ASSET PURCHASE AGREEMENT

 

TABLE OF CONTENTS

 

 

Section 1 PURCHASE AND SALE OF ASSETS		1
1.1.	Purchase and Sale of Assets.	1
1.2.	Assumption of Liabilities.	2
1.3.	Purchase Price and Escrow	4
1.4.	Allocation of Purchase Price.	5
1.5.	Allocation of Expenses	6
1.6.	Allocation of Revenues and Gross Receipts.	7
1.7.	Settlement Statements.	8
Section 2 . CLOSING		10
2.1.	Closing Date	10
2.2.	Buyers’ Closing Date Deliveries	10
2.3.	Sellers’ Closing Date Deliveries	11
Section 3 . REPRESENTATIONS AND WARRANTIES OF SELLERS		12
3.1.	Organization and Power and Authority of Seller	12
3.2.	Authority of Seller; Conflicts.	12
3.3.	Condition of Title	13
3.4.	Litigation	13
3.5.	No Brokers	13
3.6.	Inducement	13
3.7.	No Knowledge of Breach	13
Section 4 . REPRESENTATIONS AND WARRANTIES OF BUYERS		13
4.1.	Organization of Buyers	13
4.2.	Authority of Buyers	14
4.3.	No Litigation	14
4.4.	Securities Laws.	14
4.5.	No Brokers	15
4.6.	Financial Ability	15
4.7.	No Knowledge of Breach	15
4.8.	Independent Analysis	15
Section 5 . ACTION PRIOR TO THE ADJUSTMENT TIME		16
5.1.	Operations Prior to the Adjustment Time.	16
5.2.	Risk of Loss; Insurance	16
5.3.	Reasonable Efforts	16
5.4.	Confidentiality	16
5.5.	Notification of Certain Other Matters	16
5.6.	Employment	17
Section 6 . ADDITIONAL AGREEMENTS		17
6.1.	General Matters	17

 

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6.2.	Data	18
6.3.	Hazardous Substances	18
6.4.	Seismic Hazards	18
6.5.	Earthquake Zone	18
Section 7 . CONDITIONS PRECEDENT TO OBLIGATIONS TO CLOSING		19
7.1.	No Delay	19
7.2.	Related Agreements	19
7.3.	Conditions Precedent To Obligations Of Buyers	19
7.4.	Conditions Precedent To Obligations Of Seller	19
Section 8 . INDEMNIFICATION		21
8.1.	Indemnification by Seller	21
8.2.	Indemnification by Buyers	21
8.3.	Notice of Claims.	21
8.4.	Third Person Claims.	22
8.5.	Limitations.	23
8.6.	Mitigation	24
8.7.	Subrogation	24
8.8.	No Offset	25
Section 9 . TERMINATION		25
9.1.	Termination.	25
Section 10 . GENERAL PROVISIONS		26
10.1.	Survival of Covenants, Representations and Warranties	26
10.2.	No Public Announcement	26
10.3.	Notices	26
10.4.	Successors and Assigns	27
10.5.	Seller’s Access to Records after Closing	28
10.6.	Entire Agreement; Amendments	28
10.7.	Interpretation.	28
10.8.	Amendments and Waivers	29
10.9.	Bulk Sales Laws	29
10.10.	Expenses	30
10.11.	Partial Invalidity	30
10.12.	Execution in Counterparts; Facsimile	30
10.13.	Governing Law	30
10.14.	Jurisdiction; Waiver of Jury Trial	30
10.15.	Attorneys’ Fees	30
10.16.	Time of Essence	30
10.17.	Disclaimer of Warranties	31
10.18.	References to U.S. Dollars	31
10.19.	Further Assurances.	31
10.20.	No Rescission	32
10.21.	Specific Performance	32

 

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Section 11 . DEFINITIONS		32
11.1.	Definitions	32

 

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LIST OF EXHIBITS

 

Exhibit A-1		Assignment, Assumption and Bill of Sale
Exhibit A-2		Assignment and Assumption of Contracts and Liabilities
Exhibit B		Quitclaim Deed – Surface Properties
Exhibit C		Quitclaim Deed – Mineral Properties
Exhibit D		Change of Operator Form
Exhibit E		Holdback Escrow Agreement

 

LIST OF SCHEDULES

 

Schedule 1.1(c)(xii)		Excluded Agreements
Schedule 1.1(c)(xiii)		Miscellaneous Excluded Assets
Schedule 1.1(c)(xiv)		Excluded Surface Estate
Schedule 1.2		Contracts
Schedule 1.4		Allocation of Purchase Price
Schedule 3.2		No Violation
Schedule 3.4		Litigation; Claims
Schedule 7.4		Replacement of Guarantees and Letters of Credit
Schedule 11.1		Properties Relating to the NWU

 

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ASSET PURCHASE AGREEMENT

 

ASSET PURCHASE AGREEMENT, dated December 9, 2005, by and between Global Oil Production, LLC, a California limited liability company (“ Global ”), Wilmington Management, LLC, a California limited liability company (“ Wilmington ”) (Global and Wilmington are sometimes referenced herein individually as “ Seller ” and collectively as the “ Sellers ”), and Warren Resources of California, Inc., a California corporation (“ WRC ”), and Warren E&P, Inc., a New Mexico corporation (“ WEP ”), and Warren Resources, Inc., a Maryland corporation (“ WRI ”) (collectively, WRC, WEP and WRI are called the “ Buyers ”).

 

WHEREAS, Sellers desire to sell to Buyers, and Buyers desire to purchase from Seller, all of Sellers’ interest in the Assets (as hereinafter defined), and Buyers are willing to assume the Assumed Liabilities (as hereinafter defined), all on the terms and subject to the conditions set forth herein;

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is acknowledged, it is hereby agreed between Sellers and Buyers as follows (certain initially capitalized terms used herein are defined in Section 11 ):

 

SECTION 1  PURCHASE AND SALE OF ASSETS

 

1.1.                               Purchase and Sale of Assets .

 

(a)                                   Upon the terms and subject to the conditions of this Agreement, on the Closing Date, Global shall irrevocably sell, convey, transfer, assign and deliver to Buyers and Buyers shall purchase from Global all of Global’s right, title and interest in and to all of the Assets.

 

(b)                                  Upon the terms and subject to the conditions of this Agreement, on the Closing Date, Wilmington shall irrevocably sell, convey, transfer, assign and deliver to Buyers and Buyers shall purchase from Wilmington all of Wilmington’s right, title and interest in and to all of the Assets.

 

(c)                                   Notwithstanding anything to the contrary herein, Seller shall not contribute, convey, assign, or transfer to Buyers, and Buyers shall not acquire or have any rights to acquire, any assets (the “ Excluded Assets ”) other than those specifically set forth in Sections 1.1(a) or (b) .  Without limiting the generality of the foregoing, the following shall constitute Excluded Assets:

 

(i)                   All cash, cash equivalents and securities of either Seller;

 

(ii)                All intercompany notes, drafts and accounts receivable or other obligations for the payment of money;

 

(iii)             All bank and other depository accounts and safe deposit boxes of either Seller;

 

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(iv)            All refunds of Taxes and Tax loss carryforwards of either Seller relating to the Assets for any period or portion thereof ending on or prior to the Closing Date (and any such refunds received by Buyers shall be promptly paid over by Buyers to such Seller);

 

(v)               All of Seller’s right, title and interest in and to all of the assets, properties and rights of Seller, of every kind, nature, character and description (accrued, contingent or otherwise), tangible and intangible, real, personal or mixed, including without limitation, Intellectual Property, which are owned, used or held for use by Seller exclusively to conduct any business operation or activity other than operation of the NWU, or which do not exclusively relate to the Assets or the Assumed Liabilities;

 

(vi)            Nontransferable Permits;

 

(vii)         All insurance policies of Seller relating to the Assets, any refunds paid or payable in connection with the cancellation or discontinuance of any insurance policies, and any claims made on/or any such insurance policies;

 

(viii)      All Actions, credits, rights of setoff of any kind and all rights under and pursuant to all indemnities, warranties, representations, guarantees and other Contracts (including, without limitation, the Unit Agreement and the Unit Operating Agreement) arising for any period or portion thereof ending on or prior to the Adjustment Time;

 

(ix)              All Actions, demands, rights and privileges against third parties that relate to any of the Excluded Assets or Excluded Liabilities, including Actions and rights under insurance policies relating thereto;

 

(x)                 All other assets used exclusively in connection with either Seller’s limited liability company functions (including, but not limited to, the entity name, taxpayer and other identification numbers, seals, minute books and records);

 

(xi)              All rights of Sellers under this Agreement, the Purchase Price hereunder, any agreement, certificate, instrument or other document executed and delivered by Seller or Buyers in connection with the transactions contemplated hereby;

 

(xii)           The agreements set forth on Schedule 1.1(c)(xii) ;

 

(xiii)        The assets set forth on Schedule 1.1(c)(xiii ); and.

 

(xiv)       The surface estate only of nine (9) fee simple lots more particularly described in Schedule 1.1(c)(xiv) attached.

 

1.2.                               Assumption of Liabilities .

 

(a)                                   Upon the terms and subject to the conditions set forth herein, at the Closing, Buyers shall assume from Sellers (and thereafter pay, perform, discharge or otherwise satisfy in accordance with their respective terms), and Sellers shall irrevocably convey, transfer and assign to Buyers, all of the Assumed Liabilities.

 

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(b)                                  For all purposes of and under this Agreement, “Assumed Liabilities” shall mean, refer to and include only the following Liabilities of each Seller, arising out of or relating to the operation of the NWU and/or the Assets, known or unknown, contingent or mature, and specifically excluding the Excluded Liabilities (as defined below):

 

(i)                                      All Liabilities of either or both Sellers accruing after the Adjustment Time under any working interests, royalty agreements, leases, contracts, licenses and other rights included within the NWU Assets (collectively “ Contracts ”) as shown on Schedule 1.2 attached hereto;

 

(ii)                                   All Liabilities attributable to either or both Sellers under the Unit Agreement or otherwise, whether arising before or after the Closing Date, to properly plug and abandon all wells within the NWU; abandon all flowlines and other pipelines; remove all equipment and facilities; close all pits and sumps; remediate all soil and ground water that may have been impacted by oil and gas production operations; and restore the surface and/or subsurface associated with the NWU, including all surface properties (collectively, the “ Plugging Obligations ”) in accordance with the rules, regulations, and requirements of any governmental authority having jurisdiction thereof and in accordance with all obligations, express or implied, in the Unit Agreement and any other Related Agreement, regardless of when these obligations arose or arise;

 

(iii)                                All Liabilities of either or both Sellers associated, in any way, with the NWU, arising for any period from and after the Adjustment Time, but not before, whether such Liabilities arise out of Unit Operations, ownership of the Assets or otherwise;

 

(iv)                               All Liabilities and obligations of Operator under the Unit Operating Agreement from and after the Adjustment Time;

 

(v)                                  All Liabilities of either or both Sellers arising out of or related to Environmental Laws or Hazardous Substances associated, in any way, with the NWU or the Assets, whether arising before or after the Closing Date, including, without limitation, all CERCLA and CERCLA-like Liabilities, whether such Liabilities arise out of Unit Operations, Ownership of the Assets, Sellers’ negligence or otherwise (collectively, “ Environmental Obligations ”); and

 

(vi)                               Any Liability for which there is an associated downward adjustment to the Purchase Price under Sections 1.5 , 1.6 or 1.7 .

 

(c)                                   Buyers shall not assume any Liabilities other than the “Assumed Liabilities.” All Liabilities of Seller other than the Assumed Liabilities (the “ Excluded Liabilities ”) shall remain the sole responsibility of and shall be retained, paid, performed and discharged solely by Sellers. “Excluded Liabilities” shall include:

 

(i)                                      Liabilities of either Seller that arise out of or relate to the Assets prior to the Adjustment Time, except for Plugging Obligations, Environmental Obligations and Liabilities for which there is an associated downward adjustment to the Purchase Price under Sections 1.5 , 1.6 or 1.7 ;

 

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(ii)                                   Liabilities for Income Taxes of either Seller;

 

(iii)                                Liabilities of either Seller in respect of transaction costs payable by it pursuant to Section 10.10 ;

 

(iv)                               Liabilities of either Seller related to any employee of Sellers or any employee benefit plan;

 

(v)                                  Liabilities for amounts of Taxes collected or withheld by Sellers and payable to any Governmental Authority;

 

(vi)                               Liabilities of either Seller under this Agreement or any Seller Transaction Agreement;

 

(vii)                            Liabilities of either Seller, to the extent such Liabilities do not arise out of or relate to the Assets or the Operation of the Unit (including Liabilities relating exclusively to the Excluded Assets);

 

(viii)                         Except for Plugging Obligations, Environmental Obligations and Liabilities for which there is an associated downward adjustment to the Purchase Price under Sections 1.5 , 1.6 or 1.7 , Liabilities under the Contracts assumed by Buyers pursuant to Section 1.2 to the extent arising prior to the Adjustment Time;

 

(ix)                                 Liabilities arising out of or relating to Sellers’ loan indebtedness and/or credit facilities or any security interest related thereto;

 

(x)                                    Liabilities to Sellers or to any Affiliate of Sellers (other than obligations arising under the Unit Operating Agreement from and after the Adjustment Time); and

 

(xi)                                 Liabilities to indemnify, reimburse or advance amounts to any officer, director, member, manager, employee or agent of Sellers.

 

1.3.                               Purchase Price and Escrow.

 

(a)                                   For purposes of this Agreement, the Escrow shall be deemed opened on the date Escrow Agent shall have received an executed counterpart of this Agreement from both Buyers and Sellers.  Escrow Agent shall notify Buyer and Sellers, in writing, of the date the Escrow is opened and established.  In addition, Buyer and Sellers agree to execute, deliver and be bound by any reasonable or customary supplemental escrow instructions of Escrow Agent or other instruments as may reasonably be required by Escrow Agent in order to consummate the transaction contemplated by this Agreement.  Any such supplemental instructions shall not conflict with, amend or supersede any portions of this Agreement.  If there is any inconsistency between such supplemental instructions and this Agreement, this Agreement shall control.

 

(b)                                  On the Closing Date, Buyers shall pay, or cause the Escrow Agent to pay to Sellers, and the Sellers shall accept, together with the assumption of the Assumed

 

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Liabilities, in full payment for the Assets, an aggregate cash amount equal to Twenty-Three Million Dollars ($23,000,000.00) (the “Purchase Price”) plus or minus any adjustments reflected on the Preliminary Settlement Statement.  The Purchase Price shall be apportioned between Sellers in accordance with Schedule 1.4 attached.

 

(c)                                   If any adjustment under Section 1.7 results in a reduction in the Purchase Price in excess of the Holdback Amount (as hereinafter defined), Sellers shall pay to Buyer the amount of such reduction, and if any adjustment results in an increase in the Purchase Price, Buyer shall pay to Sellers the amount of such increase, in each case by wire transfer of immediately available funds to an account designated by the party receiving payment within five (5) Business Days after the final determination of the amount of such reduction or increase in Purchase Price, plus interest on the amount of such reduction or increase from the Closing Date to the date of such payment thereof at the per annum rate equal to the rate announced by Citibank, N.A. in the City of New York as its base rate in effect on the Closing Date.

 

(d)                                  Deposit of Purchase Price With Escrow Agent.   The Purchase Price shall be deposited into Escrow by the Buyers as follows:

 

(i)                                      On or before five (5) days prior to Closing, Buyers shall deliver to the Escrow Agent, a cashier’s check or other immediately available funds in the sum of Twenty-Three Million Dollars ($23,000,000.00), plus or minus any adjustments reflected on the Preliminary Settlement Statement.

 

(ii)                                   At the Closing, the Escrow Agent shall pay to each Seller an amount equal to such Seller’s share of the Purchase Price, subject to adjustments, by means of a wire transfer of immediately available U.S. funds to one or more accounts designated by such Seller to Buyers, less an amount equal to 5% of the Purchase Price (the “ Holdback Amount ”), which shall be retained by the Escrow Agent in a separate escrow account (the “ Holdback Escrow Account ”) for a period of six (6) months following the Closing solely to secure the Sellers’ indemnification obligations under Section 8 .  The Holdback Amount will be distributed in accordance with the Holdback Escrow Agreement in the form attached as Exhibit ”E” hereto.

 

1.4.                               Allocation of Purchase Price . 

 

(a)                                   On the Closing Date, the consideration for the Assets provided herein shall be allocated among the various categories of Assets in accordance with Schedule 1.4 .  Buyer and each Seller shall execute and file all Tax Returns in a manner consistent with the allocation determined pursuant to this Section 1.4 and shall not take any position before any Governmental Authority or in any judicial proceeding that is inconsistent with such allocation.  Buyer and each Seller shall each timely file a Form 8594 with the IRS in accordance with the requirements of Section 1060 of the Internal Revenue Code.

 

(b)                                  Any disagreements regarding the allocation required by Section 1.4(a)  shall be submitted for final and binding resolution to a tax partner at a Neutral Accounting Firm to resolve such disagreements (the “ Tax Arbitrator ”).  The Tax Arbitrator shall be a tax partner at a Neutral Accounting Firm selected by mutual agreement of Buyer and Sellers; provided that if the parties are unable to agree on a tax partner at a Neutral Accounting

 

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Firm to act as the Tax Arbitrator, each party shall select a Neutral Accounting Firm and such firms together shall select a tax partner at another Neutral Accounting Firm to act as the Tax Arbitrator.  The Tax Arbitrator will only consider those items as to which Buyer and Sellers have disagreed and must resolve the matter in accordance with the terms and provisions of Schedule 1.4 .  The Tax Arbitrator shall deliver to Buyer and Sellers, as promptly as practicable and in any event within ninety (90) calendar days after its appointment, a written report setting forth the resolution of any such disagreement determined in accordance with Schedule 1.4 .  The Tax Arbitrator shall select as a resolution the position of either Buyer or Sellers for each item of disagreement and may not impose an alternative resolution.  The determination of the Tax Arbitrator shall be final and binding upon Buyer and Seller.  The fees, expenses and costs of the Tax Arbitrator shall be borne by the party whose position the Tax Arbitrator does not select.  Other than such fees and expenses of the Tax Arbitrator, Buyer and Sellers shall each be responsible for their own costs and expenses incurred in connection with any actions taken pursuant to Section 1.4(a)  and this Section 1.4(b) .

 

1.5.                               Allocation of Expenses .   On the Closing Date, the following expenses attributable to the Assets and/or the operation of the NWU, regardless of whether such expenses would be otherwise payable by the Operator under the Unit Operating Agreement, shall be allocated between and are hereby assumed by Buyers and Sellers as follows:

 

(a)                                   Taxes, Utilities, and Prepaid Expenses .  All Production Taxes and Property Taxes shall be apportioned between Buyers and the respective Seller as of 5:00 P.M. on December 31, 2005 (the “ Adjustment Time ”).  The basis of the apportionment will be the current assessment for the fiscal year in which the Closing Date occurs or, if that assessment is not known, then the basis of the apportionment will be the assessment for the previous fiscal year. If Property Taxes have not been paid before Closing, the same shall be reflected on the Preliminary Settlement Statement.  Buyers will be credited for Sellers’ portion of the Property Taxes. If they have been paid before Closing, Sellers will be credited for Buyers’ portion of the taxes. Buyers will be responsible for all Property Taxes that are applied to the Assets after the Adjustment Time.  If the Production Taxes are based on prior year’s production, the assessment will be apportioned between Sellers (on the one hand) and Buyers (on the other hand) as of the Adjustment Time on the Preliminary Closing Statement; provided, however, Buyers will be responsible for paying or withholding all taxes that are assessed after the Adjustment Time.  All utility charges, gas charges, electric charges, water charges, water rents and sewer rents, if any, shall be apportioned between Buyers and such Seller as of the Adjustment Time, computed on the basis of the most recent meter charges or, in the case of annual charges, on the basis of the established fiscal year.  All prepaid expenses (including any rent) paid by either Sellers prior to the Closing Date in respect of the Assets and/or the operation of the NWU shall be apportioned between Buyers and such Seller as of the Adjustment Time computed on the basis of the benefit received by such Seller on or before December 31, 2005, and the benefit to be received by Buyers subsequent to December 31, 2005, with respect to any Contract or other matter to which the prepaid expense relates.  All prorations shall be made and the Purchase Price shall be adjusted insofar as feasible on December 31, 2005.  During the six (6) month period subsequent to December 31, 2005, Sellers shall advise Buyers and Buyers shall advise Sellers of any actual changes to such prorations, and the Purchase Price shall be increased or decreased, as applicable, at the end of such six (6) month period.  In the event Buyers or either Seller shall receive bills after the Closing Date for expenses incurred prior to December 31, 2005 that were not prorated

 

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in accordance with this Section 1.5(a) , then Buyers or such Seller, as the case may be, shall promptly notify the other party as to the amount of the expense subject to proration and the responsible party shall pay its portion of such expense (or, in the event such expense has been paid on behalf of the responsible party, reimburse the other party for its portion of such expenses).

 

(b)                                  Transfer Taxes .  Buyers and each Seller shall cooperate in preparing, executing and filing use, sales, real estate, transfer and similar Tax Returns relating to the purchase and sale of the Assets.  Sellers and Buyers shall equally share and pay on a 50% each basis all such transfer Taxes, including any penalties, interest and additives to Tax, incurred in connection with the purchase and sale of the Assets.  Such Tax Returns shall be prepared in a manner that is consistent with the determination of the aggregate fair market values of the Assets by the categories contemplated by Section 1.4 .

 

(c)                                   Tax Prosecution Rights .  Sellers shall have the right (at their own expense) to prosecute and continue to prosecute subsequent to the Closing any pending Tax certiorari proceedings for the Assets for the Tax year in which the Closing occurs and all prior Tax years.  Any refunds obtained for such claims for any Tax years prior to the Tax year in which the Closing occurs and the pro rata portion of any refunds obtained for such claims for the Tax year in which the Closing occurs, net of the expenses incurred in obtaining such pro rated refunds, shall be paid to the Seller to whom such refund relates.

 

1.6.                               Allocation of Revenues and Gross Receipts .

 

(a)                                   Oil in Storage .  All “ Oil in Storage ” at the Adjustment Time, including working inventory, belongs to Global.  Oil in Storage includes all Oil in the system downstream of the wellhead at the Adjustment Time, including Oil in stock tanks, wash tanks, heater treaters, flowlines, and pipelines.  Oil in Storage will be determined by the sum of the following:  (i) Oil in stock tanks, as gauged by Global at the Adjustment Time; plus (ii) five (5) barrels (representing the agreed upon amount of Oil downstream of the wellhead other than oil in stock tanks).  Buyers and Global may be present when the stock tanks are gauged.  At the Closing, title to Global’s Oil in Storage will transfer to Buyers.  At the Closing, the Purchase Price paid to Global shall be increased by an amount determined by multiplying the estimated Oil in Storage by the price that would have been received for such Oil had such Oil been sold on December 31, 2005.  This amount shall be set forth on the Preliminary Settlement Statement. 

 

(b)                                  Proceeds, Costs and Expenses .  Except as otherwise provided in this Agreement, Sellers reserve all rights to their proportionate share of proceeds (including, without limitation, all rents, royalties and other revenues of any nature), including proceeds held in suspense or escrowed, receipts, reimbursements, credits, accounts and income attributable to the Assets and accruing before the Adjustment Time.  Except as otherwise provided in this Agreement, all proceeds, receipts, credits, income and charges attributable to the Assets and accruing from and after the Adjustment Time will be Buyers’ property and responsibility.  Except as otherwise provided in this Agreement, Sellers will be responsible for (i) payment of charges and invoices for costs and expenses accruing before the Adjustment Time and attributable to the Assets, and (ii) payments necessary as the result of sales of production from the Assets occurring before the Adjustment Time (including payments out of proceeds held in suspense or escrow).

 

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Buyers will be responsible for (i) payment of all charges and invoices for costs and expenses accruing after the Adjustment Time, (ii) payments necessary as the result of sales of production from the Assets occurring after the Adjustment Time (including payments to fund suspense obligations with respect to unknown working interest, royalty interest and overriding royalty interest owners), and (iii) disbursements after the Adjustment Time, but if either Seller makes any payments or disbursements as contemplated in this Agreement, Buyers will reimburse such Seller for the amounts paid.  All amounts due from one party to the other under this section may be made by debits and credits in the Preliminary Settlement Statement and the Final Settlement Statement. 

 

(c)                                   Suspended Funds . Global will retain all funds that are held in suspense (or will be received into the suspense account with respect to oil sales and other activities occurring while Global served as Unit Operator) with respect to working interest, royalty interest and overriding royalty interest owners as of the date that Global ceases to serve as Unit Operator and will be solely responsible for the disbursement of such funds to the Persons entitled thereto.

 

1.7.                               Settlement Statements .

 

(a)                                   Preliminary Settlement Statement .  No later than ten (10) days prior to the Closing Date, Sellers shall prepare and deliver to Buyers, based upon the best information available to Sellers, a Preliminary Settlement Statement (the “ Preliminary Settlement Statement ”) that reports estimates as of the Adjustment Time of the amounts due to and from Buyers and Sellers (or either of them) hereunder on the Closing Date.

 

(b)                                  Final Settlement Statement .  On or before the last day of the sixth full month after the Closing Date, Sellers shall prepare and deliver to Buyers a statement setting forth the Final Settlement Statement as of the close of business on the business day immediately preceding the Closing Date (the “ Final Settlement Statement ”).  Buyers shall cooperate with Sellers in connection with, and shall furnish to Sellers all such information as Sellers may reasonably require, in the preparation of the Final Settlement Statement. The Final Settlement Statement shall set forth, in detail, all credits and debits regarding operations of the NWU as of the Adjustment Time, including any amounts paid or received thereafter, any other debits and credits, either cash or accrued, but excluding income and franchise taxes, determined in accordance with Sellers’ historic accounting practices, and shall state any adjustments required to reflect differences between the estimates made in the Preliminary Settlement Statement and the actual amounts due and owing the Parties as provided in this Agreement as of the close of business on December 31, 2005.

 

(c)                                   Accounting Methods .  The Final Settlement Statement will be prepared using the same accounting methods, policies, practices and procedures, with consistent classifications and estimation methodologies as were used in the preparation of the Preliminary Settlement Statement.  Buyers shall cause the Buyers’ employees to assist Sellers in the preparation of the Final Settlement Statement.

 

(d)                                  Access .  Each party shall provide the other party and its representatives with reasonable access to books and records and relevant personnel during the

 

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preparation of the Final Settlement Statement and the resolution of any disputes that may arise under this Section 1.7 .

 

(e)                                   Disagreement .   If Buyers disagrees with the determination of the actual amounts due and owing as shown on the Final Settlement Statement, Buyers shall notify Sellers in writing of such disagreement within thirty (30) calendar days after delivery of the Final Settlement Statement, which notice shall describe the nature of any such disagreement in reasonable detail, identify the specific items involved and the dollar amount of each such disagreement and provide reasonable supporting documentation for each such disagreement. After the end of such thirty (30) calendar day period, neither Buyers nor Sellers may introduce additional disagreements with respect to any item in the Final Settlement Statement or increase the amount of any disagreement, and any item not so identified shall be deemed to be agreed to by Buyers and Seller and will be final and binding upon the parties.  During the thirty (30) calendar day period of its review, Buyers shall have reasonable access to any documents, schedules or workpapers used in the preparation of the Final Settlement Statement.

 

(f)                                     Dispute Resolution .  Buyers and Sellers agree to negotiate in good faith to resolve any such disagreement.  If Buyers and Seller are unable to resolve all disagreements properly identified by Buyers pursuant to Section 1.7(e)  within thirty (30) calendar days after delivery to Sellers of written notice of such disagreement, then such disagreements shall be submitted for final and binding resolution to a Neutral Accounting Firm to resolve such disagreements (the “ Accounting Arbitrator ”).  The Accounting Arbitrator shall be a Neutral Accounting Firm selected by mutual agreement of Buyers and Sellers; provided that (i) if, within fifty (50) calendar days after Buyers has delivered its notice of disagreement to Sellers pursuant to Section 1.7(e) , the parties are unable to agree on a Neutral Accounting Firm to act as Accounting Arbitrator, each party shall select a Neutral Accounting Firm and such firms together shall select the Neutral Accounting Firm to act as the Accounting Arbitrator, and (ii) if any party does not select a Neutral Accounting Firm within ten (10) calendar days of written demand therefor by the other party, the Neutral Accounting Firm selected by the other party shall act as the Accounting Arbitrator.  The Accounting Arbitrator will only consider those items and amounts set forth in the Final Settlement Statement as to which Buyers and Sellers have disagreed within the time periods and on the terms specified above and must resolve the matter in accordance with the terms and provisions of this Agreement.  The Accounting Arbitrator shall deliver to Buyers and Sellers, as promptly as practicable and in any event within ninety (90) calendar days after its appointment, a written report setting forth the resolution of any such disagreement determined in accordance with the terms of this Agreement.  The Accounting Arbitrator shall select as a resolution the position of either Buyers or Sellers for each item of disagreement and may not impose an alternative resolution.  The Accounting Arbitrator shall make its determination based exclusively on presentations and supporting material provided by the parties and not pursuant to any independent review.  The determination of the Accounting Arbitrator shall be final and binding upon Buyers and Sellers.  The fees, expenses and costs of the Accounting Arbitrator shall be borne by the party whose position the Accounting Arbitrator does not select.  Other than such fees and expenses of the Accounting Arbitrator, Buyers and Sellers shall each be responsible for their own costs and expenses incurred in connection with any actions taken pursuant to Section 1.7(e)  and this Section 1.7(f) .

 

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(g)                                  Procedure .  The parties hereto agree that the procedure set forth herein with respect to the Final Settlement Statement, and the purchase price adjustment provided herein, are not intended to permit the introduction of different accounting methods, policies, practices, procedures, classifications or estimation methodologies for purposes of determining the asset and liability balances from those used in the preparation of the Preliminary Settlement Statement.

 

SECTION 2.  CLOSING

 

2.1.                               Closing Date .  The Closing shall be consummated on a date and at a time agreed upon by Buyers and Seller, but in no event later than 11:00 a.m. on December 30, 2005, at the offices of Sheppard Mullin Richter & Hampton, LLP, 501 West Broadway, 19th Floor, San Diego, California 92101, or at such other place as shall be agreed upon by Buyers and Seller.  The time and date on which the Closing is actually held is referred to herein as the “ Closing Date .”

 

2.2.                               Buyers’ Closing Date Deliveries .  At the Closing, Buyers shall deliver to Seller all of the following:

 

(a)                                   The delivery of the Purchase Price to Sellers as provided in Section 1.3 above.

 

(b)                                  The following-described executed and acknowledged instruments:

 

(i)                                      The Assignment, Assumption and Bill of Sale and the Assignment and Assumption of Contracts and Liabilities, providing for among others the assignment of the Assumed Liabilities by Seller to Buyers and the assumption of the same by Buyers and the sale of the Equipment to Buyers, substantially in the forms of Exhibit ”A-1” and Exhibit ”A-2” executed by a duly authorized officer of Buyers;

 

(ii)                                   All other instruments and certificates reasonably required hereby;

 

(iii)                                Preliminary Change of Ownership Report in the form required to record the conveyancing instruments; and

 

(iv)                               The Holdback Escrow Agreement.

 

(c)                                   A Preliminary Settlement Statement that reports estimates as of the Effective Date of the amounts due to and from Buyers and Sellers.

 

(d)                                  All other instruments and certificates of assumption and release as Seller may reasonably request in order to effectively make Buyers responsible for all Assumed Liabilities and release Seller therefrom to the fullest extent permitted under applicable Law.

 

(e)                                   A copy of each of Buyer’s charters certified as of a recent date by the Secretary of State of the state of its formation.

 

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(f)                                     A certificate of good standing for each of Buyers issued as of a recent date by the Secretary of State of the states of their formation and California.

 

(g)                                  A certificate of the secretary or an assistant secretary of Buyers, dated the Closing Date, in form and substance reasonably satisfactory to Seller, as to (i) the lack of amendments to the certificate of incorporation of Buyers since the date of the certificate referred to in Section 2.2(c)  above; (ii) the bylaws of Buyers; (iii) the resolutions of the Board of Directors of Buyers authorizing the execution and performance of this Agreement, any Buyers Transaction Agreement and the transactions contemplated hereby and thereby; and (iv) the incumbency and signatures of the officers of Buyers executing this Agreement and any Buyers Transaction Agreement.

 

(h)                                  Counterparts of real estate transfer tax or documentary stamp Tax Returns, if required.

 

(i)                                      A certified or official bank check made payable to the appropriate taxing authority for the amount of transfer tax imposed in connection with the conveyance of the Assets.

 

2.3.                               Sellers’ Closing Date Deliveries .  At the Closing, Sellers shall deliver to Buyers all of the following:

 

(a)                                   The following-described executed and acknowledged instruments:

 

(i)                                      The Assignment, Assumption and Bill of Sale and the Assignment and Assumption of Contracts and Liabilities, substantially in the forms of Exhibit ”A-1” and Exhibit ”A-2” executed by a duly authorized officer of Buyers;

 

(ii)                                   The Quitclaim Deed – Surface Properties substantially in the form of Exhibit ”B” , executed by a duly authorized officer or manager of Sellers;

 

(iii)                                The Quitclaim Deed – Mineral Properties substantially in the form of Exhibit ”C” , executed by a duly authorized officer or manager of Sellers;

 

(iv)                               All other instruments and certificates reasonably required hereby;

 

(v)                                  Preliminary Change of Ownership Report in the form required to record the conveyancing instruments; and

 

(vi)                               The Holdback Escrow Agreement.

 

(b)                                  A Preliminary Settlement Statement that reports estimates as of the Effective Date of the amounts due to and from Buyers and Sellers.

 

(c)                                   A duly executed resignation as Operator of the NWU and Change of Operator Form to be filed with the Department of Oil, Gas and Geothermal Resources in the form attached as Exhibit ”D” .

 

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(d)                                  Copies of all instruments, certificates, documents and other filings (if applicable) necessary to release the Assets from all Encumbrances other than Permitted Encumbrances.

 

(e)                                   A copy of the Articles of Organization of each Seller certified by the Secretary of State of the State of California as of a recent date.

 

(f)                                     A certificate of good standing of each Seller issued as of a recent date by the Secretary of State of the State of California.

 

(g)                                  A certificate of the Manager of each Seller, dated the Closing Date, in form and substance reasonably satisfactory to Buyers, as to (i) the lack of amendments to the articles of organization of each Seller since the date of the certificate referred to in Section 2.3(e)  above; (ii) the operating agreement of each Seller; (iii) any resolutions of the Manager of each Seller relating to the transactions contemplated by this Agreement and any Seller Transaction Agreement; and (iv) the incumbency and signature of the Manager of each Seller executing this Agreement and any Seller Transaction Agreement.

 

(h)                                  A properly executed certificate of nonforeign status, described under Treasury Regulation Section 1.1445-2(b)(2) (if applicable).

 

SECTION 3.  REPRESENTATIONS AND WARRANTIES OF SELLERS

 

As an inducement to Buyers to enter into this Agreement and to consummate the transactions contemplated hereby, each Seller hereby represents and warrants to Buyers as to itself and the Assets owned by it as set forth below to such Seller’s Knowledge:

 

3.1.                               Organization and Power and Authority of Seller .  Seller is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California.  Seller has the limited liability company power and authority to own or lease and operate the Assets.

 

3.2.                               Authority of Seller; Conflicts .

 

(a)                                   Seller has the limited liability company power and authority to execute, deliver and perform this Agreement and the Seller Transaction Agreements and its obligations hereunder and thereunder.  The execution, delivery and performance of this Agreement and the Seller Transaction Agreements by Seller and its obligations hereunder and thereunder have been duly authorized and approved by all necessary corporate action.  This Agreement has been duly authorized, executed and delivered by Seller and (assuming the valid authorization, execution and delivery of this Agreement by Buyers) is the legal, valid and binding obligation of Seller, enforceable in accordance with its terms, and each of the Seller Transaction Agreements has been duly authorized by Seller and upon execution and delivery by Seller will be (assuming the valid authorization, execution and delivery by each other party thereto) the legal, valid and binding obligation of Seller enforceable in accordance with its terms, in each case subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting creditors’ rights and to general equity principles.

 

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(b)                                  Except as set forth on Schedule 3.2 , the execution, delivery and performance of the transactions contemplated by this Agreement by Seller does not and will not violate, conflict with, or result in the breach of, any term, condition or provision of or require the consent of any person (excluding any Governmental Authority) under: (i) any law, ordinance or governmental rule or regulation of which the Seller has Knowledge and to which the Seller or the Assets is subject; (ii) the governing documents of or any securities issued by the Seller; or (iii) any of the Contracts listed on Schedule 1.2 which is not reflected in the public records (it being expressly understood that Seller has not undertaken a review of any documents for purposes of making this representation or any other representation or warranty set forth in this Agreement and is under no obligation to do so).

 

3.3.                               Condition of Title .  Subject to the Permitted Encumbrances, Sellers will convey Defensible Title to the Assets to Buyers.  Sellers make no other representation or warranty as to the condition of title to the Assets.

 

3.4.                               Litigation .  There is no litigation, proceeding or governmental investigation pending or threatened in any court, arbitration board, administrative agency or tribunal against or relating to Sellers that would prevent or impede the consummation of this Agreement by Sellers.  Except as set forth on Schedule 3.4 , Sellers do not know of and have no reasonable ground to know of any basis for any such litigation, proceeding or investigation, and the execution and performance of this Agreement by them will not result in a default with respect to any judgment, order, writ, injunction, decree, rule or regulation of any applicable court or administrative agency.  Except as disclosed on Schedule 3.4 , there are no actions, suits or proceedings pending, or to Sellers’ Knowledge threatened or noticed in writing against Sellers or the Assets, which could have a Material Adverse Effect on any of the Assets, including without limitation any written notice or claim from any governmental authority or person claiming any violation of any law, judgment, order, writ, injunction, decree, rule or regulation.

 

3.5.                               No Brokers .  Neither Seller nor any Person acting on their behalf has become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement.

 

3.6.                               Inducement . Sellers acknowledge that their representations under this Section 3 are a material inducement to Buyer to enter into this Agreement with, and close the sale of the Assets from, Sellers.

 

3.7.                               No Knowledge of Breach .  To the Knowledge of Seller, none of the representations or warranties of Sellers herein is inaccurate or false.

 

SECTION 4.  REPRESENTATIONS AND WARRANTIES OF BUYERS

 

As an inducement to Seller to enter into this Agreement and to consummate the transactions contemplated hereby, each Buyer hereby represents and warrants to Seller as to itself as set forth below to such Buyer’s Knowledge:

 

4.1.                               Organization of Buyers .  Each Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its formation.  Buyer has the corporate power and corporate authority to own or lease and operate its assets.

 

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4.2.                               Authority of Buyers.

 

(a)                                   Buyer has the corporate power and corporate authority to execute, deliver and perform this Agreement and the Buyers Transaction Agreements and its obligations hereunder and thereunder.  The execution, delivery and performance of this Agreement and the Buyers Transaction Agreements by Buyer and its obligations hereunder and thereunder have been duly authorized and approved by all necessary corporation action.  This Agreement has been duly authorized, executed and delivered by Buyers and (assuming the valid authorization, execution and delivery of this Agreement by Seller) is the legal, valid and binding obligation of Buyers, enforceable in accordance with its terms, and each of the Buyer’s Transaction Agreements has been duly authorized by Buyer and upon execution and delivery by Buyer will be (assuming the valid authorization, execution and delivery by each other party thereto) the legal, valid and binding obligation of Buyers enforceable in accordance with its terms, in each case subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting creditors’ rights and to general equity principles.

 

(b)                                  The execution and delivery by Buyer of this Agreement and the Buyers Transaction Agreements, and the performance by Buyer of its obligations hereunder and thereunder, does not and will not:

 

(i)                                      Violate any provision of the certificates of incorporation or bylaws of Buyer;

 

(ii)                                   Violate any provision of any applicable Law relating to Buyer; or

 

(iii)                                Require a registration, filing, application, notice, consent, approval, order, qualification, authorization, designation, declaration or waiver with, to or from any Governmental Authority.

 

4.3.                               No Litigation .  There is no litigation, proceeding or governmental investigation pending or threatened in any court, arbitration board, administrative agency or tribunal against or tribunal against or relating to Buyer that would prevent or impede the consummation of this Agreement by Buyer.  Buyer does not know of and have no reasonable ground to know of any basis for any such litigation, proceeding or investigation, and the execution and performance of this Agreement by it will not result in a default with respect to any judgment, order, writ, injunction, decree, rule or regulation of any applicable court or administrative agency.

 

4.4.                               Securities Laws .

 

(a)                                   Buyer acknowledges that the solicitation of an offer for and the sale of the Assets has not been registered under any securities laws.

 

(b)                                  Buyer intends to acquire the Assets for its own benefit and account and is not acquiring the Assets with the intent of distributing fractional undivided interests in them or otherwise selling them in a manner that would be subject to regulation by federal or state securities laws.  If Buyer sells, transfers, or otherwise disposes of the Assets or fractional

 

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undivided interests in them in the future, it will do so in compliance with applicable federal and state laws.

 

(c)                                   Buyer represents that at no time has it been presented with or solicited by or through any public promotion or other form of advertising in connection with this transaction.

 

4.5.                               No Brokers .  Neither Buyer nor any Person acting on its behalf has become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement .

 

4.6.                               Financial Ability .  Buyers collectively have, and will have on the Closing Date, sufficient cash on hand from Buyers’ immediately available internal funds or available under a currently established committed credit facility or unutilized lines of credit with financial institutions to consummate the transactions contemplated by this Agreement and perform its obligations hereunder (including, without limitation, its obligation to pay the Purchase Price pursuant to Section 1.3 ).

 

4.7.                               No Knowledge of Breach .  To the Knowledge of Buyer, none of the representations or warranties of Seller herein is inaccurate or false.

 

4.8.                               Independent Analysis .  Buyer is an experienced oil and gas company and operator.  It has entered into this Agreement on the basis of its own independent judgment and analysis.  Buyer is the current owner of interests in the vicinity of the NWU and as such has express knowledge concerning the Assets and the NWU.  Buyer is in the business of purchasing and owning oil and gas properties.  Buyer recognizes that Sellers have not made any representation or warranty upon which Buyer is relying in respect to the prospects or operation of the assets subsequent to the Closing Date.  Buyer acknowledges that it has conducted an independent investigation of the financial condition, results of operations, Assets, Liabilities, properties and projected operations of the NWU and, in making its determination to proceed with the transactions contemplated by this Agreement, Buyer has relied solely on the results of such investigation and the representations, warranties, covenants and agreements of Sellers set forth herein, including the Schedules hereto.  Such representations and warranties by Sellers constitute the sole and exclusive representations and warranties of Sellers to Buyer in connection with the transactions contemplated hereby, and Buyers acknowledges and agrees that Sellers are not making any representation or warranty whatsoever, express or implied, beyond those expressly given in this Agreement, including any warranty disclaimed by Sellers in Section 6 .  Buyers further acknowledges and agrees that any cost estimates, forecasts, projections or other predictions or forward-looking information that may have been provide