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ASSET
PURCHASE AND SALE AGREEMENT
by and between
DSX ENERGY LIMITED, LLP, KEBO OIL & GAS, INC., et al.,
(Sellers)
and
BASELINE OIL & GAS CORP.
(Purchaser)
dated as of August 7, 2007
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TABLE OF CONTENTS
1. PURCHASE AND
SALE......................................................6
1.1 Agreement to Sell and
Purchase..................................6
1.2
Assets..........................................................7
1.3 Effective
Date..................................................9
1.4 Gauging and
Strapping..........................................10
1.5
Records........................................................10
1.6 Excluded
Assets................................................10
2. SALE AND
PURCHASE.....................................................11
2.1 Purchase and
Sale..............................................11
2.2 Purchase
Price.................................................11
2.3 Performance
Deposit............................................12
2.4 Determination of Adjusted Purchase
Price.......................12
2.5 Payment of Adjusted Purchase
Price.............................14
2.6 Tax Purchase Price
Allocations.................................14
3. TITLE
MATTERS.........................................................14
3.1 Access to Records and
Assets...................................14
3.2
Definitions....................................................15
3.3 Notice of Title
Defect.........................................17
3.4 Remedies for Title
Defects.....................................18
3.5 Procedure for Resolving Title
Defects..........................18
3.6 Value of
Defects...............................................19
3.7 Interest
Additions.............................................19
3.8 Right to Terminate
Agreement...................................20
3.9 Expert
Determination...........................................20
3.10 Preferential Purchase Rights and Consents to
Assign............21
4. CASUALTY
LOSS.........................................................23
4.1 Casualty
Loss..................................................23
5. ENVIRONMENTAL
CONDITION...............................................24
5.1 Physical Condition of the
Assets...............................24
5.2 Environmental
Assessment.......................................24
5.3 Environmental Defect
Notice....................................25
5.4 Remedies for Environmental
Defects.............................25
5.5 Procedure for Resolving Environmental
Defects..................25
5.6
Definitions....................................................26
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6. REPRESENTATIONS OF
SELLERS............................................28
6.1
Disclaimers....................................................28
6.2
Representations................................................28
6.3
Knowledge......................................................33
7. REPRESENTATIONS OF
PURCHASER..........................................33
7.1
Representations................................................33
7.2
Knowledge......................................................35
8. PRE-CLOSING OBLIGATIONS OF
SELLERS....................................35
8.1
Operations.....................................................35
8.2
Contracts......................................................35
8.3 Compensation of
Sellers........................................35
8.4
Permissions....................................................36
8.5
Efforts........................................................36
8.6
Defaults.......................................................36
8.7
Operatorship...................................................36
8.8 Geological and Geophysical
Information.........................36
8.9 Financial
Statements...........................................37
8.10 Reserve
Report.................................................37
8.11 Exclusive
Dealing..............................................38
9. PRE-CLOSING OBLIGATIONS OF
PURCHASER..................................38
9.1 Return of
Data.................................................38
9.2
Efforts........................................................38
10. CONDITIONS OF SELLERS TO
CLOSING......................................38
10.1
Representations................................................38
10.2
Performance....................................................39
10.3
Certificate....................................................39
10.4 Governmental
Consents..........................................39
10.5 Pending
Matters................................................39
11. CONDITIONS OF PURCHASER TO
CLOSING....................................39
11.1
Representations................................................39
11.2
Performance....................................................39
11.3 Officer's
Certificate..........................................39
11.4 Governmental
Consents..........................................39
11.5 Pending
Matters................................................40
11.6 Releases of
Liens..............................................40
11.7
Operations.....................................................40
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12. CLOSING
..............................................................40
12.1 Time and Place of the
Closing..................................40
12.2 Change of the Closing
Date.....................................40
12.3 Calculation of Adjusted Purchase
Price.........................40
12.4 Failure to
Close...............................................40
12.5 Closing
Obligations............................................41
12.6
Conveyance.....................................................42
13. POST-CLOSING
OBLIGATIONS..............................................42
13.1 Post-Closing
Adjustments.......................................42
13.2 Receipts and
Credits...........................................43
13.3 Assumption and
Indemnification.................................43
13.4
Disclaimer.....................................................47
13.5 Method of Asserting
Claims.....................................47
13.6
Payment........................................................48
13.7 Limitation on
Damages..........................................49
13.8
Recording......................................................49
13.9 Cooperation and Further
Assurances.............................49
14.
TERMINATION...........................................................50
14.1 Right of
Termination...........................................50
14.2 Effect of
Termination..........................................50
15. TAXES
................................................................51
15.1 Apportionment of Ad Valorem and Property
Taxes.................51
15.2 Taxes Paid for
Others..........................................52
15.3 Sales
Taxes....................................................52
15.4 Other
Taxes....................................................52
15.5
Cooperation....................................................52
15.6 Tax
Indemnity..................................................52
16.
MISCELLANEOUS.........................................................53
16.1 Entire
Agreement...............................................53
16.2
Waiver.........................................................53
16.3
Headings.......................................................53
16.4
Assignment.....................................................53
16.5 No Third Party
Beneficiaries...................................53
16.6 Governing
Law..................................................53
16.7
Notices........................................................54
16.8 Execution in
Counterparts......................................54
16.9
Expenses.......................................................54
16.10
Confidentiality................................................54
16.11 Exhibits and
Schedules.........................................55
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16.12
Publicity......................................................55
16.13 Use of Sellers'
Names..........................................55
16.14
Severability...................................................55
16.15
Affiliate......................................................55
16.16 Attorney's
Fees................................................55
16.17
Interest.......................................................56
16.18
Exchange.......................................................56
16.19
Data...........................................................56
16.20
Execution......................................................56
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Schedules
Schedule 1.1.2 Possible Sellers; Allocation Percentages
Schedule 6.2.1 Organization, Qualification, Good Standing of
Sellers
Exhibits
Exhibit A - Leases; Interests; Reserved Overriding Royalty
Interests
Exhibit B - Wells; WI/NRI; Allocated Values
Exhibit C - Schedule of Contracts
Exhibit D - Preferential Purchase Rights; Required Consents to
Assignment
Exhibit E - Intentionally Omitted
Exhibit F - Environmental Claims
Exhibit G - Gas Imbalances
Exhibit H - Effective AFE's
Exhibit I - General Assignment
Exhibit J - Tax Allocations
Exhibit K - Bonds
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Glossary of Terms
"Accounting Firm" means Ernst & Young, 5 Houston Center,
Suite 1200, 1401
McKinney Street, Houston, Texas 77010.
"Adjusted Purchase Price" has the meaning given to it in Section
2.4 of the
Agreement.
"Affiliate" has the meaning given to it in Section 16.15 of the
Agreement.
"Agreed Rate" has the meaning given to it in Section 13.6.2 of
the Agreement.
"Agreement" has the meaning given to it in the introductory
paragraph of this
Agreement.
"Allocated Value" has the meaning given to it in Section 3.2.4
of the Agreement.
"Allocation Percentage" has the meaning given to it in Section
1.1.2 of the
Agreement.
"Applicable Laws" has the meaning given to it in Section 5.6.1
of the Agreement.
"Assets" has the meaning given to it in Section 1.2 of the
Agreement.
"Assumed Obligations" has the meaning given to it in Section
13.3.4 of the
Agreement.
"Business Day" means any day other than a Saturday, Sunday, or
other day on
which commercial banks in Houston, Texas, are required or
authorized by
Applicable Laws to be closed.
"Casualty Loss" has the meaning given to it in Section 4.1 of
the Agreement.
"Casualty Loss Amount" has the meaning given to it in Section
4.1 of the
Agreement.
"Cawley, Gillespie Reserve Report" has the meaning given to it
in Section 8.10
of the Agreement.
"CERCLA" is defined in Section 5.6.3 of the Agreement.
"Claim Notice" has the meaning given to it in Section 13.6.1 of
the Agreement.
"Closing" has the meaning given to it in Section 12.1 of the
Agreement.
"Closing Adjustment Statement" has the meaning given to it in
Section 12.3 of
the Agreement.
"Closing Date" has the meaning given to it in Section 12.1 of
the Agreement.
"Confidentiality Agreement" has the meaning given to it in
Section 16.1 of the
Agreement.
"Control," "controlled by" and "under common control with" have
the meanings
given to them in Section 16.15 of the Agreement.
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"Costs" has the meaning given to it in Section 3.1 of the
Agreement.
"Decision Notice" has the meaning given to it in Section 3.9.2
of the Agreement.
"Deductible" has the meaning given to it in Section 3.5.2 of the
Agreement.
"Defect Expert" has the meaning given to it in Section 3.9.1 of
the Agreement.
"Defect Value" has the meaning given to it in Section 3.3 of the
Agreement.
"Due Diligence Period" has the meaning given to it in Section
3.3 of the
Agreement.
"Effective Date" has the meaning given to it in Section 1.3 of
the Agreement.
"Environmental Defect" has the meaning given to it in Section
5.6.2 of the
Agreement.
"Environmental Defect Notice" has the meaning given to it in
Section 5.3 of the
Agreement.
"Environmental Indemnity Payment" has the meaning given to it in
Section 5.4 of
the Agreement.
"Environmental Laws" has the meaning given to it in Section
5.6.3 of the
Agreement.
"Environmental Obligations" has the meaning given to it in
Section 13.3.4 of the
Agreement.
"Existing Contracts" has the meaning given to it in Section
1.2.4 of the
Agreement.
"Final Settlement Date" has the meaning given to it in Section
13.1.2 of the
Agreement.
"Finally Determined Casualty Loss" has the meaning given to it
in Section 4.1 of
the Agreement.
"Finally Determined Environmental Defect" has the meaning given
to it in Section
5.5.1 of the Agreement.
"Finally Determined Title Defect" has the meaning given to it in
Section 3.5.1
of the Agreement.
"Financial Statements" has the meaning given to it in Section
8.9 of the
Agreement
"Form 8594" has the meaning given to it in Section 2.6 of the
Agreement.
"Full Interest Purchase Price" has the meaning given to it in
Section 2.2 of the
Agreement.
"General Assignment" has the meaning given to it in Section
12.5.1 of the
Agreement.
"Governmental Body" has the meaning given to it in Section 5.6.4
of the
Agreement.
"Hazardous Substances" has the meaning given to it in Section
5.6.5 of the
Agreement.
"Hydrocarbons" has the meaning given to it in Section 1.2.3 of
the Agreement.
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"Imbalance Engineer" has the meaning given to it in Section
13.1.3 of the
Agreement.
"Indemnified Party" and "Indemnifying Party" have the meanings
given to them in
Section 13.6.1 of the Agreement.
"Interest Addition," "Interest Addition Notice," "Interest
Addition Rejection
Notice," and "Interest Addition Value" have the meanings given
to them in
Section 3.7 of the Agreement.
"Interim Period" has the meaning given to it in Section 8.1 of
the Agreement.
"IRC" and "Code" have the meanings given to them in Section 2.6
of the
Agreement.
"Leases" has the meaning given to it in Section 1.2.1 of the
Agreement.
"Lenser Reserve Report" has the meaning given to it in Section
3.6.4 of the
Agreement.
"MMCFE" means million cubic feet of gas equivalent.
"Net Revenue Interest" has the meaning given to it in Section
3.2.1 of the
Agreement.
"Non-Third Party Claim" has the meaning given to it in Section
13.6.1 of the
Agreement.
"NORM" has the meaning given to it in Section 5.1 of the
Agreement.
"Notice Period" has the meaning given to it in Section 13.6.2 of
the Agreement.
"Offset" has the meaning given to it in Section 3.7 of the
Agreement.
"Operations Period" has the meaning given to it in Section 8.3
of the Agreement.
"OSHA" has the meaning given to it in Section 5.6.3 of the
Agreement.
"Participation Date" has the meaning given to it in Section
1.1.3 of the
Agreement.
"Participation Period" has the meaning given to it in Section
1.1.2 of the
Agreement.
"Party" and "Parties" have the meanings given to them in the
introductory
paragraph of the Agreement.
"Performance Deposit" has the meaning given to it in Section 2.3
of the
Agreement.
"Permitted Encumbrances" has the meaning given to it in Section
3.2.2 of the
Agreement.
"Personal Property" has the meaning given to it in Section 1.2.6
of the
Agreement.
"Plugging and Abandonment" has the meaning given to it in
Section 13.3.4 of the
Agreement.
"Possible Sellers" has the meaning given to it in Section 1.1.2
of the
Agreement.
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"Post-Closing Adjustment Statement" has the meaning given to it
in Section
13.1.1 of the Agreement.
"Preliminary Amount" has the meaning given to it in Section 2.5
of the
Agreement.
"Properties" and "Property" have the meaning given to them in
Section 1.2.1 of
the Agreement.
"Property Taxes" has the meaning given to it in Section 15.1 of
the Agreement.
"Purchase Price" has the meaning given to it in Section 2.2 of
the Agreement.
"Purchaser" has the meaning given to it in the introductory
paragraph of this
Agreement.
"Purchaser Group" has the meaning given to it in Section 5.2.2
of the Agreement.
"Purchaser's Environmental Assessment" and "Purchaser's
Environmental
Consultant" have the meanings given to them in Section 5.2.1 of
the Agreement.
"PV-NRI" has the meaning given to it in Section 3.6.4 of the
Agreement.
"RCRA" is defined in Section 5.6.3 of the Agreement.
"Records" has the meaning given to it in Section 1.2.7 of the
Agreement.
"Rejection Notice" has the meaning given to it in Section 3.5.1
of the
Agreement.
"Remediation" has the meaning given to it in Section 5.6.6 of
the Agreement.
"Remediation Amount" has the meaning given to it in Section
5.6.7 of the
Agreement.
"Report Period" has the meaning given to it in Section 8.10 of
the Agreement.
"SARA" is defined in Section 5.6.3 of the Agreement.
"Scheduled Closing Date" has the meaning given to it in Section
12.1 of the
Agreement.
"SEC" has the meaning given to it in Section 8.10 of the
Agreement.
"Seller" and "Sellers" have the meanings given to them in the
introductory
paragraph of the Agreement.
"Sellers' Group" has the meaning given to it in Section 3.1 of
the Agreement.
"Sellers' Title" has the meaning given to it in Section 3.2.1 of
the Agreement.
"Survival Date" has the meaning given to it in Section 13.3.3 of
the Agreement.
"Technical Data" has the meaning given to it in Section 1.2.8 of
the Agreement.
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"Termination Threshold" has the meaning given to it in Section
3.8 of the
Agreement. "Third Party Claim" has the meaning given to it in
Section 13.5.1 of
the Agreement.
"Title Defect" has the meaning given to it in Section 3.2.3 of
the Agreement.
"Title Defect Notice" has the meaning given to it in Section 3.3
of the
Agreement.
"Title Indemnity Payment" has the meaning given to it in Section
3.4 of the
Agreement.
"Wells" has the meaning given to it in Section 1.2.2 of the
Agreement.
"Working Interest" has the meaning given to it in Section 3.2.1
of the
Agreement.
"Work Papers" has the meaning given to it in Section 8.9 of the
Agreement.
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<PAGE>
ASSET PURCHASE AND SALE AGREEMENT
This Asset Purchase and Sale Agreement (this "Agreement") is
made and
entered into as of this 7th day of August, 2007, by and between
DSX Energy
Limited, LLP, a Texas limited liability partnership ("DSX"),
having as its
address 800 N. Shoreline Blvd., Suite 2570S, Corpus Christi,
Texas 78401, KEBO
Oil & Gas, Inc. a Texas corporation ("KEBO") having as its
address 607 Railroad
Avenue, Portland, Texas 78371, and the remaining parties
identified on the
signature pages to this Agreement under the caption "Sellers"
(subject to the
terms of Section 1.1.2, each a "Seller", and collectively,
"Sellers"), and
Baseline Oil & Gas Corp., a Nevada corporation, having as
its address 11811
North Freeway, Suite 200, Houston, Texas 77060 ("Purchaser").
Sellers and
Purchaser are sometimes collectively referred to in this
Agreement as the
"Parties" or individually as a "Party".
W I T N E S S E T H:
WHEREAS, Sellers are the owners of undivided interests in and to
the
Assets (as defined below); and
WHEREAS, KEBO is the current operator of record with respect to
all of the
Assets; and
WHEREAS, Sellers are willing to sell and deliver to Purchaser,
and
Purchaser is willing to purchase and receive from Sellers, all
of the rights and
interests of Sellers in and to the Assets upon the terms and
conditions set
forth in this Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises
of the
Parties contained in this Agreement and other good and valuable
consideration,
the receipt and sufficiency of which are hereby acknowledged,
the Parties agree
as follows:
1. PURCHASE AND SALE
1.1 Agreement to Sell and Purchase.
1.1.1 Subject to the terms and conditions of this Agreement,
Purchaser agrees
to purchase and receive from Sellers, and Sellers agree to sell,
assign,
transfer, convey, and deliver to Purchaser all of Sellers'
rights and
interests in and to the Assets, as of the Effective Date (as
defined
below).
1.1.2 Schedule 1.1.2 attached hereto identifies the owners of
interests in the
Assets in addition to DSX and KEBO ("Possible Sellers") and
the
corresponding percentage of the Full Interest Purchase Price (as
defined
below) allocable to each Possible Seller based upon its
respective
ownership interests in the Assets (in each case, its
"Allocation
Percentage"). Immediately following the execution of this
Agreement by
DSX, KEBO, and Purchaser, DSX shall circulate this Agreement
among the
Possible Sellers for execution. Each Possible Seller shall have
until
6:00 p.m., Central Daylight Time, on the third Business Day
after the
date on which this Agreement is executed by DSX and Purchaser
(the
"Participation Period") within which to evidence its election
to
participate in the sale of the Assets contemplated herein by
executing
and returning to Purchaser a counterpart of the signature page
for this
Agreement prepared for such Possible Seller. The failure of a
Possible
<PAGE>
Seller to execute and return to Purchaser its signature page for
this
Agreement prior to the expiration of the Participation Period
shall
constitute an election by such Possible Seller not to sell its
interests
in the Assets to Purchaser. Subject to the terms of Sections
1.1.3 and
2.3.1, upon the execution by a Possible Seller and return to
Purchaser
of such Possible Seller's signature page for this Agreement in a
timely
manner as provided in this Section 1.1.2, the terms of this
Agreement
shall become binding on and enforceable against such Possible
Seller,
and such Possible Seller shall become a "Seller" for purposes of
this
Agreement.
1.1.3 Notwithstanding the execution of this Agreement by DSX and
one or more
Possible Sellers in accordance with Section 1.1.2, if, prior to
the
expiration of the Participation Period, Sellers having, in
the
aggregate, Allocation Percentages of less than ninety-two
percent (92%)
do not execute and return to Purchaser signature pages for
this
Agreement in accordance with Section 1.1.2, Purchaser shall have
the
right to terminate this Agreement. If this Agreement is thus
terminated
by Purchaser, neither DSX, KEBO, the Possible Sellers who
execute and
return to DSX signature pages for this Agreement in accordance
with
Section 1.1.2, nor Purchaser shall have any further obligation
or
liability to the other Party under this Agreement or otherwise
in
connection with the transactions contemplated herein, subject,
however
to the terms of Section 14.2. If, prior to the expiration of
the
Participation Period, Possible Sellers having, in the
aggregate,
Allocation Percentages equal to or greater than ninety-two
percent (92%)
execute and return to Purchaser signature pages for this
Agreement in
accordance with Section 1.1.2, (i) Purchaser shall become
obligated to
tender to Sellers the Performance Deposit in accordance with the
terms
of Section 2.3.1, and (ii) Purchaser and Sellers shall execute
an
amendment to this Agreement that (w) establishes the Purchase
Price (as
defined below) in accordance with Section 2.2, (x) adds to
this
Agreement the final version of Exhibit B reflecting the
undivided
Working Interests of Sellers in each Well (as defined below) and
the
Allocated Value (as defined below) for such Well, (y) adds to
this
Agreement the final version of Exhibit J reflecting the
allocation of
the Purchase Price among the Assets for federal income tax
purposes in
accordance with the terms of Section 2.6, and (z) adds to this
Agreement
the final version of Schedule 6.2.1 as contemplated in Section
6.2.1.
For purposes of this Agreement, the Business Day during the
Participation Period on which Purchaser receives from Possible
Sellers
the signature pages for this Agreement that cause the
aggregate
Allocation Percentages of all Sellers who execute and return
to
Purchaser signature pages for this Agreement in accordance with
Section
1.1.2 at least to equal ninety-two (92%) shall be referred to
herein as
the "Participation Date."
1.2 Assets. The term "Assets" as used herein shall mean all of
the following
properties, rights, and interests:
1.2.1 All of Sellers' rights, titles and interests in and to all
oil and gas
leasehold interests, record title interests, overriding
royalty
interests (not otherwise expressly excluded and reserved
herefrom
pursuant to Section 1.6), net profits interests, production
payments,
operating rights, carried interests, reversionary interests,
conversion
rights and options, and other similar interests of whatever kind
or
character, whether legal or equitable, vested or contingent,
and
regardless of whether such rights and interests are described on
Exhibit
A, in, to, under, and that are otherwise attributable to the
oil, gas,
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and mineral leases described in the attached Exhibit A (limited
in all
respects to the lands and depths covered thereby, or the
applicable part
or portion thereof if limited specifically as to depth or
geographic
area, as described in said Exhibit A) and the leasehold estates
created
thereby (collectively, the "Leases"), and/or the production
of
Hydrocarbons (as defined below) therefrom or allocable thereto,
and the
lands included in any units created by pooling, unitization,
or
communitization agreements or governmental pooling or
unitization orders
in effect with respect to the Leases or the lands covered
thereby. All
of the Leases, interests and lands described in this Section
1.2.1 are
hereinafter collectively called the "Properties" and singularly
a
"Property."
1.2.2 Subject to the terms of Section 1.1.3, the undivided
interests
identified in Exhibit B in and to all producing oil wells and
gas wells,
water wells, saltwater disposal wells, injection wells,
temporarily
abandoned wells, and plugged and abandoned wells located on
the
Properties or on lands pooled, unitized, or communitized
therewith,
including, without limitation, the producing oil and/or gas
wells, water
wells, saltwater disposal wells, injection wells, and
temporarily
abandoned wells listed on Exhibit B (such wells listed on
Exhibit B
hereto being called herein the "Wells").
1.2.3 All of the rights, titles, and interests of Sellers in and
to all crude
oil, natural gas, condensate, distillate, natural gasoline,
natural gas
liquids, plant products, refined petroleum products, other
liquid or
gaseous hydrocarbons (including, without limitation, coalbed
methane),
sulphur, other gases (including, without limitation, hydrogen
and carbon
dioxide), and every other mineral or substance, or any of them,
the
right to explore for which, or an interest in which, is granted
pursuant
to the Leases (collectively, "Hydrocarbons") (i) produced from
or
allocable to the interests of Sellers in the Properties and
existing in
pipelines, storage tanks, or other processing or storage
facilities
upstream of the delivery points to the relevant purchasers on
the
Effective Date, and (ii) produced from or allocable to such
interests of
Sellers on and after the Effective Date.
1.2.4 All of the rights, titles, and interests of Sellers in,
to, and under
any and all surface leases; rights-of-way and easements;
operating
agreements; exploration agreements; Hydrocarbon purchase,
sales,
exchange, processing, gathering, storage, treatment,
compression,
transportation and balancing agreements; farmout, farmin,
and
participation agreements (except to the extent expressly
excluded and
reserved herefrom pursuant to Section 1.6); dry hole, bottom
hole,
acreage contribution, purchase and acquisition agreements; area
of
mutual interest agreements; salt water injection and
disposal
agreements; permits; licenses; servitudes; and all other
similar
contracts and agreements and any amendments thereto relating to
the
Properties (collectively, the "Existing Contracts").
1.2.5 All of the rights, titles, and interests of Sellers in,
to, and under
any and all valid Hydrocarbon unitization, pooling, or
communitization
agreements and/or orders in effect with respect to the
Properties,
including, without limitation, all units formed under orders,
rules,
regulations, or other official acts of any Governmental Body
having
jurisdiction, voluntary pooling, communitization, and
unitization
agreements, designations and/or declarations, and so-called
"working
interest units" created under operating agreements or otherwise
relating
to the Properties.
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1.2.6 Except as otherwise expressly excluded and reserved
herefrom pursuant to
Section 1.6(x), all of the rights, titles, and interests of
Sellers in
and to all surface or subsurface machinery, equipment,
platforms,
facilities, supplies or other property of whatsoever kind or
nature now
or hereafter located on or under any of the Properties and which
relate
to or are useful for the production, treatment, storage or
transportation of Hydrocarbons, including, without limitation,
all
wellhead equipment, casing, tubing, rods, pumping units and
engines,
christmas trees, derricks, separators, compressors, dehydration
units,
heater-treaters, boilers, valves, gauges, meters, pumps,
generators,
motors, gun barrels, flow lines, tanks and tank batteries, water
lines,
gas lines, gas processing plants and other plants, gathering
lines,
laterals and trunklines, gas systems (for gathering, treating
and
compression), chemicals, solutions, water systems (for
treating,
disposal and/or injection), power plants, poles, lines,
transformers,
starters, controllers, machine shops, tools, storage yards and
equipment
stored therein, buildings and camps, telegraph, telephone and
other
communication systems, loading docks, loading racks and
shipping
facilities, equipment and facilities, and any and all
additions,
accessions to, substitutions and replacements of any of the
foregoing,
wherever located, together with all attachments, components,
parts,
equipment and accessories installed thereon or affixed thereto
(all such
machinery, equipment, platforms, facilities, supplies and
other
property, excluding, however, the Wells, being collectively
called the
"Personal Property").
1.2.7 All of the files, records and data directly relating to
the items
described in Sections 1.2.1 through 1.2.6 (but including only
copies of
the hereinafter described tax and accounting records),
including,
without limitation, joint interest billings, check receipts and
third
party disbursement records, copies of files and records relating
to
Property Taxes and severance, sales, excise, and other
production-related taxes, legal files, land, lease, and contract
files,
title records, division order records, production records,
operations
records, environmental records, insurance records, regulatory
records,
and all other files, records, and information relating to the
items
described in Sections 1.2.1 through 1.2.6 in the possession of
Sellers
except where the transfer or disclosure of such files,
information, or
records is restricted by agreement with third parties or
excluded by the
terms of this Agreement (as more fully set forth in Section
1.6)
(collectively, the "Records"); provided, however, that Sellers
have the
rights with respect to the Records as provided in Section 1.5
below.
1.2.8 All maps, electric logs, core data, pressure data, decline
curves,
graphical production curves, geological, geophysical,
reserve
engineering, and other scientific and technical information,
reports,
and data (including, without limitation, conventional
two-dimensional
and three-dimensional seismic data) that relate exclusively to
the
Assets, do not constitute Excluded Assets subject to Section
1.6, and
only in the event and to the extent the transfer or disclosure
of which
is not restricted by agreement with third parties
(collectively,
"Technical Data").
1.3 Effective Date. Ownership of the Assets shall be transferred
from Sellers to
Purchaser at the Closing (as defined below), but shall be
effective as provided
in Section 2.4 below as of 7:00 a.m. (local time where the
Assets are located)
on June 1, 2007 (the "Effective Date"). Except as may be
otherwise specifically
provided herein, Sellers, severally according to their
respective ownership
interests in the Assets and not jointly, shall be entitled to
any amounts
realized from and accruing to the Assets (including contract
rights, gas
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contract settlements, take-or-pay claims, and other claims and
causes of action)
for all periods prior to the Effective Date and shall be liable
for the payment
of all expenditures relating to the Assets and attributable to
all periods prior
to the Effective Date. Except as may be otherwise specifically
provided herein,
Purchaser shall be entitled to any amounts realized from and
accruing to the
Assets for all periods on and after the Effective Date, and
shall be liable for
the payment of all expenses relating to the Assets and
attributable to all
periods on and after the Effective Date.
1.4 Gauging and Strapping. Sellers have caused the oil storage
facilities on or
utilized in connection with the Properties to be gauged or
strapped as of the
Effective Date. Sellers also have caused the gas production
meter charts (or if
such do not exist, the sales meter charts) on the pipelines
transporting gas
production from the Assets to be read as of the Effective Date.
Prior to the
Closing, Purchaser, upon request, shall be provided with access
to the records
of the gauging, strapping or chart reading for the purpose of
verifying such
records.
1.5 Records. Sellers shall deliver to Purchaser, within thirty
(30) days after
the Closing or such later time as Purchaser may request, but in
no event later
than three (3) months after the Closing, all Records. Sellers
shall have the
right to make and retain such copies of the Records as Sellers
may desire prior
to the delivery of the Records to Purchaser. Purchaser, for a
period of seven
(7) years after the Closing, shall further make available to
Sellers (at the
location of such Records in Purchaser's organization), access to
the Records
during normal business hours, upon written request of Sellers,
and Sellers shall
have the right to copy, at their own expense, and retain such
copies of the
Records. If, however, Purchaser elects to destroy any of the
Records, either
before or after the expiration of such seven (7) year period,
Purchaser shall
give to Sellers written notice of such intent at least thirty
(30) days prior to
such destruction, and Sellers shall have the option, at its
expense, of having
such Records delivered to it. SELLERS MAKE NO REPRESENTATIONS OR
WARRANTIES WITH
RESPECT TO THE ACCURACY OR COMPLETENESS OF THE RECORDS, OR ANY
PORTION THEREOF,
AND PURCHASER EXPRESSLY ACKNOWLEDGES SUCH DISCLAIMER AND AGREES
TO ASSUME SOLE
RESPONSIBILITY FOR ANY CONSEQUENCES BASED UPON, PURCHASER'S USE
OF, OR RELIANCE
UPON, THE RECORDS.
1.6 Excluded Assets. There is expressly excluded from the Assets
to be conveyed
pursuant hereto, and each Seller shall except, reserve, and
retain to itself,
severally according to its respective ownership thereof and not
jointly, the
following properties and assets: (i) all corporate, financial,
legal, and tax
records of each Seller; (ii) all deposits, cash, checks in
process of
collection, cash equivalents, accounts receivable and funds
attributable to the
Assets for the period prior to the Effective Date; (iii) all
rights, interests,
and claims that Sellers may have under any policy of insurance
or indemnity,
surety bond, or any insurance or condemnation proceeds or
recoveries from third
persons relating to property damage or Casualty Loss affecting
the Assets
occurring prior to the Effective Date; (iv) all claims, whether
in contract, in
tort, or arising by operation of law, and whether asserted or
unasserted as of
the Closing Date, that Sellers may have against any person
arising out of acts,
omissions, or events, or injury to or death of persons or loss
or destruction of
or damage to property, relating in any way to, the Assets that
occurred prior to
the Effective Date; provided, however, that no such claim may be
settled,
compromised, or otherwise resolved in a manner that results in
an obligation
borne by Purchaser or the Assets on and after the Effective Date
without the
prior written consent of Purchaser, which shall not to be
unreasonably withheld
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or delayed; (v) all exchange traded futures contracts and
over-the-counter
derivative contracts of any Seller as to which such Seller has
an open position
as of the Effective Date; (vi) any and all rights to use the
names, marks, trade
dress or insignia of any Seller, and all of the intellectual
property of each
Seller, including, without limitation, proprietary or licensed
computer
software; patents; trade secrets; copyrights; all geological and
geophysical
information and data (including, without limitation,
conventional
two-dimensional and three-dimensional seismic data) that image,
cover, or
otherwise pertain in any way to lands and/or subsurface
intervals not included
in the Assets, or Technical Data as to which the sale or
disclosure of such data
is restricted or prohibited by agreement with third parties, and
Sellers'
proprietary interpretations of any of the foregoing; economic
analyses; and
pricing forecasts; (vii) all amounts due or payable to any
Seller as adjustments
to insurance premiums related to the Assets for periods prior to
the Effective
Date; (viii) all claims of any Seller for any tax refunds and
loss
carry-forwards and carry-backs with respect to any taxes
relating to the Assets
for periods prior to the Effective Date; (ix) all audit rights
and all amounts
due or payable to any Seller as refunds, adjustments, or
settlements of disputes
arising under the Properties or the Existing Contracts for
periods prior to the
Effective Date; all inventories of pipe, equipment and other
Personal Property
not currently in use or allocated for use in connection with the
Assets, and the
surface location(s) where such items of property are located;
(xi) all rights to
drill future Hydrocarbon wells on and rights to earn additional
interests in
lands and subsurface intervals covered by the Leases, as well as
other leases
and lands, not included within the Assets under the terms of
that certain
Farmout Agreement dated May 5, 1995, as amended and/or extended,
by and between
Sue-Ann Production Company and Douglas Sartoris; (xii) the
overriding royalty
interests reserved by DSX in Article II of the General
Assignment; and (xiii)
all other interests, rights, property, and assets of Sellers not
located on or
used in connection with the Assets or otherwise specifically
included in the
definition of the Assets.
2. SALE AND PURCHASE
2.1 Purchase and Sale. At the Closing, Sellers shall sell,
assign, transfer, and
convey to Purchaser, and Purchaser shall purchase and pay for,
the Assets, and
Purchaser shall also assume the Assumed Obligations as set forth
in Section
13.3.4.
2.2 Purchase Price. The purchase price to be paid by Purchaser
to Sellers with
respect to the Assets (the "Purchase Price") shall equal the
product obtained by
multiplying (i) the aggregate Allocation Percentages of DSX,
KEBO, and those
Possible Sellers who execute and return to Purchaser signature
pages for this
Agreement in a timely manner in accordance with Section 1.1.2,
by (ii) ONE
HUNDRED MILLION AND NO/100 Dollars U.S. ($100,000,000.00) (the
"Full Interest
Purchase Price"). If all Possible Sellers execute and return to
Purchaser
signature pages for this Agreement in a timely manner in
accordance with Section
1.1.2, the Purchase Price shall equal the Full Interest Purchase
Price. To the
extent that the Purchase Price is less than the Full Interest
Purchase Price,
such shortfall shall not be taken into account in determining
whether (y) the
Deductible (as defined below) has been met for purposes of
Section 3.5.2 or
Section 5.5.2, or (z) the Termination Threshold (as defined
below) has been met
for purposes of Section 3.8. The amount of the Purchase Price is
set in
consideration of Purchaser's assumption of the Assumed
Obligations as set forth
in Section 13.3.4.
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2.3 Performance Deposit.
2.3.1 If Possible Sellers having, in the aggregate, Allocation
Percentages
equal to or greater than ninety-two percent (92%) execute and
return to
Purchaser signature pages for this Agreement in accordance with
Section
1.1.2, Purchaser, as evidence of Purchaser's good faith
intention to
consummate the transactions contemplated hereby, shall tender to
DSX, on
behalf of Sellers, no later than 6:00 p.m., Central Daylight
Time, on
the second Business Day after the Participation Date, a cash
performance
deposit in the amount of TWO MILLION FIVE HUNDRED THOUSAND AND
NO/100
Dollars U.S. ($2,500,000.00) (the "Performance Deposit"). If
Purchaser
fails to tender to Sellers the Performance Deposit in a timely
manner as
provided in the immediately preceding sentence of this Section
2.3.1,
Sellers shall have the right to terminate this Agreement. If
this
Agreement is thus terminated by Sellers, neither Sellers nor
Purchaser
shall have any further obligation or liability to the other
Party under
this Agreement or otherwise in connection with the
transactions
contemplated herein, subject, however, to the terms of Section
14.2.
2.3.2 If Sellers terminate this Agreement in accordance with
Section 14.1.2 or
Section 14.1.5 hereof, Sellers shall retain the Performance
Deposit as
liquidated damages; provided that nothing contained herein
shall
prohibit Purchaser from contesting the basis for Sellers'
decision to
terminate and seeking recovery of such Performance Deposit
through any
legal means available to it. The Parties agree that the
Performance
Deposit is a reasonable sum considering all the circumstances
existing
on the date of this Agreement, including the relationship of the
sum to
the range of harm to Sellers that reasonably could be
anticipated and
the anticipation that proof of actual damages would be costly
or
inconvenient. If this Agreement is otherwise terminated for any
reason
by either Sellers or Purchaser pursuant to the terms thereof,
the
Performance Deposit shall be returned to Purchaser, except to
the extent
otherwise provided in Section 8.10. In the event the
transactions
contemplated herein close, the Performance Deposit shall be
retained by
Sellers and credited against the Purchase Price payable by
Purchaser
hereunder.
2.4 Determination of Adjusted Purchase Price. The net purchase
price for the
Assets (the "Adjusted Purchase Price") shall be determined as
follows:
2.4.1 The Purchase Price;
2.4.2 Plus the amount of the value of all merchantable
Hydrocarbons produced
from or allocable to the Properties existing in pipelines,
storage
tanks, or other processing or storage facilities (including,
without
limitation, unsold inventories of plant products owned by
Sellers if
any) upstream of the delivery points to the relevant purchasers
as of
the Effective Date, the value to be based on the contract
price
applicable to such Hydrocarbons in effect as of the Effective
Date (or
the market value, if there is no contract price, in effect as of
the
Effective Date), less amounts payable as royalties,
overriding
royalties, and other, similar burdens upon such
Hydrocarbons;
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<PAGE>
2.4.3 Plus the amount of all actual expenditures made or prepaid
by Sellers
that are incurred in connection with the Assets which are
attributable
to periods on and after the Effective Date through the Closing
Date,
including, without limitation: rentals, shut-in well payments,
and other
lease maintenance payments; operating costs; premiums on
insurance
policies allocable to the period on and after the Effective Date
through
the Closing Date; capital costs (including, without limitation,
all
drilling costs, completion costs, acreage expenditures,
acquisition
expenditures, seismic expenditures, and waterflood
expenditures); and
the direct, overhead, and other charges and expenses (including,
without
limitation, the salaries, wages, and personal expenses of
technical
employees of Sellers directly employed on the Assets, to the
extent that
such charges are permitted as direct charges to the joint
account under
the terms of the applicable joint operating agreements) billed
to
Sellers by the operator or operators (including, without
limitation,
KEBO or its Affiliates) of the Assets under applicable
operating
agreements (or if KEBO or its Affiliate is the operator in the
absence
of an operating agreement, the charges provided in Section 8.3
hereof),
including, without limitation, unreimbursed expenses paid by
Sellers on
behalf of third parties to which Sellers are entitled to
reimbursement
under such operating agreements;
2.4.4 Plus an amount equal to upward adjustments for Interest
Additions
determined in accordance with Section 3.7, and the amount of
any
interest accrued on the Purchase Price pursuant to Section
12.2;
2.4.5 Plus the total amount of any Property Taxes (as defined
below) paid by
any Seller for its or another Seller's accounts, relating to the
Assets
and attributable to any period of time on and after the
Effective Date,
as further provided for in Sections 15.1 and 15.2 and to the
extent same
are not included under Section 2.4.3 above;
2.4.6 Less the amount of the actual proceeds received by Sellers
in the
ordinary course of business that are attributable to
Hydrocarbon
production from the Properties on and after the Effective Date
through
the Closing Date (net of any royalties and of any production,
severance,
sales, or other taxes actually paid by or on behalf of
Sellers),
together with any other monies or credits attributable to the
ownership
or operation of the Assets on and after the Effective Date
through the
Closing Date;
2.4.7 Less the amount of the Performance Deposit and all other
advances and
deposits relating to the Assets that are received by Sellers
prior to
the Closing Date and attributable to periods of time on or after
the
Effective Date;
2.4.8 Less an amount equal to the aggregate of all Title
Indemnity Payments
made in accordance with Article 3;
2.4.9 Less an amount equal to the aggregate of all Environmental
Indemnity
Payments made in accordance with Article 5;
2.4.10 Less an amount equal to the Allocated Value of (i) the
Assets with
respect to which preferential purchase rights have been
exercised prior
to the Closing Date, or (ii) Assets excluded for failure to
obtain a
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<PAGE>
required consent prior to the Closing Date, each in accordance
with
Section 3.10;
2.4.11 Less the value of any Sellers' prorated shares of all
accrued but unpaid
Property Taxes relating to the Assets for the period prior to
the
Effective Date in accordance with Sections 15.1 and 15.2;
2.4.12 Less an amount equal to all Casualty Loss Amounts paid in
accordance
with Article 4;
2.4.13 Less or plus, as the case may be, an amount necessary to
adjust for the
net gas imbalances as determined pursuant to Section 13.1.3;
and
2.4.14 Less an amount equal to the net proceeds and receivables
related to the
Assets which are payable to third parties and are held in
suspense by
any Seller on the Closing Date.
2.5 Payment of Adjusted Purchase Price. At the Closing,
Purchaser shall cause to
be delivered by wire transfer to Sellers, or, in the event
Sellers so request,
to an escrow agent determined by Sellers, an amount in
immediately available
U.S. funds equal to the Purchase Price, plus or minus the
adjustments provided
for in Section 2.4 calculated as provided in Section 12.3 (the
"Preliminary
Amount"). At the Closing, the Preliminary Amount shall be
deposited to the
accounts of Sellers in the amounts and into the accounts set
forth in a notice
to be given by Sellers to Purchaser concurrently with Sellers'
delivery to
Purchaser of the Closing Adjustment Statement pursuant to
Section 12.3. The
Preliminary Amount paid at the Closing shall be subject to later
adjustment
pursuant to Section 13.1.
2.6 Tax Purchase Price Allocations. Sellers and Purchaser
recognize that
reporting requirements, as imposed by Section 1060 of the
Internal Revenue Code
of 1986, as amended (the "IRC" or "Code"), and the regulations
thereunder, may
apply to the transaction contemplated by this Agreement. Except
as may otherwise
be required by the IRC and regulations thereunder or other
Applicable Laws,
Sellers and Purchaser agree (i) that for tax reporting purposes,
the Purchase
Price shall be allocated among the Assets as set forth in the
final version of
Exhibit J attached to this Agreement pursuant to Section 1.1.3,
and such
allocation shall be used in preparing Internal Revenue Service
Form 8594 ("Form
8594") pursuant to the regulations under Section 1060 of the
Code, and (ii) not
to assert, in connection with any tax return, tax audit, or
similar proceeding,
any allocation of the Purchase Price that differs from that set
forth in Exhibit
J to this Agreement. In the event of any adjustment of the
Purchase Price
pursuant to the terms of this Agreement, Sellers and Purchaser
shall adjust the
allocations reflected in Exhibit J accordingly and report such
adjustments in
conformity with Section 1060 of the Code and the regulations
thereunder.
3. TITLE MATTERS
3.1 Access to Records and Assets. Upon execution of this
Agreement and until the
Closing, and thereafter to the extent any Sellers, or any
Affiliate thereof,
retains physical possession of any of the Assets and/or Records,
Sellers shall
make the Records (including, without limitation, all revenue
statements, lease
operating statements, invoices, and regulatory reports necessary
to permit
Purchaser to verify the historical and current lease operating
statements and
joint interest billings prepared with respect to the Assets)
available to
Purchaser at Sellers' designated offices located at the offices
of KEBO at 607
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<PAGE>
Railroad Avenue, Portland, Texas, during normal business hours
for examination
and copying by Purchaser and shall grant to Purchaser access to
such Properties
for inspection. No Seller shall be obligated to perform any
title work or
provide abstracts other than those presently in such Seller's
possession, nor
will any existing title opinions be made current by any Seller.
Sellers will use
reasonable commercial efforts to furnish to Purchaser all other
information with
respect to the Assets that Purchaser may from time to time
reasonably request,
except to the extent that any Seller determines in good faith
that it is
prohibited by agreement with a third party from disclosing the
information
covered thereby. Purchaser agrees to conduct its due diligence
in a professional
and orderly manner and at its own cost and expense without
disruption of any
Seller's normal and usual operations. PURCHASER SHALL INDEMNIFY
AND HOLD
HARMLESS EACH SELLER, AND ITS AFFILIATES, TOGETHER WITH THEIR
RESPECTIVE
PARTNERS, CO-VENTURERS, SHAREHOLDERS, MEMBERS, OFFICERS,
DIRECTORS, TRUSTEES,
EMPLOYEES, AGENTS (INCLUDING, WITHOUT LIMITATION, RICHARDSON
BARR SECURITIES,
INC.), AND REPRESENTATIVES (COLLECTIVELY, THE "SELLERS' GROUP"),
FROM ANY AND
ALL CLAIMS, DEMANDS, DAMAGES, LOSSES, LIABILITIES, COSTS AND
EXPENSES, INCLUDING
COURT COSTS AND REASONABLE ATTORNEY'S FEES (COLLECTIVELY,
"COSTS"), ARISING OUT
OF, OR RESULTING FROM PURCHASER'S ACTS OR OMISSIONS IN
CONNECTION WITH ITS
ACCESS TO THE ASSETS, REGARDLESS OF WHETHER SUCH COSTS ARE
ATTRIBUTABLE, IN
WHOLE OR IN PART, TO THE NEGLIGENCE, SOLE OR CONCURRENT, OF THE
SELLERS' GROUP.
3.2 Definitions. For purposes of this Agreement, the following
expressions and
terms will have the meanings set forth hereinafter:
3.2.1 "Sellers' Title" shall mean, as to each Well, that (i)
Sellers (and upon
Closing, Purchaser), by virtue of their ownership interests
therein, are
collectively entitled to receive a fractional decimal interest
of not
less than the "Net Revenue Interest" set forth for each Well on
Exhibit
B, without reduction, suspension, or termination throughout
the
productive life of each Well (unless otherwise shown on Exhibit
B); (ii)
Sellers are collectively obligated to bear (and after the
Closing,
Purchaser shall be obligated to bear) a fractional decimal
interest of
not more than the "Working Interest" set forth for each Well on
Exhibit
B of the costs and expenses related to the maintenance,
development,
drilling, equipping, testing, completion, sidetracking,
reworking and
operation of each such Well, without increase throughout the
productive
life thereof (unless otherwise shown on Exhibit B); and (iii)
such Well
is free and clear of liens, encumbrances, and other defects
or
irregularities in title, except for Permitted Encumbrances.
3.2.2 "Permitted Encumbrances" shall mean:
(a) lessors' royalties, overriding royalties, payments out
of
production, reversionary interests, and other similar
burdens
affecting the aggregate Net Revenue Interest of all parties
comprising Sellers if the net cumulative effect of such
burdens
does not operate to (i) reduce the aggregate Net Revenue
Interest
of Sellers in any Well to less than the Net Revenue Interest
set
forth for such Well in Exhibit B; or (ii) increase the
aggregate
Working Interest of Sellers in any such Well to greater than
the
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<PAGE>
Working Interest set forth for such Well in Exhibit B (unless
the
aggregate Net Revenue Interest of Sellers therein is increased
in
the same proportion);
(b) preferential rights to purchase, required third party
consents to
assignment, and similar agreements with respect to which,
prior
to the Closing, (i) waivers or consents are obtained from
the
appropriate parties; (ii) the appropriate time for asserting
such
rights has expired without an exercise of such rights; (iii)
with
respect to consents, such consent need not be obtained prior
to
assignment, or the failure to obtain such consent will not have
a
material adverse effect on the value of the affected Well, or
may
not reasonably be expected to subject Purchaser to liability
in
favor of any third party;
(c) all rights to consent by, required notices to, filings with,
or
other actions by Governmental Bodies in connection with the
sale
or conveyance of the Assets if the same are customarily
obtained
subsequent to such sale or conveyance;
(d) non-consent penalties applied against the interest of any
Sellers
arising under applicable operating agreements which are
scheduled
on Exhibit C and taken into account in the calculation of
the
interests shown on Exhibit B;
(e) easements, rights-of-way, servitudes, permits, surface
leases,
and other rights in respect of surface operations that are not
a
part of, but that burden, the Assets;
(f) such Title Defects as Purchaser has waived or released or
is
deemed to have waived pursuant to the terms of this
Agreement;
(g) the terms and conditions of all Existing Contracts;
provided,
however, that the effect of such terms and conditions is
reflected in the calculation of the Working Interests and
Net
Revenue Interests set forth for the Wells in Exhibit B;
(h) rights of reassignment, to the extent any exist as of the
date of
this Agreement, upon the surrender or expiration of any
Lease;
(i) liens for taxes not yet due or not yet delinquent or, if due
or
delinquent, that are being contested in good faith;
(j) materialman's, mechanic's, repairman's, employee's,
contractor's,
operator's, and other similar liens or charges encumbering
the
Assets that arise in the ordinary course of business (i) if
they
have not been filed pursuant to Applicable Law, (ii) if
filed,
they have not yet become due and payable, or payment is
being
withheld as provided by Applicable Law, or (iii) if their
validity is being contested in good faith by appropriate
action;
(k) all rights reserved to or vested in any Governmental Body
to
control or regulate any of the Assets in any manner, and all
Applicable Laws;
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<PAGE>
(l) all defects and irregularities of title that would not
reasonably
be expected to result in claims that would materially and
adversely affect the title of any Seller to, or the
ownership,
operation, or value of, the Assets, including, without
limitation
(i) defects in the early chain of title consisting of the
failure
to recite marital status or the omission of succession or
heirship proceedings; (ii) defects or irregularities arising
out
of the lack of a survey (but not defects or irregularities,
the
existence of which is demonstrated by a survey); (iii) defects
or
irregularities arising out of or relating to the lack of
powers
of attorney from corporations to execute and deliver documents
on
their behalf or lack of spousal joinder; (iv) defects of
title
which result from the failure to file assignments or other
documents in the state or federal records so long as such
assignments or other documents are properly recorded in the
county records; and (v) irregularities cured by possession
under
applicable statutes of limitation and statutes relating to
acquisitive (or liberative) prescription; and
(m) all other liens, charges, encumbrances, instruments,
obligations,
defects and irregularities affecting the Assets which,
individually or in the aggregate, do not: (i) interfere
materially with the operation, value, or use of any of the
Wells;
(ii) do not prevent Purchaser from receiving the proceeds of
production from any of the Wells; (iii) do not reduce the
aggregate interests of all Sellers with respect to
Hydrocarbons
produced from any Well below the Net Revenue Interest set
forth
for such Well on Exhibit B; or (iv) do not increase the
aggregate
share of the costs and expenses that Sellers are obligated to
pay
above the Working Interest set forth for such Well in Exhibit
B
without a proportionate increase in the Net Revenue Interest
for
such Well.
3.2.3 "Title Defect" shall mean any matter: (i) that would cause
the title to
any Well fail to be as reflected in Sellers' Title, or that
reflects a
failure in Sellers' title to any Property; (ii) has a Defect
Value (as
hereinafter defined) which is greater than $25,000; and (iii) as
to
which notice is provided to Sellers in a timely manner as
provided for
in Section 3.3.
3.2.4 "Allocated Value" means, with respect to each Well, the
amount set forth
on the final version of Exhibit B attached to this Agreement
pursuant to
Section 1.1.3 under the column styled "Allocated Value" for such
Well.
For purposes of this Agreement, Sellers and Purchaser agree
and
stipulate that the Allocated Values set forth in Exhibit B have
been
established solely for use in calculating adjustments to the
Purchase
Price as provided herein, and not for purposes of federal,
state, local,
or foreign income taxation, such Allocated Values being solely
for the
convenience of the Parties.
3.3 Notice of Title Defect. During the period of time between
the execution of
this Agreement and September 21, 2007 (the "Due Diligence
Period"), Purchaser
may review title to the Assets and may notify Sellers in writing
(the "Title
Defect Notice") of any Title Defect; provided, however,
Purchaser shall notify
Sellers of any Title Defect it discovers as soon as reasonably
practicable after
its discovery. Any notice provided hereunder shall include
appropriate evidence
to substantiate Purchaser's position, including a description of
the Title
Defect, the basis for the Title Defect, the portion of the Well
or Wells
affected by the Title Defect, the Allocated Value therefore, the
amount by which
Purchaser reasonably believes, in accordance with the provisions
of Section 3.6,
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<PAGE>
the value of the affected Well or Wells would be reduced if the
Title Defect
were uncured (the "Defect Value"), and the computations and
information upon
which Purchaser's belief is based. Purchaser will be deemed to
have conclusively
waived any matter reflected in the public records of the county
where the
Properties are located as of the end of the Due Diligence Period
or in any
documents or records made available by Sellers to Purchaser
pursuant hereto that
would otherwise qualify as a Title Defect but about which
Purchaser fails to
notify Sellers in writing in the manner described above prior to
the expiration
of the Due Diligence Period.
3.4 Remedies for Title Defects. For any Title Defect properly
asserted by
Purchaser during the Due Diligence Period, subject to the
termination rights of
both Parties pursuant to Section 3.8 hereof, Sellers shall have
the option, in
their sole discretion, of (i) curing the Title Defect, (ii)
contesting the Title
Defect or the Defect Value, or (iii) subject to the terms of
Section 3.5.2,
reducing the Purchase Price by the amount of the Defect Value
("Title Indemnity
Payment").
3.5 Procedure for Resolving Title Defects. With respect to Title
Defects
properly and timely asserted by Purchaser as provided herein,
the following
procedures shall apply.
3.5.1 If Sellers contest the existence of a Title Defect or the
Defect Value
applicable thereto, Sellers shall so notify Purchaser in writing
on or
before five (5) days after Sellers' receipt of the Title Defect
Notice
("Rejection Notice"). The Rejection Notice shall state with
reasonable
specificity the basis of Sellers' rejection of the Title Defect
or the
Defect Value. No later than five (5) days following Purchaser's
receipt
of the Rejection Notice, representatives of Purchaser and
Sellers,
knowledgeable in title matters, shall meet and either: (i) agree
to
mutually reject the particular Title Defect, or (ii) agree on
the
validity of such Title Defect and the Defect Value, in which
case
Sellers shall cure such Title Defect at their own expense and to
their
reasonable satisfaction and, failing such cure, make the Title
Indemnity
Payment therefor, subject to the limitations set forth in
Section 3.5.2.
If the Parties cannot agree on either option (i) or (ii) in
the
preceding sentence, the Title Defect or the Defect Value subject
to the
Rejection Notice shall be submitted to dispute resolution in
accordance
with the procedures set forth in Section 3.9. Each Title Defect
as to
which Sellers and Purchaser reach agreement hereunder concerning
the
validity of such Title Defect and its Defect Value or as to
which such
validity and/or Defect Value is finally determined pursuant to
Section
3.9 shall be referred to herein as a "Finally Determined Title
Defect."
3.5.2 Notwithstanding the provisions of Section 3.5.1, and
except as otherwise
provided in Section 3.10, Sellers shall not be obligated to pay
any
Title Indemnity Payment, Environmental Indemnity Payment, or
Casualty
Loss Amount hereunder unless, and only to the extent that, the
sum of
(i) the aggregate Defect Values for all uncured, Finally
Determined
Title Defects, plus (ii) the aggregate Remediation Amounts for
all
unremedied Finally Determined Environmental Defects, plus (iii)
the
aggregate Casualty Loss Amounts for all unrepaired Finally
Determined
Casualty Losses, exceeds a deductible of five percent (5.0%) of
the
Purchase Price (the "Deductible"). If Purchaser asserts
Finally
Determined Title Defects for which Sellers elect to make a
Title
Indemnity Payment, and the sum of (x) the aggregate Defect
Values for
such uncured Finally Determined Title Defects plus (y) the
aggregate
Remediation Amounts for all unremedied Finally Determined
Environmental
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<PAGE>
Defects, plus (z) the aggregate Casualty Loss Amounts for all
unrepaired
Finally Determined Casualty Losses do not exceed the Deductible,
no
Title Indemnity Payment shall be made.
3.6 Value of Defects. The Defect Value for a Title Defect shall
be determined as
follows:
3.6.1 If, because of the Title Defect, title to a particular
Well fails
completely with the effect that Sellers have no ownership
interest in
the relevant Well, the Defect Value shall be the Allocated Value
of that
Well.
3.6.2 If the Title Defect consists of a lien, encumbrance or
other charge upon
a Well which is liquidated in amount, the Defect Value shall be
the
amount necessary to pay the obligee to remove such Title
Defect.
3.6.3 If the actual aggregate Net Revenue Interest of Sellers in
a Well is
less than the Net Revenue Interest set forth for such Well in
Exhibit B
throughout the remaining productive life of such Well, the
Defect Value
shall be an amount equal to (i) the ratio of (x) the difference
obtained
by subtracting the actual Net Revenue Interest for such Well
from the
Net Revenue Interest set forth for such Well on Exhibit B, to
(y) the
Net Revenue Interest set forth for such Well on Exhibit B,
(ii)
multiplied by the Allocated Value for such Well.
3.6.4 If the actual aggregate Net Revenue Interest of Sellers in
a Well is
less than the Net Revenue Interest set forth for such Well in
Exhibit B
for less than the remaining productive life of such Well, or if
the
actual aggregate Working Interest of Sellers in a Well is
greater than
the Working Interest set forth for such Well in Exhibit B
without a
proportionate increase in the relevant Net Revenue Interest,
then the
Defect Value shall be equal to the Allocated Value for such
Well
multiplied by a fraction (i) the numerator of which shall be the
net
present value, as of the Effective Date, of the aggregate
interests of
Sellers in the future net revenues from such Well set forth in
that
certain reserve report dated May 31, 2007, covering the
Properties as of
June 1, 2007, prepared by R. A. Lenser & Associates (the
"Lenser Reserve
Report"), a copy of which has been previously delivered to
Purchaser,
discounted at ten percent (10%) per annum (the "PV-NRI"), minus
the net
present value, as of the Effective Date, of the aggregate
interests of
Sellers in the future net revenues from such Well calculated
based upon
the same production, cost, and assumed future price estimates
and such
other methods, techniques and assumptions used in the
preparation of the
Lenser Reserve Report but taking into account the Title Defect,
and (ii)
the denominator of which shall be the PV-NRI.
3.6.5 If the Title Defect is one other than described in
Sections 3.6.1
through 3.6.4, the Defect Value shall be the amount agreed to by
Sellers
and Purchaser or, failing such agreement, the Defect Value shall
be
determined pursuant to Section 3.9 below.
3.7 Interest Additions. If Sellers discover that the actual
aggregate Net
Revenue Interest of Sellers for a Well is greater than the Net
Revenue Interest
shown for such Well on Exhibit B, and such Well is otherwise
free of Title
Defects (an "Interest Addition"), then Sellers shall, from time
to time, have
the right to give Purchaser written notice of such Interest
Additions ("Interest
Page 19
<PAGE>
Addition Notice"), as soon as practicable but no later than the
end of the Due
Diligence Period, stating with reasonable specificity the Well
affected, the
particular Interest Addition claimed, and Sellers' good faith
estimate of the
amount by which the Additional Interest increases the value of
the affected Well
over and above the Allocated Value for such Well ("Interest
Addition Value"). If
Purchaser agrees with the existence of the Interest Addition and
Sellers' good
faith estimate of the Interest Addition Value, and such Interest
Addition Value
exceeds $25,000, then the Interest Addition Value shall be
applied as an offset
to any Title Indemnity Payment or Environmental Indemnity
Payment required of
Sellers ("Offset"). If Purchaser contests the existence of the
Interest Addition
or Sellers' good faith estimate of the Interest Addition Value,
then Purchaser
shall so notify Sellers in writing on or before five (5) days
after receipt of
the Interest Addition Notice ("Interest Addition Rejection
Notice"). The
Interest Addition Rejection Notice shall state with reasonable
specificity the
basis of Purchaser's rejection of the Additional Interest or the
Interest
Addition Value. No later than five (5) days following delivery
of the Interest
Addition Rejection Notice, representatives of Purchaser and
Sellers,
knowledgeable in title matters, shall meet and either (i) agree
to mutually
reject the Interest Addition, in which case Sellers shall waive
the Interest
Addition, or (ii) agree on the validity of such Interest
Addition and the
Interest Addition Value, in which case Sellers shall be entitled
to an Offset.
If the Parties cannot agree on either option (i) or (ii) in the
preceding
sentence, the Interest Addition subject to the Interest Addition
Rejection
Notice shall be submitted to dispute resolution in accordance
with the
procedures set forth in Section 3.9. If Purchaser fails to
timely deliver an
Interest Addition Rejection Notice, Purchaser shall be deemed to
have accepted
the validity of the Interest Addition and the Interest Addition
Value, and
Sellers shall be entitled to an Offset as described above.
3.8 Right to Terminate Agreement. Notwithstanding anything in
Article 3, Article
4 or Article 5, if the sum of (i) the Defect Values for all
Finally Determined
Title Defects (which, for purposes of this Section 3.8, shall
include
preferential rights to purchase and required third person
consents to assignment
that result in the exclusion of one or more Assets from the
Closing pursuant to
Section 3.10, but shall exclude liens, encumbrances, or other
charges upon a
Well as to which Sellers obtain releases upon Sellers' payment
or discharge of
the indebtedness or other obligations secured thereby), plus
(ii) the
Remediation Amounts for all Finally Determined Environmental
Defects, plus (iii)
the Casualty Loss Amounts for all Finally Determined Casualty
Losses that occur
prior to the Closing Date, equals or exceeds, independently of
and without
regard to the Deductible, fifteen percent (15%) of the Full
Interest Purchase
Price (the "Termination Threshold"), and Sellers elect not, or
are unable, to
cure, remedy, or repair such Finally Determined Title Defects,
Finally
Determined Environmental Defects, or Finally Determined Casualty
Losses, either
Party may elect to terminate this Agreement without liability to
the other
Party, in which case Purchaser shall be entitled to a refund of
the Performance
Deposit.
3.9 Expert Determination.
3.9.1 If Sellers and Purchaser are unable to agree, as herein
provided,
regarding the existence of a Title Defect, Environmental Defect,
or
Casualty Loss, the applicable Defect Value, Remediation Amount
(as
hereinafter defined), or reduction in value resulting from a
Casualty
Loss, or any other matter to be resolved under this Article 3,
Article
4, or Article 5, the Parties shall promptly refer the matter
for
determination in the manner hereinafter provided to a person
selected by
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<PAGE>
mutual agreement of the Parties who possesses the requisite
knowledge,
skill and experience to determine the issue in question (the
"Defect
Expert"). The Defect Expert may enlist the advice of
attorneys,
accountants, geologists, landmen, or any petroleum engineer
or
environmental consultant mutually agreed upon by the Parties and
any
other neutral expert as reasonably necessary.
3.9.2 Upon referral to the Defect Expert, the Parties shall each
deliver to
the other and the Defect Expert a notice setting forth in
adequate
detail the issues to be determined by the Defect Expert and the
decision
(on a word-for-word basis) that such Party wishes the Defect
Expert to
make with respect to the issues to be determined (the
"Decision
Notice"); provided, however, in preparing their Decision Notice,
each
Party (as well as the Defect Expert) shall be bound by the terms
of this
Agreement. Within two (2) business days after the giving of the
two
Decision Notices, the Parties shall attend a meeting with the
Defect
Expert at a mutually acceptable time and place to discuss fully
the
content of such Decision Notice and, based thereon, determine
whether
either or both wish to modify their Decision Notices in any way.
Any
such modifications shall be discussed, so that when each Party
finalizes
its Decision Notice, it shall do so with full knowledge of the
content
of the other Party's final Decision Notice. The finalization of
such
Decision Notices and the delivery of same by each Party to the
other
shall occur at the meeting unless the Parties agree to have one
or more
additional meetings for such purposes. The Defect Expert shall
be
required to adopt the decision set forth in either final
Decision Notice
and shall have no power whatsoever to reach any other result.
Such
Defect Expert shall adopt the decision that, in his or her
judgment, is
the more fair and equitable and in conformity with this
Agreement and
industry standards.
3.9.3 The decision, made in writing and signed by the Defect
Expert, shall
determine such dispute. Such decision shall be made, signed
and
delivered to the Parties at the meeting unless otherwise agreed
by the
Parties. The expenses of the Defect Expert and any other expert
retained
by the Defect Expert under this Agreement shall be borne by the
Party
whose final Decision Notice was not chosen by the Defect Expert,
except
that each Party shall bear the compensation and expense of its
own
counsel, witnesses and employees. The determination and award of
the
Defect Expert shall be final and binding upon the Parties, and
judgment
may be entered thereon in any court of competent jurisdiction
upon the
application of either Party.
3.10 Preferential Purchase Rights and Consents to Assign.
3.10.1 Within five (5) days after the execution of this
Agreement, Sellers
shall send to the holder of each preferential right to
purchase
identified on Exhibit D a written notice offering to sell to
such
holder, in accordance with the contractual provisions applicable
to such
right, the Asset covered by such right on substantially the same
terms
as this Agreement and for the Allocated Value applicable to such
Asset
as set forth in Exhibit B, subject to adjustments in price in
the same
manner that the Purchase Price is adjusted pursuant to Section
2.4 of
this Agreement. Similarly, within five (5) days after the
execution of
this Agreement, Sellers shall send to each party identified on
Exhibit D
from whom a consent to assignment is required prior to the
Closing a
written notice requesting such party to consent to the
assignment of the
affected Asset to Purchaser. Both Purchaser and Sellers shall
use
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<PAGE>
reasonable efforts to identify additional preferential rights
to
purchase and consents to assign and, if any such rights are
identified,
Sellers shall notify such holder(s) in accordance with the terms
of this
Section 3.10.1 within five (5) days of the identification of
such
additional rights.
3.10.2 If an Asset (including, without limitation, an Existing
Contract) is
subject to a preferential right to purchase, right of first
refusal,
right of first offer, or similar right that is exercised prior
to the
Closing, then at Purchaser's option, (i) Sellers shall convey
the
affected Asset to Purchaser at the Closing subject to such
outstanding
preferential right to purchase or similar right, or (ii) the
affected
Asset shall be excluded from the Assets conveyed to Purchaser at
the
Closing, the Purchase Price shall be reduced by an amount equal
to the
full Allocated Value of the affected Asset without regard to
the
existence or status of amounts credited against the Deductible,
and
Sellers shall be entitled to retain all proceeds paid for the
affected
Asset by the person exercising such preferential right to
purchase or
similar right. No reduction of the Purchase Price pursuant to
this
Section 3.10.2 shall be taken into account in determining
whether the
Deductible has been met. If Purchaser purchases at the Closing
an Asset
burdened by a preferential right to purchase or similar right
that has
not been exercised as of the Closing Date, regardless of whether
the
time period for the exercise of such right has expired, no
reduction of
the Adjusted Purchase Price paid at the Closing shall be made
with
respect thereto. If, for any reason, such preferential right to
purchase
or similar right is successfully exercised by the holder thereof
after
the Closing, Purchaser shall be entitled to retain all proceeds
paid for
the affected Asset by the holder of the relevant preferential
right to
purchase or similar right. If the holder of such a preferential
right to
purchase or similar right notifies Sellers that it intends to
consummate
the purchase of an Asset to which its preferential purchase
right
applies, but the holder of such preferential right fails to
consummate
the purchase of the relevant Asset such that the holder's right
expires
or is terminated, whether before or after Closing, then Sellers,
as
promptly as possible thereafter, but in no event later than one
hundred
fifty (150) days after the Closing, shall so notify Purchaser.
Within
fifteen (15) days after Purchase
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