Commission File No. 000-23530
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
[ ] Preliminary Information Statement
[ ] Confidential for Use of the Commission Only (as permitted
by Rule 14c-5(d)(2))
[X] Definitive Information Statement
TRANS ENERGY, INC.
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(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction
applies: n/a
(2) Aggregate number of securities to which transaction applies:
n/a
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined): n/a.
(4) Proposed maximum aggregate value of transaction: n/a
(5) Total fee paid: -0-
[ ] Fee paid previously with preliminary materials.
[ ] 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:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date filed:
TRANS ENERGY, INC.
210 Second Street
P.O. Box 393
St. Marys, West Virginia 26170
NOTICE OF ACTION TAKEN BY WRITTEN CONSENT OF OUR MAJORITY STOCKHOLDERS
Dear Stockholders of Trans Energy, Inc.:
We are writing to advise you that Trans Energy, Inc. will implement a
reverse split of our outstanding common stock on a one share for 150 shares
basis. The reverse stock split has been approved by unanimous approval of our
board of directors and by stockholders owning a majority of our issued and
outstanding shares by written consent in lieu of a meeting of stockholders.
We have also entered into an agreement to acquire Arvilla, Inc., a
privately held Nevada corporation based in St. Marys, West Virginia. The
acquisition is to be accomplished through a merger of our wholly owned
subsidiary, Trans Energy Acquisitions, Inc., with and into Arvilla, with Arvilla
being the survivor of the merger. Under the terms of the merger transaction, all
of Arvilla's outstanding capital stock will be converted into shares of Trans
Energy common stock.
No action is required by you. The accompanying information statement is
furnished only to inform stockholders of the reverse stock split described above
before it takes effect in accordance with Rule 14c-2 promulgated under the
Securities Exchange Act of 1934, as amended.
PLEASE NOTE THAT STOCKHOLDERS OWNING A MAJORITY OF TRANS ENERGY'S OUTSTANDING
COMMON STOCK HAVE VOTED TO APPROVE THE REVERSE STOCK SPLIT. THE NUMBER OF VOTES
HELD BY THESE STOCKHOLDERS IS SUFFICIENT TO SATISFY THE STOCKHOLDER VOTE
REQUIREMENT FOR THIS ACTION AND NO ADDITIONAL VOTES WILL CONSEQUENTLY BE NEEDED
TO APPROVE THE ACTION.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
COMPLETION OF THE ACQUISITION WILL RESULT IN THE ASSUMPTION OF ARVILLA'S ASSETS,
LIABILITIES AND OPERATIONS BY TRANS ENERGY.
The accompanying information statement is for information purposes only and
describes the reverse stock split and explains the terms of the acquisition of
Arvilla and related transactions. Please read the accompanying information
statement carefully.
December 31, 2004 Very truly yours,
/s/ ROBERT L. RICHARDS
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Robert L. Richards
President
TRANS ENERGY, INC.
210 Second Street
P.O. Box 393
St. Marys, West Virginia 26170
INFORMATION STATEMENT PURSUANT TO SECTION 14(c)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND
REGULATION 14C THEREUNDER
This information statement is being sent by first class mail to all record
and beneficial owners of the common stock, $0.001 par value, of Trans Energy,
Inc., a Nevada corporation, which we refer to herein as "Trans Energy," "our
company," "we," "our" or "us." The mailing date of this information statement is
on or about December 31, 2004.
On December 20, 2004, the record date for determining the identity of
stockholders who are entitled to receive this information statement, 496,566,131
shares of our common stock were issued and outstanding. The common stock
constitutes the sole outstanding class of voting securities of Trans Energy.
Each share of common stock entitles the holder thereof to one vote on all
matters submitted to stockholders.
NO VOTE OR OTHER CONSENT OF OUR STOCKHOLDERS IS SOLICITED IN CONNECTION
WITH THIS INFORMATION STATEMENT. WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
On November 29, 2004, our board of directors adopted the resolution to
implement a one share for 150 shares reverse split of our outstanding common
stock, consented to in writing by stockholders who beneficially own 256,287,738
shares, or approximately 51.6%, of our issued and outstanding common stock. The
effective date of the reverse split will be set by our board and is expected to
occur immediately prior to the acquisition of Arvilla, Inc., a Nevada
corporation referred to herein as "Arvilla." Our stockholders have not consented
to or considered any other corporate action.
Because stockholders holding at least a majority of the voting rights of
our outstanding common stock have voted in favor of the foregoing reverse stock
split, and these stockholders have sufficient voting power to approve the
proposal through their ownership of common stock, no other stockholder consents
will be solicited in connection with this information statement. Pursuant to
Rule 14c-2 under the Securities Exchange Act of 1934, the proposals will not
become effective until a date at least 20 days after the date on which this
information statement has been mailed to the stockholders. We anticipate that
the action regarding the reverse stock split contemplated herein will be
effected on or about January 20, 2005. This information statement will serve as
written notice to stockholders pursuant to the Nevada Revised Statutes.
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TABLE OF CONTENTS
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Page
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FORWARD-LOOKING STATEMENTS.................................................................................. 3
GENERAL .................................................................................................... 4
SUMMARY..................................................................................................... 4
Reverse Stock Split.................................................................................... 4
Acquisition of Arvilla................................................................................. 4
Parties to the Merger.................................................................................. 4
Structure of the Acquisition of Arvilla................................................................ 5
Merger Consideration................................................................................... 6
Reasons for the Merger................................................................................. 6
Costs and Expenses of the Merger....................................................................... 6
Appraisal Rights....................................................................................... 6
Risk Factors........................................................................................... 6
Directors and Executive Management Following the Acquisition of Arvilla................................ 7
MAJORITY STOCKHOLDERS....................................................................................... 7
SECURITY OWNERSHIP OF BENEFICIAL OWNERS, MANAGEMENT AND AFFILIATES
FOLLOWING THE ACQUISITION OF ARVILLA................................................................... 7
RISK FACTORS................................................................................................ 7
Risks Relating to Reverse Stock Split.................................................................. 7
Risks Relating to Acquisition of Arvilla............................................................... 7
Risks Relating to Our Business After Completion of Arvilla Acquisition................................. 9
Risks Relating to Ownership of Our Common Stock........................................................ 11
REVERSE STOCK SPLIT......................................................................................... 12
Amendment to Articles of Incorporation................................................................. 13
Effect of the Reverse Split............................................................................ 13
MERGER AGREEMENT AND PLAN OF REORGANIZATION................................................................. 15
Background of the Merger............................................................................... 15
Trans Energy's Reasons for the Merger.................................................................. 16
Arvilla's Reasons for the Merger...................................................................... 16
Material Terms of the Merger Agreement and Plan of Reorganization...................................... 17
Effective Time of the Merger........................................................................... 17
Merger Consideration................................................................................... 17
Representations and Warranties......................................................................... 18
Certain Covenants of the Parties....................................................................... 19
Conditions to the Merger............................................................................... 20
Termination............................................................................................ 21
Cost and Expenses of the Merger........................................................................ 22
Amendment.............................................................................................. 22
Extension and Waiver................................................................................... 22
Certain Federal Income Tax Consequences and Accounting Treatment of Acquisition of Arvilla............. 22
Appraisal Rights....................................................................................... 22
Federal Securities Law Consequences.................................................................... 22
ANTICIPATED BUSINESS FOLLOWING THE ACQUISITION OF ARVILLA................................................... 23
Information Concerning Trans Energy, Inc............................................................... 23
Arvilla, Inc........................................................................................... 26
Strategy............................................................................................... 26
Services............................................................................................... 26
Marketing.............................................................................................. 27
Facilities............................................................................................. 27
Management............................................................................................. 27
Employees.............................................................................................. 30
Competition............................................................................................ 31
FINANCIAL INFORMATION FOR ARVILLA........................................................................... 31
WHERE YOU CAN FIND MORE INFORMATION......................................................................... 31
Appendix A - Agreement and Plan of Reorganization
Appendix B - Amendment to Articles of Incorporation
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FORWARD LOOKING INFORMATION
This information statement and other reports that we file with the SEC
contain certain forward-looking statements relating to, among other things, the
reverse stock split, the acquisition of Arvilla and our future financial
performance or future events. In some cases, you can identify forward-looking
statements by terminology such as "may," "will" "should," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue," or the negative of these terms or other comparable terminology. Such
statements are subject to numerous known and unknown risks, uncertainties,
assumptions and other factors, including those set forth in this information
statement, that could cause actual future events or results to differ materially
from historical results, or those described in the forward-looking statement.
The forward-looking statements contained in this information statement should
be considered in light of these factors. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this information
statement.
Except as required under federal securities laws and the rules and
regulations of the SEC, we and our merger subsidiary, Trans Energy Acquisitions,
do not undertake to update forward-looking information contained herein or
elsewhere to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking information. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those indicated in,
contemplated by or implied by such statements.
For a detailed discussion of these and other risk factors, please refer to
our filings with the SEC on Forms 10-KSB, 10-QSB and 8-K. You can obtain copies
of these reports and other filings for free at the SEC's Web site at www.sec.gov
or from commercial document retrieval services.
GENERAL
This information statement is being furnished to all of our stockholders of
record on December 20, 2004 in connection with the approval by our board of
directors and majority stockholders to implement a one share for 150 shares
reverse split of our common stock to be effective prior to the acquisition of
Arvilla. We will file with the State of Nevada an amendment to our articles of
incorporation to reflect the split, a copy of which is attached to this
information statement as Appendix B.
Following effectiveness of the reverse stock split and upon the closing of
the acquisition of Arvilla, we will issue approximately 1,185,024 shares of our
post-reverse split common stock to the stockholders of Arvilla and/or their
assigns in exchange for all of the issued and outstanding common stock of
Arvilla. In addition, our board of directors will increase our board to five
persons by appointing two new directors nominated by Arvilla. The acquisition is
expected to close on or about January 21, 2005, and will become effective upon
the filing of certificate of merger with the Secretary of State of Nevada. We
anticipate that the filing will occur on or about January 21, 2005.
The elimination of the need for a special meeting of stockholders to
approve the proposed reverse stock split set forth above is authorized by the
Nevada Revised Statutes, referred to herein as the NRS. Section 78.320 of the
NRS provides that the written consent of the holders of the outstanding shares
of voting stock, having not less than the minimum number of votes which would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted, may be substituted for such a
special meeting. In order to eliminate the costs and management time involved in
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holding a special meeting of stockholders and in order to approve the reverse
stock split, the board of directors determined to use the written consent of the
holders of a majority in interest of our outstanding common stock.
Stockholders who beneficially own approximately 51.6% of our outstanding
common stock entitled to vote on the reverse stock split, have given their
written consent to the approve the reverse stock split. Accordingly, the above
action will not be submitted to our other stockholders for a vote and this
information statement is being furnished to our stockholders only to provide the
prompt notice of the taking of such action.
We will pay all costs and expenses associated with the distribution of this
information statement, including the costs of printing and mailing. We will
reimburse brokerage firms and other custodians, nominees and fiduciaries for
reasonable expenses incurred by them in sending this information statement to
the beneficial owners of our common stock.
SUMMARY
This summary highlights selected information set forth herein and may not
contain all of the information that is important to you. To understand fully the
reverse stock split and acquisition of Arvilla, you should read carefully this
entire information statement and the accompanying documents to which we refer.
See "Where You Can Find More Information." The merger agreement is attached as
Appendix A to this information statement. We encourage you to read this
document. We have included page references in parentheses to direct you to a
more complete description of the topics presented in this summary.
Reverse Stock Split (Page 12)
Our board of directors and stockholders holding a majority of our
outstanding common stock have approved a one share for 150 shares reverse split
of our common stock. Our board will have the discretion of establishing the
effective date of the split. Presently, we anticipate the reverse split to be
effective on or about January 20, 2005.
Acquisition of Arvilla (Page 15)
Our board of directors has approved the plan to acquire Arvilla Oilfield
Services, LLC, a private West Virginia limited liability company that provides
well servicing, workover and related transportation services to independent oil
and natural gas producers in the northeast region of the United States. To
facilitate the acquisition, on December 3, 2004, we entered into a merger
agreement and plan of reorganization with Arvilla, Inc., a newly formed Nevada
corporation that owns all of the membership interests in Arvilla Oilfield
Services, LLC. The acquisition is to be accomplished through a merger of our
wholly owned subsidiary, Trans Energy Acquisitions, Inc., with and into Arvilla,
Inc., with Arvilla being the survivor of the merger. Each issued and outstanding
share of Arvilla capital stock will be converted into the right to receive
shares of Trans Energy common stock, which shares will represent approximately
25% of our total outstanding shares (post-split) following the transaction,
including shares to be issued in connection with the separate acquisition of
assets from Texas Energy Trust Company. Arvilla will operate as a separate
business entity 100% owned by Trans Energy.
Parties to the Merger (Page 23)
Trans Energy, Inc.
210 Second Street
P.O. Box 393
St. Marys, West Virginia 26170
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We are engaged in the transportation, marketing and production of natural
gas and oil and in certain exploration and development activities. We own
interests in oil and gas wells in West Virginia and oil wells in Wyoming that we
do not operate. We also own and operate gas transmission lines located within
West Virginia in the Counties of Ritchie, Tyler and Pleasants. This pipeline
system gathers natural gas produced from our wells and from wells owned by third
parties. We also have approximately 11,000 gross acres under lease in the Powder
River Basin in Campbell, Crook and Weston Counties, Wyoming.
Trans Energy Acquisitions, Inc.
210 Second Street
P.O. Box 393
St. Marys, West Virginia 26170
Trans Energy Acquisitions, Inc. was created in September 2000 as a Nevada
corporation, a wholly owned subsidiary of Trans Energy. The subsidiary was
organized for the specific purpose of effecting acquisitions and/or merger
transactions. Trans Energy Acquisition has not conducted any business during any
period of its existence except in furtherance of the proposed acquisition of
Arvilla.
Arvilla, Inc.
7994 South Pleasant Highway
P.O. Box 432
St. Marys, West Virginia 26170-0432
Arvilla, Inc. is a newly formed Nevada corporation that was created to
facilitate the acquisition of Arvilla Oilfield Services, LLC. The owners of
Arvilla initially acquired Arvilla Oilfield Services in June 2004 and negotiated
with Trans Energy in connection with our acquisition of Arvilla. Arvilla is
engaged in providing well servicing, workover and related transportation
services to independent oil and natural gas producers.
Structure of the Acquisition of Arvilla (Page 15)
The acquisition of Arvilla will be finalized upon the filing of a
certificate of merger with the Secretary of State of Nevada, referred to herein
as the "effective time of the merger." The acquisition will be effected through
the following actions:
o Trans Energy Acquisitions, our wholly owned subsidiary, will merge with
and into Arvilla, the separate corporate existence of Trans Energy
Acquisitions will cease and Trans Energy will become the parent
corporation of Arvilla;
o we will have effected, immediately prior to the effective time of the
merger, a one share for 150 shares reverse stock split of the
then-outstanding shares of Trans Energy common stock and, accordingly,
the shares of Trans Energy common stock to be issued and outstanding
after the merger transaction will give effect to such reverse stock
split;
o Trans Energy will issue to the Arvilla stockholders newly issued
(restricted) Trans Energy common stock in exchange for 100% of the
issued and outstanding shares of Arvilla capital stock;
o Arvilla's stockholders and/or assigns will become stockholders of Trans
Energy and will collectively own approximately 25% of our issued and
outstanding shares of common stock. Our current stockholders will own
approximately 75% of our issued and outstanding shares of common stock;
and
o we will expand our board of directors by adding two new directors
nominated by Arvilla.
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Merger Consideration (Page 17)
In the merger transaction between Trans Energy Acquisitions and Arvilla,
each issued and outstanding share of Arvilla common stock will be converted into
the right to receive shares of Trans Energy common stock in accordance with the
ratio set forth in the merger agreement. In the aggregate, current holders of
Arvilla capital stock will receive approximately 1,185,024 shares of our
post-split common stock. Fractional shares will not be issued, rather Arvilla
stockholders will receive cash for any fractional interest resulting from the
conversion of shares. After the acquisition, current Arvilla stockholders will
no longer own a direct equity interest in Arvilla.
Reasons for the Merger (Page 16)
Our board of directors considered various factors in approving the merger
agreement and believe the acquisition of Arvilla and will be in the best
interest of our stockholders. Our board analyzed Arvilla's current operations,
prospects and managerial resources and believes that acquiring Arvilla's growth
potential by means of a merger is the best opportunity to increase value to our
stockholders. Also, Arvilla's oilfield services business is expected to add to
our asset base and future revenues. Our board of directors did not request a
fairness opinion in connection with the merger.
Cost and Expenses of the Merger (Page 22)
The merger agreement provides that all costs and expenses in connection
with the merger will be paid by the party incurring these costs and expenses. We
have agreed to pay all expenses related to the preparation, printing and mailing
of the information statement and all related filing and other fees.
Appraisal Rights (Page 22)
Under applicable Nevada law, our stockholders do no have the right to
demand appraisal of their shares in connection with the action to effect a
reverse stock split that we are taking by written consent, or in connection with
the acquisition of Arvilla.
Risk Factors (Page 7)
The acquisition of Arvilla as well as the ownership of our common stock
after the merger involves a high degree of risk to our stockholders. You should
carefully consider the information set forth in the section entitled "Risk
Factors," as well as the other information in this information statement.
o Upon completion of the merger, we will assume Arvilla's assets,
liabilities and operations.
o If we need to seek additional funds to continue our operations, we may
have to borrow additional funds or make an offering, either private or
public, of our common stock. There can be no assurance that such future
financing can be obtained, or that we will be able to secure such funds
on terms favorable to us and our business.
o Our current stockholders will be diluted by the shares issued as part
of the merger transaction and may be diluted by future issuances of
shares, if necessary, to satisfy working capital needs. We are issuing
shares of our common stock as part of the acquisition which, together
with possible future issuances of stock to raise additional working
capital, will reduce the percentage ownership of our existing
stockholders substantially.
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Directors and Executive Management Following the Acquisition of Arvilla (Page
27)
Immediately prior to effective date of the merger, our board of directors
will appoint two new directors, Clarence E. Smith and Rebecca L. Smith, as
designated by Arvilla.
MAJORITY STOCKHOLDERS
On November 29, 2004, our board of directors adopted the resolution to
implement the one share for 150 shares reverse split of our outstanding common
stock. The board also received written consents by stockholders who beneficially
own 256,287,738 shares, or approximately 51.6%, of our 496,566,131 issued and
outstanding common shares, to approve the proposed reverse stock split.
Under Nevada law, we are not required to call for and hold a meeting of
stockholders or to give stockholders written notice of actions taken by written
consent without a stockholders meeting. However, pursuant to applicable
securities laws promulgated by the SEC, we are required to notify stockholders
of such actions by written consent by way of an information statement. Under
Section 14(c) of the Securities Exchange Act of 1934, the actions taken by
written consent without a meeting of stockholders cannot become effective until
20 days after the mailing date of this Information Statement. We are not seeking
written consent from any of our other stockholders nor will they be given an
opportunity to vote with respect to the actions taken. All necessary corporate
approvals have been obtained to effect the reverse stock split and this
information statement is furnished solely for the purpose of advising
stockholders of the actions taken by written consent as required by the Exchange
Act.
Stockholders who were not afforded an opportunity to consent or otherwise
vote with respect to the reverse stock split, will not have dissenters'
appraisal rights in conjunction with the reverse stock split, the proposed
acquisition of Arvilla or other corporate actions to be taken in connection with
acquisition and merger transaction.
SECURITY OWNERSHIP OF BENEFICIAL OWNERS, MANAGEMENT AND AFFILIATES
FOLLOWING THE ACQUISITION OF ARVILLA
The following table sets forth certain information with respect to the
anticipated beneficial ownership of our common stock, after giving effect to the
reverse stock split and acquisition of Arvilla, by each stockholder expected by
us to be the beneficial owner of more than 5% of our common stock and by each of
our anticipated directors and executive officers and all of the anticipated
directors and executive officers as a group. Unless otherwise indicated, the
address of each of the persons listed below is Trans Energy, Inc., 210 Second
Street, P.O. Box 393, St. Marys, West Virginia 26170. Unless otherwise indicated
in the footnotes to the following table, shares are owned, or will be owned of
record and beneficially by the named person. For purposes of the following
table, a person is deemed to be the beneficial owner of any shares of common
stock (i) over which the person has or shares, directly or indirectly, voting or
investment power, or (ii) of which the person has a right to acquire beneficial
ownership at any time within 60 days after the effective time of the merger.
"Voting power" is the power to vote or direct the voting of shares and
"investment power" includes the power to dispose or direct the disposition of
shares. An asterisk denotes beneficial ownership of less than 1%.
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Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class(1)
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Directors and Executive Officers:
Robert L. Richards 91,275(2) 1.9 %
Loren E. Bagley 239,647(3) 5.1 %
William F. Woodburn 419,724(4) 8.9 %
Clarence E. Smith 531,437 11.2 %
Rebecca L. Smith 531,437 11.2 %
All directors and executive officers
a group (5 persons) 1,813,520 38.3 %
(1) Based upon 4,740,097 shares of common stock estimated to be outstanding
on following the one share for 150 shares reverse stock split, the
acquisition of Arvilla and the transactions contemplated thereby, and
the issuance of shares in connection with acquisition of oil and gas
leases and leasehold interests from Texas Energy Trust Company.
Percentage ownership is calculated separately for each person on the
basis of the actual number of outstanding shares immediately following
the acquisition of Arvilla.
(2) Includes 80,084 shares held in the name of Argene Richards, wife of Mr.
Richards.
(3) Includes 33,667 shares held in the name of Carolyn S. Bagley, wife of
Mr. Bagley, over which Mrs. Bagley retains voting power.
(4) Includes 133,667 shares in the name of Janet L. Woodburn, wife of Mr.
Woodburn, over which shares Mrs. Woodburn retains voting power, and
133,333 in the name of a corporation owned by William and Janet
Woodburn.
RISK FACTORS
You should consider carefully the following risk factors relating to Trans
Energy and Arvilla, any of which could materially harm our business.
Risks Relating to Reverse Stock Split
Our current stockholders have no opportunity to approve or disapprove the
reverse stock split described herein
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Under Nevada law, the action to effect the reverse stock split described
herein, that would routinely be taken at a meeting of stockholders, is being
taken by written consent of stockholders having not less than the minimum number
of votes that would be necessary to authorize or take the action at a meeting of
stockholders. Accordingly, stockholders other than stockholders who have given
their written consent, are not being asked to approve or disapprove this action
or any other matters.
The reverse stock split will reduce the number of shares of our common
stock traded in the public market which may have a negative effect on the
trading of our common stock.
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By effecting the one share for 150 shares reverse stock split, the number
of shares available for trading in the public market will be significantly
reduced. There can be no assurance that our shares will trade at a higher price
or a multiple of 150 times our current price, or that any price increase will be
sustained. Also, the fewer number of shares in the public float may cause a less
liquid market that could negatively affect our stock price. Further, the reverse
split may increase the number of stockholders who own less than 100 shares.
These stockholders owning "odd lots" may experience an increase in the cost of
selling their shares and greater difficulty in executing such sales.
Risks Relating to Acquisition of Arvilla
Our stockholders have no opportunity to approve or disapprove the
acquisition of Arvilla described herein, have no dissenters' rights and
will experience substantial dilution in connection with the transaction.
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The acquisition of Arvilla has been approved by our board of directors and
is being facilitated by a merger of our wholly owned subsidiary into Arvilla.
Stockholders will have no opportunity to approve or disapprove the acquisition
and will not be entitled to dissenters' rights. In addition, because Trans
Energy shares will be used to acquire Arvilla, our current stockholders will
experience substantial dilution in their ownership interest in our company.
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If the merger and acquisition of Arvilla does not occur, we will not
benefit from the expenses we have incurred in the pursuit of the merger.
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The acquisition of Arvilla by way of a merger with our wholly owned
subsidiary may not be completed. If conditions to completion of the merger are
not satisfied or the merger is not otherwise completed, we will have incurred
expenses for which no ultimate benefit will have been received. We currently
expect to incur out of pocket expenses of approximately $60,000 for services in
connection with the merger, consisting of legal and accounting fees, and
financial printing and other related charges, much of which may be incurred even
if the acquisition is not completed. We anticipate paying for such expenses from
available working capital, which expenses will be treated as current liabilities
on our financial statements.
Following completion of the acquisition and merger, it may be necessary for
us to seek additional funding, which may not be available on terms
favorable to us, or at all.
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Following the acquisition, management believes that we may need to raise
funds in order to take advantage of the expansion of our business. If we cannot
meet future capital requirements through realized revenues from our ongoing
business, we may have to raise additional capital by borrowing or by selling
equity or equity-linked securities, which securities would dilute the ownership
percentage of our existing stockholders. Also, these securities could also have
rights, preferences or privileges senior to those of our common stock.
Similarly, if we raise additional capital by issuing debt securities, those
securities may contain covenants that restrict us in terms of how we operate our
business, which could also affect the value of our common stock. We may not be
able to raise capital on reasonable terms or at all.
We cannot assure you that there will be an active trading market for the
our common stock.
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Even though our shares of common stock are expected to continue to be
quoted on the OTC Bulletin Board, we cannot predict the extent to which a
trading market will continue or how liquid that market might become following
the acquisition of Arvilla and reverse stock split. Accordingly, holders of our
common stock may be required to retain their shares for a long period of time.
If a liquid, active market for our shares does not exist in the future, holders
of our stock and new purchasers may not be readily able to liquidate their
shares which could cause them to lose a portion or all of their investment in
our shares.
Risks Relating to Our Business After Completion of Arvilla Acquisition
Trans Energy has recorded operating losses for the past several years and
continuing losses may exhaust our capital resources and force us to curtail
or discontinue operations.
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For the years ended December 31, 2003 and 2002, we have reported net losses
of $1,582,180 and $1,946,959, respectively. We cannot assure you that even with
the addition of Arvilla, we will be able to achieve profitability in 2004 or in
the immediate future thereafter. Accordingly, if we continue to experience
operating losses we may exhaust our capital resources and, without the infusion
of additional funds, we may have to curtail our operations significantly, or be
forced to cease operations totally.
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Trans Energy has a significant working capital deficit, which makes it more
difficult to obtain capital necessary for our operations and which may have
an adverse effect on our future business.
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As of September 30, 2004, we had a working capital deficit of approximately
$6,378,430. If our business when combined with Arvilla does not produce positive
working capital in the future, our business and financial condition would most
likely be materially and negatively impacted.
The industry in which Arvilla operates is highly competitive and increased
competition could result in margin erosion, which would make profitability
even more difficult to achieve and sustain.
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The market for the oilfield service industry is extremely competitive and
the barriers to entry are relatively low. Increased competition could result in
reduced operating margins, as well as a loss of market share for Arvilla. Many
existing and potential competitors have greater financial resources, larger
market share and more customers than Arvilla, which may enable them to establish
a stronger competitive position than we have. Also, there is considerable
competition for qualified personnel to operate the equipment used by Arvilla. If
we fail to address competitive developments quickly and effectively, we will not
be able to grow.
Our business could be adversely affected by any adverse economic
developments in the oil and gas industry and/or the economy in general.
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The oil and gas industry is susceptible to significant change due to a
variety of factors, many of which are outside our control. Some of these factors
include
o varying demand for oil and gas;
o fluctuations in price;
o competitive factors that affect pricing;
o changes in generally accepted accounting policies, especially those
related to the oil and gas industry; and
o new government legislation or regulation.
Any of the above factors or a significant downturn in the oil and gas industry
or with economic conditions generally, could have a negative effect on our
business and on the price of our common stock.
If Arvilla fails to keep up with changes affecting the markets that it
serves, it will become less competitive, adversely affecting future
financial performance.
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In order to remain competitive and serve its customers effectively, Arvilla
must respond on a timely and cost-efficient basis to changes in technology,
industry standards and procedures and customer preferences. Arvilla needs to
continuously upgrade and update its services to address new developments and
changing customer demands. In some cases these changes may be significant and
the cost to comply with these changes may be substantial. We cannot assure you
that we will be able to adapt to any changes in the future or that we will have
the financial resources to keep up with changes in the marketplace. Also, the
cost of adapting Arvilla's services may have a material and adverse effect on
our operating results.
Our future success depends on retaining existing key employees and hiring
and assimilating new key employees. The loss of key employees or the
inability to attract new key employees could limit our ability to execute
our growth strategy, resulting in lost profitability and a slower rate of
growth.
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Our future success depends, in part, on the ability to retain Trans
Energy's and Arvilla's key employees including executive officers. Following the
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acquisition of Arvilla we do not anticipate entering into employment agreements
with their executives or key personnel. Also, we do not carry, nor do we
anticipate obtaining, "key man" insurance on our executives. It would be
difficult for us to replace any one of these individuals. In addition, as we
grow we may need to hire additional key personnel. We may not be able to
identify and attract high quality employees or successfully assimilate new
employees into our existing management structure.
If we are unable to manage our growth effectively, our operations and
financial performance could be adversely affected .
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The ability to manage and operate our business as we execute our
anticipated growth will require effective planning. Significant future growth
could strain our internal resources, leading to a lower quality of service and
other problems that could adversely affect our financial performance. Arvilla's
efforts to grow have placed, and we expect will continue to place, a strain on
its personnel, management systems, infrastructure and other resources. Our
ability to manage future growth effectively will also require us to successfully
attract, train, motivate, retain and manage new employees and continue to update
and improve our operational, financial and management controls and procedures.
If we do not manage our growth effectively, our operations could be adversely
affected, resulting in slower growth and a failure to achieve or sustain
profitability.
Risk Related to Ownership of Our Common Stock
Being a public company increases our administrative costs, which could
result in lower net income, and make it more difficult for us to attract
and retain key personnel.
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As a public company, we incur significant legal, accounting and other
expenses that Arvilla did not incur as a private company. In addition, the
Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the
SEC, have required changes in corporate governance practices of public
companies. We expect that these new rules and regulations will increase our
legal and financial compliance costs and make some activities more time
consuming. For example, in connection with being a public company, we may create
several board committees, implement additional internal controls and disclose
controls and procedures, retain a transfer agent, a bank note company, and a
financial printer, adopt an insider trading policy and incur costs relating to
preparing and distributing periodic public reports in compliance with our
obligations under the securities laws. These new rules and regulations could
also make it more difficult for us to attract and retain qualified members of
our board of directors, particularly to serve on our audit committee, and
qualified executive officers.
We do not anticipate paying dividends in the foreseeable future. This could
make our stock less attractive to potential investors.
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We anticipate that we will retain all future earnings and other cash
resources for the future operation and development of our business and we do not
intend to declare or pay any cash dividends in the foreseeable future. Future
payment of cash dividends will be at the discretion of our board of directors
after taking into account many factors, including our operating results,
financial condition and capital requirements. Corporations that pay dividends
may be viewed as a better investment than corporations that do not.
Future sales or the potential for sale of a substantial number of shares of
our common stock could cause the market value to decline and could impair
our ability to raise capital through subsequent equity offerings.
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Sales by Trans Energy of a substantial number of our common shares to
individuals or in the public markets, or the perception that these sales may
occur, could cause the market price of our common stock to decline and could
materially impair our ability to raise capital through the sale of additional
equity securities. Once the acquisition of Arvilla is completed, in addition to
the shares of our common stock actually issued and outstanding, there will be
approximately 495 million shares of common stock held in our treasury for
possible future issuance.
It may be difficult for a third party to acquire us, and this could depress
our stock price.
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Following the acquisition of Arvilla, our directors, executive officers and
other principal stockholders will control approximately 38% of our outstanding
common shares. This could delay, defer or prevent a future change in control of
our company or our management, discourage proxy contests and make it more
difficult for you and other stockholders to elect directors and take other
corporate actions. As a result, the price that investors are willing to pay in
the future for shares of our common stock could be limited. Also, the board of
directors may issue additional shares that could make it even more difficult for
minority investors to achieve any control. Further, there is no cumulative
voting in the election of directors, which would otherwise allow less than a
majority of stockholders to elect director candidates.
"Penny Stock" Regulation could negatively affect the trading and price of
our shares.
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Even following the reverse stock split of our common stock, trading in our
shares on the OTC Bulletin Board may be subject to certain provisions of the
Securities Exchange Act of 1934, commonly referred to as the "penny stock" rule.
A penny stock is generally defined to be any equity security that has a market
price less than $5.00 per share, subject to certain exceptions. If our stock is
deemed to be a penny stock, trading in our stock will be subject to additional
sales practice requirements on broker-dealers. These may require a broker dealer
to:
o make a special suitability determination for purchasers of penny
stocks;
o receive the purchaser's written consent to the transaction prior to the
purchase; and
o deliver to a prospective purchaser of a penny stock, prior to the first
transaction, a risk disclosure document relating to the penny stock
market.
Consequently, penny stock rules may restrict the ability of broker-dealers
to trade and/or maintain a market in our common stock. Also, many prospective
investors may not want to get involved with the additional administrative
requirements, which may have a material adverse effect on the trading and the
price of our shares.
REVERSE STOCK SPLIT
On November 29, 2004, our board of directors and stockholders holding a
majority of our outstanding common stock approved a one share for 150 shares
reverse split of our common stock. The effective date of the split will be
established by our board for a date prior to the effective date of the merger
agreement with Arvilla. We presently anticipate the split to occur on or about
January 20, 2005.
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All shares of our common stock have equal rights and privileges with
respect to voting, liquidation and dividend rights. Each share entitles the
holder thereof to (i) one non-cumulative vote for each share held of record on
all matters submitted to a vote of the stockholders; (ii) to participate equally
and to receive any and all such dividends as may be declared by the board of
directors; and (iii) to participate pro rata in any distribution of assets
available for distribution upon liquidation. Holders of our common stock have no
preemptive rights to acquire additional shares of common stock or any other
securities. The common stock is not subject to redemption and carries no
subscription or conversion rights.
Amendment to Articles of Incorporation
In connection with the stock split, we will file with the State of Nevada
an amendment to our articles of incorporation to reflect the reverse split. Our
current authorized capitalization will remain unchanged at 500 million shares of
common stock with a par value of $0.001
Under applicable Nevada law, a corporation may effect a reverse stock split
without correspondingly decreasing the number of authorized shares of the same
class or series if:
(a) The board of directors adopts a resolution setting forth the proposal
to decrease the number of issued and outstanding shares of a class or
series; and
(b) The proposal is approved by the vote of stockholders holding a majority
of the voting power of the outstanding shares of the affected class or
series.
As our board of directors has approved the reverse stock split and
shareholders holding a majority of our outstanding shares of common stock have
also approve the split by written consent, we are not required to change our
authorized capitalization. Accordingly, our amendment to our articles of
incorporation will reflect that our outstanding shares have been reverse split,
but that our capitalization will be unchanged. Upon the effectiveness of the
split, each share of our issued and outstanding common stock will be reverse
split on a one share for 150 shares basis. No fractional shares will be issued
in connection with the reverse split. Stockholders who would otherwise be
entitled to receive fractional shares, because they hold a number of shares of
common stock that is not evenly divided by 150, will have the number of new
shares to which they are entitled rounded up to the next whole number of shares.
No stockholders will receive cash in lieu of fractional shares.
Effect of the Reverse Split
Any new shares issued in connection with the reverse split will be fully
paid and non-assessable. The number of stockholders will remain unchanged as a
result of the reverse split. The reverse split will decrease the number of
outstanding common shares but will not affect any stockholder's proportionate
interest in our company prior to the closing of the merger transaction, except
for minor differences resulting from the rounding up of fractional shares. The
par value of our common stock will remain unchanged. While the aggregate par
value of our outstanding common stock will be decreased, our additional paid-in
capital will be increased by a corresponding amount. Therefore, the reverse
split will not affect our total stockholders' equity. All share and per share
information will be retroactively adjusted to reflect the reverse split for all
periods presented in our future financial reports and regulatory filings.
Although it is generally expected that a reverse split will result in a
proportionate increase in the market price of the split shares, there can be no
assurance that our common stock will trade at a multiple of 150 times our
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current price, or that any price increase will be sustained. If the market price
of our stock declines after the implementation of the reverse split, the
percentage decline as an absolute number and as a percentage of our overall
market capitalization would be greater than would be the case in the absence of
the reverse split.
Furthermore, the possibility exists that the reduction in the number of
outstanding shares will adversely affect the market for our common stock by
reducing the relative level of liquidity. In addition, the reverse split may
increase the number of the stockholders who own odd lots, or less than 100
shares. Stockholders who hold odd lots typically will experience an increase in
the cost of selling their shares, as well as possible greater difficulty in
effecting such sales. Consequently, there can be no assurance that the reverse
stock split will achieve the desired results outlined above.
Following the reverse split, we will have issued and outstanding
approximately 3,310,440 shares of common stock, without giving effect to the
rounding up of fractional shares, after which approximately 1,185,024 shares
will be issued pursuant to the acquisition of Arvilla and approximately 244,633
shares will be issued for the acquisition of assets from Texas Energy Trust
Company. We will have the corporate authority to issue approximately 495 million
additional shares of authorized but unissued common stock. The remaining
authorized and unissued shares may be issued without stockholder approval at any
time, in the sole discretion of our board of directors. The authorized and
unissued shares may be issued for cash, to acquire property or for any other
purpose that is deemed in the best interests of our company. Any decision to
issue additional shares will reduce the percentage of our stockholders' equity
held by our current stockholders and could dilute our net tangible book value.
We will not become a private company as a result of the reverse split, we expect
that our common stock will continue to be quoted on the OTC Bulletin Board and
we plan to continue to file periodic and other reports with the SEC under the
Exchange Act.
Following the reverse split, the share certificates you now hold will
continue to be valid. In the future, new share certificates will be issued
reflecting the stock split, but this in no way will effect the validity of your
current share certificates. The reverse split will occur on the effective date
without any further action on the part of our stockholders. After the effective
date of the reverse split, each share certificate representing shares of
pre-split common stock will be deemed to represent 1/150th share of Trans Energy
common stock. Certificates representing post-split common stock will be issued
in due course as old share certificates are tendered for exchange or transfer to
our transfer agent: Interstate Transfer Company, 6084 South 900 East #101, Salt
Lake City, Utah 84121. We request that stockholders do not send in any of their
stock certificates at this time.
As applicable, new share certificates evidencing post-split shares that are
issued in exchange for old pre-split certificates representing restricted
shares, will contain the same restrictive legend as on the old certificates.
Also, for purposes of determining the term of the restrictive period applicable
to the new post-split shares, the time period during which a stockholder has
held their existing pre-split shares will be included in the total holding
period.
We are hereby notifying our stockholders of the approval of the reverse
stock split and, pursuant to the Exchange Act, filing this information statement
on Schedule 14C, which will be mailed to all stockholders of record as of the
record date established therefore.
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MERGER AGREEMENT AND PLAN OF REORGANIZATION
The following is only a summary of the material provisions of the merger
agreement and plan of reorganization, dated as of December 3, 2004, by and among
Trans Energy, Trans Energy Acquisitions, Arvilla and the majority stockholders
of Arvilla. The agreement is attached to this information statement as Appendix
A. Please read the agreement in its entirety.
On September 10, 2004, we entered into a letter of intent to acquire
Arvilla, which was finalized by the merger agreement and plan of reorganization
being executed on December 3, 2004. Arvilla, Inc. is a newly formed Nevada
corporation that was created to facilitate the acquisition of Arvilla Oilfield
Services, LLC. The acquisition of Arvilla is to be accomplished through a merger
of our wholly owned subsidiary, Trans Energy Acquisitions, Inc., with and into
Arvilla, Inc., with Arvilla being the survivor of the merger. Pursuant to the
terms of the merger, each issued and outstanding share of Arvilla capital stock
will be converted into the right to receive shares of Trans Energy common stock.
Prior to the effective date of the merger, we will effect a one share for 150
shares reverse split of our common stock.
Following the merger, current stockholders of Arvilla and/or their assigns
will own approximately 25% of our issued and outstanding common stock
(post-split) and our current stockholders will own approximately 75%. The
purpose of the merger is to allow us to acquire and carry on the business of
Arvilla as our wholly owned subsidiary and to continue the current operations of
Trans Energy.
The terms of the merger and merger agreement are more fully described
below.
Background of the Merger
Historically, our management has known and worked with Clarence E. Smith,
the current President of Arvilla Oilfield Services, for over 20 years. Mr. Smith
and two of our directors, William F. Woodburn and Loren E. Bagley, have for a
period of time, been looking for additional business opportunities for Trans
Energy.
In March 2004, Mr. Smith learned that Arrow Oilfield Services was going to
be sold by Belden & Blake, located in Canton, Ohio, and informed Trans Energy of
the pending sale. Mr. Smith met with our management and asked that in the event
he acquired Arrow Oilfield Services, would Trans Energy consider merging Arrow
Oilfield Services into Trans Energy. After a careful and thorough review of the
proposed transaction, our board of directors decided that Arrow Oilfield
Services would be favorable acquisition candidate and that it would be in the
best interest of the company and our stockholders to pursue the acquisition.
On June 29, 2004, Clarence E. Smith acquired Arrow Oilfield Services, which
became Arvilla Oil Field Services, LLC. On July 2, 2004, we began negotiating
with Clarence and Rebecca Smith, the owners of Arvilla Oilfield Services, for
the purpose of acquiring the business. Following additional discussions and
negotiations, we entered into a letter of intent on September 10, 2004, whereby
we agreed to acquire Arvilla Oilfield Services.
In order to facilitate the transaction, Mr. and Mrs. Smith formed a new
Nevada corporation, Arvilla, Inc., that acquired the ownership interests of
Arvilla Oilfield Services. We then determined that Trans Energy would acquire
Arvilla by merging our wholly owned subsidiary, Trans Energy Acquisitions, with
and into Arvilla with Arvilla being the surviving corporation. After further
negotiations, we structured the terms and conditions of the transaction and, on
December 3, 2004, we entered into the merger agreement and plan of
reorganization with Arvilla.
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Trans Energy's Reasons for the Merger
In considering and approving the merger and the merger agreement, our board
of directors considered various factors including:
o lack of significant growth in our current business endeavors;
o our prospects for future growth and expansion through acquisitions;
o Arvilla's prospects for offering full service oilfield service
operations and providing many units of oilfield equipment and vehicles
to enhance operations;
o Arvilla employs approximately 100 skilled and experienced employees;
o Arvilla's operations in Ohio, Pennsylvania, New York, Virginia,
Kentucky and West Virginia, geographically cover the main focus of
Trans Energy's business;
o the experience and expertise that Clarence E. Smith offers to Trans
Energy; and
o anticipated increase in our stockholder values as a result of the
acquisition.
In agreeing to the merger, our board believes that the addition of
Arvilla's management, assets and operations will eventually add value to Trans
Energy. Our board of directors reached this conclusion after analyzing Arvilla's
operations, prospects and managerial resources, which are described in more
detail below, and believes that acquiring Arvilla's growth potential is the best
opportunity to increase value to our stockholders.
Arvilla's Reasons for the Merger
In considering and voting upon the merger and merger agreement, the Arvilla
board of directors considered the following:
o information with respect to the financial condition, results of
operations, business and prospects of Trans Energy and the economic and
market conditions affecting Trans Energy;
o increased market liquidity expected to result from exchanging stock in
a private company for securities of a publicly traded company;
o the ability to use registered securities to make future acquisitions of
assets or businesses;
o increased visibility in the oilfield services community;
o enhanced access to the capital markets;
o improved transparency of operations; and
o perceived credibility and enhanced corporate image of being a publicly
traded company.
Neither Trans Energy nor Arvilla retained the services of an investment
banker or requested a fairness opinion in connection with the merger
transaction.
The above discussion of material factors considered by Trans Energy and
Arvilla is not intended to be exhaustive, but sets forth the principal factors
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considered. In view of the variety of factors considered in connection with
their evaluation of the acquisition of Arvilla, the parties considered the
factors as a whole and did not find it practicable to, and did not quantify or
otherwise assign relative weight to, the specific factors considered in reaching
their determinations. In addition, individual members of the boards may have
given different weight to different factors.
Material Terms of the Merger Agreement and Plan of Reorganization
Subject to the terms and conditions of the merger agreement, at the
effective time of the merger, our subsidiary, Trans Energy Acquisitions, will
merge with and into Arvilla, Inc., the separate corporate existence of Trans
Energy Acquisitions will cease and we will become the parent corporation of
Arvilla. We will issue an aggregate of approximately 1,185,024 shares of our
post-reverse split common stock to the Arvilla stockholders in exchange for 100%
of the issued and outstanding shares of Arvilla capital stock. The effective
time of the merger and the issuance of our common stock in the merger will take
place immediately after we have effected a one share for 150 shares reverse
stock split of the then-outstanding shares of Trans Energy common stock.
Accordingly, the shares of our common stock to be issued and outstanding after
the merger transaction give effect to the reverse stock split.
At the effective time of the merger, members of Arvilla's board of
directors immediately prior to the effective time will remain as Arvilla
directors. Those persons holding executive offices of Arvilla at the effective
time, will continue to hold the same offices of the surviving corporation.
Also at the effective time, our existing board of directors will move to
expand the board by adding two nominees of Arvilla, Clarence E. Smith and
Rebecca L. Smith, to the board.
Effective Time of the Merger
The merger agreement provides that, subject to the approval of Arvilla's
stockholders and the satisfaction or waiver of other conditions, the merger will
be consummated by filing with the Nevada Secretary of State a certificate of
merger and any other requisite documents in accordance with relevant Nevada law.
We expect the merger to be consummated promptly after fulfilling the terms and
conditions of the agreement.
We anticipate that the closing will take place at a mutually agreed upon
time, but no later than five days after all conditions precedent have been met
satisfied or waived and all required documents have been delivered. The parties
have agreed to use their reasonable commercial efforts to cause the closing to
occur on or before January 17, 2005.
Merger Consideration
Upon consummation of and by virtue of the merger agreement, and without any
action on the part of any holder of any capital stock of Arvilla, Trans energy
or Trans Energy Acquisitions,
o all shares of common stock of Trans Energy Acquisition owned by Trans
Energy will be converted into one 1,000 shares of common stock of
Arvilla; and
o all shares of Arvilla common stock owned by its stockholders will be
converted into, and become exchangeable for shares of Trans Energy
common stock determined by the conversion ratio set forth in the merger
agreement.
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The conversion ratio defined in the merger agreement means a fraction, the
numerator of which is equal to the number of whole shares of Trans Energy common
stock which represents not less than 25% of the issued and outstanding shares of
Trans Energy common stock immediately following the effective time, plus 244,633
shares; and the denominator of which is equal to the number of shares of Trans
Energy common stock issued and outstanding immediately following the effective
time, plus 244,633 shares. No fractional shares will be issued to any former
holder of Arvilla capital stock; rather, a cash payment will be paid in lieu of
fractional shares.
Following the above exchange, current holders of Arvilla capital stock will
receive approximately 1,185,024 shares of Trans Energy common stock. As a result
of the merger, the shares of Arvilla capital stock, except for the 1,000 shares
to be held by Trans Energy, will no longer be outstanding, will automatically be
cancelled and retired and will cease to exist, and each holder of a certificate
representing such share immediately prior to the merger will cease to have any
rights with respect to such certificate, except the right to receive the shares
of our common stock described above.
Representations and Warranties
The merger agreement contains customary representations and warranties of
the parties. Trans Energy's and Trans Energy Acquisitions's representations and
warranties to Arvilla relate to, among other things:
o organization, standing, corporate power and similar corporate matters;
o authorization, execution, deliver and enforceability of the agreement;
o valid issuance of Trans Energy common stock;
o capital structure;
o accuracy of financial statements and other information;
o absence of certain adverse changes;
o absence of material litigation;
o absence of liabilities or claims not previously disclosed;
o timely filing of all required tax returns;
o delivery of all requested information;
o material contracts;
o compliance with the federal securities laws, including applicable
provisions of the Sarbanes-Oxley Act of 2002, and the accuracy of all
information filed with the SEC;
o absence of employee benefit plans;
o compliance with all applicable laws; and
o absence of any untrue statement of a material fact.
Arvilla's representations and warranties to Trans Energy and Trans Energy
Acquisitions relate to, among other things:
o organization, standing, corporate power and similar corporate matters;
o authorization, execution, deliver and enforceability of the merger
agreement;
o valid issuance of Arvilla capital stock;
o capital structure;
o accuracy of financial statements and other information;
o absence of certain adverse changes;
o absence of material litigation;
o absence of liabilities or claims not previously disclosed;
o timely filing of all required tax returns;
o delivery of all requested information;
o material contracts;
o compliance with all applicable laws;
o accuracy of information provided to Trans Energy for inclusion in any
filing by us with the SEC; and
o absence of any untrue statement of a material fact.
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All representations, warranties, covenants and agreements in the agreement
will survive until two years after the effective date.
Certain Covenants of the Parties
The parties to the merger agreement have agreed to take certain actions
prior the closing, including the following:
o The parties will provide to each other, their counsel, accountants,
designated employees and other representatives, all information
relating to their respective businesses deemed necessary.
o Except as otherwise agreed upon, none of the parties are to make,
declare, pay or set aside for payment any extraordinary dividend, issue
any capital except as set forth in the agreement, or incur any
indebtedness for borrowed money except in the ordinary course of
business.
o Each party will conduct their respective businesses in the ordinary
course of business, consistent with past practice and in material
conformity with all applicable laws, rules and regulations and use
reasonable efforts to maintain satisfactory relations with valuable
customers and others having business relationships with them.
o Arvilla is to provide unaudited monthly balance sheets and income
statements until the closing of the transaction.
o Arvilla is to cause a meeting of its stockholders to approve the merger
agreement and transactions contemplated thereby.
o Trans Energy's board of directors is to approve the merger agreement
and transactions contemplated thereby and also approve a reverse stock
split of our issued and outstanding shares on a one share for 150
shares basis, which stock split is to be approved by the written
consent of a majority of Trans Energy stockholders.
o As soon as practical after execution of the merger agreement, Trans
Energy will cause to be prepared, filed with the SEC and mailed to our
stockholders an Information Statement pursuant to Section 14(c) of the
Securities Exchange Act of 1934 and Regulation 14C thereunder,
concerning action to effect the reverse stock split taken by written
consent.
o Each party is to use its best efforts to obtain all permits,
authorizations, consents, waivers and approvals from third parties or
governmental authorities necessary to consummate the transactions
contemplated by the merger agreement.
In addition to the above covenants, Trans Energy has agreed to do the
following:
o Convert certain designated debt and other obligations into the Trans
Energy common stock. Accordingly, on October 26, 2004, we distributed
an aggregate of 203 million shares of common stock in exchange for the
conversion of debt in the amount of $2,401,424 previously incurred by
us, which satisfies this covenant.
o Prior to the effective date, our board of directors will cause Clarence
E. Smith and Rebecca L. Smith to be appointed to our board of
directors.
o Prior to the effective date, our board of directors will cause our
bylaws to be amended so that any of the following actions will require
the affirmative vote of 80% of the members of the board:
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(a) an amendment of our articles of incorporation or bylaws;
(b) any merger or consolidation involving Trans Energy or any of our
affiliated entities;
(c) the issuance of, or any offer to issue, any voting or, non-voting
common or preferred stock of Trans Energy or any of our affiliated
corporations, or any interest in any of our affiliated non-
corporate entities;
(d) the sale, exchange or transfer of substantially all of our assets
or any of our affiliated entities;
(e) the sale, exchange or transfer of any interest in Arvilla, Inc. or
Arvilla Oilfield Services, LLC, whether for or in the absence of
adequate consideration;
(f) the borrowing, incurrence of debt, or expenditure of more than
$25,000; or
(g) any other act or action by or of our board of directors which is
not in the regular, ordinary course of business.
o We have also agreed to give to Clarence E. Smith and Rebecca L. Smith,
or their personal representatives, the right of first refusal to
reacquire Arvilla, at its fair market value as determined by
independent appraisal, or at the same price and upon the same terms and
conditions as those set forth in a written offer of a third-party, in
the event our board of directors, or any affiliated entity, decides to
dispose of Arvilla, whether directly or indirectly.
o We have agreed that the separate legal status of Arvilla, Inc. and
Arvilla Oilfield Services, LLC will be maintained, and their assets and
business operations will remain a part of Arvilla that will remain a
wholly owned subsidiary of Trans Energy.
Conditions to the Merger
The respective obligations of Arvilla, Trans Energy and Trans Energy
Acquisitions to complete the merger are subject to the satisfaction or waiver of
various conditions, including normal and customary closing conditions such as:
o the merger agreement will have been duly approved by the board of
directors and/or stockholders of each of the parties;
o all regulatory approvals required to consummate the transactions
contemplated by the merger agreement will have been obtained;
o no governmental authority shall have promulgated or entered any
statute, rule regulation judgment decree, injunction or order which in
effect prohibits consummation of the contemplated transactions;
o no injunction or other decree will have been issued by any court which
prevents the merger; and
o all consents and approvals required for the contemplated transactions
will have been obtained.
In addition to the foregoing, the obligation of Arvilla to complete the
merger is also subject to the satisfaction or waiver of the following
conditions:
o the representations and warranties of Trans Energy and Trans Energy
Acquisitions will be true and correct;
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o Trans Energy and Trans Energy Acquisitions will have performed all
obligations required to be performed under the agreement and will have
delivered to Arvilla a certificate to such effect; and
o Arvilla will have received an opinion of counsel as to the tax-free
nature of the acquisition and reorganization.
The obligation of Trans Energy and Trans Energy Acquisitions to complete
the merger is also subject to satisfaction or waiver of the following
conditions:
o the representations and warranties of Arvilla will be true and correct;
o Arvilla will have performed all obligations required to be performed
under the agreement and will have delivered to Trans Energy and Trans
Energy Acquisitions a certificate to such effect; and
o Trans Energy and Trans Energy Acquisitions will have received an
opinion of counsel as to the tax-free nature of the acquisition and
reorganization.
Termination
Termination by either Arvilla or Trans Energy. The merger agreement may be
terminated at any time prior to the effective date, whether before or after
approval by Arvilla's stockholders:
o by mutual consent of Trans Energy or Arvilla;
o by either Trans Energy or Arvilla if the merger has not been
consummated on or before January 14, 2005 (the "termination date");
o if the transaction has not been approved by Trans Energy's board of
directors;
o if any governmental or regulatory body, the consent of which is a
condition to the obligations of the parties to consummate the
acquisition, does not grant its consent to the transaction; or
o any court of competent jurisdiction shall have issued an order,
judgment or decree restraining, enjoining or otherwise prohibiting the
merger
Effect of Termination. In the event of termination by either Trans Energy
or Arvilla, the merger agreement will become void and there will be no liability
or obligation on the part of any of the parties or their respective officers or
directors, except for liability arising out of any breach of the merger
agreement.
-21-
Cost and Expenses of the Merger
All costs and expenses in connection with the contemplated transaction will
be paid by the party incurring these costs and expenses. We have agreed to pay
all expenses related to the preparation, printing and mailing of the information
statement and all related filing and other fees paid to the SEC in connection
with the merger and acquisition of Arvilla. We estimate that the total costs and
expenses that we will pay in connection with the transaction will be
approximately $60,000, which consists of legal and professional fees, printing
and mailing costs, filing fees and other miscellaneous expenses. Arvilla will
pay all costs and expenses it incurs in connection with the transaction.
Amendment
The merger agreement may be amended at any time in writing signed by all
parties, but not after approval by the Arvilla stockholders.
Extension and Waiver
At any time before the effective time, any of the parties to the merger
agreement may waive any breach of representations, warranties, covenants,
conditions or documents of another party.
Certain Federal Income Tax Consequences and Accounting Treatment of Acquisition
of Arvilla
Because no action is being taken in connection with the current outstanding
shares of Trans Energy common stock, no gain or loss is anticipated to be
recognized by our stockholders in connection with the acquisition of Arvilla and
related merger. It is the intent of the parties that the acquisition of Arvilla
under the terms of the merger agreement will qualify, for federal income tax
purposes, as a reorganization with the meaning of Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). As such, we will not recognize a
gain or loss as a result of the acquisition, nor will Arvilla stockholders
recognize a gain or loss. It is anticipated that the issuance of our shares of
common stock to Arvilla stockholders and pursuant to the merger agreement will
be tax-free to those persons.
You are urged to consult your own tax advisor as to any possible tax
consequences related to the acquisition of Arvilla, including tax return
reporting requirements and the applicability and effect of federal, state,
local, foreign and other applicable tax laws.
Appraisal Rights
Under applicable Nevada law, our stockholders do no have the right to
demand appraisal of their shares in connection the approval by written consent
of the reverse stock split or other actions that may be contemplated in
connection with the acquisition of Arvilla pursuant to the merger.
Federal Securities Law Consequences
Trans Energy shares of common stock to be issued to the Arvilla
stockholders in connection with the merger agreement will not be registered
under the Securities Act of 1933. It is intended that such shares will be issued
pursuant to private placement exemptions available under Section 4(2) and/or
Regulation D of the Securities Act. These shares are deemed "restricted stock"
and will bear an appropriate restrictive legend indicating that the resale of
such shares may be made only pursuant to registration under the Securities Act
or pursuant to an available exemption from such registration.
-22-
After completing the acquisition of Arvilla, we anticipate that the our
common stock will continue to be listed on the OTC Bulletin Board under the
trading symbol "TSRG." Certain of our outstanding shares of common stock,
including those issued pursuant to the merger transaction, will be "restricted
securities" within the meaning of Rule 144 promulgated under the Securities Act.
Under the provisions of Rule 144, restricted securities may be sold into the
public market, subject to holding period, volume and other limitations set forth
under the Rule. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year, including any person who may be deemed to be an
"affiliate," as defined under the Securities Act, is entitled to sell, within
any three-month period, an amount of shares that does not exceed the greater of:
o the average weekly trading volume in the common stock, as reported
through the automated quotation system of a registered securities
association, during the four calendar weeks preceding such sale, or
o 1% of the shares then outstanding.
In order for a stockholder to rely on Rule 144, Trans Energy must have
available adequate current public information with respect to our business and
financial status. A person who is not deemed to be an affiliate and has not been
an affiliate for the most recent three months, and who has held restricted
shares for at least two years would be entitled to sell such shares under Rule
144(k) without regard to the various resale limitations of Rule 144.
Under Rule 144, the one-year holding period will commence as of the
effective time of the merger for the stockholders and debenture holders of
Arvilla who receive shares of our common stock in the merger. Sales under Rule
144 are also subject to manner of sale provisions and notice requirements and to
the availability of current public information about us.
ANTICIPATED BUSINESS FOLLOWING THE ACQUISITION OF ARVILLA
Information Concerning Trans Energy, Inc.
Business
Following the acquisition of Arvilla, in addition to the new business of
Arvilla we will continue our current business of the transporting, marketing and
producing natural gas and oil and engaging in certain limited exploration and
development activities.
Our business strategy is to economically increase reserves, production and
the sale of gas and oil from existing and acquired properties in the Powder
River Basin, Appalachian Basin and elsewhere, in order to maximize shareholders'
return over the long term. Our strategic location in West Virginia enables us to
actively pursue the acquisition and development of producing properties in that
area that will enhance our revenue base without proportional increases in
overhead costs.
We operate oil and natural gas properties and transport and market natural
gas through our transmission systems in West Virginia. Although management
desires to acquire additional oil and natural gas properties and to become more
involved in exploration and development, this can only be accomplished if we can
secure future funding. Management intends to continue to develop and increase
the production from oil and natural gas properties that we currently own.
Although we will continue to transport and market natural gas through our
pipelines, there are no current plans to acquire or to lay any additional
pipeline. Accordingly, during 2003 we have sold approximately 7.6 miles of our
6-inch pipeline and approximately 10 miles of our 4-inch pipeline for cash and
other consideration. In 2004, we sold approximately 3 miles of 6-inch pipeline
and approximately 5.7 miles of 4-inch pipeline.
-23-
Marketing
We operate exclusively in the oil and gas industry. Natural gas production
from wells owned by us is generally sold to various intrastate and interstate
pipeline companies and natural gas marketing companies. Sales are generally made
on the spot market or under short-term contracts (one year or less) providing
for variable or market sensitive prices. These prices often are tied to natural
gas futures contracts as posted in national publications.
Natural gas delivered through our pipeline network is sold through a
contract with Sancho Oil and Gas Corporation to Dominion Hope Gas, a local
utility. Some of the gas is sold at a fixed price on a year long basis and some
at a variable price per month per Mcf. Under our contract with Sancho, we have
the right to sell natural gas subject to the terms and conditions of a 20-year
contract, as amended, that Sancho entered into with Hope Gas in 1988. This
agreement is a flexible volume supply agreement whereby we receive the full
price which Sancho charges the end user less a $.05 per Mcf marketing fee paid
to Sancho. In addition to the natural gas produced by our wells, we also
purchased approximately 500 Mcf of natural gas per day in 2003.
We sell our oil production to third party purchasers under agreements at
posted field prices. These third parties purchase the oil at the various
locations where the oil is produced.
Although management believes that we are not dependent upon any one
customer, our marketing arrangement with Sancho accounted for approximately 82%
of our revenue for the year ended December 31, 2003, and approximately 26% for
the year ended December 31, 2002. This marketing agreement is in effect until
September 1, 2008.
Competition
We are in direct competition with numerous oil and natural gas companies,
drilling and income programs and partnerships exploring various areas of the
Appalachian and Powder River Basins and elsewhere competing for customers. Many
competitors are large, well-known oil and gas and/or energy companies, although
no single entity dominates the industry. Many of our competitors possess greater
financial and personnel resources enabling them to identify and acquire more
economically desirable energy producing properties and drilling prospects than
us. Additionally, there is competition from other fuel choices to supply the
energy needs of consumers and industry. Management believes that there exists a
viable market place for smaller producers of natural gas and oil and for
operators of smaller natural gas transmission systems.
Recent Acquisition of Assets
On November 5, 2004, we finalized an agreement with Texas Energy Trust
Company, having offices in Irving, Texas ("TETCO"), whereby we acquired from
TETCO certain oil and gas leases and leasehold interests located in Wetzel and
Marion Counties, West Virginia, and other assets. The acquisition was
accomplished by our wholly owned subsidiary, Prima Oil Company, Inc., acquiring
from TETCO 100% of the issued and outstanding shares of Cobham Gas Industries,
Inc. Under the terms of the agreement, we are acquiring certain wells, leases,
pipelines, gas purchase agreements, oil hauling agreements, equipment, right of
ways and other miscellaneous items related to the leases located in West
Virginia. A total of 229 wells are being acquired, of which 98 are currently
producing, located on approximately 15,000 leased acres. We also acquired
certain vehicles and heavy equipment and various other drilling equipment.
In consideration for the acquired property, we are paying a purchase price
of $1,975,058, of which approximately 25% is being paid in cash and the balance
in 244,633 shares of restricted Trans Energy common stock, to be issued
following effectiveness of the reverse stock split. The shares are valued at
-24-
$1,485,794. Of the total cash payment of $489,264, an initial payment of
$250,000 was paid at the closing, with the remaining balance to be paid
quarterly in equal installments of $59,816 beginning January 1, 2005, with the
final payment due October 1, 2005.
Government Regulation
The oil and gas industry is extensively regulated by federal, state and
local authorities. The scope and applicability of legislation is constantly
monitored for change and expansion. Numerous agencies, both federal and state,
have issued rules and regulations binding on the oil and gas industry and its
individual members, some of which carry substantial penalties for noncompliance.
To date, these mandates have had no material effect on our capital expenditures,
earnings or competitive position.
Legislation and implementing regulations adopted or proposed to be adopted
by the Environmental Protection Agency ("EPA") and by comparable state agencies,
directly and indirectly, affect our operations. We are required to operate in
compliance with certain air quality standards, water pollution limitations,
solid waste regulations and other controls related to the discharging of
materials into, and otherwise protecting the environment. These regulations also
relate to the rights of adjoining property owners and to the drilling and
production operations and activities in connection with the storage and
transportation of natural gas and oil.
We may be required to prepare and present to federal, state or local
authorities data pertaining to the effect or impact that any proposed operations
may have upon the environment. Requirements imposed by such authorities could be
costly, time-consuming and could delay continuation of production or exploration
activities. Further, the cooperation of other persons or entities may be
required for us to comply with all environmental regulations. It is conceivable
that future legislation or regulations may significantly increase environmental
protection requirements and, as a consequence, our activities may be more
closely regulated which could significantly increase operating costs. However,
management is unable to predict the cost of future compliance with environmental
legislation. As of the date hereof, management believes that we are in
compliance with all present environmental regulations. Further, we believe that
our oil and gas explorations do not pose a threat of introducing hazardous
substances into the environment. If such event should occur, we could be liable
under certain environmental protection statutes and laws. We presently carry
insurance for environmental liability.
Our exploration and development operations are subject to various types of
regulation at the federal, state and local levels. Such regulation includes the
requirement of permits for the drilling of wells, the regulation of the location
and density of wells, limitations on the methods of casing wells, requirements
for surface use and restoration of properties upon which wells are drilled, and
governing the abandonment and plugging of wells.
Exploration and production are also subject to property rights and other laws
governing the correlative rights of surface and subsurface owners.
We are subject to the requirements of the Occupational Safety and Health
Act, as well as other state and local labor laws, rules and regulations. The
cost of compliance with the health and safety requirements is not expected to
have a material impact on our aggregate production expenses. Nevertheless, we
are unable to predict the ultimate cost of compliance.
Although past sales of natural gas and oil were subject to maximum price
controls, such controls are no longer in effect. Other federal, state and local
legislation, while not directly applicable to us, may have an indirect effect on
the cost of, or the demand for, natural gas and oil.
-25-
Employees
We currently employ seven people full-time, consisting of three executives,
one marketing and clerical person, and three production persons. Management
presently anticipates hiring additional employees as business conditions warrant
and as funds are available.
Facilities
We currently occupy approximately 4,000 square feet of office space in St.
Marys, West Virginia, which we share with our subsidiaries, Tyler Construction
Company and Ritchie County Gathering Systems. We lease an aggregate of
approximately 4,000 square feet from an unaffiliated third party under a verbal
arrangement for $1,400 per month, inclusive of utilities. Management believes
that our present office facilities are adequate for our current business
operations.
Legal Proceedings
Information concerning certain material pending legal proceedings to which
we are a party, or to which any of our property is subject, is set forth below:
o On September 22, 2000, Tioga Lumber Company obtained a judgment of
$43,300 plus interest in the Circuit Court of Pleasants County, West
Virginia, against Tyler Construction Company for breach of contract. On
February 28, 2002, we reached a negotiated payment schedule with Tioga
and made the initial payment. We believe that we have satisfied the
balance owed to Tioga of $26,233.58, although the judgment has not yet
been released. We are proceeding to secure the release of the judgment.
o On January 15, 2003, a suit against us entitled Lario Oil & Gas Company
vs. Trans Energy, Inc. (Civil Action No. 24575) was initiated in the
Sixth District Court of Campbell County, Wyoming. Lario's suit asks for
$50,692.10 which it claims we owe for operating fees on the Sagebrush
#1 and #2 and the Pinon Fee #1 wells, operated by Lario and in which we
have working interests. We asked for a complete accounting of all
monies owed. Lario retained our share of monthly oil production monies
and applied them to the amount owed. On August 23, 2004, the court
dismissed the action with prejudice.
Registration under the Securities Exchange Act of 1934
Trans Energy is registered under the Securities Exchange Act of 1934 and,
accordingly we are required to file certain periodic, annual and other reports
with the SEC. Following the acquisition of Arvilla, we will continue to be a
reporting company under the Exchange Act and continue to file periodic reports
and be subject to the proxy solicitation requirements of the Exchange Act. It is
anticipated that our common stock will not be listed on any national securities
exchange or on The Nasdaq Stock Market, but will continue to be listed on the
OTC Bulletin Board.
Arvilla, Inc.
Following the merger transaction, we will assume all of the operations,
assets and liabilities of Arvilla, Inc., a Nevada corporation that owns all the
membership interests in Arvilla Oilfield Services, LLC. Arvilla is engaged in
providing well servicing, workover and related transportation services to
independent oil and natural gas producers in the northeast region of the United
States. Arvilla performs ongoing maintenance and major overhauls necessary to
optimize the level of production from existing oil and natural gas wells and
provides certain ancillary services during the drilling and completion of new
wells. Arvilla offers its services in Ohio, Pennsylvania, New York, Virginia,
Kentucky and West Virginia.
-26-
Typically, Arvilla will provide a well servicing or swab rig, the crew to
operate the rig, and such other specialized equipment as may be needed to meet a
customer's requirements. Arvilla also owns a fleet of equipment that provides:
o brine hauling and disposal;
o pipeline and facility construction;
o well location preparation and lease road construction;
o oil hauling; and
o trucking of oilfield equipment, such as rigs, casings, tubing and rods.
Arvilla's operations were previously conducted as Arrow Oilfield Service
Company, a division of Belden & Blake Corporation ("B&B"), a privately held
company engaged in the exploration, development and production of oil and
natural gas reserve. In June 2004, Mr. and Mrs. Smith acquired Arrow Oilfield
Services from B&B and created Arvilla Oilfield Services, LLC as the operating
entity. Mr. and Mrs. Smith then negotiated with Trans Energy which ultimately
led to the acquisition of Arvilla by us and the execution of the merger
agreement and plan of reorganization.
Arvilla's principal executive offices are located at 7994 South Pleasant
Highway, St. Marys, West Virginia 26170, and its telephone number is (304)
665-2652.
Strategy
Management believes that the Appalachian Basin in the northeastern portion
of the United States provides significant opportunities for exploration and
production companies to develop reserves at shallow depths. Because Arvilla
operates in Ohio, Pennsylvania, New York, Virginia, Kentucky and West Virginia,
we feel that Arvilla's well servicing operations are well positioned to
capitalize on existing market opportunities and established demand for its
services.
Arvilla's service area is located within 500 miles of the major gas markets
for the United States. This strategic location is important as oil and gas
companies develop natural gas reserves for future markets. Management
anticipates that demand for natural gas will grow significantly in the next few
years and, as a result of the demand, it is expected that there to be a marked
increase in drilling activity in the Appalachian Basin served by Arvilla. As
drilling activity increases, the need for the services provided by Arvilla will
increase. Every well drilled requires service of the type that Arvilla is able
to provide. As the drilling activities increase, we expect the demand for
Arvilla's services in its operation area will also increase.
Services
Through its experienced work force, Arvilla is able to provide various
services to the oil and gas industry that include:
Trucking services. Arvilla owns a fleet of trucks that can provide
customers with the ability to move equipment, tanks, drill pipe, and other types
of trucking needs necessary in the oil and gas business. Each time a well is
drilled, all drilling equipment must be moved by trucks from one site to the
next. This equipment includes generators, water pumps, drill pipe, air
compressors, drilling rigs, and many other associated items used in drilling.
Excavating equipment. Arvilla provides dozer, excavators, and loaders that
are used to build access roads, cut drill sites for wells, dig pits, reclaim
drill sites after drilling is completed, reclaim access roads, and seed,
fertilize, lime, and mulch disturbed areas.
-27-
Service and swab rigs. Arvilla maintains a fleet of 14 service rigs and
swab rigs capable of servicing wells up to 6,000 feet in depth. This service
includes running pipe, tubing, rods, and swabbing capabilities. All wells
drilled require services of this type.
Brine and water hauling. Arvilla provides a fleet of 20 vacuum trucks
designed to deliver water to drilling rigs and fracs. Arvilla also hauls and
disposes of brine water from producing wells and disposes of pit water used in
well completions.
Disposal wells. Arvilla has 14 brine disposal wells located at various
locations in Ohio. These wells are used for the disposal of brine and pit water.
Oil hauling. Arvilla maintains a fleet of 6 oil tankers that pick up oil
from producers at the well site and delivers the oil to terminals, from which it
is shipped to refineries.
Pipelines. Arvilla has the capability of constructing pipelines for the
delivery of natural gas or oil. Most wells drilled require construction of a
natural gas line to deliver gas from the well to a gathering system, which will
ultimately take the gas to market.
Marketing
Arvilla markets its services through its various office locations. Each
office has a designated person who will market the services for that offices's
given area. Currently, the marketing is done from Canton, Ohio, Pleasantville,
Pennsylvania and St. Marys, West Virginia. Arvilla advertises its services in
oil and gas trade journals as well as direct verbal and written communication to
oil ad gas companies operating in the areas served by Arvilla. Arvilla also
maintains a web site that will be available for current and prospective
customers to review. Brochures will also be prepared for distribution that will
explain those services available.
Facilities
Arvilla currently operates out of facilities located in or near its service
areas. Arvilla's corporate headquarters are located in St. Marys, West Virginia
and consist of a leased 6,400 square foot shop and office facility. This office
manages work in West Virginia, Virginia, and Kentucky. Arvilla owns a 20,000
square foot office and shop located on 39 acres in Canton, Ohio, that manages
most of Arvilla's work in Ohio and some in Western Pennsylvania. This office
reports to the main office in St. Marys. West Virginia. Arvilla also uses a
leased shop and office located in Cambridge, Ohio that manages work in Southern
Ohio and reports to the Canton, Ohio office. Further, Arvilla maintains a leased
shop and office located in Pleasantville, Pennsylvania that manages work in
Pennsylvania and New York and reports to the main office in St. Marys, West
Virginia.
Management
Immediately prior to the effective time of the merger, our board of
directors will appoint two new directors, Clarence E. Smith and Rebecca L. Smith
and elect them as officers. Trans Energy's board currently consists of Robert L.
Richards, Loren E. Bagley and William F. Woodburn. Accordingly, the following
persons will make up our board of directors and hold the respective offices as
indicated.
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Name Age Position
---- --- --------
Robert L. Richards 59 President, CEO and Director
Loren E. Bagley 62 Vice President and Director
William F. Woodburn 62 Secretary / Treasurer and Director
Clarence E. Smith 41 Vice President and Director
Rebecca L. Smith 36 Director
----------------------------
The business experience of each of the persons listed above during the past
five years is as follows:
Robert L. Richards became a director and was appointed President and CEO in
September 2001. From 1982 to the present, he has been President of Robert L.
Richards, Inc. as a consulting geologist with 27 years experience in the
petroleum industry. He has also served as a geologist with Exxon, exploration
geologist with Union Texas Petroleum, and regional exploration manager for
Carbonit Exploration, Inc. From 2000 to the present, he has been President and
CEO of Derma - Rx, Inc., a formulator and marketer of skin care products. Also,
from 1992 to August 2000, Mr. Richards was CEO of Kaire Nutraceuticals, Inc., a
developer and marketer of health and nutritional products. Mr. Richards served
as Vice President of Continental Tax Corporation from March 1989 to August 1992.
He has five and one-half years experience in the United States Air Force as an
Instructor Pilot. Mr. Richards holds a B.S. degree in geology from Brigham Young
University.
Loren E. Bagley served as our President and CEO from September 1993 to
September 2001, at which time he resigned as President and was appointed Vice
President. From 1979 to the present, Mr. Bagley has been self -employed in the
oil and gas industry as president, CEO or vice president of various corporations
which he has either started or purchased, including Ritchie County Gathering
Systems, Inc. Mr. Bagley's experience in the oil and gas industry includes
acting as a lease agent, funding and drilling of oil and gas wells, supervising
production of over 175 existing wells, contract negotiations for purchasing and
marketing of natural gas contracts, and owning a well logging company
specializing in analysis of wells. Prior to becoming involved in the oil and gas
industry, Mr. Bagley was employed by the United States government with the
Agriculture Department. Mr. Bagley attended Ohio University and Salem College
and earned a B.S. Degree.
William F. Woodburn has served as our Vice President from August 1991 to
September 2001, at which time he resigned as Vice President and was appointed
Secretary / Treasurer. Mr. Woodburn has been actively engaged in the oil and gas
business in various capacities for the past twenty years. For several years
prior to 1991, Mr. Woodburn supervised the production of oil and natural gas and
managed the pipeline operations of Tyler Construction Company, Inc. and Tyler
Pipeline, Inc. Mr. Woodburn is a stockholder and serves as President of Tyler
Construction Company, Inc. He is also a stockholder of Tyler Pipeline, Inc. that
owns and operates oil and gas wells in addition to natural gas pipelines, and
Ohio Valley Welding, Inc. that owns a fleet of heavy equipment that services the
oil and gas industry. Prior to his involvement in the oil and gas industry, Mr.
Woodburn was employed by the United States Army Corps of Engineers for twenty
four years and was Resident Engineer on several construction projects. Mr.
Woodburn graduated from West Virginia University with a B.S. in civil
engineering.
Clarence E. Smith graduated from St. Marys (West Virginia) High School and
the PRT Technical School in 1981. He started Arvilla Well Service in 1981
providing well location construction and clean-up and wellhead hook-up services.
Mr. Smith expanded his business into pipeline construction which became Arvilla
Pipeline Construction Co., operating from Bristol, Tennessee to Corning, New
York. This business provides construction services to most large gas companies
-29-
in the area such as Dominion Transmission, Equitrans, Columbia Natural Resources
and other smaller companies. Arvilla Pipeline employees approximately 90 people
and can lay up to 20" inch diameter pipe. In the summer of 2004, Clarence and
his wife Rebecca purchased Arrow Oilfield Services from the Belden and Blake
Corporation. Arrow was renamed Arvilla Oilfield Services, LLC. Mr. Smith also
owns Arvilla Rental & Equipment, LLC and is registered with the State of West
Virginia as an oil and gas producer.
Rebecca L. Smith graduated from Harrisville (West Virginia) High School in
1986 and then from the Wilma Boyd Travel School in Pittsburgh, Pennsylvania. She
was then employed as a travel agent in Philadelphia. Mrs. Smith joined Arvilla
Well Service as a part-time employee in 1995 became a full-time employee of
Arvilla Pipeline in 2000. Mrs. Smith is currently part owner and vice president
of Arvilla Pipeline Construction Co., Inc. and is part owner and acting member
of Arvilla Rental & Equipment, LLC and Arvilla Oilfield Services, LLC. Her
responsibilities include supervising all the offices and the pipeline shop as
well as overseeing the pipeline bid process. She is also active in the public
relations business of both companies and contributed to the design of both
Arvilla's brochure and web site.
Employees
Arvilla Oilfield Services, LLC has approximately 103 full time employees
consisting of the following:
o 38 rig hands that operate or work directly on a service rig or swab
rig;
o 20 truck drivers who drive various types of trucks that haul oil, brine
or oilfield equipment;
o 2 equipment operators who operate various types of excavating
equipment;
o 11 roustabouts who perform various types of labor work associated with
oil and gas production such as setting tank batteries, meter runs and
laying or repairing gas lines;
o 10 mechanics that repair and maintain all types of trucks, rigs and
equipment;
o 4 clerical employees;
o 6 managerial persons; and
o 2 executives.
Arvilla's employees are not members of any union, nor have they entered
into any collective bargaining agreements. Arvilla believes that its
relationship with its employees is good. With the successful implementation of
our business plan, we may seek additional employees in the next year to handle
anticipated potential growth. We anticipate that we may hire additional
employees in the areas of rig operators, truck drivers, mechanics and
roustabouts.
The following persons are considered key employees of Arvilla:
Randy Ile. Mr. Ile is the rig superintendent for Arvilla's Ohio region and
is primarily responsible for the region's service and swag rig activity. He has
been with Arrow Oilfield Services (which is now Arvilla) since 1997. Mr. Ile
graduated from high school in 1966 and served in the armed forces from 1966 to
1969. From 1971 to 1977, he worked as a "roughneck" (oilfield worker) for three
years before becoming a driller. Mr. Ile also became a toolpusher for PEP
Drilling from 1977 to 1987 and then a drilling superintendent from 1987 to 1997.
He is a member of the Ohio Oil & Gas Association and completed BOP (???)
training in 1989.
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James Hawkins. Mr. Hawkins is the supervisor of oil and water hauling for
Arvilla's Ohio region. He has been with Arrow Oilfield Services (Arvilla) since
1982 when he was initially hired as a rig hand. While with Arrow, Mr. Hawkins
has been a well tender, treat truck driver, roustabout, heavy equipment
operator, oil truck driver and dispatcher of Arrow's Ohio Fluid hauling
operations.
Competition
Arvilla is in direct competition with numerous other oilfield service
companies that operate in the same areas in which Arvilla operates. Some of
Arvilla's competitors include Bishop Well Services, Key Energy, Triad, Carper
Well Services, Danny Long and S & H Water Service. Some existing and potential
competitors have greater financial resources, larger market share and more
customers than Arvilla, which may enable them to establish a stronger
competitive position than we have. There is also much competition for qualified
personnel that operate the equipment used in the oilfield service business.
Management believes that Arvilla can successfully compete with these other
businesses in securing trained personnel and additional customers.
FINANCIAL INFORMATION FOR ARVILLA
Upon completion of the acquisition of Arvilla, we intend to file with the
SEC a Form 8-K current report that will include additional information
concerning Arvilla. We also intend to file audited financial statements for
Arvilla, that are expected to be ready for filing at the time of the closing the
merger agreement. However, if the financial statements have not been finalized
by the time we file the Form 8-K we are required to file the statements within
71 days after the report is required to be filed. Accordingly, we are not
including financial statements, audited or unaudited, for Arvilla as part of
this information statement or are we including pro forma financial information.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, we file annual and periodic reports and other
information with the SEC. These reports and other information contain additional
information about our company. You can inspect and copy these materials at the
Securities and Exchange Commission public reference rooms at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on public reference rooms. Some of this information may also be
accessed on the World Wide Web through the SEC's Internet address at
"http://www.sec.gov."
Statements contained in this information statement or in any document
incorporated into this information statement by reference regarding the contents
of any contract or other document are not necessarily complete and each such
statement is qualified in its entirety by reference to such contract or other
document filed as an exhibit with the SEC.
The SEC allows us to incorporate by reference into this information
statement documents we file with the SEC, which means that we can disclose
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important information by referring to those documents. The information
incorporated by reference into this information statement is considered to be a
part of this information statement, and later information that we file with the
SEC will update and supersede that information. We incorporate by reference the
documents listed:
o our annual report on Form 10-KSB for the fiscal year ended December 31,
2003;
o our quarterly reports on Form 10-QSB for the quarters ended March 31,
June 30 and September 30, 2004; and
o our current reports on Form 8-K filed on September 23, 2004 and
November 12, 2004.
We will provide without charge, upon written or oral request by a
stockholder, a copy of any and all of the documents referred to above that have
been, or may be, incorporated by reference herein. Written requests should be
sent to our principal offices at 210 Second Street, P.O. Box 393,St. Marys, West
Virginia 26170, attn: William F. Woodburn. Oral requests may be made to our
principal offices, telephone number (304) 684-7053.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
INTO THIS INFORMATION STATEMENT. THE DATE OF THIS INFORMATION STATEMENT IS
DECEMBER 31, 2004. WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION
DIFFERENT FROM THE INFORMATION CONTAINED IN THIS INFORMATION STATEMENT. YOU
SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
INTO THIS INFORMATION STATEMENT IS ACCURATE AS OF ANY LATER DATE THAN THE DATE
OF THE INFORMATION STATEMENT, AND THE MAILING OF THIS INFORMATION STATEMENT TO
STOCKHOLDERS WILL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
BY ORDER OF THE BOARD OF DIRECTORS
December 31, 2004 /s/ WILLIAM F. WOODBURN
----------------------------------
William F. Woodburn
Secretary
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Appendix A
MERGER AGREEMENT AND PLAN OF REORGANIZATION
THIS MERGER AGREEMENT AND PLAN OR REORGANIZATION, dated as of December
3, 2004 ("Agreement"), by and among TRANS ENERGY, INC., a Nevada corporation
("Parent"), TRANS ENERGY ACQUISITIONS, INC., a Nevada corporation and a
wholly-owned subsidiary of Parent ("Subsidiary"), ARVILLA, INC., a Nevada
corporation (the "Target") (Subsidiary and Target being hereinafter collectively
referred to as the Constituent Corporations") and CLARENCE E. SMITH and REBECCA
L. SMITH ("Controlling Shareholders").
WHEREAS, the Boards of Directors of Parent, Subsidiary and Target have
approved the acquisition of Target by Parent; and
WHEREAS, the Boards of Directors of Parent, Subsidiary and Target have
approved the merger of Subsidiary into Target (the "Merger"), pursuant to the
Agreement and the transactions contemplated herein, in accordance with the
applicable provisions of the statutes of the State of Nevada, which permit such
Merger; and
WHEREAS, for federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization with the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, each of the parties to this Agreement desires to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions thereto.
NOW, THEREFORE, THIS AGREEMENT WITNESSETH: That for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger.
----------
(a) At the Effective Time (as defined in Section 1.2) and
subject to the terms and conditions of this Agreement, Subsidiary shall be
merged into Target and the separate existence of Subsidiary shall thereupon
cease, in accordance with the applicable provisions of the general corporation
laws of the State of Nevada, Nevada Revised Statutes: Chapters 78 and 92A (the
"NGCL").
(b) Target will be the surviving corporation in the Merger
(sometimes referred to herein as the "Surviving Corporation") and will continue
to be governed by the laws of the State of Nevada, and the separate corporate
existence of Target and all of its rights, privileges, immunities and
franchises, public or private, and all its duties and liabilities as a
corporation organized under the NGCL, will continue unaffected by the Merger.
1
(c) The Merger will have the effects specified by the NGCL.
Section 1.2 Effective Time. As soon as practicable following
fulfillment or waiver of the conditions specified in Article VII hereof, and
provided that this Agreement has not been terminated or abandoned pursuant to
Article IX hereof, the Constituent Corporations will cause a Certificate of
Merger (the "Certificate of Merger") to be filed with the office of the
Secretary of State of the State of Nevada as provided in Section 92A.200 of the
NGCL. Subject to and in accordance with the laws of the States of Nevada, the
Merger will become effective at the date and time the Certificate of Merger is
filed with the office of the Secretary of State of the State of Nevada or such
later time or date as may be specified in the Certificate of Merger (the
"Effective Time"). Each of the parties will use its best efforts to cause the
Merger to be consummated as soon as practicable following the fulfillment or
waiver of the conditions specified in Article VII hereof.
Article II
THE SURVIVING CORPORATION
Section 2.1 Certificate of Incorporation. The Certificate of
Incorporation of Target as in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation after the
Effective Time.
Section 2.2 Bylaws. The Bylaws of Target as in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation after the
Effective Time.
Section 2.3 Board of Directors. From and after the Effective Time, the
Board of Directors of Target shall be the Board of Directors of the Surviving
Corporation.
Article III
CONVERSION AND EXCHANGE OF SHARES
Section 3.1 Conversion and Exchange of Target Parent and Subsidiary
Shares in the Merger. Pursuant to this Agreement, at the Effective Time, by
virtue of the Merger and without any action on the part of any holder of any
capital stock of Target, Parent or Subsidiary:
(a) all shares of Common Stock, no par value, of Subsidiary
("Subsidiary Common Stock") owned by Parent and any subsidiary of Parent shall
be converted into one thousand (1,000) shares of Common Stock, par value $1.00
per share, of Target ("Target Common Stock"); and
(b) all shares Target Common Stock owned by Controlling
Stockholders and all other stockholders of Target shall, subject to Section
3.3(d) hereof, be converted into, and become exchangeable for, the number of
shares of validly issued, fully paid and nonassessable common stock, par value
$0.001 per share, of Parent ("Parent Common Stock") equal to the Conversion
Ratio. In this Agreement, the term "Conversion Ratio" means a fraction, the
numerator of which is equal to the number of whole shares of Parent Common Stock
which represents not less than twenty-five percent (25%) of the authorized,
issued and outstanding shares of Parent Common Stock immediately following the
Effective Time and giving effect to the reverse stock split set forth in Section
6.3(b) below, PLUS 244,633; and the denominator of which is equal to the number
of shares of Parent Common Stock authorized, issued and outstanding immediately
following the Effective Time and giving effect to the reverse stock split set
forth in Section 6.3(b) below, PLUS 244,633. The consideration referred to in
this Section 3.1, together with any cash payments in lieu of fractional shares
as provided herein, is hereinafter referred to as the "Merger Consideration."
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Section 3.2 Status of Target and Subsidiary Shares.
(a) At the Effective Time, by virtue of the Merger and
without any action on the part of any holder of any capital stock of Subsidiary,
each issued and outstanding share of common stock of Subsidiary shall be
converted into and exchanged for Target Common Stock as provided for herein.
(b) At the Effective Time, by virtue of the Merger and
without any action on the part of any holder of any capital stock of Target,
each issued and outstanding share of common stock of Target shall be converted
into and exchanged for Parent Common Stock as provided for herein.
Section 3.3 Exchange of Parent Capital Stock Certificates.
(a) On or prior to the Closing Date, Parent shall make
available to the "Exchange Agent" the certificates representing shares of Parent
Common Stock required to effect the exchange referred to in Section 3.3(b).
Parent shall also make available to the Exchange Agent the cash required to make
the cash payments in lieu of fractional shares referred to in Section 3.3(d)
below. Shares of Parent Common Stock into which shares of Target Common Stock
shall be converted in the Merger shall be deemed to have been issued at the
Effective Time. Shares of Subsidiary Common Stock shall be converted in the
Merger into Shares of Target Common Stock and shall be deemed to have been
issued at the Effective Time.
(b) From and after the Effective Time, each holder of a
certificate which immediately prior to the Effective Time represented
outstanding shares of Target Common Stock, other than shares with respect to
which dissenters' rights, if any, are granted by reason of the Merger under the
NGCL, shall be entitled to receive in exchange therefor, upon surrender thereof
to the Exchange Agent, a certificate or certificates representing the number of
whole shares of Parent Common Stock into which such holder's shares of Target
Common Stock were converted pursuant to Section 3.1 and cash in lieu of any
fractional shares of such Parent Common Stock pursuant to Section 3.3(e). From
and after the Effective Time, Parent shall be entitled to treat the certificates
which immediately prior to the Effective Time represented shares of Target
Common Stock and which have not yet been surrendered for exchange as evidencing
the ownership of the number of full shares of Parent Common Stock into which the
shares of Target Common Stock represented by such certificates shall have been
converted pursuant to Section 3.1, notwithstanding the failure to surrender such
certificates. However, notwithstanding any other provision of this Agreement,
until holders or transferees of certificates which immediately prior to the
Effective Time represented shares of Target Common Stock have surrendered them
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for exchange as provided herein, no dividends shall be paid with respect to any
shares represented by such certificates and no payment for fractional shares
shall be made. Upon surrender of a certificate which immediately prior to the
Effective Time represented outstanding shares of Target Common Stock, there
shall be paid to the holder of such certificate the amount of any dividends
which theretofore became payable, but which were not paid by reason of the
foregoing, with respect to the number of whole shares of Parent Common Stock
represented by the certificate or certificates issued upon such surrender. If
any certificate for shares of Parent Common Stock is to be issued in a name
other than that in which the certificate, which immediately prior to the
Effective Time represented shares of Target Common Stock, surrendered in
exchange therefor is registered, it shall be a condition of such exchange that
the person requesting such exchange shall pay any transfer or other taxes
required by reason of the issuance of certificates for such shares of Parent
Common Stock in a name other than that of the registered holder of any such
certificate surrendered.
(c) As soon as practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Time represented
outstanding shares of Target Common Stock (collectively, the "Target
Certificates") (i) a form letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to Target Certificates
shall pass, only upon actual delivery of Target Certificates to the Exchange
Agent) and (ii) instructions for use in effecting the surrender of Target
Certificates in exchange for certificates representing shares of Parent Common
Stock. Upon surrender of Target Certificates for cancellation to the Exchange
Agent, together with a duly executed letter of transmittal and such other
documents as the Exchange Agent shall require, the holder of such Target
Certificates shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Parent Common Stock into which the
shares of Target Common Stock represented by Target Certificates so surrendered
shall have been converted pursuant to the provisions of Section 3.1, and Target
Certificates so surrendered shall forthwith be cancelled. Notwithstanding the
foregoing, neither the Exchange Agent nor any party hereto shall be liable to a
holder of shares of Target Common Stock for any shares of Parent Common Stock or
dividends or distributions thereon delivered to a public official pursuant to
applicable escheat laws.
(d) Notwithstanding any other provision of this Agreement, no
certificates or scrip for fractional shares of Parent Common Stock shall be
issued upon the surrender for exchange of Target Certificates pursuant to this
Article III in the Merger or upon any exchange made pursuant to Section 4.4
hereof and no Parent Common Stock dividend, stock split or interest shall relate
to any fractional security, and such fractional interests shall not entitle the
owner thereof to vote or to any other rights of a security holder. In lieu of
any such fractional shares, each holder of Target Common Stock who would
otherwise have been entitled to a fraction of a share of Parent Common Stock
upon surrender of Target Certificates for exchange pursuant to this Article III
shall be entitled to receive from the Exchange Agent a cash payment in lieu of
such fractional share equal to such fraction multiplied by the Valuation Price.
Section 3.4 Dissenting Shares. Notwithstanding anything to the contrary
contained in this Agreement, holders of shares of Target Common Stock with
respect to which dissenters' rights, if any, are granted by reason of the Merger
under the NGCL and who do not vote in favor of the Merger and otherwise comply
with the NGCL ("Target Dissenting Shares"), shall not be entitled to shares of
4
Parent Common Stock pursuant to Section 3.1, unless and until the holder thereof
shall have failed to perfect or shall have effectively withdrawn or lost such
holder's right to dissent from the Merger under the NGCL, and shall be entitled
to receive only the payment provided for pursuant to the NGCL. If any such
holder shall have failed to perfect or shall have effectively withdrawn or lost
such holder's dissenters' rights under the NGCL, such holder's Target Dissenting
Shares shall thereupon be deemed to have been converted into and to have become
exchangeable for, as of the Effective Time, the right to receive the Merger
Consideration.
Section 3.5 Closing of Transfer Books.From and after the Effective
Time, the stock transfer books of Target shall be closed and no transfer of
shares of Target Common Stock shall thereafter be made. If, after the Effective
Time, Target Certificates are presented to Parent, they shall be cancelled and
exchanged for the Merger Consideration in accordance with the procedures set
forth in this Article III.
Section 3.6 Closing.The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place (a) at the offices of Bowles
Rice McDavid Graff & Love, LLP, 501 Avery Street, Fifth Floor, Parkersburg, West
Virginia 26101, at 8:00 a.m., local time, on the later of (i) January 7, 2005,
and (ii) the second business day immediately following the date on which the
last of the conditions set forth in Article VII hereof is fulfilled or waived,
or (b) at such other time and place and on such other date as Parent and Target
shall agree (the "Closing Date").
ARTICLE IV
[THIS ARTICLE INTENTIONALLY OMITTED]
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Section 5.1 General Statement. The parties make the representations and
warranties to each other which are set forth in this Article V. The survival of
all such representations and warranties shall be in accordance with Section 10.1
hereof. All representations and warranties of the parties are made subject to
the exceptions which are noted in the respective schedules delivered by the
parties to each other concurrently herewith and identified as, in the case of
Section 5.2, the "Parent Disclosure Schedule," and in the case of Section 5.3,
the "Target Disclosure Schedule." Copies of all documents referenced in the
Parent Disclosure Schedule (other than documents filed by the Parent with the
Securities and Exchange Commission pursuant to the Securities Act of 1933 as
amended (the "Securities Act") or the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) of Target Disclosure Schedule shall be attached
thereto.
Section 5.2 Representations and Warranties of Parent and Subsidiary.
Parent and Subsidiary (collectively, for purposes of this Section 5.2, the
"Corporations") jointly and severally represent and warrant to Target, as of the
Date hereof and at the Effective Time, as follows:
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(a) Organization and Corporate Power. The Corporations are
both corporations duly incorporated and validly existing under the laws of the
State of Nevada and the Corporations are qualified to do business in every
jurisdiction in which their respective ownership of property or conduct of
business requires it to qualify. The Corporations have all requisite corporate
power and authority and all material licenses, permits and authorizations
necessary to own and operate their respective properties and to carry on their
respective businesses as now conducted. The copies of the Corporations' articles
of incorporation and bylaws have been furnished to the Target and such copies
reflect all amendments made thereto at any time prior to the date of this
Agreement and such copies are correct and complete.
(b) Capital Stock and Related Matters. The authorized capital
stock of the Parent consists of 500,000,000 Shares having a par value of $0.001
each, 496,566,131 of which are issued and outstanding, and no other shares,
common or otherwise, of the Parent are issued and outstanding. The parties
mutually agree that prior to the Effective Time, Parent will effect a reverse
stock split of its issued and outstanding shares of common stock on a one share
for 150 shares basis. The authorized capital stock of the Subsidiary consists of
25,000 Shares having no par value, 1,000 of which are issued and outstanding,
and all such Shares of Subsidiary are owned by Parent, and no other shares,
common or otherwise, of the Subsidiary are issued and outstanding. Except as set
forth on Schedule 5.2(b) hereof, the Corporations do not have outstanding and
have not agreed, orally or in writing, to issue any shares or securities
convertible or exchangeable for any shares, nor do they have outstanding nor
have they agreed, orally or in writing, to issue any options or rights to
purchase or otherwise acquire their shares. Except as set forth on Schedule
5.2(b) hereof, the Corporations are not subject to any obligation (contingent or
otherwise) to repurchase or otherwise acquire or retire any of their shares. The
Corporations have not violated any applicable securities laws or regulations in
connection with the offer or sale of their securities other than violations that
have been, or will before the Closing have been, corrected by post-issuance
filings. All of the outstanding shares of the Corporations' capital stock are
validly issued, fully paid and nonassessable. At the Effective Time the Target
Stockholders will have, good and marketable title to the Parent Shares, free and
clear of all security interests, liens, encumbrances or other restrictions or
claims, subject only to restrictions as to marketability imposed by securities
laws. The Corporations have not violated nor will not violate any applicable
securities laws in connection with the offer or sale of the Parent Shares to the
Target Stockholders hereunder.
(c) Authorization. The execution, delivery and performance by
the Corporations of this Agreement and all other agreements contemplated hereby
to which the Target or the Controlling Stockholders are a party have been duly
and validly authorized by all necessary corporate action of the Corporations,
and this Agreement and each such other agreement, when executed and delivered by
the parties thereto, will constitute the legal, valid and binding obligation of
the Corporations enforceable against both of them in accordance with their
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency and similar statutes affecting creditors' rights generally and
judicial limits on equitable remedies.
(d) Governmental Authorities. Except as set forth in Schedule
5.2(d), (i) neither Parent nor Subsidiary are required to submit any notice,
report or other filing with any governmental or regulatory authority in
connection with the execution and delivery by them of this Agreement and the
consummation of this merger and (ii) no consent, approval or authorization of
6
any governmental or regulatory authority is required to be obtained by the
Parent, Subsidiary, or any affiliate in connection with their execution,
delivery and performance of this Agreement and the consummation of this merger.
(e) No Conflict with Other Instruments or Agreements. Except
as set forth on Schedule 5.2(e), the execution, delivery and performance by the
Parent or Subsidiary of this Agreement and all other agreements contemplated
hereby to which they are a party will not result in a breach or violation of, or
constitute a default under, Parent's or Subsidiary's Articles of Incorporation
or Bylaws or any material agreement to which the Parent or Subsidiary are a
party or by which any of them are bound.
(f) Conduct of Business; Liabilities. Except as set forth in
Schedule 5.2(f), neither of the Corporations is in default under, and no
condition exists that with notice or lapse of time would constitute a default of
either of the Corporations under (i) any mortgage, loan agreement, evidence of
indebtedness or other instrument evidencing borrowed money to which either of
the Corporations are a party or by which the Corporations or the properties of
the Corporations are bound or (ii) any judgment, order or injunction of any
court, arbitrator or governmental agency that would reasonably be expected to
affect materially and adversely the business, financial condition or results of
operations of the Corporations taken as a whole.
(g) No Brokers or Finders. Except as set forth in Schedule
5.2(g), there are no claims for brokerage commissions, finders' fees or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of either of the
Corporations.
(h) Securities Disclosures. Parent and Subsidiary have made
all required filings with the federal Securities and Exchange Commission and all
state securities regulatory bodies; and all material statements of fact
disclosed therein are true and complete, and they do not fail to disclose any
material statement of fact required to make such statements true and complete.
(i) Absence of Certain Changes. Except as contemplated or
permitted by this Agreement or as described in Schedule 5.2(i), since the
Statement Date there has not been:
(A) Any material adverse change in the business,
financial condition, operations or assets of the Corporations;
(B) Any damage, destruction or loss, whether covered
by insurance or not materially adversely affecting the properties or business of
the Corporations;
(C) Any sale or transfer by the Corporations of any
tangible or intangible asset other than in the ordinary course of business, any
mortgage or pledge or the creation of any security interest, lien or encumbrance
on any such asset, or any lease of property, including equipment, other than tax
liens with respect to taxes not yet due and contract rights of customers in
inventory;
7
(D) Any declaration, setting aside or payment of a
distribution in respect of or the redemption or other repurchase by the
Corporations of any stock of either of the Corporations;
(E) Any material transaction not in the ordinary
course of businesses of the Corporations;
(F) The lapse of any material trademark, assumed
name, trade name, service mark, copyright or license or any application with
respect to the foregoing;
(G) The grant of any increase in the compensation of
officers or employees (including any such increase pursuant to any bonus,
pension, profit-sharing or other plan) other than customary increases on a
periodic basis or required by agreement or understanding in the ordinary course
of business and in accordance with past practice;
(H) The discharge or satisfaction of any material
lien or encumbrance or the payment of any material liability other than current
liabilities in the ordinary course of business;
(I) The making of any material loan, advance or
guaranty to or for the benefit of any person except the creation of accounts
receivable in the ordinary course of business; or
(J) An agreement to do any of the foregoing.
(j) Disclosure. All matters required to be disclosed by the
Corporations hereunder shall be made to Target and the Controlling Stockholders
in writing no later than thirty (30) days prior to the Closing Date (the
"Corporations' Disclosure Schedule"). Neither this Agreement nor any of the
schedules, attachments, written statements, documents, certificates or other
items prepared or supplied to the Target or the Controlling Stockholders by or
on behalf of the Corporations with respect to this merger contain any untrue
statement of a material fact or omit a material fact necessary to make each
statement contained herein or therein not misleading. No responsible officer or
director of either of the Corporations has intentionally concealed any fact
known by such person to have a material adverse effect upon the Corporations'
existing or expected financial condition, operating results, assets, customer
relations, employee relations or business prospects taken as a whole.
(k) Financial Statements. The audited balance sheet and
income statement of the Corporations as of December 31, 2003, in the form
attached to this Agreement as Exhibit 5.2(k)(A) and the income statement for the
period ending December 31, 2003, in the form attached to this Agreement as
Exhibit 5.2(k)(B) (collectively the "2003 Financial Statements"), fairly
presents the financial position of the Corporations as at December 31, 2003, and
has been prepared in accordance with generally accepted accounting principles,
consistently applied, and in a manner substantially consistent with prior
financial statements of the Corporations. The unaudited, balance sheet and
income statement of the Corporations as at September 30, 2004, and for the month
then ended, in the form attached hereto as Exhibit 5.2(k)(C) ("September 30,
2004 Financial Statements"), fairly present the financial position of the
8
Corporations as at September 30, 2004 and the results of operations for the
three months then ended and have been prepared in accordance with generally
accepted accounting principles consistently applied and in a manner
substantially consistent with the 2003 Financial Statements, except for
differences resulting from normally occurring audit adjustments, including, but
not limited to, income tax and tax accrual adjustments, or as noted in the
September 30, 2004 Financial Statements or the notes thereto. Except as
contemplated by or permitted under this Agreement, there are no adjustments that
would be required on review of the September 30, 2004 Financial Statements that
would, individually or in the aggregate, have a material negative effect upon
the Corporations' reported financial condition.
(l) No Undisclosed Liabilities. Except for (i) liabilities
and obligations incurred in the ordinary course of business since December 31,
2003 ("Statement Date"), and (ii) liabilities or obligations described in
Schedule 5.2(l), neither the Corporations nor any of the property of the
Corporations is subject to any material liability or obligation that was
required to be included or adequately reserved against in the September 30, 2004
Financial Statements or described in the notes thereto and was not so included,
reserved against or described.
(m) Title and Related Matters. Except as set forth in
Schedule 5.2(m), the Corporations have good and marketable title to all of their
respective properties, real and personal, and other assets included in the
September 30, 2004 Financial Statements (except properties and assets sold or
otherwise disposed of subsequent to the Statement Date in the ordinary course of
business or as contemplated in this Agreement), free and clear of all security
interests, mortgages, liens, pledges, charges, claims or encumbrances of any
kind or character, except (i) statutory liens for property taxes not yet
delinquent or payable subsequent to the date of this Agreement and statutory or
common law liens securing the payment or performance of any obligation of the
Corporations, the payment or performance of which is not delinquent, or that is
payable without interest or penalty subsequent to the date on which this
representation is given, or the validity of which is being contested in good
faith by the Corporations; (ii) the rights of customers of the Corporations with
respect to inventory under orders or contracts entered into by the Corporations
in the ordinary course of business; (iii) claims, easements, liens and other
encumbrances of record pursuant to filings under real property recording
statutes; and (iv) as described in the Unaudited Statements or the notes
thereto.
(n) Litigation. Except as set forth in Schedule 5.2(n), there
are no material actions, suits, proceedings, orders, investigations or claims
pending or, to the best of the Corporations' knowledge, overtly threatened
against either of the Corporations or any property of either, at law or in
equity, or before or by any governmental department, commission, board, bureau,
agency or instrumentality; the Corporations are not subject to any arbitration
proceedings under collective bargaining agreements or otherwise or, to the best
of the Corporations' knowledge, any governmental investigations or inquiries;
and, to the best knowledge of boards of directors and responsible officers of
the Corporations, there is no basis for any of the foregoing.
(o) Tax Matters. Except as set forth on Schedule 5.2(o), (i)
the Corporations have prepared in a substantially correct manner and has filed
all federal, state, local and foreign tax returns and reports heretofore
required to be filed by them and have paid all taxes shown as due thereon; and
9
(ii) no taxing authority has asserted any deficiency in the payment of any tax
or informed the Corporations that it intends to assert any such deficiency or to
make any audit or other investigation of either of the Corporations for the
purpose of determining whether such a deficiency should be asserted against the
Corporations.
(p) Compliance with Laws. The Corporations are, in the
conduct of their respective businesses, in substantial compliance with all laws,
statutes, ordinances, regulations, orders, judgments or decrees applicable to
them, the enforcement of which, if the Corporations were not in compliance
therewith, would have a materially adverse effect on the businesses of the
Corporations, taken as a whole. The Corporations have not received any notice of
any asserted present or past failure by either of the Corporations to comply
with such laws, statutes, ordinances, regulations, orders, judgments or decrees.
(q) Insurance. Schedule 5.2(q) contains a list of each
insurance policy maintained by the Corporations with respect to their respective
properties, assets and businesses, and each such policy is in full force and
effect. The Corporations are not in material default with respect to its
obligations under any such policy maintained by it. The Corporations have not
been notified of the cancellation of any of the insurance policies listed on
Schedule 5.2(q) or of any material increase in the premiums to be charged for
such insurance policies.
(r) Employees and Labor Relations Matters. Except as set
forth in Schedule 5.2(r) or as provided in this Agreement, no employee of either
of the Corporations is in violation of any material term of any employment
contract, patent disclosure agreement or any other contract or agreement
relating to the relationship of such employee with the Corporations or any other
party because of the nature of the businesses conducted or to be conducted by
either of the Corporations. Each employee of the Corporations with access to
confidential or proprietary information has executed, or in the ordinary course
will execute, a proprietary information agreement obligating such employee to
hold confidential the Corporations' proprietary information. The Corporations
are not aware that any officer or key employee, or that any group of key
employees, intends to terminate his or its employment with either of the
Corporations, nor do the Corporations have a present intention to terminate the
employment of any key employee. The Corporations have in all material respects
complied with all applicable state and federal laws related to employment.
(s) Power of Attorney. Except as set forth in Schedule
5.2(s), no material power of attorney or similar authorization given by the
Corporation is presently in effect.
(t) Accounts Receivable. All accounts receivable of the
Corporations reflected in the September 30, 2004 Financial Statements represent
bona fide sales actually made in the ordinary course of business.
(u) Agreements and Commitments. Schedule 5.2(u) contains a
complete and accurate list of each agreement, contract, instrument and
commitment (including license agreements) to which either of the Corporations is
a party that provides for payments in excess of $10,000 per year or whose term
is in excess of one year and is not cancelable upon 30 or fewer days' notice
without any liability, penalty or premium, other than a nominal cancellation fee
10
or charge ("Third Party Agreements"). Except as otherwise set forth in Schedule
5.2(u), the Corporation is not in material default under any Third Party
Agreements, nor does there exist any event that, with notice or the passage of
time or both, would constitute a material default or event of default by either
of the Corporations under any Third Party Agreements.
(v) Personal Property. Without material exception, Schedule
5.2(v) contains lists of all tangible personal property and assets owned or held
by the Corporations and used or useful in the conduct of the businesses of the
Corporations. Except as set forth in Schedule 5.2(v), the Corporations own and
have good title to such properties and none of such properties is subject to any
security interest, mortgage, pledge, conditional sales agreement or other lien
or encumbrance (except for liens for current taxes, assessments, charges or
other governmental levies not yet due and payable). The Corporations have
delivered to the Target and the Controlling Stockholders copies of all leases
and other agreements relating to property described in Schedule 5.2(v)
(including any and all amendments and other modifications to such leases and
other agreements) all of which are valid and binding, and the Corporations are
not in material default under any such leases or agreements. Except as set forth
in Schedule 5.2(v), all material properties listed therein are generally in good
operating condition and repair (ordinary wear and tear excepted), are performing
satisfactorily, and are available for immediate use in the conduct of the
businesses and operations of the Corporations. All such tangible personal
property is in compliance in all material respects with all applicable statutes,
ordinances, rules and regulations. The properties listed in Schedule 5.2(v)
include substantially all such properties necessary to conduct the business and
operations of the Corporation as now conducted.
(w) Real Property. Schedule 5.2(w) contains a list of all
real property currently owned or leased by the Corporations and used or useful
in the conduct of the business operations of the Corporations. Except as set
forth in Schedule 5.2(w), the Corporations have good and marketable fee simple
title, insurable at standard rates, to all of their respective real property
listed as owned in Schedule 5.2(w) free and clear of all liens, mortgages,
pledges, covenants, easements, restrictions, leases, charges and other claims
and encumbrances of any nature whatsoever, and without reservation or exclusion
of any mineral, timber or other rights or interests, except liens for real
estate taxes, assessments, charges, or other governmental levies not yet due and
payable and except for easements, rights of way, and restrictions of record. The
Corporations have delivered to the Target and the Controlling Stockholders
copies of all leases listed in Schedule 5.2(w) (including any and all amendments
and other modifications of such leases), which leases are valid and binding. The
Corporations are not in material default under any such leases. All property
listed in Schedule 5.2(w) (including improvements thereon) is in satisfactory
condition and repair consistent with its present use and is available for
immediate use in the conduct of the businesses of the Corporations. Except as
set forth in Schedule 5.2(w), none of the property listed in Schedule 5.2(w) or
subject to leases listed in Schedule 5.2(w) violates in any material respect any
applicable building or zoning code or regulation of any governmental authority
having jurisdiction. The property and leases described in Schedule 5.2(w)
include all such property or property interests necessary to conduct the
businesses and operations of the Corporations as they are presently conducted.
11
(x) Personnel. Schedule 5.2(x) sets forth a true and complete
list of:
(A) The names, title and current salaries of all
officers of the Corporations;
(B) The names of all directors of the Corporations;
(C) The wage rates (or ranges, if applicable) for
each class of exempt and nonexempt, salaried and hourly employees of the
Corporations;
(D) All scheduled or contemplated increases in
compensation or bonuses; and
(E) All scheduled or contemplated employee
promotions.
(y) Intellectual Property. The Corporations (i) own or have
the right to use, free and clear of all liens, charges, claims and restrictions,
those patents, trademarks, service marks, trade names, copyrights, licenses and
other intellectual property rights necessary for the operation of their
respective businesses now conducted or presently proposed to be conducted, and
(ii) to their knowledge, and except for the payments required in connection with
those patents, trademarks, service marks, trade names, copyrights, licenses and
other intellectual property rights listed on Schedule 5.2(y), are not obligated
or under any liability whatsoever to make any payments by way of royalties, fees
or otherwise to any owner or licensee of, or other claimant to, any patent,
trademark, service mark, trade name, copyright or other intangible asset, with
respect to the use thereof or in connection with the conduct of their respective
business or otherwise. To the knowledge of the Corporations, the Corporations
have not infringed upon nor is it infringing upon any patent, trademark, service
mark, trade name, copyright or other intellectual property of any third party.
The Corporations are not aware of any violation by a third party of any of the
Corporations' patents, licenses, trademarks, service marks, trade names,
copyrights, trade secrets or other proprietary rights.
(z) Environmental Issues.
(A) Except as set forth in Schedule 5.2(z), the
Corporations are in compliance with all Environmental Laws and the Corporation
has obtained all permits required under the Environmental Laws in connection
with the construction, ownership and operation of its business. The Corporations
have not received, nor are they aware of, any notice of any past, present or
anticipated future events, conditions, activities, investigations, plans,
studies or proposals which (i) would interfere with or prevent compliance by
Corporation with any Environmental Law, or (b) may give rise to any common law
or statutory liability, or otherwise form the basis of a claim, action, suit,
proceeding, investigation or hearing, involving the Corporations and related in
any way to Hazardous Substances or Environmental Laws.
(B) Except as set forth on Schedule 5.2(z), no
Hazardous Substance has been disposed of, spilled, leaked or otherwise released
on, in, under, or from, or otherwise come to be located in the soil or water on
or under, the real property owned, leased or otherwise occupied by the
12
Corporations, now or in the past. Except as set forth in Schedule 5.2(z), all
wastes generated in connection with the Corporation are and have been
transported to and disposed of at an authorized waste disposal facility in
compliance with all Environmental Laws. Except as set forth in Schedule 5.2(z),
none of the Corporations' real or personal properties have incorporated into
them any lead-based paint, urea formaldehyde foam insulation, asbestos,
polychlorinated biphenyls or any other Hazardous Substance that is prohibited,
restricted or regulated when present in buildings, structures, fixtures or
equipment. Except as set forth in Schedule 5.2(z), the Corporations are not
liable under any Environmental Law for remedial, removal, investigation or other
response costs, natural resources damages or other claims arising out of the
release or threatened release of any Hazardous Substance at any real property
owned, leased or otherwise occupied by the Corporations or at any other real
property site, now or in the past, and no basis exists for any such liability.
(C) Except as set forth in Schedule 5.2(z), there
are no underground storage tanks (in or out of service) on any real property
owned, leased or otherwise occupied by the Corporations.
(D) Except as set forth on Schedule 5.2(z), the
Corporations have disclosed and made available to the Target true, correct and
complete copies or results of any and all studies, reports, monitoring, tests,
analysis, correspondence with governmental agencies or other documents in its
possession or initiated by the Corporations or otherwise known to the
Corporations and pertaining to the existence or Hazardous Substances, to
compliance with Environmental Laws or to any other environmental concern
relating to the Corporations.
(E) For purposes of this Agreement, "Environmental
Laws" shall mean any federal, state or local statute, ordinance or regulation
pertaining to the protection of human health or the environment and any
applicable orders, decrees, permits, judgments, licenses or other authorizations
or mandates under such statutes, ordinances or regulations.
(F) For purposes of this Agreement, "Hazardous
Substance" shall mean any toxic, infectious, hazardous or radioactive substance,
pollutant, contaminant, material or waste as defined, listed or regulated under
any Environmental Law.
(aa) ERISA and Related Matters Schedule 5.2(aa) sets forth a
description of all "Employee Welfare Benefit Plans" and "Employee Pension
Benefit Plans" (as defined in ss.ss. 3(1) and 3(2), respectively, of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) existing
on the date hereof that are or have been maintained or contributed to by the
Corporation. Except as listed on Schedule 5.2(aa), neither of the Corporations
maintains any retirement or deferred compensation plan, savings, incentive,
stock option or stock purchase plan, unemployment compensation plan, vacation
pay, severance pay, bonus or benefit arrangement, insurance or hospitalization
program or any other fringe benefit arrangement for any employee, consultant or
agent of either of the Corporations, whether pursuant to contract, arrangement,
custom or informal understanding, which does not constitute an "Employee Benefit
Plan" (as defined in ss. 3(3) of ERISA), for which the Corporations may have any
ongoing material liability after Closing. The Corporations do not maintain nor
have they ever contributed to any Multiemployer Plan as defined by ss. 3(37) of
ERISA. The Corporations do not currently maintain any Employee Pension Benefit
13
Plan subject to Title IV of ERISA. There have been no "prohibited transactions"
(as described in ss. 406 of ERISA or ss. 4975 of the Code) with respect to any
Employee Pension Benefit Plan or Employee Welfare Benefit Plan maintained by the
Corporations as to which the Corporations have been party a party. As to any
employee pension benefit plan listed on Schedule 5.2(aa) and subject to Title IV
of ERISA, there have been no reportable events (as such term is defined in ss.
4043 of ERISA).
(bb) Operating Rights. The Corporations have all operating
authority, licenses, franchises, permits, certificates, consents, rights and
privileges (collectively "Licenses") as are necessary or appropriate to the
operation of its business as now conducted and as proposed to be conducted and
which the failure to possess would have a material adverse effect on the assets,
operations or financial condition of the Corporations. Such Licenses are in full
force and effect, no violations have been or are expected to have been recorded
in respect of any such licenses, and no proceeding is pending, or threatened
that could result in the revocation or limitation of any such licenses. The
Corporations have conducted their respective businesses so as to comply in all
material respects with all such Licenses.
(cc) Transactions with Affiliates. Except for (i) regular
salary payments and fringe benefits under an individual's compensation package
with either of the Corporations, and (ii) certain loans that have been made by
either of the Corporation to certain key employees as described on Schedule
5.2(cc), none of the officers, employees, directors or other affiliates of the
Corporations, or members of their families is a party to any agreements,
understandings or proposed transactions with the Corporations. The Corporations
have not guaranteed or assumed any obligations of the Corporations' officers,
directors or employees.
(dd) Minute Books. The minute books of the Corporations
contain a complete summary of all meetings of directors and shareholders since
the time of incorporation and reflect all transactions referred to in such
minutes accurately in all material respects.
Section 5.3 Representations and Warranties of Target. Target and
Controlling Shareholders jointly and severally represent and warrant to each of
Parent and Subsidiary, as of the date hereof and at the Effective Time, as
follows:
(a) Organization; Power. The Target is a corporation duly
incorporated and validly existing under the laws of the State of Nevada, and has
all requisite corporate power and authority to enter into this Agreement and
perform its obligations hereunder.
14
(b) Capital Stock and Related Matters. The authorized capital
stock of the Target consists of 50,000 Shares having a par value of $1.00 each,
Two Hundred Fifty (250) of which are issued and outstanding, and no other
shares, common or otherwise, of the Parent are issued and outstanding. Target
does not have outstanding and has not agreed, orally or in writing, to issue any
shares or securities convertible or exchangeable for any shares, nor does it
have outstanding nor has it agreed, orally or in writing, to issue any options
or rights to purchase or otherwise acquire their shares. Target is not subject
to any obligation (contingent or otherwise) to repurchase or otherwise acquire
or retire any of its shares. Target has not violated any applicable securities
laws or regulations in connection with the offer or sale of its securities other
than violations that have been, or will before the Closing have been, corrected
by post-issuance filings. All of the outstanding shares of Target's capital
stock are validly issued, fully paid and nonassessable. At the Effective Time
Parent will have, good and marketable title to the Target Shares, free and clear
of all security interests, liens, encumbrances or other restrictions or claims,
subject only to restrictions as to marketability imposed by securities laws.
(c) Authorization. The execution, delivery and performance by
the Target and all other agreements contemplated hereby to which the Target is a
party have been duly and validly authorized by all necessary corporate action of
the Target, and this Agreement and each such other agreement, when executed and
delivered by the parties thereto, will constitute the legal, valid and binding
obligation of the Target enforceable against it in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency and
similar statutes affecting creditors' rights generally and judicial limits on
equitable remedies.
(d) Governmental Authorities. Except as set forth in Schedule
5.3(d), (i) neither Target nor the Controlling Stockholders are required to
submit any notice, report or other filing with any governmental or regulatory
authority in connection with the execution and delivery by them of this
Agreement and the consummation of the purchase and (ii) no consent, approval or
authorization of any governmental or regulatory authority is required to be
obtained by the Target, or any affiliate, or either of the Controlling
Stockholders in connection with their execution, delivery and performance of
this Agreement and the consummation of this merger.
(e) No Conflict with Other Instruments or Agreements. Except
as set forth on Schedule 5.3(e), the execution, delivery and performance by the
Target or the Controlling Stockholders of this Agreement and all other
agreements contemplated hereby to which they are a party will not result in a
breach or violation of, or constitute a default under, Target's Articles of
Incorporation or Bylaws or any material agreement to which the Target or either
of the Controlling Stockholders are a party or by which any of them are bound.
(f) Conduct of Business; Liabilities. Except as set forth in
Schedule 5.3(f), Target is not in default under, and no condition exists that
with notice or lapse of time would constitute a default of Target under (i) any
mortgage, loan agreement, evidence of indebtedness or other instrument
evidencing borrowed money to which Target is a party or by which Target or the
properties of Target is bound or (ii) any judgment, order or injunction of any
court, arbitrator or governmental agency that would reasonably be expected to
affect materially and adversely the business, financial condition or results of
operations of Target taken as a whole.
15
(g) No Brokers or Finders. Except as set forth in Schedule
5.3(g), there are no claims for brokerage commissions, finders' fees or similar
compensation in connection with the transactions contemplated by this Agreement
based on any arrangement or agreement made by or on behalf of Target.
(h) Absence of Certain Changes. Except as contemplated or
permitted by this Agreement or as described in Schedule 5.3(h), since the
Statement Date there has not been:
(A) Any material adverse change in the business,
financial condition, operations or assets of Target;
(B) Any damage, destruction or loss, whether covered
by insurance or not materially adversely affecting the properties or business of
Target;
(C) Any sale or transfer by Target of any tangible
or intangible asset other than in the ordinary course of business, any mortgage
or pledge or the creation of any security interest, lien or encumbrance on any
such asset, or any lease of property, including equipment, other than tax liens
with respect to taxes not yet due and contract rights of customers in inventory;
(D) Any declaration, setting aside or payment of a
distribution in respect of or the redemption or other repurchase by Target of
any stock of Target;
(E) Any material transaction not in the ordinary
course of businesses of Target;
(F) The lapse of any material trademark, assumed
name, trade name, service mark, copyright or license or any application with
respect to the foregoing;
(G) The grant of any increase in the compensation of
officers or employees (including any such increase pursuant to any bonus,
pension, profit-sharing or other plan) other than customary increases on a
periodic basis or required by agreement or understanding in the ordinary course
of business and in accordance with past practice;
(H) The discharge or satisfaction of any material
lien or encumbrance or the payment of any material liability other than current
liabilities in the ordinary course of business;
(I) The making of any material loan, advance or
guaranty to or for the benefit of any person except the creation of accounts
receivable in the ordinary course of business; or
(J) An agreement to do any of the foregoing.
16
(i) No Undisclosed Liabilities. Except for (i) liabilities
and obligations incurred in the ordinary course of business since November 1,
2004 ("Statement Date"), and (ii) liabilities or obligations described in
Schedule 5.3(i), neither Target nor any of the property of Target is subject to
any material liability or obligation that was required to be included or
adequately reserved against in the 2004 Target Balance Sheet or described in the
notes thereto and was not so included, reserved against or described.
(j) Investment Representations
(A) The Controlling Stockholders are "accredited
investors" as defined by the SEC's Rule 501(a), and they have substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Parent so that they are capable of
evaluating the merits and risks of the investment in the Parent and has the
capacity to protect their own interests.
(B) Controlling Stockholders are acquiring the
Parent's Shares for investment for their own account, not as a nominee or agent,
and not with the view to, or for resale in connection with, any distribution
thereof. Controlling Stockholders understand that the Parent Shares to be
acquired in the merger have not been, and will not be, registered under the
Securities Act or the securities laws of any state by reason of a specific
exemption from the registration provisions of the Securities Act and the
applicable state securities laws, the availability of which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
the Purchaser's representations as expressed herein. Controlling Stockholders
are acquiring the Shares without expectation, desire or need for resale and not
with the view toward distribution, resale, subdivision or fractionalization of
the Shares.
(C) During the course of the negotiation of this
Agreement, the Controlling Stockholders have had an opportunity to discuss the
Parent's business, management and financial affairs with the Parent's management
and the opportunity to review the Parent's financial statements, books and
records, facilities and business plan. The Controlling Stockholders have also
had an opportunity to ask questions of officers of the Parent, which questions
were answered to their satisfaction.
(D) Target and the Controlling Stockholders
understand that the Parent Shares to be acquired in the merger have not been
registered under Securities Act of 1933 ("1933 Act") or under any state
securities law.
(E) The Controlling Stockholders understand that the
Parent Shares cannot be resold in a transaction to which the 1933 Act and state
securities laws apply unless (i) subsequently registered under the 1933 Act and
applicable state securities laws or (ii) exemptions from such registrations are
available. The Controlling Stockholders are aware of the provisions of Rule 144
promulgated under the 1933 Act which permit limited resale of shares purchased
in a private transaction subject to the satisfaction of certain conditions.
17
(F) The Controlling Stockholders understand that the
certificates for the Parent Shares will bear the following legend:
THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THE CORPORATION WILL NOT TRANSFER THIS CERTIFICATE UNLESS (i)
THERE IS AN EFFECTIVE REGISTRATION COVERING THE SHARES REPRESENTED BY
THIS CERTIFICATE UNDER THE SECURITIES ACT OF 1933 AND ALL APPLICABLE
STATE SECURITIES LAWS, (ii) IT FIRST RECEIVES A LETTER FROM AN
ATTORNEY, ACCEPTABLE TO THE BOARD OF DIRECTORS OR ITS AGENTS, STATING
THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL
APPLICABLE STATE SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE
PURSUANT TO RULE 144 UNDER THE SECURITIES ACT OF 1933.
(k) Minute Books. The minute books of Target contain a
complete summary of all meetings of directors and shareholders since the time of
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects.
(l) Financial Statements. The unaudited balance sheet of
Arvilla Oilfield Services, LLC, a West Virginia limited liability company
("AOS"), as of September 30, 2004, in the form attached to this Agreement as
Exhibit 5.3(l)(A), (the "2004 AOS Balance Sheet"), fairly presents the financial
position of Target as at September 30, 2004, and has been prepared in accordance
with generally accepted accounting principles, consistently applied. Except as
contemplated by or permitted under this Agreement, there are no adjustments that
would be required on review of the 2004 AOS Balance Sheet that would,
individually or in the aggregate, have a material negative effect upon Target's
reported financial condition.
(m) No Undisclosed Liabilities. Except for (i) liabilities
and obligations incurred in the ordinary course of business since September 30,
2004 ("Statement Date"), and (ii) liabilities or obligations described in
Schedule 5.3(m), neither Target nor any of the property of Target is subject to
any material liability or obligation that was required to be included or
adequately reserved against in the 2004 Target Balance Sheet and was not so
included, reserved against or described.
(n) Title and Related Matters. Except as set forth in
Schedule 5.3(n), Target has good and marketable title to all of its properties,
real and personal, and other assets included in the 2004 Balance Sheet (except
properties and assets sold or otherwise disposed of subsequent to the Statement
Date in the ordinary course of business or as contemplated in this Agreement),
free and clear of all security interests, mortgages, liens, pledges, charges,
claims or encumbrances of any kind or character, except (i) statutory liens for
property taxes not yet delinquent or payable subsequent to the date of this
Agreement and statutory or common law liens securing the payment or performance
of any obligation of Target, the payment or performance of which is not
delinquent, or that is payable without interest or penalty subsequent to the
date on which this representation is given, or the validity of which is being
contested in good faith by Target; (ii) the rights of customers of Target, or
its subsidiaries, with respect to inventory under orders or contracts entered
18
into by Target, or its subsidiaries, in the ordinary course of business; (iii)
claims, easements, liens and other encumbrances of record pursuant to filings
under real property recording statutes; and (iv) as described in the 2004 Target
Balance Sheet.
(o) Disclosure. All matters required to be disclosed by
Target or the Controlling Stockholders hereunder shall be made to Parent in
writing no later than thirty (30) days prior to the Closing Date (the "Target
and Controlling Stockholders' Disclosure Schedule"). This Agreement, with the
Exhibits hereto, when taken as a whole, do not contain any untrue statement of a
material fact concerning Target or the Controlling Stockholders or omit to state
a material fact necessary in order to make the statements concerning them
contained herein not misleading in light of the circumstances under which they
were made.
(p) Litigation. Except as set forth on Schedule 5.3(p), there
are no actions, suits, proceedings or investigations pending against the Target,
or its properties, or either of the Controlling Stockholders before any court or
governmental agency (nor, to their knowledge, is there any threat thereof) which
would impair in any way their ability to enter into and fully perform their
commitments and obligations under this Agreement or the transactions
contemplated hereby.
(q) Compliance with Other Instruments. The execution,
delivery and performance of and compliance with this Agreement, and the issuance
of shares will not result in any material violation of, or conflict with, or
constitute a material default under, Target's articles of incorporation or
bylaws or any of its material agreements nor result in the creation of any
mortgage, pledge, lien, encumbrance or charge against any of the assets or
properties of the Target or the Target's Shares.
(r) No Brokers or Finders. Neither Target nor the Controlling
Stockholders have, nor will they, incur, directly or indirectly, as a result of
any action taken by them, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement.
(s) With respect to Taxes (as defined below):
(A) Target and each subsidiary has filed, within the
time and in the manner prescribed by law, all returns, declarations, reports,
estimates, information returns and statements ("Returns") required to be filed
under federal, state, local or any foreign laws by Target or such subsidiary,
and all such Returns are true, correct and complete in all material respects.
(B) Except as set forth on Schedule 5.3(s)(B) of
Target Disclosure Schedule, Target and each subsidiary has within the time and
in the manner prescribed by law, paid (and until the Effective Time will, within
the time and in the manner prescribed by law, pay) all Taxes (as defined below)
that are due and payable.
19
(C) Target and each subsidiary has established (and
until the Effective Time will establish) on its respective books and records
reserves (to be specifically designated as an increase to current liabilities)
that are adequate for the payment of all Taxes not yet due and payable.
(D) There are no liens for Taxes upon the assets of
Target or any subsidiary except liens for Taxes not yet due.
(E) Neither Target nor any subsidiary has filed (and
will not file prior to the Effective Time) any consent agreement under Section
341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any
disposition of the subsection (f) assets (as such term is defined in Section
341(f)(4) of the Code) owned by Target or any subsidiary.
(F) Except as set forth in Schedule 5.3(s)(F) of
Target Disclosure Schedule (which shall set forth the type of return, date
filed, and date of expiration of the statute of limitations), no deficiency for
any Taxes has been proposed, asserted or assessed against Target or any of its
subsidiaries which has not been resolved and paid in full.
(G) There are no outstanding waivers or comparable
consents regarding the application of the statute of limitations with respect to
any Taxes or Returns that have been given by Target or any of its subsidiaries.
(H) Except as set forth on Schedule 5.3(s)(I) of
Target Disclosure Schedule (which shall set forth the nature of the proceedings,
the type of return, the deficiencies proposed or assessed and the amount
thereof, and the taxable year in question), no federal, state, local or foreign
audits or other administrative proceedings or court proceedings are presently
pending with regard to any Taxes or Returns.
(I) Target is not a party to any tax-sharing or
allocation agreement, nor does Target owe any amount under any tax-sharing or
allocation agreement.
(J) Each of Target and its subsidiaries has complied
(and until the Effective Time will comply) in all respects with all applicable
laws, rules and regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections 1441
or 1442 of the Code or similar provisions under any foreign laws) and have,
within the time and in the manner prescribed by law, withheld from employee
wages and paid over to the proper governmental authorities all amounts required
to be so withheld and paid over under all applicable laws.
(K) None of Target and its subsidiaries has ever
been (or has any liability for unpaid Taxes because it once was) a member of an
"affiliated group" within the meaning of Section 1502 of the Code during any
part of any consolidated return year within any part of which year any
corporation other than Target or its current subsidiaries was also a member of
such affiliated group.
(L) For purposes of this Agreement, "Taxes" shall
mean all taxes, charges, fees, levies or other assessments of whatever kind or
nature, including, without limitation, all net income, gross income, gross
receipts, sales, use, ad valorem, transfer, franchise, profits, license,
20
withholding, payroll, employment, excise, estimated, severance, stamp, occupancy
or property taxes, customs duties, fees, assessments or charges of any kind
whatsoever (together with any interest and any penalties, additions to tax or
additional amounts) imposed by any taxing authority (domestic or foreign) upon
or payable by Target or any subsidiary.
(t) Power of Attorney. Except as set forth in Schedule
5.3(t), no material power of attorney or similar authorization given by Target
is presently in effect.
(u) Agreements and Commitments. Schedule 5.3(u) contains a
complete and accurate list of each agreement, contract, instrument and
commitment (including license agreements) to which Target is a party that
provides for payments in excess of $10,000 per year or whose term is in excess
of one year and is not cancelable upon 30 or fewer days' notice without any
liability, penalty or premium, other than a nominal cancellation fee or charge
("Third Party Agreements"). Except as otherwise set forth in Schedule 5.3(u),
Target is not in material default under any Third Party Agreements, nor does
there exist any event that, with notice or the passage of time or both, would
constitute a material default or event of default by Target under any Third
Party Agreements.
(v) Operating Rights. Target has all operating authority,
licenses, franchises, permits, certificates, consents, rights and privileges
(collectively "Licenses") as are necessary or appropriate to the operation of
its business as now conducted and as proposed to be conducted and which the
failure to possess would have a material adverse effect on the assets,
operations or financial condition of Target. Such Licenses are in full force and
effect, no violations have been or are expected to have been recorded in respect
of any such licenses, and no proceeding is pending, or threatened that could
result in the revocation or limitation of any such licenses. Target has
conducted their respective businesses so as to comply in all material respects
with all such Licenses.
ARTICLE VI
COVENANTS
Section 6.1 Conduct of Business of Parties Pending the Merger. Target
agrees that from the date hereof and prior to the Effective Time or earlier
termination of this Agreement:
(a) Target, Parent and Subsidiary shall provide each other,
their counsel, accountants, designated employees and other representatives with
all information relating to their respective businesses deemed necessary by them
and their aforesaid representatives.
(b) Except as agreed in writing by the other parties, neither
Parent, Subsidiary nor Target shall:
(A) make, declare, pay or set aside for payment any
extraordinary dividend;
21
(B) issue any stock, whether common, preferred or
otherwise, in addition to the shares issued and outstanding as of the date of
this Agreement, and as set forth on Schedule 6.1(b)(B) of Target's Disclosure
Schedule; or
(C) incur any indebtedness for borrowed money except
in the ordinary course of business.
(c) Target, Parent and Subsidiary shall conduct their
respective businesses in the ordinary course of business consistent with past
practice and in material conformity with all applicable laws, rules and
regulations. They shall use reasonable efforts to maintain satisfactory
relations with valuable licensors, suppliers, distributors, customers and others
having business relationships with them.
Section 6.2 Financial Statements. Until the Closing Target shall
furnish an unaudited monthly balance sheet and income statement to Parent.
Section 6.3 Approval of Shareholders or Directors.
(a) Target shall (a) cause a meeting of its shareholders to
be duly called and held in accordance with the laws of the State of Nevada,
applicable federal and state securities laws and Target's Articles of
Incorporation and Bylaws as soon as practicable for the purpose of voting on the
adoption and approval of this Agreement, and the Merger (the "Proposal"), (b)
recommend to its shareholders approval of the Proposal (except to the extent
that the board of directors of Target determines, after receiving the written
advice of counsel, that such act is not permitted by such board of directors in
the discharge of their fiduciary duties to Target), (c) use its best efforts to
obtain the necessary approval of its shareholders, (d) take all action required
under the NGCL with respect to the holders of Target Dissenting Shares, and (e)
in cooperation with Parent mail to shareholders a transmittal letter in form and
substance reasonably satisfactory to Parent to be used by such shareholders in
forwarding their certificates for surrender and exchange. Except with the prior
written consent of Parent, neither Target nor Controlling Shareholders shall
distribute any materials to Target's Shareholders in connection with the
Proposal other than the Proxy Statement.
(b) Parent shall (a) cause a meeting of its Board of
Directors to be duly called and held in accordance with the laws of the State of
Nevada, applicable federal and state securities laws and Parent's Articles of
Incorporation and Bylaws as soon as practicable for the purpose of voting on the
adoption and approval of this Agreement, and the Merger (the "Proposal"), (b)
obtain the written consent of a majority of its shareholders for the approval of
a reverse stock split of its issued and outstanding shares of common stock on a
one share for 150 shares basis, to be effective immediately prior to the
Effective Time and to cause to be prepared and filed with the State of Nevada an
amendment to its Articles of Incorporation reflecting the reverse stock split,
after receiving the written advice of counsel, that such acts by the Parent
Board of Directors is authorized by Nevada law, (c) as soon as practical after
the date of this Agreement cause to be prepared, filed with the SEC and mailed
to its stockholders an information statement pursuant to Section 14(c) of the
Securities Exchange Act of 1934 and Regulation 14C thereunder (the "Information
Statement"), concerning action taken by written consent, (d) in cooperation with
Target mail to shareholders a transmittal letter in form and substance
22
reasonably satisfactory to Target to be used by such shareholders in forwarding
their certificates for surrender and exchange. Except with the prior written
consent of Target, neither Parent nor Subsidiary shall distribute any materials
to Parent's Shareholders in connection with the Proposal other than the Proxy
Statement.
Section 6.4 Securities Law Compliance.
(a) Parent shall promptly prepare and file the Information
Statement. Parent will use its best efforts to cause the Information Statement
to become effective as soon as practicable.
(b) Parent will take any action required to be taken under
applicable state securities laws and Parent will also take action to secure all
necessary exemptions or clearances under all state securities laws applicable to
(i) the Merger, and (ii) the issuance of Parent Common Stock pursuant thereto.
(c) Parent will promptly deliver to Target copies of any
filings made by Parent or Subsidiary pursuant to this Section 6.4.
Section 6.5 Third Party Consents. Each party to this Agreement shall
use its best efforts to obtain, as soon as reasonably practicable, all permits,
authorizations, consents, waivers and approvals from third parties or
governmental authorities necessary to consummate this Agreement and the
transactions contemplated hereby or thereby, including, without limitation, any
permits, authorizations, consents, waivers and approvals required in connection
with the Merger.
Section 6.6 Conversion of Certain Debt of Parent. Prior to the
Effective Date of the Merger, all debt or other obligations owed by which are
set forth on Schedule 6.6 attached hereto and made a part hereof, whether
secured or otherwise, shall be converted into the capital common stock of
Parent. It is the intention of the parties and the principals set forth on
Schedule 6.6 that the debts owed by Parents to said principals and certain other
debts are to be converted.
Section 6.7 Election to Board of Directors of Parent. Immediately prior
to the Effective Date of the Merger, the parties hereto shall cause Clarence E.
Smith and Rebecca L. Smith to be elected to the Board of Directors of Parent. As
long as Arvilla or AOS shall remain affiliated with or under the control of
Parent, directly or indirectly, the Controlling Stockholders, their heirs,
successors or assigns shall have the right to nominate, appoint and elect two
(2) individuals to the Board of Directors of Parent.
Section 6.8 Amendment of Parent Bylaws. Prior to the Effective Date of
the Merger, Parent shall cause its Bylaws to be amended so that any of the
following actions will require the affirmative vote of eighty percent (80%) of
its Board of Directors:
(a) Amendment of Parent's Articles of Incorporation or
Bylaws;
(b) Any merger or consolidation involving Parent or any of
its affiliated entities;
23
(c) The issuance of or any offer to issue any voting or,
non-voting preferred or common stock of Parent or any of its affiliated
corporations, or any interest in any of its affiliated non-corporate entities;
(d) The sale, exchange or transfer of substantially all of
the assets of Parent or any of its affiliated entities, whether for or in the
absence of adequate consideration;
(e) The sale, exchange or transfer, directly or indirectly,
of any interest in Target or Arvilla Oilfield Services, LLC, ("Arvilla") whether
for or in the absence of adequate consideration; or
(f) The borrowing, incurrence of debt, or expenditure of more
than $25,000;
(g) Any other act or action by or of the Board of Directors
of Parent which is not in the regular, ordinary course of business.
Section 6.9 Right of First Refusal to Reacquire Arvilla. Clarence E.
and Rebecca L. Smith, or their personal representatives, shall have the a right
of first refusal to reacquire Arvilla, at its fair market value as determined by
independent appraisal or at the same price and upon the same terms and
conditions as those set forth in a written offer of a third-party, in the event
the Board of Directors of Parent, or any affiliated entity decides to dispose of
Arvilla, whether directly or indirectly.
Section 6.10 Maintenance of Separate Status. The separate legal status
of Arvilla and Target shall be maintained, and the assets and business
operations of Arvilla shall remain a part of Arvilla.
Section 6.11 No Inconsistent Action. Neither Target, Parent or
Subsidiary will not take any other action inconsistent with their obligations
under this Agreement or that could hinder or delay the consummation of the
transactions contemplated by this Agreement.
Section 6.12 Tax Liability. In the event the Controlling Stockholders
shall become liable for any tax liability that may arise as a result of the
transactions contemplated by this Agreement or the results of operations of
Target and its single member limited liability company, AOS, Target and AOS
shall be jointly and severally responsible for payment of any such taxes.
ARTICLE VII
CONDITIONS TO CLOSING
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger shall be subject
to the fulfillment of all of the following conditions precedent at or prior to
the Effective Time:
24
(a) This Agreement and Plan of Reorganization shall have been
duly approved by the requisite vote of the stockholders or Boards of Directors
of Parent, Subsidiary and Target. (b) All regulatory approvals required to
consummate the transactions contemplated hereby shall have been obtained and
shall remain in full force and effect and all statutory waiting periods in
respect thereof shall have expired and no such approvals shall contain any
conditions, restrictions or requirements which the Boards of Directors of
Parent, Subsidiary or Target reasonably determine in good faith would either
before or after the Effective Time have a Material Adverse Effect on Parent,
Subsidiary or Target. (c) No Governmental Authority of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, judgment, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and prohibits consummation of the
transactions contemplated by this Agreement. (d) The Information Statement shall
have become effective under the Securities Act and no objections to the
Information Statement shall have been issued and no proceedings for that purpose
shall have been initiated or threatened by the SEC. (e) All permits and other
authorizations under state securities laws necessary to consummate the
transactions contemplated hereby and to issue the shares of Parent Common Stock
to be issued in the Merger shall have been received and be in full force and
effect. (f) No injunction or other or decree by any Federal, state or foreign
court which prevents the consummation of Merger shall have been issued or be in
force at the Effective Time of the Merger.
(g) No statute or regulation enacted which would prevent
consummation of Merger shall have been issued or be in force at the Effective
Time of the Merger.
(h) All governmental and other consents and approvals
required for Merger shall have been obtained.
Section 7.2 Conditions to Obligations of Target to Effect the Merger.
The obligation of Target to effect the Merger is subject to fulfillment of all
of the following conditions precedent at or prior to the Effective Time:
(a) The representations and warranties of Parent and
Subsidiary set forth in this Agreement shall be true and correct as of the date
of this Agreement and as of the Effective Date as though made on and as of the
Effective Date (except that representations and warranties that by their terms
speak as of the date of this Agreement or some other date shall be true and
correct as of such date) and Target shall have received certificates, dated the
Effective Date, signed on behalf of Parent and Subsidiary by the Presidents and
Treasurers of Parent and Subsidiary, respectively, to such effect.
25
(b) Parent and Subsidiary shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and Target shall have received a
certificate, dated the Effective Date, signed on behalf of Parent and Subsidiary
by the Presidents and Treasurers of Parent and Subsidiary, respectively, to such
effect.
(c) Target shall have received an opinion of Bowles Rice
McDavid Graff & Love, LLP, general counsel to Target, dated the Effective Date,
to the effect that, on the basis of facts, representations and assumptions set
forth in such opinion, (i) the Merger constitutes a "reorganization" within the
meaning of Section 368 of the Code and (ii) no gain or loss will be recognized
by stockholders of Target who receive shares of Parent Common Stock in exchange
for shares of Target Common Stock, except that gain or loss may be recognized as
to cash received as Merger Consideration and cash received in lieu of fractional
share interests. In rendering its opinion, Bowles Rice McDavid Graff & Love, LLP
may require and rely upon representations contained in letters from Target and
others.
Section 7.3 Conditions to Obligations of Parent and Subsidiary to
Effect the Merger. The obligations of Parent and Subsidiary to effect the Merger
are subject to the fulfillment of all of the following conditions precedent at
or prior to the Effective Time:
(a) The representations and warranties of Target set forth in
this Agreement shall be true and correct as of the date of this Agreement and as
of the Effective Date as though made on and as of the Effective Date (except
that representations and warranties that by their terms speak as of the date of
this Agreement or some other date shall be true and correct as of such date),
and Parent and Subsidiary shall have received a certificate, dated the Effective
Date, signed on behalf of Target by the President and Treasurer of Target to
such effect.
(b) Target shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Effective Time, and Parent and Subsidiary shall have received a certificate,
dated the Effective Date, signed on behalf of Target by the President and
Treasurer of Target to such effect.
[THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK]
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ARTICLE VIII
INDEMNIFICATION
Section 8.1 General Indemnification Covenants.
(a) Subject to the provisions of Section 8.3, Controlling
Shareholders shall indemnify, save and keep Parent and its affiliates,
successors and permitted assigns (including Subsidiary and Target) (the "Parent
Indemnitees"), harmless against and from all liability, demands, claims, actions
or causes of action, assessments, losses, fines, penalties, costs, damages and
expenses, including reasonable attorneys' fees, disbursements and expenses
(collectively, "Damages"), sustained or incurred by any of the Parent
Indemnitees as a result of, arising out of or by virtue of any
misrepresentation, breach of any warranty or representation, or non-fulfillment
of any agreement or covenant on the part of Target or Controlling Shareholders,
whether contained in this Agreement or any exhibit or schedule hereto to thereto
or any written statement or certificate furnished or to be furnished to Parent
or Subsidiary pursuant hereto or in any closing document delivered by Target or
Controlling Shareholders to Parent or Subsidiary in connection herewith.
(b) Subject to the provisions of Section 8.3, Parent and
Subsidiary shall indemnify, save and keep Controlling Stockholders (the
"Indemnitees"), harmless against and from all liability, demands, claims,
actions or causes of action, assessments, losses, fines, penalties, costs,
damages and expenses, including reasonable attorneys' fees, disbursements and
expenses (collectively, "Damages"): (A) sustained or incurred by any of the
Indemnitees as a result of, arising out of or by virtue of any
misrepresentation, breach of any warranty or representation, or non-fulfillment
of any agreement or covenant on the part of Parent or Subsidiary, whether
contained in this Agreement or any exhibit or schedule hereto to thereto or any
written statement or certificate furnished or to be furnished to Target or
Controlling Stockholders pursuant hereto or in any closing document delivered by
Parent or Subsidiary to Target or Controlling Stockholders in connection
herewith; or (B) sustained or incurred by Target or Controlling Stockholders by
reason of the failure of the transactions contemplated by this Agreement to
satisfy the requirements of the Internal Revenue Code of 1986, or the
regulations thereunder, qualifying said transactions as a tax-free
reorganization.
Section 8.2 Tax Return Preparation and Filing. Controlling Stockholders
shall prepare and file any Return of Target and its subsidiaries which is
required to be filed after the Effective Time and which relates to any period
(or portion thereof) up to and including the Effective Time.
Section 8.3 Conditions of Indemnification Pursuant to Section 8.1.
(a) Promptly following the receipt by a Parent Indemnitee or
an Indemnitee of notice of a demand, claim, action, assessment or proceeding
made or brought by a third party, including a governmental agency (a "Third
Party Claim"), the Parent Indemnitee or Indemnitee receiving the notice of the
Third Party Claim (i) shall notify the other parties to this Agreement of its
existence, setting forth the facts and circumstances of which such Parent
Indemnitee or Indemnitee has received notice, and (ii) if the Parent Indemnitee
27
or Indemnitee giving such notice is a person entitled to indemnification under
this Article VIII (an "Indemnified Party"), specifying the basis hereunder upon
which the Indemnified Party's claim for indemnification is asserted.
(b) The Indemnified Party shall, upon reasonable notice by
the party having an indemnification obligation under this Article VIII (the
"Indemnifying Party"), tender the defense of a Third Party Claim to the
Indemnifying Party. If the Indemnifying Party accepts responsibility for the
defense of a Third Party Claim, then Indemnifying Party shall have the exclusive
right to contest, defend and litigate the Third Party Claim and shall have the
exclusive right, in its discretion exercised in good faith and upon the advice
of counsel, to settle any such matter, either before or after the initiation of
litigation, at such time and upon such terms as it deems fair and reasonable,
provided that at least ten (10) days prior to any such settlement, it shall give
written notice of its intention to settle to the Indemnified Party. The
Indemnified Party shall have the right to be represented by counsel at its own
expense in any defense conducted by Indemnifying Party.
(c) Notwithstanding the foregoing, in connection with any
settlement negotiated by Indemnifying Party, no Indemnified Party shall be
required to (x) enter into any settlement (A) that does not include the delivery
by the claimant or plaintiff to the Indemnified Party of a release from all
liability in respect of such claim or litigation, (B) if the Indemnified Party
shall, in writing to Indemnifying Party within the ten (10) day period prior to
such proposed settlement, disapprove of such settlement proposal and desire to
have Indemnifying Party tender the defense of such matter back to the
Indemnified Party, or (C) that requires an Indemnified Party to take any
affirmative actions as a condition of such settlement, of (y) consent to the
entry of any judgment that does not include a full dismissal of the litigation
or proceeding against the Indemnified Party with prejudice; provided, however,
that should the Indemnified Party disapprove of a settlement proposal pursuant
to Clause (B) above, the Indemnified Party shall thereafter have all of the
responsibility for defending, contesting and settling such Third Party Claim but
shall not be entitled to indemnification by Indemnifying Party to the extent
that, upon final resolution of such Third Party Claim, Indemnifying Party's
liability to the Indemnified Party but for this proviso exceeds what
Indemnifying Party's liability to the Indemnified Party would have been if
Indemnifying Party were permitted to settle such Third Party Claim in the
absence of the Indemnified Party exercising its right under clause (B) above.
(d) If, in accordance with the foregoing provisions of this
Section 8.3, an Indemnified Party shall be entitled to indemnification against a
Third Party Claim, and if Indemnifying Party shall fail to accept the defense of
a Third Party Claim which has been tendered in accordance with this Section 8.3,
the Indemnified Party shall have the right, without prejudice to its right of
indemnification hereunder, in its discretion exercised in good faith and upon
the advice of counsel, to contest, defend and litigate such Third Party Claim,
and may settle such Third Party Claim, either before or after the initiation of
litigation, at such time and upon such terms as the Indemnified Party deems fair
and reasonable, provided that at least ten (10) days prior to any such
settlement, written notice of its intention to settle is given to Indemnifying
Party. If, pursuant to this Section 8.3, the Indemnified Party so defends or
settles a Third Party Claim for which it is entitled to indemnification
hereunder, as hereinabove provided, the Indemnified Party shall be reimbursed by
Indemnifying Party for the reasonable attorneys' fees and other expenses of
28
defending the Third Party Claim which are incurred from time to time, forthwith
following the presentation to Indemnifying Party of itemized bills for said
attorneys' fees and other expenses. No failure by Indemnifying Party to
acknowledge in writing his indemnification obligations under this Article VIII
shall relieve it of such obligations to the extent they exist.
Section 8.4 Certain Information. Parent, Subsidiary, Controlling
Shareholders and Target agree to furnish or cause to be furnished to each other
(at reasonable times and at no charge) upon request as promptly as practicable
such information (including access to books and records) pertinent to any of
them and assistance relating to any of them as is reasonably necessary for the
preparation, review and audit of financial statements, the preparation, review,
audit and filing of any Tax Return, the preparation for any audit or the
prosecution or defense of any claim, suit or proceeding relating to any proposed
adjustment or assessment. Controlling Shareholders shall grant to Parent access
to all Tax Returns filed with respect to Target or its subsidiaries
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
shareholders of Target:
(a) by mutual consent of Parent and Target; or
(b) by either Parent or Target if (i) the Merger shall not
have been consummated on or before January 14, 2005 (the "Termination Date"),
(ii) the requisite vote of the Board of Directors of Parent to approve this
Agreement and the transactions contemplated hereby and thereby shall not be
obtained at the meetings, or any adjournments thereof, called therefore, (iii)
any governmental or regulatory body, the consent of which is a condition to the
obligations of Parent, Subsidiary and Target to consummate the transactions
contemplated hereby, shall have determined not to grant its consent and all
appeals of such determination shall have been taken and have been unsuccessful,
or (iv) any court of competent jurisdiction in the United States or any State
shall have issued an order, judgment or decree (other than a temporary
restraining order) restraining, enjoining or otherwise prohibiting the Merger
and such order, judgment or decree shall have become final and nonappealable.
Section 9.2 Effect of Termination. In the event of termination of this
Agreement by either Parent or Target, as provided in Section 9.1, this Agreement
shall forthwith become void and there shall be no liability on the part of
either Target, Parent, Subsidiary or their respective officers or directors
(except as set forth in this Section 9.2). Nothing in this Section 9.2 shall
relieve any party from liability for any breach of this Agreement.
Section 9.3 Amendment. There shall be no material amendments to this
Agreement after shareholder approval.
29
Section 9.4 Waiver. Any of the parties to this Agreement may
waive breach of representations, warranties, covenants, conditions or documents
of another party, provided, however, any such waiver shall be in writing.
ARTICLE X
MISCELLANEOUS
Section 10.1 Survival of Representations, Warranties and Covenants. All
representations, warranties, covenants and agreements made by any party in this
Agreement or pursuant hereto shall survive the Merger until two (2) years after
the Effective Time, except for the representations, warranties, covenants and
agreements contained in Sections 5.2(h), 5.2(n), 5.2(o), 5.2(z), 5.2(aa),
5.3(e), 5.3(g), 5.3(i), and 5.3(l) of this Agreement which shall survive the
Merger until the expiration of the applicable statutes of limitations with
respect to such matters, and the covenants and agreements of Sections 6.7, 6.9,
6.10, and 6.12 which shall survive indefinitely. All claims made by Parent by
virtue of any such representations, warranties, covenants and agreements, and
all claims made by Target except for the covenants and agreements of Sections
6.7, 6.9, 6.10 and 6.12 shall be made under, and subject to the limitations set
forth in, Article VIII hereof. The parties acknowledge that ordinary damages for
a breach of the covenants and agreements of Sections 6.7, 6.9, 6.10 and 6.12 are
and will be inadequate, and, therefore, the parties agree that the Controlling
Stockholders shall be entitled to specific performance and such other legal and
equitable remedies as a court of competent jurisdiction may award.
Section 10.2 Publicity. Neither party shall issue any press releases or
engage in any other publicity before the Effective Time without the prior
written consent of the other parties, except for the filing with the SEC of any
notice or report that may be required by applicable regulations promulgated by
the SEC.
Section 10.3 Notice. All notices required or permitted to be
given hereunder shall be in writing and shall be deemed given when delivered in
person or sent by confirmed facsimile, or when received if given by Federal
Express or other nationally recognized overnight courier service, or five (5)
business days after being deposited in the United States mail, postage prepaid,
registered or certified mail, addressed to the applicable party as follows:
Trans Energy, Inc.
210 Market Street
P. O. Box 393
St. Marys, West Virginia 26170
Copy to:
Leonard Neilson, Esq.
8160 South Highland Drive, Suite 209
Sandy, Utah 84903
30
Arvilla, Inc.
P. O. Box 432
St. Marys, West Virginia 26170-0432
Copy to:
Richard A. Hudson, Esq.
Bowles Rice McDavid Graff & Love, LLP
P. O. Box 49
Parkersburg, West Virginia 26102
Section 10.4 Entire Agreement. This Agreement constitutes the entire
agreement between the parties and shall be binding upon and inure to the benefit
of the parties hereto and their respective legal representatives, successors and
permitted assigns. The parties and their respective affiliates make no
representations or warranties to each other, except as contained in this
Agreement, and any and all prior representations and statements made by any
party or its representatives, whether verbally or in writing, are deemed to have
been merged into this Agreement, it being intended that no such representations
or statements shall survive the execution and delivery of this Agreement.
Section 10.5 Non-Waiver. The failure in any one or more instances of a
party to insist upon performance of any of the terms, covenants or conditions of
this Agreement, to exercise any right or privilege conferred in this Agreement,
or the waiver by said party of any breach of any of the terms, covenants or
conditions of this Agreement, shall not be construed as a subsequent waiver of
any such terms, covenants, conditions, rights or privileges, but the same shall
continue and remain in full force and effect as if no such forbearance or waiver
had occurred. No waiver shall be effective unless it is in writing and signed by
an authorized representative of the waiving party.
Section 10.6 Counterparts. This Agreement may be executed in
counterparts, and each such counterpart shall be considered as an original.
Section 10.7 Severability. The invalidity of any provision of this
Agreement shall not affect the validity of any other provisions hereof.
Section 10.8 Governing Law. This Agreement shall be and is governed by
and interpreted in accordance with the laws of the State of Nevada as applied to
contracts made and performed entirely within the State of Nevada.
Section 10.9 Binding Arbitration. Except in the case of violation of a
restrictive covenant, which shall entitle a party to this Agreement to obtain
injunctive relief, all other controversies, claims and breaches arising out of,
or relating to, this Agreement shall be settled by binding arbitration in
accordance with the Rules of the American Arbitration Association (Commercial
Rules), with the arbitration taking place in Pleasants County, West Virginia.
31
Section 10.10 Binding Effect. This Agreement shall inure to the benefit
of and be binding upon the parties hereto and their successors and permitted
assigns. Nothing in this Agreement, express or implied, is intended to confer on
any person other than the parties hereto and their respective successors and
permitted assigns, any rights, remedies, obligations or liabilities under or by
reason of this Agreement, including, without limitation, third party beneficiary
rights.
Section 10.11 Assignability. This Agreement shall not be
assignable by either party without prior written consent of other party.
Section 10.12 Headings. The headings in this Agreement are for
convenience of reference only, and shall not be considered when giving
interpreting to any of its provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement and Plan
of Reorganization on the date first above written.
PARENT: SUBSIDIARY:
Trans Energy, Inc. Trans Energy Acquisitions, Inc.
By: /s/ Loren E. Bagley By: /s/ Loren E. Bagley
--------------------------- ---------------------------------
Its Vice President Its President
TARGET: CONTROLLING STOCKHOLDERS:
Arvilla, Inc. /S/ (Clarence E. Smith)
------------------------------------
(Clarence E. Smith)
By: /s/ Clarence E. Smith
---------------------------------
Its President /S/ (Rebecca L. Smith)
-------------------------------------
(Rebecca L. Smith)
32
Appendix B
DEAN HELLER Certificate of
Secretary of State Amendment
202 North Carson St. (PURSUANT TO NRS 78.385 and 78.390)
Carson City, NV 89701
Certificate of Amendment to Articles of Incorporation
For Nevada Profit Corporations
(Pursuant to NRS 78.385 and 78.390 - After Issuance of Stock)
- Remit in Duplicate -
1. Name of Corporation: Trans Energy, Inc.
2. The articles have been amended as follows (provide article numbers, if
available):
Article #3 - is amended by adding the following paragraph:
"As of January __, 2005, a one share for 150 shares reverse
stock split of the then issued and outstanding shares of
common stock of the corporation was effected. Accordingly,
each 150 shares of common stock, par value $0.001, issued and
outstanding immediately prior to the effective time of the
split was automatically and without any action on the part of
the holder thereof reclassified and changed, pursuant to the
reverse stock split, into one share of post split common
stock, par value $0.001 per share, subject to the rounding up
of any fractional shares to the next higher whole share. The
total authorized capitalization of the corporation is
unchanged and remains at 500,000,000 shares of common stock,
par value $0.001 per share, and 10,000,000 shares of preferred
stock, par value $0.001 per share."
3. The vote by which the stockholders holding shares in the corporation
entitling them to exercise at least a majority of the voting power, or such
greater proportion of the voting power as may be required in the case of a vote
by classes or series, or as may be required by the provisions of the articles of
incorporation have voted in favor of the amendment is: 256,287,738 shares
(51.6%) voting for (by written consent) and zero shares voting against.
4. Officer Signature (Required):
/s/ Robert L. Richards
-------------------------------------
Robert L. Richards, President
* If any proposed amendment would alter or change any preference or any relative
or other right given to any class or series of outstanding shares, then the
amendment must be approved by the vote, in addition to the affirmative vote
otherwise required, of the holders of shares representing a majority of the
voting power of each class or series affected by the amendment regardless of
limitations or restrictions on the voting power thereof.
IMPORTANT: Failure to include any of the above information and remit the proper
fees may cause this filing to be rejected.