be duly authorized, validly issued, fully
paid and non-assessable.
Section
5.09
Brokers
. Except
as set forth on
Section 5.09
of the Parent
Disclosure Schedule, no broker, finder or investment banker is
entitled to any brokerage, finders or other fee or
commission in connection with the Merger or the other
transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent or Merger Sub.
A-40
Section
5.10
Intentionally
Omitted
.
Section
5.11
Financial
Statements
.
(a) True and complete copies of (i) the audited
balance sheet, the audited statements of operations, changes in
stockholders equity and changes in cash flows for the year
then ended, together with all related notes and schedules
thereto (collectively referred to herein as the
Parent
Audited Financial Statements
, and (ii) the
unaudited balance sheet of the Parent as of June 30, 2007,
(the
Parent Reference Balance Sheet
), and the
related statements of operations, changes in members
equity and changes in cash flows for the year ended
June 30, 2007, (together with Parent Reference Balance
Sheet, the
Parent Interim Financial
Statements
), attached as
Section 5.11(a)
of the Parent Disclosure Schedule. The Parent Audited Financial
Statements and the Parent Interim Financial Statements
(including, in each case, any notes thereto) were prepared in
accordance with the GAAP applied on a consistent basis
throughout the periods indicated (except as may be indicated in
the notes thereto or, in the case of unaudited statements, as
permitted by GAAP) and each present fairly, in all material
respects, the financial position of Parent as at the respective
dates thereof and for the respective periods indicated therein,
except as otherwise noted therein (subject, in the case of the
Parent Interim Financial Statements, to normal and recurring
year-end adjustments which were not and are not expected,
individually or in the aggregate, to be material).
(b) To the Knowledge of Parent, except as set forth in
Section 5.11(b)
of the Parent Disclosure Schedule,
Parent does not have any Liabilities, other than Liabilities
(i) recorded or reserved against on the Parent Reference
Balance Sheet or (ii) incurred in the ordinary course of
business, consistent with past practice, since June 30,
2007 plus up to an aggregate amount of $100,000 incurred since
June 30, 2007 not in the ordinary course of the business,
consistent with past practice. Except as set forth in
Section 5.11(b)
of the Parent Disclosure Schedule,
reserves are reflected on the Parent Reference Balance Sheet and
on the books of account and other financial records of Parent
against all Liabilities of Parent in amounts that have been
established on a basis consistent with the past practice of
Parent and in accordance with GAAP. To the Knowledge of Parent,
there are no outstanding warranty claims against Parent.
Section
5.12
Absence
of Certain Changes or Events
. Since
January 1, 2007, except as contemplated by or as disclosed
in this Agreement or as set forth in
Section 5.12
of
the Parent Disclosure Schedule, Parent has conducted its
business only in the ordinary course and in a manner consistent
with past practice and, since such date, (a) there has not
been any Parent Material Adverse Effect and (b) Parent has
not taken or legally committed to take any of the actions
specified in
Section 6.02(a) through (x)
.
Section
5.13
Absence
of Litigation
. Except for the Dispute and the
matters addressed in the Settlement Agreement, there is no Legal
Proceeding pending or, to the Knowledge of Parent, threatened
against Parent or Merger Sub, or any property or asset owned or
used by Parent or any person whose liability Parent has or may
have assumed, either contractually or by operation of Law,
before any arbitrator or Governmental Entity that could
reasonably be expected, if resolved adversely to Parent, to
(i) impair the operations of Parent or Merger Sub as
currently conducted, including, without limitation, any claim of
infringement of any intellectual property right,
(ii) collectively result in losses to Parent or Merger Sub
in excess of $250,000, (iii) impair the ability of Parent
or Merger Sub to perform its obligations under this Agreement,
or (iv) prevent, delay or make illegal the consummation of
the transactions contemplated by this Agreement. To
Parents Knowledge, no event has occurred, and no claim,
dispute or other condition or circumstance exists, that could
reasonably be expected to give rise to or serve as a basis of
the commencement of any Legal Proceeding. Neither Parent nor
Merger Sub nor the officers or managers thereof in their
capacity as such, or any property or asset of Parent or Merger
Sub is subject to any continuing order of, consent decree,
settlement agreement or other similar written agreement with,
or, to the Knowledge of Parent, continuing investigation by, any
Governmental Entity, or any order, writ, judgment, injunction,
decree, determination or award of any court, arbitrator or
Governmental Entity. Neither Parent nor Merger Sub has plans to
initiate any Legal Proceeding against any third party.
Section
5.14
Taxes
.
(a) All Tax Returns have been or will be completed and
filed when due (including any extensions of such due date) and
all amounts shown due on such Tax Returns on or before the
Effective Time have been or will be paid on or before such date.
The Parent Interim Financial Statements (i) fully accrue
all actual and contingent liabilities for
A-41
Taxes (as defined below) with respect to all periods through
June 30, 2007, and (ii) properly accrues in accordance
with GAAP all material liabilities for Taxes payable after
June 30, 2007, with respect to all transactions and events
occurring on or prior to such date. All information set forth in
the notes to the Parent Interim Financial Statements relating to
Tax matters is true, complete and accurate in all material
respects. Parent has not incurred any material Tax liability
since June 30, 2007 other than in the ordinary course of
business and Parent has made adequate provisions for all Taxes
since that date in accordance with GAAP on at least a quarterly
basis.
(b) Parent has withheld and paid to the applicable
financial institution or Tax Authority all amounts required to
be withheld. To the Knowledge of Parent, no Tax Returns filed
with respect to Taxable years through the Taxable year ended
December 31, 2006 in the case of the United States, have
been examined and closed. Parent (or any member of any
affiliated or combined group of which Parent has been a member)
has not granted any extension or waiver of the limitation period
applicable to any Tax Returns that is still in effect and there
is no material claim, audit, action, suit, proceeding, or (to
the Knowledge of Parent) investigation now pending or threatened
against or with respect to Parent in respect of any Tax or
assessment. No notice of deficiency or similar document of any
Tax Authority has been received by Parent, and there are no
liabilities for Taxes (including liabilities for interest,
additions to Tax and penalties thereon and related expenses)
with respect to the issues that have been raised (and are
currently pending) by any Tax Authority that could, if
determined adversely to Parent, materially and adversely affect
the liability of Parent for Taxes. There are no liens for Taxes
(other than for current Taxes not yet due and payable) upon the
assets of Parent. Parent has never been a member of an
affiliated group of corporations, within the meaning of
Section 1504 of the Code. Parent is in full compliance with
all the terms and conditions of any Tax exemption or other
Tax-sharing agreement or order of a foreign government, and the
consummation of the Merger will not have any adverse effect on
the continued validity and effectiveness of any such Tax
exemption or other Tax-sharing agreement or order. Neither
Parent nor any person on behalf of Parent has entered into or
will enter into any agreement or consent pursuant to the
collapsible corporation provisions of Section 341(f) of the
Code (or any corresponding provision of state, local or foreign
income tax Law) or agreed to have Section 341(f)(2) of the
Code (or any corresponding provision of state, local or foreign
income tax Law) apply to any disposition of any asset owned by
Parent. None of the assets of Parent is property that Parent is
required to treat as being owned by any other person pursuant to
the so-called safe harbor lease provisions of former
Section 168(f)(8) of the Code. None of the assets of Parent
directly or indirectly secures any debt the interest on which is
tax exempt under Section 103(a) of the Code. None of the
assets of Parent is tax-exempt use property within
the meaning of Section 168(h) of the Code. Parent has not
made and will not make a deemed dividend election under Treas.
Reg. § 1.1502-32(f)(2) or a consent dividend election
under Section 565 of the Code. Parent has never been a
party (either as a distributing corporation, a distributed
corporation or otherwise) to any transaction intended to qualify
under Section 355 of the Code or any corresponding
provision of state Law. Parent has not participated in (and will
not participate in) an international boycott within the meaning
of Section 999 of the Code. Parent does not have and has
not had a permanent establishment in any foreign country, as
defined in any applicable Tax treaty or convention between the
United States of America and such foreign country and Parent has
not engaged in a trade or business within any foreign country.
Parent has never elected to be treated as an S-corporation under
Section 1362 of the Code or any corresponding provision of
Federal or state Law. All material elections with respect to
Parents Taxes made during the fiscal years ending
December 31, 2005 and 2006 are reflected on Parents
Tax Returns for such periods, copies of which have been provided
to the Company. After the date of this Agreement, no material
election with respect to Taxes will be made without the prior
written consent of the Company, which consent will not be
unreasonably withheld or delayed. Parent is not party to any
joint venture, partnership, or other arrangement or contract
that could be treated as a partnership for Federal income tax
purposes. Parent is not currently and never has been subject to
the reporting requirements of Section 6038A of the Code.
There is no agreement, contract or arrangement to which Parent
is a party that could, individually or collectively, result in
the payment of any amount that would not be deductible by reason
of Sections 280G (as determined without regard to
Section 280G(b)(4)), 162 (other than 162(a)) or 404 of the
Code. Parent is not a party to or bound by any Tax indemnity,
Tax sharing or Tax allocation agreement (whether written or
unwritten or arising under operation of Federal Law as a result
of being a member of a group filing consolidated Tax Returns,
under operation of certain state Laws as a result of being a
member of a unitary group, or under comparable Laws of other
states or foreign jurisdictions) that includes a party other
than Parent nor does Parent owe any amount under any such
agreement. Parent has previously provided or made available to
the Company true and correct copies of all income, franchise,
and sales Tax Returns, and, as reasonably
A-42
requested by the Company, prior to or following the date hereof,
presently existing information statements and reports. Parent is
not, and has not been, a United States real property holding
corporation (as defined in Section 897(c)(2) of the Code)
during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code. Other than by reason
of the Merger, Parent has not been and will not be required to
include any material adjustment in Taxable income for any Tax
period (or portion thereof) pursuant to Section 481 or 263A
of the Code or any comparable provision under state or foreign
Tax Laws as a result of transactions, events or accounting
methods employed prior to the Merger.
(c) As used in this
Section 5.14
, the term
Parent
means Parent and any entity included
in, or required under GAAP to be included in, any of the Parent
Interim Financial Statements.
Section
5.15
Assets;
Absence of Liens and Encumbrances
.
Parent
owns, leases or has the legal right to use all of the assets,
properties and rights of every kind, nature, character and
description, including, without limitation, real property and
personal property, used or intended to be used in the conduct of
the business of Parent or otherwise owned or leased by Parent
and, with respect to contract rights, is a party to and enjoys
the right to benefits of all contracts, agreements and other
arrangements used or intended to be used by Parent in or
relating to the conduct of the business of Parent (all such
properties, assets and contract rights being the
Parent
Assets
). Parent has good and indefeasible title to,
or, in the case of leased or subleased Parent Assets, valid and
subsisting leasehold interests in, all Parent Assets, free and
clear of all mortgages, liens, pledges, charges, claims, defects
of title, restrictions, infringements, security interests or
encumbrances of any kind or character (
Parent
Liens
).
Section
5.16
Proxy
Statement
.
The information previously
supplied or to be supplied by Parent for inclusion in the Proxy
Statement shall not contain at the time the Proxy Statement is
filed with the SEC and at the time it becomes effective under
the Securities Act, any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not
misleading. At the time it becomes effective, the Proxy
Statement will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, except to the extent that information provided to
the Parent by the Company is contained therein and such
information, as provided to the Parent by the Company, contains
any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary in
order to make the statements therein not misleading. The
information to be supplied by Parent for inclusion in the Proxy
Statement to be delivered to Parents stockholders in
connection with the Parent Stockholders Meeting shall not
contain, on the date the Proxy Statement is first mailed to
Parents stockholders, and at the time of the Parent
Stockholders Meeting, any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not false
or misleading; or omit to state any material fact necessary to
correct any statement provided by Parent in any earlier
communication with respect to the solicitation of proxies for
the Parent Stockholders Meeting which has become false or
misleading. If at any time prior to the Effective Time, any
event relating to Parent or any of its Affiliates, officers or
managers should be discovered by Parent which should be set
forth in a supplement to the Proxy Statements, Parent shall
promptly inform Company.
Section
5.17
Registration
Rights Agreement
.
The Registration Rights
Agreement contains substantially the same terms and conditions
as the registration rights agreement entered into among Parent,
Founders and FBW, dated April 10, 2006 (the
Founders RR Agreement
), and such Founders RR
Agreement has not been and shall not be amended without the
prior written consent of the Members Representative.
Section
5.18
Offers
.
The
Company acknowledges that Parent is permitted to receive general
inquiries from third parties concerning potential transactions
that would be in substitution of or in addition to, the
transaction contemplated by this Agreement (a
Back Up
Transaction
), and to conduct preliminary dialogue
related thereto. However, Parent may not negotiate, present, or
propose related to any presentations or proposals concerning
conditional terms with any third party with respect to any Back
Up Transaction until the earlier of (i) the Closing or
(ii) the Termination of this Agreement pursuant to the
terms provided for in Article IX hereof.
Section
5.19
Undisclosed
Liabilities
.
Neither Parent nor Merger Sub
has any liabilities or obligations of a type required to be
reflected on a balance sheet prepared in accordance with GAAP or
the footnotes required to be included therewith, without regard
to materiality, except (i) as and to the extent disclosed
in the Parent SEC Reports
A-43
or on
Section 5.19
of the Parent Disclosure
Schedule, or (ii) as incurred by Parent or Merger Sub in
the ordinary course of business after June 30, 2007 in an
aggregate amount not to exceed $25,000. The aggregate
liabilities and indebtedness of the Parent and Merger Sub as of
the date hereof do not, and as of the Closing Date will not,
exceed Four Million Two Hundred and Two Thousand Five Hundred
and No/100 Dollars ($4,202,500), including, but not limited to,
the Estimated Parent Expenses.
Section
5.20
No
Misstatements
.
No representation or warranty
made by Parent or Merger Sub in this Agreement, the Parent
Disclosure Schedule or any certificate delivered or deliverable
pursuant to the terms hereof contains or will contain any untrue
statement of a material fact, or omits, or will omit, when taken
as a whole, to state a material fact, necessary in order to make
the statements made, in light of the circumstances under which
they were made, not misleading; provided, however, that any
representations and warranties made by Parent or Merger Sub
herein that are qualified by Parents or Merger Subs
Knowledge or materiality shall be incorporated into
the representation and warranty made by this sentence of this
Section 5.20.
To the Knowledge of Parent and Merger
Sub, Parent and Merger Sub have disclosed to the Company all
material information relating to the business of Parent and
Merger Sub or the transactions contemplated by this Agreement.
ARTICLE VI
CONDUCT
OF BUSINESSES PENDING THE MERGER
Section
6.01
Conduct
of Business by the Company Pending the
Merger.
During the period from the date of
this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time the Company
agrees to carry on its business in the usual, regular and
ordinary course and in substantially the same manner as
previously conducted, to pay its debts and Taxes, including
Permitted Tax Distributions, when due (subject to good faith
disputes over such debts or Taxes), to pay or perform other
obligations when due and, to the extent consistent with such
business, to use all commercially reasonable efforts consistent
with past practices and policies to preserve intact its present
business organization, keep available the services of its
present officers and key employees and consultants and preserve
its relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with
it, to the end that its goodwill and ongoing businesses would be
substantially identical at the Effective Time. The Company shall
promptly notify Parent of any material event or occurrence not
in the ordinary course of business of the Company. The Company
agrees to use its commercially reasonable best efforts to
satisfy all conditions to the Closing set forth in
Article VIII, to the extent such conditions are applicable
to the Company, and timely consummate the Merger contemplated
herein.
By way of amplification and not limitation, except as
specifically contemplated by this Agreement or as specifically
set forth in
Section 6.01
of the Company Disclosure
Schedule, the Company shall not, between the date of this
Agreement and the Effective Time, directly or indirectly, do, or
propose to do, any of the following without the prior written
consent, which consent shall not be unreasonably withheld, of
Parent:
(a) amend or otherwise change the Company Charter Documents
or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, encumber,
authorize or propose the issuance, sale, pledge, disposition,
grant or encumbrance of any shares of its capital stock of any
class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of such capital stock
or any other ownership interest (including, without limitation,
any phantom interest), of the Company, except pursuant to the
terms of options, warrants or preferred stock outstanding on the
date of this Agreement and new issuances under the Gain Share
Plan;
(c) sell, lease, license, pledge, grant, encumber or
otherwise dispose of any of its properties or assets which are
material, individually or in the aggregate, to its business;
(d) split, combine, subdivide, redeem or reclassify any of
its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its equity
interests except from former
A-44
employees, managers, directors and consultants in accordance
with agreements providing for the repurchase of shares in
connection with any termination of service by such party;
(e) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any interest
or any assets in any corporation, partnership, other business
organization or any division thereof other than the RST
Transaction;
(f) except for the Settlement Agreement, institute or
settle any Legal Proceeding for an amount greater than $100,000,
except as related to Legal Proceedings disclosed in
Section 3.10
of the Company Disclosure Schedule;
(g) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, or otherwise as
an accommodation become responsible for, the obligations of any
person, or make any loans or advances other than such
indebtedness described herein and to be included on the
Estimated Closing Balance Sheet;
(h) authorize any unbudgeted capital expenditure in excess
of $100,000, individually or in the aggregate;
(i) enter into any lease or contract for the purchase or
sale of any property, real or personal, other than as permitted
by subparagraph 6.01(h) above, in an amount greater than
$100,000 on an annual basis other than the new lease agreement
contemplated to be entered into between the Company and
Angel/McIver Interests, LP, regarding the Companys
facility in Conroe, Texas;
(j) waive or release any material right or claim;
(k) except as set forth on Schedule 6.01(k) as it
relates to increases in compensation for persons covered herein
to the extent the person has or is expected to have a material
increase in duties, responsibilities and authority,
and/or
has
received a documented promotion, increase, or agree to increase,
the compensation payable, or to become payable, to its
(i) officers or (ii) employees (provided that any
employees annual compensation may be increased by an
amount not to exceed 10% of such employees current annual
base salary), or grant any severance or termination pay to, or
enter into any employment or severance agreement with, any of
its managers, officers or other employees, or establish, adopt,
enter into or amend any collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment,
termination, severance or other Plan, agreement, trust, fund,
policy or arrangement for the benefit of any director, officer
or employee;
provided
,
however
, that the foregoing
provisions of this subsection shall not apply to any amendments
to employee benefit plans described in Section 3(3) of
ERISA that may be required by Law;
(l) accelerate, amend or change the period of
exercisability or the vesting schedule of restricted stock or
Company Options granted under any option plan, employee stock
plan or other agreement or authorize cash payments in exchange
for any Company Options granted under any of such plans, except
as specifically required by the terms of such plans or any such
agreement or any related agreement in effect as of the date of
this Agreement and disclosed in the Company Disclosure Schedule;
(m) extend any offers of employment to potential employees,
consultants or independent contractors or terminate any existing
employment relationships for which the annual remuneration is
greater than $200,000;
(n) enter into, amend or terminate any Material Contract;
(o) enter into, amend or terminate any contract, agreement,
commitment or arrangement that, if fully performed, would not be
permitted under this
Section 6.01
;
(p) other than in the ordinary course of business
consistent with past practice and current business plans, enter
into any licensing, distribution, OEM agreements, sponsorship,
advertising, merchant program or other similar contracts,
agreements or obligations, other than the RST Transaction or as
contemplated thereby, that may not be cancelled without
penalties by the Company upon notice of 30 days or less;
(q) take any action, other than reasonable and usual action
in the ordinary course of business, consistent with past
practice, with respect to accounting policies, principles or
procedures;
A-45
(r) other than the 754 election that has been made or will
be made on the Companys March 31, 2007 short
form Tax return on or prior to the Closing Date, make or
change any Tax or accounting election, change any annual
accounting period, adopt or change any accounting method, file
any amended Tax Return, enter into any closing agreement, settle
any Tax claim or assessment relating to the Company, surrender
any right to claim refund of Taxes, consent to any extension or
waiver of the limitation period applicable to any Tax claim or
assessment relating to the Company, but in no event take any
other action or omit to take any action that would have the
effect of increasing the Tax liability of the Company or Parent;
(s) (i) sell, assign, lease, terminate, abandon,
transfer, permit to be encumbered or otherwise dispose of or
grant any security interest in and to any item of the Company
Intellectual Property, in whole or in part, (ii) grant any
license with respect to any Company Intellectual Property, other
than a license of Software granted to customers of the Company
to whom the Company licenses such Software in the ordinary
course of business and the license contemplated to be entered
into by the Company with respect to the RST Transaction,
(iii) other than in connection with the RST Transaction,
develop, create or invent any Intellectual Property jointly with
any third party, or (iv) disclose, or allow to be
disclosed, any confidential Company Intellectual Property,
unless such Company Intellectual Property is subject to a
confidentiality or non-disclosure covenant protecting against
disclosure thereof;
(t) make (or become obligated to make) any bonus payments
to any of its officers or employees except: (1) for those
for which the Company is simultaneously fully reimbursed or
(2) between the execution date hereof and the Effective
Time, bonus payments to certain employees not covered by the
incentive plan in an amount not to exceed an aggregate of
$500,000;
(u) except as permitted by GAAP, revalue any of its assets,
including writing down the value of inventory or writing off
notes or accounts receivable;
(v) fail to maintain its equipment and other assets in good
working condition and repair according to the standards it has
maintained up to the date of this Agreement, subject only to
ordinary wear and tear, unless it is more commercially
reasonable to replace any such asset in the ordinary course of
Companys business;
(w) take any action or fail to take any reasonable action
that would cause there to be a Company Material Adverse Effect;
(x) permit any insurance policy naming it as a beneficiary
or a loss payable payee to be cancelled or terminated and not
replaced by a substantially similar replacement policy without
notice to Parent;
(y) except in the ordinary course of its business, the
Company will not write off as uncollectible, or establish any
extraordinary reserve with respect to, any account receivable or
other right of the Company to customer remittances for services
in excess of $150,000 with respect to a single matter, or in
excess of $450,000 in the aggregate; or
(z) take, or agree in writing or otherwise to take, any of
the actions described in subsections (a) through
(y) above, or any action which is reasonably likely to make
any of the Companys representations or warranties
contained in this Agreement untrue or incorrect on the date made
(to the extent so limited) or as of the Effective Time.
Section
6.02
Conduct
of Business by Parent Pending the
Merger.
During the period from the date of
this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time, Parent
agrees to carry on its business in the usual, regular and
ordinary course and in substantially the same manner as
previously conducted, to pay its debts and Taxes when due
(subject to good faith disputes over such debts or Taxes), to
pay or perform other obligations when due and, to the extent
consistent with such business, to use all reasonable efforts
consistent with past practices and policies to preserve intact
its present business organization, keep available the services
of its present officers and key employees and consultants and
preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others having business
dealings with it, to the end that its goodwill and ongoing
businesses would be substantially identical at the Effective
Time. Parent shall promptly notify the Company of any material
event or occurrence not in the ordinary course of business of
Parent. The Parent and the
A-46
Merger Sub agree to use their commercially reasonable best
efforts to satisfy all conditions to the Closing set forth in
Article VIII and timely consummate the Merger contemplated
herein.
By way of amplification and not limitation, except as
specifically contemplated by this Agreement or as specifically
set forth in
Section 6.02
of the Parent Disclosure
Schedule, Parent shall not, between the date of this Agreement
and the Effective Time, directly or indirectly, do, or propose
to do, any of the following without the prior written consent,
which consent shall not be unreasonably withheld, of Company:
(a) amend or otherwise change the Certificate of
Incorporation and Bylaws or equivalent organizational documents;
(b) except as it relates to the redemption or cancellation
of Parent Common Stock pursuant to the Settlement Agreement,
issue, sell, pledge, dispose of, grant, encumber, authorize or
propose the issuance, sale, pledge, disposition, grant or
encumbrance of any shares of its capital stock of any class, or
any options, warrants, convertible securities or other rights of
any kind to acquire any shares of such capital stock or any
other ownership interest (including, without limitation, any
phantom interest), of Parent, except pursuant to the terms of
options, warrants or preferred stock outstanding on the date of
this Agreement;
(c) sell, lease, license, pledge, grant, encumber or
otherwise dispose of any of its properties or assets which are
material, individually or in the aggregate, to its business;
(d) split, combine, subdivide, redeem or reclassify any of
its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or purchase or otherwise
acquire, directly or indirectly, any shares of its equity
interests except from former employees, managers, directors and
consultants in accordance with agreements providing for the
repurchase of shares in connection with any termination of
service by such party;
(e) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any interest
or any assets in any corporation, partnership, other business
organization or any division thereof;
(f) except for the Settlement Agreement, institute or
settle any Legal Proceeding for an amount greater than $100,000;
(g) incur any indebtedness for borrowed money or issue any
debt securities or assume, guarantee or endorse, or otherwise as
an accommodation become responsible for, the obligations of any
person, or make any loans or advances other than such
indebtedness described herein;
(h) authorize any unbudgeted capital expenditure in excess
of $100,000, individually or in the aggregate;
(i) enter into any lease or contract for the purchase or
sale of any property, real or personal, in an amount greater
than $50,000 on an annual basis;
(j) waive or release any material right or claim;
(k) increase, or agree to increase, the compensation
payable, or to become payable, to its (i) officers or
(ii) employees (provided that any employees annual
compensation may be increased by an amount not to exceed 10% of
such employees current annual base salary), or grant any
severance or termination pay to, or enter into any employment or
severance agreement with, any of its managers, officers or other
employees or establish, adopt, enter into or amend any
collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination,
severance or other Plan, agreement, trust, fund, policy or
arrangement for the benefit of any director, officer or
employee;
provided
,
however
, that the foregoing
provisions of this subsection shall not apply to any amendments
to employee benefit plans described in Section 3(3) of
ERISA that may be required by Law;
(l) accelerate, amend or change the period of
exercisability or the vesting schedule of restricted stock or
stock options granted under any option plan, employee stock plan
or other agreement or authorize cash payments in exchange for
any stock options granted under any of such plans, except as
specifically required by the terms of such plans or any such
agreement or any related agreement in effect as of the date of
this Agreement and disclosed in the Parent Disclosure Schedule;
A-47
(m) extend any offers of employment to potential employees,
consultants or independent contractors or terminate any existing
employment relationships for which the annual remuneration is
greater than $200,000;
(n) enter into, amend or terminate any Material Contract to
which it is a party;
(o) enter into, amend or terminate any contract, agreement,
commitment or arrangement that, if fully performed, would not be
permitted under this
Section 6.02
;
(p) other than in the ordinary course of business
consistent with past practice, enter into any licensing,
distribution, OEM agreements, sponsorship, advertising, merchant
program or other similar contracts, agreements or obligations
that may not be cancelled without penalties by Parent upon
notice of 30 days or less;
(q) take any action, other than reasonable and usual action
in the ordinary course of business, consistent with past
practice, with respect to accounting policies, principles or
procedures;
(r) make or change any Tax or accounting election, change
any annual accounting period, adopt or change any accounting
method, file any amended Tax Return, enter into any closing
agreement, settle any Tax claim or assessment relating to
Parent, surrender any right to claim refund of Taxes, consent to
any extension or waiver of the limitation period applicable to
any Tax claim or assessment relating to Parent, or take any
other action or omit to take any action that would have the
effect of increasing the Tax liability of Parent or the Company;
(s) make (or become obligated to make) any bonus payments
to any of its officers or employees except as set forth on
Schedule 6.02(s);
(t) except as permitted by GAAP, revalue any of its assets,
including writing down the value of inventory or writing off
notes or accounts receivable;
(u) fail to maintain its equipment and other assets in good
working condition and repair according to the standards it has
maintained up to the date of this Agreement, subject only to
ordinary wear and tear, unless it is more commercially
reasonable to replace any such asset in the ordinary course of
Parents business;
(v) take any action or fail to take any reasonable action
that would cause there to be a Parent Material Adverse Effect;
(w) permit any insurance policy naming it as a beneficiary
or a loss payable payee to be cancelled or terminated and not
replaced by a substantially similar replacement policy without
notice to the Company;
(x) amend, modify, terminate or otherwise change the PB
Agreement or the GB Agreement;
(y) take, or agree in writing or otherwise to take, any of
the actions described in subsections (a) through
(x) above, or any action which is reasonably likely to make
any of Parents or Merger Subs representations or
warranties contained in this Agreement untrue or incorrect on
the date made (to the extent so limited) or as of the Effective
Time; and
(z) fail to timely file any Parent SEC Reports with the SEC.
Section
6.03
Litigation.
The
parties shall notify one another in writing promptly after
learning of any claim, action, suit, arbitration, mediation,
proceeding or investigation by or before any court, arbitrator
or arbitration panel, board or other Governmental Entity
initiated by it or them or against it or them, or known by
either party to be threatened against it or them or any of its
or their officers, directors, managers, employees or
stockholders in their capacity as such.
Section
6.04
Notification
of Certain Matters.
Parent shall give prompt
notice to the Company, and the Company shall give prompt notice
to Parent, of (i) the occurrence, or non-occurrence, of any
event the occurrence, or non-occurrence, of which would be
likely to cause (x) any representation or warranty
contained in this Agreement to be untrue or inaccurate or
(y) any covenant, condition or agreement contained in this
Agreement not to be complied with or satisfied; and
(ii) any failure or inability of Parent or the Company, as
the case may be, to comply with or satisfy, any covenant,
condition or agreement to be complied with or satisfied by it
hereunder;
A-48
provided
,
however
, that the delivery of any notice
pursuant to this
Section 6.04
shall not limit or
otherwise affect the remedies available hereunder to the party
receiving such notice. The parties hereto acknowledge that
reliance shall not be an element of any claim or cause of action
by any party hereto for misrepresentation or breach of a
representation, warranty or covenant under this Agreement.
ARTICLE VII
ADDITIONAL
AGREEMENTS
Section
7.01
Proxy
Statement; Stockholder Approval. Proxy Statement; Parent
Stockholders Meeting; Name Change.
(a) Parent will use its commercially reasonable best
efforts to timely prepare and file the Proxy Statement with the
SEC, including but not limited to, describing changes in this
Agreement, updating the Financial Statements and Company
Financial Statements as required, describing the
Recapitalization, the Ulterra Acquisition and the Settlement
Agreement, disclosing all changes to the Proxy Statement
associated therewith, and addressing, to the extent relevant,
SEC comments received by Parent on June 19, 2007 to the
Proxy Statement filed by the Parent on May 8, 2007. Parent
will solely be responsible to respond to, and will respond to,
any comments of the SEC and Parent will use its commercially
reasonable best efforts to mail the Proxy Statement to its
stockholders at the earliest practicable time. As promptly as
practicable after the execution of this Agreement, the Parent
will prepare and file any other filings required under the
Exchange Act, the Securities Act or any other Federal, foreign
or Blue Sky laws relating to the Merger and the transactions
contemplated by this Agreement, (collectively, the
Other Filings
). The Company shall, within a
reasonable time, provide all information with respect to the
Company and its Affiliates and Ulterra reasonably requested by
Parent as required to prepare and file the Proxy Statement and
any Other Filings and such information shall not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and the
Company shall and shall cause its employees and advisors to
comply with this provision. The Company shall use its
commercially reasonable best efforts to cause its Chief
Executive Officer to participate as reasonably requested by
Parent in the road show presentations to investors.
Each of the Members shall, within a reasonable time, provide all
information with respect to that Member reasonably requested by
Parent as required to prepare and file the Proxy Statement and
any Other Filings and such information shall not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in
order to make the statements therein not misleading. The Company
or the Parent will notify the other party promptly upon its
receipt of any comments from the SEC or its staff and of any
request by the SEC or its staff or any other governmental
officials for amendments or supplements to the Proxy Statement
or any Other Filing or for additional information and will
supply the other party with copies of all correspondence between
such party or any of its representatives, on the one hand, and
the SEC, or its staff or other government officials, on the
other hand, with respect to the Proxy Statement, the Merger or
any Other Filing. The Parent will cause the Proxy Statement and
the Other Filings to comply in all material respects with all
applicable requirements of law and the rules and regulations
promulgated thereunder. Whenever any material event occurs with
respect to the Company, the Company will, within a reasonable
time, inform the Parent of such occurrence and, within a
reasonable time, provide Parent with the information reasonably
requested by the Parent in connection therewith. The proxy
materials will be sent to the stockholders of Parent for the
purpose of soliciting proxies from holders of Parent Common
Stock to vote in favor of (i) the adoption of this
Agreement and the approval of the Merger (
Parent
Stockholder Approval
), (ii) the issuance and sale
of shares of Common Stock to the extent that such issuance
requires shareholder approval under the rules of AMEX and
(iii) the election of Ron Nixon (Chairman), Allen Neel,
Richard Turner, James Jacoby and Kim Eubanks, and up to two
(2) other designees of the Members, such designees to be
designated by the Members Representative at least ninety (
90) days prior to the Effective Time, and the resignation
of Messrs. Wilson, Spickelmier, McConnell and Williamson to
Parents Board of Directors at the Parent
Stockholders Meeting. Such proxy materials shall be in the
form of a proxy statement to be used for the purpose of
soliciting such proxies from holders of Parent Common Stock.
Nothing contained in this
Section 7.01(a)
shall
impose any additional obligations on the Company except to the
extent explictly set forth herein.
A-49
(b) As soon as practicable following its approval by the
SEC, Parent shall distribute the Proxy Statement to the holders
of Parent Common Stock and, pursuant thereto, shall call the
Parent Stockholders Meeting in accordance with the DGCL
and, subject to the other provisions of this Agreement, solicit
proxies from such holders to vote in favor of the adoption of
this Agreement and the approval of the Merger and the other
matters presented to the stockholders of Parent for approval or
adoption at the Parent Stockholders Meeting, including,
without limitation, the matters described in
Section 7.01(a).
(c) Parent shall comply with all applicable provisions of
and rules under the Exchange Act, the Securities Act and all
applicable provisions of the DGCL in the preparation, filing and
distribution of the Proxy Statement, the solicitation of proxies
thereunder, and the calling and holding of the Parent
Stockholders Meeting. Without limiting the foregoing,
Parent shall ensure that the Proxy Statement does not, as of the
date on which it is distributed to the holders of Parent Common
Stock, and as of the date of the Parent Stockholders
Meeting, contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they
were made, not misleading (provided that Parent shall not be
responsible for the accuracy or completeness of any information
provided by the Company pursuant to
Section 7.01(d)
below relating to the Company or any other information furnished
by the Company for inclusion in the Proxy Statement to the
extent the Company information or its interpretation thereof has
not been altered by Parent or Parents representatives).
(d) Except as set forth in this Agreement, the parties
acknowledge and agree that (i) Parent shall be responsible
for preparing the Proxy Statement and the Other Filings and
(ii) that the Company and the Members shall have no duty,
obligation or responsibility with respect to the Proxy Statement
and the Other Filings.
(e) Prior to the Effective Time, Parent shall take such
actions necessary to change its name from JK Acquisition
Corp. to MS Energy Services, Inc.
Section
7.02
Members
Approval; Exemption from Registration.
(a) Within a reasonable time after the date the Parent
mails the definitive proxy materials to its
stockholders, and in any event within ten (10) days of such
mailing, so long as such mailing has occurred, and in accordance
with applicable Law and the Companys Charter Documents,
the Company shall convene a meeting of its Members or solicit
written consents from its Members to obtain their approval and
adoption of this Agreement and the other transactions
contemplated hereby. The Company shall ensure that the
Members meeting is called, noticed, convened and held, and
that all proxies or written consents are solicited and obtained
from the Members, in compliance with applicable Law, the
Companys Charter Documents, and all other applicable legal
requirements. The Company agrees to use its commercially
reasonable best efforts to take all action necessary or
advisable to secure the necessary votes required by applicable
Law and the Companys Charter Documents to effect the
Merger. The Board of Managers of the Company shall unanimously
recommend that the Members vote in favor of and adopt and
approve this Agreement and the other transactions contemplated
hereby. Neither the Board of Managers of the Company nor any
committee thereof shall withdraw, amend or modify, or propose or
resolve to withdraw, amend or modify in a manner adverse to
Parent, the recommendation of the Board of Managers of the
Company that the Members vote in favor of and adopt and approve
this Agreement and the other transactions contemplated hereby,
except that the Board of Managers shall not be obligated to
approve or recommend to the Members for approval any proposed
amendment or modification of this Agreement unless the Board of
Managers determines, in its sole reasonable discretion, that
such amendment or modification is in the best interest of the
Company.
(b) At every meeting of the Members of the Company called
with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of
the Members of the Company with respect to the Merger so long as
Parent and Merger Sub are not in material violation of this
Agreement, each Member shall vote or cause to be voted the
Company Interests and any New Company Interests (as defined
below) in favor of (x) adoption of the Merger Agreement and
approval of the Merger, and (y) any matter that is required
for the Company to ensure the satisfaction of the conditions
precedent to the consummation of the Merger. Each current Member
and any future Member agrees that any Company Interests to which
that Member acquires record or beneficial ownership
(
New Membership Interests
) after the
execution of this Agreement and prior to the Closing Date
(including through the exercise of any options, warrants or
similar instruments), shall be subject to the terms and
conditions of this Agreement to the same extent as if the New
Membership Interests constituted Company
A-50
Interests. The Members will provide information and otherwise
execute documents and take other ministerial actions reasonably
necessary to complete the transactions described herein.
(c) Each of the parties hereto acknowledge that the shares
of Parent Common Stock issued to the Members pursuant to this
Agreement are intended to be issued pursuant to the
private placement exemption from registration under
Section 4(2) of the Securities Act
and/or
Regulation D promulgated under the Securities Act and agree
to fully cooperate with Parent in its efforts to ensure that the
shares of Parent Common Stock may be issued pursuant to such
private placement exemption;
provided
,
however
,
that neither Parent nor Merger Sub makes any representation or
warranty that such issuance in fact qualifies for such private
placement exemption. Such Parent Shares shall be subject to a
Registration Rights Agreement substantially in the form attached
hereto as
Exhibit C
(the
Registration
Rights Agreement
).
(d) Notwithstanding the foregoing and anything to the
contrary in Article VIII hereof, in the event that Parent,
based on advice of its counsel, has determined that the shares
of Parent Common Stock to be issued pursuant to this Agreement
cannot be issued under the private placement
exemption from registration under Section 4(2) of the
Securities Act
and/or
Regulation D promulgated under the Securities Act, then
Parent shall take all action necessary to prepare and file, on a
timely basis, a registration statement on
Form S-4
with the SEC which registers the issuance of the shares of
Parent Common Stock pursuant to this Agreement (the
Form S-4
Alternative
). Parent shall use, and shall cause its
officers, employees, agents, advisors or other representatives
to use, their respective commercially reasonable best efforts to
effectuate the foregoing (and fully cooperate with the other
parties), including, without limitation, preparing and filing
all applications, documents and forms necessary to register the
shares of Parent Common Stock on an effective registration
statement on
Form S-4.
In the event that shares of Parent Common Stock are issued
pursuant to the Form
S-4
Alternative, no Shares of Parent Common Stock (or certificates
therefor) shall be issued in exchange for any Company Interest
Certificates to any person who, prior to the Effective Time, may
be an Affiliate (as that term is used in
Rule 145 under the Securities Act) of the Company until
such person has delivered to Parent and the Company a duly
executed Affiliate Agreement in the form provided by Parent.
(e) The Members agree that they shall vote any shares of
Parent Common Stock held by such Members on the record date of
the Parent Stockholder Meeting in favor of the Merger and for
the approval of all of the other items brought before the Parent
Stockholder Meeting for which Parent seeks approval in the Proxy
Statement.
(f) The Members agree that, prior to the Effective Time,
they shall not transfer any of their Company Interests to any
Person who is not an accredited investor as such
term is defined in Rule 501(a) of Regulation D as
promulgated under the Securities Act.
Section
7.03
Access
to Information; Confidentiality.
(a) From the date of this Agreement to the Effective Time,
the Parent and the Company shall, subject to the other
partys compliance with the covenant set forth in
Section 7.03(b)
below, use commercially reasonable
efforts to provide to each other (and each partys
officers, directors, employees, accountants, consultants, legal
counsel, advisors, agents and other representatives
(collectively,
Representatives
) access as may
be reasonably necessary at reasonable times upon prior notice to
the directors, officers, employees, agents, properties, offices
and other facilities of the other party and to the books and
records of the Company. The parties acknowledge and agree that
in the event the Company voluntarily undertakes to perform any
action other than providing access to its books, records,
directors, officers, employees, or agents as described herein,
no such action or actions shall give rise to any obligation on
the part of the Company broader than the obligations expressly
set forth in this
Section 7.03(a)
and as otherwise
set forth in this Agreement.
(b) The parties shall comply with, and shall cause their
respective Representatives to comply with, all of their
respective obligations under the Non-Disclosure Agreement, dated
May 25, 2006 (the
Non-Disclosure
Agreement
), between the Company and Parent.
Section
7.04
No
Solicitation of Transactions.
(a) The Company will not, directly or indirectly, and will
instruct its Representatives not to, directly or indirectly,
solicit, initiate or encourage (including by way of furnishing
nonpublic information), or take any other
A-51
action to facilitate, any inquiries or the making of any
proposal or offer (including, without limitation, any proposal
or offer to its Members) that constitutes any Competing
Transaction (as defined below), or enter into or maintain or
continue discussions or negotiate with any person in furtherance
of such inquiries or to obtain a Competing Transaction, or agree
to or endorse any Competing Transaction, or authorize or permit
any of the officers, managers or employees of the Company, or
any investment banker, financial advisor, attorney, accountant
or other representative retained by the Company, to take any
such action. The Company will notify Parent immediately after
receipt by the Company (or by any of its officers, directors,
employees, agents, advisors or other representatives) of any
written proposal for, or written inquiry respecting, any
Competing Transaction, or any request for nonpublic information
in connection with such written proposal or inquiry or for
access to the properties, books or records of the Company by any
person that informs or has informed the Company that it is
considering making or has made such a written proposal or
inquiry. Such notice to Parent shall indicate in reasonable
detail the identity of the person making such written proposal
or inquiry and the terms and conditions of such written proposal
or inquiry. The Company immediately shall cease and cause to be
terminated all existing discussions or negotiations with any
parties conducted heretofore with respect to a Competing
Transaction. The Company agrees not to release any third party
from, or waive any provision of, any confidentiality or
standstill agreement to which it is a party.
(b) A
Competing Transaction
means any of
the following involving the Company (other than the Merger and
the other transactions contemplated by this Agreement):
(i) a merger, consolidation, share exchange, business
combination or other similar transaction; (ii) any sale,
lease, exchange, transfer or other disposition of a material
portion of the assets or debt or equity securities of such
party; (iii) a tender offer or exchange offer for 15% or
more of the outstanding voting securities of such party; or
(iv) any solicitation in opposition to approval by the
Members of the Company of this Agreement and the Merger.
Section
7.05
Employee
Benefits Matters.
(a) Subject to the requirements of third parties and laws
associated with existing Company employee benefit plans and
further subject to determination of any and all obligations
relating to existing Company benefit plans on the Closing Date,
all employees of the Company shall continue in their existing
benefit plans, except for the Companys satisfaction of its
obligations under any existing incentive plans and the Special
Bonus Plan as noted in
Section 3.11
of the Company
Disclosure Schedule, until such time as, in Parents sole
discretion, an orderly transition can be accomplished to
employee benefit plans and programs maintained by Parent or
Merger Sub for its and its Affiliates employees in the
United States. Parent and Merger Sub shall take such reasonable
actions, to the extent permitted by Parents and Merger
Subs benefits programs, as are necessary to allow eligible
employees of the Company to participate in the health, welfare
and other benefits programs of Parent or Merger Sub or
alternative benefits programs in the aggregate that are
substantially equivalent to those applicable to employees of the
Company prior to Closing in similar functions and positions on
similar terms (it being understood that equity incentive plans
are not considered employee benefits). Pending such action,
Parent shall maintain the effectiveness of and be solely
responsible for the Companys benefit plans.
(b) At Closing, Parent will enter into employment
agreements or the Company will amend existing employment
agreements (in either case, collectively, the
Employment Agreements
, and, individually, an
Employment Agreement
) with the individuals
set forth on Schedule 7.05(b) hereto.
(c) At Closing, Parent will enter into non-solicitation and
non-competition agreements (collectively, the
Non-Solicitation Agreements
, and,
individually, a
Non-Solicitation Agreement
)
with the individuals set forth on Schedule 7.05(c) hereto.
(d) Prior to the Effective Time, the Company shall take all
necessary actions to obtain the requisite Member approval under
Section 280G(b)(5) of the Code of any payments or benefits
that could be considered excess parachute payments
within the meaning of Section 280G of the Code and shall
require all disqualified individuals within the
meaning of Section 280G of the Code to subject their
existing benefits and payments to the stockholder approval
requirements of Section 280G(b)(5) of the Code, as
contemplated in the Proposed Treasury Regulations promulgated
thereunder. The Company further agrees that whether or not its
Members approve any such excess parachute payments, neither
Parent nor the Surviving Corporation shall have any
responsibility or liability with respect to any excise taxes
owed by the recipients of any such payments.
A-52
(e)
Intentionally omitted.
(f) The Company and, as applicable, its ERISA Affiliates
each agree to terminate any and all group severance, separation
or salary continuation plans, programs or arrangements
immediately prior to Closing. Parent shall receive from the
Company evidence that the plans, programs or arrangements of the
Company and, as applicable, each ERISA Affiliate have been
terminated pursuant to resolutions adopted by each such
entitys board of managers or directors (the form and
substance of which resolutions shall be subject to review and
approval of Parent), effective as of the day immediately
preceding the Closing Date but contingent on the Closing.
(g) With respect to all equity interest purchase, option
and award agreements (including any restricted units, unit
purchase, option or award agreements under the incentive plans)
between the Company and any current or former employee, manager,
consultant or founder effective as of the Effective Time, any
and all rights of repurchase under each such agreement shall be
assigned to Parent (or to such other entity as Parent shall
designate) by virtue of the Merger and without any further
action on the part of the Company, such assignment to be
effective as of the Effective Time.
Section
7.06
Further
Action; Consents; Filings.
(a) Upon the terms and subject to the conditions hereof
including, without limitation, those set forth in
Section 7.01(d)
, each of Parent, Merger Sub and the
Company shall use its commercially reasonable best efforts to
(i) take, or cause to be taken, all appropriate action and
do, or cause to be done, all things necessary under applicable
Law or this Agreement to consummate and make effective the
Merger and the other transactions contemplated by this
Agreement, (ii) obtain from any Governmental Entity or any
other person all consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or
made by Parent or the Company or any of their subsidiaries in
connection with the authorization, execution and delivery of
this Agreement and the consummation of the Merger and the other
transactions contemplated by this Agreement, including those
required under the HSR Act, and (iii) make all necessary
filings, and thereafter make any other required submission, with
respect to this Agreement, the Merger and the other transactions
contemplated by this Agreement required under applicable Law.
The Company, Merger Sub and the Company shall, subject to the
limitations contained in
Section 7.01(d)
, cooperate
with each other in connection with the making of all such
filings, including by providing copies of all such documents to
the non-filing party and its advisors prior to filing and, if
requested, by accepting all reasonable additions, deletions or
changes suggested in connection therewith. The Parent covenants
and agrees that it will provide the Company with not less than
ten (10) business days advance written notice of its intent
to file the Premerger Notification Report Form under the HSR Act.
(b) To the extent required, Parent and the Company shall
file as soon as practicable notifications under the HSR Act and
each of Parent and the Company shall use commercially reasonable
efforts to respond as promptly as practicable to all reasonable
inquiries or requests and to resolve such objections, if any, as
may be asserted by any Governmental Entity with respect to the
transactions contemplated by this Agreement under the HSR Act,
the Sherman Act, as amended, the Clayton Act, as amended, the
Federal Trade Commission Act, as amended, and any other Federal,
state or foreign statutes, rules, regulations, orders or decrees
that are designed to prohibit, restrict or regulate actions
having the purpose or effect of monopolization or restraint of
trade (collectively,
Antitrust Laws
). Parent
shall be solely responsible for any fee payable by Parent,
Company or the Members in connection with filing the required
notifications under the HSR Act, if applicable. In connection
therewith, if any administrative or judicial action or
proceeding is instituted (or threatened to be instituted)
challenging any transaction contemplated by this Agreement as
violating any Antitrust Law, each of Parent and Company shall
cooperate and Parent shall use all reasonable efforts to contest
and resist vigorously any such action or proceeding and to have
vacated, lifted, reversed, or overturned any decree, judgment,
injunction or other order, whether temporary, preliminary or
permanent, that is in effect and that prohibits, prevents, or
restricts consummation of the Merger or any such other
transactions contemplated by this Agreement, unless by mutual
agreement Parent and Company decide that litigation is not in
their respective best interests. The Parent and the Company will
consult and cooperate with one another, at no expense to the
Company, and consider in good faith the views of one another, in
connection with any analyses, appearances, presentations,
memoranda, briefs, arguments, opinions and proposals made or
submitted by or on behalf of any party hereto in connection with
proceedings under or relating to any Antitrust Laws, if
necessary; provided, that Company shall have no duty, obligation
or responsibility to undertake any analyses, efforts or other
A-53
actions in connection with any Proceedings under or relating to
any Antitrust Laws, except with respect to its obligations to
file a response to the Premerger Notification Report Form filed
by the Parent under the HSR Act. Notwithstanding the provisions
of the immediately preceding sentence, it is expressly
understood and agreed that neither the Company, the Parent nor
the Members shall have any obligation to litigate or contest any
administrative or judicial action or proceeding or any Antitrust
Order. Each of Parent and Company shall use all commercially
reasonable efforts to take such actions as may be required to
cause the expiration of the waiting periods under the HSR Act or
other Antitrust Laws with respect to such transactions as
promptly as possible after the execution of this Agreement;
provided
,
however
, that nothing contained herein
shall require either party to seek early termination of any such
waiting period under the Antitrust Laws.
(c) Notwithstanding anything to the contrary in
Section 7.06(a) or (b)
, (i) neither Parent nor
Merger Sub shall be required to divest (including, without
limitation, through a licensing arrangement) any of their
respective businesses, product lines or assets, or to take or
agree to take any other action or agree to any limitation that
could reasonably be expected to have a Parent Material Adverse
Effect and (ii) the Company shall not be required to divest
(including, without limitation, through a licensing arrangement)
any of its respective businesses, product lines or assets, or to
take or agree to take any other action or agree to any
limitation that could reasonably be expected to have a Company
Material Adverse Effect.
(d) From the date of this Agreement until the earlier of
the Effective Time or the termination of this Agreement, the
Company and the Parent shall promptly notify one another in
writing of any pending or, to the knowledge of such party,
threatened action, proceeding or investigation by any
Governmental Entity or any other person (i) challenging or
seeking material damages in connection with this Agreement or
the transactions contemplated hereunder or (ii) seeking to
restrain or prohibit the consummation of the Merger or the
transactions contemplated hereunder or otherwise limit the right
of Parent or its subsidiaries to own or operate all or any
portion of the business, assets or properties of the Company.
Section
7.07
Intentionally
Omitted.
Section
7.08
No
Public Announcement.
The initial press
release relating to this Agreement shall be a joint press
release the text of which has or will have been substantially
agreed to by each of Parent and the Company prior to its
release. Thereafter, unless otherwise required by applicable
Law, neither Parent nor the Company shall issue any press
release or otherwise make any public statements with respect to
this Agreement, the Merger or any of the other transactions
contemplated by this Agreement without the prior written consent
of the other party.
Section
7.09
Expenses.
Except
as provided in
Article IX
or
Section 2.03
, in the event that the Merger is
consummated, then at Closing (a) the Parent shall reimburse
the Members for all prepaid Transaction Expenses and either pay
to the Members, or pay directly to the third parties who are
owed Transaction Expenses, all unpaid Transaction Expenses,
(b) the Parent shall reimburse James P. Wilson and Keith D.
Spickelmier for their proportionate share of the $300,000
advanced to the Parent as of the date hereof, and (c) with
respect to Founder Expenses paid or incurred after the date
hereof, either pay any such Founder Expenses to James P. Wilson
and Keith D. Spickelmier or to the third parties who are owed
Founder Expenses; provided, however, in no event will the
aggregate amount of Founder Expenses paid or reimbursed to
Messrs. Wilson and Spickelmier under Subsection (b)
and (c) above exceed $800,000. In addition, at Closing or
at such other time as may be specified under the GB Agreement or
the PB Agreement, the Parent shall pay all amounts required to
be paid by it under the GB Agreement and the PB Agreement. In
the event that the Merger is not consummated, then the
provisions of Article IX shall govern.
Section
7.10
Affiliate
Agreements.
In the event that Parent elects
to issue the shares of Parent Common Stock pursuant to the
Form S-4
Alternative, the Company shall request each person that could
reasonably be deemed to be an Affiliate of the
Company for purposes of the Securities Act to execute and
deliver to Parent, as promptly as practicable after the
execution of this Agreement, an Affiliate Agreement in the form
provided by Parent.
Section
7.11
Intentionally
Omitted.
Section
7.12
AMEX
Listing.
Parent shall promptly prepare and
file with AMEX a Notification Form for Listing Additional Shares
with respect to the Parent Shares and Redemption Liability
Shares to be issued at the
A-54
Effective Time pursuant to this Agreement and shall use its
reasonable efforts to obtain, prior to the Effective Time,
approval for the listing of such Parent Shares and
Redemption Liability Shares, subject to official notice to
AMEX of issuance, and the Company shall reasonably cooperate
with Parent with respect to such filing on a basis consistent
with the Companys duties under
Section 7.01
hereof.
Section
7.13
Intentionally
Omitted.
Section
7.14
Key
Employees.
Prior to the Closing, the Company
shall notify Parent if, to the Companys Knowledge, any key
employee or officer of the Company expects to or has expressed
an intent to resign from his or her position with the Company
within twelve (12) months after the Closing Date.
Section
7.15
WARN
Act.
To the extent that the Merger triggers a
termination of the Companys employees, the Company agrees
to use commercially reasonable efforts to make available the
existing Company employees to Parent that the Merger Sub desires
to continue employment of for the purpose of operating the
Business. Parent and Merger Sub agree to continue the
opportunity to be employed to all or substantially all of the
Company employees on the terms and conditions that presently
exist as of the Closing Date. Nothing between the parties shall
prohibit Parent or Merger Sub from terminating any of the
existing employees subsequent to their employment by Merger Sub.
If it appears that a violation of the federal Worker Adjustment
and Retraining Notification Act (the
WARN
Act
) is likely to occur, Parent or the Company may
elect to terminate this Agreement without further liability or,
by mutual agreement, they may elect to proceed with complying
with said laws and close the transaction as soon after such
compliance as is reasonably practicable. The parties agree to
consult with each other on the need for and timing of notices
pursuant to the WARN Act, if applicable, and utilize
commercially reasonable efforts to comply with same.
Section
7.16
Conversion
Schedule.
Section 7.16
of the
Company Disclosure Schedule is a schedule prepared by the
Company (the
Preliminary Conversion Schedule
)
showing the number of Parent Shares, Parent Warrants,
Redemption Liability Shares and Redemption Warrants to
be issued to each holder of shares of Company Interests and each
holder of rights to acquire membership interests of the Company,
including the number of Parent Shares, Parent Warrants,
Redemption Liability Shares and Redemption Warrants to
be deposited in the Escrow Fund, as of the execution of this
Agreement as if the Effective Time and the exchange of shares
pursuant to the Merger had occurred as of the date of the
execution of this Agreement (assuming that no
Redemption Liability Shares and Redemption Warrants
will be issued to the Members pursuant to
Section 2.08
). Within ten (10) days after the
Closing, the Company and the Members Representative shall
prepare a final schedule as of the Effective Time (the
Final Conversion Schedule
), and an officer of
the Company shall certify the Final Conversion Schedule and
deliver such schedule to Parent.
Section
7.17
Litigation
Support.
In the event and for so long as any
Member is actively contesting or defending against any action,
suit, proceeding, hearing, investigation, charge, complaint,
claim or demand in connection with (i) any transaction
contemplated under this Agreement, or (ii) any fact,
situation, circumstance, status, condition, activity, practice,
plan, occurrence, event incident, action, failure to act, or
transaction on or prior to the Closing Date involving the
Company, each of the Parent, Merger Sub and the Company will
reasonably cooperate with one another and their respective
counsel in the contest or defense, reasonably make available
their personnel, and provide such testimony and access to their
books and records as shall be reasonably necessary in connection
with the contest or defense, all at the sole cost and expense of
the contesting or defending Member (unless the contesting or
defending Member is entitled to indemnification therefore as
described below). Parent and Merger Sub acknowledge and agree
that any Member that is individually brought into any litigation
in connection with the Company for facts, events or
circumstances arising prior to the Closing shall be indemnified
to the maximum extent permitted to be indemnified under the
Companys Charter Documents. Notwithstanding the foregoing,
the Member(s) shall not be entitled to indemnification to the
extent of any of the following:
(i) they are sued for any shareholder derivative action or
suit by any Member; or
(ii) actions or inactions which constitute a breach of any
Member representation, warranty, covenant or agreement set forth
herein; or
(iii) actions or inactions by any Member which constitute a
breach of any fiduciary duty; or
A-55
(iv) to the extent such Member(s) are found to have engaged
in gross negligence, intentional misconduct, willful misconduct
or fraud or other non-indemnifiable conduct set forth in the
Company Charter Documents.
Section
7.18
Director
and Officer Insurance.
On or before the
Closing Date, Parent shall provide to the Company an updated
commitment for a director and officer insurance policy covering
Parent, Merger Sub and Company directors, managers and executive
officers with coverage limits not less than $10,000,000. Such
policy shall be, without exception, effective as of the
Effective Time, and reasonably acceptable to the Company and all
directors of Parent and Merger Sub in accordance with the terms
and provisions contained in the commitment. The bylaws,
regulations or other operative documents of the Surviving
Corporation shall furthermore continue to provide
indemnification to all directors and executive officers to the
maximum extent provided by Delaware law.
Section
7.19
Schedules
Bring Down.
(a) The representations and warranties of the Company
contained in this Agreement and all information delivered in the
Company Disclosure Schedule, or any attachment or exhibit hereto
or in any certificate delivered by the Company to Parent
and/or
Merger Sub shall be true and correct on the Closing Date as
though then made and as though the Closing Date was substituted
for the date to which such representations and warranties relate
throughout such representations and warranties; provided,
however, that the Company Disclosure Schedule delivered to
Parent and Merger Sub as of the date of the Original Agreement
shall be permitted to be revised and amended as of the Closing
Date pursuant to the terms and conditions of
Section 7.19(c)
below.
(b) The representations and warranties of Parent and Merger
Sub contained in this Agreement and all information delivered in
the Parent Disclosure Schedule, or any attachment or exhibit
hereto or in any certificate delivered by Parent to the Company
shall be true and correct on the Closing Date as though then
made and as though the Closing Date was substituted for the date
of this Agreement throughout such representations and
warranties; provided, however, that the Parent Disclosure
Schedule delivered to the Company as of the date of the Original
Agreement shall be permitted to be revised and amended as of the
Closing Date pursuant to the terms and conditions of
Section 7.19(c)
below.
(c) The Company agrees to use its commercially reasonable
best efforts to update Company Disclosure Schedules and deliver
a revised and amended Company Disclosure Schedule to Parent on
or prior to September 30, 2007, which updated Company
Disclosure Schedules will be as of the Execution Date. The
Parent and the Company agree to use their commercially
reasonable best efforts to provide each other with any revised
and amended schedules pursuant to this
Section 7.19
no later than five (5) business days prior to the Closing
Date mutually agreed upon by Parent and the Company. Based upon
its review of the schedules delivered pursuant to
Section 7.19
by the other party, either party may
terminate this Agreement and the Merger and the other
transactions contemplated by this Agreement may be abandoned at
any time prior to the Effective Time (i) by the Company if
the revised Parent Disclosure Schedules contain an adverse
change (other than a Parent Excluded Change) that can reasonably
be valued in excess of $1,000,000, or (ii) by the Parent if
the revised Company Disclosure Schedules contain an adverse
change (other than a Company Excluded Change) that can
reasonably be valued in excess of $1,000,000;
provided,
however
, if (i) Parent terminates this Agreement
pursuant to this
Section 7.19(c)
or if Parents
termination is not reasonable pertaining to the schedules
delivered by the Company to Parent, and Parents duties
under
Section 9.02(b)
herein would otherwise have
existed, then the terms of
Section 9.02(b)
shall
apply to Parent, and (ii) the Company terminates this
Agreement pursuant to this
Section 7.19(c)
, and
Parents duties under
Section 9.02(b)
herein
would otherwise have existed, then the terms of
Section 9.02(b)
shall apply to Parent. The term
Parent Excluded Change
means (i) any
changes in general, political, global or other national or
worldwide events or changes in economic or business conditions
that do not disproportionately impact Parent as compared to
other entities similar in size and scope as that of Parent and
that are within its industry or (ii) any changes or events
affecting the industry in which Parent operates that do not
disproportionately impact Parent as compared to other entities
similar in size and scope as that of Parent and that are within
its industry, (iii) any decline in the trading price of
Parent Common Stock, (iv) any adverse change in the United
States securities market that does not disproportionately impact
Parent, or (v) the expenditure or incurrence of the Parent
Estimated Expenses, on or after the date of this Agreement and
prior to the Closing Date. The term
Company Excluded
Change
means (i) any changes in general,
political, global or other national or worldwide events or
changes in economic or business conditions that do not
disproportionately impact the Company as compared to other
entities similar in size
A-56
and scope as that of the Company and that are within its
industry or (ii) any changes or events affecting the
industry in which the Company operates that do not
disproportionately impact the Company as compared to other
entities similar in size and scope as that of the Company and
that are within its industry.
(d) Notwithstanding anything to the contrary contained
herein, the parties acknowledge and agree that all the schedules
attached hereto are as of the Execution Date except for the
schedules attached hereto that pertain to
Sections 3.07
through
3.33
, which will be as
of June 30, 2007 (until, with respect to the Company
Disclosure Schedules, such schedules are updated as contemplated
in
Section 7.19(c)
). Accordingly, none of the
parties shall be in breach of any of the representations and
warranties containing schedules by virtue of those schedules
being inaccurate due to changes thereto between the time of
June 30, 2007 and the Execution Date; provided, however,
that the provisions contained in
Section 7.19(a),
(b)
and
(c)
hereof shall apply with respect to the
right, duty and obligation of the parties to update the
schedules no later than five (5) business days prior to the
Closing Date, and as further updated up to the actual Closing
Date.
ARTICLE VIII
CONDITIONS
TO THE MERGER
Section
8.01
Conditions
to the Obligations of Each Party.
The
respective obligations of the Company, Parent and Merger Sub to
consummate the Merger are subject to the satisfaction or waiver
(where permissible) of the following conditions:
(a)
Stockholder Approval.
This
Agreement shall have been approved and adopted by the requisite
affirmative vote of the stockholders of Parent in accordance
with the DGCL and the Parents Certificate of Incorporation
and Bylaws, provided that Parent will proceed with the Merger
only if (i) a majority of the shares of Parent Common Stock
voted by the Public Stockholders are voted in favor of the
Merger and (ii) Public Stockholders owning less than 20% of
the shares of Parent Common Stock both vote against the Merger
and exercise their Redemption Option pursuant to the
Parents Certificate of Incorporation. As used herein, the
term
Public Stockholders
shall mean any
stockholder of Parent holding shares of Parent Common Stock
issued in connection the Parents IPO, excluding shares of
Parent Common Stock held by the Founders. As used herein, the
term
Founders
shall mean James P. Wilson,
Keith D. Spickelmier, Michael H. McConnell and Herbert C.
Williamson;
(b)
No Order.
No Governmental
Entity or court of competent jurisdiction located or having
jurisdiction in the United States shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation,
decree, judgment, injunction or other order, whether temporary,
preliminary or permanent (each an
Order
)
which is then in effect and has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger;
(c)
HSR Act.
Any waiting period
(and any extension thereof) applicable to the consummation of
the Merger under the HSR Act shall have expired or been
terminated, if applicable;
(d)
Listing.
Parent shall have
filed with AMEX a Notification Form for Listing Additional
Shares with respect to Parent Shares and
Redemption Liability Shares at the Effective Time to be
issued pursuant to this Agreement; and
(e)
Registration Rights
Agreement.
Parent, the Members and the
Members Representative shall have entered into the
Registration Rights Agreement.
Section
8.02
Conditions
to the Obligations of Parent and Merger Sub.
The obligations of Parent and Merger Sub to consummate the
Merger are subject to the satisfaction or waiver (where
permissible) of the following additional conditions:
(a)
Representations and
Warranties.
Each of the representations and
warranties made by the Company in this Agreement that are
qualified as to Knowledge, materiality or Company Material
Adverse Effect, or any similar standard or qualification, shall
be true and correct in all respects, and each of the
representations and warranties made by the Company in this
Agreement that are not qualified as to Knowledge, materiality or
A-57
Company Material Adverse Effect, or any similar standard or
qualification, shall be true and correct in all material
respects, in each case as of the Effective Time with the same
force and effect as if made on and as of the Effective Time,
except that those representations and warranties that address
matters only as of a particular date shall remain true and
correct as of such date, and Parent shall have received a
certificate of the Chief Executive Officer of the Company to
that effect;
(b)
Agreements and Covenants.
The
Company shall have performed or complied in all material
respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to
the Effective Time and Parent shall have received a certificate
of the Chief Executive Officer of the Company to that effect;
(c)
Approvals.
Parent shall have
received, each in form and substance reasonably satisfactory to
Parent, all authorizations, consents, orders and approvals
(i) required by any Governmental Entity or official, if
any, (ii) set forth in
Section 3.06
of the
Company Disclosure Schedule or (iii) the failure of which
to obtain would have, or could reasonably be expected to have, a
Company Material Adverse Effect;
(d)
No Company Material Adverse
Effect.
No event or events shall have
occurred, or could be reasonably likely to occur, which,
individually or in the aggregate, have, or could reasonably be
expected to have, a Company Material Adverse Effect;
(e)
Employment Agreements.
Each
individual set forth on
Schedule 7.05(b)
hereto
shall remain employed by the Company and the Employment
Agreements shall have been entered into at Closing on mutually
acceptable terms to Parent and such individuals;
(f)
Non-Solicitation
Agreements.
Each individual set forth on
Schedule 7.05(c)
shall have entered into a
Non-Solicitation Agreement on mutually acceptable terms to
Parent and such individuals;
(g)
Affiliate Agreements.
In the
event that Parent elects to issue the shares of Parent Common
Stock pursuant to the
Form S-4
Alternative, each of the Affiliates of the Company shall have
executed and delivered to Parent an Affiliate Agreement and such
agreement shall (i) become effective at Closing or
(ii) remain in full force and effect and shall not have
been anticipatorily breached or repudiated by any of such
Affiliates;
(h)
No Restraints.
There shall not
be pending or threatened any suit, action, investigation or
proceeding to which a Governmental Entity is a party
(i) seeking to restrain or prohibit the consummation of the
Merger or any of the other transactions contemplated by this
Agreement or seeking to obtain from Parent or the Company any
damages that are material or (ii) seeking to prohibit or
limit the ownership or operation by Parent or the Company of any
material portion of their respective businesses or assets;
(i)
Issuance of Shares of Parent Common
Stock.
The issuance of the shares of Parent
Common Stock pursuant to this Agreement will be validly issued
pursuant to the private placement exemption from
registration provided by Section 4(2) of the Securities Act
and/or
Regulation D promulgated under the Securities Act. If
Parent elects to utilize the
Form S-4
Alternative, the registration statement on
Form S-4
shall have become effective under the Securities Act and shall
not be the subject of any stop order or proceeding seeking a
stop order;
(j)
Escrow Agreement.
Parent, the
Members Representative and Escrow Agent shall have entered
into the Escrow Agreement and the Escrow Agreement shall be in
full force and effect and shall not have been anticipatorily
breached or repudiated;
(k)
Termination or Amendment of Incentive
Plans.
The Company shall have terminated or
amended the incentive plans identified by Parent prior to
Closing, and the Company shall have provided Parent with
evidence, reasonably satisfactory to Parent, as to the
termination or amendment of the incentive plans;
(l)
Opinion of the Companys
Counsel.
Parent shall have received the
opinion of Franklin, Cardwell & Jones, P.C.,
counsel to the Company, substantially in the form attached
hereto as
Exhibit D
;
(m)
Intentionally omitted
;
A-58
(n)
Secretarys
Certificate.
Parent shall have received
(i) a certificate executed by the Secretary of the Company
attaching and certifying as to matters customary for a
transaction of this sort, including, without limitation, the
true and correct copies of the Companys Charter Documents
and copies of the resolutions of the Companys Board of
Managers and the Members approving and adopting this Agreement
and the transactions relating hereto, and (ii) such other
documents relating to the transactions contemplated by this
Agreement as Parent may reasonably request;
(o)
Estoppel Certificate.
Parent
shall have received an estoppel certificate, dated as of a date
not more than seven (7) days prior to the Closing Date and
satisfactory in form and content to Parent, executed by each of
those landlords listed on
Section 3.12(a)(iii)
of
the Company Disclosure Schedule whose consent is required in
order that the parties might consummate the transactions
contemplated hereby;
(p)
FIRPTA Compliance.
The Company
shall, prior to the Closing Date, provide Parent with a properly
executed Foreign Investment in Real Property Tax Act of 1980
(
FIRPTA
) Notification Letter, in form and
substance satisfactory to Parent, which states that the
membership interests of the Company do not constitute
United States real property interests under
Section 897(c) of the Code, for purposes of satisfying
Parents obligations under Treasury
Regulation Section 1.1445-2(c)(3).
In addition, simultaneously with delivery of such Notification
Letter, the Company shall have provided to Parent, as agent for
the Company, a form of notice to the Internal Revenue Service in
accordance with the requirements of Treasury
Regulation Section 1.897-2(h)(2)
along with written authorization for Parent to deliver such
notice form to the Internal Revenue Service on behalf of the
Company upon the consummation of the Merger;
(q)
Parachute Payments.
Prior to
the Effective Time, the Company shall have obtained the
requisite Members approval, if any, under
Section 280G(b)(5) of the Code of any payments or benefits
that could be considered excess parachute payments
within the meaning of Section 280G of the Code, and any
disqualified individuals as defined in
Section 280G of the Code shall have agreed to forfeit any
payments that would otherwise be non-deductible if such Member
approval, if required is not obtained;
(r)
Employees.
Each of the
individuals set forth on
Schedule 8.02(r)
shall be
employed in good standing by the Company;
(s)
Board and Officer
Resignations.
The Company shall have received
written letters of resignation from each of the current members
of the Board of Managers and officers of the Company, in each
case effective at the Effective Time;
(t)
Termination or Amendment of Employee
Agreements.
Parent shall have been furnished
evidence satisfactory to it that the Company has terminated or
amended all employment agreements with Messrs. Neel,
Culbreth and Cudd, and that any employment agreements existing
prior to Closing between the Company and each of those employees
set forth on
Schedule 8.02(t)
shall be valid and
enforceable;
(u)
Termination of the Companys
Agreements.
Parent shall have been furnished
evidence satisfactory to it that all rights granted by the
Company to its members and in effect prior to the Closing,
including, but not limited to, rights of co-sale, voting,
registration, first refusal, first offer, preemptive, board
observation or information or operational covenants, shall have
terminated prior to the Closing Date;
(v)
Intentionally Omitted.
(w)
Termination of Membership Interest Transfer
Agreement.
The Company shall have terminated
the Membership Interest Transfer Agreement effective as of the
date of the Closing; and
(x)
Fairness Opinion.
The Opinion
shall have been issued by a nationally recognized firm that
(i) the Merger is fair to, and in the best interest of,
Parent, Merger Sub and their respective stockholders and
(ii) the fair market value of the Company is equal to at
least 80% of Parents net assets.
A-59
Section
8.03
Conditions
to the Obligations of the Company.
The
obligations of the Company to consummate the Merger are subject
to the satisfaction or waiver (where permissible) of the
following additional conditions:
(a)
Representations and
Warranties.
Each of the representations and
warranties of Parent and Merger Sub contained in this Agreement
that are qualified as to materiality or Parent Material Adverse
Effect, or any similar standard or qualification, shall be true
and correct, and each of the representations and warranties of
Parent and Merger Sub contained in this Agreement that are not
qualified as to materiality or Parent Material Adverse Effect,
or any similar standard or qualification, shall be true and
correct in all material respects, in each case as of the
Effective Time with the same force and effect as if made on and
as of the Effective Time, except that those representations and
warranties which address matters only as of a particular date
shall remain true and correct as of such date, and the Company
shall have received a certificate of a duly authorized officer
of Parent to that effect;
(b)
Approvals.
The Company shall
have received, each in form and substance reasonably
satisfactory to the Company, all authorizations, consents,
orders and approvals (i) required by any Governmental
Entity or official, if any, (ii) set forth in
Section 5.04(b)
of the Parent Disclosure Schedule or
(iii) the failure of which to obtain would have, or could
reasonably be expected to have, a Parent Material Adverse Effect;
(c)
Employment Agreements.
Each
individual set forth on
Schedule 7.05(b)
hereto
shall remain employed by the Company and the Employment
Agreements shall be entered into with such individuals at
Closing on mutually acceptable terms;
(d)
Non-Solicitation
Agreements.
Each individual set forth on
Schedule 7.05(c)
hereto shall enter into a
Non-Solicitation Agreement at Closing on mutually acceptable
terms;
(e)
Affiliate Agreements.
In the
event that Parent elects to issue the shares of Parent Common
Stock pursuant to the
Form S-4
Alternative, each of the Affiliates of the Company shall have
executed and delivered to Parent an Affiliate Agreement and such
agreement shall (i) become effective at Closing, or
(ii) remain in full force and effect and shall not have
been anticipatorily breached or repudiated by any of such
Affiliates;
(f)
No Restraints.
There shall not
be pending or threatened any suit, action, investigation or
proceeding to which a Governmental Entity is a party
(i) seeking to restrain or prohibit the consummation of the
Merger or any of the other transactions contemplated by this
Agreement or seeking to obtain from Parent or the Company any
damages that are material or (ii) seeking to prohibit or
limit the ownership or operation by Parent or the Company of any
material portion of their respective businesses or assets;
(g)
Issuance of Shares of Parent Common
Stock.
The issuance of the shares of Parent
Common Stock pursuant to this Agreement will be validly issued
pursuant to the private placement exemption from
registration provided by Section 4(2) of the Securities Act
and/or
Regulation D promulgated under the Securities Act. If
Parent elects to utilize the
Form S-4
Alternative, the registration statement on
Form S-4
shall have become effective under the Securities Act and shall
not be the subject of any stop order or proceeding seeking a
stop order;
(h)
Escrow Agreement.
Parent, the
Members Representative and Escrow Agent shall have entered
into the Escrow Agreement and the Escrow Agreement shall be in
full force and effect and shall not have been anticipatorily
breached or repudiated;
(i)
Secretarys
Certificate.
The Company shall have received
(i) certificates executed by the Secretary of each of
Parent and Merger Sub attaching and certifying as to matters
customary for a transaction of this sort, including, without
limitation, the true and correct copies of Parents and
Merger Subs organizational documents and copies of the
resolutions of the each of their Boards of Directors approving
and adopting this Agreement and the transactions relating
hereto, and (ii) such other documents relating to the
transactions contemplated by this Agreement as the Company may
reasonably request;
(j)
FIRPTA Compliance.
Parent
shall, prior to the Closing Date, provide the Company with a
properly executed FIRPTA Notification Letter, in form and
substance satisfactory to the Company, which states that the
stock of Parent and Merger Sub do not constitute United
States real property interests under Section 897(c)
A-60
of the Code, for purposes of satisfying Parents
obligations under Treasury
Regulation Section 1.1445-2(c)(3).
In addition, simultaneously with delivery of such Notification
Letter, Parent shall have provided to the Company, as agent for
Parent, a form of notice to the Internal Revenue Service in
accordance with the requirements of Treasury
Regulation Section 1.897-2(h)(2)
along with written authorization for Company to deliver such
notice form to the Internal Revenue Service on behalf of Parent
upon the consummation of the Merger;
(k)
Employees.
Each of the
individuals set forth on
Schedule 8.02(r)
shall be
employed in good standing by the Company;
(l)
Termination of the Companys
Agreements.
All rights granted by the Company
to its Members and in effect prior to the Closing, including,
but not limited to, rights of co-sale, voting, registration,
first refusal, first offer, preemptive, board observation or
information or operational covenants, shall have terminated
prior to the Closing Date;
(m)
Termination of Incentive
Plan.
The Company shall have terminated or
amended the incentive plans effective as of the date of the
Closing;
(n)
Termination of Membership Interest Transfer
Agreement.
The Company shall have terminated
the Membership Interest Transfer Agreement effective as of the
date of the Closing;
(o)
Agreements and Covenants.
Each
of Parent and Merger Sub shall have performed or complied in all
material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or
prior to the Effective Time, and the Company shall have received
a certificate of a duly authorized officer of Parent to that
effect;
(p)
Opinion of Parents
Counsel.
The Company shall have received the
opinion of Patton Boggs, counsel to Parent, or another counsel
reasonably satisfactory to the Company, substantially in the
form attached hereto as
Exhibit E
;
(q)
Resignations.
Parent shall
have received a written letter of resignation and release from
Herbert C. Williamson and Michael H. McConnell as directors of
Parent, and from James P. Wilson as a director and Chief
Executive Officer of Parent and Keith D. Spickelmier as a
director and President of Parent, in each case effective at the
Effective Time;
provided
, that such resignation and
release will not release Parent from any contractual or
statutory obligations owed by it to insure
and/or
indemnify any of the foregoing individuals for such
individuals acts or omissions in their capacity as
officers
and/or
directors of Parent.
(r)
No Parent Material Adverse
Effect.
No event or events shall have
occurred, or be reasonably likely to occur, which, individually
or in the aggregate, have, or could have, a Parent Material
Adverse Effect;
(s)
Fairness Opinion.
An updated
Opinion shall have been issued by a nationally recognized firm
that (i) the Merger is fair to, and in the best interest
of, Parent, Merger Sub and their respective stockholders and
(ii) the fair market value of the Company is equal to at
least 80% of Parents net assets;
(t)
Evidence of Funding.
Parent
shall provide the Company with evidence satisfactory to the
Company that Messrs. Wilson and Spickelmier have funded the
Parent with up to an additional $500,000 (in addition to the
$300,000 advanced as of the Execution Date) as necessary for the
expenses of the Parent on terms acceptable to the Company;
(u)
Contribution of Founder
Shares.
For the consideration provided in the
Settlement Agreement and each to be effective upon the Effective
Time: (i) the Parent shall have received, and James P.
Wilson shall have contributed to Parent, 1,327,339 shares
of Parent Common Stock; (ii) Parent shall have received,
and Keith D. Spickelmier shall have contributed to Parent,
1,086,005 shares of Parent Common Stock, (iii) Parent
shall have received, and Michael H. McConnell shall have
contributed to Parent, 22,495 shares of Parent Common
Stock, (iv) Parent shall have received, and Herbert C.
Williamson shall have contributed to Parent, 22,495 shares
of Parent Common Stock, and Parent shall hold such shares of
Parent Common Stock as treasury stock;
(v)
PB Agreement.
Parent shall
provide the Company with a copy of the PB Agreement duly
executed by the Parent and Patton Boggs;
A-61
(w)
GB Agreement.
Parent shall
provide the Company with a copy of the GB Legal Fees Agreement
duly executed by the Parent, Merger Sub, James P. Wilson,
Keither D. Spickelmier, Herbert C. Williamson, Michael H.
McConnell and Gibbs & Bruns;
(x)
Transfer of Parent Common Stock to
Gibbs & Bruns.
(i) James P.
Wilson shall have transferred all of his right, title and
interest in and to 50,417 shares of Parent Common Stock to
Gibbs & Bruns, (ii) Keith D. Spickelmier shall
have transferred all of his right, title and interest in and to
41,250 shares of Parent Common Stock to Gibbs &
Bruns, (iii) Herbert C. Williamson shall have transferred
all of his right, title and interest in and to 463 shares
of Parent Common Stock to Gibbs & Bruns, and
(iv) Michael H. McConnell shall have transferred all of his
right, title and interest in and to 463 shares of Parent
Common Stock to Gibbs & Bruns, in each instance in
accordance with the terms of the GB Agreement and effective as
of the Effective Time;
(y)
Repayment of Stephens Group
Debt.
At the Closing, the Company shall have
repaid the Stephens Group Debt in full;
(z)
Transaction Expenses.
At the
Closing, the Parent shall have either directly paid the
Transaction Expenses on behalf of the Members and Company or
reimbursed the Members for the Transaction Expenses;
(aa)
Cash Consideration.
At the
Closing, the Parent shall have paid the Cash Consideration to
the Members in cash or other readily available funds as provided
in
Section 2.01(a)(i)(3)
hereof; and
(bb)
Parent Warrants.
At the
Closing, the Parent shall have duly executed and delivered the
Parent Warrants to the Members as provided in
Section 2.01(a)(i)(2)
hereof.
ARTICLE IX
TERMINATION,
AMENDMENT AND WAIVER
Section
9.01
Termination.
This
Agreement may be terminated and the Merger and the other
transactions contemplated by this Agreement may be abandoned at
any time prior to the Effective Time, notwithstanding any
requisite approval and adoption of this Agreement and the
transactions contemplated by this Agreement, as follows:
(a) by mutual written consent duly authorized by the Board
of Directors of Parent and Merger Sub and the Board of Managers
of the Company prior to the Effective Time;
(b) by either Parent or the Company upon the issuance of
any Order which is final and nonappealable which would
(i) prevent the consummation of the Merger,
(ii) prohibit Parents or the Companys ownership
or operation of any portion of the business of the Company or
(iii) compel Parent or the Company to dispose of or hold
separate, as a result of the Merger, any material portion of the
business or assets of the Company or Parent;
(c) by Parent upon a breach of any material representation,
warranty, covenant or agreement on the part of the Company set
forth in this Agreement, or if any representation or warranty of
the Company shall have become untrue, in either case such that
the conditions set forth in
Sections 8.02(a)
and
8.02(b)
would not be satisfied (
Terminating
Company Breach
);
provided
,
however
,
that, if such Terminating Company Breach is curable by the
Company through the exercise of its commercially reasonable best
efforts and for so long as the Company continues to exercise
such commercially reasonable best efforts, Parent may not
terminate this Agreement under this
Section 9.01(c)
unless such breach is not cured within 30 days after notice
thereof is provided by Parent to the Company (but no cure period
is required for a breach which, by its nature, cannot be cured);
(d) by the Company upon a breach of any material
representation, warranty, covenant or agreement on the part of
Parent and Merger Sub set forth in this Agreement, or if any
representation or warranty of Parent and Merger Sub shall have
become untrue, in either case such that the conditions set forth
in
Sections 8.03(a)
and
8.03(b)
would not be
satisfied (
Terminating Parent Breach
);
provided
,
however
, that, if such Terminating
Parent Breach is curable by Parent and Merger Sub through the
exercise of their respective commercially reasonable best
efforts and for so long as Parent and Merger Sub continue to
exercise such commercially reasonable best efforts, the Company
may not terminate this Agreement under this
Section 9.01(d)
unless such breach is not cured
within 30 days after notice thereof is provided by the
Company to Parent (but no cure period
A-62
is required for a breach which, by its nature, cannot be cured);
provided that, in the event that the aggregate liabilities and
indebtedness of Parent and Merger Sub exceed $4,202,500 as of
the Closing Date, then Parent shall be in material breach of its
representation contained in the last sentence of
Section 5.19 and such breach shall constitute a Terminating
Parent Breach for purposes of this Section 9.01(d); or
(e) by Parent if the Companys 2007 Annualized
Adjusted EBITDA is less than $29,000,000 through the end of the
most recently completed month prior to the month in which the
Effective Time occurs.
Section
9.02
Effect
of Termination.
(a) In the event of termination of this Agreement pursuant
to
Sections
9.01(a)
,
9.01(c)
,
9.01(d)
or
9.01(e)
, or by Parent to the extent
permitted under
Section 7.19(c)
, this Agreement
shall forthwith become void, there shall be no liability under
this Agreement on the part of Parent, Merger Sub or the Company
or any of their respective officers, managers or directors, and
all rights and obligations of each party hereto shall cease;
provided
,
however
, that (i)
Section 7.03(b)
,
Section 9.02
and
Article XI shall remain in full force and effect and
survive any termination of this Agreement and (ii) nothing
herein shall relieve (x) a Member from liability for such
Members breach of any of its, his or her own
representations or warranties set forth in Article IV of
this Agreement, or (y) Parent, Merger Sub or Company from
liability for the breach of any of its representations or
warranties or the breach of any of its covenants or agreements
set forth in this Agreement;
(b) In the event of termination of this Agreement pursuant
to any other provision contained in this Agreement or otherwise
(including, without limitation, pursuant to
Section 9.05
) except for those cited in
Section 9.02(a)
, or if the Company has terminated
this Agreement pursuant to
Section 7.19(c)
, Parent
shall reimburse the Company and the Members for all Transaction
Expenses;
provided
, that the Company and the Members
acknowledge and agree that they shall not seek such expenses
from (i) the trust fund holding the net proceeds of the
Parents initial public offering and the interest thereon,
or (ii) the Founders individually, except in the instance
of the Founders gross negligence, willful misconduct or
fraud or to the extent the Parents liabilities exceed $4,202,500
as a result of expenses that are not reasonable in amount and
purpose, and then only to the extent of such unreasonable
expenses; and
(c) Other than termination giving rise to the
Companys right of expense reimbursement by the Parent as
outlined in
Section 9.02(b)
above, each partys
responsibility and right to reimbursement for its costs and
expenses incurred in connection with this Merger shall be as
provided for in
Section 7.09
hereto in the same
manner as though the Closing had occurred and the Merger been
consummated.
Section
9.03
Amendment.
This
Agreement may be amended by the parties hereto by action taken
by or on behalf of their respective Boards of Directors or Board
of Managers at any time prior to the Effective Time. This
Agreement may not be amended except by an instrument in writing
signed by the parties hereto.
Section
9.04
Waiver.
At
any time prior to the Effective Time, any party hereto may
(a) extend the time for the performance of any obligation
or other act of any other party hereto, (b) waive any
inaccuracy in the representations and warranties contained
herein or in any document delivered pursuant hereto, and
(c) waive compliance with any agreement or condition
contained herein. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party or
parties to be bound thereby.
Section
9.05
Automatic
Termination.
This Agreement will be
automatically terminated without the requirement of any action
or notice by or to any party hereto in the event that:
(a) Parent has failed to file with the SEC and mail to its
stockholders the definitive Proxy Statement prior to
December 31, 2007; or
(b) if the Effective Time shall not have occurred on or
before January 31, 2008.
A-63
ARTICLE X
INDEMNIFICATION
Section
10.01
Survival
of Representations and Warranties.
(a) The representations and warranties of the Company and
the Members contained in this Agreement and any other document
or certificate relating hereto (collectively, the
Acquisition Documents
) shall survive the
Effective Time until December 31, 2008;
provided
,
however
, that the representations and warranties set
forth in
Section 3.14
shall survive the Effective
Time for a period of 36 months;
provided
further
that the representations and warranties set forth
in
Sections 3.01
,
3.02
,
3.03
,
3.04
,
3.05
,
3.06
,
3.13
,
3.15
and
3.16
(the
Company Basic
Representations
) shall survive until the end of the
applicable statute of limitations pertinent thereto in each
instance. Neither the period of survival nor the liability of
the Members with respect to the Companys and such
Members representations and warranties shall be affected
by any investigation made at any time (whether before or after
the Effective Time) by or on behalf of Parent or by any actual,
implied or constructive knowledge or notice of any facts or
circumstances that Parent may have as a result of any such
investigation or otherwise.
(b) The representations and warranties of Parent and the
Merger Sub contained in the Acquisition Documents shall survive
the Effective Time until December 31, 2008;
provided
,
however
, that the representations and
warranties set forth in
Sections 5.01
,
5.02
,
5.03
,
5.04
,
5.05(a)
,
5.07
,
5.08
,
5.11
,
5.14
,
5.16
,
5.17
and
5.19
(the
Parent Basic
Representations
) shall survive until the end of the
applicable statute of limitations pertinent thereto in each
instance;
provided
,
that
, in the event any
inaccuracy or breach of the representations and warranties set
forth in
Section 5.16
by Parent or Merger Sub is due
to any inaccuracy or breach of the representations and
warranties set forth in
Section 3.32
(subject to its
survival period pursuant to
Section 10.01(a)
) by the
Company, the representations and warranties of Parent and the
Merger Sub contained in
Section 5.16
shall only
survive from the Effective Time for a period of 18 months.
Neither the period of survival nor the liability of Parent and
Merger Sub with respect to Parents and Merger Subs
representations and warranties shall be affected by any
investigation made at any time (whether before or after the
Effective Time) by or on behalf of the Company or by any actual,
implied or constructive knowledge or notice of any facts or
circumstances that the Company may have as a result of any such
investigation or otherwise.
(c) The parties hereto agree that reliance shall not be an
element of any claim for misrepresentation or indemnification
under this Agreement. The waiver by any party of any condition
based on the accuracy of any such representation or warranty, or
based on the performance of, or compliance with, any covenant or
obligation, shall not affect the right to indemnification or
other remedy based on such representations, warranties,
covenants or obligations. If written notice of a claim has been
given in good faith prior to the expiration of the applicable
representations and warranties by any party, then the relevant
representations and warranties shall survive as to such claim
until such claim has been finally resolved.
Section
10.02
Indemnification
by the Members.
(a) After the Effective Time, Parent and its Affiliates
(including, after the Effective Time, the Surviving
Corporation), officers, directors, employees, agents, successors
and assigns (collectively, the
Parent Indemnified
Parties
) shall be indemnified and held harmless by the
Members, severally, and not jointly and severally, for any and
all liabilities, losses, damages of any kind, diminution in
value, claims, costs, expenses, fines, fees, deficiencies,
interest, awards, judgments, amounts paid in settlement and
penalties (including, without limitation, attorneys,
consultants and experts fees and expenses and other
costs of defending, investigating or settling claims) suffered,
incurred, accrued (in accordance with GAAP) or paid by them
(including, without limitation, in connection with any action
brought or otherwise initiated by any of them) (collectively,
Losses
) arising out of or resulting from:
(i) any inaccuracy or breach of any representation or
warranty (without giving effect to any qualification as to
materiality (or similar qualifications) contained therein) made
by the Company or any Member in the Acquisition Documents;
(ii) the breach of any covenant or agreement made by the
Company or any Member in the Acquisition Documents;
A-64
(iii) Losses from breach of contract or other claims made
by any party that had a contractual or other right to acquire
the Companys membership interests or assets;
(iv) any cost, loss or other expense (including the value
of any Tax deduction lost) as a result of the application of
Section 280G of the Code to any of the transactions
contemplated by this Agreement plus any necessary gross up
amount; or
(v) any Member expenses paid by the Surviving Corporation
following the Closing.
(b) As used herein, Losses are not limited to
matters asserted by third parties, but include Losses incurred
or sustained by the Parent Indemnified Parties in the absence of
claims by third parties.
(c) Notwithstanding anything to the contrary contained in
this Agreement, except with respect to (A) claims for
equitable remedies and (B) claims based on fraud or willful
misrepresentation or misconduct:
(i) the maximum aggregate amount of indemnifiable Losses
arising out of or resulting from the causes enumerated in
Sections 10.02(a)
or
10.02(b)
that may be
recovered from the Members shall not exceed $10,000,000; and
(ii) no indemnification payment by the Members with respect
to any indemnifiable Losses otherwise payable under
Section 10.02(a)
and arising out of or resulting
from the causes enumerated in
Section 10.02(a)(i)
shall be payable until such time as all such indemnifiable
Losses shall aggregate to more than $500,000, after which time
the Members shall be liable in full for all indemnifiable Losses
in excess of the first $500,000.
(d) In the event of a claim relating to any Indemnification
Claim any Parent Indemnified Person may have under
Article X
, Parent shall seek payment first out of
the Escrow Fund. Such Indemnification Amounts shall be payable
in Escrow Shares; provided, that, the Members
Representative may elect to have all or a portion of an
Indemnification Amount paid from Proceeds or other cash provided
by the Members in lieu of Escrow Shares. If the Escrow Fund has
been reduced to zero, Parent shall then be entitled to seek
payment for an unsatisfied Indemnification Amount directly from
the Members, subject to the terms and conditions set forth in
Article X.
Section
10.03
Indemnification
by Parent and Merger Sub.
(a) After the Effective Time, the Members shall be
indemnified and held harmless by Parent and Merger Sub
(collectively, the
Member Indemnified
Parties
) for any Losses arising out of or resulting
from :
(i) any inaccuracy or breach of any representation or
warranty (without giving effect to any qualification as to
materiality (or similar qualifications) contained therein) made
by Parent or Merger Sub in the Acquisition Documents; or
(ii) the breach of any covenant or agreement made by Parent
or Merger Sub in the Acquisition Documents.
(b) Notwithstanding anything to the contrary contained in
this Agreement:
(i) the maximum aggregate amount of indemnifiable Losses
arising out of or resulting from the causes enumerated in
Section 10.03(a)
that may be recovered from Parent
shall not exceed an amount determined as follows;
(1) determine the percentage of ownership of Parent held by
the Members, on a fully diluted basis resulting from the Closing
of the Merger, as of the Closing Date (after considering any
Redemption Shares, but not considering any Parent Warrants);
(2) subtract the amount determined in
Section 10.03(b)(i)(1)
above from 1.00, which will
represent the percentage ownership of JKA common stock on a
fully diluted basis held by JKA stockholders resulting from the
Closing of the Merger, as of the Closing Date (after considering
and Redemption Shares, but not considering any Parent
Warrants); and
(3) determine the maximum aggregate amount of indemnifiable
Losses that may be recovered from Parent by dividing $10,000,000
by the fractional percentage determined by subsection (2)
above.
A-65
(ii) no indemnification payment by Parent with respect to
any indemnifiable Losses otherwise payable under
Section 10.03(a)
and arising out of or resulting
from the causes enumerated in
Section 10.03(a)
shall
be payable until such time as all such indemnifiable Losses
shall aggregate to more than $500,000, after which time Parent
shall be liable in full for all indemnifiable Losses in excess
of the first $500,000.
(iii) Any payments made pursuant to
Section 10.03(b)(ii)
shall be paid to the Members in
an amount determined by dividing (A) the claim amount by
(B) the amount determined in
Section 10.03(b)(i)(2)
above.
(c) In no event shall the Members be entitled to
indemnification pursuant to this
Article X
for
Losses for which they are compensated through the post closing
adjustment mechanism in
Section 2.03
hereof. In
addition, the exclusion of the first $500,000 of Losses in
Section 10.03(b)(ii)
shall not apply to reduce the
Losses of the Company in connection with any Parent Expense
Excess.
Section
10.04
Indemnification
Procedures.
(a) For purposes of this
Section 10.04
, a party
against which indemnification may be sought is referred to as
the
Indemnifying Party
and the party which
may be entitled to indemnification is referred to as the
Indemnified Party
.
(b) The obligations and liabilities of Indemnifying Parties
under this
Article X
with respect to Losses arising
from actual or threatened claims or demands by any third party
which are subject to the indemnification provided for in this
Article X
(
Third Party Claims
)
shall be governed by and contingent upon the following
additional terms and conditions: if an Indemnified Party shall
receive notice of any Third Party Claim, the Indemnified Party
shall give the Indemnifying Party notice of such Third Party
Claim within 15 days of the receipt by the Indemnified
Party of such notice;
provided
,
however
, that the
failure to provide such notice shall not release an Indemnifying
Party from any of its obligations under this
Article X
except to the extent that such
Indemnifying Party is materially prejudiced by such failure. The
notice of claim shall describe in reasonable detail the facts
known to the Indemnified Party giving rise to such
indemnification claim, and the amount or good faith estimate of
the amount arising therefrom.
(c) If the Indemnifying Party acknowledges in writing its
obligation to indemnify the Indemnified Party hereunder against
any Losses that may result from such Third Party Claim, then the
Indemnifying Party shall be entitled to assume and control the
defense of such Third Party Claim through counsel of its choice
(such counsel to be reasonably acceptable to the Indemnified
Party) if it gives notice of its intention to do so to the
Indemnified Party within 15 days of the receipt of such
notice from the Indemnified Party;
provided
,
however
, that the Indemnifying Party shall not have the
right to assume the defense of the Third Party Claim if
(i) any such claim seeks, in addition to or in lieu of
monetary losses, any injunctive or other equitable relief,
(ii) the Indemnifying Party fails to provide reasonable
assurance to the Indemnified Party of the adequacy of the Escrow
Fund to provide indemnification in accordance with the
provisions of this Agreement and the Escrow Agreement with
respect to such proceeding, (iii) there is reasonably
likely to exist a conflict of interest that would make it
inappropriate (in the judgment of the Indemnified Party in its
reasonable discretion) for the same counsel to represent both
the Indemnified Party and the Indemnifying Party, or
(iv) settlement of, or an adverse judgment with respect to,
the Third Party Claim may establish (in the good faith judgment
of the Indemnified Party) a precedential custom or practice
adverse to the business interests of the Indemnified Party or
would increase the Tax liability of the Indemnified Party;
provided
further
, that if by reason of the Third
Party Claim a Lien, attachment, garnishment, execution or other
encumbrance is placed upon any of the property or assets of such
Indemnified Party, the Indemnifying Party, if it desires to
exercise its right to assume such defense of the Third Party
Claim, must agree to use a portion of the Escrow Fund to furnish
a satisfactory indemnity bond to obtain the prompt release of
such Lien, attachment, garnishment, execution or other
encumbrance. If the Indemnifying Party assumes the defense of a
Third Party Claim, it will conduct the defense actively,
diligently and at its own expense, and, subject to the limits of
this Agreement, it will hold all Indemnified Parties harmless
from and against all Losses caused by or arising out of any
settlement thereof. The Indemnified Party shall cooperate with
the Indemnifying Party in such defense and make available to the
Indemnifying Party, at the Indemnifying Partys expense,
all witnesses, pertinent records, materials and information in
the Indemnified Partys possession or under the Indemnified
Partys control relating thereto as is reasonably requested
by the Indemnifying Party. Except with the written consent of
the Indemnified Party (not to be unreasonably withheld), the
Indemnifying Party will not, in the defense of a Third Party
Claim, consent to the
A-66
entry of any judgment or enter into any settlement
(i) which does not include as an unconditional term thereof
the giving to the Indemnified Party by the third party of a
release from all liability with respect to such suit, claim,
action, or proceeding; (ii) unless there is no finding or
admission of (A) any violation of Law by the Indemnified
Party (or any Affiliate thereof), (B) any liability on the
part of the Indemnified Party (or any Affiliate thereof) or
(C) any violation of the rights of any person and no effect
on any other claims of a similar nature that may be made by the
same third party against the Indemnified Party (or any Affiliate
thereof); or (iii) which exceeds the limits of
indemnification set forth in this Agreement.
(d) In the event that the Indemnifying Party fails or
elects not to assume the defense of an Indemnified Party against
such Third Party Claim which the Indemnifying Party had the
right to assume pursuant to
Section 10.04(c)
, the
Indemnified Party shall have the right, at the expense of the
Indemnifying Party, to defend or prosecute such claim in any
manner as it may reasonably deem appropriate and may settle such
claim after giving written notice thereof to the Indemnifying
Party, on such terms as such Indemnified Party may deem
appropriate, and the Indemnified Party may seek prompt
reimbursement from the Escrow Fund for any Losses incurred in
connection with such settlement. If no settlement of such Third
Party Claim is made, the Indemnified Party may seek prompt
reimbursement from the Escrow Fund for any Losses arising out of
any judgment rendered with respect to such claim. Any Losses for
which an Indemnified Party is entitled to indemnification
hereunder shall be promptly paid as suffered, incurred or
accrued (in accordance with GAAP). If the Indemnifying Party
does not elect to assume the defense of a Third Party Claim
which it has the right to assume hereunder, the Indemnified
Party shall have no obligation to do so.
(e) In the event that the Indemnifying Party is not
entitled to assume the defense of the Indemnified Party against
such Third Party Claim pursuant to
Section 10.04(c)
,
the Indemnified Party shall have the right, at the expense of
the Indemnifying Party, to defend or prosecute such claim and
consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim in any manner
it may reasonably deem appropriate after giving written notice
thereof to the Indemnifying Party, and the Indemnified Party may
seek prompt reimbursement from the Escrow Fund for any Losses
incurred in connection with such judgment or settlement. In such
case, the Indemnified Party shall conduct the defense of the
Third Party Claim actively and diligently, and the Indemnifying
Party shall cooperate with the Indemnified Party in such defense
and make available to the Indemnified Party, at the Indemnifying
Partys expense, all such witnesses, records, materials and
information in the Indemnifying Partys possession or under
the Indemnifying Partys control relating thereto as is
reasonably requested by the Indemnified Party. If no settlement
of such Third Party Claim is made, the Indemnified Party may
seek prompt reimbursement from the Escrow Fund for any Losses
arising out of any judgment rendered with respect to such claim.
Any Losses for which an Indemnified Party is entitled to
indemnification hereunder shall be promptly paid as suffered,
incurred or accrued (in accordance with GAAP).
Section
10.05
Members
Representative.
(a) CHGCM Co., LLC, and SGD (such person or persons and any
successor or successors being collectively, each or either or
both, the
Members Representative
) shall
act as the representative of the Members, and shall be
authorized to act on behalf of the Members and to take any and
all actions required or permitted to be taken by the
Members Representative under this Agreement with respect
to any claims (including the settlement thereof) made by a
Parent Indemnified Party for indemnification pursuant to this
Article X
and with respect to any actions to be
taken by the Members Representative pursuant to the terms
of the Escrow Agreement (including, without limitation, the
exercise of the power to (i) authorize the delivery of
Escrow Securities to a Parent Indemnified Party in satisfaction
of claims by a Parent Indemnified Party, (ii) agree to,
negotiate, enter into settlements and compromises of, and comply
with orders of courts with respect to any claims for
indemnification and (iii) take all actions necessary in the
judgment of the Members Representative for the
accomplishment of the foregoing). In all matters relating to
this
Article X
, the Members Representative
shall be the only party entitled to assert the rights of the
Members, and the Members Representative shall perform all
of the obligations of the Members hereunder. The Parent
Indemnified Parties shall be entitled to rely on all statements,
representations and decisions of the Members
Representative. The Members shall have the right to change
either one or both of the persons serving as Members
Representative from time to time, which shall be effective upon
written notification to the Parent; provided, however that any
person serving as a Members Representative must be a
Member or employed by a Member.
A-67
(b) The Members shall be bound by all actions taken by the
Members Representative in his, her or its capacity
thereof, except for any action that conflicts with the
limitations set forth in subsection (d) below. The
Members Representative shall promptly, and in any event
within five (5) business days, provide written notice to
the Members of any action taken on behalf of them by the
Members Representative pursuant to the authority delegated
to the Members Representative under this
Section 10.05.
The Members Representative
shall at all times act in his or her capacity as Members
Representative in a manner that the Members Representative
believes to be in the best interest of the Members. Neither the
Members Representative nor any of its directors, officers,
agents or employees, if any, shall be liable to any person for
any error of judgment, or any action taken, suffered or omitted
to be taken under this Agreement or the Escrow Agreement, except
in the case of its gross negligence, bad faith or willful
misconduct. The Members Representative may consult with
legal counsel, independent public accountants and other experts
selected by it. The Members Representative shall not have
any duty to ascertain or to inquire as to the performance or
observance of any of the terms, covenants or conditions of this
Agreement or the Escrow Agreement. As to any matters not
expressly provided for in this Agreement or the Escrow
Agreement, the Members Representative shall not exercise
any discretion or take any action.
(c) Each Member shall indemnify and hold harmless and
reimburse the Members Representative from and against such
Members ratable share of any and all liabilities, losses,
damages, claims, costs or expenses suffered or incurred by the
Members Representative arising out of or resulting from
any action taken or omitted to be taken by the Members
Representative under this Agreement or the Escrow Agreement,
other than such liabilities, losses, damages, claims, costs or
expenses arising out of or resulting from the Members
Representatives gross negligence, bad faith or willful
misconduct.
(d) Notwithstanding anything to the contrary herein or in
the Escrow Agreement, the Members Representative is not
authorized to, and shall not, accept on behalf of any Member any
merger consideration to which such Member is entitled under this
Agreement and the Members Representative shall not in any
manner exercise, or seek to exercise, any voting power
whatsoever with respect to shares of capital stock of the
Company or Parent now or hereafter owned of record or
beneficially by any Member unless the Members
Representative is expressly authorized to do so in a writing
signed by such Member.
Section
10.06
Taxes.
In
addition to, and not by way of limitation on, the indemnities
set forth in
Section 10.02(a)
, the Members agree to,
and shall, indemnify a Parent Indemnified Party and hold each of
them harmless for Losses resulting from Taxes for all tax
periods prior to Closing (or otherwise related to a tax periods
prior to Closing).
Section
10.07
Reduction
of Indemnified Amounts.
(a) Notwithstanding any provision of this
Article X
to the contrary, Losses owed by the
Members to a Parent Indemnified Party shall be reduced by the
amount of any mitigating recovery a Parent Indemnified Party
shall have received with respect thereto from any recovery by
the Parent Indemnified Party under any insurance policies,
without regard to whether the Parent Indemnified Party or
another person paid the premiums therefor. If such a recovery is
received by an a Parent Indemnified Party after it receives
payment or other credit under this Agreement with respect to
indemnified Losses, then a refund equal to the aggregate amount
of such recovery shall be made promptly to the Members.
(b) Notwithstanding any provision of this
Article X
to the contrary, Losses owed by Parent to
a Member Indemnified Party shall be reduced by the amount of any
mitigating recovery a Member Indemnified Party shall have
received with respect thereto from any recovery by the Member
Indemnified Party under any insurance policies, without regard
to whether the Member Indemnified Party or another person paid
the premiums therefor. If such a recovery is received by an a
Member Indemnified Party after it receives payment or other
credit under this Agreement with respect to indemnified Losses,
then a refund equal to the aggregate amount of such recovery
shall be made promptly to Parent.
Section
10.08
Exclusive
Rights and Remedies.
The provisions of this
Article X
shall be the exclusive basis of the
parties to this Agreement for (i) any breach of a
representation or warranty herein and (ii) any failure of a
party to comply with any obligation, covenant, agreement or
condition herein.
A-68
ARTICLE XI
GENERAL
PROVISIONS
Section
11.01
Notices.
All
notices, requests, claims, demands and other communications
hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in
person, by cable, telecopy, facsimile, telegram or telex or by
registered or certified mail (postage prepaid, return receipt
requested) to the respective parties
and/or
their
designees or successors at the following addresses (or at such
other address for a party as shall be specified in a notice
given in accordance with this
Section 11.01
):
(a) if to Parent or Merger Sub:
JK Acquisition Corp.
4400 Post Oak Parkway
Suite 2530
Houston, Texas 77027
Facsimile No.:
(713) 552-9226
Attention: James P. Wilson
with a copy to:
Patton Boggs LLP
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Facsimile No.:
(214) 758-1550
Attention: Fred S. Stovall, Esq.
(b) if to the Company:
Multi-Shot, LLC
2507 N. Frazier
Conroe, Texas 77303
Facsimile No.:
(936) 441-6635
Attention: Allen Neel
with a copy to:
Catalyst Hall Growth Capital Co., LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Facsimile No.:
(713) 623-0473
Attention: Ron Nixon and Rick Herrman
with a copy to:
SG-Directional, LLC
P.O. Box 3417
Little Rock, Arkansas
72203-3417
Facsimile No.:
(501) 377-3463
Attn: Ronald M. Clark
(c) if to the Members Representatives:
Catalyst Hall Growth Capital Co., LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Facsimile No.:
(713) 623-0473
Attention: Ron Nixon and Rick Herrman
and
A-69
SG-Directional, LLC
P.O. Box 3417
Little Rock, Arkansas
72203-3417
Facsimile No.:
(501) 377-3463
Attn: Ronald M. Clark
with a copy to:
Franklin, Cardwell & Jones, P.C.
1001 McKinney, Suite 1800
Houston, Texas 77002
Facsimile No.:
(713) 227-5657
Attention: Randolph Ewing, Esq.
with a further copy to:
Locke, Liddell & Sapp, PLLC
3400 JPMorgan Chase Tower
600 Travis
Houston, Texas 77002
Facsimile No.:
(713) 229-2510
Attention: Craig L. Weinstock, Esq.
Section
11.02
Certain
Definitions.
(a) As used in this Agreement, the following terms shall
have the following meanings:
(i)
Adjusted EBITDA
means for any
period, an amount equal to: the sum, without duplication, of the
amounts for such period of (a) Net Income,
(b) interest expense, (c) provisions for taxes based
on income, (d) total depreciation expense, (e) total
amortization expense, (f) non-cash losses in connection
with dispositions of equipment having a basis at the time of
disposition, (g) so called First
Tier Bonuses or Commission Bonuses paid
to or accrued to management personnel, as defined in
Schedule B of each of the employment agreements dated
August 1, 2004, between Messrs. Neel, Culbreth and
Cudd and the Company, and further defined within these
agreements as 0.50% of monthly sales for one of the
aforementioned participants and 1.00% of Companys monthly
EBITDA for two of the aforementioned participants, (h) any
bonuses or payments made to or accrued to employees of the
Company under the Multi-Shot LLC 2004 Incentive Plan and the
Multi-Shot, LLC Special Bonus Plan, each of such plans having
been terminated on or about April 1, 2007, and (j) any
and all management fees paid to or accrued for with respect to
amounts due to Affiliates of the Company (which shall not exceed
an aggregate of $120,000 on an annualized basis), all as
determined in accordance with GAAP.
(ii)
Affiliate
of a specified
person means a person who directly or indirectly through one or
more intermediaries controls, is controlled by, or is under
common control with such specified person.
(iii)
beneficial owner
with
respect to any shares means a person who shall be deemed to be
the beneficial owner of such shares (i) which such person
or any of its Affiliates or associates (as such term is defined
in
Rule 12b-2
promulgated under the Exchange Act) beneficially owns, directly
or indirectly, (ii) which such person or any of its
Affiliates or associates has, directly or indirectly,
(A) the right to acquire (whether such right is exercisable
immediately or subject only to the passage of time), pursuant to
any agreement, arrangement or understanding or upon the exercise
of consideration rights, exchange rights, warrants or options,
or otherwise, or (B) the right to vote pursuant to any
agreement, arrangement or understanding, or (iii) which are
beneficially owned, directly or indirectly, by any other persons
with whom such person or any of its Affiliates or associates or
person with whom such person or any of its Affiliates or
associates has any agreement, arrangement or understanding for
the purpose of acquiring, holding, voting or disposing of any
shares.
A-70
(iv)
business day
means any day
on which banks are not required or authorized to close in New
York, New York.
(v)
control
(including the terms
controlled by and under common control
with) means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting securities, as trustee or
executor, by contract or credit arrangement or otherwise.
(vi)
Dispute
means that certain
lawsuit styled
JK Acquisition Corp. v. Multi-Shot, LLC,
et al,
Cause
No. 2007-42384,
District Court of Harris County, Texas.
(vii)
EBITDA
means for a period,
an amount equal to: the sum, without duplication, of the amounts
for such period of (a) Net Income, (b) interest
expense, (c) provisions for taxes based on income,
(d) total depreciation expense, and (e) total
amortization expense.
(viii)
Escrow Agent
means First
Zions National Bank, a national banking association.
(ix)
Estimated Parent Expenses
means the $3,202,500 of expenses estimated to be comprised
of (1) the $300,000 advanced by Messrs. Wilson and
Spickelmier to date, (2) up to $500,000 additional advances
that Messrs. Wilson and Spickelmier may fund, (3) the
$350,000 to be paid to Patton Boggs pursuant to the PB
Agreement, (4) the $500,000 to be paid to Gibbs &
Bruns pursuant to the GB Agreement, and (5) the $1,552,500
payable to FBW.
(x)
FARMITA
means that certain
First Amended and Restated Membership Interest Transfer
Agreement, dated as of March 30, 2007, by and among the
Company, the Original Members and SGD.
(xi)
FBW
means Ferris, Baker
Watts, Incorporated.
(xii)
FBW Warrants
means the
warrants to purchase up to 1,400,000 shares of Parent
Common Stock at an exercise price of $6.50 per share held by FBW.
(xiii)
Founder Expenses
means all
documented expenses paid to third parties not affiliated with
James P. Wilson or Keith D. Spickelmier at the direction of
Messrs. Wilson or Spickelmier that are reasonable in amount
and purpose until the Closing, which Founder Expenses will be
listed on
Section 11.02(a)(x)
of the Parent
Disclosure Schedule to be delivered to the Company at Closing,
provided that the Founder Expenses shall not include amounts
paid to Patton Boggs under the PB Agreement or to
Gibbs & Bruns under the GB Agreement or the amounts
payable to FBW.
(xiv)
Gain Share Plan
means that
certain 2007 Gain Share Plan adopted by the Board of Managers of
the Company on or about April 1, 2007.
(xv)
GB Agreement
means an
agreement among Parent, Merger Sub, James P. Wilson, Keith D.
Spickelmier, Herbert C. Williamson, Michael H. McConnell and
Gibbs & Bruns, a copy of which is attached hereto as
Exhibit F.
(xvi)
Knowledge
means, with
respect to any party hereto, actual or deemed knowledge of:
(i) in the case of the Company, the Companys
managers, as well as Allen Neel, Paul Culbreth, David Cudd, and
Scott Bork, and (ii) in the case of Parent, James P.
Wilson, Keith D. Spickelmier, Michael H. McConnell and Herbert
C. Williamson, and such knowledge that would be imputed to such
persons upon reasonable inquiry or due investigation. An
individual will be deemed to have knowledge of a particular
fact, circumstance, event or other matter if (i) such fact
circumstance, event or other matter is reflected in one or more
documents, written or electronic, that are or have been in such
individuals possession or that would reasonably be
expected to be reviewed by an individual who has the duties and
responsibilities of such individual in the customary performance
of such duties and responsibilities, or (ii) such knowledge
could be obtained from reasonable inquiry of those persons
employed by the Company (as the case may be) charged with
administrative or operational responsibility for such matter for
such party by the person in the discharge of his duties and
responsibilities with regards to those persons.
A-71
(xvii)
Net Income
means, for any
period, the net income (or loss) of the Company for such period
taken as a single accounting period determined in conformity
with GAAP.
(xviii)
Original Members
means
all of the Companys existing Members, excluding SGD.
(xix)
Parent Expense Excess
means
the amount to which the aggregate liabilities and indebtedness
at the Closing exceed the Estimated Parent Expenses.
(xx)
PB Agreement
means an
agreement between Parent, Merger Sub and Patton Boggs, a copy of
which is attached hereto as
Exhibit G.
(xxi)
Permitted Liens
means
(a) mechanics and materialmens liens and
similar encumbrances arising in the ordinary course of the
Business of the Company that are not delinquent and not material
to the business of the Company, (b) liens or encumbrances
for federal, state, local, foreign and other taxes or
assessments not yet due and payable or delinquent,
(c) purchase money encumbrances and encumbrances securing
rental payments under capital lease arrangements that are not
delinquent and not material to the Business, and (d) liens
in favor of Wells Fargo Bank.
(xxii)
Permitted Tax Distributions
means any distribution by the Company to its Members of such
portion of the Net Income for any applicable year necessary to
pay the Taxes incurred by the Members as permitted by the
Company Regulations.
(xxiii)
Person
means an
individual, corporation, partnership, limited partnership,
syndicate, person (including, without limitation, a
person as defined in Section 13(d)(3) of the
Exchange Act), trust, association or entity or government,
political subdivision, agency or instrumentality of a government.
(xxiv)
Recapitalization
means the
transaction consummated on or about April 1, 2007 pursuant
to the terms of that certain Recapitalization and Purchase
Agreement dated effective April 1, 2007, by and among the
Company, the Original Members and SGD.
(xxv)
RST Transaction
means the
transaction under which the Company is acquiring an ownership
interest, together with Cyrus Solutions Corporation, a Texas
corporation (
Cyrus
) in a legal entity to be
formed.
(xxvi)
Settlement Agreement
means
that certain Settlement Agreement entered into by and among
Parent, Company and SGD, which settles the Dispute.
(xxvii)
Stephens
means The
Stephens Group, LLC, an Arkansas limited liability company.
(xxviii)
Stephens Group Debt
means all indebtedness or other obligations of the Company
owing to Stephens pursuant to that certain subordinated
promissory note dated on or about April 1, 2007, executed
by the Company in favor of Stephens in the original principal
amount of $15,000,000.
(xxix)
subsidiary
or
subsidiaries
of any person means any
corporation, partnership, joint venture or other legal entity of
which such person (either alone or through or together with any
other subsidiary) owns, directly or indirectly, more than 50% of
the stock or other equity interests, the holders of which are
generally entitled to vote for the election of the board of
directors or other governing body of such corporation or other
legal entity.
(xxx)
Transaction Expenses
means
all out-of-pocket expenses and costs incurred by the Company
and/or
the
Members from and after May 15, 2006, in connection with or
relating to (A) the negotiation, drafting and contemplated
consummation of the transactions contemplated under the Original
Agreement, the Second Agreement, this Agreement and the
Settlement Agreement, and (B) the Dispute, including,
without limitation, all legal, accounting, tax, travel and
ordinary expenses, but excluding any expenses referenced under
Section 3.22
hereof, which Transaction Expenses will
be summarized on
Section 11.02(a)(xxvi)
of the
Company Disclosure Schedule to be delivered to the Parent at
Closing.
(xxxi)
Ulterra Acquisition
means
the transaction consummated on July 6, 2007, pursuant to
the terms of that certain Asset Purchase Agreement dated
effective July 6, 2007, by and among the Company, Ulterra
MWD, L.P. and Ulterra Drilling Technologies, L.P.
A-72
(b) The following terms shall have the meanings defined for
such terms in the Sections of this Agreement set forth below:
|
|
|
Term
|
|
Section
|
|
2006 Balance Sheet
|
|
2.02(b)
|
Acquisition Documents
|
|
10.01(a)
|
Actual Net Enterprise Value
|
|
2.03(i)
|
Actual Parent Stock Consideration
|
|
2.03(i)
|
Adjusted EBITDA
|
|
11.02(a)(i)
|
Adjustment Amount
|
|
2.03(a)
|
Adjustment Notice
|
|
2.03(a)
|
Affiliate
|
|
7.02(b), 7.10, 11.02(a)
|
AMEX
|
|
2.03(h)
|
Antitrust Laws
|
|
7.06(b)
|
Assets
|
|
3.17
|
Audited Financial Statements
|
|
3.08(a)
|
Back Up Transaction
|
|
5.18
|
Beneficial Owner
|
|
11.02(a)
|
Business
|
|
3.13
|
Business Day
|
|
11.02(a)
|
Cash Consideration
|
|
2.01(b)
|
Cash Exercise Warrant
|
|
2.06(n)
|
Cash Exercise Warrant Shares
|
|
2.06(j)
|
CERCLA
|
|
3.13
|
Certificate of Merger
|
|
1.02
|
CHGCM
|
|
Recitals
|
Closing
|
|
1.02
|
Closing Balance Sheet
|
|
2.03(a)
|
Closing Date
|
|
1.02
|
Closing Indebtedness
|
|
2.03(a)
|
Closing Working Capital
|
|
2.03(a)
|
COBRA
|
|
3.11(d)
|
Code
|
|
2.04(g)
|
Company
|
|
Preamble, 3.15(c)
|
Company Basic Representations
|
|
10.01(a)
|
Company Charter Documents
|
|
3.02
|
Company Confidential Information
|
|
3.14(f)
|
Company Disclosure Schedule
|
|
Article III
|
Company Exluded Changes
|
|
7.19(c)
|
Company Financial Statements
|
|
3.08(a)
|
Company Insiders
|
|
7.13
|
Company Intellectual Property
|
|
3.14(a)
|
Company Interest Certificates
|
|
2.04(a)
|
Company Interest to Cash Exchange Ratio
|
|
2.01(b)
|
Company Interest to Parent Common Stock Exchange Ratio
|
|
2.01(b)
|
Company Interest to Parent Warrant Exchange Ratio
|
|
2.01(b)
|
A-73
|
|
|
Term
|
|
Section
|
|
Company Interests
|
|
Preamble
|
Company Material Adverse Effect
|
|
3.01
|
Company Permits
|
|
3.07(a)
|
Competing Transaction
|
|
7.04(b)
|
Contingent Award
|
|
2.06(a)
|
Contingent Award Calculation
|
|
2.06(f)
|
Contingent Award Dispute Notice
|
|
2.06(f)
|
Contingent Award Notice
|
|
2.06(e)
|
Contingent Award Per Share Market Value
|
|
2.06(b)
|
Contingent Award Shares
|
|
2.06(d)
|
Control
|
|
11.02(a)
|
Current Assets
|
|
2.02(a)
|
Current Liabilities
|
|
2.02(a)
|
Determination
|
|
2.06(c)
|
Determination Date
|
|
2.06(c)
|
DGCL
|
|
1.01
|
Dispute
|
|
11.02(a)
|
Dispute Notice
|
|
2.03(b)
|
EBITDA
|
|
11.02(a)
|
Effective Time
|
|
1.02
|
Employee Obligation
|
|
3.14(i)
|
Employment Agreement(s)
|
|
7.05(b)
|
Environmental Laws
|
|
3.13
|
Environmental Liabilities
|
|
3.13
|
Environmental Permits
|
|
3.13
|
ERISA
|
|
3.11(a)
|
ERISA Affiliate
|
|
3.11(e)
|
Escrow Account
|
|
2.04(b)
|
Escrow Agent
|
|
11.02(a)
|
Escrow Agreement
|
|
2.04(b)
|
Escrow Fund
|
|
2.04(b)
|
Escrow Per Share Market Value
|
|
2.03(h)
|
Escrow Securities
|
|
2.04(a)
|
Escrow Shares
|
|
2.01(b)
|
Escrow Warrants
|
|
2.04(a)
|
Estimated Closing Balance Sheet
|
|
2.02(b)
|
Estimated Closing Working Capital
|
|
2.02(b)
|
Estimated Indebtedness
|
|
2.02(b)
|
Estimated Net Enterprise Value
|
|
2.01(b)
|
Estimated Parent Expenses
|
|
11.02(a)
|
Estimated Third Party Indebtedness
|
|
2.01(b)
|
Exchange Act
|
|
5.04(b)
|
Exchange Agent
|
|
2.04(a)
|
Exchange Value
|
|
2.08(a)
|
A-74
|
|
|
Term
|
|
Section
|
|
Execution Date
|
|
Preamble
|
FARMITA
|
|
11.02(a)
|
FBW
|
|
11.02(a)
|
FBW Warrants
|
|
11.02(a)
|
Final Conversion Schedule
|
|
7.16
|
FIRPTA
|
|
8.02(p)
|
Form S-4
Alternative
|
|
7.02(b)
|
Founder Expenses
|
|
11.02(a)
|
Founders
|
|
8.01(a)
|
Founders RR Agreement
|
|
5.17
|
Fully Diluted Company Interest Amount
|
|
2.01(b)
|
GAAP
|
|
2.02(a)
|
Gain Share Plan
|
|
11.02(a)
|
GB Agreement
|
|
11.02(a)
|
Governmental Entity
|
|
3.06(b)
|
Gross Enterprise Value
|
|
2.01(b)
|
Gross Redemption Dollar Amount
|
|
2.08(a)
|
Hazardous Substances
|
|
3.13
|
HSR Act
|
|
3.06(b)
|
Indebtedness
|
|
2.01(b)
|
Indemnification Claim
|
|
2.04(b)
|
Indemnified Party
|
|
10.04(a)
|
Indemnifying Party
|
|
10.04(a)
|
Independent Accounting Firm
|
|
2.03(d)
|
Index Warrant
|
|
2.06(b)
|
Index Warrant Exercise Notice
|
|
2.06(o)
|
Index Warrant Holder
|
|
2.06(b)
|
Infringement
|
|
3.14(a)
|
Initial Determination Date
|
|
2.06(c)
|
Initial Merger Consideration
|
|
2.01(e)
|
Intellectual Property
|
|
3.14(a)
|
Interim Financial Statements
|
|
3.08(a)
|
Inventions
|
|
3.14(a)
|
IP Rights
|
|
3.14(a)
|
Knowledge
|
|
11.02(a)
|
Law
|
|
3.06(a)
|
Legal Proceeding
|
|
3.10
|
Legal Requirement
|
|
3.13
|
Letter of Transmittal
|
|
2.04(a)
|
Liabilities
|
|
3.08(b)
|
Liens
|
|
3.17
|
Losses
|
|
10.02(a)
|
Marks
|
|
3.14(a)
|
Material Contracts
|
|
3.12(a)
|
A-75
|
|
|
Term
|
|
Section
|
|
Measurement Date
|
|
2.06(b)
|
Measurement Period
|
|
2.06(b)
|
Member Indemnified Parties
|
|
10.03(a)
|
Members
|
|
Preamble
|
Members Representative
|
|
10.05(a)
|
Merger
|
|
Preamble
|
Merger Consideration
|
|
2.03(i), 2.08(k)
|
Merger Sub
|
|
Preamble
|
Multi-employer Plan
|
|
3.11(c)
|
Multiple Employer Plan
|
|
3.11(c)
|
Multi-Shot, Inc.
|
|
1.04(a)
|
Net Income
|
|
11.02(a)
|
Net Redemption Dollar Amount
|
|
2.08(a)
|
New Membership Interests
|
|
7.02(b)
|
Non-Disclosure Agreement
|
|
7.03(b)
|
Non-Solicitation Agreement(s)
|
|
7.05(c)
|
Opinion
|
|
5.07
|
Order
|
|
8.01(b)
|
Original Agreement
|
|
Preamble
|
Original Members
|
|
11.02(a)
|
Other Filings
|
|
7.01(a)
|
Parent
|
|
Preamble, 5.14(c)
|
Parent Assets
|
|
5.15
|
Parent Audited Financial Statements
|
|
5.11(a)
|
Parent Basic Representations
|
|
10.01(b)
|
Parent Common Stock
|
|
Preamble
|
Parent Disclosure Schedule
|
|
Article V
|
Parent Expense Excess
|
|
11.02(a)
|
Parent Excluded Changes
|
|
7.19(c)
|
Parent Indemnified Parties
|
|
10.02(a)
|
Parent Interim Financial Statements
|
|
5.11(a)
|
Parent Liens
|
|
5.15
|
Parent Material Adverse Effect
|
|
5.01(a)
|
Parent Preferred Stock
|
|
5.03(a)
|
Parent Reference Balance Sheet
|
|
5.11(a)
|
Parent SEC Reports
|
|
5.05(a)
|
Parent Shares
|
|
2.01(b)
|
Parent Stock Consideration
|
|
2.01(b)
|
Parent Stockholder Approval
|
|
7.01(a)
|
Parent Stockholders Meeting
|
|
3.32
|
Parent Warrant
|
|
2.01(b)
|
Patton Boggs
|
|
1.02
|
PB Agreement
|
|
11.02(a)
|
Permitted Liens
|
|
11.02(a)
|
A-76
|
|
|
Term
|
|
Section
|
|
Permitted Tax Distributers
|
|
11.02(a)
|
Person
|
|
11.02(a)
|
Plan(s)
|
|
3.11(a)
|
Preliminary Conversion Schedule
|
|
7.16
|
Proceeds
|
|
2.03(i)(i)
|
Proxy Statement
|
|
3.32
|
Public Stockholders
|
|
8.01(a)
|
RCRA
|
|
3.13
|
Real Property
|
|
3.13
|
Recapitalization
|
|
11.02(a)
|
Redemption Calculations
|
|
2.08(a), 2.08(c)
|
Redemption Dispute Notice
|
|
2.08(a), 2.08(c)
|
Redemption Liability Amount
|
|
2.08(a)
|
Redemption Liability Shares
|
|
2.08(a)
|
Redemption Notice
|
|
2.08(a), 2.08(b)
|
Redemption Option
|
|
2.08(a)
|
Redemption Price Differential
|
|
2.08(a)
|
Redemption Share Price
|
|
2.08(a)
|
Redemption Shares Number
|
|
2.08(a)
|
Redemption Value Safe Harbor
|
|
2.08(a)
|
Redemption Warrant
|
|
2.08(a)
|
Reference Balance Sheet
|
|
3.08(a)
|
Registration Rights Agreement
|
|
7.02(a)
|
Release
|
|
3.13
|
Remedial Action
|
|
3.13
|
Representatives
|
|
7.03(a)
|
RST Transaction
|
|
11.02(a)
|
Safe Harbor Shares
|
|
2.08(a)
|
SEC
|
|
5.5(a)
|
Second Agreement
|
|
Preamble
|
Second Determination Date
|
|
2.06(c)
|
Section 16 Information
|
|
7.13
|
Securities Act
|
|
2.07
|
Settlement Agreement
|
|
11.02(a)
|
SGD
|
|
Preamble
|
Shares in Excess of Safe Harbor
|
|
2.08(a)
|
Software
|
|
3.14(j)
|
Source Materials
|
|
3.14(c)
|
Stephens
|
|
11.02(a)
|
Stephens Group Debt
|
|
11.02(a)
|
Subsidiary(ies)
|
|
11.02(a)
|
Surviving Corporation
|
|
1.01
|
Target Working Capital
|
|
2.03(g)
|
Tax(s)
|
|
3.15(c)
|
A-77
|
|
|
Term
|
|
Section
|
|
Tax Authority
|
|
3.15(c)
|
Tax Return(s)
|
|
3.15(a)
|
Taxable
|
|
3.15(c)
|
Terminating Company Breach
|
|
9.01(c)
|
Terminating Parent Breach
|
|
9.01(d)
|
Third Determination Date
|
|
2.06(c)
|
Third Determination Period
|
|
2.06(c)
|
Third Party Claims
|
|
10.04(b)
|
TLLCA
|
|
1.01
|
Total Exercise Warrant Value
|
|
2.06(d)
|
Trading Price
|
|
2.06(b)
|
Transaction Expenses
|
|
11.02(a)
|
Transaction Related Members Equity Charges
|
|
2.01(c)
|
Ulterra Acquisition
|
|
11.02(a)
|
Used
|
|
3.14(a)
|
WARN Act
|
|
7.15
|
Weighted Average Index Warrant Exercise Price
|
|
2.06(d)
|
Working Capital
|
|
2.02(a)
|
Section
11.03
Severability.
If
any term or other provision of this Agreement is invalid,
illegal or incapable of being enforced by any rule of Law or
public policy, all other conditions and provisions of this
Agreement shall nevertheless remain in full force and effect so
long as the economic or legal substance of the transactions
contemplated by this Agreement is not affected in any manner
materially adverse to any party. Upon such determination that
any term or other provision is invalid, illegal or incapable of
being enforced, the parties hereto shall negotiate in good faith
to modify this Agreement so as to effect the original intent of
the parties as closely as possible in a mutually acceptable
manner in order that the transactions contemplated by this
Agreement be consummated as originally contemplated to the
fullest extent possible.
Section
11.04
Assignment;
Binding Effect; Benefit.
Neither this
Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto
(whether by operation of Law or otherwise) without the prior
written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in
this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other
than the parties hereto or their respective successors and
assigns any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
Section
11.05
Incorporation
of Exhibits.
The Company Disclosure Schedule,
the Parent Disclosure Schedule, the Schedules and all Exhibits
attached hereto and referred to herein are hereby incorporated
herein and made a part hereof for all purposes as if fully set
forth herein.
Section
11.06
Specific
Performance.
Each party acknowledges and
agrees that the other party would be damaged irreparably in the
event any of the provisions of this Agreement is not performed
in accordance with its specific terms or is otherwise breached.
Accordingly, each party agrees that the other party shall be
entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically
this Agreement and the terms and provisions hereof in any action
instituted in any court in the United States or in any state
having jurisdiction over the parties and the matter in addition
to any other remedy to which they may be entitled pursuant
hereto.
Section
11.07
Governing
Law; Forum.
(a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed in that state and
without regard to any applicable conflicts of
A-78
law. In any action between the parties hereto arising out of or
relating to this Agreement or any of the transactions
contemplated by this Agreement: (i) each of the parties
irrevocably and unconditionally consents and submits to the
exclusive jurisdiction and venue of either the state courts
located in Harris County, Texas or the United States District
Court for the Southern District of Texas and (ii) each of
the parties irrevocably consents to service of process by first
class certified mail, return receipt requested, postage prepaid.
(b) Notwithstanding anything contained in this Agreement to
the contrary, the parties hereto agree that a condition
precedent to Parent or Merger Sub asserting a claim or cause of
action against the Company
and/or
any
Member alleging that the Company or such Member has breached any
obligation(s) to provide access to information and to personnel
as reasonably necessary for Parent to prepare and file the Proxy
Statement with the SEC, shall be that (i) Parent
and/or
Merger Sub shall provide written notice of the alleged breach to
the Company and the Members Representative, (ii) the
Company
and/or
the
Members Representative, shall have three (3) business
days from the date of receipt of the aforementioned written
notice to cure the alleged breach, and (iii) if Parent
and/or
Merger Sub contend that an alleged breach has not been cured
after the expiration of this three (3) business day cure
period, then as a final condition precedent to asserting a claim
or cause of action against the Company
and/or
any
Member alleging that the Company or such Member has breached any
obligation(s) to provide access to information and to personnel
as reasonably necessary for Parent to prepare and file the Proxy
Statement with the SEC, Parent or Merger Sub first shall seek
compliance by filing a motion with the 234th Judicial
District Court in Harris County, Texas seeking to compel
compliance with this Agreement. The parties hereto further agree
that the 234th Judicial District Court shall retain
jurisdiction over the parties to enforce this Agreement with
respect to any such alleged breach(es), and agree not to take
the position that such motion is a procedurally improper
mechanism for seeking such relief or that the Court lacks the
authority to order specific compliance with this Agreement.
Parent and Merger Sub acknowledge and agree that Parent and
Merger Sub shall be barred from asserting a claim or cause of
action against the Company
and/or
any
Member alleging the Company
and/or
a
Member has breached any obligation(s) to provide access to
information or otherwise assist with the SEC proxy process if
Parent or Merger Sub fails to follow the procedures set forth in
the first sentence of this Subparagraph with respect to such
alleged breach, and any such failure to so comply with the
aforementioned procedures shall operate as an absolute waiver of
any such claims or causes of action by Parent or Merger Sub.
Section
11.08
Time
of the Essence.
For purposes of this
Agreement and the transactions contemplated by this Agreement,
time is of the essence.
Section
11.09
Waiver
of Jury Trial.
Each of the parties hereto
hereby irrevocably waives any and all right to trial by jury in
any legal proceeding arising out of or relating to this
Agreement or the transactions contemplated hereby.
Section
11.10
Construction
and Interpretation.
(a) For purposes of this Agreement, whenever the context
requires, the singular number shall include the plural, and vice
versa; the masculine gender shall include the feminine and
neuter genders; the feminine gender shall include the masculine
and neuter genders; and the neuter gender shall include the
masculine and feminine genders.
(b) Neither this Agreement nor any uncertainty or ambiguity
herein shall be construed or resolved against any party, whether
under any rule of construction or otherwise. No party to this
Agreement shall be considered the draftsman. The parties
acknowledge and agree that this Agreement has been reviewed,
negotiated, and accepted by all parties and their attorneys and
shall be construed and interpreted according to the ordinary
meaning of the words used so as fairly to accomplish the
purposes and intentions of all parties hereto.
(c) As used in this Agreement, the words
include and including, and variations
thereof, shall not be deemed to be terms of limitation, but
rather shall be deemed to be followed by the words without
limitation.
(d) Except as otherwise indicated, all references in this
Agreement to Articles, Sections,
Schedules and Exhibits are intended to
refer to an Article or Section of, or Schedule or Exhibit to,
this Agreement.
(e) Except as otherwise indicated, all references
(i) to any agreement (including this Agreement), contract
or Law are to such agreement, contract or Law as amended,
modified, supplemented or replaced from time to time, and
(ii) to any Governmental Entity include any successor to
that Governmental Entity.
A-79
(f) This Agreement may not be modified by the parties
course of dealing or course of performance. The parties
expressly agree that their duties, obligations and rights shall
not be expanded, altered or modified based on their conduct.
Furthermore, the wavier of any right on one occasion shall not
constitute the waiver of that right on any other occasion or the
wavier of any other rights. Moreover, any action voluntarily
undertaken by the Company or its members shall not modify alter
or expand their obligations in connection with Parents
Proxy Statement or otherwise under this Agreement.
Section
11.11
Further
Assurances.
Each party hereto shall execute
and cause to be delivered to each other party hereto such
instruments and other documents, and shall take such other
actions, as such other party may reasonably request (prior to,
at or after the Closing) for the purpose of carrying out or
evidencing any of the transactions contemplated by this
Agreement.
Section
11.12
Headings.
The
descriptive headings contained in this Agreement are included
for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Agreement.
Section
11.13
Counterparts.
This
Agreement may be executed and delivered (including by facsimile
transmission) in two or more counterparts, each of which when
executed and delivered shall be deemed to be an original but all
of which taken together shall constitute one and the same
agreement.
Section
11.14
Entire
Agreement.
This Agreement (including the
Exhibits, the Schedules, the Company Disclosure Schedule and the
Parent Disclosure Schedule) and the Non-Disclosure Agreement
constitute the entire agreement among the parties with respect
to the subject matter hereof and supersede all prior agreements
and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement
shall be binding upon any party hereto unless made in writing
and signed by all parties hereto.
[Remainder
of this page intentionally left blank; signature page
follows.]
A-80
IN WITNESS WHEREOF,
each of Parent, Merger Sub, the
Company and the Members Representative has executed or has
caused this Agreement to be executed by its duly authorized
officer as of the date first written above.
JK ACQUISITION CORP.
James P. Wilson
Chief Executive Officer
MULTI-SHOT, INC.
James P. Wilson
President
MULTI-SHOT, LLC
Allen Neel
President
SG-DIRECTIONAL, LLC
(in such capacity as Members Representative)
|
|
|
|
By:
|
The Stephens Group, LLC,
|
Its Manager
Ronald M. Clark
Senior Vice President
CATALYST/HALL GROWTH CAPITAL MANAGEMENT CO., LLC
(in such capacity as Members Representative)
Rick Herrman
President
A-81
JOINDER
OF MEMBERS
Each of the undersigned Members hereby joins in execution of
this Agreement to evidence its or his agreement to be bound by
the provisions contained in Article IV, Article VII,
Article X and Article XI, to the extent that such
provisions relate to such Member individually.
SG-DIRECTIONAL, LLC
|
|
|
|
By:
|
The Stephens Group, LLC,
|
Its Manager
Ronald M. Clark
Senior Vice President
CATALYST/HALL GROWTH CAPITAL, LP
|
|
|
|
By:
|
Catalyst/Hall Growth Capital Management Co.,
|
LLC
Its sole general partner
Rick Herrman
President
CATALYST/HALL PRIVATE EQUITY, LP
|
|
|
|
By:
|
Catalyst/Hall Private Equity Management
|
Company, LLC
Its sole general partner
Rick Herrman
President
A-82
CATALYST CAPITAL PARTNERS I, LTD.
|
|
|
|
By:
|
The Catalyst Group, Inc.
|
Its sole general partner
Rick Herrman
Vice President
CATALYST CAPITAL PARTNERS II, LTD.
|
|
|
|
By:
|
The Catalyst Group II, Inc.
|
Its sole general partner
Rick Herrman
Vice President
CRF AIR, LLC
Jay C. Jimerson
Manager
ROBERT P. VILYUS
ALLEN NEEL
DAVID CUDD
PAUL CULBRETH
A-83
ANNEX B-1
Contingent
Award Calculation Example (Cashless
Exercise)
(Based on the following assumptions: (i)
1,000,000 warrants exercised by public stockholders in the
determination period, (ii) weighted average stock price of $7.00
per share for such warrant exercises by public stockholders in
such determination period, and (iii) weighted average exercise
price of $5.00 per share.)
|
|
|
|
|
|
|
Merger
|
|
|
|
|
|
Agreement
|
|
|
|
|
|
Section
|
|
|
|
|
|
|
2.06(d)(ii)(A)
|
|
Aggregate # of Index Warrants for Initial Determination Period
|
|
|
1,000,000
|
|
2.06(d)(ii)(B)
|
|
Aggregate Total Exercised Warrant Value for Initial Determinate
Period
|
|
$
|
7,000,000
|
|
2.06(d)(ii)(C)
|
|
Per share weighted average Total Exercised Warrant Value
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.06(d)(iii)(A)
|
|
# shares in 2.06(d)(ii)(A) above
|
|
|
1,000,000
|
|
2.06(d)(iii)(B)
|
|
multiply, # of shares in 2.06(d)(iii) A by $5.00
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,000,000
|
|
|
|
|
|
|
|
|
2.06(d)(iv)(A)
|
|
Subtract the amount determined in 2.06(d)(iii) from
|
|
$
|
5,000,000
|
|
2.06(d)(iv)(B)
|
|
the Total Exercised Warrant Value for Initial Determination
Period 2.06(d)(i)
|
|
$
|
7,000,000
|
|
|
|
Contingent Award amount
|
|
$
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.06(d)(v)(A)
|
|
Contingent Award amount per 2.06(d)(iv) divided by
|
|
$
|
2,000,000
|
|
2.06(d)(v)(B)
|
|
Amount determined in 2.06(d)(ii)(C): per share weighted average
Total Exercise Warrant Value for the Determination Period
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
|
Contingent Award Shares to be issued to Members
|
|
|
285,714
|
|
B-1
ANNEX B-2
Redemption Liability
Shares and Redemption Warrants
Calculation-Example
|
|
|
|
|
|
|
Redemption Shares as per
2.08(c)(i)
of the Merger
Agreement
|
|
|
|
|
|
|
#1
Assumed Redemption Shares Number
|
|
|
|
|
2,710,311
|
|
#2
Redemption Share Price
(assumed)
|
|
|
|
$
|
5.97
|
|
#3
Gross Redemption Dollar Amount
|
|
= #1* #2
|
|
$
|
16,180,556
|
|
#4
Redemption Value Safe Harbor
|
|
|
|
$
|
3,000,000
|
|
#5
Net Redemption Dollar Amount
|
|
= #3 - #4
|
|
$
|
13,180,556
|
|
#6
Safe Harbor Shares
|
|
= #4 / #2
|
|
|
502,513
|
|
#7
Shares in Excess of Safe Harbor
|
|
= #5 / #2
|
|
|
2,207,798
|
|
#8
Exchange Value
|
|
|
|
$
|
5.40
|
|
#9
Redemption Price Differential
|
|
= #2 - #7
|
|
$
|
0.57
|
|
#10
Redemption Liability Amount
|
|
#7* #9
|
|
$
|
1,258,445
|
|
#11 Redemption Liability Shares
|
|
= #10 / #8
|
|
|
233,045
|
|
#12 Redemption Warrants
|
|
#11* 2
|
|
|
466,091
|
|
B-2
ANNEX C
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS, AND MAY NOT BE PLEDGED,
SOLD, OFFERED FOR SALE, TRANSFERRED OR OTHERWISE DISPOSED OF IN
THE ABSENCE OF REGISTRATION UNDER OR EXEMPTION FROM SUCH
ACT AND ALL APPLICABLE STATE SECURITIES LAWS.
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
ARE SUBJECT TO THE TERMS AND PROVISIONS OF THE SECOND AMENDED
AND RESTATED AGREEMENT AND PLAN OF MERGER, DATED AS OF
AUGUST , 2007, AMONG JK ACQUISITION CORP. (THE
COMPANY
), MULTI-SHOT, INC., MULTI-SHOT, LLC,
AND CATALYST HALL GROWTH CAPITAL MANAGEMENT CO., LLC, AND
SG-DIRECTIONAL, LLC, TOGETHER AS MEMBERS REPRESENTATIVE,
AND THE MEMBERS OF MULTI-SHOT, LLC (AS SUCH AGREEMENT MAY BE
SUPPLEMENTED, MODIFIED, AMENDED, OR RESTATED FROM TIME TO TIME,
THE
MERGER AGREEMENT
). A COPY OF THE
AGREEMENT IS AVAILABLE AT THE EXECUTIVE OFFICES OF THE
COMPANY.
|
|
[ ] Shares
|
Warrant
No. [ ]
|
WARRANT
TO ACQUIRE SHARES OF COMMON STOCK OF
JK ACQUISITION CORP.
This is to certify that, in consideration of valuable
consideration, which is hereby acknowledged as received,
[ ],
its successors and registered assigns, is entitled at any time
after the Closing Date (as defined in the Merger Agreement) to
exercise this Warrant to acquire as an Contingent Award Share or
a Cash Exercise Warrant pursuant to Section 2.06 of the
Merger Agreement
[ ]
( )
shares of common stock, par value $0.0001 per share, of JK
ACQUISITION CORP., a Delaware corporation (which shall be
renamed MS Energy Services, Inc. at the Effective Time)(the
Company
), and to exercise the other rights,
powers, and privileges hereinafter provided, all on the terms
and subject to the conditions specified in this Warrant and in
the Merger Agreement. All capitalized terms used herein but not
otherwise defined shall have the meaning set forth in the Merger
Agreement. This Warrant is one of a series of Parent Warrants
issued pursuant to the Merger Agreement (the
Parent
Warrants
).
1.
Duration of Warrants
.
A
Warrant may be exercised only during the period
(
Exercise Period
) commencing on the Effective
Time and ending on the later of (i) April 10, 2010,
(ii) fifteen (15) days following the final
determination of the Contingent Award Calculation with respect
to the Third Determination Period, or (iii) such time as
all Index Warrants have expired, been exercised or have been
terminated in accordance with their respective terms (in any
case, the
Expiration Date
). Each Warrant not
exercised on or before the Expiration Date shall become void,
and all rights thereunder and all rights in respect thereof
under this Warrant shall cease at the close of business on the
Expiration Date. The Company in its sole discretion may extend
the duration of the Warrants by delaying the Expiration Date;
provided, however, that any extension of the duration of the
Warrants must apply equally to all of the Warrants.
2.
Exercise of Warrants
.
(a)
Payment by Return of
Warrant
.
A Warrant may be exercised by the
registered holder thereof by surrendering it, at the office of
the Company, for the number of shares of Common Stock which the
registered holder is entitled to receive as an Contingent Award
pursuant to Section 2.06 of the Merger Agreement, as well
as any and all applicable taxes due in connection with the
exercise of the Warrant, the exchange of the Warrant for shares
of Common Stock, and the issuance of the Common Stock. The
registered holder shall not be required to provide any
additional consideration upon the exercise of the Warrant or the
issuance of Common Stock upon exercise of a Warrant. Subject to
the terms of Section 2.06 of the Merger Agreement, the
holder of the Warrant shall
C-1
have the option, prior to exercise, to exchange a portion of
this Warrant for Cash Exercise Warrants pursuant to
Section 2.06(n) of the Merger Agreement.
(b)
Certificates and Remaining
Warrants
.
As soon as practicable after the
exercise of any Warrant, the Company shall issue to the
registered holder of such Warrant a certificate or certificates
for the number of full shares of Common Stock to which he is
entitled pursuant to the exercise of the Warrant pursuant to
Section 2.06 of the Merger Agreement, registered in such
name or names as may be directed by him, her or it, and
additionally if such Warrant shall not have been exercised in
full, a new countersigned Warrant for the number of shares as to
which such Warrant shall not have been exercised pursuant to
Section 2.06(l) of the Merger Agreement. Notwithstanding
the foregoing, the Company shall not be obligated to deliver any
securities pursuant to the exercise of a Warrant unless a
registration statement under the Act and all applicable state
securities laws with respect to the Common Stock is effective or
an exemption under the Act and all applicable state securities
laws is available for the issuance and provided that any shares
to be received upon exercise of this Warrant while in the Escrow
Account shall be issued and held in the Escrow Account until
released pursuant to the terms of the Escrow Agreement.
(c)
Shares
.
All shares of Common
Stock issued upon the proper exercise of a Warrant in conformity
with this Warrant shall be validly issued, fully paid and
nonassessable.
(d)
Rights as a Shareholder
.
Each
person in whose name any such certificate for shares of Common
Stock is issued shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the
Warrant was surrendered, irrespective of the date of delivery of
such certificate, except that, if the date of such surrender and
payment is a date when the stock transfer books of the Company
are closed, such person shall be deemed to have become the
holder of such shares at the close of business on the next
succeeding date on which the stock transfer books are re-opened,
which shall be the earliest practical date available to the
Company.
(e)
Aggregate Limit
.
In no event
shall the aggregate number of shares of Parent Common Stock
issued in connection with this Warrant exceed the aggregate
number of shares set forth in the preamble paragraph of this
Warrant.
3.
No Fractional
Shares
.
Notwithstanding any other provision
of this Warrant or the Merger Agreement, no fractional shares of
Common Stock shall be issued pursuant to the terms of this
Warrant, and no Member shall be entitled to receive a fractional
share of Common Stock pursuant to the terms of this Warrant.
4.
Transfer and Exchange of Warrants
.
(a)
Registration of Transfer
.
The
Company shall register the transfer, from time to time, of any
outstanding Warrant in the Warrant register, upon the surrender
of such Warrant for transfer, properly endorsed with signatures
properly guaranteed and accompanied by appropriate instructions
for transfer. Upon any such transfer, a new Warrant representing
an equal aggregate number of Warrants shall be issued and the
old Warrant shall be cancelled by the Company.
(b)
Procedure for Surrender of
Warrants
.
Warrants may be surrendered to the
Company, together with a written request for exchange or
transfer, and thereupon the Company shall issue in exchange
therefor one or more new Warrants as requested by the registered
holder of the Warrants so surrendered, representing an equal
aggregate number of Warrants.
(c)
Partial Exercise
.
If the
Warrant shall have been exercised in part, the Company shall, at
the time of delivery of the certificate or certificates
representing shares of Parent Common Stock, deliver to holder a
new Warrant evidencing the unexercised rights of holder to
acquire shares of Parent Common Stock called for by the Warrant,
which new Warrant shall in all other respects be identical with
the original Warrant.
(d)
Service Charges
.
No service
charge shall be made for any exchange of Warrants.
5.
Other Provisions Relating to Rights of Holders of
Warrants
.
(a)
No Rights as Stockholder
.
A
Warrant does not entitle the registered holder thereof to any of
the rights of a stockholder of the Company, including, without
limitation, the right to receive dividends, or other
distributions, exercise any preemptive rights to vote or to
consent or to receive notice as stockholders in respect of the
meetings of stockholders or the election of directors of the
Company or any other matter. The holder shall be entitled to all
rights
C-2
of a stockholder of the Company with respect to shares of Common
Stock issuable upon exercise of this Warrant immediately upon
such exercise notwithstanding that a certificate representing
such shares Common Stock has not been issued.
(b)
Lost, Stolen, Mutilated, or Destroyed
Warrants
.
If any Warrant is lost, stolen,
mutilated, or destroyed, the Company may on such terms as to
indemnity or otherwise as they may in their discretion impose
(which shall, in the case of a mutilated Warrant, include the
surrender thereof), issue a new Warrant of like denomination,
tenor, and date as the Warrant so lost, stolen, mutilated, or
destroyed. Any such new Warrant shall constitute a substitute
contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated, or destroyed Warrant shall be
at any time enforceable by anyone.
(c)
Reservation of Common
Stock
.
The Company shall at all times that
any Warrant is outstanding reserve and keep available a number
of its authorized but unissued shares of Common Stock that will
be sufficient to permit the exercise in full of all outstanding
Warrants.
(d)
Registration of Common
Stock
.
The registration of the Common Stock
issuable pursuant to the terms of this Warrant shall be subject
to that certain Registration Rights Agreement, dated
[ ],
200[ ]
by and between the Company, the Members Representative and
the members of Multi-Shot, LLC.
6.
Miscellaneous Provisions
.
(a)
Successors
.
All the covenants
and provisions of this Warrant by or for the benefit of the
Company shall bind and inure to the benefit of their respective
successors and assigns.
(b)
Notices
.
All notices,
requests, claims, demands and other communications hereunder
shall be in writing and shall be given (and shall be deemed to
have been duly given upon receipt) by delivery in person, by
cable, telecopy, facsimile, telegram or telex or by registered
or certified mail (postage prepaid, return receipt requested) to
the respective parties at the following addresses (or at such
other address for a party as shall be specified in a notice
given in accordance with this Section 6(b)):
if to the Company:
JK Acquisition Corp.
4400 Post Oak Parkway, Suite 2530
Houston, Texas 77027
Facsimile No.:
(713) 552-9226
Attention: James P. Wilson
with a copy to:
Patton Boggs LLP
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Facsimile No.:
(214) 758-1550
Attention: Fred S. Stovall, Esq.
if to Holder, to the address reflected on the register of
Warrants kept by
the Company, with a copy to the Members Representative at:
Catalyst Hall Growth Capital Management Co., LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Facsimile No.:
(713) 623-0473
Attention: Ron Nixon and Rick Herrman
C-3
And
SG-Directional, LLC
P.O. Box 3417
Little Rock, Arkansas
72203-3417
Facsimile No.:
(501) 377-3463
Attention: Ronald M. Clark
with a copy to:
Franklin, Cardwell & Jones, P.C.
1001 McKinney, Suite 1800
Houston, Texas 77002
Facsimile No.:
(713) 227-5657
Attention: Randolph Ewing, Esq.
(c)
Applicable law
.
The validity,
interpretation, and performance of the Warrants shall be
governed in all respects by the laws of the State of Delaware,
applicable to contracts executed in and to be performed in that
state and without regard to any applicable conflicts of law. In
any action between the parties hereto arising out of or relating
to the Warrants: (i) each of the parties irrevocably and
unconditionally consents and submits to the exclusive
jurisdiction and venue of either the state courts located in
Harris County, Texas or the United States District Court for the
Southern District of Texas and (ii) each of the parties
irrevocably consents to service of process by first class
certified mail, return receipt requested, postage prepaid.
(d)
Persons Having Rights under this
Warrant
.
Nothing in this Warrant expressed
and nothing that may be implied from any of the provisions
hereof is intended, or shall be construed, to confer upon, or
give to, any person or corporation other than the parties hereto
and the registered holders of the Warrants. All covenants,
conditions, stipulations, promises, and agreements contained
herein shall be for the sole and exclusive benefit of the
parties hereto and their successors and assigns and of the
registered holders of the Warrants.
(e)
Counterparts
.
This Agreement
may be executed in any number of counterparts and each of such
counterparts shall for all purposes be deemed to be an original,
and all such counterparts shall together constitute but one and
the same instrument.
(f)
Effect of Headings
.
The
Section headings herein are for convenience only and are not
part of this Warrant Agreement and shall not affect the
interpretation thereof.
(g)
Other
.
This Warrant is issued
under, and the rights represented hereby are subject to the
terms and provisions contained in the Merger Agreement, to all
terms and provisions of which the registered holder of this
Warrant, by acceptance of this Warrant, assents. Reference is
hereby made to the Merger Agreement for a more complete
statement of the rights and limitations of rights of the
registered holder of this Warrant and the rights and duties of
the Company under this Warrant. A copy of the Merger Agreement
is on file at the office of the Company.
[Remainder
of this page intentionally left blank; signature page
follows.]
C-4
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed on this
[ ] day
of
[ ],
200[ ].
JK ACQUISITION CORP.
By:
Name:
Title:
Form of
Warrant Signature Page
C-5
ANNEX
D
REGISTRATION
RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this
Agreement
) is entered into as of the
[
] day
of
[
]
200[
],
by and among JK Acquisition Corp., a Delaware corporation (which
shall be renamed MS Energy Services, Inc. at the Effective Time,
the
Company
), Catalyst/Hall Growth
Capital Management Co., LLC, a Texas limited liability company
(
Catalyst
), and SG-Directional, LLC,
an Arkansas limited liability company
(
SG-Directional
and together with
Catalyst, the
Members
Representative
), and the undersigned parties
listed on the signature page hereto (each a
Stockholder
and collectively, the
Stockholders
), each of whom was a
member of Multi-Shot, LLC prior to the Effective Time of the
Merger. Unless otherwise indicated, capitalized terms not
defined herein have the meanings set forth in the Merger
Agreement.
WHEREAS, the Company and the Stockholders are parties to that
certain Second Amended and Restated Agreement and Plan of
Merger, dated as of August
,
2007, among the Company, Multi-Shot, Inc., Multi-Shot, LLC,
Catalyst, SG-Directional and the members of Multi-Shot, LLC (the
Merger Agreement
);
WHEREAS, the Stockholders own
[
] shares
of Common Stock of the Company and
[
]
Warrants;
WHEREAS, as a material inducement to enter into the Merger
Agreement, the Stockholders and the Company desire to enter into
this Agreement to provide the Stockholders with certain rights
relating to the registration of such shares of Common Stock and
such shares of Common Stock issuable upon the exercise of such
Warrants held by them;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1.
DEFINITIONS
.
The
following capitalized terms used herein have the following
meanings:
Agreement
means this Agreement, as
amended, restated, supplemented, or otherwise modified from time
to time.
Commission
means the Securities and
Exchange Commission, or any other federal agency then
administering the Securities Act or the Exchange Act.
Common Stock
means the common stock,
par value $0.0001 per share, of the Company.
Company
is defined in the preamble to
this Agreement.
Demand Registration
means a written
demand for registration under the Securities Act of all or part
of their Registrable Securities.
Demanding Holder
means each holder of
Registrable Securities who wishes to include all or a portion of
such holders Registrable Securities in a Demand
Registration.
Disclosure Package
means the
preliminary prospectus included in the Registration Statement
immediately prior to the Time of Sale and any additional
materials distributed in connection with the offering and sale
of Registrable Securities.
Escrow Agreement
means the Escrow
Agreement dated as of
[
], 200[ ]
executed and delivered by the Company, the Members
Representative, and Zions First National Bank pursuant to
Section 2.04(b) of the Merger Agreement.
D-1
Exchange Act
means the Securities
Exchange Act of 1934, as amended, and the rules and regulations
of the Commission promulgated thereunder, all as the same shall
be in effect at the time.
Form S-3
is defined in Section 2.3.
Indemnified Party
is defined in
Section 4.3.
Indemnifying Party
is defined in
Section 4.3.
Stockholder Indemnified Party
is
defined in Section 4.1.
Maximum Number of Shares
is defined in
Section 2.1.4.
Merger Agreement
is defined in the
recitals to this Agreement.
Notices
is defined in Section 6.2.
Piggy-Back Registration
is defined in
Section 2.2.1.
Register
,
Registered
and
Registration
mean a
registration effected by preparing and filing a registration
statement or similar document in compliance with the
requirements of the Securities Act, and the applicable rules and
regulations promulgated thereunder, and such registration
statement becoming effective.
Registrable Securities
mean all of the
shares of Common Stock and Warrants owned or held by the
Stockholders and all of the shares of Common Stock issuable upon
exercise of the Warrants, whether or not such shares of Common
Stock or Warrants are then subject to the Escrow Agreement.
Registrable Securities include any warrants, shares of capital
stock or other securities of the Company issued as a dividend or
other distribution with respect to or in exchange for or in
replacement of such shares of Common Stock. As to any particular
Registrable Securities, such securities shall cease to be
Registrable Securities when: (a) a Registration Statement
with respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall
have been sold, transferred, disposed of or exchanged in
accordance with such Registration Statement; (b) such
securities shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further
transfer shall have been delivered by the Company and subsequent
public distribution of them shall not require registration under
the Securities Act; (c) such securities shall have ceased
to be outstanding, (d) the Securities and Exchange
Commission makes a definitive determination to the Company that
the Registrable Securities are salable under Rule 144(k),
or (e) such securities shall no longer be entitled to
registration rights pursuant to the terms hereof.
Registration Statement
means a
registration statement filed by the Company with the Commission
in compliance with the Securities Act and the rules and
regulations promulgated thereunder for a public offering and
sale of Common Stock (other than a registration statement on
Form S-4
or
Form S-8,
or their successors, or any registration statement covering only
securities proposed to be issued in exchange for securities or
assets of another entity).
Release Date
means the date that is
six months after the Effective Time as defined in the Merger
Agreement.
Securities Act
means the Securities
Act of 1933, as amended, and the rules and regulations of the
Commission promulgated thereunder, all as the same shall be in
effect at the time.
Time of Sale
means the time and date
as of which contracts for sale of Registrable Securities are
deemed made pursuant to a Registration Statement filed pursuant
to this Agreement.
Underwriter
means a securities dealer
who purchases any Registrable Securities as principal in an
underwritten offering and not as part of such dealers
market-making activities.
Warrants
means those Parent Warrants,
Cash Exercise Warrants and Redemption Warrants issued by
the Company to the Stockholders as Merger Consideration pursuant
to the Merger Agreement.
2.
REGISTRATION RIGHTS
.
2.1
Demand Registration
.
D-2
2.1.1
Request for Registration by the
Stockholders
.
At any time and from time to
time on or after the Release Date, Members Representative
or, if the Members Representative ceases to act as such,
the holders of a
majority-in-interest
of the Registrable Securities held by the Stockholders or the
transferees of the Stockholders, may make up to four
(4) written demands for a Demand Registration. The Company
will notify the Stockholders of its receipt of and intent to act
upon the demand, and each Stockholder shall notify the Company
within fifteen (15) days after the receipt by the holder of
the notice from the Company specifying the number of
Registerable Securities that such Demanding Holder wishes to
include in such Demand Registration and the intended method(s)
of distribution thereof. Upon any such request, the Demanding
Holders shall be entitled to have their Registrable Securities
included in the Demand Registration, subject to
Section 2.1.4 and the provisos set forth in
Section 3.1.1. The Company shall not be obligated to effect
more than an aggregate of four (4) Demand Registrations
under this Section 2.1.1 in respect of Registrable
Securities.
2.1.2
Effective
Registration
.
A registration will not count
as a Demand Registration until the Registration Statement filed
with the Commission with respect to such Demand Registration has
been declared effective and the Company has complied with all of
its obligations under this Agreement with respect thereto;
provided, however, that if, after such Registration Statement
has been declared effective, the offering of Registrable
Securities pursuant to a Demand Registration is interfered with
by any stop order or injunction of the Commission or any other
governmental agency or court, the Registration Statement with
respect to such Demand Registration will be deemed not to have
been declared effective, unless and until, (i) such stop
order or injunction is removed, rescinded or otherwise
terminated, and (ii) the Members Representative or a
majority-in-interest
of the Demanding Holders, whichever is applicable, thereafter
elect to continue the offering; provided, further, that the
Company shall not be obligated to file a second Registration
Statement until a Registration Statement that has been filed is
counted as a Demand Registration or is terminated.
2.1.3
Underwritten
Offering
.
If the Members Representative
or a
majority-in-interest
of the Demanding Holders, whichever is applicable, so elects and
such holders so advise the Company as part of their written
demand for a Demand Registration, the offering of such
Registrable Securities pursuant to such Demand Registration
shall be in the form of an underwritten offering. In such event,
the right of any holder to include its Registrable Securities in
such registration shall be conditioned upon such holders
participation in such underwriting and the inclusion of such
holders Registrable Securities in the underwriting to the
extent provided herein. All Demanding Holders proposing to
distribute their securities through such underwriting shall
enter into an underwriting agreement in customary form with the
Underwriter or Underwriters selected for such underwriting by
the Members Representative or a
majority-in-interest
of the holders initiating the Demand Registration, whichever is
applicable.
2.1.4
Reduction of
Offering
.
If the managing Underwriter or
Underwriters for a Demand Registration that is to be an
underwritten offering advises the Company and the Demanding
Holders in writing that the dollar amount or number of shares of
Registrable Securities which the Demanding Holders desire to
sell, taken together with all other shares of Common Stock or
other securities which the Company desires to sell and the
shares of Common Stock, if any, as to which registration has
been requested pursuant to written contractual piggy-back
registration rights held by other stockholders of the Company
who desire to sell, exceeds the maximum dollar amount or maximum
number of shares that can be sold in such offering without
adversely affecting the proposed offering price, the timing, the
distribution method, or the probability of success of such
offering (such maximum dollar amount or maximum number of
shares, as applicable, the
Maximum Number of
Shares
), then the Company shall include in such
registration: (i) first, the Registrable Securities as to
which such Demand Registration has been requested by the
Demanding Holders (pro rata in accordance with the number of
shares that each such Person has requested be included in such
registration, regardless of the number of shares held by each
such Person (such proportion is referred to herein as
Pro Rata
)) that can be sold without
exceeding the Maximum Number of Shares; (ii) second, to the
extent that the Maximum Number of Shares has not been reached
under the foregoing clause (i), the shares of Common Stock or
other securities that the Company desires to sell that can be
sold without exceeding the Maximum Number of Shares; and
(iii) third, to the extent that the Maximum Number of
Shares have not been reached under the foregoing
clauses (i) and (ii), the shares of Common Stock or other
securities for the account of other persons that the Company is
obligated to register pursuant to written contractual
arrangements with such persons and that can be sold without
exceeding the Maximum Number of Shares.
D-3
2.1.5
Withdrawal
. If the
Members Representative or a
majority-in-interest
of the Demanding Holders, whichever is applicable, disapprove of
the terms of any underwriting or are not entitled to include all
of their Registrable Securities in any offering, the
Members Representative or such
majority-in-interest
of the Demanding Holders, whichever is applicable, may elect to
withdraw from such offering by giving written notice to the
Company and the Underwriter or Underwriters of their request to
withdraw prior to the effectiveness of the Registration
Statement filed with the Commission with respect to such Demand
Registration. If the Members Representative or such
majority-in-interest
of the Demanding Holders withdraws from a proposed offering
relating to a Demand Registration, then such registration shall
be terminated and withdrawn and shall not count as a Demand
Registration provided for in Section 2.1.
2.2
Piggy-Back Registration
.
2.2.1
Piggy-Back Rights
.
If
at any time on or after the Release Date the Company proposes to
file a Registration Statement under the Securities Act with
respect to an offering of equity securities, or securities or
other obligations exercisable or exchangeable for, or
convertible into, equity securities, by the Company for its own
account or for stockholders of the Company for their account (or
by the Company and by stockholders of the Company including,
without limitation, pursuant to Section 2.1), other than a
Registration Statement (i) filed in connection with any
employee stock option or other benefit plan, (ii) for an
exchange offer or offering of securities solely to the
Companys existing stockholders, (iii) for an offering
of debt that is convertible into equity securities of the
Company or (iv) for a dividend reinvestment plan, then the
Company shall (x) give written notice of such proposed
filing to the holders of Registrable Securities as soon as
practicable but in no event less than ten (10) days before
the anticipated filing date, which notice shall describe the
amount and type of securities to be included in such offering,
the intended method(s) of distribution, and the name of the
proposed managing Underwriter or Underwriters, if any, of the
offering, and (y) offer to the holders of Registrable
Securities in such notice the opportunity to register the sale
of such number of shares of Registrable Securities as such
holders may request in writing within five (5) days
following receipt of such notice (a
Piggy-Back
Registration
). The Company shall cause such
Registrable Securities to be included in such registration and
shall use its best efforts to cause the managing Underwriter or
Underwriters of a proposed underwritten offering to permit the
Registrable Securities requested to be included in a Piggy-Back
Registration on the same terms and conditions as any similar
securities of the Company and to permit the sale or other
disposition of such Registrable Securities in accordance with
the intended method(s) of distribution thereof. All holders of
Registrable Securities proposing to distribute their securities
through a Piggy-Back Registration that involves an Underwriter
or Underwriters shall enter into an underwriting agreement in
customary form with the Underwriter or Underwriters selected for
such Piggy-Back Registration.
2.2.2
Reduction of
Offering
.
If the managing Underwriter or
Underwriters for a Piggy-Back Registration that is to be an
underwritten offering advises the Company and the holders of
Registrable Securities in writing that the dollar amount or
number of shares of Common Stock which the Company desires to
sell, taken together with shares of Common Stock, if any, as to
which registration has been demanded pursuant to written
contractual arrangements with persons other than the holders of
Registrable Securities hereunder, the Registrable Securities as
to which registration has been requested under this
Section 2.2, and the shares of Common Stock, if any, as to
which registration has been requested pursuant to the written
contractual piggy-back registration rights of other stockholders
of the Company, exceeds the Maximum Number of Shares, then the
Company shall include in any such registration:
(i) If the registration is undertaken for the
Companys account: (A) first, the shares of Common
Stock or other securities that the Company desires to sell that
can be sold without exceeding the Maximum Number of Shares;
(B) second, to the extent that the Maximum Number of Shares
has not been reached under the foregoing clause (A), the shares
of Common Stock or other securities, if any, comprised of
Registrable Securities, as to which registration has been
requested pursuant to the applicable written contractual
piggy-back registration rights of such security holders, Pro
Rata, that can be sold without exceeding the Maximum Number of
Shares; and (C) third, to the extent that the Maximum
Number of shares has not been reached under the foregoing
clauses (A) and (B), the shares of Common Stock or other
securities for the account of other persons that the Company is
obligated to register pursuant to written contractual piggy-back
registration rights with such persons and that can be sold
without exceeding the Maximum Number of Shares; and
D-4
(ii) If the registration is a demand
registration undertaken at the demand of persons other than the
holders of Registrable Securities, (A) first, the shares of
Common Stock or other securities for the account of the
demanding persons that can be sold without exceeding the Maximum
Number of Shares; (B) second, to the extent that the
Maximum Number of Shares has not been reached under the
foregoing clause (A), collectively the shares of Common Stock or
other securities comprised of Registrable Securities, pro rata,
as to which registration has been requested pursuant to the
terms hereof, that can be sold without exceeding the Maximum
Number of Shares; (C) third, to the extent that the Maximum
Number of Shares has not been reached under the foregoing
clauses (A) and (B), the shares of Common Stock or other
securities that the Company desires to sell that can be sold
without exceeding the Maximum Number of Shares; and
(D) fourth, to the extent that the Maximum Number of Shares
has not been reached under the foregoing clauses (A),
(B) and (C), the shares of Common Stock or other securities
for the account of other persons that the Company is obligated
to register pursuant to written contractual arrangements with
such persons, that can be sold without exceeding the Maximum
Number of Shares. .
2.2.3
Withdrawal.
Any holder
of Registrable Securities may elect to withdraw such
holders request for inclusion of Registrable Securities in
any Piggy-Back Registration by giving written notice to the
Company of such request to withdraw prior to the effectiveness
of the Registration Statement. The Company (whether on its own
determination or as the result of a withdrawal by persons making
a demand pursuant to written contractual obligations) may
withdraw a registration statement at any time prior to the
effectiveness of the Registration Statement. Notwithstanding any
such withdrawal, the Company shall pay all expenses incurred by
the holders of Registrable Securities in connection with such
Piggy-Back Registration as provided in Section 3.3.
2.3
Registrations on
Form S-3.
The
holders of Registrable Securities may at any time and from time
to time, request in writing that the Company register the resale
of any or all of such Registrable Securities on
Form S-3
or any similar short-form registration which may be available at
such time
(
Form S-3
);
provided, however, that the Company shall not be obligated to
effect such request through an underwritten offering. Upon
receipt of such written request, the Company will promptly give
written notice of the proposed registration to all other holders
of Registrable Securities, and, as soon as practicable
thereafter, effect the registration of all or such portion of
such holders or holders Registrable Securities as
are specified in such request, together with all or such portion
of the Registrable Securities or other securities of the
Company, if any, of any other holder or holders joining in such
request as are specified in a written request given within
fifteen (15) days after receipt of such written notice from
the Company; provided, however, that the Company shall not be
obligated to effect any such registration pursuant to this
Section 2.3: (i) if
Form S-3
is not available for such offering; or (ii) if the holders
of the Registrable Securities, together with the holders of any
other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such
other securities (if any) at any aggregate price to the public
of less than $500,000. Registrations effected pursuant to this
Section 2.3 shall not be counted as Demand Registrations
effected pursuant to Section 2.1.
3.
REGISTRATION PROCEDURES.
3.1
Filings;
Information.
Whenever the Company is required
to effect the registration of any Registrable Securities
pursuant to Section 2, the Company shall use its best
efforts to effect the registration and sale of such Registrable
Securities in accordance with the intended method(s) of
distribution thereof as expeditiously as practicable, and in
connection with any such request:
3.1.1
Filing Registration
Statement.
The Company shall, as
expeditiously as possible and in any event within sixty
(60) days after receipt of a request for a Demand
Registration pursuant to Section 2.1, prepare and file with
the Commission a Registration Statement on any form for which
the Company then qualifies or which counsel for the Company
shall deem appropriate and which form shall be available for the
sale of all Registrable Securities to be registered thereunder
in accordance with the intended method(s) of distribution
thereof, and shall use its best efforts to cause such
Registration Statement to become and remain effective for the
period required by Section 3.1.3; provided, however, that
the Company shall have the right to defer any Demand
Registration for up to thirty (30) days, and any Piggy-Back
Registration for such period as may be applicable to deferment
of any demand registration to which such Piggy-Back Registration
relates, in each case if the Company shall furnish to the
holders a certificate signed by the Chief Executive Officer or
President of the Company stating that, in the good faith
D-5
judgment of the Board of Directors of the Company, it would be
materially detrimental to the Company and its stockholders for
such Registration Statement to be effected at such time;
provided further, however, that the Company shall not have the
right to exercise the right set forth in the immediately
preceding proviso more than once in any
365-day
period in respect of a Demand Registration hereunder.
3.1.2
Copies.
The Company
shall, prior to filing a Registration Statement or prospectus,
or any amendment or supplement thereto, furnish without charge
to the holders of Registrable Securities included in such
registration, and such holders legal counsel, copies of
such Registration Statement as proposed to be filed, each
amendment and supplement to such Registration Statement (in each
case including all exhibits thereto and documents incorporated
by reference therein), the prospectus included in such
Registration Statement (including each preliminary prospectus),
and such other documents as the holders of Registrable
Securities included in such registration or legal counsel for
any such holders may request in order to facilitate the
disposition of the Registrable Securities owned by such holders.
3.1.3
Amendments and
Supplements.
The Company shall prepare and
file with the Commission such amendments, including
post-effective amendments, and supplements to such Registration
Statement and the prospectus used in connection therewith as may
be necessary to keep such Registration Statement effective and
in compliance with the provisions of the Securities Act until
all Registrable Securities and other securities covered by such
Registration Statement have been disposed of in accordance with
the intended method(s) of distribution set forth in such
Registration Statement (which period shall not exceed the sum of
one hundred eighty (180) days plus any period during which
any such disposition is interfered with by any stop order or
injunction of the Commission or any governmental agency or
court) or such securities have been withdrawn.
3.1.4
Notification.
After
the filing of a Registration Statement, the Company shall
promptly, and in no event more than two (2) business days
after such filing, notify the holders of Registrable Securities
included in such Registration Statement of such filing, and
shall further notify such holders promptly and confirm such
advice in writing in all events within two (2) business
days of the occurrence of any of the following: (i) when
such Registration Statement becomes effective; (ii) when
any post-effective amendment to such Registration Statement
becomes effective; (iii) the issuance or threatened
issuance by the Commission of any stop order (and the Company
shall take all actions required to prevent the entry of such
stop order or to remove it if entered); and (iv) any
request by the Commission for any amendment or supplement to
such Registration Statement or any prospectus relating thereto
or for additional information or of the occurrence of an event
requiring the preparation of a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of
the securities covered by such Registration Statement, such
prospectus will not contain an untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading, and promptly make available to the holders of
Registrable Securities included in such Registration Statement
any such supplement or amendment; except that before filing with
the Commission a Registration Statement or prospectus or any
amendment or supplement thereto, including documents
incorporated by reference, the Company shall furnish to the
holders of Registrable Securities included in such Registration
Statement and to the legal counsel for any such holders, copies
of all such documents proposed to be filed sufficiently in
advance of filing to provide such holders and legal counsel with
a reasonable opportunity to review such documents and comment
thereon, and the Company shall not file any Registration
Statement or prospectus or amendment or supplement thereto,
including documents incorporated by reference, to which such
holders or their legal counsel shall object.
3.1.5
State Securities Laws
Compliance.
The Company shall use its best
efforts to (i) register or qualify the Registrable
Securities covered by the Registration Statement under such
securities or blue sky laws of such jurisdictions in
the United States as the holders of Registrable Securities
included in such Registration Statement (in light of their
intended plan of distribution) may request and (ii) take
such action necessary to cause such Registrable Securities
covered by the Registration Statement to be registered with or
approved by such other Governmental Authorities as may be
necessary by virtue of the business and operations of the
Company and do any and all other acts and things that may be
necessary or advisable to enable the holders of Registrable
Securities included in such Registration Statement to consummate
the disposition of such Registrable Securities in such
jurisdictions; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this
paragraph or subject itself to taxation in any such jurisdiction.
D-6
3.1.6
Agreements for
Disposition.
The Company shall enter into
customary agreements (including, if applicable, an underwriting
agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities. The representations,
warranties and covenants of the Company in any underwriting
agreement which are made to or for the benefit of any
Underwriters, to the extent applicable, shall also be made to
and for the benefit of the holders of Registrable Securities
included in such Registration Statement. No holder of
Registrable Securities included in such Registration Statement
shall be required to make any representations or warranties in
the underwriting agreement except, if applicable, with respect
to such holders organization, good standing, authority,
title to Registrable Securities, lack of conflict of such sale
with such holders material agreements and organizational
documents, and with respect to written information relating to
such holder that such holder has furnished in writing expressly
for inclusion in such Registration Statement.
3.1.7
Cooperation.
The
principal executive officer of the Company, the principal
financial officer of the Company, the principal accounting
officer of the Company and all other officers and members of the
management of the Company shall cooperate fully in any offering
of Registrable Securities hereunder, which cooperation shall
include, without limitation, the preparation of the Registration
Statement with respect to such offering and all other offering
materials and related documents, and participation in meetings
with Underwriters, attorneys, accountants and potential
investors.
3.1.8
Records.
The Company
shall make available for inspection by the holders of
Registrable Securities included in such Registration Statement,
any Underwriter participating in any disposition pursuant to
such Registration Statement and any attorney, accountant or
other professional retained by any holder of Registrable
Securities included in such Registration Statement or any
Underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, as shall be
necessary to enable them to exercise their due diligence
responsibility, and cause the Companys officers, directors
and employees to supply all information requested by any of them
in connection with such Registration Statement.
3.1.9
Opinions and Comfort
Letters.
The Company shall furnish to each
holder of Registrable Securities included in any Registration
Statement a signed counterpart, addressed to such holder, of
(i) any opinion of counsel to the Company delivered to any
Underwriter and (ii) any comfort letter from the
Companys independent public accountants delivered to any
Underwriter. In the event no legal opinion is delivered to any
Underwriter, the Company shall furnish to each holder of
Registrable Securities included in such Registration Statement,
at any time that such holder elects to use a prospectus, an
opinion of counsel to the Company to the effect that the
Registration Statement containing such prospectus has been
declared effective and that no stop order is in effect.
3.1.10
Earnings
Statement.
The Company shall comply with all
applicable rules and regulations of the Commission and the
Securities Act, and make available to its stockholders, as soon
as practicable, an earnings statement covering a period of
twelve (12) months, beginning within three (3) months
after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158
thereunder.
3.1.11
Listing.
The Company
shall use its best efforts to cause all Registrable Securities
included in any registration to be listed on such exchanges or
otherwise designated for trading in the same manner as similar
securities issued by the Company are then listed or designated
or, if no such similar securities are then listed or designated,
in a manner satisfactory to the holders of a majority of the
Registrable Securities included in such registration.
3.2
Obligation to Suspend
Distribution.
Upon receipt of any notice from
the Company of the happening of any event of the kind described
in Section 3.1.4(iv), or, in the case of a resale
registration on
Form S-3
pursuant to Section 2.3 hereof, upon any suspension by the
Company, pursuant to a written insider trading compliance
program adopted by the Companys Board of Directors, of the
ability of all insiders covered by such program to
transact in the Companys securities because of the
existence of material non-public information, each holder of
Registrable Securities included in any registration shall
immediately discontinue disposition of such Registrable
Securities pursuant to the Registration Statement covering such
Registrable Securities until such holder receives the
supplemented or amended prospectus contemplated by
Section 3.1.4(iv) or the restriction on the ability of
insiders to transact in the Companys
securities is removed, as applicable, and, if so directed by the
Company,
D-7
each such holder will deliver to the Company all copies, other
than permanent file copies then in such holders
possession, of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice.
3.3
Registration
Expenses.
The Company shall bear all costs
and expenses incurred in connection with any Demand Registration
pursuant to Section 2.1, any Piggy-Back Registration
pursuant to Section 2.2, and any registration on
Form S-3
effected pursuant to Section 2.3, and all expenses incurred
in performing or complying with its other obligations under this
Agreement, whether or not the Registration Statement becomes
effective, including, without limitation: (i) all
registration and filing fees; (ii) fees and expenses of
compliance with securities or blue sky laws
(including fees and disbursements of counsel in connection with
blue sky qualifications of the Registrable Securities);
(iii) printing expenses; (iv) the Companys
internal expenses (including, without limitation, all salaries
and expenses of its officers and employees); (v) the fees
and expenses incurred in connection with the listing of the
Registrable Securities as required by Section 3.1.11;
(vi) National Association of Securities Dealers, Inc. fees;
(vii) fees and disbursements of counsel for the Company and
fees and expenses for independent certified public accountants
retained by the Company (including the expenses or costs
associated with the delivery of any opinions or comfort letters
requested pursuant to Section 3.1.9); (viii) the fees
and expenses of any special experts retained by the Company in
connection with such registration and (ix) the fees and
expenses of one legal counsel selected by the Members
Representative or the holders of a
majority-in-interest
of the Registrable Securities included in such registration,
whichever is applicable. The Company shall have no obligation to
pay any underwriting discounts or selling commissions
attributable to the Registrable Securities being sold by the
holders thereof, which underwriting discounts or selling
commissions shall be borne by such holders. Additionally, in an
underwritten offering, all selling stockholders and the Company
shall bear the expenses of the underwriter pro rata in
proportion to the respective amount of shares each is selling in
such offering.
3.4
Information.
The holders
of Registrable Securities shall provide such information as may
reasonably be requested by the Company, or the managing
Underwriter, if any, in connection with the preparation of any
Registration Statement, including amendments and supplements
thereto, in order to effect the registration of any Registrable
Securities under the Securities Act pursuant to Section 2
and in connection with the Companys obligation to comply
with federal and applicable state securities laws.
3.5
Form S-3
Availability.
For so long as any Registerable
Securities are outstanding, the Company will (a) not
incorporation or reincorporate in any jurisdiction other than
one of the United States; (b) maintain its principal place
of business in the United States; (c) maintain a class of
securities registered under Section 12(b) or 12(g) of the
Exchange Act; (d) timely file when due all reports required
to be filed by it under Section 13, 14 or 15(d) of the
Exchange Act (other than reports required pursuant to
Items 1.01, 1.02, 2.03, 2.04, 2.05, 2.06, 4.02(a), 6.01,
6.03 or 6.05 of
Form 8-K);
(e) pay when due all dividends and installments of any
sinking fund relating to preferred stock, (f) not default
on (i) any installments of principal and interest on any
indebtedness or (ii) any rents under any long-term lease
such that any such defaults in the aggregate would be material
to the consolidated financial position of the Company and its
subsidiaries, taken as a whole; and (g) maintain the Common
Stock as listed and registered on a national securities exchange
or quoted on the automated quotation system of a national
securities association in accordance with General
Instruction I.B.3. to
Form S-3.
3.6
Outstanding
Agreements.
The Company has provided the
Stockholders with copies of all outstanding agreements providing
for the demand registration or piggyback registration of
securities issued by the Company.
4.
INDEMNIFICATION AND CONTRIBUTION.
4.1
Indemnification by the
Company.
The Company agrees to indemnify and
hold harmless each Stockholder and each other holder of
Registrable Securities, and each of their respective officers,
employees, affiliates, directors, partners, members, attorneys
and agents, and each person, if any, who controls a Stockholder
and each other holder of Registrable Securities (within the
meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act) (each, an
Stockholder Indemnified Party
), from
and against any expenses, losses, judgments, claims, damages or
liabilities, whether joint or several, arising out of or based
upon any untrue statement (or allegedly untrue statement) of a
material fact contained in any Registration Statement under
which the sale of such Registrable Securities was registered
under the Securities Act, any preliminary prospectus, final
prospectus, summary prospectus or Disclosure Package contained
in the Registration Statement, or any amendment or supplement to
such Registration Statement or Disclosure Package, or arising
out of or based upon any omission
D-8
(or alleged omission) to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities
Act or any rule or regulation promulgated thereunder applicable
to the Company and relating to action or inaction required of
the Company in connection with any such registration; and the
Company shall promptly reimburse the Stockholder Indemnified
Party for any legal and any other expenses reasonably incurred
by such Stockholder Indemnified Party in connection with
investigating and defending any such expense, loss, judgment,
claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that
any such expense, loss, claim, damage or liability arises out of
or is based upon any untrue statement or allegedly untrue
statement or omission or alleged omission made in such
Registration Statement, preliminary prospectus, final
prospectus, summary prospectus or Disclosure Package, or any
such amendment or supplement, in reliance upon and in conformity
with information furnished to the Company, in writing, by such
selling holder expressly for use therein. The Company also shall
indemnify any Underwriter of the Registrable Securities, their
officers, affiliates, directors, partners, members and agents
and each person who controls such Underwriter on substantially
the same basis as that of the indemnification provided above in
this Section 4.1.
4.2
Indemnification by Holders of Registrable
Securities.
Each selling holder of
Registrable Securities will, in the event that any registration
is being effected under the Securities Act pursuant to this
Agreement of any Registrable Securities held by such selling
holder, indemnify and hold harmless the Company, each of its
directors and officers and each underwriter (if any), and each
other selling holder and each other person, if any, who controls
another selling holder or such underwriter within the meaning of
the Securities Act, against any losses, claims, judgments,
damages or liabilities, whether joint or several, insofar as
such losses, claims, judgments, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any
untrue statement or allegedly untrue statement of a material
fact contained in any Registration Statement or Disclosure
Package under which the sale of such Registrable Securities was
registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained in the
Registration Statement or Disclosure Package, or any amendment
or supplement to the Registration Statement, or arise out of or
are based upon any omission or the alleged omission to state a
material fact required to be stated therein or necessary to make
the statement therein not misleading, if the statement or
omission was made in reliance upon and in conformity with
information furnished in writing to the Company by such selling
holder expressly for use therein, and shall reimburse the
Company, its directors and officers, and each other selling
holder or controlling person for any legal or other expenses
reasonably incurred by any of them in connection with
investigation or defending any such loss, claim, damage,
liability or action. Each selling holders indemnification
obligations hereunder shall be several and not joint and shall
be limited to the amount of any net proceeds actually received
by such selling holder.
4.3
Conduct of Indemnification
Proceedings.
Promptly after receipt by any
person of any notice of any loss, claim, damage or liability or
any action in respect of which indemnity may be sought pursuant
to Section 4.1 or 4.2, such person (the
Indemnified Party
) shall, if a claim
in respect thereof is to be made against any other person for
indemnification hereunder, notify such other person (the
Indemnifying Party
) in writing of the
loss, claim, judgment, damage, liability or action; provided,
however, that the failure by the Indemnified Party to notify the
Indemnifying Party shall not relieve the Indemnifying Party from
any liability which the Indemnifying Party may have to such
Indemnified Party hereunder, except and solely to the extent the
Indemnifying Party is actually prejudiced by such failure. If
the Indemnified Party is seeking indemnification with respect to
any claim or action brought against the Indemnified Party, then
the Indemnifying Party shall be entitled to participate in such
claim or action, and, to the extent that it wishes, jointly with
all other Indemnifying Parties, to assume control of the defense
thereof with counsel satisfactory to the Indemnified Party.
After notice from the Indemnifying Party to the Indemnified
Party of its election to assume control of the defense of such
claim or action, the Indemnifying Party shall not be liable to
the Indemnified Party for any legal or other expenses
subsequently incurred by the Indemnified Party in connection
with the defense thereof other than reasonable costs of
investigation; provided, however, that in any action in which
both the Indemnified Party and the Indemnifying Party are named
as defendants, the Indemnified Party shall have the right to
employ separate counsel (but no more than one such separate
counsel) to represent the Indemnified Party and its controlling
persons who may be subject to liability arising out of any claim
in respect of which indemnity may be sought by the Indemnified
Party against the Indemnifying Party, with the fees and expenses
of such counsel to be paid by such Indemnifying Party if, based
upon the written opinion of counsel of such Indemnified Party,
representation of both parties by the same counsel would be
inappropriate due to
D-9
actual or potential differing interests between them. No
Indemnifying Party shall, without the prior written consent of
the Indemnified Party, consent to entry of judgment or effect
any settlement of any claim or pending or threatened proceeding
in respect of which the Indemnified Party is or could have been
a party and indemnity could have been sought hereunder by such
Indemnified Party, unless such judgment or settlement includes
an unconditional release of such Indemnified Party from all
liability arising out of such claim or proceeding.
4.4
Contribution.
4.4.1 If the indemnification provided for in the
foregoing Sections 4.1, 4.2 and 4.3 is unavailable to any
Indemnified Party in respect of any loss, claim, damage,
liability or action referred to herein, then each such
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 loss, claim, damage,
liability or action in such proportion as is appropriate to
reflect the relative fault of the Indemnified Parties and the
Indemnifying Parties in connection with the actions or omissions
which resulted in such loss, claim, damage, liability or action,
as well as any other relevant equitable considerations. The
relative fault of any Indemnified Party and any Indemnifying
Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material
fact relates to information supplied by such Indemnified Party
or such Indemnifying Party and the parties relative
intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
4.4.2 The parties hereto agree that it would not be
just and equitable if contribution pursuant to this
Section 4.4 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 the immediately
preceding Section.
4.4.3 The amount paid or payable by an Indemnified
Party as a result of any loss, claim, damage, liability or
action referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth
above, any legal or other expenses incurred by such Indemnified
Party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this
Section 4.4, no holder of Registrable Securities shall be
required to contribute any amount in excess of the dollar amount
of the net proceeds (after payment of any underwriting fees,
discounts, commissions or taxes) actually received by such
holder from the sale of Registrable Securities which gave rise
to such contribution obligation. 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.
5.
UNDERWRITING AND DISTRIBUTION.
5.1
Rule 144.
The
Company covenants that it shall file any reports required to be
filed by it under the Securities Act and the Exchange Act and
shall take such further action as the holders of Registrable
Securities may reasonably request, all to the extent required
from time to time to enable such holders to sell Registrable
Securities without registration under the Securities Act within
the limitation of the exemptions provided by Rule 144 under
the Securities Act, as such Rule may be amended from time to
time, or any similar Rule or regulation hereafter adopted by the
Commission.
6.
MISCELLANEOUS.
6.1
Assignment; No Third Party
Beneficiaries.
This Agreement and the rights,
duties and obligations of the Company hereunder may not be
assigned or delegated by the Company in whole or in part. This
Agreement and the rights, duties and obligations of the holders
of Registrable Securities hereunder may be freely assigned or
delegated by such holder of Registrable Securities in
conjunction with and to the extent of any transfer of
Registrable Securities by any such holder. This Agreement and
the provisions hereof shall be binding upon and shall inure to
the benefit of each of the parties and their respective
successors, and the permitted assigns of the Stockholder or
holder of Registrable Securities or of any assignee of the
Stockholder or holder of Registrable Securities. The Company
acknowledges that the Registerable Securities may be held from
time to time by an escrow agent pursuant to the Escrow Agreement
and specifically consents to the exercise of the rights of the
Stockholders under this Agreement in the manner described in the
Escrow Agreement. This Agreement is not intended to confer any
rights or benefits on any persons that are not party hereto
other than as expressly set forth in Article 4 and this
Section 6.1.
D-10
6.2
Notices.
All notices,
demands, requests, consents, approvals or other communications
(collectively,
Notices
) required or
permitted to be given hereunder or which are given with respect
to this Agreement shall be in writing and shall be personally
served, delivered by reputable air courier service with charges
prepaid, or transmitted by hand delivery, telegram, telex or
facsimile, addressed as set forth below, or to such other
address as such party shall have specified most recently by
written notice. Notice shall be deemed given on the date of
service or transmission if personally served or transmitted by
telegram, telex or facsimile; provided, that if such service or
transmission is not on a business day or is after normal
business hours, then such notice shall be deemed given on the
next business day. Notice otherwise sent as provided herein
shall be deemed given on the next business day following timely
delivery of such notice to a reputable air courier service with
an order for
next-day
delivery.
To the Company:
JK Acquisition Corp.
4400 Post Oak Parkway, Suite 2530
Houston, Texas 77057
Facsimile No.:
(713) 552-9226
Attn: President
with a copy to:
Patton Boggs LLP
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Facsimile No.:
(214) 758-1550
Attn: Fred S. Stovall, Esq.
To a Stockholder, to:
The address of such Stockholder as set forth on the signature
pages hereto
with a copy to:
Catalyst/Hall Growth Capital Management Co., LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Facsimile No.:
(713) 623-0473
Attention: Ron Nixon and Rick Herrman
SG-Directional, LLC
P.O. Box 3417
Little Rock, Arkansas
72203-3417
Facsimile No.:
(501) 377-3463
Attention: Ronald M. Clark
Franklin, Cardwell & Jones, P.C.
1001 McKinney, Suite 1800
Houston, Texas 77002
Facsimile No.:
(713) 623-0478
Attention: Randolph Ewing, Esq.
6.3
Severability.
This
Agreement shall be deemed severable, and the invalidity or
unenforceability of any term or provision hereof shall not
affect the validity or enforceability of this Agreement or of
any other term or provision hereof. Furthermore, in lieu of any
such invalid or unenforceable term or provision, the parties
hereto intend that there shall be added as a part of this
Agreement a provision as similar in terms to such invalid or
unenforceable provision as may be possible that is valid and
enforceable.
6.4
Counterparts.
This
Agreement may be executed in multiple counterparts, each of
which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.
D-11
6.5
Entire Agreement.
This
Agreement (including all agreements entered into pursuant hereto
and all certificates and instruments delivered pursuant hereto
and thereto) constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede all prior and
contemporaneous agreements, representations, understandings,
negotiations and discussions between the parties, whether oral
or written.
6.6
Modifications and
Amendments.
No amendment, modification or
termination of this Agreement shall be binding upon any party
unless executed in writing by such party.
6.7
Titles and
Headings.
Titles and headings of sections of
this Agreement are for convenience only and shall not affect the
construction of any provision of this Agreement.
6.8
Waivers and
Extensions.
Any party to this Agreement may
waive any right, breach or default which such party has the
right to waive, provided that such waiver will not be effective
against the waiving party unless it is in writing, is signed by
such party, and specifically refers to this Agreement. Waivers
may be made in advance or after the right waived has arisen or
the breach or default waived has occurred. Any waiver may be
conditional. No waiver of any breach of any agreement or
provision herein contained shall be deemed a waiver of any
preceding or succeeding breach thereof or of any other agreement
or provision herein contained. No waiver or extension of time
for performance of any obligations or acts shall be deemed a
waiver or extension of the time for performance of any other
obligations or acts.
6.9
Remedies Cumulative.
In
the event that the Company fails to observe or perform any
covenant or agreement to be observed or performed under this
Agreement, the Stockholder or any other holder of Registrable
Securities may proceed to protect and enforce its rights by suit
in equity or action at law, whether for specific performance of
any term contained in this Agreement or for an injunction
against the breach of any such term or in aid of the exercise of
any power granted in this Agreement or to enforce any other
legal or equitable right, or to take any one or more of such
actions, without being required to post a bond. None of the
rights, powers or remedies conferred under this Agreement shall
be mutually exclusive, and each such right, power or remedy
shall be cumulative and in addition to any other right, power or
remedy, whether conferred by this Agreement or now or hereafter
available at law, in equity, by statute or otherwise.
6.10
Governing Law.
This
Agreement shall be governed by, interpreted under, and construed
in accordance with the internal laws of the State of New York
applicable to agreements made and to be performed within the
State of New York, without giving effect to any choice-of-law
provisions thereof that would compel the application of the
substantive laws of any other jurisdiction.
6.11
Waiver of Trial by
Jury.
Each party hereby irrevocably and
unconditionally waives the right to a trial by jury in any
action, suit, counterclaim or other proceeding (whether based on
contract, tort or otherwise) arising out of, connected with or
relating to this Agreement, the transactions contemplated
hereby, or the actions of the Stockholders in the negotiation,
administration, performance or enforcement hereof.
[Remainder
of this page intentionally left blank; signature pages
follows.]
D-12
IN WITNESS WHEREOF, the parties have caused this Registration
Rights Agreement to be executed and delivered by their duly
authorized representatives as of the date first written above.
JK ACQUISITION CORP.
By: Keith D. Spickelmier, President
CATALYST/HALL GROWTH CAPITAL MANAGEMENT CO., LLC (as the
Members Representative)
By: Rick Herrman, President
SG-DIRECTIONAL, LLC
(as the Members Representative)
By: The Stephens Group, LLC,
Its
Manager
|
|
|
|
Name:
|
Ronald M. Clark
Title: Senior Vice President
|
STOCKHOLDERS:
SG-DIRECTIONAL, LLC
|
|
|
|
By:
|
The Stephens Group, LLC
|
Its Manager
|
|
|
|
Title:
|
Senior Vice President
|
Address for Notices:
Registration Rights Agreement Signature Pages
D-13
SG-Directional, LLC
P.O. Box 3417
Little Rock, Arkansas
72203-3417
Facsimile No.:
(501) 377-3463
Attention: Ronald M. Clark
CATALYST/HALL GROWTH CAPITAL, LP
|
|
|
|
By:
|
Catalyst/Hall Growth Capital Management
|
Co., LLC
Its sole general partner
Address for Notices:
c/o Catalyst/Hall
Growth Capital Management
Co., LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Facsimile No.:
(713) 623-0473
Attention: Ron Nixon and Rick Herrman
CATALYST/HALL PRIVATE EQUITY, LP
|
|
|
|
By:
|
Catalyst/Hall Private Equity Management
|
Company, LLC
Its sole general partner
Address for Notices:
Registration Rights Agreement Signature Pages
D-14
c/o Catalyst/Hall
Growth Capital Management
Co., LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Facsimile No.:
(713) 623-0473
Attention: Ron Nixon and Rick Herrman
CATALYST CAPITAL PARTNERS I, LTD.
|
|
|
|
By:
|
The Catalyst Group, Inc.
|
Its sole general partner
Address for Notices:
c/o Catalyst/Hall
Growth Capital Management
Co., LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Facsimile No.:
(713) 623-0473
Attention: Ron Nixon and Rick Herrman
CATALYST CAPITAL PARTNERS II, LTD.
|
|
|
|
By:
|
The Catalyst Group II, Inc.
|
Its sole general partner
Address for Notices:
c/o Catalyst/Hall
Growth Capital Management
Co., LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Facsimile No.:
(713) 623-0473
Attention: Ron Nixon and Rick Herrman
Registration Rights Agreement Signature Pages
D-15
CRF AIR, LLC
Address for Notices:
[Address]
[Address]
[Facsimile No:]
Address for Notices:
[Address]
[Address]
[Facsimile No:]
Address for Notices:
[Address]
[Address]
[Facsimile No:]
Address for Notices:
[Address]
[Address]
[Facsimile No:]
Registration Rights Agreement Signature Pages
D-16
Address for Notices:
[Address]
[Address]
[Facsimile No:]
Registration Rights Agreement Signature Pages
D-17
ANNEX
E
ESCROW
AGREEMENT
This ESCROW AGREEMENT (this
Agreement
) is
made and entered into as of
[ ],
200[ ] by and among JK Acquisition Corp. and
Multi-Shot, Inc., both Delaware corporations
(
Purchaser
), Catalyst/Hall Growth Capital
Management Co., LLC, a Texas limited liability company
(
Catalyst
), and SG-Directional, LLC, an
Arkansas limited liability company
(
SG-Directional
and together with Catalyst,
the
Members Representative
), as agents
of the selling members of Multi-Shot, LLC, a Texas limited
liability company (the
Company
), listed on
Schedule I
hereto (the
Members
),
and Zions First National Bank, a national banking association,
as escrow agent (the
Escrow Agent
).
BACKGROUND
A. Purchaser, the Company, the Members and the
Members Representative have entered into that certain
Second Amended and Restated Agreement and Plan of Merger, dated
as of August , 2007 (the
Merger
Agreement
), pursuant to which Purchaser has acquired
all of the outstanding Membership Interests of the Company.
B. Section 2.04(b) of the Merger Agreement provides
that Purchaser shall deposit the Escrow Deposit (as defined
herein) into an escrow account to be held by the Escrow Agent in
order to provide security for the payment to Purchaser of any
(i) purchase price adjustment claims made by Purchaser
pursuant to Section 2.03 of the Merger Agreement (the
Closing Date Balance Sheet Adjustments
) and
(ii) indemnification claims made by the Parent Indemnified
Persons pursuant to Article X of the Merger Agreement.
Accordingly, the parties desire to establish an escrow account
on the terms and conditions set forth herein.
C. The parties hereto desire to appoint the Escrow Agent
to receive, hold and invest the Escrow Deposit, together with
any Parent Common Stock issued pursuant to the exchange of any
Escrow Warrants (which, together with the Parent Shares and the
Redemption Liability Shares are collectively known herein
as the
Escrow Shares
) and the proceeds from
the sale of any Escrow Shares or Escrow Warrants (the
Proceeds
), and any interest or other income
earned thereon (all of which is referred to herein as the
Escrow Fund
), and to satisfy such Closing
Date Balance Sheet Adjustments and Company indemnification
obligations as may result and to disburse said Escrow Fund in
accordance with the terms set forth herein. The Escrow Agent has
agreed to act as such upon the terms, covenants and conditions
hereinafter set forth.
D. A material condition to the consummation of the
transactions contemplated by the Merger Agreement is that the
parties hereto enter into this Agreement.
AGREEMENT
In consideration of the mutual representations, warranties and
covenants contained herein, and upon and subject to the terms
and the conditions hereinafter set forth, the parties do hereby
agree as follows:
1.
Defined
Terms
.
Capitalized terms used herein without
definition shall have the meanings ascribed to them in the
Merger Agreement. As among Purchaser, the Members and the
Members Representative, the provisions of the Merger
Agreement are hereby incorporated herein by reference, but only
as the context of this Agreement may require. The Escrow Agent
is not a party to the Merger Agreement and shall, therefore, act
only in accordance with the terms and conditions contained in
this Agreement, and it shall not have any liability under, nor
duty to inquire into, the terms and provisions of the Merger
Agreement, other than with respect to the capitalized terms that
are used herein as defined in the Merger Agreement, which are
set forth hereto as
Exhibit A.
2.
Escrow Deposit
.
At the
Closing, Purchaser will deposit with the Escrow Agent, in
accordance with Section 2.04(b) of the Merger Agreement,
(i)
[ ]
the Parent Shares issued as Parent Stock Consideration
E-1
pursuant to the Merger Agreement (the
Parent
Shares
), (ii)
[ ]
Parent Warrants as issued by Parent pursuant to the Merger
Agreement (the
Parent Warrants
),
(iii) the Redemption Liability Shares issued by the
Parent pursuant to Section 2.08 of the Merger Agreement
(the
Redemption Liability Shares
), and
(iv) the Redemption Warrants issued by the Parent
pursuant to Section 2.08 of the Merger Agreement (the
Redemption Warrants
and together with
the Parent Warrants, the
Escrow Warrants
which term shall include any Cash Exercise Warrants issued upon
exercise of Parent Warrants deposited with Escrow Agent). The
term
Escrow Deposit
used in this Escrow
Agreement shall mean the Parent Shares, the
Redemption Liability Shares, and the Escrow Warrants.
3.
Escrow Fund
.
Upon receipt
of the Escrow Deposit, the Escrow Agent shall send a notice to
the Members Representative and Purchaser acknowledging
receipt of such amount and shall hold, administer and dispose of
the Escrow Fund pursuant to the terms of this Agreement (the
Escrow
). All rights associated with the
Escrow Fund, including any interest or other income attributable
thereto, shall be exercised by the Escrow Agent, and shall in no
event be exercisable by or rest with the Members, the
Members Representative or Purchaser, unless otherwise
provided for herein. Until such time as the Escrow Fund shall be
distributed by the Escrow Agent as provided herein, the Proceeds
shall be invested and reinvested by the Escrow Agent at the
joint written direction of Purchaser and the Members
Representative, in the name of the Escrow Agent or its nominee,
in readily marketable direct obligations of the Government of
the United States or any agency or instrumentality thereof or
readily marketable obligations unconditionally guaranteed by the
full faith and credit of the Government of the United States. In
the absence of such written instructions, the Escrow Agent will
invest the Proceeds in the AIM Treasury Trust, Private Class,
Money Market Fund, in an account styled JKA/Multi-Shot Escrow
with a federal tax identification number
27-0035085,
and the parties acknowledge that the Escrow Agent may render
administrative services and receive additional fees from the
administrator or distributor of said account. The Escrow Agent
shall be entitled to sell or redeem any such investment as
necessary to make any distributions required under this
Agreement and shall not be liable or responsible for any loss
resulting from any such sale or redemption. All costs and
expenses of the Escrow Agent related to its administration of
the Escrow Fund shall be borne by Purchaser and not paid from
the Escrow Fund itself.
4.
Sale of Parent Shares, Parent Warrants and
Parent Common Stock
.
(a) Notwithstanding the Escrow, the Members
Representative may direct the Escrow Agent to sell any or all
the Escrow Shares or the Escrow Warrants in one or more
transactions. The Members Representative shall give
Purchaser and the Escrow Agent written notice (the
Sale
Notice
) of each proposed sale specifying the number
and description of the securities to be sold, the manner of
sale, selling price, purchaser (if known), and whether such sale
is pursuant to the Registration Rights Agreement (and, if so,
the provision thereof) or otherwise (e.g., a sale pursuant to a
private transaction, Rule 144, or other exempt transaction).
(b) Within five (5) days after delivery of a Sale
Notice to Purchaser and the Escrow Agent in accordance with
Section 4(a), Purchaser will deliver to the Members
Representative and the Escrow Agent a written response in which
Purchaser must either:
(i) acknowledge that the sale is in accordance with the
Registration Rights Agreement; or
(ii) agree that the proposed sale is acceptable and in
compliance with the sale description as contained in the Sale
Notice; or
(iii) dispute the Sale Notice on the basis that such sale
does not comply will applicable laws or regulations, specifying
such laws.
(c) If Purchaser fails to take any of the foregoing actions
within five (5) days after delivery of the Sale Notice then
Purchaser will be deemed to have irrevocably authorized the sale
in accordance with such Sale Notice. The Members
Representative will send written notice of such failure to the
Escrow Agent who will release the Escrow Shares
and/or
Escrow Warrants to the Members Representative to be sold
to facilitate their sale pursuant to the Sale Notice.
(d) If Purchaser delivers to the Members
Representative and the Escrow Agent a notice that such sale
would not comply with applicable laws or regulations (specifying
such laws), such securities will be held by the Escrow
E-2
Agent as an undivided part of the Escrow Fund (which shall
continue to be available to satisfy Adjustment Claims and
Indemnity Claims pursuant to Section 6) and the Escrow
Agent will release the Escrow Shares
and/or
Escrow Warrants to be sold only in accordance with:
(i) the Escrow Agents receipt of joint written
instructions executed by Purchaser and the Members
Representative with respect to the sale; or
(ii) the Escrow Agents receipt of written
instructions from the Members Representative accompanied
by a legal opinion from counsel for Members that such sale
complies with all applicable laws and regulations.
(e) If any Escrow Shares
and/or
Escrow Warrants to be sold are represented by a certificate or
certificates representing a number of shares of Escrow Shares or
Escrow Warrants in excess of the number sold, the Escrow Agent
shall deliver to Purchaser certificates representing at least
the number of securities sold. Purchaser shall cancel such
certificate or certificates and deliver to the Members
Representative a certificate or certificates representing the
number of Escrow Shares or Escrow Warrants subject to such sale
and deliver to the Escrow Agent a certificate or certificates
representing the excess Escrow Shares or Escrow Warrants, which
shall be held by the Escrow Agent and disposed of according to
the terms of this Escrow Agreement.
(f) The Proceeds from any sale of Escrow Shares or Escrow
Warrants shall be delivered to the Escrow Agent and held
pursuant to the Escrow; provided however, that any amount of the
Proceeds shall be immediately distributed to the Members to the
extent that the aggregate amount of cash in the Escrow Fund is
in excess of $10,000,000.
5.
Exercise of Escrow Warrants.
(a) Notwithstanding the Escrow, the Escrow Warrants shall
be surrendered to the Parent by the Escrow Agent from time to
time and to be exchanged for Parent Common Stock pursuant to
Section 2.06 of the Merger Agreement. On each Determination
Date (as defined in the Merger Agreement) Purchaser shall give
written notice (a
Contingent Award Notice
) to
the Members Representative and the Escrow Agent specifying
the amount of the Contingent Award and the number of Escrow
Warrants to be converted into Parent Common Stock as of such
Determination Date.
(b) Within ten (10) days after Purchasers
delivery of a Contingent Award Notice to the Members
Representative and the Escrow Agent in accordance with
Section 5(a), the Members Representative will deliver
to Purchaser and the Escrow Agent a written response in which
the Members Representative must either:
(i) agree that the computation of the Contingent Award is
correct, in which event the Escrow Agent shall deliver Escrow
Warrants to Purchaser, and Purchaser shall deliver to the Escrow
Agent Parent Common Stock in the amount of the Contingent
Award; or
(ii) dispute the Contingent Award as set forth in the
Contingent Award Notice is correct by delivering to Purchaser
and the Escrow Agent a notice of such dispute setting forth in
reasonable detail the basis for such dispute.
(c) If the Members Representative fails to take
either of the foregoing actions within ten (10) days after
delivery of the Contingent Award Notice, the Members will be
deemed to have irrevocably accepted Purchasers calculation
of the Contingent Award. In such event, Purchaser will send
written notice of such failure to the Escrow Agent who will
exchange the requisite number of Escrow Warrants for Parent
Common Stock and hold such Parent Common Stock according to the
terms of the Escrow.
(d) If the Members Representative delivers to
Purchaser and the Escrow Agent a notice of dispute regarding the
Contingent Award Notice, then the Escrow Warrants shall continue
to be held by the Escrow Agent as an undivided portion of the
Escrow Fund (which shall continue to be available to satisfy
Adjustment Claims and Indemnity Claims pursuant to
Section 6) and the Escrow Agent will exchange the
Escrow Warrants for Parent Common Stock only in accordance with
the Escrow Agents receipt of joint written instructions
executed by Purchaser and the Members Representative with
respect thereto. Such Parent Common Stock issued in exchange for
Escrow Warrants shall be held by the Escrow Agent as Escrow
Shares in accordance with the terms of this Agreement.
E-3
(e) If any Escrow Warrants are exercised in part according
to this Section 5, Purchaser shall, at the time of delivery
of the certificate or certificates representing the Escrow
Warrants to be exercised, deliver to the Escrow Agent new Escrow
Warrants evidencing the unexercised Escrow Warrants, which new
Escrow Warrants shall in all other respects be identical with
the original Escrow Warrants. Such new Escrow Warrant shall be
held by the Escrow Agent as Escrow Warrants and disposed of
according to the terms of this Escrow Agreement.
6.
Distributions of the Escrow Fund;
Termination of the Escrow
.
The Escrow
Fund shall be distributed by the Escrow Agent in accordance with
the following:
(a)
Post-Closing Adjustment Claims
(i) Per the terms of the Merger Agreement, Purchaser may
give written notice (the
Adjustment Notice
)
to the Members Representative specifying the nature and
dollar amount (to the extent known) of a claim (an
Adjustment Amount
). The Members
Representative may either agree with Purchasers Adjustment
Amount, or protest via its delivery of a Dispute Notice. In the
event of the delivery of a Dispute Notice, Purchaser and
Members Representative will follow the dispute resolution
process in Section 2.03 of the Merger Agreement.
(ii) Once the dispute is resolved, the Members
Representative and Purchaser shall provide the Escrow Agent
joint written instructions with respect to such amount;
certifying that the Adjustment Amount has been determined in
accordance with Section 2.03 of the Merger Agreement and
containing instructions with respect to such amount.
(iii) With respect to any distributions by the Escrow Agent
to Purchaser for an Adjustment Amount pursuant to the Merger
Agreement, such distributions shall reduce the amount of the
Escrow Fund otherwise payable to, and such Adjustment Claim
shall be borne pro rata by, each Member in accordance with such
Members percentage of the Escrow Deposit set forth on
Schedule I
hereto. Any such distributions to
Purchaser made by the Escrow Agent shall be payable as follows:
100% of the Adjustment Claim shall be payable in Escrow Shares
(based on the Escrow Per Share Market Value (as defined below)
on such date) or Proceeds; provided that the Members
Representative may elect to have an Adjustment Claim paid from
the Proceeds or other cash provided by the Members in any
proportional amount of such Adjustment Claim.
(iv) As used herein, the terms
Escrow Per Share
Market Value
shall mean for any date, the price
determined by calculating the average of the closing per share
prices of the Parent Common Stock on the American Stock Exchange
(or such other nationally recognized exchange on which the
Parent Common Stock is then traded); based on a Trading Day
closing value as of 4:02 p.m. New York City time, for
the twenty Trading Days prior to the distribution date. Such
calculation of the Escrow Per Share Market Value
will be performed by the parties and submitted to the Escrow
Agent.
(b)
Indemnification Claims
.
(i) From time to time before the Final Release Date (as
defined below), Purchaser may give written notice (the
Indemnification Notice
) to the Members
Representative and the Escrow Agent specifying the nature and
dollar amount (to the extent known) of a claim relating to any
claim for indemnification (an
Indemnification
Claim
) any Parent Indemnified Person may have under
Article X of the Merger Agreement; provided; however, that
(A) the amount of any Indemnification Claim set forth in
the Indemnification Notice shall in no way limit the Losses
recoverable by a Purchaser Indemnified Party under the Merger
Agreement in connection with such Indemnification Claim (by way
of example and not of limitation, any Losses as finally
determined that may exceed any estimated amount set forth in the
Indemnification Notice and attorneys fees incurred after
the delivery of an Indemnification Notice to the extent
indemnifiable under the Merger Agreement) and (B) an
Indemnification Claim may be made even if no amounts are then
being sought for release from the Escrow Fund on account of such
Indemnification Claim (by way of example and not of limitation,
on the basis that such Indemnification Claim has not, at such
time, been resolved). If the Members Representative does
not deliver notice to Purchaser and the Escrow Agent disputing
such Indemnification Claim (a
Counter Indemnification
Notice
) within thirty (30) days after the
Members Representatives receipt of the
Indemnification Notice, then the dollar
E-4
amount of the Indemnification Claim set forth in the
Indemnification Notice shall be deemed conclusive for purposes
of this Agreement, and, at the end of such thirty (30)-day
period, the Escrow Agent shall pay to Purchaser the dollar
amount of the Indemnification Claim in the Indemnification
Notice from the Escrow Fund. The Escrow Agent shall not inquire
into or consider whether an Indemnification Claim complies with
the requirements of the Merger Agreement.
(ii) If a Counter Indemnification Notice is given with
respect to a Indemnification Claim, the Escrow Agent shall make
payment with respect to an Indemnification Notice only
(1) in accordance with joint written instructions of
Purchaser and the Members Representative or (2) after
a final decision has been rendered by a court or binding
arbitrator to enforce an award with respect to the amount of
such Indemnification Claim (resolved as between Purchaser and
the Members Representative in accordance with the terms of
the Merger Agreement), and then in accordance with such
decision. Upon receipt of the joint written instructions or
final decision as specified in the preceding sentence, the
Escrow Agent shall pay Purchaser the dollar amount specified in
the joint written instruction or final decision, as applicable,
from the Escrow Fund. In case the Escrow Agent obeys or complies
with any such order, judgment or decree of any court or binding
resolution of arbitration, the Escrow Agent shall not be liable
to any of the parties hereto or to any other person by reason of
such compliance, notwithstanding any such order, judgment or
decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without
jurisdiction.
(iii) With respect to any distributions by the Escrow Agent
to Purchaser for an Indemnification Claim pursuant to the Merger
Agreement, such distributions shall reduce the amount of the
Escrow Fund otherwise payable to, and such Indemnification Claim
shall be borne pro rata by, each Member in accordance with such
Members percentage of the Escrow Deposit set forth on
Schedule I hereto. Any such distributions to Purchaser made
by the Escrow Agent shall be payable as follows: 100% of the
Indemnification Claim shall be payable in Escrow Shares (based
on the Escrow Per Share Market Value (as defined below) on such
date) or Proceeds; provided that the Members
Representative may elect to have an Indemnification Claim paid
from the Proceeds or other cash provided by the Members in any
proportional amount of such Indemnification Claim.
(iv) With respect to any distributions by the Escrow Agent
to Purchaser for an Indemnification Claim under the Merger
Agreement, such distributions shall reduce the amount of the
Escrow Fund otherwise payable to, and such Claim shall be borne
pro rata by, each Member in accordance with such Members
percentage of the Escrow Deposit set forth on
Schedule I
hereto. Any distributions made pursuant
to Section 6 (b) by the Escrow Agent shall be solely
payable to Purchaser in Escrow Shares (based on the Per Share
Market Trading Value on such date) or from Proceeds.
(v) As used herein, the terms
Claims
shall mean, collectively, the Adjustment Claims and
Indemnification Claims.
(c)
Escrow
Distributions
.
On December 31,
2008 (such date being, the
Initial Release
Date
), the Escrow Agent shall pay and distribute to
the Members Representative for distribution to the Members
the then remaining portion, if any, of the (i) Parent
Warrants, Cash Exercise Warrants and Proceeds and (ii) the
Escrow Shares in excess of $3,000,000 in value (based on the Per
Share Market Trading Value as of the Initial Release Date), less
the sum of (A) any and all Claims finally determined by
written agreement of Purchaser and the Members
Representative but unpaid as of the Initial Release Date, and
(B) the amount (or Purchasers good faith estimate
thereof to which the Members Representative must consent)
specified in any Claim asserted in good faith by Purchaser on or
prior to the Initial Release Date (the
Initial Escrow
Release Amount
). The Members Representative
shall then distribute to each Member an amount equal to the
Initial Escrow Release Amount multiplied by such Members
Initial Escrow Percentage set forth on
Schedule I
hereto. To the extent that there is pending any unresolved Claim
as of the Initial Release Date, the portion of the Escrow Fund
reserved with respect to such Claim less amounts ultimately used
to satisfy such Claim upon its final resolution shall be
distributed to the Members Representative upon final
settlement or resolution of each such pending Claim, and the
Members Representative shall distribute such amount(s) to
the Members in the manner described above.
E-5
On
[ ]
[ ], 20[ ], which is a date thirty six
(36) months after the Closing Date (such date being, the
Final Release Date
), the Escrow Agent shall
pay and distribute to the Members Representative for
distribution to the Members the then remaining portion, if any,
of the Escrow Fund less the sum of (i) any and all Claims
finally determined by written agreement of Purchaser and the
Members Representative but unpaid as of the Final Release
Date, and (ii) the amount (or Purchasers good faith
estimate thereof to which the Members Representative must
consent) specified in any Claim asserted in good faith by
Purchaser on or prior to the Final Release Date (the
Remaining Escrow Fund
). The Members
Representative shall then distribute to each Member a portion of
the Remaining Escrow Fund equal to the Remaining Escrow Fund
multiplied by such Members Initial Escrow Percentage set
forth on
Schedule I
hereto. To the extent that there
is pending any unresolved Claim as of the Final Release Date,
the portion of the Escrow Fund reserved with respect to such
Claim less amounts ultimately used to satisfy such Claim upon
its final resolution shall be distributed to the Members
Representative upon final settlement or resolution of each such
pending Claim, and the Members Representative shall
distribute such amount(s) to the Members in the manner described
above. Upon the final distribution of all of the Escrow Fund in
accordance with the terms of this Agreement, this Agreement
shall terminate.
7.
Duties of the Escrow
Agent
.
The Escrow Agent shall have no duties
or responsibilities other than those expressly set forth in this
Agreement, and no implied duties or obligations shall be read
into this Agreement against the Escrow Agent. The Escrow Agent
shall have no duty to enforce any obligation of any person,
other than as provided herein. The Escrow Agent shall be under
no liability to anyone by reason of any failure on the part of
any party hereto or any maker, endorser or other signatory of
any document or any other person to perform such persons
obligations under any such document. Except as set forth in this
Agreement, the Escrow Agent shall not have any duties or
responsibilities under any provision of any other agreement,
including without limitation, the Merger Agreement.
8.
Liability of the Escrow Agent;
Withdrawal
.
This Escrow Agreement expressly
and exclusively sets forth the duties of Escrow Agent with
respect to any and all matters pertinent hereto, and no implied
duties or obligations shall be read into this Escrow Agreement
against Escrow Agent. This Escrow Agreement constitutes the
entire agreement between the Escrow Agent and the other parties
hereto in connection with the subject matter of this escrow, and
no other agreement entered into between the parties, or any of
them, shall be considered as adopted or binding, in whole or in
part, upon the Escrow Agent notwithstanding that any such other
agreement may be referred to herein or deposited with Escrow
Agent or the Escrow Agent may have knowledge thereof, and Escrow
Agents rights and responsibilities shall be governed
solely by this Escrow Agreement.
Escrow Agent acts hereunder as a depository only, and is not
responsible or liable in any manner whatsoever for the
sufficiency, correctness, genuineness or validity of the subject
matter of this Escrow Agreement or any part thereof, or for the
form of execution thereof, or for the identity or authority of
any person executing or depositing such subject matter. Escrow
Agent shall be under no duty to investigate or inquire as to the
validity or accuracy of any document, agreement, instruction or
request furnished to it hereunder believed by it to be genuine
and Escrow Agent may rely and act upon, and shall not be liable
for acting or not acting upon, any such document, agreement,
instruction or request. Escrow Agent shall in no way be
responsible for notifying, nor shall it be its duty to notify,
any party hereto or any other party interested in this Escrow
Agreement of any payment required or maturity occurring under
this Escrow Agreement or under the terms of any instrument
deposited herewith.
Purchaser and the Members Representative agree, jointly
and severally, to indemnify the Escrow Agent for, and to hold it
harmless from and against, any losses, liabilities, claims,
actions, damages or expenses (including reasonable expenses and
disbursements of its counsel) incurred without gross negligence,
bad faith or intentional misconduct on the part of the Escrow
Agent arising out of or in connection with its entering into
this Agreement and attempting to carry out its duties hereunder,
including the reasonable costs and expenses of defending itself
against any such claim or liability. As between Purchaser and
the Members Representative, any such indemnification of
the Escrow Agent shall be payable one-half by Purchaser and
one-half by the Members Representative on behalf of the
Members (to be further allocated among the Members in proportion
to their Initial Escrow Percentages as set forth on
Schedule I
hereto). The foregoing indemnities in
this paragraph shall survive the resignation or substitution of
the Escrow Agent or the termination of this Agreement.
E-6
The Escrow Agent (and any successor Escrow Agent) may at any
time resign as such by giving thirty (30) days prior
written notice to Purchaser and the Members Representative
and delivering the Escrow Fund to any successor Escrow Agent
jointly designated by Purchaser and the Members
Representative in writing, or by any court of competent
jurisdiction, whereupon the Escrow Agent shall be discharged of
and from any and all further obligations arising in connection
with this Agreement. Prior to the effectiveness of such
resignation, Purchaser and the Members Representative
shall appoint a new Escrow Agent, which shall be a bank or
national banking association. The resignation of the Escrow
Agent will take effect on the earlier of (a) the
appointment of a successor (including a court of competent
jurisdiction) and (b) the day which is thirty
(30) days after the date of delivery of its written notice
of resignation to the other parties hereto. If at that time the
Escrow Agent has not received a designation of a successor
Escrow Agent, the Escrow Agents sole responsibility after
that time shall be to retain and safeguard the Escrow Fund until
receipt of a designation of successor Escrow Agent or a joint
written disposition instruction by the other parties hereto or a
final non-appealable order of a court of competent jurisdiction.
The Escrow Agent shall be paid any outstanding fees and expenses
prior to transferring the Escrow Fund to a successor Escrow
Agent.
9.
Escrow Agents Authority to
Act
.
Escrow Agent is hereby authorized and
directed by the undersigned to deliver the subject matter of
this Escrow Agreement only in accordance with the provisions of
this Escrow Agreement.
Escrow Agent shall be protected in acting upon any written
notice, request, waiver, consent, certificate, receipt,
authorization, power of attorney or other paper or document
which Escrow Agent in good faith believes to be genuine and what
it purports to be, including, but not limited to, items
directing investment or non-investment of funds, items
requesting or authorizing release, disbursement or retainage of
the subject matter of this Escrow Agreement and items amending
the terms of this Escrow Agreement.
Escrow Agent may consult with legal counsel at the joint and
several cost and expense of the undersigned (other than Escrow
Agent) in the event of any dispute or question as to the
construction of any of the provisions hereof or its duties
hereunder, and it shall incur no liability and shall be fully
protected in acting in accordance with the advice of such
counsel.
In the event of any disagreement between any of the parties to
this Escrow Agreement, or between any of them and any other
person, resulting in adverse claims or demands being made in
connection with the matters covered by this Escrow Agreement, or
in the event that Escrow Agent, in good faith, is in doubt as to
any action it should take hereunder, Escrow Agent may, at its
option, refuse to comply with any claims or demands on it, or
refuse to take any other action hereunder, so long as such
disagreement continues or such doubt exists, and in any such
event, Escrow Agent shall not be or become liable in any way or
to any person for its failure or refusal to act (baring its
fraud, gross negligence or willful misconduct), and Escrow Agent
shall be entitled to continue to so refrain from acting until
(i) the rights of all interested parties shall have been
fully and finally adjudicated by a court of competent
jurisdiction, or (ii) all differences shall have been
adjudged and all doubt resolved by agreement among all of the
interested persons, and Escrow Agent shall have been notified
thereof in writing duly executed by all such persons. In the
event that the Escrow Agent shall become involved in any
arbitration or litigation relating to the Escrow Fund, the
Escrow Agent is authorized to comply with any decision reached
through such arbitration or litigation.
In the event that any controversy should arise among the parties
with respect to the Escrow Agreement, or should the Escrow Agent
resign and the parties fail to select another Escrow Agent to
act in its stead, the Escrow Agent shall have the right to
institute a bill of interpleader in any court of competent
jurisdiction to determine the rights of the parties.
10.
The Escrow Agents Fees &
Expenses
.
The Escrow Agents fees shall
be as set forth on
Schedule II
hereto and shall be
payable by Purchaser within a reasonable period of time not to
exceed thirty (30) days after billing. Escrow Agent shall
be entitled to reasonable compensation as well as reimbursement
for its reasonable costs (equal to $25.00 per check issued after
the first 20 checks are issued) and expenses incurred in
connection with the performance by it of service under this
Escrow Agreement (including reasonable fees and expenses of
Escrow Agents counsel). The Escrow Agent shall be under no
obligation to institute or defend any action, suit, or legal
proceeding in connection herewith, unless first indemnified and
held harmless to its satisfaction, except that the Escrow Agent
shall not be indemnified against any loss, liability or expense
arising out of its gross negligence or willful misconduct. Such
indemnity shall survive the termination or discharge of this
Agreement or resignation of
E-7
the Escrow Agent and shall be subject to the provisions of
Section 6. To the extent any amount due to the Escrow Agent
pursuant to this Section 10 is not paid, the Escrow Agent
shall notify all parties and if such amount is not paid within
ten (10) business days of such notice, the Escrow Agent may
resign and pursue its rights of collection against Purchaser.
11.
Inspection
.
All funds or
other property held as part of the Escrow shall at all times be
clearly identified as being held by the Escrow Agent hereunder.
Any party hereto may at any time during the Escrow Agents
business hours (with reasonable notice) inspect any records or
reports relating to the Escrow Fund.
12.
Accounting by Escrow
Agent
.
The Escrow Agent shall keep accurate
and detailed records of all investments, receipts,
disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in
writing among Purchaser, the Members Representative and
the Escrow Agent. Within fifteen (15) days following the
close of each month and within five (5) days after the
removal or resignation of the Escrow Agent, the Escrow Agent
shall deliver to Purchaser and the Members Representative
a written account of its administration of the Escrow during
such month or during the period from the close of the last
preceding month to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other
transactions effected by it, including a description of all
securities and investments purchased and sold with the cost or
net proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately), and showing all cash,
securities and other property held in the Escrow with the terms
hereof at the end of such month or as of the date of such
removal or resignation, as the case may be.
13.
Tax Reporting of Interest or Other Income
Accrued or Received with respect to the Escrow
Fund
.
Except as otherwise set forth herein,
the parties hereto acknowledge and agree that no interest income
or other income accrued or received on the Escrow Fund shall be
due or remitted to Purchaser, the Members Representative
and/or
the
Members for the period of time the Escrow Fund is held by the
Escrow Agent. Notwithstanding the foregoing, the Escrow Agent
shall, for each calendar year (or portion thereof) that the
Escrow is in existence, report the income of the Escrow on IRS
Forms 1099. Pursuant to Proposed Treasury Regulations
1.468B-8, the Forms 1099 shall show as payor the Escrow
Agent and as payee Purchaser. Further, neither Purchaser, nor
the Members Representative nor any Member shall take any
position in connection with the preparation, filing or audit of
any Tax Return that is in any way inconsistent with the
foregoing determination or the Forms 1099 provided by the
Escrow Agent. As an agreement with which the Escrow Agent need
not be concerned, (i) Purchaser shall be treated as having
paid interest to the Members at the time of and in the amount of
any interest distributed by the Escrow Agent to the Members and
(ii) Purchaser shall issue Form(s) 1099 to the Members
reflecting the same as required by applicable law.
14.
Notices
.
All notices,
requests, consents and other communications required or
permitted hereunder will be in writing and will be deemed given:
(a) when delivered if delivered personally (including by
courier); (b) on the third day after mailing, if mailed,
postage prepaid, by registered or certified mail (return receipt
requested); (c) on the day after mailing if sent by a
nationally recognized overnight delivery service which maintains
records of the time, place, and recipient of delivery; or
(d) upon written confirmation of receipt of transmission,
if sent by telecopy or facsimile transmission, in each case to
the parties at the following addresses:
(a) if to the Members Representative, to:
Catalyst/Hall Growth Capital Management, LLC
2 Riverway, Suite 1710
Houston, Texas 77056
Attention: Ron Nixon and Rick Herman
Facsimile:
(713) 623-0473
And
SG-Directional, LLC
P.O. Box 3417 Little Rock, Arkansas
72203-3417
Attention: Ronald M. Clark
Facsimile No.:
(501) 377-3463
E-8
with a copy, which shall not constitute notice to the
Members Representative, to:
Franklin, Cardwell & Jones, P.C.
1001 McKinney, Suite 1800
Houston, Texas 77002
Attention: Randolph Ewing, Esq.
Facsimile No.:
(713) 623-0478
(b) if to Purchaser to:
JK Acquisition Corp.
4400 Post Oak Parkway
Suite 2530
Houston, Texas 77027
Attention: James P. Wilson
Facsimile No.:
(713) 552-9226
with copies, which shall not constitute notice to Purchaser, to:
Patton Boggs LLP
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Attention: Fred Stovall, Esq.
Facsimile No.:
(214) 758-1550
(c) if to Escrow Agent to:
Zions First National Bank Corporate Trust
c/o Amegy
Bank, N.A.
1801 Main Street, Suite 800
Houston, Texas 77002
Attention: Riley Salyer, Vice President
Facsimile No.:
(713) 561-0123
or to such other person or address as a party may designate in
writing.
15.
Governing Law
.
This
Agreement shall be construed in accordance with and governed by
the laws of the State of Texas without giving effect to the
principles of conflicts of law thereof.
16.
Binding Effect; Benefit; No
Assignment
.
This Agreement shall be binding
upon and inure to the benefit of the successors and assigns of
the parties hereto. Except as expressly provided herein, this
Agreement shall not be assignable by any party hereto without
the prior written consent of the other parties; provided,
however, that Purchaser from time to time may assign and grant a
security interest in its rights, title and interest under this
Agreement for collateral security purposes to any
(i) lender(s) providing financing to Purchaser,
(ii) any of Purchasers Subsidiaries or
(iii) other Affiliates of Purchaser without any additional
notice or consent of the other parties hereto, and any such
lender(s) may exercise from time to time all of the rights and
remedies of Purchaser hereunder; provided, however that in such
case Purchaser shall remain primarily liable under this
Agreement.
17.
Modification
.
Subject to
Section 16, this Agreement may be amended or modified at
any time by a writing executed by the Members
Representative, Purchaser and the Escrow Agent.
18.
Counterparts
.
This
Agreement may be executed in one or more counterparts (including
facsimile versions), each of which will be deemed an original,
but all of which together will constitute one and the same
instrument.
19.
Headings
.
The section
headings contained in this Agreement are inserted for
convenience only, and shall not affect in any way the meaning or
interpretation of this Agreement.
E-9
20.
Entire Agreement; Severability and Further
Assurances
.
This Agreement and all exhibits
and schedules attached hereto constitute the entire agreement
among the parties and supersedes all prior and contemporaneous
agreements and undertakings of the parties in connection
herewith. No failure or delay of the Escrow Agent in exercising
any right, power or remedy may be, or may be deemed to be, a
waiver thereof; nor may any single or partial exercise of any
right, power or remedy preclude any other or further exercise of
any right, power or remedy. In the event that any one or more of
the provisions contained in this Agreement shall, for any
reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such
invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement. Each of the parties hereto
shall, at the request of the other party, deliver to the
requesting party all further documents or other assurances as
may reasonably be necessary or desirable in connection with this
Agreement.
[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK; SIGNATURE
PAGE FOLLOWS]
E-10
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed as of the date first written above.
JK ACQUISITION CORP.,
a Delaware corporation
CATALYST/HALL GROWTH CAPITAL MANAGEMENT CO., LLC,
a Texas Limited Liability Co. (in such capacity as Members
Representative)
SG-DIRECTIONAL, LLC
an Arkansas Limited Liability Co. (in such
capacity as Members Representative)
By: The Stephens Group, LLC,
Its Manager
|
|
|
|
Title:
|
Senior Vice President
|
ZIONS FIRST NATIONAL BANK,
solely as Escrow Agent hereunder and not in
its individual capacity
Riley Salyer
Vice President
[Signature
page to Escrow Agreement]
E-11
EXHIBIT A
Merger Agreement Terms
Exhibit A
SCHEDULE I
Members
|
|
|
|
|
|
|
Initial Escrow
|
|
Name & Address of Members
|
|
Percentage (%)
|
|
|
Catalyst/Hall Growth Capital, LP
|
|
|
[ ]
|
%
|
Two Riverway, Suite 1710
|
|
|
|
|
Houston, TX 77056
|
|
|
|
|
Catalyst/Hall Private Equity, LP
|
|
|
[ ]
|
%
|
Two Riverway, Suite 1710
|
|
|
|
|
Houston, TX 77056
|
|
|
|
|
Catalyst Capital Partners I, Ltd.
|
|
|
[ ]
|
%
|
Two Riverway, Suite 1710
|
|
|
|
|
Houston, TX 77056
|
|
|
|
|
Catalyst Capital Partners II, Ltd.
|
|
|
[ ]
|
%
|
Two Riverway, Suite 1710
|
|
|
|
|
Houston, TX 77056
|
|
|
|
|
CRF Air, LLC
|
|
|
[ ]
|
%
|
210 Park Avenue, Suite 1130
|
|
|
|
|
Oklahoma City, OK 73102
|
|
|
|
|
Robert P. Vilyus
|
|
|
[ ]
|
%
|
5530 Olympiad Drive
|
|
|
|
|
Houston, TX 77041
|
|
|
|
|
Allen Neel
|
|
|
[ ]
|
%
|
43 West Pines Drive
|
|
|
|
|
Montgomery, TX 77356
|
|
|
|
|
David Cudd
|
|
|
[ ]
|
%
|
1603 Cafe Dumonde
|
|
|
|
|
Conroe, TX 77304
|
|
|
|
|
Paul Culbreth
|
|
|
[ ]
|
%
|
57 Cascade Springs
|
|
|
|
|
The Woodlands, TX 77381
|
|
|
|
|
|
|
|
|
|
Totals:
|
|
|
100.00
|
%
|
|
|
|
|
|
Schedule I
SCHEDULE II
ESCROW
AGENT
SCHEDULE OF
FEES
|
|
|
Initial Escrow Fee:
|
|
$3,000.00
|
Annual Escrow Fee (due on anniversary date):
|
|
$3,000.00
|
Safekeeping Account Fee
|
|
$35/month
|
Monthly Maintenance Per Certificate
|
|
$5/month
|
Receipt/Delivery of Physical Certificate
|
|
$30 per physical certificate
|
Schedule II
ANNEX F
August 24,
2007
The Board of Directors
JK Acquisition Corp.
4440 Post Oak Parkway
Suite 2530
Houston, TX 77027
Members of the Board:
You have requested our opinion as to the fairness, from a
financial point of view, to JK Acquisition Corp., a Delaware
corporation (the Parent), of the Merger
Consideration (as defined below) proposed to be paid by the
Parent in the proposed merger of Multi-Shot, LLC, a Texas
limited liability company (the Company) with and
into Multi-Shot, Inc., a Delaware corporation and a wholly-owned
subsidiary of Parent (Merger Sub), pursuant to the
proposed Second Amended and Restated Agreement and Plan of
Merger (the Agreement), by and among Parent, Merger
Sub, the Company, and each of Catalyst/Hall Growth Management
Co., LLC, a Texas limited liability company and SG-Directional,
LLC, an Arkansas limited liability company, collectively as
Members Representative. Additionally, you have requested
our opinion as to whether, as of the date hereof, the fair
market value of the Company is equal to at least 80% of the net
asset value of Parent. Capitalized terms used herein shall have
the meanings used in the Agreement unless otherwise defined
herein.
Pursuant to the Agreement, and subject to the terms and
conditions thereof, the Company will merge with and into Merger
Sub and Merger Sub will continue as a wholly owned subsidiary of
Parent (the Merger), and each unit of Company
membership interest issued and outstanding immediately prior to
the Effective Time shall be converted into the right to receive
(a) a number of shares of Parent Common Stock equal to the
Company Interest Exchange Ratio, (b) two Parent Warrants
for each Parent Share issued for a Company membership interest
under the Agreement, and (c) a cash amount equal to the
Company Interest to Cash Exchange Ratio. The aggregate
consideration to be issued in respect of all Company membership
interests outstanding immediately prior to the Effective time
pursuant to (a), (b) and (c) above is referred to
herein as the Initial Merger Consideration and the
Initial Merger Consideration together with certain additional
shares of Parent Common Stock and warrants to purchase Parent
Common Stock issuable to the members of the Company following
the Effective Time, subject to the terms and conditions of the
Agreement, is referred to herein as the Merger
Consideration. The Merger Consideration is subject to
certain adjustments set forth in the Agreement. The terms and
conditions of the Merger are set forth more fully in the
Agreement.
RBC Capital Markets Corporation (RBC), as part of
its investment banking services, is regularly engaged in the
valuation of businesses and their securities in connection with
mergers and acquisitions, corporate restructurings,
underwritings, secondary distributions of listed and unlisted
securities, private placements, and valuations for corporate and
other purposes.
We have been engaged to render an opinion to the Board of
Directors of Parent as to the fairness of the Merger
Consideration, from a financial point of view, to the Parent,
and as to whether as of the date hereof, the fair market value
of the Company is equal to at least 80% of the net asset value
of Parent. We will be entitled to receive a fee upon delivery
thereof, without regard to whether our opinions are accepted or
the Merger is consummated. In addition, Parent has agreed to
indemnify us for certain liabilities arising out of our
engagement. In the ordinary course of business, RBC (or one of
its affiliates) may act as a market maker and broker in the
publicly-traded securities of Parent and receive customary
compensation, and may also actively trade securities (whether
debt or equity) of Parent for our own account and the accounts
of our customers, and, accordingly, RBC and its affiliates, may
hold a long or short position in such securities.
F-1
For the purposes of rendering our opinions we have undertaken
such review and inquiries as we deem necessary or appropriate
under the circumstances, including the following: (i) we
reviewed the financial terms of the draft Agreement dated
August 22, 2007 (the Latest Draft Agreement);
(ii) we reviewed and analyzed certain publicly available
financial and other data with respect to Parent and the Company
and certain other relevant historical operating data relating to
Parent and the Company made available to us from published
sources and from the internal records of Parent and the Company;
(iii) we conducted discussions with members of the senior
management of Parent and the Company with respect to the
business prospects and financial outlook of Parent and the
Company; (iv) we reviewed historical financial information
relating to Parent and the Company and estimates provided to us
either by the Company management (the Company
Forecasts) or by Parents management (Parent
Estimates); and (v) we performed other studies and
analyses as we deemed appropriate.
In arriving at our opinions, we performed the following analyses
in addition to the review, inquiries, and analyses referred to
in the preceding paragraph: (i) we compared selected
comparable publicly-traded companies with the financial metrics
implied by the Merger Consideration; (ii) we compared the
financial metrics of selected precedent transactions, to the
extent publicly available, with the financial metrics implied by
the Merger Consideration; (iii) we conducted a discounted
cash flow analysis based on the projected financials of the
Company; (iv) we performed a leveraged buyout analysis on
the Company; and (v) we calculated the net asset value of
Parent.
Several analytical methodologies have been employed and no one
method of analysis should be regarded as critical to the overall
conclusion we have reached. Each analytical technique has
inherent strengths and weaknesses, and the nature of the
available information may further affect the value of particular
techniques. The overall conclusions we have reached are based on
all the analyses and factors presented, taken as a whole, and
also on application of our own experience and judgment. Such
conclusions may involve significant elements of subjective
judgment and qualitative analyses. We therefore give no opinion
as to the value or merit standing alone of any one or more parts
of the analyses.
In rendering our opinions, we have assumed and relied upon the
accuracy and completeness of the financial, legal, tax,
operating and other information provided to us by Parent and the
Company (including, without limitation, the financial
statements, the capitalization tables, and related notes thereto
of Parent and the Company), and have not assumed responsibility
for independently verifying and have not independently verified
such information. For all forward-looking financial information
with respect to the Parent, we have relied upon the Parent
Estimates. For all forward-looking financial information with
respect to the Company, we have relied upon the Company
Forecasts. We have assumed that all Parent Estimates and Company
Forecasts represent the best currently available estimates and
good faith judgments of the Parents management or the
Companys management, as the case may be, as to the
applicable entitys financial performance, and we express
no opinion as to any aspect of the Parent Estimates or the
Company Forecasts.
In rendering our opinions, we have not assumed any
responsibility to perform, and have not performed, an
independent evaluation or appraisal of any of the assets or
liabilities of Parent or the Company, and we have not been
furnished with any such valuations or appraisals. We have not
assumed any obligation to conduct, and have not conducted, a
physical inspection of the property or facilities of Parent or
the Company. We have not investigated, and make no assumption,
regarding any litigation or other claims affecting Parent, the
Company, or any other person or entity. Our opinions relate, in
part, to the Company as a going concern and, accordingly, we
express no opinion regarding the liquidation value of the
Company.
We have assumed, in all respects material to our analysis, that
all conditions to the consummation of the Agreement will be
satisfied without waiver thereof, that the representations and
warranties of each party contained in the Agreement are true and
correct and that each party to the Agreement and any documents
ancillary thereto will perform all covenants and agreements
required to be performed by it under the Agreement and such
document, without amendment thereto. We have assumed that the
executed version of the Agreement will not differ, in any
respect material to our opinions, from the Latest Draft
Agreement.
Our opinions speaks only as of the date hereof, is based on the
conditions as they exist and information which we have been
supplied as of the date hereof, and is without regard to any
market, economic, financial, legal, or other circumstances or
event of any kind or nature which may exist or occur after such
date. We have not undertaken to reaffirm or revise this opinion
or otherwise comment upon events occurring after the date hereof
and do not have an
F-2
obligation to update, revise or reaffirm these opinions. We are
not expressing any opinion herein as to the prices at which
Parent Common Stock or warrants to purchase Parent Common Stock
have traded or will trade following the announcement or
consummation of the Merger or the Agreement.
The opinions expressed herein are provided for the information
and assistance of the Board of Directors of Parent in connection
with the Agreement. We express no opinion and make no
recommendation to any stockholder of Parent as to how such
stockholder should vote with respect to the Merger or the
Agreement. All advice and opinions (written and oral) rendered
by RBC are intended solely for the use and benefit of the Board
of Directors of Parent. Such advice or opinions may not be
reproduced, summarized, excerpted from or referred to in any
public document or given to any other person without the prior
written consent of RBC. If required by applicable law, such
opinions may be included in any disclosure document filed by
Parent with the Securities and Exchange Commission with respect
to the proposed transactions contemplated by the Agreement;
provided however, that such opinions must be reproduced in full
and that any description of or reference to RBC must be in a
form reasonably acceptable to RBC and its counsel (which
acceptance will not be unreasonably withheld, delayed or
conditioned). RBC shall have no responsibility for the form or
content of any such disclosure document, other than the opinion
itself.
Our opinions do not address the merits of the underlying
decision by Parent to engage in the transactions contemplated by
the Agreement or the relative merits of the transactions
contemplated by the Agreement compared to any alternative
business strategy or transaction in which Parent might engage.
Our opinions address solely (i) the fairness to Parent,
from a financial point of view, of the Merger Consideration and
(ii) whether, as of the date hereof, the fair market value
of the Company is equal to at least 80% of the net asset value
of Parent. Our opinions do not in any way address other terms or
arrangements of the Merger or the Agreement, including, without
limitation, the financial or other terms of any voting
agreement, escrow agreement, or employment agreement or the
indemnification provisions of the Agreement.
Based on our experience as investment bankers and subject to the
foregoing, including the various assumptions and limitations set
forth herein, it is our opinion that, as of the date hereof,
(i) the Merger Consideration to be paid by the Parent in
the Merger is fair, from a financial point of view, to the
Parent, and (ii) the fair market value of the Company is
equal to at least 80% of the net asset value of Parent.
Very truly yours,
RBC CAPITAL MARKETS CORPORATION
F-3
ANNEX G
AMENDED
AND RESTATED
CERTIFICATE OF INCORPORATION OF
JK ACQUISITION CORP.
The undersigned, James P. Wilson, hereby certifies that:
ONE:
He is the duly elected and acting
Secretary of the corporation.
TWO:
The name of the corporation is JK
Acquisition Corp. and the corporation was originally
incorporated on May 11, 2005, pursuant to the General
Corporation Law of the State of Delaware under the name JK
Acquisition Company.
THREE:
The Certificate of Incorporation of the
corporation shall be amended and restated to read in full as
follows:
I.
The name of the Corporation is JK Acquisition Corp. (the
Corporation
).
II.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the
General Corporation Law of the State of Delaware
(
GCL
).
III.
The address, including street, number, city and county, of the
registered office of the Corporation in the State of Delaware is
1209 Orange Street, in the City of Wilmington, County of New
Castle, Delaware 19801. The name of the registered agent of the
Corporation in the State of Delaware at such address is The
Corporation Trust Company.
IV.
A. This Corporation is authorized to issue two classes of
stock to be designated, respectively,
Common
Stock
and
Preferred Stock.
The
total number of shares the Corporation is authorized to issue is
forty-one million (41,000,000) shares, forty million
(40,000,000) shares of which shall be Common Stock (the
Common Stock
) and one million (1,000,000)
shares of which shall be Preferred Stock (the
Preferred
Stock
). The Preferred Stock shall have a par value of
$0.0001 per share and the Common Stock shall have a par
value of $0.0001 per share.
B. The rights, preferences, privileges, restrictions and
other matters relating to the Preferred Stock and the Common
Stock are as follows:
1.
Preferred Stock.
The Board of
Directors is expressly granted authority to issue shares of the
Preferred Stock, in one or more series, and to fix for each such
series such voting powers, full or limited, and such
designations, preferences and relative, participating, optional
or other special rights and such qualifications, limitations or
restrictions thereof as shall be stated and expressed in the
resolution or resolutions adopted by the Board of Directors
providing for the issue of such series (a Preferred Stock
Designation) and as may be permitted by the GCL. The
number of authorized shares of Preferred Stock may be increased
or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a
majority of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a
G-1
single class, without a separate vote of the holders of the
Preferred Stock, or any series thereof, unless a vote of any
such holders is required pursuant to any Preferred Stock
Designation.
2.
Common Stock.
Except as
otherwise required by law or as otherwise provided in any
Preferred Stock Designation, the holders of the Common Stock
shall exclusively possess all voting power and each share of
Common Stock shall have one vote.
V.
The following provisions Article V,
Paragraphs (A) through (E) shall apply during the
period commencing upon the filing of this Certificate of
Incorporation and terminating upon the consummation of any
Business Combination, and may not be amended prior to the
consummation of any Business Combination. A Business
Combination shall mean the acquisition by the Corporation,
whether by merger, capital stock exchange, asset or stock
acquisition or other similar type of transaction, of an
operating business (Target Business) having a fair
market value (as calculated in accordance with the requirements
set forth below) of at least 80% of the Corporations net
assets at the time of such acquisition. For purposes of this
Article V, fair market value shall be determined by the
Board of Directors of the Corporation based upon financial
standards generally accepted by the financial community, such as
actual and potential sales, earnings, cash flow and book value.
If the Board of Directors of the Corporation is not able to
independently determine the fair market value of the Target
Business, the Corporation shall obtain an opinion with regard to
such fair market value from an unaffiliated, independent
investment-banking firm that is a member of the National
Association of Securities Dealers, Inc. (d/b/a NASD). The
Corporation is not required to obtain an opinion from an
investment-banking firm as to fair market value of the Target
Business if the Corporations Board of Directors
independently determines the fair market value for such Target
Business.
A. Prior to the consummation of any Business Combination,
the Corporation shall submit such Business Combination to its
stockholders for approval regardless of whether the Business
Combination is of a type which normally would require such
stockholder approval under the GCL. In the event that a majority
of the IPO Shares (defined below) voted at the meeting to
approve the Business Combination are voted for the approval of
such Business Combination, the Corporation shall be authorized
to consummate the Business Combination; provided that the
Corporation shall not consummate any Business Combination if the
holders of IPO Shares (defined below) demand conversion in
accordance with paragraph B below with respect to 20% or
more of the IPO Shares.
B. Any stockholder of the Corporation holding shares of
Common Stock (IPO Shares) issued in the
Corporations initial public offering (IPO) of
securities who votes against the Business Combination may,
contemporaneous with such vote, demand that the Corporation
convert his IPO Shares into cash if a Business Combination is
approved in accordance with the above paragraph A and is
consummated by the Corporation. If a Business Combination is
approved in accordance with the above paragraph A and is
consummated by the Corporation, the Corporation shall convert
such shares at a per share conversion price equal to the
quotient determined by dividing (i) the amount in the
Trust Fund (as defined below), inclusive of any interest
thereon, calculated as of two business days prior to the
consummation of the Business Combination, by (ii) the total
number of IPO Shares. Trust Fund shall mean the
trust account established by the Corporation at the consummation
of its IPO and into which a certain amount of the net proceeds
of the IPO are deposited.
C. In the event that the Corporation does not consummate a
Business Combination by the later of the date which is
(i) 18 months after the consummation of the IPO or
(ii) 24 months after the consummation of the IPO in
the event that either a letter of intent, an agreement in
principle or a definitive agreement to complete a Business
Combination was executed but was not consummated within such
18-month
period (such later date being referred to as the
Termination Date), the officers of the Corporation
shall take all such action necessary to dissolve and liquidate
the Corporation as soon as reasonably practicable. In the event
that the Corporation is so dissolved and liquidated, only the
holders of IPO Shares shall be entitled to receive liquidating
distributions and the Corporation shall pay no liquidating
distributions with respect to any other shares of capital stock
of the Corporation.
G-2
D. A holder of IPO Shares shall be entitled to receive
distributions from the Trust Fund only in the event of a
liquidation of the Corporation or in the event he demands
conversion of his shares in accordance with paragraph B
above. In no other circumstances shall a holder of IPO Shares
have any right or interest of any kind in or to the
Trust Fund.
VI.
The Corporation shall keep at its principal office a register
for the registration of the Preferred Stock and the Common
Stock. Upon the surrender of any certificate representing
Preferred Stock or Common Stock at such place, the Corporation
shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporations expense) a new
certificate or certificates in exchange therefor representing in
the aggregate the number of shares represented by the
surrendered certificate. Each such new certificate shall be
registered in such name and shall represent such number of
shares as is requested by the holder of the surrendered
certificate and shall be substantially identical in form to the
surrendered certificate.
VII.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be
satisfactory) of the ownership and the loss, theft, destruction
or mutilation of any certificate evidencing shares of Preferred
Stock or Common Stock, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is
a financial institution or other institutional investor its own
agreement shall be satisfactory), or in the case of any such
mutilation upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such
certificate a new certificate of like kind representing the
number of shares of such class represented by such lost, stolen,
destroyed or mutilated certificate and dated the date of such
lost, stolen, destroyed or mutilated certificate.
VIII.
The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of the shares
of Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion
of all outstanding shares of Preferred Stock. If at any time the
number of authorized but unissued shares of Common Stock shall
not be sufficient to effect the conversion of all
then-outstanding shares of Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be
sufficient for such purpose.
IX.
Any notice required by the provisions of this Article IX
shall be in writing and shall be deemed effectively given:
(i) upon personal delivery to the party to be notified,
(ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient; if not, then on
the next business day, (iii) five (5) days after
having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (iv) one (1) day after
deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of
receipt. All notices to stockholders shall be addressed to each
holder of record at the address of such holder appearing on the
books of the Corporation.
X.
The Corporation will pay all documentary, excise and similar
taxes or governmental charges imposed by the Corporation upon
the issuance of shares of Common Stock upon conversion of shares
of Preferred Stock, excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery
of
G-3
shares of Common Stock in a name other than that in which the
shares of Preferred Stock so converted were registered.
XI.
The Corporation shall not amend its Certificate of Incorporation
or participate in any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities
or any other voluntary action, for the purpose of avoiding or
seeking to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation.
XII.
The Corporation is to have perpetual existence.
XIII.
A. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly
authorized to make, repeal, alter, amend or rescind the Bylaws.
B. The directors in their discretion may submit any
contract or act for approval or ratification at any annual
meeting of the stockholders or at any meeting of the
stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or
be ratified by the vote of the holders of a majority of the
stock of the Corporation which is represented in person or by
proxy at such meeting and entitled to vote thereat (provided
that a lawful quorum of stockholders be there represented in
person or by proxy) shall be as valid and binding upon the
Corporation and upon all the stockholders as though it had been
approved or ratified by every stockholder of the Corporation,
whether or not the contract or act would otherwise be open to
legal attack because of directors interests, or for any
other reason.
C. In addition to the powers and authorities hereinbefore
or by statute expressly conferred upon them, the directors are
hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation;
subject, nevertheless, to the provisions of the statutes of
Delaware, of this Certificate of Incorporation, and to any
Bylaws from time to time made by the stockholders; provided,
however, that no by-law so made shall invalidate any prior act
of the directors which would have been valid if such by-law had
not been made.
XIV.
The number of directors which shall constitute the whole Board
of Directors from time to time shall be fixed by, or in the
manner provided in, the Bylaws.
XV.
Election of directors at an annual or special meeting of
stockholders need not be by written ballot unless the Bylaws
shall so provide.
XVI.
No director shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director; provided that this Article XVI shall not
eliminate or limit the liability of a director (i) for any
breach of such directors duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a
knowing violation of the law, (iii) under Section 174
of the General Corporation Law of the State of Delaware, or
(iv) for any transaction from which such director derived
any improper personal benefit. If the General Corporation Law of
the State of Delaware is amended to authorize corporate action
further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted
by the General Corporation Law of the State of Delaware as so
amended. No amendment to or repeal of this Article XVI
shall adversely affect any right or protection of any director
of the Corporation existing at
G-4
the time of such amendment or repeal for or with respect to acts
or omissions of such director prior to such amendment or repeal.
XVII.
A. Any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of the
Corporation, by reason of the fact that he is or was a director,
officer, employee, trustee or agent of the Corporation, or is or
was serving at the request of the Corporation as a director,
officer, employee trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise, expressly
including service as a director, officer or in a similar
position with any exchange, board of trade, clearing corporation
or similar institution on which the Corporation or any other
corporation a majority of the stock of which is owned directly
or indirectly by the Corporation had membership privileges at
the relevant time during which any such position was held, shall
be indemnified by the Corporation against expenses including
attorneys fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful;
provided
that
funds paid or required to be paid to any person as a result of
the provisions of this Article XVII shall be returned to
the Corporation or reduced, as the case may be, to the extent
that such person receives funds pursuant to an indemnification
from any other corporation or organization. Any such person who
could be indemnified pursuant to the preceding sentence except
for the fact that the subject action or suit is or was by or in
the right of the Corporation shall be indemnified by the
Corporation against expenses including attorneys fees
actually or reasonably incurred by him in connection with the
defense or settlement of such action or suit, except that no
indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his
duty to the Corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
B. To the extent that a director, officer, employee or
agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred
to in Article XVII.A above, or in defense of any claim,
issue or matter therein, he shall be indemnified by the
Corporation against expenses, including attorneys fees,
actually and reasonably incurred by him in connection therewith
without the necessity of any action being taken by the
Corporation other than the determination, in good faith, that
such defense has been successful. In all other cases wherein
such indemnification is provided by this Article XVII,
unless ordered by a court, indemnification shall be made by the
Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has
met the applicable standard of conduct specified in this
Article XVII. Such determination shall be made (1) by
the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or
proceeding, or (2) if such quorum is not obtainable, or,
even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or
(3) by the holders of a majority of the shares of capital
stock of the Corporation entitled to vote thereon.
C. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of
nolo contendere
or its equivalent, shall not, of itself,
create a presumption that the person seeking indemnification did
not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was
unlawful. Entry of a judgment by consent as part of a settlement
shall not be deemed a final adjudication of liability for
negligence or misconduct in the performance of duty, nor of any
other issue or matter.
G-5
D. Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the Corporation in
advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors in the
specific case upon receipt of an undertaking by the director,
officer, employee or agent involved to repay such amount unless
it shall ultimately be determined that he is entitled to be
indemnified by the Corporation.
E. The indemnification hereby provided shall not be deemed
exclusive of any other rights to which those seeking
indemnification may be entitled under any Bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as
to action in an official capacity and as to action in another
capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
F. By action of the Board of Directors, notwithstanding any
interest of the directors in the action, the Corporation may
purchase and maintain insurance, in such amounts as the Board of
Directors deems appropriate, on behalf of any person who is or
was a director, owner, employee, trustee or agent of the
Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee trustee or of
another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation shall have the
power to indemnify him against such liability under the
provisions of this Article XVII.
XVIII.
The Corporation, to the full extent permitted by
Section 145 of the GCL, as amended from time to time, shall
indemnify all persons whom it may indemnify pursuant thereto.
Expenses (including attorneys fees) incurred by an officer
or director in defending any civil, criminal, administrative, or
investigative action, suit or proceeding for which such officer
or director may be entitled to indemnification hereunder shall
be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized
hereby.
XIX.
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them
and/or
between this Corporation and its stockholders or any class of
them, any court of equitable jurisdiction within the State of
Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this
Corporation under Section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution
or of any receiver or receivers appointed for this Corporation
under Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors,
and/or
of
the stockholders or class of stockholders of this Corporation,
as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three
fourths in value of the creditors or class of creditors,
and/or
of
the stockholders or class of stockholders of this Corporation,
as the case may be, agree to any compromise or arrangement and
to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be
binding on all the creditors or class of creditors,
and/or
on
all the stockholders or class of stockholders, of this
Corporation, as the case may be, and also on this Corporation.
* * *
FOUR:
The foregoing Amended and Restated
Certificate of Incorporation has been duly adopted by the
corporations Board of Directors in accordance with the
provisions of Sections 228, 242 and 245 of the General
Corporation Law.
G-6
IN WITNESS WHEREOF, the undersigned has executed this Amended
and Restated Certificate of Incorporation on May 31, 2005.
JK ACQUISITION CORP.
James P. Wilson
Secretary
G-7
AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION OF
JK ACQUISITION CORP.
The undersigned, James P. Wilson, hereby certifies that:
ONE:
He is the duly elected and acting
Secretary of the corporation.
TWO:
The name of the corporation is JK
Acquisition Corp. and the corporation was originally
incorporated on May 11, 2005, pursuant to the General
Corporation Law of the State of Delaware under the name JK
Acquisition Company.
THREE:
Article IV of the Certificate of
Incorporation of the corporation shall be amended and restated
to read as follows in its entirety:
IV.
A. This Corporation is authorized to issue two classes of
stock to be designated, respectively,
Common
Stock
and
Preferred Stock.
The
total number of shares the Corporation is authorized to issue is
forty-one million (51,000,000) shares, forty million
(50,000,000) shares of which shall be Common Stock (the
Common Stock
) and one million (1,000,000)
shares of which shall be Preferred Stock (the
Preferred
Stock
). The Preferred Stock shall have a par value of
$0.0001 per share and the Common Stock shall have a par
value of $0.0001 per share.
B. The rights, preferences, privileges, restrictions and
other matters relating to the Preferred Stock and the Common
Stock are as follows:
1. Preferred Stock. The Board of Directors is expressly
granted authority to issue shares of the Preferred Stock, in one
or more series, and to fix for each such series such voting
powers, full or limited, and such designations, preferences and
relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as
shall be stated and expressed in the resolution or resolutions
adopted by the Board of Directors providing for the issue of
such series (a Preferred Stock Designation) and as
may be permitted by the GCL. The number of authorized shares of
Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the voting power of all of
the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of
directors, voting together as a single class, without a separate
vote of the holders of the Preferred Stock, or any series
thereof, unless a vote of any such holders is required pursuant
to any Preferred Stock Designation.
2. Common Stock. Except as otherwise required by law or as
otherwise provided in any Preferred Stock Designation, the
holders of the Common Stock shall exclusively possess all voting
power and each share of Common Stock shall have one vote.
FOUR:
The foregoing Amendment to the
Certificate of Incorporation has been duly adopted by the
corporations board of directors and stockholders in
accordance with the provisions of Sections 228 and 242 of
the General Corporation Law.
G-8
IN WITNESS WHEREOF, the undersigned has executed this Amendment
to the Certificate of Incorporation on July 13, 2005.
JK ACQUISITION CORP.
James P. Wilson
Secretary
G-9
THIRD
AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
JK ACQUISITION CORP.
The undersigned, James P. Wilson, hereby certifies that:
ONE:
He is the duly elected and acting
Secretary of the corporation.
TWO:
The name of the corporation is JK
Acquisition Corp. and the corporation was originally
incorporated on May 11, 2005, pursuant to the General
Corporation Law of the State of Delaware under the name JK
Acquisition Company.
THREE:
Article V of the Certificate of
Incorporation of the corporation shall be amended and restated
to read as follows in its entirety:
V.
The following provisions Article V,
Paragraphs (A) through (E) shall apply during the
period commencing upon the filing of this Certificate of
Incorporation and terminating upon the consummation of any
Business Combination, and may not be amended prior to the
consummation of any Business Combination. A Business
Combination shall mean the acquisition by the Corporation,
whether by merger, capital stock exchange, asset or stock
acquisition or other similar type of transaction, of an
operating business (Target Business) having a fair
market value (as calculated in accordance with the requirements
set forth below) of at least 80% of the Corporations net
assets at the time of such acquisition (excluding any deferred
compensation payable to the underwriters of the
Corporations IPO (as defined below)). For purposes of this
Article V, fair market value shall be determined by the
Board of Directors of the Corporation based upon financial
standards generally accepted by the financial community, such as
actual and potential sales, earnings, cash flow and book value.
If the Board of Directors of the Corporation is not able to
independently determine the fair market value of the Target
Business, the Corporation shall obtain an opinion with regard to
such fair market value from an unaffiliated, independent
investment-banking firm that is a member of the National
Association of Securities Dealers, Inc. (d/b/a NASD). The
Corporation is not required to obtain an opinion from an
investment-banking firm as to fair market value of the Target
Business if the Corporations Board of Directors
independently determines the fair market value for such Target
Business.
C. Prior to the consummation of any Business Combination,
the Corporation shall submit such Business Combination to its
stockholders for approval regardless of whether the Business
Combination is of a type which normally would require such
stockholder approval under the GCL. In the event that a majority
of the IPO Shares (defined below) voted at the meeting to
approve the Business Combination are voted for the approval of
such Business Combination, the Corporation shall be authorized
to consummate the Business Combination; provided that the
Corporation shall not consummate any Business Combination if the
holders of IPO Shares (defined below) demand conversion in
accordance with paragraph B below with respect to 20% or
more of the IPO Shares and the shares sold in the private
placement immediately prior to the IPO.
D. Any stockholder of the Corporation holding shares of
Common Stock (IPO Shares) issued in the
Corporations initial public offering (IPO) of
securities who votes against the Business Combination may,
contemporaneous with such vote, demand that the Corporation
convert his IPO Shares into cash if a Business Combination is
approved in accordance with the above paragraph A and is
consummated by the Corporation. If a Business Combination is
approved in accordance with the above paragraph A and is
consummated by the Corporation, the Corporation shall convert
such shares at a per share conversion price equal to the
quotient determined by dividing (i) the amount in the
Trust Fund (as defined below), inclusive of any interest
thereon (net of interest up to a maximum of $900,000 in the
aggregate distributed to the Corporation for working capital
purposes and net of taxes), calculated as of two business days
prior to the consummation of the Business Combination, by
(ii) the total number of IPO Shares.
Trust Fund shall mean the trust account
established by
G-10
the Corporation at the consummation of its IPO and into which a
certain amount of the net proceeds of the IPO and the private
placement immediately prior to the IPO are deposited.
E. In the event that the Corporation does not consummate a
Business Combination by the later of the date which is
(i) 18 months after the consummation of the IPO or
(ii) 24 months after the consummation of the IPO in
the event that either a letter of intent, an agreement in
principle or a definitive agreement to complete a Business
Combination was executed but was not consummated within such
18-month
period (such later date being referred to as the
Termination Date), the officers of the Corporation
shall take all such action necessary to dissolve and liquidate
the Corporation as soon as reasonably practicable. In the event
that the Corporation is so dissolved and liquidated, only the
holders of IPO Shares shall be entitled to receive liquidating
distributions and the Corporation shall pay no liquidating
distributions with respect to any other shares of capital stock
of the Corporation.
F. A holder of IPO Shares shall be entitled to receive
distributions from the Trust Fund only in the event of a
liquidation of the Corporation or in the event he demands
conversion of his shares in accordance with paragraph B
above. In no other circumstances shall a holder of IPO Shares
have any right or interest of any kind in or to the
Trust Fund.
FOUR:
The foregoing Third Amendment to the
Certificate of Incorporation has been duly adopted by the
corporations board of directors and stockholders in
accordance with the provisions of Sections 228 and 242 of
the General Corporation Law.
G-11
IN WITNESS WHEREOF, the undersigned has executed this Third
Amendment to the Certificate of Incorporation on March 31,
2006.
JK ACQUISITION CORP.
James P. Wilson
Secretary
G-12
ANNEX H
FOURTH
AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
JK ACQUISITION CORP.
The undersigned, James P. Wilson, hereby certifies that:
ONE:
He is the duly elected and acting
Secretary of the corporation.
TWO:
The name of the corporation is JK
Acquisition Corp. and the corporation was originally
incorporated on May 11, 2005, pursuant to the General
Corporation Law of the State of Delaware under the name JK
Acquisition Company.
THREE:
Article I of the Certificate of
Incorporation of the corporation shall be amended and restated
to read as follows in its entirety:
I.
The name of the Corporation is MS Energy Services, Inc. (the
Corporation
)
FOUR:
Article IV(A) of the Certificate of
Incorporation of the corporation shall be amended and restated
to read as follows in its entirety:
A. This Corporation is authorized to issue two classes of
stock to be designated, respectively,
Common
Stock
and
Preferred Stock
. The
total number of shares the Corporation is authorized to issue is
one hundred fifty one million (151,000,000) shares, one hundred
fifty million (150,000,000) shares of which shall be Common
Stock (the
Common Stock
) and one million
(1,000,000) shares of which shall be Preferred Stock (the
Preferred Stock
). The Preferred Stock shall
have a par value of $0.0001 per share and the Common Stock
shall have a par value of $0.0001 per share.
FIVE:
Article V of the Certificate of
Incorporation of the corporation shall be deleted in its
entirety.
FOUR:
The foregoing Fourth Amendment to the
Certificate of Incorporation has been duly adopted by the
corporations board of directors and stockholders in
accordance with the provisions of Sections 228 and 242 of
the General Corporation Law.
H-1
IN WITNESS WHEREOF, the undersigned has executed this Fourth
Amendment to the Certificate of Incorporation on
[ ],
2007.
JK ACQUISITION CORP.
James P. Wilson
Secretary
H-2
ANNEX I
JK
ACQUISITION CORP.
2007 EQUITY INCENTIVE PLAN
The JK Acquisition Corp.s 2007 Equity Incentive Plan (the
Plan) was adopted by the Board of Directors of JK
Acquisition Corp., a Delaware corporation (the
Company), effective as of
[ ],
2007 subject to approval by the Companys stockholders.
ARTICLE 1
PURPOSE
The purpose of the Plan is to attract and retain the services of
key employees, key contractors, key consultants and outside
directors of the Company and its subsidiaries and to provide
such persons with a proprietary interest in the Company through
the granting of incentive stock options, non-qualified stock
options, stock appreciation rights, restricted stock, restricted
stock units, performance awards, dividend equivalent rights, and
other awards, whether granted singly, or in combination, or in
tandem, that will
(a) increase the interest of such persons in the
Companys welfare;
(b) furnish an incentive to such persons to continue their
services for the Company; and
(c) provide a means through which the Company may attract
able persons as employees, contractors, consultants and outside
directors.
With respect to reporting Participants, the Plan and all
transactions under the Plan are intended to comply with all
applicable conditions of
Rule 16b-3
promulgated under the Securities Exchange Act of 1934 (the
1934 Act). To the extent any provision of the
Plan or action by the Committee fails to so comply, it shall be
deemed null and void ab initio, to the extent permitted by law
and deemed advisable by the Committee.
Unless otherwise specified or unless the context otherwise
requires, the following terms, as used in this
JK Acquisition Corp. 2007 Equity Incentive Plan, have the
following meanings:
Administrator
means the Committee, unless it
has delegated power to act on its behalf to the Board of
Directors, in which case the Administrator means the Board of
Directors.
Affiliate
means a corporation which, for
purposes of Section 424 of the Code, is a parent or
subsidiary of the Company, direct or indirect.
Agreement
means an agreement between the
Company and a Participant delivered pursuant to the Plan, in
such form as the Administrator shall approve.
Board of Directors
means the Board of
Directors of the Company.
Code
means the United States Internal Revenue
Code of 1986, as amended.
Committee
means the committee of the Board of
Directors to which the Board of Directors has delegated power to
act under or pursuant to the provisions of the Plan.
Common Stock
means shares of the
Companys common stock, $0.0001 par value per share.
Company
means JK Acquisition Corp., a
Delaware corporation.
Disability
or
Disabled
means permanent and total disability as defined in
Section 22(e)(3) of the Code.
I-1
Employee
means any employee of the Company or
of an Affiliate (including, without limitation, an employee who
is also serving as an officer or director of the Company or of
an Affiliate), designated by the Administrator to be eligible to
be granted one or more Stock Rights under the Plan.
Fair Market Value of a Share of Common Stock
means:
(1) If the Common Stock is listed on a national securities
exchange or traded in the
over-the-counter
market and sales prices are regularly reported for the Common
Stock, the average of the closing or last price of the Common
Stock on the composite tape or other comparable reporting system
for the five (5) trading days, consisting of (i) the
two (2) trading days immediately following the applicable
date, (ii) the trading day that is the applicable date, and
(iii) the two (2) trading days immediately preceding
the applicable date;
(2) If the Common Stock is not traded on a national
securities exchange but is traded on the
over-the-counter
market, if sales prices are not regularly reported for the
Common Stock for the trading day referred to in clause (1),
and if bid and asked prices for the Common Stock are regularly
reported, the mean between the bid and the asked price for the
Common Stock at the close of trading in the
over-the-counter
market for the trading day on which Common Stock was traded
immediately preceding the applicable date; and
(3) If the Common Stock is neither listed on a national
securities exchange nor traded in the
over-the-counter
market, such value as the Administrator, in good faith, shall
determine.
ISO
means an option meant to qualify as an
incentive stock option under Section 422 of the Code.
Non-Qualified Option
means an option which is
not intended to qualify as an ISO.
Option
means an ISO or Non-Qualified Option
granted under the Plan.
Participant
means an Employee, director or
consultant of the Company or an Affiliate to whom one or more
Stock Rights are granted under the Plan. As used herein,
Participant shall include Participants
Survivors where the context requires.
Plan
means this JK Acquisition Corp. 2007
Equity Incentive Plan.
Shares
means shares of the Common Stock as to
which Stock Rights have been or may be granted under the Plan or
any shares of capital stock into which the Shares are changed or
for which they are exchanged within the provisions of
Paragraph 3 of the Plan. The Shares issued under the Plan
may be authorized and unissued shares or shares held by the
Company in its treasury, or both.
Stock-Based Award
means a grant by the
Company under the Plan of an equity award or an equity based
award which is not an Option or a Stock Grant.
Stock Grant
means a grant by the Company of
Shares under the Plan.
Stock Right
means a right to Shares or the
value of Shares of the Company granted pursuant to the
Plan an ISO, a Non-Qualified Option, a Stock Grant
or a Stock-Based Award.
Survivor
means a deceased Participants
legal representatives
and/or
any
person or persons who acquired the Participants rights to
a Stock Right by will or by the laws of descent and distribution.
The Plan is intended to encourage ownership of Shares by
Employees and directors of and certain consultants to the
Company in order to attract and retain such people, to induce
them to work for the benefit of the Company or of an Affiliate
and to provide additional incentive for them to promote the
success of the Company or of an Affiliate. The Plan provides for
the granting of ISOs, Non-Qualified Options, Stock Grants and
Stock-Based Awards.
I-2
|
|
3.
|
SHARES SUBJECT
TO THE PLAN.
|
(a) The number of Shares which may be issued from time to
time pursuant to this Plan shall be 420,000, or the equivalent
of such number of Shares after the Administrator, in its sole
discretion, has interpreted the effect of any stock split, stock
dividend, combination, recapitalization or similar transaction
in accordance with Paragraph 24 of the Plan.
(b) If an Option ceases to be outstanding, in
whole or in part (other than by exercise), or if the Company
shall reacquire (at not more than its original issuance price)
any Shares issued pursuant to a Stock Grant or Stock-Based
Award, or if any Stock Right expires or is forfeited, cancelled,
or otherwise terminated or results in any Shares not being
issued, the unissued Shares which were subject to such Stock
Right shall again be available for issuance from time to time
pursuant to this Plan. Notwithstanding the foregoing, if a Stock
Right is exercised in whole or in part, by tender of Shares or
if the Companys tax withholding obligation is satisfied by
withholding Shares, the number of Shares needed to have been
issued under the Plan for purposes of the limitation set forth
in Paragraph 3(a) above shall be the number of Shares that
were subject to the Stock Right or portion thereof, and not the
net number of Shares actually issued.
|
|
4.
|
ADMINISTRATION
OF THE PLAN.
|
The Administrator of the Plan will be the Board of Directors,
except to the extent the Board of Directors delegates its
authority to the Committee, in which case the Committee shall be
the Administrator. Subject to the provisions of the Plan, the
Administrator is authorized to:
(a) Interpret the provisions of the Plan and all Stock
Rights and to make all rules and determinations which it deems
necessary or advisable for the administration of the Plan;
(b) Determine which Employees, directors and consultants
shall be granted Stock Rights;
(c) Determine the number of Shares for which a Stock Right
or Stock Rights shall be granted, provided, however, that in no
event shall Stock Rights with respect to more than
600,000 Shares be granted to any Participant in any fiscal
year;
(d) Specify the terms and conditions upon which a Stock
Right or Stock Rights may be granted;
(e) Make changes to any outstanding Stock Right, including,
without limitation, to reduce or increase the exercise price or
purchase price, accelerate the vesting schedule or extend the
expiration date, provided that no such change shall impair the
rights of a Participant under any grant previously made without
such Participants consent;
(f) Buy out for a payment in cash or Shares, a Stock Right
previously granted
and/or
cancel any such Stock Right and grant in substitution therefor
other Stock Rights, covering the same or a different number of
Shares and having an exercise price or purchase price per share
which may be lower or higher than the exercise price or purchase
price of the cancelled Stock Right, based on such terms and
conditions as the Administrator shall establish and the
Participant shall accept; and
(g) Adopt any sub-plans applicable to residents of any
specified jurisdiction as it deems necessary or appropriate in
order to comply with or take advantage of any tax or other laws
applicable to the Company or to Plan Participants or to
otherwise facilitate the administration of the Plan, which
sub-plans may include additional restrictions or conditions
applicable to Stock Rights or Shares issuable pursuant to a
Stock Right.
provided, however, that all such interpretations, rules,
determinations, terms and conditions shall be made and
prescribed in the context of preserving the tax status under
Section 422 of the Code of those Options which are
designated as ISOs. Subject to the foregoing, the interpretation
and construction by the Administrator of any provisions of the
Plan or of any Stock Right granted under it shall be final,
unless otherwise determined by the Board of Directors, if the
Administrator is the Committee. In addition, if the
Administrator is the Committee, the Board of Directors may take
any action under the Plan that would otherwise be the
responsibility of the Committee.
To the extent permitted under applicable law, the Board of
Directors or the Committee may allocate all or any portion of
its responsibilities and powers to any one or more of its
members and may delegate all or any portion of its
I-3
responsibilities and powers to any other person selected by it.
The Board of Directors or the Committee may revoke any such
allocation or delegation at any time.
5. ELIGIBILITY
FOR PARTICIPATION.
The Administrator will, in its sole discretion, name the
Participants in the Plan, provided, however, that each
Participant must be an Employee, director or consultant of the
Company or of an Affiliate at the time a Stock Right is granted.
Notwithstanding the foregoing, the Administrator may authorize
the grant of a Stock Right to a person not then an Employee,
director or consultant of the Company or of an Affiliate;
provided, however, that the actual grant of such Stock Right
shall be conditioned upon such person becoming eligible to
become a Participant at or prior to the time of the execution of
the Agreement evidencing such Stock Right. ISOs may be granted
only to Employees. Non-Qualified Options, Stock Grants and
Stock-Based Awards may be granted to any Employee, director or
consultant of the Company or an Affiliate. The granting of any
Stock Right to any individual shall neither entitle that
individual to, nor disqualify him or her from, participation in
any other grant of Stock Rights.
|
|
6.
|
TERMS AND
CONDITIONS OF OPTIONS.
|
Each Option shall be set forth in writing in an Option
Agreement, duly executed by the Company and, to the extent
required by law or requested by the Company, by the Participant.
The Administrator may provide that Options be granted subject to
such terms and conditions, consistent with the terms and
conditions specifically required under this Plan, as the
Administrator may deem appropriate including, without
limitation, subsequent approval by the shareholders of the
Company of this Plan or any amendments thereto. The Option
Agreements shall be subject to at least the following terms and
conditions:
A.
Non-Qualified Options
:
Each
Option intended to be a Non-Qualified Option shall be subject to
the terms and conditions which the Administrator determines to
be appropriate and in the best interest of the Company, subject
to the following minimum standards for any such Non-Qualified
Option:
(a)
Option Price:
Each Option Agreement
shall state the option price (per share) of the Shares covered
by each Option, which option price shall be determined by the
Administrator but shall not be less than the Fair Market Value
per share of Common Stock.
(b)
Number of Shares:
Each Option
Agreement shall state the number of Shares to which it pertains.
(c)
Option Periods:
Each Option Agreement
shall state the date or dates on which it first is exercisable
and the date after which it may no longer be exercised, and may
provide that the Option rights accrue or become exercisable in
installments over a period of months or years, or upon the
occurrence of certain conditions or the attainment of stated
goals or events.
(d)
Option Conditions:
Exercise of any
Option may be conditioned upon the Participants execution
of a Share purchase agreement in form satisfactory to the
Administrator providing for certain protections for the Company
and its other shareholders, including requirements that:
(i) The Participants or the Participants
Survivors right to sell or transfer the Shares may be
restricted; and
(ii) The Participant or the Participants Survivors
may be required to execute letters of investment intent and must
also acknowledge that the Shares will bear legends noting any
applicable restrictions.
B.
ISOs
:
Each Option intended to
be an ISO shall be issued only to an Employee and be subject to
the following terms and conditions, with such additional
restrictions or changes as the Administrator determines are
appropriate but not in conflict with Section 422 of the
Code and relevant regulations and rulings of the Internal
Revenue Service:
(a)
Minimum standards:
The ISO shall meet
the minimum standards required of Non-Qualified Options, as
described in Paragraph 6(A) above, except clauses (a)
and (e) thereunder.
I-4
(b)
Option Price:
Immediately before the
ISO is granted, if the Participant owns, directly or by reason
of the applicable attribution rules in Section 424(d) of
the Code:
(i) 10% or less of the total combined voting power of all
classes of stock of the Company or an Affiliate, the Option
price per share of the Shares covered by each ISO shall not be
less than 100% of the Fair Market Value per share of the Shares
on the date of the grant of the Option; or
(ii) More than 10% of the total combined voting power of
all classes of stock of the Company or an Affiliate, the Option
price per share of the Shares covered by each ISO shall not be
less than 110% of the Fair Market Value on the date of grant.
(c)
Term of Option:
For Participants who
own:
(i) 10% or less of the total combined voting power of all
classes of stock of the Company or an Affiliate, each ISO shall
terminate not more than ten years from the date of the grant or
at such earlier time as the Option Agreement may provide; or
(ii) More than 10% of the total combined voting power of
all classes of stock of the Company or an Affiliate, each ISO
shall terminate not more than five years from the date of the
grant or at such earlier time as the Option Agreement may
provide.
(d)
Limitation on Yearly Exercise:
The
Option Agreements shall restrict the amount of ISOs which may
become exercisable in any calendar year (under this or any other
ISO plan of the Company or an Affiliate) so that the aggregate
Fair Market Value (determined at the time each ISO is granted)
of the stock with respect to which ISOs are exercisable for the
first time by the Participant in any calendar year does not
exceed $100,000.
|
|
7.
|
TERMS AND
CONDITIONS OF STOCK GRANTS.
|
Each offer of a Stock Grant to a Participant shall state the
date prior to which the Stock Grant must be accepted by the
Participant, and the principal terms of each Stock Grant shall
be set forth in an Agreement, duly executed by the Company and,
to the extent required by law or requested by the Company, by
the Participant. The Agreement shall be in a form approved by
the Administrator and shall contain terms and conditions which
the Administrator determines to be appropriate and in the best
interest of the Company, subject to the following minimum
standards:
(a) Each Agreement shall state the purchase price (per
share), if any, of the Shares covered by each Stock Grant, which
purchase price shall be determined by the Administrator but
shall not be less than the minimum consideration required by the
Delaware General Corporation Law on the date of the grant of the
Stock Grant;
(b) Each Agreement shall state the number of Shares to
which the Stock Grant pertains; and
(c) Each Agreement shall include the terms of any right of
the Company to restrict or reacquire the Shares subject to the
Stock Grant, including the time and events upon which such
rights shall accrue and the purchase price therefor, if any.
|
|
8.
|
TERMS AND
CONDITIONS OF OTHER STOCK-BASED AWARDS.
|
The Board shall have the right to grant other Stock-Based Awards
based upon the Common Stock having such terms and conditions as
the Board may determine, including, without limitation, the
grant of Shares based upon certain conditions, the grant of
securities convertible into Shares and the grant of stock
appreciation rights, phantom stock awards or stock units. The
principal terms of each Stock-Based Award shall be set forth in
an Agreement, duly executed by the Company and, to the extent
required by law or requested by the Company, by the Participant.
The Agreement shall be in a form approved by the Administrator
and shall contain terms and conditions which the Administrator
determines to be appropriate and in the best interest of the
Company.
|
|
9.
|
EXERCISE
OF OPTIONS AND ISSUE OF SHARES.
|
An Option (or any part or installment thereof) shall be
exercised by giving written notice to the Company or its
designee, together with provision for payment of the full
purchase price in accordance with this Paragraph for the
I-5
Shares as to which the Option is being exercised, and upon
compliance with any other condition(s) set forth in the Option
Agreement. Such notice shall be signed by the person exercising
the Option, shall state the number of Shares with respect to
which the Option is being exercised and shall contain any
representation required by the Plan or the Option Agreement.
Payment of the purchase price for the Shares as to which such
Option is being exercised shall be made (a) in United
States dollars in cash or by check, or (b) at the
discretion of the Administrator, through delivery of shares of
Common Stock having a Fair Market Value equal as of the date of
the exercise to the cash exercise price of the Option and held
for at least six months, or (c) at the discretion of the
Administrator, by having the Company retain from the shares
otherwise issuable upon exercise of the Option, a number of
shares having a Fair Market Value equal as of the date of
exercise to the exercise price of the Option, or (d) at the
discretion of the Administrator, in accordance with a cashless
exercise program established with a securities brokerage firm,
and approved by the Administrator, or (e) at the discretion
of the Administrator, by any combination of (a), (b),
(c) and (d) above or (f) at the discretion of the
Administrator, payment of such other lawful consideration as the
Administrator may determine. Notwithstanding the foregoing, the
Administrator shall accept only such payment on exercise of an
ISO as is permitted by Section 422 of the Code.
The Company shall then reasonably promptly deliver the Shares as
to which such Option was exercised to the Participant (or to the
Participants Survivors, as the case may be). In
determining what constitutes reasonably promptly, it
is expressly understood that the issuance and delivery of the
Shares may be delayed by the Company in order to comply with any
law or regulation (including, without limitation, state
securities or blue sky laws) which requires the
Company to take any action with respect to the Shares prior to
their issuance. The Shares shall, upon delivery, be fully paid,
non-assessable Shares.
The Administrator shall have the right to accelerate the date of
exercise of any installment of any Option; provided that the
Administrator shall not accelerate the exercise date of any
installment of any Option granted to an Employee as an ISO (and
not previously converted into a Non-Qualified Option pursuant to
Paragraph 27) if such acceleration would violate the
annual vesting limitation contained in Section 422(d) of
the Code, as described in Paragraph 6.B.d.
The Administrator may, in its discretion, amend any term or
condition of an outstanding Option provided (i) such term
or condition as amended is permitted by the Plan, (ii) any
such amendment shall be made only with the consent of the
Participant to whom the Option was granted, or in the event of
the death of the Participant, the Participants Survivors,
if the amendment is adverse to the Participant, and
(iii) any such amendment of any Option shall be made only
after the Administrator determines whether such amendment would
constitute a modification of any Option which is an
ISO (as that term is defined in Section 424(h) of the Code)
or would cause any adverse tax consequences for the holder of
such Option including, but not limited to, pursuant to
Section 409A of the Code.
|
|
10.
|
ACCEPTANCE
OF STOCK GRANTS AND STOCK-BASED AWARDS AND ISSUE OF
SHARES.
|
A Stock Grant or Stock-Based Award (or any part or installment
thereof) shall be accepted by executing the applicable Agreement
and delivering it to the Company or its designee, together with
provision for payment of the full purchase price, if any, in
accordance with this Paragraph for the Shares as to which such
Stock Grant or Stock-Based Award is being accepted, and upon
compliance with any other conditions set forth in the applicable
Agreement. Payment of the purchase price for the Shares as to
which such Stock Grant or Stock-Based Award is being accepted
shall be made (a) in United States dollars in cash or by
check, or (b) at the discretion of the Administrator,
through delivery of shares of Common Stock held for at least six
months and having a Fair Market Value equal as of the date of
acceptance of the Stock Grant or Stock Based-Award to the
purchase price of the Stock Grant or Stock-Based Award, or
(c) at the discretion of the Administrator, by delivery of
the grantees personal recourse note bearing interest
payable not less than annually at no less than 100% of the
applicable Federal rate, as defined in Section 1274(d) of
the Code, or (d) at the discretion of the Administrator, by
any combination of (a), (b) and (c) above; or
(e) at the discretion of the Administrator, payment of such
other lawful consideration as the Administrator may determine.
The Company shall then, if required by the applicable Agreement,
reasonably promptly deliver the Shares as to which such Stock
Grant or Stock-Based Award was accepted to the Participant (or
to the Participants Survivors, as the case may be),
subject to any escrow provision set forth in the applicable
Agreement. In determining what
I-6
constitutes reasonably promptly, it is expressly
understood that the issuance and delivery of the Shares may be
delayed by the Company in order to comply with any law or
regulation (including, without limitation, state securities or
blue sky laws) which requires the Company to take
any action with respect to the Shares prior to their issuance.
The Administrator may, in its discretion, amend any term or
condition of an outstanding Stock Grant, Stock-Based Award or
applicable Agreement provided (i) such term or condition as
amended is permitted by the Plan, and (ii) any such
amendment shall be made only with the consent of the Participant
to whom the Stock Grant or Stock-Based Award was made, if the
amendment is adverse to the Participant.
|
|
11.
|
RIGHTS AS
A SHAREHOLDER.
|
No Participant to whom a Stock Right has been granted shall have
rights as a shareholder with respect to any Shares covered by
such Stock Right, except after due exercise of the Option or
acceptance of the Stock Grant or as set forth in any Agreement,
and tender of the full purchase price, if any, for the Shares
being purchased pursuant to such exercise or acceptance and
registration of the Shares in the Companys share register
in the name of the Participant.
|
|
12.
|
ASSIGNABILITY
AND TRANSFERABILITY OF STOCK RIGHTS.
|
By its terms, a Stock Right granted to a Participant shall not
be transferable by the Participant other than (i) by will
or by the laws of descent and distribution, or (ii) as
approved by the Administrator in its discretion and set forth in
the applicable Agreement. Notwithstanding the foregoing, an ISO
transferred except in compliance with clause (i) above
shall no longer qualify as an ISO. The designation of a
beneficiary of a Stock Right by a Participant, with the prior
approval of the Administrator and in such form as the
Administrator shall prescribe, shall not be deemed a transfer
prohibited by this Paragraph. Except as provided above, a Stock
Right shall only be exercisable or may only be accepted, during
the Participants lifetime, by such Participant (or by his
or her legal representative) and shall not be assigned, pledged
or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or
similar process. Any attempted transfer, assignment, pledge,
hypothecation or other disposition of any Stock Right or of any
rights granted thereunder contrary to the provisions of this
Plan, or the levy of any attachment or similar process upon a
Stock Right, shall be null and void.
|
|
13.
|
EFFECT ON
OPTIONS OF TERMINATION OF SERVICE OTHER THAN FOR
CAUSE OR DEATH OR DISABILITY.
|
Except as otherwise provided in a Participants Option
Agreement, in the event of a termination of service (whether as
an employee, director or consultant) with the Company or an
Affiliate before the Participant has exercised an Option, the
following rules apply:
(a) A Participant who ceases to be an employee, director or
consultant of the Company or of an Affiliate (for any reason
other than termination for cause, Disability, or
death for which events there are special rules in
Paragraphs 14, 15, and 16, respectively), may
exercise any Option granted to him or her to the extent that the
Option is exercisable on the date of such termination of
service, but only within such term as the Administrator has
designated in a Participants Option Agreement.
(b) Except as provided in Subparagraph (c) below,
or Paragraph 15 or 16, in no event may an Option
intended to be an ISO, be exercised later than three months
after the Participants termination of employment.
(c) The provisions of this Paragraph, and not the
provisions of Paragraph 15 or 16, shall apply to a
Participant who subsequently becomes Disabled or dies after the
termination of employment, director status or consultancy;
provided, however, in the case of a Participants
Disability or death within three months after the termination of
employment, director status or consultancy, the Participant or
the Participants Survivors may exercise the Option within
one year after the date of the Participants termination of
service, but in no event after the date of expiration of the
term of the Option.
(d) Notwithstanding anything herein to the contrary, if
subsequent to a Participants termination of employment,
termination of director status or termination of consultancy,
but prior to the exercise of an Option, the Board of Directors
determines that, either prior or subsequent to the
Participants termination, the
I-7
Participant engaged in conduct which would constitute
cause, then such Participant shall forthwith cease
to have any right to exercise any Option.
(e) A Participant to whom an Option has been granted under
the Plan who is absent from the Company or an Affiliate because
of temporary disability (any disability other than a Disability
as defined in Paragraph 1 hereof), or who is on leave of
absence for any purpose, shall not, during the period of any
such absence, be deemed, by virtue of such absence alone, to
have terminated such Participants employment, director
status or consultancy with the Company or with an Affiliate,
except as the Administrator may otherwise expressly provide.
(f) Except as required by law or as set forth in a
Participants Option Agreement, Options granted under the
Plan shall not be affected by any change of a Participants
status within or among the Company and any Affiliates, so long
as the Participant continues to be an employee, director or
consultant of the Company or any Affiliate.
|
|
14.
|
EFFECT ON
OPTIONS OF TERMINATION OF SERVICE FOR
CAUSE.
|
Except as otherwise provided in a Participants Option
Agreement, the following rules apply if the Participants
service (whether as an employee, director or consultant) with
the Company or an Affiliate is terminated for cause
prior to the time that all his or her outstanding Options have
been exercised:
(a) All outstanding and unexercised Options as of the time
the Participant is notified his or her service is terminated
for cause will immediately be forfeited.
(b) For purposes of this Plan, cause shall
include (and is not limited to) dishonesty with respect to the
Company or any Affiliate, insubordination, substantial
malfeasance or non-feasance of duty, unauthorized disclosure of
confidential information, breach by the Participant of any
provision of any employment, consulting, advisory,
nondisclosure, non-competition or similar agreement between the
Participant and the Company, and conduct substantially
prejudicial to the business of the Company or any Affiliate. The
determination of the Administrator as to the existence of
cause will be conclusive on the Participant and the
Company.
(c) Cause is not limited to events which have
occurred prior to a Participants termination of service,
nor is it necessary that the Administrators finding of
cause occur prior to termination. If the
Administrator determines, subsequent to a Participants
termination of service but prior to the exercise of an Option,
that either prior or subsequent to the Participants
termination the Participant engaged in conduct which would
constitute cause, then the right to exercise any
Option is forfeited.
(d) Any provision in an agreement between the Participant
and the Company or an Affiliate, which contains a conflicting
definition of cause for termination and which is in
effect at the time of such termination, shall supersede the
definition in this Plan with respect to that Participant.
|
|
15.
|
EFFECT ON
OPTIONS OF TERMINATION OF SERVICE FOR DISABILITY.
|
Except as otherwise provided in a Participants Option
Agreement:
(a) A Participant who ceases to be an employee, director or
consultant of the Company or of an Affiliate by reason of
Disability may exercise any Option granted to such Participant:
(i) To the extent that the Option has become exercisable
but has not been exercised on the date of Disability; and
(ii) In the event rights to exercise the Option accrue
periodically, to the extent of a pro rata portion through the
date of Disability of any additional vesting rights that would
have accrued on the next vesting date had the Participant not
become Disabled. The proration shall be based upon the number of
days accrued in the current vesting period prior to the date of
Disability.
(b) A Disabled Participant may exercise such rights only
within the period ending one year after the date of the
Participants termination of employment, directorship or
consultancy, as the case may be,
I-8
notwithstanding that the Participant might have been able to
exercise the Option as to some or all of the Shares on a later
date if the Participant had not become Disabled and had
continued to be an employee, director or consultant or, if
earlier, within the originally prescribed term of the Option.
(c) The Administrator shall make the determination both of
whether Disability has occurred and the date of its occurrence
(unless a procedure for such determination is set forth in
another agreement between the Company and such Participant, in
which case such procedure shall be used for such determination).
If requested, the Participant shall be examined by a physician
selected or approved by the Administrator, the cost of which
examination shall be paid for by the Company.
|
|
16.
|
EFFECT ON
OPTIONS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR
CONSULTANT.
|
Except as otherwise provided in a Participants Option
Agreement:
(a) In the event of the death of a Participant while the
Participant is an employee, director or consultant of the
Company or of an Affiliate, such Option may be exercised by the
Participants Survivors:
(i) To the extent that the Option has become exercisable
but has not been exercised on the date of death; and
(ii) In the event rights to exercise the Option accrue
periodically, to the extent of a pro rata portion through the
date of death of any additional vesting rights that would have
accrued on the next vesting date had the Participant not died.
The proration shall be based upon the number of days accrued in
the current vesting period prior to the Participants date
of death.
(b) If the Participants Survivors wish to exercise
the Option, they must take all necessary steps to exercise the
Option within one year after the date of death of such
Participant, notwithstanding that the decedent might have been
able to exercise the Option as to some or all of the Shares on a
later date if he or she had not died and had continued to be an
employee, director or consultant or, if earlier, within the
originally prescribed term of the Option.
|
|
17.
|
EFFECT OF
TERMINATION OF SERVICE ON UNACCEPTED STOCK GRANTS.
|
In the event of a termination of service (whether as an
employee, director or consultant) with the Company or an
Affiliate for any reason before the Participant has accepted a
Stock Grant, such offer shall terminate.
For purposes of this Paragraph 17 and Paragraph 18
below, a Participant to whom a Stock Grant has been offered and
accepted under the Plan who is absent from work with the Company
or with an Affiliate because of temporary disability (any
disability other than a Disability as defined in
Paragraph 1 hereof), or who is on leave of absence for any
purpose, shall not, during the period of any such absence, be
deemed, by virtue of such absence alone, to have terminated such
Participants employment, director status or consultancy
with the Company or with an Affiliate, except as the
Administrator may otherwise expressly provide.
In addition, for purposes of this Paragraph 17 and
Paragraph 18 below, any change of employment or other
service within or among the Company and any Affiliates shall not
be treated as a termination of employment, director status or
consultancy so long as the Participant continues to be an
employee, director or consultant of the Company or any Affiliate.
|
|
18.
|
EFFECT ON
STOCK GRANTS OF TERMINATION OF SERVICE OTHER THAN FOR
CAUSE OR DEATH OR DISABILITY.
|
Except as otherwise provided in a Participants Stock Grant
Agreement, in the event of a termination of service (whether as
an employee, director or consultant), other than termination
for cause, Disability, or death for which events
there are special rules in Paragraphs 19, 20,
and 21, respectively, before all Company rights of
repurchase shall have lapsed, then the Company shall have the
right to repurchase that number of Shares subject to a Stock
Grant as to which the Companys repurchase rights have not
lapsed.
I-9
|
|
19.
|
EFFECT ON
STOCK GRANTS OF TERMINATION OF SERVICE FOR
CAUSE.
|
Except as otherwise provided in a Participants Stock Grant
Agreement, the following rules apply if the Participants
service (whether as an employee, director or consultant) with
the Company or an Affiliate is terminated for cause:
(a) All Shares subject to any Stock Grant shall be
immediately subject to repurchase by the Company at the purchase
price, if any, thereof.
(b) For purposes of this Plan, cause shall
include (and is not limited to) dishonesty with respect to the
employer, insubordination, substantial malfeasance or
non-feasance of duty, unauthorized disclosure of confidential
information, breach by the Participant of any provision of any
employment, consulting, advisory, nondisclosure, non-competition
or similar agreement between the Participant and the Company,
and conduct substantially prejudicial to the business of the
Company or any Affiliate. The determination of the Administrator
as to the existence of cause will be conclusive on
the Participant and the Company.
(c) Cause is not limited to events which have
occurred prior to a Participants termination of service,
nor is it necessary that the Administrators finding of
cause occur prior to termination. If the
Administrator determines, subsequent to a Participants
termination of service, that either prior or subsequent to the
Participants termination the Participant engaged in
conduct which would constitute cause, then the
Companys right to repurchase all of such
Participants Shares shall apply.
(d) Any provision in an agreement between the Participant
and the Company or an Affiliate, which contains a conflicting
definition of cause for termination and which is in
effect at the time of such termination, shall supersede the
definition in this Plan with respect to that Participant.
|
|
20.
|
EFFECT ON
STOCK GRANTS OF TERMINATION OF SERVICE FOR DISABILITY.
|
Except as otherwise provided in a Participants Stock Grant
Agreement, the following rules apply if a Participant ceases to
be an employee, director or consultant of the Company or of an
Affiliate by reason of Disability: to the extent the
Companys rights of repurchase have not lapsed on the date
of Disability, they shall be exercisable; provided, however,
that in the event such rights of repurchase lapse periodically,
such rights shall lapse to the extent of a pro rata portion of
the Shares subject to such Stock Grant through the date of
Disability as would have lapsed had the Participant not become
Disabled. The proration shall be based upon the number of days
accrued prior to the date of Disability.
The Administrator shall make the determination both of whether
Disability has occurred and the date of its occurrence (unless a
procedure for such determination is set forth in another
agreement between the Company and such Participant, in which
case such procedure shall be used for such determination). If
requested, the Participant shall be examined by a physician
selected or approved by the Administrator, the cost of which
examination shall be paid for by the Company.
|
|
21.
|
EFFECT ON
STOCK GRANTS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR
CONSULTANT.
|
Except as otherwise provided in a Participants Stock Grant
Agreement, the following rules apply in the event of the death
of a Participant while the Participant is an employee, director
or consultant of the Company or of an Affiliate: to the extent
the Companys rights of repurchase have not lapsed on the
date of death, they shall be exercisable; provided, however,
that in the event such rights of repurchase lapse periodically,
such rights shall lapse to the extent of a pro rata portion of
the Shares subject to such Stock Grant through the date of death
as would have lapsed had the Participant not died. The proration
shall be based upon the number of days accrued prior to the
Participants death.
|
|
22.
|
PURCHASE
FOR INVESTMENT.
|
Unless the offering and sale of the Shares to be issued upon the
particular exercise or acceptance of a Stock Right shall have
been effectively registered under the Securities Act of 1933, as
now in force or hereafter amended
I-10
(the 1933 Act), the Company shall be under no
obligation to issue the Shares covered by such exercise unless
and until the following conditions have been fulfilled:
(a) The person(s) who exercise(s) or accept(s) such Stock
Right shall warrant to the Company, prior to the receipt of such
Shares, that such person(s) are acquiring such Shares for their
own respective accounts, for investment, and not with a view to,
or for sale in connection with, the distribution of any such
Shares, in which event the person(s) acquiring such Shares shall
be bound by the provisions of the following legend which shall
be endorsed upon the certificate(s) evidencing their Shares
issued pursuant to such exercise or such grant:
The shares represented by this certificate have been taken
for investment and they may not be sold or otherwise transferred
by any person, including a pledgee, unless (1) either
(a) a Registration Statement with respect to such shares
shall be effective under the Securities Act of 1933, as amended,
or (b) the Company shall have received an opinion of
counsel satisfactory to it that an exemption from registration
under such Act is then available, and (2) there shall have
been compliance with all applicable state securities laws.
(b) At the discretion of the Administrator, the Company
shall have received an opinion of its counsel that the Shares
may be issued upon such particular exercise or acceptance in
compliance with the 1933 Act without registration
thereunder.
|
|
23.
|
DISSOLUTION
OR LIQUIDATION OF THE COMPANY.
|
Upon the dissolution or liquidation of the Company, all Options
granted under this Plan which as of such date shall not have
been exercised and all Stock Grants and Stock-Based Awards which
have not been accepted will terminate and become null and void;
provided, however, that if the rights of a Participant or a
Participants Survivors have not otherwise terminated and
expired, the Participant or the Participants Survivors
will have the right immediately prior to such dissolution or
liquidation to exercise or accept any Stock Right to the extent
that the Stock Right is exercisable or subject to acceptance as
of the date immediately prior to such dissolution or
liquidation. Upon the dissolution or liquidation of the Company,
any outstanding Stock-Based Awards shall immediately terminate
unless otherwise determined by the Administrator or specifically
provided in the applicable Agreement.
Upon the occurrence of any of the following events, a
Participants rights with respect to any Stock Right
granted to him or her hereunder shall be adjusted as hereinafter
provided, unless otherwise specifically provided in a
Participants Agreement:
A.
Stock Dividends and Stock
Splits
.
If (i) the shares of Common
Stock shall be subdivided or combined into a greater or smaller
number of shares or if the Company shall issue any shares of
Common Stock as a stock dividend on its outstanding Common
Stock, or (ii) additional shares or new or different shares
or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock, the
number of shares of Common Stock deliverable upon the exercise
of an Option or acceptance of a Stock Grant shall be
appropriately increased or decreased proportionately, and
appropriate adjustments shall be made including, in the purchase
price per share, to reflect such events. The number of Shares
subject to the limitation in Paragraph 4(c) shall also be
proportionately adjusted upon the occurrence of such events.
B.
Corporate Transactions
.
If the
Company is to be consolidated with or acquired by another entity
in a merger, sale of all or substantially all of the
Companys assets other than a transaction to merely change
the state of incorporation (a Corporate
Transaction), the Administrator or the board of directors
of any entity assuming the obligations of the Company hereunder
(the Successor Board), shall, as to outstanding
Options, either (i) make appropriate provision for the
continuation of such Options by substituting on an equitable
basis for the Shares then subject to such Options either the
consideration payable with respect to the outstanding shares of
Common Stock in connection with the Corporate Transaction or
securities of any successor or acquiring entity; or
(ii) upon written notice to the Participants, provide that
all Options must be exercised (either (a) to the extent
then exercisable or, (b) at the discretion of the
Administrator, all Options being made
I-11
fully exercisable for purposes of this Subparagraph), within a
specified number of days of the date of such notice, at the end
of which period the Options shall terminate; or
(iii) terminate all Options in exchange for a cash payment
equal to the excess of the Fair Market Value of the Shares
subject to such Options (either (a) to the extent then
exercisable or, (b) at the discretion of the Administrator,
all Options being made fully exercisable for purposes of this
Subparagraph) over the exercise price thereof.
With respect to outstanding Stock Grants, the Administrator or
the Successor Board, shall either (i) make appropriate
provisions for the continuation of such Stock Grants on the same
terms and conditions by substituting on an equitable basis for
the Shares then subject to such Stock Grants either the
consideration payable with respect to the outstanding Shares of
Common Stock in connection with the Corporate Transaction or
securities of any successor or acquiring entity; or
(ii) terminate all Stock Grants in exchange for a cash
payment equal to the excess of the Fair Market Value of the
Shares subject to such Stock Grants over the purchase price
thereof, if any. In addition, in the event of a Corporate
Transaction, the Administrator may waive any or all Company
repurchase rights with respect to outstanding Stock Grants.
C.
Recapitalization or
Reorganization
.
In the event of a
recapitalization or reorganization of the Company other than a
Corporate Transaction pursuant to which securities of the
Company or of another corporation are issued with respect to the
outstanding shares of Common Stock, a Participant upon
exercising an Option or accepting a Stock Grant after the
recapitalization or reorganization shall be entitled to receive
for the purchase price paid upon such exercise or acceptance of
the number of replacement securities which would have been
received if such Option had been exercised or Stock Grant
accepted prior to such recapitalization or reorganization.
D.
Adjustments to Stock-Based
Awards
.
Upon the happening of any of the
events described in Subparagraphs A, B or C above, any
outstanding Stock-Based Award shall be appropriately adjusted to
reflect the events described in such Subparagraphs. The
Administrator or the Successor Board shall determine the
specific adjustments to be made under this Paragraph 24,
including, but not limited to the effect if any, of a Change in
Control and, subject to Paragraph 4, its determination
shall be conclusive.
E.
Modification of
ISOs
.
Notwithstanding the foregoing, any
adjustments made pursuant to Subparagraph A, B or C above with
respect to ISOs shall be made only after the Administrator
determines whether such adjustments would constitute a
modification of such ISOs (as that term is defined
in Section 424(h) of the Code) or would cause any adverse
tax consequences for the holders of such ISOs. If the
Administrator determines that such adjustments made with respect
to ISOs would constitute a modification of such ISOs, it may
refrain from making such adjustments, unless the holder of an
ISO specifically requests in writing that such adjustment be
made and such writing indicates that the holder has full
knowledge of the consequences of such modification
on his or her income tax treatment with respect to the ISO.
|
|
25.
|
ISSUANCES
OF SECURITIES.
|
Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by
reason thereof shall be made with respect to, the number or
price of shares subject to Stock Rights. Except as expressly
provided herein, no adjustments shall be made for dividends paid
in cash or in property (including without limitation,
securities) of the Company prior to any issuance of Shares
pursuant to a Stock Right.
No fractional shares shall be issued under the Plan and the
person exercising a Stock Right shall receive from the Company
cash in lieu of such fractional shares equal to the Fair Market
Value thereof.
|
|
27.
|
CONVERSION
OF ISOs INTO NON-QUALIFIED OPTIONS; TERMINATION OF
ISOs.
|
The Administrator, at the written request of any Participant,
may in its discretion take such actions as may be necessary to
convert such Participants ISOs (or any portions thereof)
that have not been exercised on the date of conversion into
Non-Qualified Options at any time prior to the expiration of
such ISOs, regardless of whether the
I-12
Participant is an employee of the Company or an Affiliate at the
time of such conversion. At the time of such conversion, the
Administrator (with the consent of the Participant) may impose
such conditions on the exercise of the resulting Non-Qualified
Options as the Administrator in its discretion may determine,
provided that such conditions shall not be inconsistent with
this Plan. Nothing in the Plan shall be deemed to give any
Participant the right to have such Participants ISOs
converted into Non-Qualified Options, and no such conversion
shall occur until and unless the Administrator takes appropriate
action. The Administrator, with the consent of the Participant,
may also terminate any portion of any ISO that has not been
exercised at the time of such conversion.
In the event that any federal, state, or local income taxes,
employment taxes, Federal Insurance Contributions Act
(F.I.C.A.) withholdings or other amounts are
required by applicable law or governmental regulation to be
withheld from the Participants salary, wages or other
remuneration in connection with the exercise or acceptance of a
Stock Right or in connection with a Disqualifying Disposition
(as defined in Paragraph 29) or upon the lapsing of
any right of repurchase, the Company may withhold from the
Participants compensation, if any, or may require that the
Participant advance in cash to the Company, or to any Affiliate
of the Company which employs or employed the Participant, the
statutory minimum amount of such withholdings unless a different
withholding arrangement, including the use of shares of the
Companys Common Stock or a promissory note, is authorized
by the Administrator (and permitted by law). For purposes
hereof, the fair market value of the shares withheld for
purposes of payroll withholding shall be determined in the
manner provided in Paragraph 1 above, as of the most recent
practicable date prior to the date of exercise. If the fair
market value of the shares withheld is less than the amount of
payroll withholdings required, the Participant may be required
to advance the difference in cash to the Company or the
Affiliate employer. The Administrator in its discretion may
condition the exercise of an Option for less than the then Fair
Market Value on the Participants payment of such
additional withholding.
|
|
29.
|
NOTICE TO
COMPANY OF DISQUALIFYING DISPOSITION.
|
Each Employee who receives an ISO must agree to notify the
Company in writing immediately after the Employee makes a
Disqualifying Disposition of any shares acquired pursuant to the
exercise of an ISO. A Disqualifying Disposition is defined in
Section 424(c) of the Code and includes any disposition
(including any sale or gift) of such shares before the later of
(a) two years after the date the Employee was granted the
ISO, or (b) one year after the date the Employee acquired
Shares by exercising the ISO, except as otherwise provided in
Section 424(c) of the Code. If the Employee has died before
such stock is sold, these holding period requirements do not
apply and no Disqualifying Disposition can occur thereafter.
|
|
30.
|
TERMINATION
OF THE PLAN.
|
The Plan will terminate on 10 years after adoption, the
date which is ten years from the earlier of the date of its
adoption by the Board of Directors and the date of its approval
by the shareholders of the Company. The Plan may be terminated
at an earlier date by vote of the shareholders or the Board of
Directors of the Company; provided, however, that any such
earlier termination shall not affect any Agreements executed
prior to the effective date of such termination.
31. AMENDMENT
OF THE PLAN AND AGREEMENTS.
The Plan may be amended by the shareholders of the Company. The
Plan may also be amended by the Administrator, including,
without limitation, to the extent necessary to qualify any or
all outstanding Stock Rights granted under the Plan or Stock
Rights to be granted under the Plan for favorable federal income
tax treatment (including deferral of taxation upon exercise) as
may be afforded incentive stock options under Section 422
of the Code, and to the extent necessary to qualify the shares
issuable upon exercise or acceptance of any outstanding Stock
Rights granted, or Stock Rights to be granted, under the Plan
for listing on any national securities exchange or quotation in
any national automated quotation system of securities dealers.
Any amendment approved by the Administrator which the
Administrator determines is of a scope that requires shareholder
approval shall be subject to obtaining such shareholder
approval. Any modification or amendment of the Plan shall not,
without the consent of a Participant, adversely affect his or
her rights under a Stock Right previously granted to him or her.
With the
I-13
consent of the Participant affected, the Administrator may amend
outstanding Agreements in a manner which may be adverse to the
Participant but which is not inconsistent with the Plan. In the
discretion of the Administrator, outstanding Agreements may be
amended by the Administrator in a manner which is not adverse to
the Participant.
32. EMPLOYMENT
OR OTHER RELATIONSHIP.
Nothing in this Plan or any Agreement shall be deemed to prevent
the Company or an Affiliate from terminating the employment,
consultancy or director status of a Participant, nor to prevent
a Participant from terminating his or her own employment,
consultancy or director status or to give any Participant a
right to be retained in employment or other service by the
Company or any Affiliate for any period of time.
33. GOVERNING
LAW.
This Plan shall be construed and enforced in accordance with the
law of the State of Delaware.
I-14
Annex J
First
Amended and Restated
EMPLOYMENT
AGREEMENT
THIS FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
Agreement), is made effective the 1st day of
April, 2007, by and between Multi-Shot, LLC, a Texas limited
liability company (the Employer), and Allen R. Neel,
a resident of the state of Texas (the Employee).
WHEREAS, Employer and Employee desire to enter into this
Agreement in connection with Employees employment as the
President and Chief Executive Officer of Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements contained herein, and other good and valuable
consideration, the adequacy of which is hereby acknowledged, the
parties hereby agree as follows:
1.
Employment
.
1.1
Acceptance
.
Employer hereby
employs Employee and Employee accepts such employment, as the
President and Chief Executive Officer of Employer, subject to
the supervision and direction of the Board of Managers and to
policies adopted from time-to-time by Employer.
1.2
Term
.
The term of this
Agreement shall commence on the effective date and continue for
a period of two and three quarters
(2
3
/
4
ths)
years, ending on December 31, 2009 (the Term),
subject to earlier termination as provided herein. This
Agreement will be automatically renewed for successive one
(1) year terms following the Term (the Renewal
Term) unless either party (i) gives the other party
no less than ninety (90) days written notice prior to the
expiration of the Term or a Renewal Term of such partys
intent not to renew, or (ii) the Term or Renewal Term is
earlier terminated as provided in this Agreement.
2.
Duties
.
During the Term and any
Renewal Term, Employee shall devote Employees best efforts
and Employees full time, attention and skill to the
performance of Employees duties as an employee of
Employer. Employees duties will include responsibility for
the operation and performance of Employer and are more
specifically set forth in
Schedule A
attached hereto. Employee understands that Employees
duties may be modified from time to time by Employer; provided
any material change in Employees duties will require
Employees consent, which will not be unreasonably withheld.
3.
Compensation
.
3.1
Base Salary
.
In consideration
of the performance of Employees duties hereunder, Employer
will pay to Employee during the Term and any Renewal Term, and
Employee agrees to accept from Employer, an annual salary as set
forth in
Schedule B
attached hereto
(the Base Salary), subject to the terms and
conditions of this Agreement.
3.2
Bonus
.
As additional
compensation for the performance of Employees duties under
this Agreement, Employer will pay Employee an annual bonus
(Bonus) as set forth in
Schedule
B
attached hereto. Bonuses will be paid
within 15 days after receipt by the Employer of its annual
audited financial statements. Bonuses shall be calculated on a
calendar year basis, prorated (i) from the effective date
of this Agreement for 2007 and (ii) to the applicable
termination date of this Agreement.
3.3.
Performance Award
.
As
additional long term compensation for the performance of
Employees duties under this Agreement, Employee shall
receive that certain gain share award (the Gain
Share) executed as of even date herewith by and between
Employee and the Employer, a description of such Gain Share
being attached hereto as
Schedule C
,
the terms of which are incorporated herein by reference.
3.4
Benefits
.
Employee shall be
entitled to participate in such standard benefit and vacation
programs as Employer may from time to time make available, in
its discretion, to its employees. Such benefits and perquisites
can be adjusted, reduced or eliminated on the same basis as
changes in the benefits and perquisites made available by
Employer to its employees as determined by the Board from
time-to-time.
J-1
3.5
Place of Employment
.
During
the Term of this Agreement, Employee shall principally perform
Employees duties at Employers corporate headquarters
in Conroe, Texas and no change in Employees principal
place of employment will be made without Employees consent.
3.6
Vehicle Allowance
.
Employee
shall receive a vehicle or vehicle allowance for business use
and shall be reimbursed for usual and customary business
expenses.
4.
Key Person Insurance
.
Employer
acknowledges Employee is a Key Person and as such will most
likely secure a life insurance policy on the Employee, for the
benefit of Employer. Employee agrees to cooperate with Employer
and submit to the necessary medical examinations and tests
reasonably required to obtain such insurance. The initial amount
of the policy shall be $1,000,000 and will be secured as soon as
possible. The Employer also agrees to provide (i.e., secure and
pay for) additional term life insurance on the Employee, for the
benefit of the Employee, in an amount equal to Two Hundred Fifty
Thousand Dollars ($250,000).
5.
Termination of Employment
.
5.1
Definitions
.
For the purposes
of this Agreement:
5.1.1
(a)
Cause
shall mean the finding
by the majority of the Board (excluding the Employee, should
he/she
be a
Board member) of the commission by the Employee of an act of:
(i) fraud; (ii) theft; iii) dishonesty;
iv) embezzlement against Employer or any customer or client
thereof, (v) habitual substance abuse, or (vi) be
convicted for (or render a plea of nolo contendere in lieu
thereof) (a) a felony, or (b) a crime involving fraud,
dishonesty or moral turpitude, provided however that during the
time after indictment and pending the court determined outcome,
the Employer reserves the right to suspend the Employees
duties while continuing such Employees Base Salary.
(b)
Misconduct
shall mean a good
faith finding by the majority of the Board (excluding the
Employee, should
he/she
be a
Board member) of the commission by Employee of any one or more
of the following acts or omissions: (i) the intentional
disclosure of Confidential Business Information (defined in
Section 6.1.1 herein) which disclosure Employee knew or
reasonably should have known could have the potential to result
in material damage to Employer; (ii) any intentional
violation of written policies of the Employer or specific
written directions of the Board;
provided
such written
policies or directives are neither illegal (or do not involve
illegal conduct) nor do they require Employee to violate
reasonable business ethical standards;
(iii) Employees repeated failure to perform
Employees duties or the Employees taking actions or
engaging in conduct adverse to the interests of Employer, its
assets, business or business opportunities, including, without
limitation, gross negligence, (iv) breach or violation of
Sections 6, 7, 8 or 9 herein
; or (v) a material
breach by Employee of one or more terms of this Agreement, in
each case, for which the Employer has provided Employee written
notice of such material breach and a thirty (30) day cure
period for a breach that might reasonably be expected to be
curable. Such notice shall be provided in the manner described
in
Section 5.1.2
.
5.1.2
Termination Notice
means a
written notice which: (i) indicates the specific
termination provision in this Agreement relied upon;
(ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis
for termination of Employees employment under the
provision so indicated; and (iii) if the effective date of
such termination is other than the date of receipt of such
notice, specifies the termination date (which date shall not be
more than thirty (30) days after the giving of such
notice). Any termination by Employer for Cause or for Misconduct
shall be communicated to Employee by a Termination Notice. The
failure by Employer to set forth in the Termination Notice any
fact or circumstance which contributes to a showing of Cause or
Misconduct shall not waive any right of Employer hereunder or
preclude Employer from asserting such fact or circumstance in
enforcing its rights hereunder.
5.1.3
Voluntary Termination
shall
mean the termination of Employees employment by Employer
via Employees voluntary resignation
for reasons
other than
: (i) Employees death or
disability; (ii) Employees retirement after
age 65; (iii) due to Employee experiencing a Family
Emergency (defined below); (iv) simultaneous with
Employees termination for Cause; or (iv) simultaneous
with or following an event which,
J-2
whether or not known to Employer at the time of such Voluntary
Termination by Employee would constitute Cause. In the event of
a Voluntary Termination, Employee shall deliver to Employer
written notice of such termination no less than eight
(8) weeks prior to the proposed termination date.
5.1.4
Constructive Termination
shall mean (i) material breach by Employer of this
Agreement, including, without limitation, a material reduction
in the Employees Base Salary or a material change in
Employees duties or job description as set forth in
Schedule A
without Employees
written consent; or (ii) a material change in the
Employees principal employment location, without
Employees consent. A Constructive Termination will not
have occurred until and unless Employee has provided Employer
with ten (10) day prior written notice of such Constructive
Termination and the opportunity to cure within this ten
(10) day period.
5.1.5
Family Emergency
shall mean
the resignation by the Employee, or the Boards finding
that the Employee is not discharging his or her duties in a
manner consistent with his or her prior discharge of such
duties, in either case due to a serious health condition of an
immediate family member of the Employee. For the purposes of
this Agreement, serious health condition shall mean an injury,
illness, impairment or physical or mental condition that
requires continuing treatments by a healthcare provider and that
has caused a period of incapacity for such family member of more
than sixty (60) days. For the purpose of this Agreement,
immediate family member shall mean the Employees spouse,
parents,
parents-in-law
or children.
5.2
Termination for Cause, Misconduct or Voluntary
Termination
.
Employer may terminate this
Agreement and its obligations to Employee hereunder at any time
for Cause or Misconduct upon delivery to Employee of a
Termination Notice. Upon a documented finding of Misconduct by
the Board, Employer shall give Employee a Termination Notice.
The notice shall comply with
Section 5.1.2
. If
Employees employment is terminated for Cause, or
Misconduct after the cure period, if applicable, or in the event
of a Voluntary Termination by the Employee, Employer shall have
no further obligation or liability to Employee relating to this
Agreement, Employees employment hereunder, or the
termination thereof, other than the Base Salary and vacation
time, all as accrued and prorated but unpaid through the
effective date of Employees termination, and reimbursable
business expenses incurred on behalf of Employer by Employee
prior to the effective date of Employees termination.
5.3
Termination Without Cause or by Constructive
Termination
.
In the event Employer terminates
this Agreement without Cause including termination for a
Constructive Termination, and so long as Employee has not
breached any of Employees obligations under this
Agreement, Employee shall be entitled to the Base Salary, Bonus,
any vested Gain Share, and vacation time, all as accrued and
prorated but unpaid through the date of termination, and
reimbursable business expenses incurred on behalf of Employer by
Employee prior to the date of termination.
In addition
,
if Employer terminates Employees employment without Cause
or Employee terminates such employment as a result of
Employers actions leading to a Constructive Termination,
and only in such events, Employee shall be entitled to, as
severance pay, equal to $500,000, payable, at Employers
option, either in a lump sum or over a period of twelve months
through Employers normal pay practices. Provided, however,
that Employers obligations to make such payments of
severance pay shall be subject to (i) Employees
continued compliance with
Sections 5, 6, 7, 8, and 9
during the severance period, and (ii) at the
Employers option the execution by Employer and Employee of
a mutual general release and waiver of claims against each other
in a form provided by Employer. Such form shall be provided and
drafted in good faith by the Employer. In the event Employer
terminates this Agreement without Cause, the time periods set
forth in
Sections 6, 7, 8, and 9
will be for one
(1) year following the date of termination in accordance
with this
Section 5.3
, unless the Employer exercises
its option to pay the Employee as provided for in
Section 7.1
.
5.4
Termination due to Death, Disability, or Family
Emergency
.
Employees employment shall
terminate automatically in the event of Employees death or
disability (as reasonably determined by the Board, using good
faith and in reliance on an independent medical determination,
with the standard being the Employees reasonable ability
to discharge
his/her
duties consistent with such discharge prior to the malady or
accident giving rise to the disability) or due to the Employee
experiencing a Family Emergency during the Term or any Renewal
Term. If Employees employment is terminated on account of
death, disability, or because of a Family Emergency, Employee
or, as applicable, Employees estate, legal representatives
or designee shall be entitled to receive, in
J-3
full satisfaction of all obligations due to Employee or
Employees estate, legal representatives or designee by
Employer hereunder, Employees Base Salary, Bonus, any
vested Gain Share and vacation time, all as accrued and prorated
(except Gain Share, which by its terms is only awarded annually)
but unpaid through the date of termination, and reimbursable
business expenses incurred on behalf of Employer by Employee
prior to the date of termination.
In addition
, upon the
occurrence of such an event, Employee or Employees estate
shall have the right at any time within one (1) year after
the date of the termination to require: a) Employer to
purchase Employees Membership Interests in the Employer
(the Employees Put Right), for a value (as
determined by the Employers Board, using good faith, as of
the termination date) and otherwise in accordance with the
relevant provisions of
Section 5.5
below, and to
b) repay any loans made to the Company by the Employee.
5.5
Right of Set-off
.
Upon
Employees breach of, or default under, this Agreement,
Employer may set-off any amounts due from the Employee against
any amounts owing by the Employer to Employee under this
Agreement or otherwise. Neither the exercise of nor the failure
to exercise such right of set-off will constitute an election of
remedies or limit Employer in any manner in enforcing other
remedies that may be available to Employer.
5.6
Other Termination
Obligations
.
Employee hereby acknowledges and
agrees that all personal property and equipment (Personal
Property) furnished to Employee in the course of, or
incident to, Employees employment by Employer belongs to
Employer and shall be promptly returned to Employer upon
termination of the Term. Personal Property includes, without
limitation, all vehicles, computers, equipment, credit cards,
books, manuals, records, reports, notes, contracts, lists,
blueprints, and other documents, or materials, or copies thereof
(including computer files), and all other proprietary
information relating to the business of Employer or any
subsidiary or affiliate thereof. Following termination, Employee
will not retain any Personal Property of Employer, or any
written or other tangible material containing any proprietary
information, Confidential Business Information or Trade Secrets
of Employer or any subsidiary or affiliate thereof.
6.
Confidential Business Information and Trade
Secrets
.
6.1
Definitions
.
For purposes of
this Agreement:
6.1.1 The term Confidential Business
Information shall mean any and all confidential and
proprietary information of Employer and Employers
business, including, without limitation, Employers
product, product designs, specifications, service designs,
development processes, business plans, prospects and
projections, marketing plans, business records, financial data,
customer information and customer lists, dealer lists, pricing,
financial information, sales information, purchasing and cost
information, pricing information, supplier lists, computer
programs, systems, formats, designs, specifications, processes,
discoveries or other information of similar character; and
6.1.2 The term Trade Secret shall mean any and
all information used by Employer and in Employers
business, including, without limitation, any and all formulas,
intellectual property, compilations, programs, devices, methods,
techniques, processes or other such similar information.
For purposes of this Agreement, Confidential Business
Information and Trade Secrets shall not include, and
Employees obligations under this Agreement, shall not
extend to: (i) information which is generally known and
available to the public; (ii) information obtained by
Employee from third persons other than employees of Employer,
such third party persons of which are not under agreement to
maintain the confidentiality of the same; and
(iii) information which is required to be disclosed by law
or legal process.
6.2
Property of
Employer
.
Employee acknowledges that
in connection with the performance of Employees Duties
during the Term or any Renewal Term, Employer will make
available to Employee, and Employee will have access to certain
Confidential Business Information and Trade Secrets, which is
either information not known by actual or potential competitors,
customers and third parties of Employer or is proprietary
information of Employer. Employee acknowledges and agrees that
any and all Confidential Business Information or Trade Secrets
learned or obtained by Employee during the course of
Employees employment by Employer or otherwise (including,
without limitation, information that Employee obtained through
or in connection with Employees ownership of and
employment by Employer at anytime prior to the date hereof)
whether developed by Employee alone or in conjunction with
others or otherwise, shall be and is the exclusive property of
Employer
J-4
6.3
Non-Disclosure
.
Employee
covenants and agrees that at all times during the Term or any
Renewal Term and for so long as Employer is making the payments
specified in Section 7 and for agreeing to ultimately pay
for any Employee vested Gain Share, and its agreement to honor
the Employees Put Right, either as applicable, that for up
to a maximum term of three (3) years immediately following
termination of Employees employment or the expiration of
this Agreement, Employee will hold in the strictest confidence
and will not intentionally or negligently disclose, use,
publicize, lecture upon or publish any Confidential Business
Information or Trade Secrets, and will not use any Confidential
Business Information or Trade Secrets for Employees own
benefit, or intentionally or negligently disclose any
Confidential Business Information or Trade Secrets to, or
intentionally or negligently use any Confidential Business
Information or Trade Secrets for the benefit of, anyone outside
of Employer, during or after Employees employment with
Employer; except to the extent that such disclosure is necessary
in connection with Employees duties on behalf of Employer.
Employee acknowledges that Employee is obligated under this
Agreement to use Employees best efforts to ensure that no
Confidential Business Information or Trade Secrets are disclosed.
6.4
Effect of
Termination
.
Upon termination of
Employees employment by Employer, or upon an earlier
request of Employer, Employee shall immediately deliver to
Employer all memoranda, data listings, computer programs,
manuals, letters, electronic mail, notes, notebooks,
specifications, reports, documents, records, devices, models or
other materials, and all copies or reproductions thereof, that
contain Confidential Business Information or Trade Secrets,
which Employee may then possess or have under Employees
control.
6.5
Employees
Assistance
.
Upon termination of
Employees employment under this Agreement, Employee agrees
to assist Employer in the transition of Employees duties
and business relationships for a reasonable limited period after
the termination.
7.
Noncompetition
.
The Employee
recognizes that the Employer has business goodwill and other
legitimate business interests which must be protected in
connection with and in addition to the Confidential Business
Information, and therefore, in exchange for access to the
Confidential Business Information, the specialized training and
instruction that the Employer will provide the Employee, and the
promotion and advertisement by the Employer of Employees
skill, ability and value in the business of the Employer,
Employee covenants and agrees that for the Term or any Renewal
Term and for so long as Employer is making the Retention Bonus
payments specified in
Sections 7.1
,
7.2
, and
7.3
, as applicable, and for agreeing to ultimately pay
for any Employee vested Gain Share, and its agreement to honor
the Employees Put Right, either as applicable, that for up
to a maximum period of thirty-six (36) months immediately
following termination of Employees employment for any
reason whatsoever or the expiration of this Agreement (in any
case, the Non-Compete Period), Employee shall not,
directly or indirectly, own an interest in, operate, join,
control, advise, consult with, work for, serve as a director of,
have a financial interest in, or participate in any corporation,
partnership, limited liability company, proprietorship, firm,
association, person, or other entity that engages (or engaged)
in the business of directional drilling, directional surveying,
measurement while drilling or related services in the geographic
area in which Employer has operations at the time of
termination. Notwithstanding the foregoing, by making the
payments contemplated under
Section 7.1
or
7.2,
the cumulative Non-Compete Period, as so extended,
shall not exceed three (3) years from the date of
termination of Employees employment.
7.1
Payments Upon Termination Without Cause
or
from Constructive Termination
.
In the event
that the Employee is terminated for any reason other than for
Cause or Misconduct or Voluntary Termination (but not due to
Disability, retirement, or due to a Family Emergency), then, as
additional consideration for the covenants of Employee set forth
in this Section 7, Employer may pay Employee a retention
bonus equal to $12,000 per month (in accordance with the
provisions contained in Section 7.3) (W/O Cause
Retention Bonus) and continue to provide Employee the
medical benefits in accordance with
Section 3.4
. The
severance payments made pursuant to
Section 5.3
will
be credited against the W/O Cause Retention Bonus during the
initial twelve month period. As such, the payment of the
severance shall satisfy the obligation to pay the W/O Cause
Retention Bonus for the first year following such termination
(other than with respect to the obligation to provide health
benefits pursuant to
Section 3.4)
.
7.2
Payments Upon Termination for Cause, Misconduct,
or Voluntary Termination
.
In the event that
the Employee is terminated for Cause, Misconduct or by reason of
Voluntary Termination, or due to Disability,
J-5
retirement, or Family Emergency (For Reason), then,
as additional consideration for the covenants of Employee set
forth in this Section 7, Employer may pay Employee a
retention bonus equal to $2,000 per month (in accordance with
the provisions contained in Section 7.3) (the For
Reason Retention Bonus), but shall not be required to
provide medical benefits. For purposes of
Section 7
and
Section 7.3
, the terms For Reason Retention
Bonus and W/O Cause Retention Bonus shall be referred to as the,
or a Retention Bonus.
7.3
Retention Bonus Payments; Determination of
Non-Compete Period
.
If a termination of
employment occurs other than on the first day of a calendar
month, then, for that calendar month, the amount of any
Retention Bonus will be pro rated to the actual number of full
days remaining in the calendar month in which such termination
occurs. Thereafter, the Retention Bonus, if any, will be paid on
the first business day of each month. The parties stipulate and
agree that Employers payment of a Retention Bonus to
Employee shall cause the Non-Compete Period, and the
Employees covenants in Sections 6, 8 and 9, to be
automatically extended for the entire duration of the calendar
month in which such payment is made; provided, in no event may
the aggregate Retention Bonus payments exceed thirty six
(36) months.
8.
Non-Interference with Business
Relations
.
Employee covenants and agrees that
during the Term or any Renewal Term and, so long as Employer is
paying the consideration contemplated by
Sections 7.1
and
7.2
, for a period of up to
thirty six (36) months following the termination of
Employees employment or expiration of this Agreement,
Employee shall not, (directly or indirectly, personally, or on
behalf of any other person, business, corporation, limited
liability company, partnership or entity), contact or do
business with any customer, supplier, partner, vendor,
contractor or financing source (the Protected
Parties) that has any relationship with the Employer,
provided that this restriction applies to directional drilling,
directional surveying, measurement while drilling services or
related services in which the Employee or former Employee is
seeking to engage which are competitive with the Employer. With
regard to Employees post-termination obligations, the
Employees covenant applies to those customers and the
related entities of the customers to which Employer sold its
products or services at any time before or during
Employees employment with Employer, and those prospective
customers with which Employer actively pursued sales during the
twenty-four (24) month period prior to such termination or
expiration of this Agreement.
9.
Non-Solicitation
.
Employee
acknowledges that Employer has invested substantial time and
effort in assembling its present workforce and client base.
Accordingly, Employee covenants and agrees that during the Term
and any Renewal Term and, so long as Employer is paying the
applicable Retention Bonus payments described in
Sections 7.1
and
7.2
, for a period of up to
thirty six (36) months following the termination of
Employees employment or expiration of this Agreement,
Employee shall not hire away, nor directly or indirectly,
entice, induce, solicit or influence any officer, employee,
agent, consultant, independent contractor or supplier to
discontinue such affiliation with Employer or to refrain from
entering into new business relationships with Employer.
10.
Miscellaneous
.
10.1
Dispute
Resolution
.
Except as provided in
Section 10.7.2, in the event a dispute arises between
Employer and Employee in the interpretation of this Agreement,
both parties agree to work towards a mutually agreeable
resolution. If a resolution cannot be reached, both parties will
agree to mediation. Such mediation will not be binding, and if
no mutually acceptable resolution results from mediation, either
party may commence with litigation at their own expense;
provided that the prevailing party shall be awarded its
reasonable attorneys fees and costs of the litigation as
determined by the court.
10.2
Waiver
.
The waiver of
any breach of any provision of this Agreement will not operate
or be construed as a waiver of any subsequent breach of the same
or other provision of this Agreement.
10.3
Entire
Agreement
.
Except as otherwise
provided in this Agreement, this Agreement and all Schedules
hereto, which are incorporated herein by reference, represent
the entire understanding among the parties with respect to the
subject matter of this Agreement, and this Agreement supersedes
any and all prior understandings, agreements, plans, and
negotiations, whether written or oral, with respect to the
subject matter hereof, including without limitation, any
understandings, agreements, or obligations respecting any past
or future compensation,
J-6
bonuses, reimbursements, or other payments to Employee from
Employer as well as previously executed employment agreements.
10.4
Modification
.
No
modification or amendment to this Agreement, or any provision
hereof shall be effective for any purpose unless specifically
set forth in a writing signed by the party to be bound thereby.
10.5
Survivability of
Terms
.
The terms and provisions and
Employees obligations
and/or
agreements under
Sections 5, 6, 7, 8 and 9
hereunder, subject to Employers payment of the
consideration set forth in
Sections 7.1
and
7.2
, shall survive any termination or expiration
of this Agreement and will be construed as agreements
independent of any other provisions of this Agreement.
10.6
Notices
.
All notices and
other communications under this Agreement must be in writing and
must be given by personal delivery, or first class mail, postage
prepaid, certified or registered with return receipt requested,
and will be deemed to have been duly given upon confirmed
receipt if personally delivered, or three (3) days after
deposit, if mailed, to the respective persons named below:
|
|
|
|
If to Employer:
|
Multi-Shot, LLC
100 Morgan Keegan Drive, Suite 500
Little Rock, Arkansas 72202
Attn: Jim Jacoby
|
|
|
|
|
With a copy to:
|
Catalyst Hall Growth Capital Co., LLC
Two Riverway, Suite 1710
Houston, Texas 77056
Attention: Ron Nixon or Rick Herrman
|
|
|
|
|
And a copy to:
|
Franklin, Cardwell & Jones
1001 Mc Kinney,
18
th
Floor
Houston, Texas 77002
Attention: J. Randolph Ewing, Esq.
|
|
|
|
|
If to Employee:
|
Mr. Allen R. Neel
43 West Pines Drive
Montgomery, Texas 77356
|
Any party may change such partys address for notices by
notice duly given pursuant to this Section.
10.7
Governing Law and Venue: Waiver of Jury
Trial
.
10.7.1 This Agreement shall be deemed to be made in and in
all respects shall be interpreted, construed and governed by and
in accordance with the law of the State of Texas without regard
to the conflict of law principles thereof. In absence of an
election by either the Employer or the Employee to resolve any
dispute through arbitration pursuant to Section 10.1, the
parties hereby irrevocably submit to the jurisdiction of the
federal courts located in the State of Texas and the Southern
District of Texas or the state courts located in Harris County,
Texas solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred
to in this Agreement, and in respect of the transaction
contemplated hereby, and hereby waive, and agree not to assert,
as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document,
that it is not subject thereto or that such action, suit or
proceeding may not be brought or is not maintainable in said
courts or that the venue thereof may not be appropriate or that
this Agreement or any such document may not be enforced in or by
such courts. The parties hereby consent to and grant any such
court jurisdiction over the person of such parties and over the
subject matter of such dispute and agree that mailing of process
or other papers in connection with any such action or proceeding
in the manner provided in Section 10.6 in such other manner
as may be permitted by applicable Law, shall be valid and
sufficient service thereof.
10.7.2 The parties agree that irreparable damage would
occur and that the parties will not, and could not reasonably be
expected to, have any adequate remedy at law in the event that
any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to
an injunction or injunctions to prevent breaches of this
Agreement and to
J-7
enforce specifically the terms and provisions of this Agreement
in any federal court located in the State of Texas or in the
Southern District of Texas or the state courts located in Harris
County, Texas, such remedy being in addition to any other remedy
to which the parties are entitled at law or in equity. A party
seeking injunctive relief will not be required to post bond in
excess of $1,000.
10.7.3 Each party acknowledges and agrees that any
controversy which may arise under this Agreement is likely to
involve complicated and difficult issues, and therefore each
such party hereby irrevocably and unconditionally waives any
right such party may have to a trial by jury in respect of any
litigation directly or indirectly arising out of or relating to
this Agreement or the transactions contemplated by this
Agreement. Each party certifies and acknowledges that
(i) no representative, agent or attorney of any other party
has represented, expressly or otherwise, that such other party
would not, in the event of litigation, seek to enforce the
foregoing waiver; (ii) each such party understands and has
considered the implications of this waiver; (iii) each such
party makes this waiver voluntarily; and (iv) each such
party has been induced to enter into this Agreement by, among
other things, the waivers and certifications in this Section.
10.8
Severability
.
This
Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision
hereof shall be prohibited or invalid under any such law, such
provision shall be ineffective to the extent of such prohibition
or invalidity, without invalidating or nullifying the remainder
of such provision or any other provisions of this Agreement. If
any one or more of the provisions contained in this Agreement
shall for any reason be held to be excessively broad as to
duration, geographical scope, time period, activity or subject,
such provisions shall be construed by limiting and reducing it
so as to be enforceable to the maximum extent permitted by
applicable law, or if any provision herein is not supported by
adequate consideration, then the party paying such consideration
may increase such consideration to an amount determined by a
court of competent jurisdiction as adequate consideration.
10.9
Headings
.
The Section
headings of this Agreement are intended for reference and may
not by themselves determine the construction or interpretation
of this Agreement.
10.10
Assignment
.
This
Agreement is a personal employment contract and the rights and
interest of Employee under this Agreement may not be sold,
transferred, assigned, pledged, or hypothecated, directly or
indirectly, or by operation of law or otherwise.
10.11
Successors
.
This
Agreement will inure to the benefit of and be binding upon
Employer and its successors and assigns and upon Employee and
Employees legal representatives.
10.12
Counterparts
.
This
Agreement may be executed in one or more counterparts, all of
which taken together will constitute one and the same Agreement.
10.13
Confirmation of
Employee
.
The Employee confirms that
the time and geographic constraints contained in Section 7,
8 and 9 are reasonable in all respects and but for such
confirmation, Employer would not have executed this Agreement.
10.14
Reliance on
Counsel
.
Employee attests that he has
read this Agreement carefully, has consulted with legal counsel
regarding the terms and provisions thereof or has consciously
waived his right to do so, and has relied solely upon his own
judgment without the influence of anyone in entering into this
Agreement.
10.16
Drafting
.
This
Agreement was prepared and drafted by the Employer, however,
Employee acknowledges and agrees that he has carefully reviewed
this Agreement, and has been given an opportunity to negotiate
the terms hereof and, therefore, no law or rule of construction
shall be raised or used in which the provisions of this
Agreement shall be construed in favor of or against the Employer
because it is deemed to be the author hereto.
[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]
J-8
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
EMPLOYER
MULTI-SHOT, LLC
Ron Nixon, Manager
EMPLOYEE
ALLEN R. NEEL
J-9
SCHEDULE A
President & Chief Executive Officer
(CEO).
As such, the duties include
being responsible for a variety of aspects of the
Employers business affairs, including but not limited to
the following:
|
|
|
|
|
Overseeing the development of sales and marketing initiatives
(including managing the VP of Sales and Marketing), including
helping to ensure a satisfactory level of customer satisfaction;
|
|
|
|
Overseeing the accounting, finance and administrative functions
(including managing the Chief Financial Officer and Controller
and Secretary and Treasurer) to ensure material compliance with
all GAAP and tax and financial reporting requirements;
|
|
|
|
Overseeing the operations of the business (including managing
the VP of Operations,
and/or
COO),
including establishing the proper level of capital equipment and
inventory to correspond to the business opportunities, and to
help ensure material compliance with all regulations and laws
(i.e., immigration, OSHA, traffic, etc.);
|
|
|
|
Working with the Chairman and the Board in terms of establishing
and amending, as necessary, all business forecasts and
projections, including capital expenditure budgets, as well as
developing Board meeting agendas and the related materials and
reports to properly conduct such meetings;
|
|
|
|
Working with the Chairman and the Board in terms of merger and
acquisition activity, to the extent such activity is initiated
by the Chairman and the Board;
|
|
|
|
Making certain that appropriate procedures, controls, personnel,
systems and safeguards are in place to properly address (to the
fullest extent reasonably possible) risk management (including,
but not limited to insurance) for the business;
|
|
|
|
Designing protocols to regularly monitor industry developments,
including the activities of competitors, with the goal being
that the Employer, as a result of these actions, maintains a
forward looking awareness of trends and developments that
represent either threats or opportunities, or both, to the
Employer; and
|
|
|
|
Conducting ones personal life on a basis consistent with
the values and mission of the Employer, namely, to be a fair,
honest and responsive.
|
J-10
SCHEDULE B
Compensation
Annual Base Salary:
The Employees
minimum annual salary, payable in accordance with
Employers payroll policy, shall consist of the following:
$275,000, p.a.
Annual Salary Review:
The annual salary and
other benefits offered to Employee will be reviewed on an annual
basis by the Board.
Annual Bonus:
Employee shall be eligible for
an annual bonus as determined by the compensation committee of
the Board, in its reasonable discretion. The maximum amount of
the bonus will be equal to 75% of the then existing Base Salary.
The compensation committee shall principally consider two
components (Objective and Subjective) when determining the
amount of the bonus:
(i) to the extent of approximately 2/3rds of the bonus
amount (equal to 50% of Employees Base Salary, such
component of which is known as the Objective
Component), the Employers financial performance in
relationship to the Board approved financial budget used
throughout the relevant time frame. Specifically, the Objective
Component shall be subject to determination as follows:
a) first determine the maximum amount of the Objective
Component (i.e., 50% of then existing Base Salary); next,
b) for each 1% negative variance of actual EBITDA vs.
budgeted EBITDA, 4% of the possible maximum amount that could be
earned per the Objective Component is forfeited. For example,
assuming a $275,000 Base Salary, the Objective Component of the
bonus could be $137,500. Assume actual EBITDA is 5% below
budgeted EBITDA, resulting in a 20% discount (the Discount
Amount) to the maximum possible amount. Deduct the
Discount Amount from the maximum possible amount, to determine
the Objective Component amount; and
(ii) to the extent of the remainder of the potential amount
(equal to 25% of Employees Base Salary, such component of
which is known as the Subjective Component), the
Employees individual contributions to the business of the
Employer, which may or may not necessarily manifest themselves
in the financial performance, or the Objective Component, for
the subject year.
Accounting recognition of the possible bonus payment should be
accrued @ 50% of base pay throughout the year (unless financial
performance indicates that such an accrual is unsupported), and
the compensation committees final determination of the
amount earned (and hence, to be accrued and paid) shall occur in
a timely fashion after receipt of audited financial results.
Notwithstanding the foregoing, nothing herein will obligate the
Employer to pay any portion of the Subjective Component. The
Objective Component will be paid based upon the level of
attainment of the metrics set forth above as amended from time
to time based upon the evolving business operations of the
Company.
J-11
Schedule C
GAIN
SHARE AWARD AGREEMENT
This Gain Share Award Agreement (the Gain Share) is
dated effective as of April 1, 2007, by and between
MULTI-SHOT, LLC
, a Texas limited liability company (the
Company), and Allen R. Neel, an individual (the
Participant).
The purpose of this Gain Share is to provide the Participant
with a long term incentive (subject to the terms herein) tied to
the realized increases in the gross enterprise value
(GEV) of the Employer, after allowing for an agreed
to return to the Employers equity owners (the Hurdle
Amount). For purposes of the Gain Share, beginning gross
enterprise value (GEV) of the Company will be GEV as defined and
determined in the Recapitalization and Purchase Agreement dated
as of April 1, 2007 (approximately $120,000,000). The Gain
Share is being granted in conjunction with an employment
agreement of even date herewith executed by and between the
Participant and the Company (the Employment
Agreement). Any defined term used herein and not otherwise
defined herein shall have the meaning prescribed to such term in
the Employment Agreement. The Company and the Participant hereby
agree as follows:
1.
Vesting.
The Gain Share shall vest
over a four year time frame as follows:
|
|
|
Date
|
|
Percent Vested
|
|
Prior to 4/1/08
|
|
0%
|
4/1/08-3/31/09
|
|
25%
|
4/1/09-3/31/10
|
|
50%
|
4/1/10-3/31/11
|
|
75%
|
On or after 4/1/11
|
|
100%
|
Subject to Section 2 below, upon a termination of
Participants employment for any reason, the non-vested
portion of the Gain Share shall be forfeited and be of no
further force or effect.
2.
Realization Event.
For purposes of
the Gain Share, a Realization Event shall be defined
as (i) a sale of all or substantially all of the assets of
the Company or (ii) or any transaction (including, without
limitation, a merger or reorganization in which the Company is
the surviving entity) approved by the Board that results in any
person or entity (other than persons (or their Affiliates) who
are holders of Membership Interests of the Company at the time
the Gain Share is approved by the Board) owning fifty percent
(50%) or more of the combined voting power of all classes of
Membership Interests of the Company.
Upon a Realization Event, the Participant shall immediately
become 100% vested in his Gain Share. In addition, if the
Participants employment is terminated under the terms of
the Employment Agreement without Cause or due to a Constructive
Termination and a Realization Event occurs within six
(6) months subsequent to the date of such termination,
Participant shall become 100% vested in his Gain Share.
3.
Employment Agreement.
The Participant
and the Company acknowledge that the Gain Share is subject to
such other terms and conditions as set forth in the Employment
Agreement, including, but not limited to, certain buy back
rights and provisions and certain provisions relating to
forfeiture of the Gain Share, all as further described in the
Employment Agreement;
4.
Payment.
Payment of the Gain Share
amount is due upon the closing of a Realization Event.
5.
Amount.
The amount due pursuant to
this Gain Share is determined as follows:
a) determine an amount equal to a combination of the
amounts of the initial equity investment of SG and the retained
equity of the MS Members as of the Closing of the private
recapitalization (the Initial Equity Threshold) and
add to such Initial Equity Threshold, an amount equal to the
gross consideration paid by the Company for any acquisitions of
businesses or assets occurring prior to any Realization Event
(Subsequent Equity Threshold Additions), such
combined amount being known as the Total Equity
Threshold;
b) compound the Initial Equity Threshold, and any
Subsequent Equity Threshold Additions at a rate equal to 15% per
annum (the Hurdle Rate), from the effective date of
this Agreement, or of the subsequent
J-12
acquisition, as applicable, to the date of the Realization Event
to determine a nominal amount of minimum required return to the
holders of the Companys equity, such amount of which will
be known as the Hurdle Amount;
c) determine the amount by which the Hurdle Amount exceeds
the Total Equity Threshold, such minimum net return on the
Companys Total Equity Threshold to be known as the
Net Equity Threshold Increase;
d) next, determine an amount equal to the increase in GEV
as between the private recapitalization GEV and the GEV as of
the Realization Event by deducting: i) the amount of any
Subsequent Equity Threshold Additions; ii) the amount of
any outstanding Company funded debt as of the Realization Event
in excess of the amount of funded debt as of the Closing of the
Private Recapitalization; and iii) transaction expenses
related to the Realization Event, to determine an amount called
the Increase in Realized GEV; and;
e) deduct the Net Equity Threshold Increase from the
Increase in Realized GEV to determine an amount called the
Gain Share Pool.
6.
Eligibility.
The Employee is eligible
to receive from the Company an amount equal to two percent (2%)
of the Gain Share Pool, payable in the same components of
consideration (i.e., cash, notes, securities, earn outs,
retained or newly issued ownership, etc.) as are received in the
transaction triggering the Realization Event, if any.
7.
Withholding of Tax.
Upon the issuance
of any amounts subject to this Gain Share, the Company may be
required to withhold United States federal, state and local tax
with respect to the realization of compensation related thereto.
The Company is hereby authorized to satisfy any such withholding
requirement out of (i) any cash also distributable upon
such issuance, and (ii) any other cash compensation then or
thereafter payable to the Participant. To the extent the
Company, in its sole discretion, determines that such sources
are or may be insufficient to fully
and/or
timely satisfy such withholding requirement, the Participant, as
a condition to the issuance of such Units, shall deliver to the
Company cash in an amount determined by the Company to be
sufficient to satisfy any such withholding requirement.
8.
Binding Effect.
This Award Agreement
shall be binding upon and inure to the benefit of any successors
to the Company and all persons lawfully claiming under the
Participant.
9.
Notices.
Any notice to be given under
the terms of this Gain Share, the Company may hereafter
designate in writing to the other.
10.
Laws Applicable to Construction.
The
interpretation, performance and enforcement of this Award
Agreement, shall be governed by the laws of the State of Texas,
as applied to contracts executed in and performed wholly within
the State of Texas.
11.
Interpretation.
In the event of any
ambiguity in this Gain Share, any term which is not defined
herein, or any matters as to which this Gain Share is silent,
the following shall govern including, without limitation, the
provisions hereof pursuant to which the Board of the Company is
empowered power, among others, exercising good faith to
(i) interpret the Gain Share, and (ii) make all other
reasonable determinations deemed necessary or advisable for the
administration of the Gain Share.
12.
Headings.
The headings of paragraphs
herein are included solely for convenience of reference and
shall not affect the meaning or interpretation of any of the
provisions of this Award Agreement.
13.
Amendment.
Except as otherwise
provided, this Gain Share may not be modified, amended or waived
in any manner except by an instrument in writing signed by both
parties hereto. The waiver by either party of compliance with
any provision of this Gain Share shall not operate or be
construed as a waiver of any other provision of this Gain Share,
or of any subsequent breach by such party of a provision of this
Gain Share.
J-13
14.
Employment.
The existence of this
Gain Share does not, and no provision in the Gain Share or in
any award granted or agreement entered into pursuant to the Gain
Share shall be construed to, create an employment contract;
confer upon any individual the right to receive any amounts;
permit the Participant to remain in the employ of the Company or
alter a Participants status as an at-will employee per the
terms of the Employment Agreement; or allow the Participant to
interfere in any way with the right and authority of the Board
of the Company either to increase or decrease the compensation
of any individual at any time, or to terminate any employment or
other relationship between any individual and the Company,
provided the Board and Company comply with the terms of the
Employment Agreement. The obligation of the Company to pay any
benefits pursuant to the Gain Share shall be interpreted as a
contractual obligation to pay only those amounts described
herein, in the manner and under the conditions prescribed
herein. The Gain Share shall in no way be interpreted to require
the Company to transfer any amounts to a third party trustee or
otherwise hold any amounts in trust or escrow for payment to any
Participant or beneficiary under the terms of the Gain Share.
[SIGNATURE
PAGE FOLLOWS]
J-14
IN WITNESS WHEREOF
, the Company has caused this Gain
Share to be duly executed by its officer hereunto duly
authorized, and the Participant has executed this Gain Share,
all on the day and year first above written.
MULTI-SHOT, LLC,
a Texas limited liability company
Ron Nixon, Manager
Participant:
ALLEN R. NEEL
Address:
43 West Pines Drive
Montgomery, Texas 77356
J-15
Annex K
First
Amended and Restated
EMPLOYMENT
AGREEMENT
THIS FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
Agreement), is made effective the 1st day of
April, 2007, by and between Multi-Shot, LLC, a Texas limited
liability company (the Employer), and David Cudd, a
resident of the state of Texas (the Employee).
WHEREAS, Employer and Employee desire to enter into this
Agreement in connection with Employees employment as the
Vice President Sales and Marketing of Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements contained herein, and other good and valuable
consideration, the adequacy of which is hereby acknowledged, the
parties hereby agree as follows:
1.
Employment
.
1.1
Acceptance
.
Employer hereby
employs Employee and Employee accepts such employment, as the
Vice President Sales and Marketing of Employer,
subject to the supervision and direction of the Board of
Managers and to policies adopted from time-to-time by Employer.
1.2
Term
.
The term of this
Agreement shall commence on the effective date and continue for
a period of two and three quarters
(2
3
/
4
ths)
years, ending on December 31, 2009 (the Term),
subject to earlier termination as provided herein. This
Agreement will be automatically renewed for successive one
(1) year terms following the Term (the Renewal
Term) unless either party (i) gives the other party
no less than ninety (90) days written notice prior to the
expiration of the Term or a Renewal Term of such partys
intent not to renew, or (ii) the Term or Renewal Term is
earlier terminated as provided in this Agreement.
2.
Duties
.
During the Term and any
Renewal Term, Employee shall devote Employees best efforts
and Employees full time, attention and skill to the
performance of Employees duties as an employee of
Employer. Employees duties will include responsibility for
the operation and performance of Employer and are more
specifically set forth in
Schedule A
attached hereto. Employee understands that Employees
duties may be modified from time to time by Employer; provided
any material change in Employees duties will require
Employees consent, which will not be unreasonably withheld.
3.
Compensation
.
3.1
Base Salary
.
In consideration
of the performance of Employees duties hereunder, Employer
will pay to Employee during the Term and any Renewal Term, and
Employee agrees to accept from Employer, an annual salary as set
forth in
Schedule B
attached hereto
(the Base Salary), subject to the terms and
conditions of this Agreement.
3.2
Bonus
.
As additional
compensation for the performance of Employees duties under
this Agreement, Employer will pay Employee an annual bonus
(Bonus) as set forth in
Schedule
B
attached hereto. Bonuses will be paid
within 15 days after receipt by the Employer of its annual
audited financial statements. Bonuses shall be calculated on a
calendar year basis, prorated (i) from the effective date
of this Agreement for 2007 and (ii) to the applicable
termination date of this Agreement.
3.3.
Performance Award
.
As
additional long term compensation for the performance of
Employees duties under this Agreement, Employee shall
receive that certain gain share award (the Gain
Share) executed as of even date herewith by and between
Employee and the Employer, a description of such Gain Share
being attached hereto as
Schedule C
,
the terms of which are incorporated herein by reference.
3.4
Benefits
.
Employee shall be
entitled to participate in such standard benefit and vacation
programs as Employer may from time to time make available, in
its discretion, to its employees. Such benefits and perquisites
can be adjusted, reduced or eliminated on the same basis as
changes in the benefits and perquisites made available by
Employer to its employees as determined by the Board from
time-to-time.
K-1
3.5
Place of Employment
.
During
the Term of this Agreement, Employee shall principally perform
Employees duties at Employers corporate headquarters
in Conroe, Texas and no change in Employees principal
place of employment will be made without Employees consent.
3.6
Vehicle Allowance
.
Employee
shall receive a vehicle or vehicle allowance for business use
and shall be reimbursed for usual and customary business
expenses.
4.
Key Person Insurance
.
Employer
acknowledges Employee is a Key Person and as such will most
likely secure a life insurance policy on the Employee, for the
benefit of Employer. Employee agrees to cooperate with Employer
and submit to the necessary medical examinations and tests
reasonably required to obtain such insurance. The initial amount
of the policy shall be $1,000,000 and will be secured as soon as
possible. The Employer also agrees to provide (i.e., secure and
pay for) additional term life insurance on the Employee, for the
benefit of the Employee, in an amount equal to Two Hundred Fifty
Thousand Dollars ($250,000).
5.
Termination of Employment
.
5.1
Definitions
.
For the purposes
of this Agreement:
5.1.1
(a)
Cause
shall mean the finding
by the majority of the Board (excluding the Employee, should
he/she
be a
Board member) of the commission by the Employee of an act of:
(i) fraud; (ii) theft; iii) dishonesty;
iv) embezzlement against Employer or any customer or client
thereof, (v) habitual substance abuse, or (vi) be
convicted for (or render a plea of nolo contendere in lieu
thereof) (a) a felony, or (b) a crime involving fraud,
dishonesty or moral turpitude, provided however that during the
time after indictment and pending the court determined outcome,
the Employer reserves the right to suspend the Employees
duties while continuing such Employees Base Salary.
(b)
Misconduct
shall mean a good
faith finding by the majority of the Board (excluding the
Employee, should
he/she
be a
Board member) of the commission by Employee of any one or more
of the following acts or omissions: (i) the intentional
disclosure of Confidential Business Information (defined in
Section 6.1.1 herein) which disclosure Employee knew or
reasonably should have known could have the potential to result
in material damage to Employer; (ii) any intentional
violation of written policies of the Employer or specific
written directions of the Board;
provided
such written
policies or directives are neither illegal (or do not involve
illegal conduct) nor do they require Employee to violate
reasonable business ethical standards;
(iii) Employees repeated failure to perform
Employees duties or the Employees taking actions or
engaging in conduct adverse to the interests of Employer, its
assets, business or business opportunities, including, without
limitation, gross negligence, (iv) breach or violation of
Sections 6, 7, 8 or 9 herein
; or (v) a material
breach by Employee of one or more terms of this Agreement, in
each case, for which the Employer has provided Employee written
notice of such material breach and a thirty (30) day cure
period for a breach that might reasonably be expected to be
curable. Such notice shall be provided in the manner described
in
Section 5.1.2
.
5.1.2
Termination Notice
means a
written notice which: (i) indicates the specific
termination provision in this Agreement relied upon;
(ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis
for termination of Employees employment under the
provision so indicated; and (iii) if the effective date of
such termination is other than the date of receipt of such
notice, specifies the termination date (which date shall not be
more than thirty (30) days after the giving of such
notice). Any termination by Employer for Cause or for Misconduct
shall be communicated to Employee by a Termination Notice. The
failure by Employer to set forth in the Termination Notice any
fact or circumstance which contributes to a showing of Cause or
Misconduct shall not waive any right of Employer hereunder or
preclude Employer from asserting such fact or circumstance in
enforcing its rights hereunder.
5.1.3
Voluntary Termination
shall
mean the termination of Employees employment by Employer
via Employees voluntary resignation
for reasons
other than
: (i) Employees death or
disability; (ii) Employees retirement after
age 65; (iii) due to Employee experiencing a Family
Emergency (defined below); (iv) simultaneous with
Employees termination for Cause; or (iv) simultaneous
with or following an event which,
K-2
whether or not known to Employer at the time of such Voluntary
Termination by Employee would constitute Cause. In the event of
a Voluntary Termination, Employee shall deliver to Employer
written notice of such termination no less than eight
(8) weeks prior to the proposed termination date.
5.1.4
Constructive Termination
shall mean (i) material breach by Employer of this
Agreement, including, without limitation, a material reduction
in the Employees Base Salary or a material change in
Employees duties or job description as set forth in
Schedule A
without Employees
written consent; or (ii) a material change in the
Employees principal employment location, without
Employees consent. A Constructive Termination will not
have occurred until and unless Employee has provided Employer
with ten (10) day prior written notice of such Constructive
Termination and the opportunity to cure within this ten
(10) day period.
5.1.5
Family Emergency
shall mean
the resignation by the Employee, or the Boards finding
that the Employee is not discharging his or her duties in a
manner consistent with his or her prior discharge of such
duties, in either case due to a serious health condition of an
immediate family member of the Employee. For the purposes of
this Agreement, serious health condition shall mean an injury,
illness, impairment or physical or mental condition that
requires continuing treatments by a healthcare provider and that
has caused a period of incapacity for such family member of more
than sixty (60) days. For the purpose of this Agreement,
immediate family member shall mean the Employees spouse,
parents,
parents-in-law,
or children.
5.2
Termination for Cause, Misconduct or Voluntary
Termination
.
Employer may terminate this
Agreement and its obligations to Employee hereunder at any time
for Cause or Misconduct upon delivery to Employee of a
Termination Notice. Upon a documented finding of Misconduct by
the Board, Employer shall give Employee a Termination Notice.
The notice shall comply with
Section 5.1.2
. If
Employees employment is terminated for Cause, or
Misconduct after the cure period, if applicable, or in the event
of a Voluntary Termination by the Employee, Employer shall have
no further obligation or liability to Employee relating to this
Agreement, Employees employment hereunder, or the
termination thereof, other than the Base Salary and vacation
time, all as accrued and prorated but unpaid through the
effective date of Employees termination, and reimbursable
business expenses incurred on behalf of Employer by Employee
prior to the effective date of Employees termination.
5.3
Termination Without Cause or by Constructive
Termination
.
In the event Employer terminates
this Agreement without Cause including termination for a
Constructive Termination, and so long as Employee has not
breached any of Employees obligations under this
Agreement, Employee shall be entitled to the Base Salary, Bonus,
any vested Gain Share, and vacation time, all as accrued and
prorated but unpaid through the date of termination, and
reimbursable business expenses incurred on behalf of Employer by
Employee prior to the date of termination.
In addition
,
if Employer terminates Employees employment without Cause
or Employee terminates such employment as a result of
Employers actions leading to a Constructive Termination,
and only in such events, Employee shall be entitled to, as
severance pay, equal to $500,000, payable, at Employers
option, either in a lump sum or over a period of twelve months
through Employers normal pay practices. Provided, however,
that Employers obligations to make such payments of
severance pay shall be subject to (i) Employees
continued compliance with
Sections 5, 6, 7, 8, and 9
during the severance period, and (ii) at the
Employers option the execution by Employer and Employee of
a mutual general release and waiver of claims against each other
in a form provided by Employer. Such form shall be provided and
drafted in good faith by the Employer. In the event Employer
terminates this Agreement without Cause, the time periods set
forth in
Sections 6, 7, 8, and 9
will be for one
(1) year following the date of termination in accordance
with this
Section 5.3
, unless the Employer exercises
its option to pay the Employee as provided for in
Section 7.1
.
5.4
Termination due to Death, Disability, or Family
Emergency
.
Employees employment shall
terminate automatically in the event of Employees death or
disability (as reasonably determined by the Board, using good
faith and in reliance on an independent medical determination,
with the standard being the Employees reasonable ability
to discharge
his/her
duties consistent with such discharge prior to the malady or
accident giving rise to the disability) or due to the Employee
experiencing a Family Emergency during the Term or any Renewal
Term. If Employees employment is terminated on account of
death, disability, or because of a Family Emergency, Employee
or, as applicable, Employees estate, legal representatives
or designee shall be entitled to receive, in
K-3
full satisfaction of all obligations due to Employee or
Employees estate, legal representatives or designee by
Employer hereunder, Employees Base Salary, Bonus, any
vested Gain Share and vacation time, all as accrued and prorated
(except Gain Share, which by its terms is only awarded annually)
but unpaid through the date of termination, and reimbursable
business expenses incurred on behalf of Employer by Employee
prior to the date of termination.
In addition
, upon the
occurrence of such an event, Employee or Employees estate
shall have the right at any time within one (1) year after
the date of the termination to require: a) Employer to
purchase Employees Membership Interests in the Employer
(the Employees Put Right), for a value (as
determined by the Employers Board, using good faith, as of
the termination date) and otherwise in accordance with the
relevant provisions of
Section 5.5
below, and to
b) repay any loans made to the Company by the Employee.
5.5
Right of Set-off
.
Upon
Employees breach of, or default under, this Agreement,
Employer may set-off any amounts due from the Employee against
any amounts owing by the Employer to Employee under this
Agreement or otherwise. Neither the exercise of nor the failure
to exercise such right of set-off will constitute an election of
remedies or limit Employer in any manner in enforcing other
remedies that may be available to Employer.
5.6
Other Termination
Obligations
.
Employee hereby acknowledges and
agrees that all personal property and equipment (Personal
Property) furnished to Employee in the course of, or
incident to, Employees employment by Employer belongs to
Employer and shall be promptly returned to Employer upon
termination of the Term. Personal Property includes, without
limitation, all vehicles, computers, equipment, credit cards,
books, manuals, records, reports, notes, contracts, lists,
blueprints, and other documents, or materials, or copies thereof
(including computer files), and all other proprietary
information relating to the business of Employer or any
subsidiary or affiliate thereof. Following termination, Employee
will not retain any Personal Property of Employer, or any
written or other tangible material containing any proprietary
information, Confidential Business Information or Trade Secrets
of Employer or any subsidiary or affiliate thereof.
6.
Confidential Business Information and Trade
Secrets
.
6.1
Definitions
.
For purposes of
this Agreement:
6.1.1 The term Confidential Business
Information shall mean any and all confidential and
proprietary information of Employer and Employers
business, including, without limitation, Employers
product, product designs, specifications, service designs,
development processes, business plans, prospects and
projections, marketing plans, business records, financial data,
customer information and customer lists, dealer lists, pricing,
financial information, sales information, purchasing and cost
information, pricing information, supplier lists, computer
programs, systems, formats, designs, specifications, processes,
discoveries or other information of similar character; and
6.1.2 The term Trade Secret shall mean any and
all information used by Employer and in Employers
business, including, without limitation, any and all formulas,
intellectual property, compilations, programs, devices, methods,
techniques, processes or other such similar information.
For purposes of this Agreement, Confidential Business
Information and Trade Secrets shall not include, and
Employees obligations under this Agreement, shall not
extend to: (i) information which is generally known and
available to the public; (ii) information obtained by
Employee from third persons other than employees of Employer,
such third party persons of which are not under agreement to
maintain the confidentiality of the same; and
(iii) information which is required to be disclosed by law
or legal process.
6.2
Property of Employer
.
Employee
acknowledges that in connection with the performance of
Employees Duties during the Term or any Renewal Term,
Employer will make available to Employee, and Employee will have
access to certain Confidential Business Information and Trade
Secrets, which is either information not known by actual or
potential competitors, customers and third parties of Employer
or is proprietary information of Employer. Employee acknowledges
and agrees that any and all Confidential Business Information or
Trade Secrets learned or obtained by Employee during the course
of Employees employment by Employer or otherwise
(including, without limitation, information that Employee
obtained through or in connection with Employees ownership
of and employment by Employer at anytime prior to the date
hereof) whether developed by Employee alone or in conjunction
with others or otherwise, shall be and is the exclusive property
of Employer
K-4
6.3
Non-Disclosure
.
Employee
covenants and agrees that at all times during the Term or any
Renewal Term and for so long as Employer is making the payments
specified in Section 7 and for agreeing to ultimately pay
for any Employee vested Gain Share, and its agreement to honor
the Employees Put Right, either as applicable, that for up
to a maximum term of three (3) years immediately following
termination of Employees employment or the expiration of
this Agreement, Employee will hold in the strictest confidence
and will not intentionally or negligently disclose, use,
publicize, lecture upon or publish any Confidential Business
Information or Trade Secrets, and will not use any Confidential
Business Information or Trade Secrets for Employees own
benefit, or intentionally or negligently disclose any
Confidential Business Information or Trade Secrets to, or
intentionally or negligently use any Confidential Business
Information or Trade Secrets for the benefit of, anyone outside
of Employer, during or after Employees employment with
Employer; except to the extent that such disclosure is necessary
in connection with Employees duties on behalf of Employer.
Employee acknowledges that Employee is obligated under this
Agreement to use Employees best efforts to ensure that no
Confidential Business Information or Trade Secrets are disclosed.
6.4
Effect of Termination
.
Upon
termination of Employees employment by Employer, or upon
an earlier request of Employer, Employee shall immediately
deliver to Employer all memoranda, data listings, computer
programs, manuals, letters, electronic mail, notes, notebooks,
specifications, reports, documents, records, devices, models or
other materials, and all copies or reproductions thereof, that
contain Confidential Business Information or Trade Secrets,
which Employee may then possess or have under Employees
control.
6.5
Employees
Assistance
.
Upon termination of
Employees employment under this Agreement, Employee agrees
to assist Employer in the transition of Employees duties
and business relationships for a reasonable limited period after
the termination.
7.
Noncompetition
.
The Employee
recognizes that the Employer has business goodwill and other
legitimate business interests which must be protected in
connection with and in addition to the Confidential Business
Information, and therefore, in exchange for access to the
Confidential Business Information, the specialized training and
instruction that the Employer will provide the Employee, and the
promotion and advertisement by the Employer of Employees
skill, ability and value in the business of the Employer,
Employee covenants and agrees that for the Term or any Renewal
Term and for so long as Employer is making the Retention Bonus
payments specified in
Sections 7.1
,
7.2
, and
7.3
, as applicable, and for agreeing to ultimately pay
for any Employee vested Gain Share, and its agreement to honor
the Employees Put Right, either as applicable, that for up
to a maximum period of thirty-six (36) months immediately
following termination of Employees employment for any
reason whatsoever or the expiration of this Agreement (in any
case, the Non-Compete Period), Employee shall not,
directly or indirectly, own an interest in, operate, join,
control, advise, consult with, work for, serve as a director of,
have a financial interest in, or participate in any corporation,
partnership, limited liability company, proprietorship, firm,
association, person, or other entity that engages (or engaged)
in the business of directional drilling, directional surveying,
measurement while drilling or related services in the geographic
area in which Employer has operations at the time of
termination. Notwithstanding the foregoing, by making the
payments contemplated under
Section 7.1
or
7.2
; the cumulative Non-Compete Period, as so extended,
shall not exceed three (3) years from the date of
termination of Employees employment.
7.1
Payments Upon Termination Without Cause or from
Constructive Termination.
In the event that
the Employee is terminated for any reason other than for Cause
or Misconduct or Voluntary Termination (but not due to
Disability, retirement, or due to a Family Emergency), then, as
additional consideration for the covenants of Employee set forth
in this Section 7, Employer may pay Employee a retention
bonus equal to $12,000 per month (in accordance with the
provisions contained in Section 7.3) (W/O Cause
Retention Bonus) and continue to provide Employee the
medical benefits in accordance with
Section 3.4
. Any severance payments made
pursuant to
Section 5.3
will be credited against the
W/O Cause Retention Bonus during the initial twelve month
period. As such, the payment of the severance shall satisfy the
obligation to pay the W/O Cause Retention Bonus for the first
year following such termination (other than with respect to the
obligation to provide health benefits pursuant to
Section 3.4
).
7.2
Payments Upon Termination for Cause, Misconduct,
or Voluntary Termination.
In the event that
the Employee is terminated for Cause, Misconduct or by reason of
Voluntary Termination, or due to Disability,
K-5
retirement, or Family Emergency (For Reason), then,
as additional consideration for the covenants of Employee set
forth in this Section 7, Employer may pay Employee a
retention bonus equal to $2,000 per month (in accordance with
the provisions contained in Section 7.3) (the For
Reason Retention Bonus), but shall not be required to
provide medical benefits. For purposes of
Section 7
and
Section 7.3
, the terms For Reason Retention
Bonus and W/O Cause Retention Bonus shall be referred to as the,
or a Retention Bonus.
7.3
Retention Bonus Payments; Determination of
Non-Compete Period
.
If a termination of
employment occurs other than on the first day of a calendar
month, then, for that calendar month, the amount of any
Retention Bonus will be pro rated to the actual number of full
days remaining in the calendar month in which such termination
occurs. Thereafter, the Retention Bonus, if any, will be paid on
the first business day of each month. The parties stipulate and
agree that Employers payment of a Retention Bonus to
Employee shall cause the Non-Compete Period, and the
Employees covenants in Sections 6, 8 and 9, to be
automatically extended for the entire duration of the calendar
month in which such payment is made; provided, in no event may
the aggregate Retention Bonus payments exceed thirty six
(36) months.
8.
Non-Interference with Business
Relations
.
Employee covenants and agrees that
during the Term or any Renewal Term and, so long as Employer is
paying the consideration contemplated by
Sections 7.1
and
7.2
, for a period of up to
thirty six (36) months following the termination of
Employees employment or expiration of this Agreement,
Employee shall not, (directly or indirectly, personally, or on
behalf of any other person, business, corporation, limited
liability company, partnership or entity), contact or do
business with any customer, supplier, partner, vendor,
contractor or financing source (the Protected
Parties) that has any relationship with the Employer,
provided that this restriction applies to directional drilling,
directional surveying, measurement while drilling or related
services in which the Employee or former Employee is seeking to
engage which are competitive with the Employer. With regard to
Employees post-termination obligations, the
Employees covenant applies to those customers and the
related entities of the customers to which Employer sold its
products or services at any time before or during
Employees employment with Employer, and those prospective
customers with which Employer actively pursued sales during the
twenty-four (24) month period prior to such termination or
expiration of this Agreement.
9.
Non-Solicitation
.
Employee
acknowledges that Employer has invested substantial time and
effort in assembling its present workforce and client base.
Accordingly, Employee covenants and agrees that during the Term
and any Renewal Term and, so long as Employer is paying the
applicable Retention Bonus payments described in
Sections 7.1
and
7.2
, for a period of up to
thirty six (36) months following the termination of
Employees employment or expiration of this Agreement,
Employee shall not hire away, nor directly or indirectly,
entice, induce, solicit or influence any officer, employee,
agent, consultant, independent contractor or supplier to
discontinue such affiliation with Employer or to refrain from
entering into new business relationships with Employer.
10.
Miscellaneous
.
10.1
Dispute Resolution
.
Except as
provided in Section 10.7.2, in the event a dispute arises
between Employer and Employee in the interpretation of this
Agreement, both parties agree to work towards a mutually
agreeable resolution. If a resolution cannot be reached, both
parties will agree to mediation. Such mediation will not be
binding, and if no mutually acceptable resolution results from
mediation, either party may commence with litigation at their
own expense; provided that the prevailing party shall be awarded
its reasonable attorneys fees and costs of the litigation
as determined by the court.
10.2
Waiver
.
The waiver of any
breach of any provision of this Agreement will not operate or be
construed as a waiver of any subsequent breach of the same or
other provision of this Agreement.
10.3
Entire Agreement
.
Except as
otherwise provided in this Agreement, this Agreement and all
Schedules hereto, which are incorporated herein by reference,
represent the entire understanding among the parties with
respect to the subject matter of this Agreement, and this
Agreement supersedes any and all prior understandings,
agreements, plans, and negotiations, whether written or oral,
with respect to the subject matter hereof, including without
limitation, any understandings, agreements, or obligations
respecting any past or future compensation,
K-6
bonuses, reimbursements, or other payments to Employee from
Employer as well as previously executed employment agreements.
10.4
Modification
.
No modification
or amendment to this Agreement, or any provision hereof shall be
effective for any purpose unless specifically set forth in a
writing signed by the party to be bound thereby.
10.5
Survivability of Terms
.
The
terms and provisions and Employees obligations
and/or
agreements under
Sections 5, 6, 7, 8 and 9
hereunder, subject to Employers payment of the
consideration set forth in
Sections 7.1
and
7.2
, shall survive any termination or expiration
of this Agreement and will be construed as agreements
independent of any other provisions of this Agreement.
10.6
Notices
.
All notices and
other communications under this Agreement must be in writing and
must be given by personal delivery, or first class mail, postage
prepaid, certified or registered with return receipt requested,
and will be deemed to have been duly given upon confirmed
receipt if personally delivered, or three (3) days after
deposit, if mailed, to the respective persons named below:
|
|
|
|
If to Employer:
|
Multi-Shot, LLC
100 Morgan Keegan Drive, Suite 500
Little Rock, Arkansas 72202
Attn: Jim Jacoby
|
|
|
|
|
With a copy to:
|
Catalyst Hall Growth Capital Co., LLC
Two Riverway, Suite 1710
Houston, Texas 77056
Attention: Ron Nixon or Rick Herrman
|
|
|
|
|
And a copy to:
|
Franklin, Cardwell & Jones
1001 Mc Kinney,
18
th
Floor
Houston, Texas 77002
Attention: J. Randolph Ewing, Esq.
|
|
|
|
|
If to Employee:
|
Mr. David Cudd
1603 Café Dumonde
Conroe, Texas 77382
|
Any party may change such partys address for notices by
notice duly given pursuant to this Section.
10.7
Governing Law and Venue: Waiver of Jury
Trial
.
10.7.1 This Agreement shall be deemed to be made in and in
all respects shall be interpreted, construed and governed by and
in accordance with the law of the State of Texas without regard
to the conflict of law principles thereof. In absence of an
election by either the Employer or the Employee to resolve any
dispute through arbitration pursuant to Section 10.1, the
parties hereby irrevocably submit to the jurisdiction of the
federal courts located in the State of Texas and the Southern
District of Texas or the state courts located in Harris County,
Texas solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred
to in this Agreement, and in respect of the transaction
contemplated hereby, and hereby waive, and agree not to assert,
as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document,
that it is not subject thereto or that such action, suit or
proceeding may not be brought or is not maintainable in said
courts or that the venue thereof may not be appropriate or that
this Agreement or any such document may not be enforced in or by
such courts. The parties hereby consent to and grant any such
court jurisdiction over the person of such parties and over the
subject matter of such dispute and agree that mailing of process
or other papers in connection with any such action or proceeding
in the manner provided in Section 10.6 in such other manner
as may be permitted by applicable Law, shall be valid and
sufficient service thereof.
10.7.2 The parties agree that irreparable damage would
occur and that the parties will not, and could not reasonably be
expected to, have any adequate remedy at law in the event that
any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to
an injunction or injunctions to prevent breaches of this
Agreement and to
K-7
enforce specifically the terms and provisions of this Agreement
in any federal court located in the State of Texas or in the
Southern District of Texas or the state courts located in Harris
County, Texas, such remedy being in addition to any other remedy
to which the parties are entitled at law or in equity. A party
seeking injunctive relief will not be required to post bond in
excess of $1,000.
10.7.3 Each party acknowledges and agrees that any
controversy which may arise under this Agreement is likely to
involve complicated and difficult issues, and therefore each
such party hereby irrevocably and unconditionally waives any
right such party may have to a trial by jury in respect of any
litigation directly or indirectly arising out of or relating to
this Agreement or the transactions contemplated by this
Agreement. Each party certifies and acknowledges that
(i) no representative, agent or attorney of any other party
has represented, expressly or otherwise, that such other party
would not, in the event of litigation, seek to enforce the
foregoing waiver; (ii) each such party understands and has
considered the implications of this waiver; (iii) each such
party makes this waiver voluntarily; and (iv) each such
party has been induced to enter into this Agreement by, among
other things, the waivers and certifications in this Section.
10.8
Severability
.
This Agreement
shall be interpreted in such a manner as to be effective and
valid under applicable law, but if any provision hereof shall be
prohibited or invalid under any such law, such provision shall
be ineffective to the extent of such prohibition or invalidity,
without invalidating or nullifying the remainder of such
provision or any other provisions of this Agreement. If any one
or more of the provisions contained in this Agreement shall for
any reason be held to be excessively broad as to duration,
geographical scope, time period, activity or subject, such
provisions shall be construed by limiting and reducing it so as
to be enforceable to the maximum extent permitted by applicable
law, or if any provision herein is not supported by adequate
consideration, then the party paying such consideration may
increase such consideration to an amount determined by a court
of competent jurisdiction as adequate consideration.
10.9
Headings
.
The Section
headings of this Agreement are intended for reference and may
not by themselves determine the construction or interpretation
of this Agreement.
10.10
Assignment
.
This Agreement
is a personal employment contract and the rights and interest of
Employee under this Agreement may not be sold, transferred,
assigned, pledged, or hypothecated, directly or indirectly, or
by operation of law or otherwise.
10.11
Successors
.
This Agreement
will inure to the benefit of and be binding upon Employer and
its successors and assigns and upon Employee and Employees
legal representatives.
10.12
Counterparts
.
This Agreement
may be executed in one or more counterparts, all of which taken
together will constitute one and the same Agreement.
10.13
Confirmation of
Employee
.
The Employee confirms that the time
and geographic constraints contained in Section 7, 8 and 9
are reasonable in all respects and but for such confirmation,
Employer would not have executed this Agreement.
10.14
Reliance on
Counsel
.
Employee attests that he has read
this Agreement carefully, has consulted with legal counsel
regarding the terms and provisions thereof or has consciously
waived his right to do so, and has relied solely upon his own
judgment without the influence of anyone in entering into this
Agreement.
10.15
Drafting
.
This Agreement was
prepared and drafted by the Employer, however, Employee
acknowledges and agrees that he has carefully reviewed this
Agreement, and has been given an opportunity to negotiate the
terms hereof and, therefore, no law or rule of construction
shall be raised or used in which the provisions of this
Agreement shall be construed in favor of or against the Employer
because it is deemed to be the author hereto.
[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]
K-8
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
EMPLOYER
MULTI-SHOT, LLC
Allen Neel, President and
Chief Executive Officer
EMPLOYEE
DAVID CUDD
K-9
SCHEDULE A
Vice President Sales and Marketing (VP
Sales).
As such, the duties include being
responsible for a variety of aspects of the Employers
business affairs, including but not limited to the following:
|
|
|
|
|
Overseeing and the development of, and direct all sales and
marketing initiatives, consistent with the periodically
established sales objectives by customer, region and company
wide, including helping to ensure a satisfactory level of
customer satisfaction;
|
|
|
|
Working with the CEO/COO and CFO (as applicable) in terms of
establishing and amending, as necessary, all business forecasts
and projections, as well as developing Board meeting agendas for
sales a marketing and the related materials and reports to
properly conduct such meetings;
|
|
|
|
Working with the CEO, as requested in terms of merger and
acquisition activity, to the extent such activity is initiated
by the Chairman and the Board;
|
|
|
|
Making certain that appropriate procedures, controls, personnel,
systems and safeguards are in place to properly address (to the
fullest extent reasonably possible) risk management (including,
but not limited to working with the CEO and CFO in regards to
credit policies and A/R reserves and collection efforts) for the
business;
|
|
|
|
Helping to regularly monitor industry developments, including
the activities of competitors, with the goal being that the
Employer, as a result of these actions, maintains a forward
looking awareness of trends and developments that represent
either threats or opportunities, or both, to the
Employer; and
|
|
|
|
Conducting ones personal life on a basis consistent with
the values and mission of the Employer, namely, to be a fair,
honest and responsive.
|
K-10
SCHEDULE B
Compensation
Annual Base Salary:
The Employees
minimum annual salary, payable in accordance with
Employers payroll policy, shall consist of the following:
$230,000, p.a.
Annual Salary Review:
The annual salary and
other benefits offered to Employee will be reviewed on an annual
basis by the Board.
Annual Bonus:
Employee shall be eligible for
an annual bonus as determined by the compensation committee of
the Board, in its reasonable discretion. The maximum amount of
the bonus will be equal to 75% of the then existing Base Salary.
The compensation committee shall principally consider two
components (Objective and Subjective) when determining the
amount of the bonus:
(i) to the extent of approximately 2/3rds of the bonus
amount (equal to 50% of Employees Base Salary, such
component of which is known as the Objective
Component), the Employers financial performance in
relationship to the Board approved financial budget used
throughout the relevant time frame. Specifically, the Objective
Component shall be subject to determination as follows:
a) first determine the maximum amount of the Objective
Component (i.e., 50% of then existing Base Salary); next,
b) for each 1% negative variance of actual EBITDA vs.
budgeted EBITDA, 4% of the possible maximum amount that could be
earned per the Objective Component is forfeited. For example,
assuming a $230,000 Base Salary, the Objective Component of the
bonus could be $115,000. Assume actual EBITDA is 5% below
budgeted EBITDA, resulting in a 20% discount (the Discount
Amount) to the maximum possible amount. Deduct the
Discount Amount from the maximum possible amount, to determine
the Objective Component amount; and
(ii) to the extent of the remainder of the potential amount
(equal to 25% of Employees Base Salary, such component of
which is known as the Subjective Component), the
Employees individual contributions to the business of the
Employer, which may or may not necessarily manifest themselves
in the financial performance, or the Objective Component, for
the subject year.
Accounting recognition of the possible bonus payment should be
accrued @ 50% of base pay throughout the year (unless financial
performance indicates that such an accrual is unsupported), and
the compensation committees final determination of the
amount earned (and hence, to be accrued and paid) shall occur in
a timely fashion after receipt of audited financial results.
Notwithstanding the foregoing, nothing herein will obligate the
Employer to pay any portion of the Subjective Component. The
Objective Component will be paid based upon the level of
attainment of the metrics set forth above as amended from time
to time based upon the evolving business operations of the
Company.
K-11
Schedule C
GAIN
SHARE AWARD AGREEMENT
This Gain Share Award Agreement (the Gain Share) is
dated effective as of April 1, 2007, by and between
MULTI-SHOT, LLC
, a Texas limited liability company (the
Company), and David Cudd, an individual (the
Participant).
The purpose of this Gain Share is to provide the Participant
with a long term incentive (subject to the terms herein) tied to
the realized increases in the gross enterprise value
(GEV) of the Employer, after allowing for an agreed
to return to the Employers equity owners (the Hurdle
Amount). For purposes of the Gain Share, beginning gross
enterprise value (GEV) of the Company will be GEV as defined and
determined in the Recapitalization and Purchase Agreement dated
as of April 1, 2007 (approximately $120,000,000). The Gain
Share is being granted in conjunction with an employment
agreement of even date herewith executed by and between the
Participant and the Company (the Employment
Agreement). Any defined term used herein and not otherwise
defined herein shall have the meaning prescribed to such term in
the Employment Agreement. The Company and the Participant hereby
agree as follows:
1.
Vesting.
The Gain Share shall vest over a four
year time frame as follows:
|
|
|
Date
|
|
Percent Vested
|
|
Prior to 4/1/08
|
|
0%
|
4/1/08-3/31/09
|
|
25%
|
4/1/09-3/31/10
|
|
50%
|
4/1/10-3/31/11
|
|
75%
|
On or after 4/1/11
|
|
100%
|
Subject to Section 2 below, upon a termination of
Participants employment for any reason, the non-vested
portion of the Gain Share shall be forfeited and be of no
further force or effect.
2.
Realization Event.
For purposes of
the Gain Share, a Realization Event shall be defined
as (i) a sale of all or substantially all of the assets of
the Company or (ii) or any transaction (including, without
limitation, a merger or reorganization in which the Company is
the surviving entity) approved by the Board that results in any
person or entity (other than persons (or their Affiliates) who
are holders of Membership Interests of the Company at the time
the Gain Share is approved by the Board) owning fifty percent
(50%) or more of the combined voting power of all classes of
Membership Interests of the Company.
Upon a Realization Event, the Participant shall immediately
become 100% vested in his Gain Share. In addition, if the
Participants employment is terminated under the terms of
the Employment Agreement without Cause or due to a Constructive
Termination and a Realization Event occurs within six
(6) months subsequent to the date of such termination,
Participant shall become 100% vested in his Gain Share.
3.
Employment Agreement.
The Participant
and the Company acknowledge that the Gain Share is subject to
such other terms and conditions as set forth in the Employment
Agreement, including, but not limited to, certain buy back
rights and provisions and certain provisions relating to
forfeiture of the Gain Share, all as further described in the
Employment Agreement;
4.
Payment.
Payment of the Gain Share
amount is due upon the closing of a Realization Event.
5.
Amount.
The amount due pursuant to
this Gain Share is determined as follows:
a) determine an amount equal to a combination of the
amounts of the initial equity investment of SG and the retained
equity of the MS Members as of the Closing of the private
recapitalization (the Initial Equity Threshold) and
add to such Initial Equity Threshold, an amount equal to the
gross consideration paid by the Company for any acquisitions of
businesses or assets occurring prior to any Realization Event
(Subsequent Equity Threshold Additions), such
combined amount being known as the Total Equity
Threshold;
b) compound the Initial Equity Threshold, and any
Subsequent Equity Threshold Additions at a rate equal to 15% per
annum (the Hurdle Rate), from the effective date of
this Agreement, or of the subsequent
K-12
acquisition, as applicable, to the date of the Realization Event
to determine a nominal amount of minimum required return to the
holders of the Companys equity, such amount of which will
be known as the Hurdle Amount;
c) determine the amount by which the Hurdle Amount exceeds
the Total Equity Threshold, such minimum net return on the
Companys Total Equity Threshold to be known as the
Net Equity Threshold Increase;
d) next, determine an amount equal to the increase in GEV
as between the private recapitalization GEV and the GEV as of
the Realization Event by deducting: i) the amount of any
Subsequent Equity Threshold Additions; ii) the amount of
any outstanding Company funded debt as of the Realization Event
in excess of the amount of funded debt as of the Closing of the
Private Recapitalization; and iii) transaction expenses
related to the Realization Event, to determine an amount called
the Increase in Realized GEV; and;
e) deduct the Net Equity Threshold Increase from the
Increase in Realized GEV to determine an amount called the
Gain Share Pool.
6.
Eligibility.
The Employee is eligible
to receive from the Company an amount equal to two percent (2%)
of the Gain Share Pool, payable in the same components of
consideration (i.e., cash, notes, securities, earn outs,
retained or newly issued ownership, etc.) as are received in the
transaction triggering the Realization Event, if any.
7.
Withholding of Tax.
Upon the issuance
of any amounts subject to this Gain Share, the Company may be
required to withhold United States federal, state and local tax
with respect to the realization of compensation related thereto.
The Company is hereby authorized to satisfy any such withholding
requirement out of (i) any cash also distributable upon
such issuance, and (ii) any other cash compensation then or
thereafter payable to the Participant. To the extent the
Company, in its sole discretion, determines that such sources
are or may be insufficient to fully
and/or
timely satisfy such withholding requirement, the Participant, as
a condition to the issuance of such Units, shall deliver to the
Company cash in an amount determined by the Company to be
sufficient to satisfy any such withholding requirement.
8.
Binding Effect.
This Award Agreement
shall be binding upon and inure to the benefit of any successors
to the Company and all persons lawfully claiming under the
Participant.
9.
Notices.
Any notice to be given under
the terms of this Gain Share, the Company may hereafter
designate in writing to the other.
10.
Laws Applicable to Construction.
The
interpretation, performance and enforcement of this Award
Agreement, shall be governed by the laws of the State of Texas,
as applied to contracts executed in and performed wholly within
the State of Texas.
11.
Interpretation.
In the event of any
ambiguity in this Gain Share, any term which is not defined
herein, or any matters as to which this Gain Share is silent,
the following shall govern including, without limitation, the
provisions hereof pursuant to which the Board of the Company is
empowered power, among others, exercising good faith to
(i) interpret the Gain Share, and (ii) make all other
reasonable determinations deemed necessary or advisable for the
administration of the Gain Share.
12.
Headings.
The headings of paragraphs
herein are included solely for convenience of reference and
shall not affect the meaning or interpretation of any of the
provisions of this Award Agreement.
13.
Amendment.
Except as otherwise
provided, this Gain Share may not be modified, amended or waived
in any manner except by an instrument in writing signed by both
parties hereto. The waiver by either party of compliance with
any provision of this Gain Share shall not operate or be
construed as a waiver of any other provision of this Gain Share,
or of any subsequent breach by such party of a provision of this
Gain Share.
K-13
14.
Employment.
The existence of this
Gain Share does not, and no provision in the Gain Share or in
any award granted or agreement entered into pursuant to the Gain
Share shall be construed to, create an employment contract;
confer upon any individual the right to receive any amounts;
permit the Participant to remain in the employ of the Company or
alter a Participants status as an at-will employee per the
terms of the Employment Agreement; or allow the Participant to
interfere in any way with the right and authority of the Board
of the Company either to increase or decrease the compensation
of any individual at any time, or to terminate any employment or
other relationship between any individual and the Company,
provided the Board and Company comply with the terms of the
Employment Agreement. The obligation of the Company to pay any
benefits pursuant to the Gain Share shall be interpreted as a
contractual obligation to pay only those amounts described
herein, in the manner and under the conditions prescribed
herein. The Gain Share shall in no way be interpreted to require
the Company to transfer any amounts to a third party trustee or
otherwise hold any amounts in trust or escrow for payment to any
Participant or beneficiary under the terms of the Gain Share.
[SIGNATURE
PAGE FOLLOWS]
K-14
IN WITNESS WHEREOF
, the Company has caused this Gain
Share to be duly executed by its officer hereunto duly
authorized, and the Participant has executed this Gain Share,
all on the day and year first above written.
MULTI-SHOT, LLC,
a Texas limited liability company
Ron Nixon, Manager
Participant:
DAVID CUDD
Address:
1603 Café Dumonde
Conroe, Texas 77382
K-15
Annex L
First
Amended and Restated
EMPLOYMENT
AGREEMENT
THIS FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the
Agreement), is made effective the 1st day of
April, 2007, by and between Multi-Shot, LLC, a Texas limited
liability company (the Employer), and Paul Culbreth,
a resident of the state of Texas (the Employee).
WHEREAS, Employer and Employee desire to enter into this
Agreement in connection with Employees employment as the
Vice President of Operations of Employer;
NOW, THEREFORE, in consideration of the mutual promises and
agreements contained herein, and other good and valuable
consideration, the adequacy of which is hereby acknowledged, the
parties hereby agree as follows:
1.
Employment
.
1.1
Acceptance
.
Employer hereby
employs Employee and Employee accepts such employment, as the
Vice President of Operations of Employer, subject to the
supervision and direction of the Board of Managers and to
policies adopted from time-to-time by Employer.
1.2
Term
.
The term of this
Agreement shall commence on the effective date and continue for
a period of two and three quarters
(2
3
/
4
ths)
years, ending on December 31, 2009 (the Term),
subject to earlier termination as provided herein. This
Agreement will be automatically renewed for successive one
(1) year terms following the Term (the Renewal
Term) unless either party (i) gives the other party
no less than ninety (90) days written notice prior to the
expiration of the Term or a Renewal Term of such partys
intent not to renew, or (ii) the Term or Renewal Term is
earlier terminated as provided in this Agreement.
2.
Duties
.
During the Term and any
Renewal Term, Employee shall devote Employees best efforts
and Employees full time, attention and skill to the
performance of Employees duties as an employee of
Employer. Employees duties will include responsibility for
the operation and performance of Employer and are more
specifically set forth in
Schedule A
attached hereto. Employee understands that Employees
duties may be modified from time to time by Employer; provided
any material change in Employees duties will require
Employees consent, which will not be unreasonably withheld.
3.
Compensation
.
3.1
Base Salary
.
In consideration
of the performance of Employees duties hereunder, Employer
will pay to Employee during the Term and any Renewal Term, and
Employee agrees to accept from Employer, an annual salary as set
forth in
Schedule B
attached hereto
(the Base Salary), subject to the terms and
conditions of this Agreement.
3.2
Bonus
.
As additional
compensation for the performance of Employees duties under
this Agreement, Employer will pay Employee an annual bonus
(Bonus) as set forth in
Schedule
B
attached hereto. Bonuses will be paid
within 15 days after receipt by the Employer of its annual
audited financial statements. Bonuses shall be calculated on a
calendar year basis, prorated (i) from the effective date
of this Agreement for 2007 and (ii) to the applicable
termination date of this Agreement.
3.3.
Performance Award
.
As
additional long term compensation for the performance of
Employees duties under this Agreement, Employee shall
receive that certain gain share award (the Gain
Share) executed as of even date herewith by and between
Employee and the Employer, a description of such Gain Share
being attached hereto as
Schedule C
,
the terms of which are incorporated herein by reference.
3.4
Benefits
.
Employee shall be
entitled to participate in such standard benefit and vacation
programs as Employer may from time to time make available, in
its discretion, to its employees. Such benefits and perquisites
can be adjusted, reduced or eliminated on the same basis as
changes in the benefits and perquisites made available by
Employer to its employees as determined by the Board from
time-to-time.
L-1
3.5
Place of Employment
.
During
the Term of this Agreement, Employee shall principally perform
Employees duties at Employers corporate headquarters
in Conroe, Texas and no change in Employees principal
place of employment will be made without Employees consent.
3.6
Vehicle Allowance
.
Employee
shall receive a vehicle or vehicle allowance for business use
and shall be reimbursed for usual and customary business
expenses.
4.
Key Person Insurance
.
Employer
acknowledges Employee is a Key Person and as such will most
likely secure a life insurance policy on the Employee, for the
benefit of Employer. Employee agrees to cooperate with Employer
and submit to the necessary medical examinations and tests
reasonably required to obtain such insurance. The initial amount
of the policy shall be $1,000,000 and will be secured as soon as
possible. The Employer also agrees to provide (i.e., secure and
pay for) additional term life insurance on the Employee, for the
benefit of the Employee, in an amount equal to Two Hundred Fifty
Thousand Dollars ($250,000).
5.
Termination of Employment
.
5.1
Definitions
.
For the purposes
of this Agreement:
5.1.1
(a)
Cause
shall mean the finding
by the majority of the Board (excluding the Employee, should
he/she
be a
Board member) of the commission by the Employee of an act of:
(i) fraud; (ii) theft; iii) dishonesty;
iv) embezzlement against Employer or any customer or client
thereof, (v) habitual substance abuse, or (vi) be
convicted for (or render a plea of nolo contendere in lieu
thereof) (a) a felony, or (b) a crime involving fraud,
dishonesty or moral turpitude, provided however that during the
time after indictment and pending the court determined outcome,
the Employer reserves the right to suspend the Employees
duties while continuing such Employees Base Salary.
(b)
Misconduct
shall mean a good
faith finding by the majority of the Board (excluding the
Employee, should
he/she
be a
Board member) of the commission by Employee of any one or more
of the following acts or omissions: (i) the intentional
disclosure of Confidential Business Information (defined in
Section 6.1.1 herein) which disclosure Employee knew or
reasonably should have known could have the potential to result
in material damage to Employer; (ii) any intentional
violation of written policies of the Employer or specific
written directions of the Board;
provided
such written
policies or directives are neither illegal (or do not involve
illegal conduct) nor do they require Employee to violate
reasonable business ethical standards;
(iii) Employees repeated failure to perform
Employees duties or the Employees taking actions or
engaging in conduct adverse to the interests of Employer, its
assets, business or business opportunities, including, without
limitation, gross negligence, (iv) breach or violation of
Sections 6, 7, 8 or 9 herein
; or (v) a material
breach by Employee of one or more terms of this Agreement, in
each case, for which the Employer has provided Employee written
notice of such material breach and a thirty (30) day cure
period for a breach that might reasonably be expected to be
curable. Such notice shall be provided in the manner described
in
Section 5.1.2
.
5.1.2
Termination Notice
means a
written notice which: (i) indicates the specific
termination provision in this Agreement relied upon;
(ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis
for termination of Employees employment under the
provision so indicated; and (iii) if the effective date of
such termination is other than the date of receipt of such
notice, specifies the termination date (which date shall not be
more than thirty (30) days after the giving of such
notice). Any termination by Employer for Cause or for Misconduct
shall be communicated to Employee by a Termination Notice. The
failure by Employer to set forth in the Termination Notice any
fact or circumstance which contributes to a showing of Cause or
Misconduct shall not waive any right of Employer hereunder or
preclude Employer from asserting such fact or circumstance in
enforcing its rights hereunder.
5.1.3
Voluntary Termination
shall
mean the termination of Employees employment by Employer
via Employees voluntary resignation
for reasons
other than
: (i) Employees death or
disability; (ii) Employees retirement after
age 65; (iii) due to Employee experiencing a Family
Emergency (defined below); (iv) simultaneous with
Employees termination for Cause; or (iv) simultaneous
with or following an event which,
L-2
whether or not known to Employer at the time of such Voluntary
Termination by Employee would constitute Cause. In the event of
a Voluntary Termination, Employee shall deliver to Employer
written notice of such termination no less than eight
(8) weeks prior to the proposed termination date.
5.1.4
Constructive Termination
shall mean (i) material breach by Employer of this
Agreement, including, without limitation, a material reduction
in the Employees Base Salary or a material change in
Employees duties or job description as set forth in
Schedule A
without Employees
written consent; or (ii) a material change in the
Employees principal employment location, without
Employees consent. A Constructive Termination will not
have occurred until and unless Employee has provided Employer
with ten (10) day prior written notice of such Constructive
Termination and the opportunity to cure within this ten
(10) day period.
5.1.5
Family Emergency
shall mean
the resignation by the Employee, or the Boards finding
that the Employee is not discharging his or her duties in a
manner consistent with his or her prior discharge of such
duties, in either case due to a serious health condition of an
immediate family member of the Employee. For the purposes of
this Agreement, serious health condition shall mean an injury,
illness, impairment or physical or mental condition that
requires continuing treatments by a healthcare provider and that
has caused a period of incapacity for such family member of more
than sixty (60) days. For the purpose of this Agreement,
immediate family member shall mean the Employees spouse,
parents,
parents-in-law
or children.
5.2
Termination for Cause, Misconduct or Voluntary
Termination
.
Employer may terminate this
Agreement and its obligations to Employee hereunder at any time
for Cause or Misconduct upon delivery to Employee of a
Termination Notice. Upon a documented finding of Misconduct by
the Board, Employer shall give Employee a Termination Notice.
The notice shall comply with
Section 5.1.2
. If
Employees employment is terminated for Cause, or
Misconduct after the cure period, if applicable, or in the event
of a Voluntary Termination by the Employee, Employer shall have
no further obligation or liability to Employee relating to this
Agreement, Employees employment hereunder, or the
termination thereof, other than the Base Salary and vacation
time, all as accrued and prorated but unpaid through the
effective date of Employees termination, and reimbursable
business expenses incurred on behalf of Employer by Employee
prior to the effective date of Employees termination.
5.3
Termination Without Cause or by Constructive
Termination
.
In the event Employer terminates
this Agreement without Cause including termination for a
Constructive Termination, and so long as Employee has not
breached any of Employees obligations under this
Agreement, Employee shall be entitled to the Base Salary, Bonus,
any vested Gain Share, and vacation time, all as accrued and
prorated but unpaid through the date of termination, and
reimbursable business expenses incurred on behalf of Employer by
Employee prior to the date of termination.
In addition
,
if Employer terminates Employees employment without Cause
or Employee terminates such employment as a result of
Employers actions leading to a Constructive Termination,
and only in such events, Employee shall be entitled to, as
severance pay, equal to $500,000, payable, at Employers
option, either in a lump sum or over a period of twelve months
through Employers normal pay practices. Provided, however,
that Employers obligations to make such payments of
severance pay shall be subject to (i) Employees
continued compliance with
Sections 5, 6, 7, 8, and 9
during the severance period, and (ii) at the option of
Employer, the execution by Employer and Employee of a mutual
general release and waiver of claims against each other in a
form provided by Employer. Such form shall be provided and
drafted in good faith by the Employer. In the event Employer
terminates this Agreement without Cause, the time periods set
forth in
Sections 6, 7, 8, and 9
will be for one
(1) year following the date of termination in accordance
with this
Section 5.3
, unless the Employer exercises
its option to pay the Employee as provided for in
Section 7.1
.
5.4
Termination due to Death, Disability, or Family
Emergency
.
Employees employment shall
terminate automatically in the event of Employees death or
disability (as reasonably determined by the Board, using good
faith and in reliance on an independent medical determination,
with the standard being the Employees reasonable ability
to discharge
his/her
duties consistent with such discharge prior to the malady or
accident giving rise to the disability) or due to the Employee
experiencing a Family Emergency during the Term or any Renewal
Term. If Employees employment is terminated on account of
death, disability, or because of a Family Emergency, Employee
or, as applicable, Employees estate, legal representatives
or designee shall be entitled to receive, in
L-3
full satisfaction of all obligations due to Employee or
Employees estate, legal representatives or designee by
Employer hereunder, Employees Base Salary, Bonus, any
vested Gain Share and vacation time, all as accrued and prorated
(except Gain Share, which by its terms is only awarded annually)
but unpaid through the date of termination, and reimbursable
business expenses incurred on behalf of Employer by Employee
prior to the date of termination.
In addition
, upon the
occurrence of such an event, Employee or Employees estate
shall have the right at any time within one (1) year after
the date of the termination to require: a) Employer to
purchase Employees Membership Interests in the Employer
(the Employees Put Right), for a value (as
determined by the Employers Board, using good faith, as of
the termination date) and otherwise in accordance with the
relevant provisions of
Section 5.5
below, and to
b) repay any loans made to the Company by the Employee.
5.5
Right of Set-off
.
Upon
Employees breach of, or default under, this Agreement,
Employer may set-off any amounts due from the Employee against
any amounts owing by the Employer to Employee under this
Agreement or otherwise. Neither the exercise of nor the failure
to exercise such right of set-off will constitute an election of
remedies or limit Employer in any manner in enforcing other
remedies that may be available to Employer.
5.6
Other Termination
Obligations
.
Employee hereby acknowledges and
agrees that all personal property and equipment (Personal
Property) furnished to Employee in the course of, or
incident to, Employees employment by Employer belongs to
Employer and shall be promptly returned to Employer upon
termination of the Term. Personal Property includes, without
limitation, all vehicles, computers, equipment, credit cards,
books, manuals, records, reports, notes, contracts, lists,
blueprints, and other documents, or materials, or copies thereof
(including computer files), and all other proprietary
information relating to the business of Employer or any
subsidiary or affiliate thereof. Following termination, Employee
will not retain any Personal Property of Employer, or any
written or other tangible material containing any proprietary
information, Confidential Business Information or Trade Secrets
of Employer or any subsidiary or affiliate thereof.
6.
Confidential Business Information and Trade
Secrets
.
6.1
Definitions
.
For purposes of
this Agreement:
6.1.1 The term Confidential Business
Information shall mean any and all confidential and
proprietary information of Employer and Employers
business, including, without limitation, Employers
product, product designs, specifications, service designs,
development processes, business plans, prospects and
projections, marketing plans, business records, financial data,
customer information and customer lists, dealer lists, pricing,
financial information, sales information, purchasing and cost
information, pricing information, supplier lists, computer
programs, systems, formats, designs, specifications, processes,
discoveries or other information of similar character; and
6.1.2 The term Trade Secret shall mean any and
all information used by Employer and in Employers
business, including, without limitation, any and all formulas,
intellectual property, compilations, programs, devices, methods,
techniques, processes or other such similar information.
For purposes of this Agreement, Confidential Business
Information and Trade Secrets shall not include, and
Employees obligations under this Agreement, shall not
extend to: (i) information which is generally known and
available to the public; (ii) information obtained by
Employee from third persons other than employees of Employer,
such third party persons of which are not under agreement to
maintain the confidentiality of the same; and
(iii) information which is required to be disclosed by law
or legal process.
6.2
Property of
Employer
.
Employee acknowledges that
in connection with the performance of Employees Duties
during the Term or any Renewal Term, Employer will make
available to Employee, and Employee will have access to certain
Confidential Business Information and Trade Secrets, which is
either information not known by actual or potential competitors,
customers and third parties of Employer or is proprietary
information of Employer. Employee acknowledges and agrees that
any and all Confidential Business Information or Trade Secrets
learned or obtained by Employee during the course of
Employees employment by Employer or otherwise (including,
without limitation, information that Employee obtained through
or in connection with Employees ownership of and
employment by Employer at anytime prior to the date hereof)
whether developed by Employee alone or in conjunction with
others or otherwise, shall be and is the exclusive property of
Employer
L-4
6.3
Non-Disclosure
.
Employee
covenants and agrees that at all times during the Term or any
Renewal Term and for so long as Employer is making the payments
specified in Section 7 and for agreeing to ultimately pay
for any Employee vested Gain Share, and its agreement to honor
the Employees Put Right, either as applicable, that for up
to a maximum term of three (3) years immediately following
termination of Employees employment or the expiration of
this Agreement, Employee will hold in the strictest confidence
and will not intentionally or negligently disclose, use,
publicize, lecture upon or publish any Confidential Business
Information or Trade Secrets, and will not use any Confidential
Business Information or Trade Secrets for Employees own
benefit, or intentionally or negligently disclose any
Confidential Business Information or Trade Secrets to, or
intentionally or negligently use any Confidential Business
Information or Trade Secrets for the benefit of, anyone outside
of Employer, during or after Employees employment with
Employer; except to the extent that such disclosure is necessary
in connection with Employees duties on behalf of Employer.
Employee acknowledges that Employee is obligated under this
Agreement to use Employees best efforts to ensure that no
Confidential Business Information or Trade Secrets are disclosed.
6.4
Effect of
Termination
.
Upon termination of
Employees employment by Employer, or upon an earlier
request of Employer, Employee shall immediately deliver to
Employer all memoranda, data listings, computer programs,
manuals, letters, electronic mail, notes, notebooks,
specifications, reports, documents, records, devices, models or
other materials, and all copies or reproductions thereof, that
contain Confidential Business Information or Trade Secrets,
which Employee may then possess or have under Employees
control.
6.5
Employees
Assistance
.
Upon termination of
Employees employment under this Agreement, Employee agrees
to assist Employer in the transition of Employees duties
and business relationships for a reasonable limited period after
the termination.
7.
Noncompetition
.
The Employee
recognizes that the Employer has business goodwill and other
legitimate business interests which must be protected in
connection with and in addition to the Confidential Business
Information, and therefore, in exchange for access to the
Confidential Business Information, the specialized training and
instruction that the Employer will provide the Employee, and the
promotion and advertisement by the Employer of Employees
skill, ability and value in the business of the Employer,
Employee covenants and agrees that for the Term or any Renewal
Term and for so long as Employer is making the Retention Bonus
payments specified in
Sections 7.1
,
7.2
, and
7.3
, as applicable, and for agreeing to ultimately pay
for any Employee vested Gain Share, and its agreement to honor
the Employees Put Right, either as applicable, that for up
to a maximum period of thirty-six (36) months immediately
following termination of Employees employment for any
reason whatsoever or the expiration of this Agreement (in any
case, the Non-Compete Period), Employee shall not,
directly or indirectly, own an interest in, operate, join,
control, advise, consult with, work for, serve as a director of,
have a financial interest in, or participate in any corporation,
partnership, limited liability company, proprietorship, firm,
association, person, or other entity that engages (or engaged)
in the business directional drilling, directional surveying,
measurement while drilling or related services in the geographic
area in which Employer has operations at the time of
termination. Notwithstanding the foregoing, by making the
payments contemplated under
Section 7.1
or
7.2
; provided, the cumulative Non-Compete Period, as so
extended, shall not exceed three (3) years from the date of
termination of Employees employment.
7.1
Payments Upon Termination Without Cause
or from
Constructive Termination In the event that the Employee is
terminated for any reason other than for Cause or Misconduct or
Voluntary Termination (but not due to Disability, retirement, or
due to a Family Emergency), then, as additional consideration
for the covenants of Employee set forth in this Section 7,
Employer may pay Employee a retention bonus equal to $12,000 per
month (in accordance with the provisions contained in
Section 7.3) (W/O Cause Retention Bonus) and
continue to provide Employee the medical benefits in accordance
with
Section 3.4
. Any severance payments made
pursuant to
Section 5.3
will be credited against the
W/O Cause Retention Bonus during the initial twelve month
period. As such, payment of the severance shall satisfy the
obligation to pay the W/O Cause Retention Bonus for the first
year following such termination (other than with respect to the
obligation to provide health benefits pursuant to
Section 3.4
).
7.2
Payments Upon Termination for Cause, Misconduct,
or Voluntary Termination.
In the event that
the Employee is terminated for Cause, Misconduct or by reason of
Voluntary Termination, or due to Disability,
L-5
retirement, or Family Emergency (For Reason), then,
as additional consideration for the covenants of Employee set
forth in this Section 7, Employer may pay Employee a
retention bonus equal to $2,000 per month (in accordance with
the provisions contained in Section 7.3) (the For
Reason Retention Bonus), but shall not be required to
provide medical benefits. For purposes of
Section 7
and
Section 7.3
, the terms For Reason Retention
Bonus and W/O Cause Retention Bonus shall be referred to as the,
or a Retention Bonus.
7.3
Retention Bonus Payments; Determination of
Non-Compete Period
.
If a termination of
employment occurs other than on the first day of a calendar
month, then, for that calendar month, the amount of any
Retention Bonus will be pro rated to the actual number of full
days remaining in the calendar month in which such termination
occurs. Thereafter, the Retention Bonus, if any, will be paid on
the first business day of each month. The parties stipulate and
agree that Employers payment of a Retention Bonus to
Employee shall cause the Non-Compete Period, and the
Employees covenants in Sections 6, 8 and 9, to be
automatically extended for the entire duration of the calendar
month in which such payment is made; provided, in no event may
the aggregate Retention Bonus payments exceed thirty six
(36) months.
8.
Non-Interference with Business
Relations
.
Employee covenants and agrees that
during the Term or any Renewal Term and, so long as Employer is
paying the consideration contemplated by
Sections 7.1
and
7.2
, for a period of up to
thirty six (36) months following the termination of
Employees employment or expiration of this Agreement,
Employee shall not, (directly or indirectly, personally, or on
behalf of any other person, business, corporation, limited
liability company, partnership or entity), contact or do
business with any customer, supplier, partner, vendor,
contractor or financing source (the Protected
Parties) that has any relationship with the Employer,
provided that this restriction applies directional drilling,
directional surveying, measurement while drilling or related
services in which the Employee or former Employee is seeking to
engage which are competitive with the Employer. With regard to
Employees post-termination obligations, the
Employees covenant applies to those customers and the
related entities of the customers to which Employer sold its
products or services at any time before or during
Employees employment with Employer, and those prospective
customers with which Employer actively pursued sales during the
twenty-four (24) month period prior to such termination or
expiration of this Agreement.
9.
Non-Solicitation
.
Employee
acknowledges that Employer has invested substantial time and
effort in assembling its present workforce and client base.
Accordingly, Employee covenants and agrees that during the Term
and any Renewal Term and, so long as Employer is paying the
applicable Retention Bonus payments described in
Sections 7.1
and
7.2
, for a period of up to
thirty six (36) months following the termination of
Employees employment or expiration of this Agreement,
Employee shall not hire away, nor directly or indirectly,
entice, induce, solicit or influence any officer, employee,
agent, consultant, independent contractor or supplier to
discontinue such affiliation with Employer or to refrain from
entering into new business relationships with Employer.
10.
Miscellaneous
.
10.1
Dispute
Resolution
.
Except as provided in
Section 10.7.2, in the event a dispute arises between
Employer and Employee in the interpretation of this Agreement,
both parties agree to work towards a mutually agreeable
resolution. If a resolution cannot be reached, both parties will
agree to mediation. Such mediation will not be binding, and if
no mutually acceptable resolution results from mediation, either
party may commence with litigation at their own expense;
provided that the prevailing party shall be awarded its
reasonable attorneys fees and costs of the litigation as
determined by the court.
10.2
Waiver
.
The waiver of
any breach of any provision of this Agreement will not operate
or be construed as a waiver of any subsequent breach of the same
or other provision of this Agreement.
10.3
Entire
Agreement
.
Except as otherwise
provided in this Agreement, this Agreement and all Schedules
hereto, which are incorporated herein by reference, represent
the entire understanding among the parties with respect to the
subject matter of this Agreement, and this Agreement supersedes
any and all prior understandings, agreements, plans, and
negotiations, whether written or oral, with respect to the
subject matter hereof, including without limitation, any
understandings, agreements, or obligations respecting any past
or future compensation,
L-6
bonuses, reimbursements, or other payments to Employee from
Employer as well as previously executed employment agreements.
10.4
Modification
.
No
modification or amendment to this Agreement, or any provision
hereof shall be effective for any purpose unless specifically
set forth in a writing signed by the party to be bound thereby.
10.5
Survivability of
Terms
.
The terms and provisions and
Employees obligations
and/or
agreements under
Sections 5, 6, 7, 8 and 9
hereunder, subject to Employers payment of the
consideration set forth in
Sections 7.1
and
7.2
, shall survive any termination or expiration
of this Agreement and will be construed as agreements
independent of any other provisions of this Agreement.
10.6
Notices
.
All notices and
other communications under this Agreement must be in writing and
must be given by personal delivery, or first class mail, postage
prepaid, certified or registered with return receipt requested,
and will be deemed to have been duly given upon confirmed
receipt if personally delivered, or three (3) days after
deposit, if mailed, to the respective persons named below:
|
|
|
|
If to Employer:
|
Multi-Shot, LLC
100 Morgan Keegan Drive, Suite 500
Little Rock, Arkansas 72202
Attn: Jim Jacoby
|
|
|
|
|
With a copy to:
|
Catalyst Hall Growth Capital Co., LLC
Two Riverway, Suite 1710
Houston, Texas 77056
Attention: Ron Nixon or Rick Herrman
|
|
|
|
|
And a copy to:
|
Franklin, Cardwell & Jones
1001 Mc Kinney,
18
th
Floor
Houston, Texas 77002
Attention: J. Randolph Ewing, Esq.
|
|
|
|
|
If to Employee:
|
Mr. Paul Culbreth
57 Cascade Springs Place
The Woodlands, Texas 77381
|
Any party may change such partys address for notices by
notice duly given pursuant to this Section.
10.7
Governing Law and Venue: Waiver of Jury
Trial
.
10.7.1 This Agreement shall be deemed to be made in and in
all respects shall be interpreted, construed and governed by and
in accordance with the law of the State of Texas without regard
to the conflict of law principles thereof. In absence of an
election by either the Employer or the Employee to resolve any
dispute through arbitration pursuant to Section 10.1, the
parties hereby irrevocably submit to the jurisdiction of the
federal courts located in the State of Texas and the Southern
District of Texas or the state courts located in Harris County,
Texas solely in respect of the interpretation and enforcement of
the provisions of this Agreement and of the documents referred
to in this Agreement, and in respect of the transaction
contemplated hereby, and hereby waive, and agree not to assert,
as a defense in any action, suit or proceeding for the
interpretation or enforcement hereof or of any such document,
that it is not subject thereto or that such action, suit or
proceeding may not be brought or is not maintainable in said
courts or that the venue thereof may not be appropriate or that
this Agreement or any such document may not be enforced in or by
such courts. The parties hereby consent to and grant any such
court jurisdiction over the person of such parties and over the
subject matter of such dispute and agree that mailing of process
or other papers in connection with any such action or proceeding
in the manner provided in Section 10.6 in such other manner
as may be permitted by applicable Law, shall be valid and
sufficient service thereof.
10.7.2 The parties agree that irreparable damage would
occur and that the parties will not, and could not reasonably be
expected to, have any adequate remedy at law in the event that
any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to
an injunction or injunctions to prevent breaches of this
Agreement and to
L-7
enforce specifically the terms and provisions of this Agreement
in any federal court located in the State of Texas or in the
Southern District of Texas or the state courts located in Harris
County, Texas, such remedy being in addition to any other remedy
to which the parties are entitled at law or in equity. A party
seeking injunctive relief will not be required to post bond in
excess of $1,000.
10.7.3 Each party acknowledges and agrees that any
controversy which may arise under this Agreement is likely to
involve complicated and difficult issues, and therefore each
such party hereby irrevocably and unconditionally waives any
right such party may have to a trial by jury in respect of any
litigation directly or indirectly arising out of or relating to
this Agreement or the transactions contemplated by this
Agreement. Each party certifies and acknowledges that
(i) no representative, agent or attorney of any other party
has represented, expressly or otherwise, that such other party
would not, in the event of litigation, seek to enforce the
foregoing waiver; (ii) each such party understands and has
considered the implications of this waiver; (iii) each such
party makes this waiver voluntarily; and (iv) each such
party has been induced to enter into this Agreement by, among
other things, the waivers and certifications in this Section.
10.8
Severability
.
This
Agreement shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision
hereof shall be prohibited or invalid under any such law, such
provision shall be ineffective to the extent of such prohibition
or invalidity, without invalidating or nullifying the remainder
of such provision or any other provisions of this Agreement. If
any one or more of the provisions contained in this Agreement
shall for any reason be held to be excessively broad as to
duration, geographical scope, time period, activity or subject,
such provisions shall be construed by limiting and reducing it
so as to be enforceable to the maximum extent permitted by
applicable law, or if any provision herein is not supported by
adequate consideration, then the party paying such consideration
may increase such consideration to an amount determined by a
court of competent jurisdiction as adequate consideration.
10.9
Headings
.
The Section
headings of this Agreement are intended for reference and may
not by themselves determine the construction or interpretation
of this Agreement.
10.10
Assignment
.
This
Agreement is a personal employment contract and the rights and
interest of Employee under this Agreement may not be sold,
transferred, assigned, pledged, or hypothecated, directly or
indirectly, or by operation of law or otherwise.
10.11
Successors
.
This
Agreement will inure to the benefit of and be binding upon
Employer and its successors and assigns and upon Employee and
Employees legal representatives.
10.12
Counterparts
.
This
Agreement may be executed in one or more counterparts, all of
which taken together will constitute one and the same Agreement.
10.13
Confirmation of
Employee
.
The Employee confirms that
the time and geographic constraints contained in Section 7,
8 and 9 are reasonable in all respects and but for such
confirmation, Employer would not have executed this Agreement.
10.14
Reliance on
Counsel
.
Employee attests that he has
read this Agreement carefully, has consulted with legal counsel
regarding the terms and provisions thereof or has consciously
waived his right to do so, and has relied solely upon his own
judgment without the influence of anyone in entering into this
Agreement.
10.16
Drafting
.
This
Agreement was prepared and drafted by the Employer, however,
Employee acknowledges and agrees that he has carefully reviewed
this Agreement, and has been given an opportunity to negotiate
the terms hereof and, therefore, no law or rule of construction
shall be raised or used in which the provisions of this
Agreement shall be construed in favor of or against the Employer
because it is deemed to be the author hereto.
[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]
L-8
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
EMPLOYER
MULTI-SHOT, LLC
Allen Neel, President and
Chief Executive Officer
EMPLOYEE
PAUL CULBRETH
L-9
SCHEDULE A
Vice President & Vice President of Operations
(VP Operations).
As such, the duties
include being responsible for a variety of aspects of the
Employers business affairs, including but not limited to
the following:
|
|
|
|
|
Working with the VP of Sales and Marketing, particularly as it
relates to utilization, profitability and customer service
levels in respect to the Companys overall goals and
objectives;
|
|
|
|
Working with the accounting, finance and administrative
functions to help ensure timely and accurate information flows
regarding Company operations and the corresponding Company
related GAAP, tax and financial reporting requirements;
|
|
|
|
Overseeing the operations of the business (including working
with the CEO in making material commitments related thereto),
including establishing the proper level of capital equipment and
inventory to correspond to the business opportunities, and to
develop, monitor and enforce compliance with all regulations and
laws (i.e., immigration, OSHA, traffic, etc.);
|
|
|
|
Working with the CEO in terms of establishing and amending, as
necessary, all business forecasts and projections, including
capital expenditure budgets, as well as developing operationally
based information pertinent for Board meeting agendas and the
related materials and reports to properly conduct such meetings;
|
|
|
|
Working with the CEO in terms of assisting in the assessment of
merger and acquisition activity, to the extent such activity is
initiated by the Chairman and the Board;
|
|
|
|
Making certain that appropriate procedures, controls, personnel,
systems and safeguards are in place to properly address (to the
fullest extent reasonably possible) risk management related to
the Companys operations (including, but not limited to,
assisting the CEO and CFO in assessing and securing insurance)
for the business;
|
|
|
|
Remaining attentive to, and regularly monitoring industry
developments, including the activities of competitors, to assist
the CEO in maintaining a forward looking awareness of trends and
developments that represent either threats or opportunities, or
both, to the Employer; and
|
|
|
|
Conducting ones personal life on a basis consistent with
the values and mission of the Employer, namely, to be a fair,
honest and responsive.
|
L-10
SCHEDULE B
Compensation
Annual Base Salary:
The Employees
minimum annual salary, payable in accordance with
Employers payroll policy, shall consist of the following:
$230,000, p.a.
Annual Salary Review:
The annual salary and
other benefits offered to Employee will be reviewed on an annual
basis by the Board.
Annual Bonus:
Employee shall be eligible for
an annual bonus as determined by the compensation committee of
the Board, in its reasonable discretion. The maximum amount of
the bonus will be equal to 75% of the then existing Base Salary.
The compensation committee shall principally consider two
components (Objective and Subjective) when determining the
amount of the bonus:
(i) to the extent of approximately 2/3rds of the bonus
amount (equal to 50% of Employees Base Salary, such
component of which is known as the Objective
Component), the Employers financial performance in
relationship to the Board approved financial budget used
throughout the relevant time frame. Specifically, the Objective
Component shall be subject to determination as follows:
a) first determine the maximum amount of the Objective
Component (i.e., 50% of then existing Base Salary); next,
b) for each 1% negative variance of actual EBITDA vs.
budgeted EBITDA, 4% of the possible maximum amount that could be
earned per the Objective Component is forfeited. For example,
assuming a $230,000 Base Salary, the Objective Component of the
bonus could be $115,000. Assume actual EBITDA is 5% below
budgeted EBITDA, resulting in a 20% discount (the Discount
Amount) to the maximum possible amount. Deduct the
Discount Amount from the maximum possible amount, to determine
the Objective Component amount; and
(ii) to the extent of the remainder of the potential amount
(equal to 25% of Employees Base Salary, such component of
which is known as the Subjective Component), the
Employees individual contributions to the business of the
Employer, which may or may not necessarily manifest themselves
in the financial performance, or the Objective Component, for
the subject year.
Accounting recognition of the possible bonus payment should be
accrued @ 50% of base pay throughout the year (unless financial
performance indicates that such an accrual is unsupported), and
the compensation committees final determination of the
amount earned (and hence, to be accrued and paid) shall occur in
a timely fashion after receipt of audited financial results.
Notwithstanding the foregoing, nothing herein will obligate the
Employer to pay any portion of the Subjective Component. The
Objective Component will be paid based upon the level of
attainment of the metrics set forth above as amended from time
to time based upon the evolving business operations or the
Company.
L-11
Schedule C
GAIN
SHARE AWARD AGREEMENT
This Gain Share Award Agreement (the Gain Share) is
dated effective as of April 1, 2007, by and between
MULTI-SHOT, LLC
, a Texas limited liability company (the
Company), and Paul Culbreth, an individual (the
Participant).
The purpose of this Gain Share is to provide the Participant
with a long term incentive (subject to the terms herein) tied to
the realized increases in the gross enterprise value
(GEV) of the Employer, after allowing for an agreed
to return to the Employers equity owners (the Hurdle
Amount). For purposes of the Gain Share, beginning gross
enterprise value (GEV) of the Company will be GEV as defined and
determined in the Recapitalization and Purchase Agreement dated
as of April 1, 2007 (approximately $120,000,000). The Gain
Share is being granted in conjunction with an employment
agreement of even date herewith executed by and between the
Participant and the Company (the Employment
Agreement). Any defined term used herein and not otherwise
defined herein shall have the meaning prescribed to such term in
the Employment Agreement. The Company and the Participant hereby
agree as follows:
1.
Vesting.
The Gain Share shall vest
over a four year time frame as follows:
|
|
|
Date
|
|
Percent Vested
|
|
Prior to 4/1/08
|
|
0%
|
4/1/08-3/31/09
|
|
25%
|
4/1/09-3/31/10
|
|
50%
|
4/1/10-3/31/11
|
|
75%
|
On or after 4/1/11
|
|
100%
|
Subject to Section 2 below, upon a termination of
Participants employment for any reason, the non-vested
portion of the Gain Share shall be forfeited and be of no
further force or effect.
2.
Realization Event.
For purposes of the
Gain Share, a Realization Event shall be defined as
(i) a sale of all or substantially all of the assets of the
Company or (ii) or any transaction (including, without
limitation, a merger or reorganization in which the Company is
the surviving entity) approved by the Board that results in any
person or entity (other than persons (or their Affiliates) who
are holders of Membership Interests of the Company at the time
the Gain Share is approved by the Board) owning fifty percent
(50%) or more of the combined voting power of all classes of
Membership Interests of the Company.
Upon a Realization Event, the Participant shall immediately
become 100% vested in his Gain Share. In addition, if the
Participants employment is terminated under the terms of
the Employment Agreement without Cause or due to a Constructive
Termination and a Realization Event occurs within six
(6) months subsequent to the date of such termination,
Participant shall become 100% vested in his Gain Share.
3.
Employment Agreement.
The Participant
and the Company acknowledge that the Gain Share is subject to
such other terms and conditions as set forth in the Employment
Agreement, including, but not limited to, certain buy back
rights and provisions and certain provisions relating to
forfeiture of the Gain Share, all as further described in the
Employment Agreement;
4.
Payment.
Payment of the Gain Share
amount is due upon the closing of a Realization Event.
5.
Amount.
The amount due pursuant to
this Gain Share is determined as follows:
a) determine an amount equal to a combination of the
amounts of the initial equity investment of SG and the retained
equity of the MS Members as of the Closing of the private
recapitalization (the Initial Equity Threshold) and
add to such Initial Equity Threshold, an amount equal to the
gross consideration paid by the Company for any acquisitions of
businesses or assets occurring prior to any Realization Event
(Subsequent Equity Threshold Additions), such
combined amount being known as the Total Equity
Threshold;
b) compound the Initial Equity Threshold, and any
Subsequent Equity Threshold Additions at a rate equal to 15% per
annum (the Hurdle Rate), from the effective date of
this Agreement, or of the subsequent
L-12
acquisition, as applicable, to the date of the Realization Event
to determine a nominal amount of minimum required return to the
holders of the Companys equity, such amount of which will
be known as the Hurdle Amount;
c) determine the amount by which the Hurdle Amount exceeds
the Total Equity Threshold, such minimum net return on the
Companys Total Equity Threshold to be known as the
Net Equity Threshold Increase;
d) next, determine an amount equal to the increase in GEV
as between the private recapitalization GEV and the GEV as of
the Realization Event by deducting: i) the amount of any
Subsequent Equity Threshold Additions; ii) the amount of
any outstanding Company funded debt as of the Realization Event
in excess of the amount of funded debt as of the Closing of the
Private Recapitalization; and iii) transaction expenses
related to the Realization Event, to determine an amount called
the Increase in Realized GEV; and;
e) deduct the Net Equity Threshold Increase from the
Increase in Realized GEV to determine an amount called the
Gain Share Pool.
6.
Eligibility.
The Employee is eligible
to receive from the Company an amount equal to two percent (2%)
of the Gain Share Pool, payable in the same components of
consideration (i.e., cash, notes, securities, earn outs,
retained or newly issued ownership, etc.) as are received in the
transaction triggering the Realization Event, if any.
7.
Withholding of Tax.
Upon the issuance
of any amounts subject to this Gain Share, the Company may be
required to withhold United States federal, state and local tax
with respect to the realization of compensation related thereto.
The Company is hereby authorized to satisfy any such withholding
requirement out of (i) any cash also distributable upon
such issuance, and (ii) any other cash compensation then or
thereafter payable to the Participant. To the extent the
Company, in its sole discretion, determines that such sources
are or may be insufficient to fully
and/or
timely satisfy such withholding requirement, the Participant, as
a condition to the issuance of such Units, shall deliver to the
Company cash in an amount determined by the Company to be
sufficient to satisfy any such withholding requirement.
8.
Binding Effect.
This Award Agreement
shall be binding upon and inure to the benefit of any successors
to the Company and all persons lawfully claiming under the
Participant.
9.
Notices.
Any notice to be given under
the terms of this Gain Share, the Company may hereafter
designate in writing to the other.
10.
Laws Applicable to Construction.
The
interpretation, performance and enforcement of this Award
Agreement, shall be governed by the laws of the State of Texas,
as applied to contracts executed in and performed wholly within
the State of Texas.
11.
Interpretation.
In the event of any
ambiguity in this Gain Share, any term which is not defined
herein, or any matters as to which this Gain Share is silent,
the following shall govern including, without limitation, the
provisions hereof pursuant to which the Board of the Company is
empowered power, among others, exercising good faith to
(i) interpret the Gain Share, and (ii) make all other
reasonable determinations deemed necessary or advisable for the
administration of the Gain Share.
12.
Headings.
The headings of paragraphs
herein are included solely for convenience of reference and
shall not affect the meaning or interpretation of any of the
provisions of this Award Agreement.
13.
Amendment.
Except as otherwise
provided, this Gain Share may not be modified, amended or waived
in any manner except by an instrument in writing signed by both
parties hereto. The waiver by either party of compliance with
any provision of this Gain Share shall not operate or be
construed as a waiver of any other provision of this Gain Share,
or of any subsequent breach by such party of a provision of this
Gain Share.
L-13
14.
Employment.
The existence of this
Gain Share does not, and no provision in the Gain Share or in
any award granted or agreement entered into pursuant to the Gain
Share shall be construed to, create an employment contract;
confer upon any individual the right to receive any amounts;
permit the Participant to remain in the employ of the Company or
alter a Participants status as an at-will employee per the
terms of the Employment Agreement; or allow the Participant to
interfere in any way with the right and authority of the Board
of the Company either to increase or decrease the compensation
of any individual at any time, or to terminate any employment or
other relationship between any individual and the Company,
provided the Board and Company comply with the terms of the
Employment Agreement. The obligation of the Company to pay any
benefits pursuant to the Gain Share shall be interpreted as a
contractual obligation to pay only those amounts described
herein, in the manner and under the conditions prescribed
herein. The Gain Share shall in no way be interpreted to require
the Company to transfer any amounts to a third party trustee or
otherwise hold any amounts in trust or escrow for payment to any
Participant or beneficiary under the terms of the Gain Share.
[SIGNATURE
PAGE FOLLOWS]
L-14
IN WITNESS WHEREOF
, the Company has caused this Gain
Share to be duly executed by its officer hereunto duly
authorized, and the Participant has executed this Gain Share,
all on the day and year first above written.
MULTI-SHOT, LLC,
a Texas limited liability company
Ron Nixon, Manager
Participant:
PAUL CULBRETH
Address:
57 Cascade Springs Place
The Woodlands, Texas 77381
L-15
JK ACQUISITION CORP.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ______, 2007
The undersigned hereby appoints [
]
and [
]
, and each of them, as proxies of
the undersigned, with full power of substitution, to vote all of the shares of stock of JK
Acquisition Corp. that the undersigned may be entitled to vote at the Special Meeting of
Stockholders of JK Acquisition Corp. to be held on [
], [
], 2007, at [
],
at 10:00 a.m. (Central Time), and at any and all postponements, continuations and adjournments
thereof, with all powers that the undersigned would possess if personally present, upon and in
respect of the following matters and in accordance with the following instructions.
IF YOU DO NOT RETURN YOUR PROXY CARD WITH AN INDICATION OF HOW YOU WISH TO VOTE, THIS
PROXY WILL BE VOTED AGAINST THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION PROPOSAL. FAILURE
TO VOTE WITH RESPECT TO THE MERGER PROPOSAL, THE INCENTIVE PLAN PROPOSAL, THE NOMINATION PROPOSAL
AND THE ADJOURNMENT PROPOSAL WILL HAVE NO EFFECT ON THESE PROPOSALS, AS MORE SPECIFICALLY DESCRIBED
IN THE PROXY STATEMENT.
IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE ON THE MERGER
PROPOSAL OR IF YOU ABSTAIN FROM VOTING ON THE MERGER PROPOSAL, YOU WILL NOT BE ELIGIBLE TO HAVE
YOUR SHARES CONVERTED INTO A PRO RATA PORTION OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION
OF THE NET PROCEEDS OF JK ACQUISITIONS INITIAL PUBLIC OFFERING ARE HELD. YOU MUST AFFIRMATIVELY
VOTE AGAINST THE MERGER PROPOSAL AND DEMAND THAT JK ACQUISITION CONVERT YOUR SHARES INTO CASH NO
LATER THAN THE CLOSE OF THE VOTE ON THE MERGER PROPOSAL TO EXERCISE YOUR CONVERSION RIGHTS.
IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH YOUR
INSTRUCTIONS. IF NO DIRECTIONS ARE GIVEN, THIS PROXY WILL BE VOTED
FOR EACH OF THE PROPOSALS. EACH OF THE DIRECTORS AND OFFICERS OF
JK ACQUISITION CORP. WILL RETURN AN UNMARKED PROXY WITH DIRECTIONS TO VOTE
THEIR RESPECTIVE SHARES IN ACCORDANCE WITH THE VOTE OF THE MAJORITY
INTEREST OF ALL OTHER STOCKHOLDERS VOTING ON THE MERGER PROPOSAL AND
FOR ALL OTHER PROPOSALS.
detach here
MERGER
PROPOSAL:
To adopt the Second Amended and Restated Agreement and Plan of
Merger, dated as of August 27, 2007,
by and among JK Acquisition Corp., Multi-Shot, Inc., Multi-Shot, LLC, Catalyst/Hall Growth Capital
Management Co., LLC and SG-Directional, LLC, as the Multi-Shot, LLC members
representatives, and the members of Multi-Shot,
LLC, and to approve the merger contemplated thereby, pursuant to which Multi-Shot, LLC will merger
with and into Multi-Shot, Inc., a wholly-owned subsidiary of JK Acquisition Corp., for
initial consideration of approximately $197.5 million, subject to adjustment based on possible future
contingent payments related to earnouts and redemption liability.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE MERGER PROPOSAL.
|
|
|
|
|
¨
FOR
|
|
¨
AGAINST
|
|
¨
ABSTAIN
|
If you voted AGAINST the merger proposal and you hold shares of JK Acquisition common stock
issued as part of the units issued in the JK Acquisition Corp. initial public offering, you may
exercise your conversion rights and
demand that JK Acquisition Corp. convert your shares of common stock into a pro rata portion of the
trust account by marking the Exercise Conversion Rights box below. If you exercise your
conversion rights, then you will be exchanging your shares of JK Acquisition Corp. common stock for
cash and will no longer own these shares. You will only be entitled to receive cash for these
shares if the merger is completed and you continue to hold these shares through the effective time
of the merger and tender your stock certificate to JK Acquisition Corp. Failure to (a) vote
against the adoption of the merger proposal, (b) check the following box or, alternatively, demand
conversion in writing, (c) continue to hold your shares of common stock through the effective time
and tender your stock certificate to JK Acquisition Corp. when and as requested or (d) submit this
proxy in a timely manner will result in the loss of your conversion
rights. If you are voting against the merger and electing to convert your shares into a
pro rata portion of the trust account, in order to receive your pro
rata share of the trust account, you must deliver to
Continental Stock Transfer & Trust Company, our stock transfer agent, your
stock certificate either duly endorsed or with a stock power (in either case
with a signature guarantee), written instructions that you want to convert your
shares into cash, and a written certificate addressed to us.
|
|
|
¨
|
|
I HEREBY EXERCISE MY CONVERSION RIGHTS
|
AMENDMENT TO CERTIFICATE OF INCORPORATION PROPOSAL:
|
|
To change the name of JK Acquisition from JK Acquisition Corp. to MS Energy Services, Inc.
|
|
|
|
To increase the number of authorized shares of common stock
from 50,000,000 to 150,000,000, which
when taking into account the number of shares of preferred stock currently authorized (1,000,000), will result in an
increase of the total number of authorized shares of capital stock
from 51,000,000 to 151,000,000
- To remove Article V(A) from the certificate of incorporation, which relates to the operation of JK
Acquisition as a blank check company prior to the consummation of a business combination
|
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION
PROPOSAL.
|
|
|
|
|
¨
FOR
|
|
¨
AGAINST
|
|
¨
ABSTAIN
|
NOMINATION
PROPOSAL:
To approve the election of Allen Neel, Ron
Nixon, K. Rick Turner,
James O. Jacoby, Jr. and Kim Eubanks, as directors of JK Acquisition Corp.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINATION PROPOSAL
|
|
|
|
|
¨
FOR
|
|
¨
AGAINST
|
|
¨
ABSTAIN
|
|
|
|
INCENTIVE PLAN PROPOSAL:
|
|
To approve the 2007 Equity Incentive Plan.
|
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE INCENTIVE PLAN PROPOSAL
|
|
|
|
|
¨
FOR
|
|
¨
AGAINST
|
|
¨
ABSTAIN
|
|
|
|
ADJOURNMENT PROPOSAL:
|
|
To authorize the adjournment of the
special meeting to a later date or
dates, if necessary, to permit
further solicitation and vote of
proxies in the event there are
insufficient votes at the time of
the special meeting to adopt the
merger proposal or the certificate
amendment proposal.
|
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADJOURNMENT PROPOSAL.
|
|
|
|
|
¨
FOR
|
|
¨
AGAINST
|
|
¨
ABSTAIN
|
Dated
, 2007
Please sign exactly as your name appears hereon. If the stock is registered in the names of two or
more persons, each should sign. Executors, administrators, trustees, guardians and
attorneys-in-fact should add their titles. If signer is a corporation, please give full corporate
name and have a duly authorized officer sign, stating title. If signer is a partnership, please
sign in partnership name by authorized person.
Please vote, date and promptly return this proxy. Any votes received after a matter has been
voted upon will not be counted
JK Acquisition Corp (AMEX:JKA)
Historical Stock Chart
From Sep 2024 to Oct 2024
JK Acquisition Corp (AMEX:JKA)
Historical Stock Chart
From Oct 2023 to Oct 2024