EXHIBIT 10.1 ASSET PURCHASE AGREEMENT

 

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                                                                    EXHIBIT 10.1

 

                            ASSET PURCHASE AGREEMENT

 

         THIS ASSET PURCHASE AGREEMENT is made as of the 18th day of August,

2004 by and between STONE MOUNTAIN ENERGY, L.C., a Virginia limited liability

company ("SME"), and DAUGHERTY PETROLEUM, INC., a Kentucky corporation ("DPI").

 

                                    RECITALS

 

         WHEREAS, SME owns certain assets in Leslie, Bell and Harlan Counties,

Kentucky and Lee County, Virginia (the "Purchased Assets") which it desires to

sell and assign and DPI desires to purchase the Purchased Assets and assume

certain of SME's obligations related to the Purchased Assets; and

 

         NOW, THEREFORE, in consideration of the mutual covenants, conditions

and agreements set forth herein and for other good and valuable consideration,

the receipt and sufficiency of which are hereby acknowledged, the Parties hereby

agree as follows:

 

                                    ARTICLE I

                                   DEFINITIONS

 

         Unless otherwise expressly provided herein, all references to Recitals,

Sections, Schedules or Exhibits refer to recitals, sections, schedules or

Exhibits to this Agreement (the "Agreement"). The Recitals, Schedules and

Exhibits are hereby incorporated in and made a part of this Agreement as if set

forth in full herein. References to this Agreement include the Schedules and

Exhibits, in each case as the same may be amended from time to time in

accordance with the terms hereof. All capitalized terms used in the Schedules

and not otherwise defined shall have the respective meanings ascribed to them in

this Agreement. When used in this Agreement or the Schedules, the following

terms shall have the meanings specified below.

 

         1.1 "Affiliate" shall mean, with respect to a specified Person, another

Person that directly, or indirectly through one or more intermediaries, Controls

or is Controlled by or is under common Control with the Person specified.

"Control" shall mean the possession, directly or indirectly, of the power to

direct or cause the direction of the management or policies of a Person, whether

through the ownership of voting securities, by contract or otherwise.

 

         1.2 "Assignment and Assumption Agreement" shall mean one or more

assignment and assumption agreements substantially in the form of Exhibit A.

 

         1.3 "Assumed Liabilities" shall mean all liabilities and obligations of

SME specified on Schedule 1.3.

 

         1.4 "Bill of Sale" shall mean one or more bills of sale, each

substantially in the form of Exhibit B.

 

         1.5 "Books and Records" shall mean the original or true and complete

copies of all of the books and records of SME pertaining to the Purchased Assets

and the Assumed Liabilities, including but not limited to, all leases,

agreements, contracts, accounting records, orders and invoices, sales orders and

sales order log books, credit and collection records, correspondence and

miscellaneous records with respect to customers and supply sources, lessors and

lessees, records, correspondence and documents relating to the Permits and

compliance with Laws, and all other general correspondence, records, books and

files of SME pertaining to the Purchased Assets and the Assumed Liabilities, but

excluding any and all Tax Returns and organizational records of SME.

 

         1.6 "Closing" shall mean the closing of the transactions contemplated

by this Agreement to be held on the Closing Date at a mutually agreed location.

 

         1.7 "Closing Certificate" shall mean (a) the certificate of DPI in

substantially in the form of Exhibit C or (b) the certificate of SME in

substantially in the form of Exhibit D.

 

 

 

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          1.8 "Closing Date" shall mean a date within 60 days after the date of

this Agreement when the conditions to the Closing set forth herein (other than

those that by their terms are to be satisfied at the Closing) are satisfied, or

such other date as the Parties may mutually agree in writing.

 

         1.9 "Code" shall mean the Internal Revenue Code of 1986, as amended,

and, where appropriate, any predecessor or successor provisions of Law, and all

regulations thereunder.

 

         1.10 "Contracts" shall mean the contracts, agreements, personal

property leases, relationships and commitments, written or oral, of SME or its

Affiliates pertaining to the Personal Property included in the Purchased Assets,

a complete list of which is set forth on Schedule 1.10.

 

          1.11 "Deed" shall mean the deed substantially in the form of Exhibit E.

 

         1.12 "Environmental Laws" shall mean all federal, state and local

statutes, regulations and ordinances as well as all permits, orders, standards

and policies issued or enforced thereunder, pertaining to: (a) protection of air

and water quality, natural resources, historic and archeological resources,

flora and fauna (including endangered and threatened species) and human health;

(b) prevention or control of the discharge of any substance into air or water

(including groundwater) or into, onto or beneath the soil; (c) removal or

remediation of any substance that has been discharged, released, spilled or

disposed of; (d) construction, operation, closure and post-closure care of any

facility that treats, stores, receives, disposes or discharges any substance

regulated under any Environmental Law; (e) requirements for recordkeeping and

reporting of activities regulated under any Environmental Law; and (f)

construction, operation and maintenance of facilities, dredging, and other

activities in waters (including wetlands) or on lands that are subject to the

jurisdiction of any Governmental Authority.

 

         1.13 "Excluded Assets" shall include the properties conveyed to SME in

the following instruments: (a) deed dated November 9, 1998, recorded in the

Harlan County Court Clerk's Office in Deed Book 339, Page 386; (b) deed dated

September 14, 2000, recorded in the Lee County Circuit Court Clerk's Office in

Deed Book 513, Page 642; (c) deed dated September 14, 2000, recorded in the Lee

County Circuit Court Clerk's Office in Deed Book 513, Page 645; and, (d) deed

dated September 14, 2000, recorded in the Lee County Circuit Court Clerk's

Office in Deed Book 513, Page 647.

 

          1.14 "GAAP" means accounting principles generally accepted in the

United States of America, consistently applied.

 

         1.15 "Gas" shall mean all gas, whether hydrocarbon or non-hydrocarbon

or any combination or mixture thereof, including Hydrocarbons, hydrogen,

sulfide, helium, carbon dioxide, nitrogen, hydrogen and casinghead gas.

 

         1.16 "Gathering Systems" shall mean the gathering and transportation

systems owned or leased by SME and all material plants, equipment, fixtures,

improvements and other Personal Property owned or leased by SME that directly

relates to those systems.

 

         1.17 "Governmental Authority" shall mean any governmental, judicial,

legislative, executive, administrative or regulatory authority of the United

States, or of any state, county or local government or any subdivision, agency,

commission, office, authority or bureau thereof.

 

         1.18 "Hydrocarbon Leases" shall mean the leases, subleases, and

farm-out agreements for Hydrocarbons held by SME and listed on Schedule 1.18.

 

         1.19 "Hydrocarbons" shall mean oil, gas, coalbed methane, coalseam gas,

coalbed gas, methane gas, gob gas, occulated gas and other naturally occurring

gases contained in or associated with any coal seam and gas originating in or

produced from any coal seam, and other liquid or gaseous hydrocarbons and all

components of any of them or produced in connection therewith.

 

         1.20 "Income Tax" or "Income Taxes" shall mean any Tax based on or

measured by net income, and "IRS" shall mean the United States Internal Revenue

Service.

 

         1.21 "Knowledge of SME" shall mean the actual knowledge of the

individuals listed on Schedule 1.21.

 

 

 

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         1.22 "Law" shall mean any federal, state, local or other law or

governmental requirement of any kind, and the rules, regulations and orders

promulgated thereunder.

 

         1.23 "Lien" shall mean any lien, encumbrance, mortgage, charge, claim,

restriction, pledge, security interest or imposition of any kind.

 

         1.24 "Material Adverse Effect" shall mean any material adverse effect

on the Purchased Assets, taken as a whole. For purposes of this definition,

"Material" means an amount equal to five percent (5%) or more of the Purchase

Price.

 

         1.25 "Materialmen's Claims" shall mean any trade payables or claims

arising from operations of the Purchased Assets prior to the Closing Date, to

the extent secured by materialmen's, mechanic's or other statutory Liens having

priority over the Liens securing SME's indebtedness to Duke Capital Partners.

 

         1.26 "Oil" shall mean all oil, natural crude oil or petroleum and other

hydrocarbons regardless of gravity, produced at the well in liquid form by

ordinary production methods.

 

          1.27 "Party" shall mean SME, DPI or their respective successors or

permitted assigns.

 

         1.28 "Permits" shall mean the written permits, licenses, registrations

and approvals held by SME listed on Schedule 1.28.

 

         1.29 "Permitted Liens" shall mean: (a) Liens for property Taxes not due

and payable; (b) Liens disclosed by or excepted in a document in the

chain-of-title of the Real Property of record in the county in which the Real

Property is located (excluding any mortgage or deed of trust); (c) a right of

way, utility easement, reservation or other right of use existing in or held by

a third party not an Affiliate of SME that is created by an instrument of record

or easements that arise by operation of law by prescription or previous use; and

(d) Liens affecting the Purchased Assets that are listed on Schedule 1.29.

 

         1.30 "Person" shall mean any individual, corporation, general or

limited partnership, limited liability company, joint venture, estate, trust,

association, organization, labor union or other entity or

 

         1.31 "Personal Property" shall mean the Suspense Funds and all Wells,

fixtures and other items of personal property (including without limitation,

wellhead equipment, pumping units and other artificial lift equipment, field

separators, liquid extractors, pipe, casing and tubing, physical gathering

systems and equipment, production and associated flowlines and equipment, oil

loadout equipment and facilities, tanks, machines, vehicles, tools, dies and

associated equipment, vessels and other facilities) that SME owns or leases,

including but not limited to those listed on Schedule 1.31, other than the

Excluded Assets.

 

         1.32 "Post-Closing Period" shall mean any taxable period beginning

after the Closing Date.

 

          1.33 "Pre-Closing Period" shall mean any taxable period ending on or

before the Closing Date.

 

         1.34 "Purchase Price" shall mean Twenty-Seven Million Dollars

($27,000,000.00), payable as provided in Section 2.1.

 

         1.35 "Purchased Assets" shall mean the Books and Records, Real

Property, Personal Property, and the rights of SME and its Affiliates under the

Contracts and Permits.

 

         1.36 "Real Property" shall mean: (a) the Hydrocarbon Leases; (b) the

surface leases, drilling and production rights, easements, rights-of-way, access

rights, and other rights or interests in real property and improvements thereon,

or with respect to the drilling, production or transportation of the oil and gas

therein and thereunder, as well as underground voids leased to SME and listed on

Schedule 1.36(b); and the tracts of land described on Schedule 1.36(c).

 

 

 

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         1.37 "SME Annual Audited Financial Statement" shall mean the audited

balance sheet of SME as of December 31, 2002 and related statement of operations

and cash flows for the fiscal year ended December 31, 2002.

 

         1.38 "SME Unaudited Financial Statements" means unaudited balance

sheets of SME as of December 31, 2003 and as of June 30, 2004 and related

unaudited statements of operations and cash flows for the fiscal year ended

December 31, 2003 and the six months ended June 30, 2004.

 

         1.39 "Straddle Period" shall mean any taxable period covering days

before and after the Closing Date.

 

         1.40 "Suspense Funds" shall mean the amount of funds, as of Closing,

related to rental or royalty payments due to third parties that SME has been

unable to pay, and certain plugging obligations, a listing of which as of the

date hereof, is identified by SME on Schedule 1.3.

 

         1.41 "Tax" or "Taxes" shall mean any federal, state, county, local or

foreign taxes, charges, levies, imposts, duties, other assessments or similar

charges of any kind whatsoever, including, interest, penalties and additions

imposed thereon or with respect thereto, of whatever nature and regardless of

how denominated.

 

         1.42 "Tax Return" shall mean any original or amended report, return,

document, schedule or other information supplied or required to be supplied to a

Governmental Authority with respect to Taxes, including any return of an

affiliated, combined or unitary group.

 

         1.43 "Transfer Period" shall have the meaning set forth in Section

5.6(d).

 

         1.44 "Wells" shall mean all Hydrocarbon wells in Lee County, Virginia,

and Bell and Harlan Counties, Kentucky, in which SME owns any interest or has

any obligations with respect to future expenditures or other liability.

 

                                   ARTICLE II

                            PURCHASE AND SALE OF ASSETS

 

         2.1 Transfer of Assets.

 

                  (a) On the Closing Date, SME shall sell, convey, transfer,

assign and deliver or cause to be sold, conveyed, transferred, assigned and

delivered to DPI, and DPI shall acquire, all of SME's right, title and interest

in and to all of the Purchased Assets. At the Closing, subject to the terms and

conditions of this Agreement, SME shall (i) cause the Purchased Assets to be

transferred and delivered to DPI and (ii) perform its obligations under this

Agreement to be performed at the Closing.

 

                  (b) On the Closing Date, in full consideration for the

Purchased Assets, DPI shall (i) assume the Assumed Liabilities, (ii) pay the

Purchase Price to or for the account of SME as set forth below and (iii) perform

its obligations under this Agreement to be performed at the Closing. DPI shall

not assume any obligation of SME or any other liability related to the Purchased

Assets except the Assumed Liabilities.

 

                   (c) The Purchase Price shall be payable by DPI at the Closing

as follows:

 

                           (i) first, by check (A) to the holders of any

Materialmen's Claims asserted prior to the Closing Date, in the respective

amounts thereof, and (B) $250,000 for deposit in an escrow account to be

maintained by DPI in accordance with Section 2.4(b) to satisfy any Materialmen's

Claims asserted after the Closing Date;

 

                           (ii) second, by wire transfer of immediately

available funds to Duke Capital Partners in the full amount of SME's outstanding

indebtedness to Duke Capital Partners as of the Closing Date;

 

                           (iii) third, by wire transfer of immediately

available funds to Wachovia Bank in an amount equal to the Purchase Price less

amounts paid pursuant to Sections 2.1(c)(i) and (ii).

 

 

 

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         2.2 Bills of Sale; Assignment and Assumption Agreement. At the Closing,

SME shall execute and deliver to DPI Bills of Sale and the Assignment and

Assumption Agreement and perform its other obligations under this Agreement to

be performed at the Closing.

 

         2.3 Assumption of Liabilities. At the Closing, DPI shall execute and

deliver to SME the Assignment and Assumption Agreement and such other documents

and instruments, in form and substance acceptable to both parties, as may be

necessary for it to assume the Assumed Liabilities.

 

         2.4 Proration of Liabilities; Payment Reimbursement.

 

                  (a) SME and DPI shall cooperate to provide each other with

information on the status of the Assumed Liabilities. With the exception of the

Assumed Liabilities, following the Closing Date, SME shall remain responsible

for payment of all liabilities and obligations of any kind and nature arising

from the ownership of the Purchased Assets prior to the Closing Date. All

monthly royalties, charges and fees payable on account of the operation of the

Purchased Assets for the month in which the Closing occurs shall be apportioned

between SME and DPI on a per diem basis as of the Closing Date. SME will pay all

such retained liabilities, accounts payable and other obligations related to the

Purchased Assets in a timely fashion.

 

                  (b) Upon receipt of a Materialmen's Claim following the

Closing Date, DPI shall provide SME with notice of same. SME shall have a

reasonable opportunity to contest and resolve same. Subject to such procedures,

funds deposited in the escrow account contemplated by Section 2.1(c)(i) shall be

paid by DPI to the holders of any Materialmen's Claims asserted after the

Closing Date, in the respective amounts thereof. DPI shall remit any funds

remaining in the escrow account to SME or its designees upon: (i) termination of

the applicable statutory periods for filing Materialmen's Claims; and (ii)

resolution of any Materialmen's Claim filed within the applicable statutory time

periods.

 

                  (c) All revenues from operations of the Purchased Assets for

the month in which the Closing occurs shall be apportioned between SME and DPI

on a per diem basis as of the Closing Date. If DPI or any of its Affiliates

receives any payment in any form attributable the operations of the Purchased

Assets for periods prior to the Closing Date, it will forward such payment to

SME within five business days of its receipt. If SME or any of its Affiliates

receives any payment in any form attributable to the operations of the Purchased

Assets for periods following the Closing Date, its will forward or cause such

Affiliate to forward such payment to DPI within five business days of its

receipt.

 

         2.5 Additional Closing Documents. At the Closing, the Parties shall

execute and deliver all such other documents or instruments, in form and

substance reasonably acceptable to them, to the extent any documents or

instruments not specifically provided for herein are necessary to implement the

transactions contemplated by this Article II.

 

                                   ARTICLE III

                      REPRESENTATIONS AND WARRANTIES OF SME

 

         SME hereby represents and warrants to DPI that:

 

         3.1 Incorporation SME is a limited liability company duly organized,

validly existing and in good standing under the Laws of the Commonwealth of

Virginia and is duly qualified to do business in the Commonwealth of Kentucky.

 

         3.2 Execution, Delivery and Performance. The execution, delivery and

performance by SME of this Agreement and of each other agreement or instrument

to which it is a party executed in connection herewith or delivered pursuant

hereto and the consummation of the transactions contemplated herein and therein

will not, with or without the giving of notice or the passage of time, or both,

(a) conflict with, or result in a violation or breach of, or a default, right to

accelerate or loss of rights under, or result in the creation of any Lien (other

than Permitted Liens) under or pursuant to, any provision of its Articles of

Organization or Operating Agreement or, to the Knowledge of SME of any material

franchise, mortgage, deed of trust, lease, license, instrument, agreement,

consent, approval, waiver or understanding to which it is a party or is bound,

any Law or any order, judgment, writ, injunction or decree to which it is a

party or by which it or its assets may be bound or affected, or (b) to the

 

 

 

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Knowledge of SME, require the approval, consent of, prior notice to, or filing

or registration with any Governmental Authority; provided that this Section 3.2

shall not apply to any requirement of SME or DPI to obtain any consent of the

applicable Governmental Authority to transfer or modify the Permits.

 

         3.3 Authorization.

 

                  (a) SME has full power and authority to enter into and deliver

this Agreement and each other agreement or instrument to be executed and

delivered by it hereunder and to perform its obligations hereunder and

thereunder. SME's execution, delivery and performance of this Agreement and all

such other agreements and instruments and its consummation of the transactions

contemplated hereby and thereby have been duly authorized by all requisite

company action on the its part. This Agreement and all such other agreements or

instruments have been or upon delivery shall be duly executed and delivered by

SME, and this Agreement and all such other agreements and instruments constitute

or upon delivery shall constitute the legal, valid and binding obligation of

SME, enforceable in accordance with their respective terms (subject to any

applicable bankruptcy, insolvency, reorganization, moratorium or other similar

Laws affecting generally the enforcement of creditors' rights).

 

         3.4 Real Property.

 

                  (a) SME has made available to DPI all deeds, leases, bills of

sale, documents of title, abstracts, surveys, plats, maps and other Book and

Records in the possession of SME or its Affiliates that relate to the Real

Property.

 

                  (b) Schedules 1.36(b) and 1.36(c) list all of the Real

Property other than the Hydrocarbon Leases.

 

                  (c) Schedule 1.18 lists all of the Hydrocarbon Leases. SME

holds the lessees' interests under the Hydrocarbon Leases, and the interests

held by SME for its own account in the Hydrocarbon Leases are free and clear of

any Liens (other than Permitted Liens). Except as listed on Schedule 3.4(c), (i)

SME is in compliance in all material respects with each of the leases and

subleases to which it is a party that is included in the Real Property,

including each Hydrocarbon Lease, (ii) each of such leases and subleases is in

full force and effect, enforceable in accordance with its terms against the

respective lessee, sublessee, lessor or sublessor thereunder (subject to any

applicable bankruptcy, insolvency, reorganization, moratorium or other similar

Laws affecting generally the enforcement of creditors' rights), (iii) there is

no existing default by SME or, to the Knowledge of SME, by any other party under

any such lease or sublease, including any Hydrocarbon Lease, which would result

in a Material Adverse Effect, and (iv) there is not any event or condition

which, after the passage of time or the giving of notice, or both, would

constitute an event of default thereunder by SME or, to the Knowledge of SME, by

any other party thereunder, which would result in a Material Adverse Effect

 

                  (d) Except as listed on Schedule 3.4(d) or Schedule 3.9, there

is not any pending or, to the Knowledge of SME, any threatened third party

adverse claim to any of the Real Property, other than Permitted Liens and, to

the Knowledge of SME, there are no conditions or events that with the passage of

time or the giving of notice, or both, would constitute the basis for any such

third party adverse claim.

 

                   (e) With respect to the Hydrocarbon Leases, all rentals and

other payments due in respect of the leasehold interests have been timely paid,

and SME has fully performed all other conditions necessary to keep such

interests in full force and effect during their primary term and thereafter if

commercial production has been established thereon or on lands pooled therewith,

or if wells have been shut-in.

 

                  (f) SME has made available to DPI all lease files, land files,

well files, production files and abstracts, title opinions, accounting records,

seismic records and surveys, shot points, field notes, gravity maps, electric

logs, geological and geophysical prospect maps, geological base maps, and other

geological or geophysical data and records or other documents, including

interpretations of geologic and geophysical data of every kind and description

in the possession of SME or any of its Affiliates and relating to the Real

Property. All of the foregoing documents, instruments and records are included

in the Books and Records to be delivered to DPI at the Closing as part of the

Purchased Assets.

 

                  (g) NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE

CONTRARY, (i) DPI ACCEPTS THE HYDROCARBON RESERVES AS IS, WHERE IS, FREE OF ANY

WARRANTY

 

 

 

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(EXPRESS OR IMPLIED) WITH REGARD TO THE RECOVERABILITY OF OR THE COST OF

RECOVERING ANY OF SUCH RESERVES, THE VALUE OF SUCH RESERVES, PRICES (OR

ANTICIPATED PRICES) AT WHICH PRODUCTION WILL BE SOLD AND THE ABILITY TO SELL

HYDROCARBON PRODUCTION; AND (II) SME EXPRESSLY DISCLAIMS ANY WARRANTY AS TO THE

ACCURACY OR COMPLETENESS OF GEOLOGICAL AND/OR GEOPHYSICAL INFORMATION OR RESERVE

ESTIMATES CONTAINED IN ANY OIL AND GAS DATA MADE AVAILABLE TO DPI, THE SAME

BEING PREDICTIONS TO FUTURE EVENTS WHICH ARE INHERENTLY SUBJECT TO

INCOMPLETENESS AND INACCURACY.

 

                  (h) Schedule 3.4(h) sets forth the consents required to be

obtained pursuant to the Hydrocarbon Leases or otherwise with respect to the

Real Property as a result of the sale and assignment of the Purchased Assets and

other transactions contemplated by this Agreement.

 

         3.5 Personal Property.

 

                  (a) Schedule 1.31 contains (i) a list of all of the Personal

Property owned by SME with an initial purchase price of $25,000 or more and (ii)

a summary description of the Personal Property owned by SME with an initial

purchase price of less than $25,000.

 

                  (b) SME has marketable title to all of the Personal Property,

free and clear of all Liens, except for Permitted Liens. SME does not lease any

Personal Property.

 

                  (c) All Personal Property currently in use and material to the

operation of the Purchased Assets has been maintained in accordance with normal

industry practice, is in good operating condition and repair (subject to normal

wear and tear), and is suitable for the purposes for which it presently is used.

 

         3.6 Permits and Environmental Compliance.

 

                   (a) SME has made available to DPI true and complete copies of

the Permits. To the Knowledge of SME, the Permits include all material permits,

licenses, franchises and other authorizations necessary for operations of the

Purchased Assets on the Real Property and pursuant to the Contracts as currently

operated, and SME is in material compliance with all such Permits. No such

Permit is subject of any proceeding by or before any Governmental Authority that

might affect its validity, and no such proceeding is pending or, to the

Knowledge of SME, threatened. The Permits are currently held by an Affiliate of

SME and shall be transferred to SME prior to the Closing Date. No such transfer

shall adversely affect the status of the Permits.

 

                  (b) Except as set forth in Schedule 3.6(b), and to the

Knowledge of SME, SME is in compliance with all Environmental Laws. Except as

listed on Schedule 3.6(b) or Schedule 3.9: (i) to the Knowledge of SME, no

written notices of violation, correction orders, cessation orders, notices of

penalty, notices of proposed assessment or other written notices (which remains

outstanding or unabated) have been issued by any Governmental Authority or third

party that any operations under the Permits are not in compliance with any

Environmental Law; (ii) SME has not entered into or agreed to any court decree

or order and is not subject to any judgment, decree or order relating to

compliance with any Environmental Law or to investigation or cleanup of

hazardous materials under any Environmental Law; (iii) to the Knowledge of SME,

SME has no contingent liabilities for operations of the Purchas