SECURITIES PURCHASE AGREEMENT

Exhibit 10.2

SECURITIES PURCHASE AGREEMENT

for

CALUMET OIL COMPANY

J.M. GRAVES L.L.C.

and

JMG OIL & GAS, LP

Dated as of September 16, 2006

Table of Contents

 

 

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SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (the “ Agreement ”) is made and entered into this 16th day of September, 2006, among the parties identified on Exhibit A-1 (collectively, the “ Shareholders ” and individually a “ Shareholder ”), the parties identified on Exhibit A-2 (collectively, the “ Partners ” and individually a “ Partner ”), the parties identified on Exhibit A-3 (collectively, the “ Members ” and individually a “ Member ”) (the Shareholders, the Partners and the Members in their respective capacities sometimes being collectively referred to herein as the “ Sellers ” and individually as a “ Seller ”), Calumet Oil Company, an Oklahoma corporation (the “Company”), JMG Oil & Gas, LP, an Oklahoma limited partnership (the “ Partnership ”), J.M. Graves L.L.C. (the “ General Partner ”, and together with the Partnership, the “ Partnership Entities ”) (the Company, the Partnership and the General Partner being sometimes referred to collectively as the “ Entities ”), and Chaparral Energy, Inc., a Delaware corporation (the “Purchaser”). The Sellers, the Company, the Partnership, the General Partner and the Purchaser are each sometimes referred to herein as a “ Party ” and are sometimes collectively referred to herein as the “ Parties .”

RECITALS

A. WHEREAS, the Shareholders own all of the capital stock, warrants, options and any other rights to acquire the capital stock of the Company outstanding on the date set forth above (collectively, the “ Shares ”), such Shares being owned by the Shareholders in the respective amounts set forth next to the Shareholders’ names on Exhibit B-1 ;

B. WHEREAS, the Partners own all of the partnership interests, warrants, options and any other rights to acquire partnership interests in the Partnership other than the general partner interest owned by the General Partner (collectively, the “ Partnership Interests ”), such Partnership Interests being owned by the Partners and the general partner interest owned by the General Partner in the respective amounts set forth next to the Partners’ names on Exhibit B-2 ; and

C. WHEREAS, the Members own all of the membership interests, warrants, options and any other rights to acquire membership interests in the General Partner (collectively, the “ Membership Interests ”), such Membership Interests being owned by the Members in the respective amounts set forth next to the Partners’ names on Exhibit B-3

D. WHEREAS, the Purchaser desires to purchase all, and not less than all, of the Shares, the Partnership Interests and the Membership Interests (collectively, the “ Interests ”), and the Sellers desire to sell the Interests for the Aggregate Purchase Price, subject to and in accordance with the terms and conditions of this Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing recitals, the agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

1. Agreement of Sale and Purchase of Interests . Subject to the terms and conditions contained in this Agreement, the Sellers shall sell to the Purchaser, and the Purchaser shall purchase from the Sellers, the Interests.

 

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2. Purchase Price; Closing .

a. Purchase Price . Subject to the terms and conditions contained in this Agreement, on the Closing Date, the Purchaser shall pay to the Sellers, in the aggregate, an amount equal to $510,000,000.00 (the “ Aggregate Purchase Price ”), subject to adjustment as provided in Section 2(b) , Section 10(e) , and Section 3 in consideration for the Interests. The Aggregate Purchase Price as adjusted pursuant to Section 2(b) , Section 10(e) and Section 3 is herein referred to as the “ Interest Purchase Price .” The parties hereto agree that the Interest Purchase Price shall be allocated as set forth on Exhibit C .

b. Post-Closing Purchase Price Adjustment . If Working Capital as of the Closing Date exceeds $6,000,000 plus net income from September 1, 2006 until the Closing Date, then cash equal to the excess will be paid by the Purchaser to the Sellers pro rata in accordance with the allocations to Sellers of the Aggregate Purchase Price. If Working Capital is equal to or less than $6,000,00 plus net income from September 1, 2006 until the Closing Date, then a payment from the Sellers to the Purchaser will be made in an amount equal to the deficit. The cash held by the Entities on the Closing Date will be at least $3,500,000 plus $1,800,000 of cash in the North Burbank Unit escrow account listed on Schedule 2(b) of the Seller Disclosure Schedules. “ Working Capital ” will be computed for the Entities on a consolidated basis as (A) cash, cash equivalents, accounts receivable and other short-term assets less (B)(i) accounts payable and other short-term liabilities plus (ii) all indebtedness for borrowed money, including interest and premium, if any, thereon payable as of the Closing Date in connection with the repayment of such indebtedness in accordance with Section 8(b) , with such GAAP items computed in accordance with GAAP consistently applied. Net income for purposes of this Section shall be calculated before giving effect to permitted bonus payments set forth in Schedule 9(f) of the Sellers Disclosure Schedule. Purchaser shall use its commercially reasonable efforts to compute the calculations of Working Capital as of the Closing Date and net income from September 1, 2006 until the Closing Date within 120 days after the Closing Date .

c. Closing . The closing of this transaction shall be held at 9:00 a.m. on Monday, October 31, 2006, or, if the conditions set forth in Section 11 have not been satisfied by that date, two Business Days after the date on which the last of the conditions set forth in Section 11 shall have been satisfied or waived, in the offices of the Seller at 2455 East 51st, Suite 101, Tulsa, Oklahoma 74105, or at such other time, place or method to be mutually agreed upon by the Parties (hereinafter, the “ Closing ” or “ Closing Date ”).

d. Withholding Rights . The Purchaser (in consummating the transactions contemplated by this Agreement) and the Entities (from and after the Closing Date) shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement such amounts as the Purchaser or an Entity may be required to deduct and

 

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withhold with respect to the making of such payment under any provision of federal, state, local or foreign tax law. If the Purchaser or an Entity so withholds amounts, such amounts shall be remitted to the appropriate tax authority and treated for all purposes of this Agreement as having been paid to the Person in respect of whom the Purchaser or the Entity made such deduction or withholding.

3. Title Defects and Environmental Defects .

a. Title Defects .

I. As soon as reasonably practicable (and on an ongoing basis), but no later than 5:00 p.m. Central Time on Monday, October 23, 2006 (the “ Objection Deadline ”), the Purchaser may notify the Sellers in writing of Title Defects affecting assets of the Entities or their Subsidiaries. The Purchaser’s notice asserting Title Defects shall include a reasonably detailed description and explanation (including any available supporting documentation) of each Title Defect claimed, the assets affected, and the value that the Purchaser in good faith attributes to the Title Defect, which shall not exceed the Allocated Value of such property. The Purchaser and the Sellers shall meet periodically to attempt to agree on resolution with respect to Title Defects. The Sellers shall have the right, but not the obligation, to attempt, at their sole cost, to cure or remove any Title Defects. The Sellers’ election to attempt to cure a Title Defect shall not constitute a waiver of Sellers’ right to dispute the existence, nature or value of, or cost to cure, the Title Defect. In the event that any Title Defect(s) as to which the Purchaser has given the Sellers timely notice as provided in this Section 3(a) are not remedied or cured prior to Closing, then, subject to the other provisions of this Section 3 , the Aggregate Purchase Price shall be reduced by the aggregate value of all such uncured Title Defects, determined as follows: (1) where the Sellers agree in writing with the value of the Title Defect as set forth in the Purchaser’s notice, that value shall be the value of the Title Defect; (2) if the Title Defect is a lien, encumbrance or other charge upon a property which is undisputed and liquidated in amount, then the value of the Title Defect shall be the lesser of (A) the Allocated Value of such property or (B) the amount necessary to be paid to the obligee to remove the Title Defect from the interest of the affected Entity or its Subsidiary in the affected property; (3) if the Allocated Value for a property is positive and the Title Defect represents a discrepancy between the Net Revenue Interest for such property and the Net Revenue Interest for that property stated on Exhibit D , then the value of such Title Defect shall be the product of the Allocated Value for such property multiplied by a fraction, the numerator of which is the decrease in Net Revenue Interest and the denominator of which is the Net Revenue Interest stated on Exhibit D (it being understood that if such reduction in Net Revenue Interest is not accompanied by a proportionate decrease in the Working Interest then such discrepency shall constitute a separate Title Defect); and (4) if the Title Defect represents an obligation, encumbrance, burden or charge upon or other defect in title to the affected property of a type not described in subsections (1), (2) or (3) above, the value of the Title Defect shall be determined by taking into account the Allocated Value for the property so

 

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affected, the portion of the property affected by the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the affected property, and such other factors as are appropriate to make a proper evaluation, in each case net to the interest, as represented on Exhibit D , of the affected Entity and its Subsidiaries in the affected property.

II. De Minimis Title Defects and Title Defect Threshold . Notwithstanding anything contained in this Agreement to the contrary, the Purchaser shall not be entitled to an Aggregate Purchase Price reduction for any individual Title Defect that has a value (determined in accordance with Section 3(a) ) of less than $10,000 (a “ De Minimis Defect ”). In addition, notwithstanding anything contained in this Agreement to the contrary, the Purchaser shall not be entitled to an Aggregate Purchase Price reduction for Title Defects pursuant to Section 3(a) unless the aggregate value of all uncured Title Defects (“ Aggregate Title Defect Amount ”) exceeds $2,500,000 (the “ Title Defect Threshold ”).

III. Disagreements as to Defect Amount . If the Sellers and the Purchaser are unable to mutually agree upon the Aggregate Title Defect Amount at least two Business Days prior to the Closing Date, and if the Purchaser’s good faith estimate of the Aggregate Title Defect Amount exceeds the Title Defect Threshold, then at the Closing (1) the portion of the Aggregate Purchase Price payable at Closing shall be reduced by the Purchaser’s good faith estimate of the Aggregate Title Defect Amount and (2) the Purchaser shall deliver to the Escrow Agent pursuant to an escrow agreement substantially in the form of Exhibit E-1 attached hereto (the “ Title Escrow Agreement ”) the difference between the Purchaser’s good faith estimate and the Sellers’ good faith estimate of the reduction to the Aggregate Purchase Price attributable to Title Defects. The disputed Title Defects shall be resolved post-Closing by arbitration conducted pursuant to Section 15(f) . All amounts escrowed pursuant to this Section 3(a)(III) shall be distributed by the Escrow Agent to the Sellers and/or the Purchaser, and the Aggregate Purchase Price shall be adjusted, in accordance with the arbitration decision reached in accordance with Section 15(f) .

IV. Post-Closing Curative . Provided that the Aggregate Title Defect Amount exceeds the Title Defect Threshold, the Sellers shall have 90 days following the Closing Date to attempt to cure any Title Defect. Any disputes as to whether a Title Defect has been cured shall be submitted to arbitration conducted pursuant to Section 15(f) . With respect to any Title Defect that the Sellers cure, in whole or in part, within such 90-day period following the Closing Date, the reduction in the Aggregate Purchase Price made at Closing with respect to such Title Defect shall be adjusted to reflect such curative, and the Sellers shall be entitled to periodic distributions from the Escrow Agent of amounts related to such cured Title Defects. In the event that the total amount owed to the Sellers as a result of post-closing curatives pursuant to this Section 3(a)(IV) exceeds the total amount deposited with the Escrow Agent pursuant to Section 3(a)(III) , then the Purchaser shall pay the Sellers the amount of such excess, and the Purchaser

 

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shall cause the release of any amounts held in escrow to the Sellers, within five Business Days after the end of the 90-day post-closing cure period (or, if defect disputes are submitted to arbitration pursuant to Section 15(f) , within five Business Days after the final decision of the arbitrators). If, at the end of the 90-day post-closing cure period, the aggregate value of all remaining Title Defects no longer exceeds the Title Defect Threshold, then the reduction of the Aggregate Purchase Price for Title Defects made at Closing will be reversed, and (after giving full effect to any distributions previously made to the Sellers from the escrow account established pursuant to Section 3(a)(III) ) the Purchaser shall pay the full amount of the reduction in the Aggregate Purchase Price remaining in respect of such Title Defects to the Sellers.

b. Escrow for Environmental Defects . At Closing, $10,000,000 of the Aggregate Purchase Price shall be deposited by the Purchaser with JPMorgan Chase Bank, N.A. (“ Escrow Agent ”) pursuant to an escrow agreement substantially in the form of Exhibit E-2 attached hereto (the “ Environmental Escrow Agreement ”). Such amount, together with interest or other earnings thereon, is referred to herein as the “ Escrow Amount. ” For a period of one (1) year after Closing, the Purchaser may notify the Sellers in writing of any Environmental Claims or other non-compliance with Environmental Laws by either Entity, any Subsidiary of either Entity, or any Person whose liability for an Environmental Claim any Entity, or any Subsidiary of any Entity, has retained, assumed or indemnified either contractually or by operation of law, occurring prior to the Closing (an “ Environmental Defect ”). Each such notice asserting Environmental Defects shall include a report of an independent, third-party environmental consultant identifying and describing the Environmental Defect in reasonable detail, together with any other available supporting documentation, and the estimated amount necessary to remediate, remove, repair, clean, and settle damages and claims associated with the Environmental Defect (collectively, “ Environmental Remediation Costs ”). The Escrow Agent shall, from time to time upon request by the Purchaser and/or an Entity, distribute from the Escrow Amount to such Purchaser and/or Entity the Environmental Remediation Costs incurred by such Person with respect to timely asserted Environmental Defects. The Purchaser shall promptly notify the Sellers in writing of each such distribution by the Escrow Agent, which notification shall include the date, amount and specific purpose of such distribution. Within sixty (60) days after the first anniversary of the Closing Date, the Purchaser shall direct the Escrow Agent to disburse to Sellers the amount, if any, remaining in the escrow account after deduction of the remaining estimated Environmental Remediation Costs associated with timely asserted Environmental Defects. Thereafter, if any amount remains in the escrow account upon final resolution of the timely asserted Environmental Defects and payment of all of Purchaser’s and/or the Entities’ Environmental Remediation Costs, such remaining amount shall be distributed to the Sellers. Notwithstanding anything contained in this Agreement to the contrary, (1) the Purchaser shall not be entitled to an Aggregate Purchase Price reduction for Environmental Remediation Costs for any individual remediation site that are less than $10,000 (it being agreed that the existing environmental claims on the Fox Deese Unit and claims associated with the cleanup of the North Burbank Unit and South Burbank Unit each will be considered one remediation site for purposes of this threshold) and (2) following the Closing Date, distributions from the Escrow Amount shall be the exclusive remedy available to the Purchaser for Environmental Defects.

 

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4. Seller’s Representations And Warranties . Except as set forth on the Seller Disclosure Schedules (each Section of which qualifies the correspondingly numbered representation and warranty or covenant to the extent specified therein, provided that any disclosure set forth in the Seller Disclosure Schedules with respect to any particular Section shall be deemed to be disclosed in reference to all other applicable sections of this Agreement if the disclosure in respect of the particular Section is sufficient on its face without further inquiry reasonably to inform Purchaser of the information required to be disclosed in respect of the other sections to avoid a breach under the representation and warranty or covenant corresponding to the other sections) dated the date hereof and delivered to the Purchaser concurrently with the execution and delivery of this Agreement (the “ Seller Disclosure Schedules ”), each Seller hereby severally and not jointly represents and warrants to Purchaser, with respect to itself/himself/herself, as follows:

a. Organization and Standing . To the extent Seller is a corporation, partnership, limited liability company, trust or other entity formed under the laws of any state, Seller is duly organized, validly existing and in good standing under the laws of the state of its organization and in such other jurisdictions necessary for the consummation of this Agreement.

b. Power . Seller has all requisite power and authority to carry on its business as presently conducted and to enter into and perform its obligations under this Agreement. The execution and delivery of this Agreement does not, and the fulfillment of and compliance with the terms and conditions hereof will not, violate, or be in conflict with, any provision of its governing documents, to the extent applicable, or any provision of any agreement or instrument to which it is a party or by which it is bound, or to any judgment, decree, order, statute, rule or regulation applicable to it. No authorizations, consents or approvals of, or notices to or filings with, any third party or governmental authority are necessary for the consummation by Seller of the transactions contemplated hereby, except for such authorizations, consents or approvals as shall have been obtained or such notices or filings as shall have been accepted before the Closing Date.

c. Authorization and Enforceability . The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly and validly authorized by all requisite actions of the Seller. This Agreement constitutes the legal, valid and binding obligation of the Seller and is enforceable in accordance with its terms, subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium and other laws for the protection of creditors generally, as well as to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law.

d. Title to Interests . Seller owns the Shares indicated on Exhibit B-1, the Partnership Interests indicated on Exhibit B-2 and/or the Membership Interests indicated in Exhibit B-3 , and at Closing, will convey to Purchaser good and marketable title to the applicable Interests free and clear of any and all liens, mortgages, claims, encumbrances, pledges or security interests and all other defects of title, adverse claims or other matters whatsoever (other than those arising under federal and state securities laws).

 

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e. Liability for Brokers’ Fees . Seller has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which the Purchaser, the Company or the Partnership Entities shall have any responsibility.

5. Shareholders’ Representations and Warranties Concerning the Company . Except as set forth in the Seller Disclosure Schedules, each Shareholder hereby jointly and severally represents and warrants to the Purchaser that the statements contained in this Section 5 are true and correct as of the date of this Agreement.

a. Organization and Qualification . The Company is a corporation formed under the laws of the state of Oklahoma and is (1) duly organized, validly existing and in good standing under the laws of the State of Oklahoma and (2) duly qualified or admitted to do business and in good standing in each jurisdiction where the character of the properties owned or leased by it or the nature of its activities make such qualification necessary. Except as disclosed in Schedule 5(a) of the Seller Disclosure Schedules, the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity. The Sellers have previously delivered or made available to the Purchaser correct and complete copies of the certificate or articles of incorporation, bylaws or code of regulations (or other comparable constituent or organizational documents) of the Company, and each of which, as so delivered is in full force and effect.

b. Power . The Company and its Subsidiaries have all requisite power and authority to carry on their businesses as presently conducted and to enter into and perform their obligations under this Agreement. Except as set forth on Schedule 5(b) of the Seller Disclosure Schedules, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement will not: (1) violate or conflict with any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling or other restriction of any governmental authority or court to which the Company or its Subsidiaries are subject or any provision of the certificates of incorporation or bylaws of the Company or its Subsidiaries or any agreement among the stockholders of any such corporation; or (2) violate, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, cancel or receive any payment under, require any notice of consent under, or result in the imposition of any lien, claim or encumbrance upon any of the assets of the Company or its Subsidiaries under, any agreement, contract, lease, license, instrument or other arrangement to which the Company or its Subsidiaries are a party, by which the Company or its Subsidiaries are bound or to which the assets of the Company or its Subsidiaries are subject. Except as set forth on Schedule 5(b) of the Seller Disclosure Schedules, none of the Company or its Subsidiaries is required to give any notice to, make any filing with, or obtain any authorization, consent or approval of, any third party or any governmental authority in order to execute and deliver this Agreement or consummate the transactions contemplated hereby.

 

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c. Capitalization . The Company’s authorized capital stock consists of 30,020,000 shares of which (1) 20,000 shares are authorized as voting common stock, par value $1.00 per share (“ Common Stock ”), and (2) 30,000,000 shares are authorized as non-voting Class B common stock, par value $0.001 per share (“ Non-Voting Common Stock ”). As of the date hereof, there are 20,000 shares of Common Stock issued and outstanding and 20,000,000 shares of Non-Voting Common Stock issued and outstanding. All outstanding shares have been validly issued, are fully paid and non-assessable, were not issued in violation of the terms of any contract binding upon the Company and were issued in compliance with all governing documents of the Company. There are no outstanding subscriptions, options, warrants, conversion rights, convertible securities, preemptive rights, preferential rights (contractual or otherwise), “phantom” stock rights, or agreements, understandings or arrangements of any kind relating to equity securities (together, “ Options ”), obligating the Company or any of its Subsidiaries to issue or sell any capital stock of the Company or to grant, extend or enter into any Option with respect thereto. At Closing, the Purchaser will acquire all of the issued and outstanding shares of capital stock and Options of the Company.

d. Capitalization of Subsidiaries . Except as disclosed in Schedule 5(d) of the Seller Disclosure Schedules, all of the outstanding capital shares of each Subsidiary of the Company that is a corporation are duly authorized, validly issued, fully paid and nonassessable and are owned, beneficially and of record, by the Company or a Subsidiary wholly owned, directly or indirectly, by the Company, free and clear of any liens, claims, mortgages, encumbrances, pledges, security interests, equities and charges of any kind (each a “ Lien ”). Except as disclosed in Schedule 5(d) of the Seller Disclosure Schedules, there are no (i) outstanding Options obligating the Company or any of its Subsidiaries to issue or sell any capital shares of any Subsidiary of the Company that is a corporation or to grant, extend or enter into any such Option or (ii) voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person other than the Company or a Subsidiary wholly owned, directly or indirectly, by the Company with respect to the voting of or the right to participate in dividends or other earnings on any capital shares of any Subsidiary of the Company. Except as disclosed in Schedule 5(d) of the Seller Disclosure Schedule, there are no outstanding contractual obligations of the Company or any Subsidiary of the Company to repurchase, redeem or otherwise acquire any shares of capital stock of any Subsidiary of the Company or to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any Subsidiary of the Company or any other person.

e. Financial Statements . Attached hereto as Schedule 5(e) are the following financial statements (collectively, the “ Financial Statements ”): (1) audited consolidated balance sheets of the Company and its Subsidiaries as of December 31, 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows of the Company and its Subsidiaries for the year ended December 31, 2003; (2) unaudited consolidated balance sheets of the Company and its Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity,

 

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and cash flows of the Company and its Subsidiaries for the two years ended December 31, 2005; and (2) an unaudited consolidated balance sheet of the Company as of June 30, 2006 (the “ Most Recent Period End ”) and related consolidated statement of income for the six months then ended. The Financial Statements at and for the six-month period ended June 30, 2006 are herein referred to as the “ Most Recent Financial Statements .” The Financial Statements (other than the Most Recent Financial Statements) have been prepared in accordance with GAAP in all material respects applied on a consistent basis throughout the periods covered thereby, and all of the Financial Statements (including the notes thereto) present fairly, in all material respects, the consolidated financial position of the Company and its Subsidiaries as of such dates and the results of operations for such periods, and are consistent with the books and records of the operations for such periods, and are consistent with the books and records of the Company; provided , however , that the Most Recent Financial Statements are subject to normal year-end adjustments and lack footnotes and other presentation items. Schedule 5(e) sets forth a summary of any related party transactions and cash flow information since December 31, 2005 with respect to any transactions between the Company or its Subsidiaries, on one hand, and any affiliates of the Company or its Subsidiaries or affiliates of any of the shareholders of the Company, on the other hand.

f. Events Subsequent to Most Recent Period End . Except as set forth on Schedule 5(f) , since the date of the Most Recent Financial Statements, there have not been any (1) distributions by the Company to the holders of its equity securities or (2) changes in the assets, condition, affairs (financial or otherwise) or business prospects of the Company and its Subsidiaries, taken as a whole, which have had or would be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect.

g. Legal Compliance . Except as set forth on Schedule 5(g) of the Seller Disclosure Schedules, the Company and each of its Subsidiaries: (1) are in compliance with all applicable federal, state, local, tribal or foreign laws (including statues, rules, regulations, codes, plans, writs, injunctions, judgments, orders, decrees, rulings, and charges thereunder) (collectively, “ Laws ”); (2) have or have timely applied for all permits, licenses, certificates of authority, orders and approvals of, and have made all filings and applications with, federal, state, local, tribal and foreign regulatory bodies required to carry on their current operations in the ordinary course of business (collectively, “ Permits ”); (3) have not received any notice, charge, claim or action of any filed, commenced or, to its knowledge, threatened action alleging any violation of Laws; and (4) have not received any notice that any Permit required to carry on its current operations in the ordinary course of business will be terminated or modified or cannot be renewed in the ordinary course of business, and has no knowledge of any reasonable basis for any such termination, modification or non-renewal, and the execution, delivery and performance of this Agreement or any other transactions contemplated hereby do not and will not violate any such Permit or result in any termination, modification or non-renewal thereof.

 

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h. Tax Matters .

I. The Company, each of its Subsidiaries and each affiliated, consolidated, combined or unitary group of which the Company or any of its Subsidiaries is or has been a member (a “ Company Affiliated Group ”), has filed timely with the appropriate taxing authorities all Tax Returns required to be filed by the Company, its Subsidiaries or any Company Affiliated Group. Each such Tax Return is true, correct and complete in all material respects. All Taxes of the Company and its Subsidiaries that are due and payable have been timely paid in full. There are no unpaid Taxes of the Company and its Subsidiaries as of the Most Recent Period End.

II. There is no action, suit, proceeding, investigation, audit, claim or assessment pending or threatened with respect to the Company or its Subsidiaries with respect to a liability for Taxes or with respect to any Tax Return. No deficiency for any Tax has been assessed with respect to the Company or its Subsidiaries which has not been paid in full. There are no liens for Taxes upon the assets or properties of the Company or its Subsidiaries other than liens for Taxes not yet due and payable and for which adequate reserves have been established in the Financial Statements.

III. Each of the Company and its Subsidiaries has withheld and timely paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, member or other third party.

IV. There are no outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any Taxes or Tax Returns of the Company or its Subsidiaries.

V. None of the Company or its Subsidiaries is a party to, is bound by, or has any obligation under, any Tax sharing agreement, Tax indemnification agreement or similar contract or arrangement, and none of the Company or its Subsidiaries has any potential liabilities or obligations to any Person as a result of, or pursuant to, any such agreement, contract or arrangement. None of the Company or its Subsidiaries has any liability for Taxes of another Person by contract or otherwise.

VI. The Company (1) has at all times since its election in 1981 been a “small business corporation” within the meaning of Section 1361(b) of the Code (“ S Corporation ”) and any corresponding provision of applicable state and local income tax law, (2) has had in effect at all times its election in 1981 a valid election under Section 1362(a) of the Code and (3) will be treated as an S Corporation at all times from the date hereof through the Closing Date.

VII. Neither the Company nor any Subsidiary has been a member of an “affiliated group” (within the meaning of Section 1504 of the Code) filing a consolidated federal income Tax Return or a member of any other group of entities with which the Company or any Subsidiary filed or was required to file Tax Returns on a consolidated, combined, unitary or similar basis (other than by reason of being a disregarded entity for income Tax purposes).

 

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VIII. The Company will have no liability for any Taxes under Section 1374 of the Code (or any similar provision of state or local law) in connection with the deemed sale of assets caused by the Section 338(h)(10) Election (as hereinafter defined) or otherwise.

i. Material Agreements . Schedule 5(i) lists all: (1) governing documents of the Company and its Subsidiaries (including, without limitation, certificates of incorporation, certificates of designation, bylaws, stockholder agreements, investor rights agreements and other similar instruments), (2) agreements and contracts (whether oral or written) with Persons who are or will be affiliates of the Company or affiliates of any stockholders of the Company immediately prior to Closing that will be binding on the Company or its Subsidiaries (or the assets of the Company or its Subsidiaries) after Closing, (3) agreements for the sale or purchase of Hydrocarbons produced from or attributable to the assets of the Company or its Subsidiaries, except for agreements that expire by their terms or may be terminated without penalty within 30 days after the Closing Date, (4) other than as listed on Schedule 5(n) , any puts, calls or other rights of acquisition or disposition pursuant to which the Company or any of its Subsidiaries could be required to purchase or sell, as applicable, any assets (including equity interests of any Person) that have a market value purchase price of more than $50,000, or, with respect to calls on production, that obligate the Company or any of its Subsidiaries to sell Hydrocarbons at a price which is less than market value, (5) instruments that create any area of mutual interest, or that materially restrain, limit or impede the Company’s or any of its Subsidiaries’ ability to compete with or conduct any business or line of business, including geographic limitations on the Company’s or is Subsidiaries’ activities, (6) instruments that create or evidence an asset purchase or sale agreement that has not been consummated as of the date hereof, (7) contracts to which the Company or any Subsidiary is a party, the performance of which will involve consideration in excess of $100,000 per year, or (8) any other agreement not described in (1) through (7) above the existence or loss of which has had or would be reasonably likely to have a Material Adverse Effect on the Company (collectively, the “ Company Material Agreements ”). The Company has made or will make available to the Purchaser a copy of each Company Material Agreement and all minute books of the Company and its Subsidiaries, the copies of which are true, accurate and complete in all material respects. With respect to each Company Material Agreement, the Company is not in breach or default of the terms and conditions of such agreement.

j. Litigation . (1) There is no action, suit, proceeding, hearing, audit, citation, summons, supeona, inquiry or investigation of any nature, civil, criminal, or regulatory, in law or in equity, by or before any court or quasi-judicial or administrative agency of any jurisdiction or arbitrator (“ Litigation ”) pending, or, to the knowledge of the Company or its Subsidiaries, threatened, against, relating to or naming as a party thereto the Company or any of its Subsidiaries, any of their respective properties or assets or any of the Company’s officers or directors (in their capacities as such), (2) there is no agreement, order, judgment, decree, injunction or award of any governmental entity or

 

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arbitrator against and/or binding upon the Company, any of its Subsidiaries or any of the Company’s officers or directors (in their capacities as such), and (3) there is no Litigation that the Company or any of its Subsidiaries has pending against other parties, where such Litigation is intended to enforce or preserve material rights of the Company or any of its Subsidiaries.

k. Liability for Brokers’ Fees . Neither the Company nor its Subsidiaries have incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to the transactions contemplated by this Agreement for which the Purchaser or the Entities shall have any responsibility.

l. Insurance . Schedule 5(l) describes all contracts of insurance maintained by the Company, which are in full force and effect, and all premiums due and owing in connection with such policies have been paid. The Company has given notice or has otherwise presented every material claim known to the Company to be covered by insurance under its insurance policies or contracts in a timely fashion.

m. Labor Matters and Employee Benefit Plans . Except as shown on Schedule 5(m) of the Seller Disclosure Schedules:

I. Schedule 5(m)(I) lists all Benefit Plans of the Company. With respect to each such Benefit Plan, to the extent applicable, Seller has made or will make available to Purchaser true and accurate copies of (1) the most recent plan and related trust documents, insurance contracts or other funding arrangements, and any amendments or participation agreements relating thereto; (2) the most recent summary plan description and all related summaries of material modification; (3) the most recent Forms 5500 and all schedules thereto; (4) the most recent actuarial report, if any; (5) for any Benefit Plan intended to be qualified under Section 401(a) of the Code, the most recent favorable determination letter received from the IRS; and (6) descriptions of all claims filed and pending (other than for benefits in the normal course), lawsuits pending, grievances pending and similar actions pending with respect to each of the Company’s Benefit Plans. All Benefit Plans and their related trusts have been and are (i) maintained in accordance with each such plan’s and trust’s terms and (ii) operated in compliance with the requirements of all applicable federal and state statutes and regulations. Each Benefit Plan intended to be qualified under Section 401 of the Code is so qualified, has received a current favorable determination or opinion letter(s) from the IRS as to its qualified status, and no fact or event has occurred (or failed to occur) since the date of such letter(s) that could adversely affect the qualified status of any such Benefit Plan. Each of the Benefit Plans can be unilaterally terminated in accordance with its terms and without liability to the Company or any of its Subsidiaries other than for ordinary administration expenses, benefits accrued or, with respect to welfare benefit plans, claims incurred thereunder through the date of such termination, and the transactions contemplated by this Agreement will not result in the imposition of any restrictions, limitations or penalty on the right to amend or terminate any Benefit Plan.

 

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II. Neither the Company nor any ERISA Affiliate has ever established, maintained, contributed to or had any liability or obligation to contribute to (1) any Pension Plan that is subject to Section 412 of the Code or Title IV of ERISA; (2) any “multiemployer plan” within the meaning of Section 3(37) or 4001(a)(3) of ERISA; (3) any “multiple-employer plan” within the meaning of Section 413 of the Code or Section 4063 or 4064 of ERISA; or (4) any Benefit Plan providing medical, health, or other welfare-type benefits for any former employee, director or individual independent contractor of the Company or any ERISA Affiliate other than in accordance with COBRA or any similar state or local laws.

III. Neither the Company nor any of its Subsidiaries is a party to, or has ever been a party to, any collective bargaining agreement.

IV. The execution and delivery of, and the performance of the transactions contemplated by, this Agreement will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Benefit Plan, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any current or former employee, director or individual independent contractor of the Company or its Subsidiaries.

V. The Company has made no agreement with any Person, including, but not limited to, any employee, director or Seller, regarding the tax treatment of the Interests, nor does the Company have any obligation to “gross-up” any payments to any Person, including, but not limited to, any employee, director or Seller for any income or excise tax or penalty that may be imposed on such Person.

VI. All contributions (including all employer contributions and employee contributions), premiums or other payments required to have been made under any of the Benefit Plans (including workers compensation) or by law to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof (including any valid extension);

VII. None of the Benefit Plans are currently under audit by any regulatory authority with jurisdiction over such plans;

VIII. Other than routine claims for benefits, there are no claims (including any enforcement initiatives by any regulatory authority) pending or, to the knowledge of the Company or the Sellers, threatened, against any such plan or against the assets of any such plan or of the Company or any of its ERISA Affiliates with respect to any such plan, nor are there any current or, to the knowledge of the Company or any of the Sellers, threatened, liens on the assets of any such plan or of the Company or any of its ERISA Affiliates with respect to any such plan;

 

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IX. No condition exists (or fails to exist) or event or transaction has occurred (or failed to occur) with respect to any of the Benefit Plans which would result in the Company or any of its ERISA Affiliates incurring any material tax, fine, penalty or liability (other than any routine liability in the ordinary course) as a result of sponsoring, administering, maintaining, contributing to or participating in the Benefit Plans.

n. Hedging Transactions . Schedule 5(n) sets forth all obligations (including, without limitation, any obligations relating to the posting of collateral and the actual amounts posted as collateral, whether in the form of cash, letters of credit or otherwise, in respect of such obligations) of the Company and its Subsidiaries (collectively, “ Hedge Obligations ”) in respect of any futures, hedges, swaps, collars, puts, calls, floors, caps, options, forward sales, forward purchases or other contracts or derivative securities that are intended to benefit from, relate to or reduce or eliminate the risk of fluctuations in the price of commodities (including, without limitation, Hydrocarbons), interest rates, currencies or securities (collectively, “ Hedge Transactions ”). All such Hedge Transactions were, and any Hedge Transactions entered into after the date of this Agreement will be, entered into in accordance with applicable Laws, and in accordance with the investment, securities, commodities, risk management and other policies, practices and procedures employed by the Company and its Subsidiaries. The Company and each of its Subsidiaries have duly performed all of their respective obligations under the Hedge Transactions to the extent that such obligations to perform have accrued, and, to the knowledge of the Company, there are no material breaches, violations, collateral deficiencies, requests for collateral or demands for payment (except for ordinary course margin deposit requests), or defaults or allegations or assertions of such by any party thereunder. The Company and its Subsidiaries have not entered into any Hedge Transaction for the purposes of speculation.

o. Imbalances . Except as set forth on Schedule 5(o) , (1) there are no aggregate production, pipeline transportation or processing imbalances or penalties existing with respect to the Company, its Subsidiaries or the Company Operating Interests and (2) neither the Company nor its Subsidiaries have received a deficiency payment under any Hydrocarbon contracts for which any party has a right to take deficiency Hydrocarbons from the Company or its Subsidiaries, nor have the Company or its Subsidiaries received any payments for production which are subject to refund or recoupment out of future production.

p. Prepaid Obligations . Except as set forth on Schedule 5(p) , neither the Company nor its Subsidiaries are subject to any “take or pay” arrangement, production payment arrangement, or other agreement or arrangement which require it to deliver or to suffer the delivery of Hydrocarbons produced in connection with any of the Company Operating Interests at some future time (or make a cash payment in lieu thereof) without then or thereafter receiving full payment therefor and without deduction or credit on account of such arrangement from the price that would otherwise be received.

q. Preferential Rights; Restrictions on Transfer . Except as set forth on Schedule 5(q) , there are no preferential rights to purchase or other similar rights or restrictions on

 

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assignment, including requirements for consents from third parties to assignment, affecting the Company Operating Interests that would be applicable to, or required for the consummation of, the transactions contemplated by this Agreement, and the transactions contemplated by this Agreement will not create in any individual or entity any option to purchase, preferential right to purchase or similar rights with respect to the Company Operating Interests.

r. Calls on Production . Except as set forth on Schedule 5(r) , there are no calls on production (whether or not exercised) or other similar marketing restrictions affecting the Company Operating Interests, nor will the transactions contemplated by this Agreement create any such calls on production.

s. Reserve Report . The Sellers have furnished to Purchaser the Company’s estimate of Company’s and Company Subsidiaries’ oil and gas reserves as of December 31, 2004, determined by Bob Burlingame (the “ Company Reserve Report ”). In connection with the preparation of the Company Reserve Report, the Company made available to Bob Burlingame all material information then in the Company’s possession to enable Bob Burlingame to determine such estimate as of December 31, 2004. Except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company, the factual, non-interpretive data on which the Company Reserve Reports were based for purposes of estimating the oil and gas reserves set forth in the Company Reserve Report was accurate. Since the date of the Company Reserve Report, there have been (i) no material adverse changes in the information provided to the engineers and (ii) no material adverse changes that, when aggregated with other changes, would cause or be reasonably likely to cause a materially adverse revision to the estimates of aggregate oil and gas quantities reflected in the Company Reserve Report or the estimated future net cash flows to be received from such quantities as reflected in the Company Reserve Report, except for (w) production of oil, gas and other Hydrocarbons in the ordinary course of business, (x) changes which adversely affect the oil and gas exploration and development industry generally (including, without limitation, changes in commodity prices, general market prices and regulatory changes), (y) changes that arise out of general economic or industry conditions or (z) those matters reflected on Schedule 5(s) . With the exception of the express terms of the warranties set forth in this Section 5(s) , the Sellers make no warranty, express or implied, with respect to the Company Reserve Report, including, without limitation, any conclusions, opinions, projections, assumptions or judgments set forth in the Company Reserve Report.

t. Operation of Wells . All Wells operated by the Company or its Subsidiaries, and to the knowledge of the Company, all Wells operated by third parties in which the Company or its Subsidiaries own an interest, have been drilled, operated and produced in accordance in all material respects with reasonable, prudent oil and gas field practices and in compliance in all material respects with the applicable oil and gas leases and applicable Law. No claim, notice or order from any governmental entity or other Person has been received by the Company or any of its Subsidiaries due to Hydrocarbon production in excess of allowables or similar violations that could result in curtailment of production after the Closing Date from any Company Operating Interests.

 

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u. Proceeds of Production . Except as set forth in Schedule 5(u) , all proceeds from the sale of the Company’s and its Subsidiaries’ interest in Hydrocarbons produced from the Company Operating Interests are being received by the Company and its Subsidiaries in a timely manner and are not being held in suspense for any reason.

v. Title to the Company Operating Interests . To the knowledge of the Sellers, the Company and its Subsidiaries have Defensible Title to the Company Operating Interests free and clear of all Liens, except for Permitted Encumbrances. To the knowledge of the Sellers, the oil and gas leases and other agreements that provide the Company and its Subsidiaries with operating rights in the Company Operating Interests are in full force and effect. The rentals, royalties and other payments due thereunder have been properly and timely paid and there is no existing default (or event that, with notice or lapse of time or both, would become a default) under any of such oil and gas leases or other agreements. All royalties, overriding royalties and other burdens on production due with respect to the Company Operating Interests have been properly and timely paid. Except as set forth on Schedule 5(v) , neither the Sellers nor any Person controlled by any of the Sellers own any properties or interests in Hydrocarbons in, under or that may be produced from (i) any lands covered by any of the Company Operating Interests or (ii) any formation in which any Well comprising the Company Operating Interests is completed or from which any of the Company Operating Interests is producing or capable of producing Hydrocarbons, or (iii) that would drain or otherwise adversely affect any of the Company Operating Interests or their related Hydrocarbons.

w. No Undisclosed Liabilities . Except for liabilities incurred or paid (1) after the date of the Most Recent Financial Statements but before the date of this Agreement and (2) after the date of this Agreement that do not violate Section 8 , there are no liabilities, debts or obligations of the Company or its Subsidiaries of any kind, whether accrued, absolute, contingent, inchoate or otherwise (and there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against the Company or its Subsidiaries giving rise to any such debt, liability or obligation) including any taxes which are due and payable as of the date hereof or any governmental charges or penalties, interest or fines, except for liabilities (A) reflected on or reserved against in the Financial Statements or otherwise disclosed in the notes thereto or (B) set forth on Schedule 5(w) .

x. Environmental Matters . Except as set forth in Schedule 5(x) :

I. To the knowledge of the Sellers, the Company and its Subsidiaries have complied, and the Company and its Subsidiaries are in compliance, with all applicable Environmental Laws, which compliance includes the possession of all permits required under applicable Environmental Laws and compliance with the terms and conditions thereof and the making and filing with all applicable governmental entities of all reports, forms and documents and the maintenance of all records required to be made, filed or maintained by it under any Environmental Law.

 

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II. There are no Environmental Claims pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries or, to the knowledge of the Company, against any Person whose liability for any Environmental Claim the Company or any of its Subsidiaries has retained, assumed or indemnified, either contractually or by operation of law.

III. To the knowledge of the Sellers, neither the Company nor any of its Subsidiaries is subject to any liability or obligation (accrued, contingent or otherwise) to cleanup, correct, abate or to take any response, remedial or corrective action under or pursuant to any Environmental Laws, relating to (i) environmental conditions on, under, or about any of the properties or assets owned, leased, operated or used by the Company or any of its Subsidiaries or, to the knowledge of the Company, any predecessor thereto at the present time or in the past, including the air, soil, surface water and groundwater conditions at, on, under, from or near such properties, or (ii) the past or present use, management, handling, transport, treatment, generation, storage, disposal or Release of any Hazardous Substances, whether on-site on any properties or assets owned, leased, operated or used by any of the Company and its Subsidiaries, or at any off-site location. The Company has provided or made available to Purchaser copies of all studies, assessments, reports, data, results of investigations or audits, analyses and test results, in the possession, custody or control of the Company or any of its Subsidiaries relating to (x) the environmental conditions on, under or about any of the properties or assets owned, leased, operated or used by any of the Company and its Subsidiaries or any predecessor in interest thereto at the present time or in the past and (y) any Hazardous Substances used, managed, handled, transported, treated, generated, stored or Released by any Person on, under, about or from, any of the properties, assets and businesses of the Company or any of its Subsidiaries.

IV. To the knowledge of the Company, there are no past or present actions, activities, circumstances, conditions, events or incidents in violation of Environmental Laws (including the Release, emission, discharge, presence or disposal of any Hazardous Substance in violation of Environmental Laws), that would be reasonably likely to form the basis of any Environmental Claim against the Company or any of its Subsidiaries or against any Person whose liability for such Environmental Claim the Company or any of its Subsidiaries has retained or assumed either contractually or by operation of law.

V. Without in any way limiting the generality of the foregoing, to the knowledge of the Sellers, neither the Company nor any of its Subsidiaries owns or operates any there are no underground storage tanks at any property currently owned, leased or operated by the Company or any of its Subsidiaries.

VI. To the knowledge of the Sellers, neither the Company nor any of its Subsidiaries is required by virtue of the transactions contemplated by this Agreement, or as a condition to the effectiveness of any transactions contemplated by this Agreement, (i) to perform a site assessment for Hazardous Substances at any property or asset owned, leased, operated or used by the Company or any of its Subsidiaries or (ii) to remove or remediate any Hazardous Substances from any such property or asset.

 

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y. Company Real Property; Operating Equipment .

I. Schedule 5(y) contains a complete and correct list, as of the date of this Agreement, of all Company Owned Real Property setting forth information sufficient to specifically identify such Company Owned Real Property and the legal owner thereof. To the knowledge of the Sellers, the Company and its Subsidiaries have good, valid fee simple title to the Company Owned Real Property. The use and operation of the Company Owned Real Property in the conduct of the business of the Company and its Subsidiaries does not violate any instrument of record or agreement affecting the Company Owned Real Property. No current use by the Company and its Subsidiaries of the Company Owned Real Property is dependent on a nonconforming use or other governmental approval.

II. Except as set forth in Schedule 5(y) , the material operating equipment owned or leased by the Company or any of its Subsidiaries is in a state of repair so as to be adequate in all material respects for operation of the Company Operating Interests to which such equipment relates in substantially the same manner in which such properties were operated as of and during the period of the Most Recent Financial Statements.

6. Partners’ and Members Representations and Warranties Concerning the Partnership and the General Partner . Except as set forth in the Seller Disclosure Schedules, each Partner and Member hereby jointly and severally represents and warrants to the Purchaser that the statements contained in this Section 6 are true and correct as of the date of this Agreement.

a. Organization and Standing .

I. The Partnership is a limited partnership formed under the laws of the State of Oklahoma and is (1) duly organized, validly existing and in good standing under the laws of the State of Oklahoma and (2) duly qualified to do business as a foreign entity and in good standing in each jurisdiction where the character of the properties owned or leased by it or the nature of its activities make such qualification necessary. The Partnership has no Subsidiaries and does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity.

II. The General Partner is a limited liability company formed under the laws of the State of Oklahoma and is (1) duly organized, validly existing and in good standing under the laws of the State of Oklahoma and (2) duly qualified to do business as a foreign entity and in good standing in each jurisdiction where the character of the properties owned or leased by it or the nature of its activities make such qualification necessary. Other than the Partnership and its general

 

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partner interests in the Partnership, the General Partner has no Subsidiaries and does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity.

b. Power . The Partnership Entities have all requisite power and authority to carry on its businesses as presently conducted and to enter into and perform its obligations under this Agreement. Except as set forth on Schedule 6(b) , the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement will not: (1) violate or conflict with any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling or other restriction of any governmental authority or court to which the Partnership Entities are subject or any provision of its certificate of formation, limited partnership agreement, limited liability company agreement or any agreement among the partners of the Partnership or members of the General Partner; or (2) violate, conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, cancel or receive any payment under, require any notice of consent under, or result in the imposition of any lien, claim or encumbrance upon any of the assets of the Partnership Entities under, any agreement, contract, lease, license, instrument or other arrangement to which the Partnership Entities are a party, by which the Partnership Entities are bound or to which the assets of the Partnership Entities are subject. Except as set forth on Schedule 6(b) , the Partnership Entities are not required to give any notice to, make any filing with, or obtain any authorization, consent or approval of, any third party or any governmental authority in order to execute and deliver this Agreement or consummate the transactions contemplated hereby.

c. Capitalization .

I. All outstanding Partnership Interests and the general partner interest owned by the General Partner have been validly issued, are fully paid and non-assessable, were not issued in violation of the terms of any contract binding upon the Partnership and were issued in compliance with all governing documents of the Partnership. There are no outstanding Options for the purchase or sale of the Partnership Interests or the general partner interest owned by the General Partner. At Closing, the Purchaser will acquire all of the Partnership Interests and Options of the Partnership.

II. All outstanding Membership Interests have been validly issued, are fully paid and non-assessable, were not issued in violation of the terms of any contract binding upon the General Partner and were issued in compliance with all governing documents of the General Partner. There are no outstanding Options for the purchase or sale of the Membership Interests. At Closing, the Purchaser will acquire all of the Membership Interests and Options of the General Partner.

d. Financial Statements . Attached hereto as Schedule 6(d) are the following financial statements (collectively, the “ Partnership Financial Statements ”): (1)

 

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unaudited balance sheets of the Partnership and the General Partner, respectively, as of December 31, 2005, and the related statement of income of the Partnership and the General Partner, respectively] for the year ended December 31, 2005; and (3) an unaudited balance sheet of the Partnership and the General Partner, respectively, as of the Most Recent Period End, and related consolidated statement of income for the six months then ended. The Partnership Financial Statements at and for the six-month period ended June 30, 2006, are herein referred to as the “ Partnership Most Recent Financial Statements .” The Partnership Financial Statements (including the notes thereto) present fairly, in all material respects, the consolidated financial position of the Partnership and the General Partner as of such dates and the results of operations for such periods, and are consistent with the books and records of the operations for such periods, and are consistent with the books and records of the Partnership and the General Partner; provided , however , that the Partnership Most Recent Financial Statements are subject to normal year-end adjustments, and Partnership Financial Statements and the Partnership Most Recent Financial Statements lack footnotes and other presentation items. Schedule 6(e) sets forth a summary of any related party transactions and cash flow information since January 1, 2005 with respect to any transactions between the Partnership and the General Partner, on one hand, and any partners or affiliates of the Partnership and the General Partner, or affiliates of any of such Persons, on the other hand.

e. Events Subsequent to Most Recent Period End . Except as set forth on Schedule 6(e) , since the date of the Partnership Most Recent Financial Statements, there have not been any (1) distributions by the Partnership Entities to the Partners or the Members or (2) changes in the assets, condition, affairs (financial or otherwise) or business prospects of the Partnership Entities, taken as a whole, which have had or would be reasonably likely to have, individually or in the aggregate, a Material Adverse Effect on the Partnership Entities.

f. Legal Compliance . Except as set forth on Schedule 6(f) , the Partnership Entities: (1) are in compliance with all applicable Laws; (2) have or have timely applied for all Permits required to carry on its current operations in the ordinary course of business; (3) have not received any notice, charge, claim or action of any filed, commenced or, to its knowledge, threatened action alleging any violation of Laws; and (4) have not received any notice that any Permit required to carry on its current operations in the ordinary course of business will be terminated or modified or cannot be renewed in the ordinary course of business, and has no knowledge of any reasonable basis for any such termination, modification or non-renewal, and the execution, delivery and performance of this Agreement or any other transactions contemplated hereby do not and will not violate any such Permit or result in any termination, modification or non-renewal thereof.

g. Tax Matters .

I. The Partnership Entities have filed timely with the appropriate taxing authorities all Tax Returns required to be filed by the Partnership Entities. Each such Tax Return is true, correct and complete in all material respects. All Taxes of the Partnership Entities that are due and payable have been timely paid

 

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in full. The unpaid Taxes of the Partnership Entities did not, as of the Most Recent Period End, exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth or included in the Most Recent Financial Statements, and do not exceed the reserve as adjusted for passage of time through the Closing Date in accordance with the past custom of each of the Partnership Entities in filing its Tax Returns.

II. There is no action, suit, proceeding, investigation, audit, claim or assessment pending or threatened with respect to the Partnership Entities with respect to a liability for Taxes or with respect to any Tax Return. No deficiency for any Tax has been assessed with respect to the Partnership Entities which has not been paid in full. There are no liens for Taxes upon the assets or properties of the Partnership Entities other than liens for Taxes not yet due and payable and for which adequate reserves have been established in the Financial Statements.

III. The Partnership Entities have withhe