**Exhibit 10.10**

 

 

**ASSET PURCHASE AND SALE AGREEMENT**

 

 

**Dated January 15, 2003**

 

 

 

**By and between Carbon Energy Corporation(USA), formerlyknown as Bonneville Fuels Corporation, as Seller andFasken Acquisitions 02, Ltd., as Buyer**

###  

----

 

### **TABLE OF CONTENTS**

##  

| ARTICLE 1                                           |                                      |
|-----------------------------------------------------|-------------------------------------------|
| Certain Definitions                                 |
| Section 1.1                                         | Certain Defined Terms.                    |
| ARTICLE 2                                           |                                      |
| Sale and Purchase of Assets                         |
| Section 2.1                                         | Sale and Purchase.                        |
| Section 2.2                                         | Reserved Interests.                       |
| Section 2.3                                         | Effective Date.                           |
| Section 2.4                                         | Ownership Rights.                         |
| Section 2.5                                         | Risk of Loss**.**                         |
| ARTICLE 3                                           |                                      |
| Purchase Price                                      |                                      |
| Section 3.1                                         | Purchase Price.                           |
| Section 3.2                                         | Deposit.                                  |
| Section 3.3                                         | Adjustments to Purchase Price.            |
| ARTICLE 4                                           |                                      |
| Representations and Warranties                      |
| Section 4.1                                         | Representations and Warranties of Seller. |
| Section 4.2                                         | Scope of Representations of Seller.       |
| Section 4.3                                         | Representations and Warranties of Buyer.  |
| ARTICLE 5                                           |                                      |
| Access to Information; Environmental  Matters; Etc. |
| Section 5.1                                         | General Access.                           |
| Section 5.2                                         | Confidential Information.                 |
| Section 5.3                                         | No Warranty or Representation.            |
| Section 5.4                                         | Environmental Review and Audit.           |
| Section 5.5                                         | Environmental Defects.                    |
| ARTICLE 6                                           |                                      |
| Title Adjustments                                   |
| Section 6.1                                         | No Title Warranty or Representation.      |
| Section 6.2                                         | Buyer’s Title Review.                |
| Section 6.3                                         | Determination of Title Defects.           |
| Section 6.4                                         | Seller Title Credit.                      |
| Section 6.5                                         | Deferred Claims and Disputes.             |
| ARTICLE 7                                           |                                      |
| Certain Agreements of Seller and Buyer              |
| Section 7.1                                         | Maintenance of Assets.                    |
| Section 7.2                                         | Qualifications on Conduct.                |
| Section 7.3                                         | Public Announcements.                     |
| Section 7.4                                         | Actions by Parties.                       |
| Section 7.5                                         | Further Assurances.                       |
| Section 7.6                                         | Records.                                  |
| Section 7.7                                         | Like-Kind Exchange.                       |

 

i

----

 
| ARTICLE 8                                                                   |
|-----------------------------------------------------------------------------|
| Closing Conditions                                                          |
| Section 8.1                                                                 | Seller’s Closing Conditions. |
| Section 8.2                                                                 | Buyer’s Closing Conditions. |
| Section 8.3                                                                 | Deferred Adjustment Claims Extension. |
| ARTICLE 9                                                                   |   |
| Closing                                                                     |   |
| Section 9.1                                                                 | Closing. |
| ARTICLE 10                                                                  |   |
| Post Closing Matters                                                        |
| Section 10.1                                                                | Final Settlement Statement**.** |
| Section 10.2                                                                | Unpaid Third Party Funds. |
| Section 10.3                                                                | Survival. |
| ARTICLE 11                                                                  |   |
| Limitations                                                                 |   |
| Section 11.1                                                                | Disclaimer of Warranties. |
| Section 11.2                                                                | Damages. |
| Section 11.3                                                                | Plugging and Abandonment. |
| Section 11.4                                                                | Environmental Release. |
| ARTICLE 12                                                                  |   |
| Preference Rights and Transfer Requirements                                 |
| Section 12.1                                                                | Preference Rights and Requirements. |
| ARTICLE 13                                                                  |   |
| Indemnification                                                             |
| Section 13.1                                                                | Indemnification by Seller. |
| Section 13.2                                                                | Indemnification by Buyer. |
| Section 13.3                                                                | Common Limitations on Indemnities. |
| The following additional limitations on  indemnity obligations shall apply: |
| Section 13.4                                                                | Notification. |
| ARTICLE 14                                                                  |   |
| Termination; Remedies; Limitations                                          |
| Section  14.1                                                               | Termination. |
| Section  14.2                                                               | Remedies. |
| ARTICLE 15                                                                  |   |
| Miscellaneous                                                               |   |
| Section 15.1                                                                | Counterparts. |
| Section 15.2                                                                | Governing Law; Jurisdiction; Process. |
| Section 15.3                                                                | Entire Agreement. |
| Section 15.4                                                                | Expenses. |
| Section 15.5                                                                | Notices. |
| Section 15.6                                                                | Successors and Assigns. |
| Section 15.7                                                                | Amendments and Waivers. |
| Section 15.8                                                                | Appendices, Schedules and Exhibits. |
| Section 15.9                                                                | References, Gender, Number. |
| Section 15.10                                                               | Interpretation. |
| Section 15.11                                                               | Attorneys’ Fees. |
| Section 15.12                                                               | Severability. |
| Section 15.13                                                               | No Recordation. |
| Section 15.14                                                               | Time of Essence. |
| Section 15.15                                                               | Arbitration. |

 

ii

----

 

### ASSET PURCHASE AND SALE AGREEMENT

 

This Asset Purchase and SaleAgreement (this “Agreement”), dated January 15, 2003, is by and between CarbonEnergy Corporation (USA), formerly known as Bonneville Fuels Corporation, aColorado corporation (“Seller”), and Fasken Acquisitions 02, Ltd., a Texaslimited partnership (“Buyer”).

 

Recitals:

 

A.                                   Seller owns aninterest in the Assets.

 

B.                                     This Agreementcontemplates a transaction in which Buyer will purchase from Seller, and Sellerwill sell to Buyer, all of the Seller’s right, title and interest in the Assetsin return for cash.

 

Agreement:

 

NOW, THEREFORE, inconsideration of the premises and mutual promises herein made, and inconsideration of the representations, warranties and covenants hereincontained, the parties agree as follows:

 

Article 1

Certain Definitions

 

Section 1.1             Certain Defined Terms.

 

Unless the context otherwiserequires, the respective terms defined in Appendix A attached hereto andincorporated herein shall, when used herein, have the respective meanings thereinspecified, with each such definition to apply both to the singular and theplural forms of the term so defined.

 

Article 2

Sale and Purchase of Assets

 

Section 2.1             Sale and Purchase.

 

On the Closing Date, effectiveas of the Effective Date, and subject to the terms and conditions of thisAgreement, Seller agrees to sell and assign to Buyer, and Buyer agrees topurchase and accept from Seller, all of the following described assets andinterests (the “Assets”):

 

(a)           All of Seller’sright, title and interest in, to and under the oil, gas and mineral leasesdescribed on Exhibit A-1 (collectively the “Leases”), including, withoutlimitation, working interests, overriding royalty interests, royalty interests,fee mineral interests and any other interests of a similar nature affecting thelands covered by such leases (the “Lands”), together with all the property andrights incident thereto, to the extent assignable, including permits,rights-of-way, easements, licenses, and Contract Rights.

 

1

----

 

(b)           All of Seller’sright, title and interest in and to the wells located on the Leases anddescribed on Exhibit A-2 (collectively the “Wells”), together withcorresponding interests in and to all personal property, equipment, fixturesand improvements located in or on, or incident or attributable to, the Leases,or used or obtained in connection with the production, treatment, sale ordisposal of hydrocarbons or water produced therefrom (collectively, the“Equipment”).

 

(c)           To the extent Sellerhas the right to transfer same, all files, records, information and datarelating to any of the items described in Sections 2.1(a) and (b) above, whichare in the possession of Seller or reasonably available to it (the “Records”), including,without limitation:  title records(including abstracts of title, title opinions, certificates of title and titlecurative documents), division orders, correspondence, seismic data, geologicaldata and information, production records, electric logs, core data, pressuredata, decline curves, graphical production curves, accounting records and allrelated documents, in all available formats, whether digital, paper orotherwise; provided that the Assets shall not include interpretive data andother proprietary information prepared by or on behalf of Seller and itsagents, employees or consultants.

 

(d)           All of Seller’sright, title and interest in, to and under all contracts and agreementsrelating to the Leases, Lands and the Wells (“Contract Rights”), includingwithout limitation, unit agreements, pooling agreements, area of mutualinterest agreements, farm-outs and farm-ins, saltwater disposal agreements,water injections agreements, line well injection agreements, road useagreements, drilling contracts, operating agreements, well service contracts,production sales contracts, gas balancing agreements, storage or warehouseagreements, service contracts, construction agreements, and division andtransfer orders.

 

(e)           To the extent Sellerhas the right to transfer same, all of Seller’s right, title and interest inand to all intangible rights, inchoate rights, choses in action, rights underwarranties made by third parties, and rights accruing under applicable statutesof limitations or prescription insofar and only insofar as the foregoing itemsaccrue or are attributable to the Leases, Lands, Wells, Equipment, Records andContract Rights.

 

Section 2.2             Reserved Interests.

 

Seller reserves and retains (i)Seller’s corporate, financial, tax (other than property tax records relating tothe Assets), legal and other business records; (ii) Seller’s managementinformation systems and other intellectual property rights owned or licensed bySeller or used by Seller in the management and administration of its businessand properties; (iii) all claims that Seller may have under any policy ofinsurance, indemnity or bond maintained by Seller other than claims relating toproperty damage or casualty loss affecting the Assets (which claims shall beincluded in the Assets); (iv) all accounts receivable, trade credits or notesreceivable accrued before the Effective Date; (v) all files or records thatSeller is contractually or otherwise obligated not to disclose to Buyer; and(vi) all claims and causes of action arising from acts, omissions or events, ordamage or destruction of property that occurred prior to the Effective Dateexcept to the extent that such claims or causes of action could be used as anoffset to claims or causes of action made against Buyer or damages awardedagainst Buyer (the “Reserved Interests”).

 

2

----

 

Section 2.3             Effective Date.

 

The purchase and sale of theAssets shall be effective as of January 1, 2003, at 7:00 a.m., local time(herein called the “Effective Date”).

 

Section 2.4             Ownership Rights.

 

Subject to the provisions ofthis Agreement, should Closing occur, (i) Seller shall be entitled to all ofthe rights of ownership (including the right to all production, proceeds ofproduction and other proceeds) and shall be subject to the duties andobligations of such ownership, attributable to the Assets for the period oftime prior to the Effective Date, and (ii) Buyer shall be entitled to all ofthe rights of ownership (including the right to all production, proceeds ofproduction and other proceeds) and shall be subject to the duties andobligation of such ownership, attributable to the Assets for the period of timefrom and after the Effective Date.  Allexpenses and costs including, without limitation, all ad valorem, property,production, severance, and similar taxes and assessments based upon or measuredby the ownership of the Assets, the production of hydrocarbons, or the receiptof proceeds therefrom, shall be:  (a)paid by or allocated to Seller if incurred or accruing with respect tooperations conducted prior to the Effective Date; or (b) paid by or allocatedto Buyer if incurred or accruing with respect to operations conducted after theEffective Date.  All hydrocarbons instorage facilities above or upstream from the pipeline connection to suchstorage facility, or downstream of delivery point sales meters on gaspipelines, as of the Effective Date, shall belong to Seller.  All hydrocarbons placed in such storagefacilities or upstream of the aforesaid meters on pipelines after the EffectiveDate shall belong to Buyer and shall become a part of the Assets.  To accomplish the foregoing allocation ofproduction, the parties shall rely upon the records maintained by the operatorof the relevant Asset.

 

Section 2.5             Risk of Loss**.**

 

Except as otherwise provided inthis Agreement, Seller shall assume all risk of loss with respect to the Assetsprior to the Effective Date and Buyer shall assume all risk of loss from andafter the Effective Date.

 

Article 3

Purchase Price

 

Section 3.1             Purchase Price.

 

The purchase price for the saleand conveyance of the Assets to Buyer is Fifteen Million, Seven Hundred FiftyThousand Dollars and No Cents ($15,750,000.00) (the “Purchase Price”), subjectto adjustment in accordance with Section 3.3. The “Adjusted Purchase Price” shall be the Purchase Price, as soadjusted.

 

Section 3.2             Deposit.

 

Contemporaneously with theexecution of this Agreement, Buyer, Seller and [Welborn Sullivan Meck &Tooley, P.C.] (the “Escrow Agent”) have entered into an Escrow Agreement (the“Escrow Agreement”), a copy of which is attached hereto as Schedule 3.2.  Contemporaneously with execution of thisAgreement and the Escrow Agreement, Buyer shall

 

3

----

 

deliver to the Escrow Agent anamount equal to ten percent (10%) of the Purchase Price ($1,575,000.00) as adeposit hereunder (the “Deposit”).  AtClosing, the Deposit shall be a credit against the Purchase Price.  If this Agreement is terminated without aClosing, the provisions of Section 14.2 shall govern the Deposit hereof.

 

Section 3.3             Adjustments to Purchase Price.

 

At Closing,the Purchase Price shall be adjusted as follows:

 

(a)           ThePurchase Price shall be adjusted upward by the following:

 

(i)            The amount of all actual operating or capitalexpenditures or prepaid expenses paid by or on behalf of Seller in connectionwith operations and, according to generally accepted accounting principles,attributable to the period of time between the Effective Date and the ClosingDate, including, without limitation, royalties, rentals and other charges; advalorem, property, excise, and other taxes based upon or measured by theownership of the Assets, the production of hydrocarbons or the receipt ofproceeds therefrom; and expenses payable to a third person under applicablejoint operating agreements, including overhead charges and royalty disbursementfees, or, in the absence of any joint operating agreement, those itemscustomarily billed under such an agreement.

 

(ii)           Any other amounts agreed upon by Seller and Buyer.

 

(b)           The Purchase Priceshall be adjusted downward by the following:

 

(i)            The amount of the Deposit paid pursuant to Section 3.2

 

(ii)           Reductions due to Title Defects as provided in Article 6.

 

(iii)          Reductions due to the Environmental Defects as provided inArticle 5.

 

(iv)          The gross proceeds actually received by Seller, net ofapplicable severance and production taxes and compression charges, derived fromthe sale of hydrocarbons attributable to the Assets from and after theEffective Date.

 

(v)           An amount equal to all unpaid ad valorem, property,production, severance and similar taxes and assessments (but not includingincome taxes) based upon or measured by the ownership of the Assets, theproduction of hydrocarbons, or the receipt of proceeds therefrom, which taxesor assessments were due and payable or accrued (but were not yet due andpayable) prior to the Effective Date, which amount shall, where possible, becomputed based upon the tax rate and values applicable to the tax period inquestion; otherwise based upon such taxes assessed against the applicableportion of the Assets for the immediately preceding tax period.

 

(vi)          Any other amounts agreed upon by Seller and Buyer.

 

4

----

 

(c)           Schedule 3.3(c)attached hereto sets forth Seller’s best estimate of gas imbalances affectingthe Assets as of the Effective Date. The Purchase Price shall be:

 

(i)            reduced by the product obtained by multiplying theaggregate amount of Unscheduled (Negative) Imbalances by $3.27 per Mcf; and

 

(ii)           increased by the product obtained by multiplying theaggregate amount of Unscheduled (Positive) Imbalances by $3.27 per Mcf;

 

provided,however, that there shall be no adjustment for Unscheduled (Negative)Imbalances or for Unscheduled (Positive) Balances if the aggregate amount ofnet adjustments under this clause (c) is less than $10,000.00.

 

Article 4

Representations and Warranties

 

Section 4.1             Representations and Warrantiesof Seller.

 

Seller represents and warrantsto Buyer as follows:

 

(a)           Organization andQualification.  Seller is acorporation duly organized, validly existing and in good standing under thelaws of its state of incorporation and is duly qualified to carry on itsbusiness and is in good standing under the laws of the state in which theAssets are located.

 

(b)           Power andAuthority.  Seller has all requisitepower and authority to carry on its business as presently conducted, and toenter into this Agreement and perform its obligations hereunder.  The execution, delivery and performance ofthis Agreement and the transactions contemplated herein have been duly andvalidly authorized by all requisite action on the part of Seller.

 

(c)           Due Execution.  This Agreement has been duly executed anddelivered on behalf of Seller, and all documents and instruments requiredhereunder to be executed and delivered by Seller at or prior to Closing shallhave been duly executed and delivered.

 

(d)           Enforceability.  This Agreement constitutes a valid andbinding agreement of Seller enforceable against Seller in accordance with itsterms, subject to (i) applicable bankruptcy, insolvency, reorganization,moratorium and other similar laws of general application with respect tocreditors, (ii) general principles of equity, and (iii) the power of a court todeny enforcement of remedies generally based upon public policy.

 

(e)           No Conflict orViolation.  Except as shown onSchedule 4.1(e), neither the execution and delivery of this Agreement nor theconsummation of the transactions and performance of the terms and conditionscontemplated hereby by Seller will (i) conflict with or result in a violationor breach of any provision of the certificate of incorporation, bylaws or othersimilar governing documents of Seller or any material agreement, indenture orother instrument under which Seller is bound; or (ii) violate or conflict withany law applicable to Seller or the properties or assets of Seller.

 

5

----

 

(f)            Consents.  No consent, approval, authorization orpermit of, or filing with or notification to, any person is required for or inconnection with the execution and delivery of this Agreement by Seller or foror in connection with the consummation and performance of the transactionscontemplated hereby by Seller, except as shown on Schedule 4.1(f) and suchconsents, approvals, authorizations, permits, filings and notifications thefailure of which to obtain or make are not reasonably likely to have a materialadverse effect on the ability of Seller to consummate and perform thetransactions contemplated by this Agreement. The foregoing notwithstanding, all Preference Rights and TransferRequirements, including those disclosed in Schedule 4.1(f), shall be resolvedin accordance with Section 12.1 of this Agreement and shall not be the basisfor Buyer claiming a breach of this Section 4.1(f).

 

(g)           Compliance WithLaws.  Except as shown on Schedule4.1(g), Seller is in material compliance with all Laws and other requirementsof Governmental Authorities applicable to the operation of the Assets that areoperated by Seller, and, to the knowledge of Seller, there are no (i) materialviolations of any such Laws or requirements applicable to the operation of theAssets that are operated by third parties, and (ii) Existing P & AObligations.

 

(h)           Actions.  Except as set forth on Schedule 4.1(h), noaction, suit, claim or legal, administrative or arbitral proceeding orinvestigation (whether or not the defense thereof is covered by insurance) ispending or, to the knowledge of Seller, threatened against Seller or the Assetsother than Actions which are not reasonably likely to have a material adverseeffect on the ability of Seller to consummate and perform the transactionscontemplated by this Agreement or on the development and operation of theAssets after the Closing.

 

(i)            MaterialContracts.  Schedule 4.1(i) setsforth a list of the Contracts which are material to the Assets and which willbe binding on the Assets after the Closing Date (“Material Contracts”).  The Material Contracts are in full force andeffect and, except as set forth in Schedule 4.1(i), neither Seller nor, to theknowledge of Seller, any other party to any Material Contract (i) is in breachof or default with respect to any of its obligations thereunder or (ii) hasgiven or threatened to give notice of any default under or inquiry into anypossible default under, any Material Contract.

 

(j)            Taxes.  To the knowledge of Seller, all Taxeslevied, assessed or imposed upon or against the Assets have been duly paid oradequately provided for or are being timely and properly contested, and all Taxreports or other reports required by law or regulation have been duly filed or extensionshave been duly obtained.

 

(k)           AFE’s.  With respect to the joint, unit or otheroperating agreements relating to the Assets, and except as set forth inSchedule 4.1(k), there are no material outstanding calls or payments underauthorities for expenditures for payments relating to the Assets which are dueor which Seller has committed to make which have not been made.

 

(l)            ContractualRestrictions.  Except to the extentotherwise permitted by this Agreement and except as set forth on Schedule4.1(l), Seller has not entered into any contracts for or received prepayments,take-or-pay arrangements, buydowns, buyouts for oil and gas, or storage of thesame relating to the Assets which Buyer shall be obligated to honor and makedeliveries of oil and gas or pay refunds of amounts previously paid under suchcontracts or arrangements.

 

6

----

 

(m)          Permits.  With respect to Assets for which Seller isthe operator, Seller (i) has acquired all material permits, licenses, approvalsand consents from appropriate Governmental Authorities to conduct operations onthe Assets in compliance with applicable Laws, and (ii) is in materialcompliance with all such permits, licenses, approvals and consents.

 

(n)           Advisors’ andBrokers’ Fees.  Seller has notretained any advisor or broker in respect of the transactions contemplated bythis Agreement for which Buyer shall incur any liability.

 

(o)           Bankruptcy.  No bankruptcy or reorganization proceedingsare pending against or contemplated by Seller, and, to the knowledge of Seller,no such proceedings are threatened against Seller.

 

(p)           Royalties.  All royalties and other payments requiredwith respect to oil and/or gas production from the Leases and Lands have beenproperly and timely paid.

 

Section 4.2             Scope of Representations ofSeller.

 

(a)           Information Aboutthe Assets.  Except as expressly setforth in this Agreement, Seller disclaims all liability and responsibility forany representation, warranty, statement or communication (oral or in writing)to Buyer, including any information contained in any opinion, information oradvice that may have been provided to Buyer by any employee, officer, director,agent, consultant, engineer or engineering firm, trustee, representative,partner, member, beneficiary, stockholder or contractor of Seller wherever andhowever made, including those made in any data room or internet site and anysupplements or amendments thereto or during any negotiations with respect tothis Agreement or any confidentiality agreement previously executed by theparties with respect to the Assets. EXCEPT AS SET FORTH IN THIS ARTICLE 4,SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS, STATUTORY OR IMPLIED, ASTO: (i) THE ACCURACY, COMPLETENESS OR MATERIALITY OF ANY DATA, INFORMATION ORRECORDS FURNISHED TO BUYER IN CONNECTION WITH THE ASSETS OR OTHERWISECONSTITUTING A PORTION OF THE ASSETS, INCLUDING WITHOUT LIMITATION, SEISMICDATA AND SELLER’S INTERPRETATION AND OTHER ANALYSIS THEREOF; (ii) THE PRESENCE,QUALITY AND QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THEASSETS; (iii) THE ABILITY OF THE ASSETS TO PRODUCE HYDROCARBONS, INCLUDINGWITHOUT LIMITATION PRODUCTION RATES, DECLINE RATES AND RECOMPLETIONOPPORTUNITIES; (iv) IMBALANCE OR PAYOUT ACCOUNT INFORMATION, ALLOWABLES, OROTHER REGULATORY MATTERS; (v) THE PRESENT OR FUTURE VALUE OF THE ANTICIPATEDINCOME, COSTS OR PROFITS, IF ANY, TO BE DERIVED FROM THE ASSETS; (vi) THEENVIRONMENTAL CONDITION OF THE ASSETS; (vii) ANY PROJECTIONS AS TO EVENTS THATCOULD OR COULD NOT OCCUR WITH RESPECT TO THE ASSETS; (viii) THE TAX ATTRIBUTESOF ANY ASSETS; (ix) ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM ANYINFORMATION OR MATERIAL FURNISHED TO BUYER BY SELLER OR OTHERWISE CONSTITUTINGA PORTION OF THE ASSETS; AND (x) THE COMPLETENESS OR ACCURACY OF THEINFORMATION CONTAINED IN ANY EXHIBIT HERETO. ANY DATA, INFORMATION OR OTHER

 

7

----

 

RECORDS FURNISHED BY SELLER AREPROVIDED TO BUYER AS CONVENIENCE AND BUYER’S RELIANCE ON OR USE OF THE SAME ISAT BUYER’S SOLE RISK.

 

(b)           IndependentInvestigation.  Buyer has, or byClosing will have, made its own independent investigation, analysis andevaluation of the Assets (including Buyer’s own estimate and appraisal of theextent and value of Seller’s oil and gas reserves attributable to the Assetsand an independent assessment and appraisal of the environmental risks andliabilities associated with the acquisition of the Assets).  Buyer has had, or will have prior toClosing, access to all information necessary to perform its investigation andhas not, or will not have, relied on any representations by Seller, it’semployees, agents or representatives other than those expressly set forth inthis Agreement.

 

(c)           Seller’sKnowledge.  In those instances whereSeller’s representations are “to the knowledge of Seller,” such representationsare made on the basis of the actual knowledge of Seller’s personnel at or abovethe supervisory level, without any investigation.

 

Section 4.3             Representations and Warrantiesof Buyer.

 

Buyer represents and warrantsto Seller as follows:

 

(a)           Organization andQualification.  Buyer is a limitedpartnership, duly organized, validly existing and in good standing under thelaws of its state of formation, and is, or will be by Closing, duly qualifiedto carry on its business and in good standing under the laws of the state inwhich the Assets are located.

 

(b)           Authority.  Buyer has all requisite power and authorityto carry on its business as presently conducted and to enter into thisAgreement and perform its obligations hereunder.  The execution, delivery and performance of this Agreement and thetransactions contemplated hereby have been duly and validly authorized by allrequisite action on the part of Buyer.

 

(c)           Due Execution.  This Agreement has been duly executed anddelivered on behalf of Buyer, and all documents and instruments requiredhereunder to be executed and delivered by Buyer at or prior to Closing shallhave been duly executed and delivered.

 

(d)           Enforceability.This Agreement constitutes a valid and binding agreement of Buyer enforceableagainst Buyer in accordance with its terms, subject to (i) applicablebankruptcy, insolvency, reorganization, moratorium and other similar laws ofgeneral application with respect to creditors, (ii) general principles ofequity, and (iii) the power of a court to deny enforcement of remediesgenerally based upon public policy.

 

(e)           No Conflict orViolation.  Neither the executionand delivery of this Agreement nor the consummation of the transactions andperformance of the terms and conditions contemplated hereby by Buyer will (i)conflict with or result in a violation or breach of any provision of thecertificate of limited partnership, limited partnership agreement or othersimilar governing documents of Buyer or any material agreement, indenture orother instrument under which Buyer is bound, or (ii) violate or conflict withany law applicable to Buyer or the properties or assets of Buyer.

 

8

----

 

(f)            Consents.  No consent, approval, authorization orpermit of, or filing with or notification to, any person is required for or inconnection with the execution and delivery of this Agreement by Buyer or for orin connection with the consummation and performance of the transactionscontemplated hereby by Buyer, except for the consents shown on Schedule 4.1(f)and such consents, approvals, authorizations, permits, filings andnotifications the failure of which to obtain or make are not reasonably likelyto affect the ability of Buyer to consummate and perform the transactionscontemplated by this Agreement.

 

(g)           Actions.  No action is pending or, to the knowledge ofBuyer, threatened against Buyer, which would be likely to affect the ability ofBuyer to consummate and perform the transactions contemplated by thisAgreement.

 

(h)           Advisors’ andBrokers’ Fees.  Buyer has notretained any advisor or broker in respect of the transactions contemplated bythis Agreement for which Seller shall incur any liability.

 

(i)            Qualified Owner.  The consummation of the transactionscontemplated hereby will not cause Buyer to be disqualified as an owner of anyfederal or state oil, gas and mineral lease or to exceed any acreage limitationimposed by any statute, rule, regulation or order of governmental authority.

 

(j)            Funds.  Buyer has, and all times prior to Closingwill have, sufficient funds available to enable Buyer to consummate thetransactions contemplated hereby and to pay the Adjusted Purchase Price and allrelated fees and expenses of Buyer.

 

Article 5

Access to Information; Environmental Matters; Etc.

 

Section 5.1             General Access.

 

Following the execution of thisAgreement, Seller shall (a) permit Buyer and its representatives to have accessat reasonable times in Seller’s offices and, in a manner so as not to interfereunduly with the business operations of Seller, to the Records insofar as Sellermay do so (i) without violating legal constraints or any legal obligation orwaiving any attorney/client work product or like privilege, and (ii) subject toany required consent of any third person and; (b) permit Buyer and itsrepresentatives at reasonable times and at Buyer’s sole risk, cost and expenseto conduct an inspection of the Assets; provided, however, Buyer shall repairany damage to the Assets resulting from such inspection and Buyer does herebyindemnify and hold harmless, release and agree to defend Seller from andagainst any and all losses, costs, damages, obligations, claims, liabilities,expenses and causes of action to the extent arising from Buyer’s inspection ofthe Assets, including, without limitation, claims for personal injuries,property damage and reasonable attorneys’ fees and expenses, regardless of theform of claim and whether at common law, strict liability negligence or underany statute or regulation.

 

Section 5.2             Confidential Information.

 

Unless and until Closing occursand subject to Section 5.5(d), Buyer agrees to maintain all information madeavailable to it pursuant to this Agreement confidential and to cause itsofficers, employees, representatives, consultants and advisors to maintain allinformation made

 

9

----

 

available to them pursuant tothis Agreement confidential.  Buyer andSeller have entered into that certain Confidentiality Agreement dated October23, 2002, the terms of which are incorporated by reference and made a part ofthis Agreement to the extent such terms are not inconsistent with the terms ofthis Agreement.

 

Section 5.3             No Warranty or Representation.

 

Seller makes no warranty orrepresentation, express or implied, statutory or otherwise, with respect to anyEnvironmental Matters (including any Environmental Condition or EnvironmentalClaim) and Buyer hereby acknowledges and agrees that Buyer’s sole remedy forany Environmental Matter (including without limitation any EnvironmentalDefect, Environmental Condition or Environmental Claim) with respect to any ofthe Assets shall be pursuant to the procedures set forth in Sections 5.4 and5.5 hereof.  Notwithstanding the above,Seller agrees to indemnify Buyer with regard to any Offsite EnvironmentalMatter as set forth in Section 13.1.

 

Section 5.4             Environmental Review and Audit.

 

(a)           EnvironmentalAccess.  During the ExaminationPeriod and subject to the restrictions contained in this Agreement and anyrequired consent or waiver of any third person, Seller shall  (i) permit Buyer and its representatives tohave access in Seller’s offices, in a manner so as not to interfere unduly withthe business operations of Seller, to Seller’s environmental files and theRecords in Seller’s possession relating to the Assets insofar as Seller may doso without waiving any attorney/client, work product or like privilege andsubject to any confidentiality restrictions; and (ii) permit Buyer and itsrepresentatives or consultants to have reasonable access to the Assets for thepurpose of allowing Buyer and its representatives or consultants to inspectand/or audit the Assets for any Environmental Defects (collectively, “Buyer’sEnvironmental Review”), all at Buyer’s sole risk, cost and expense.

 

(b)           Conduct of Review.  Prior to conducting Buyer’s EnvironmentalReview, Buyer shall furnish Seller or its representatives with a proposed scopeof Buyer’s Environmental Review, including a description of the activities tobe conducted and the locations of such activities.  Seller or its representatives shall have the right to be presentduring any inspection of the Assets and shall have the right, at its option andexpense, to split samples with Buyer.

 

(c)           Buyer’sResponsibility for Review.  Inconnection with Buyer’s Environmental Review, Buyer agrees that Buyer and itsrepresentatives or consultants shall comply with all laws and shall exercisedue care with respect to the Assets and their condition, taking intoconsideration the characteristics of any wastes or substances found thereon,and in light of all relevant facts and circumstances.  Promptly after completing Buyer’s Environmental Review, Buyershall, at its sole cost and expense, restore the Assets to substantially thesame condition the Assets were in at the time of Buyer’s entry thereon, inaccordance with good engineering practice, if changed due to Buyer’s EnvironmentalReview.  Buyer shall maintain and shallcause its representatives or consultant to maintain all information obtained byBuyer pursuant to the Buyer’s Environmental Review as strictly confidential andshall not disclose same to any third party without the prior written consent ofSeller which shall not be unreasonably withheld, except to the extent requiredby law.  Buyer shall provide Seller orits representatives with copies of any final written reports prepared andanalytical tests results

 

10

----

 

received by Buyer promptlyfollowing Buyer’s or its representatives’ or consultants’ preparation orreceipt of same.  Buyer does herebyindemnify and hold harmless, release and agree to defend Seller from andagainst any and all losses, costs, damages, obligations, claims, liabilities,expenses and causes of action, including all Environmental Liabilities, to theextent arising out of any violation by Buyer or Buyer’s representatives orconsultants of the provisions of this subsection or from the inspection ortesting of the Assets conducted by or on behalf of Buyer, including, withoutlimitation, claims for personal injuries, property damage and reasonableattorneys’ fees and expenses, regardless of the form of claim and whether atcommon law, strict liability, negligence or under any statute orregulation.  However, except to theextent such inspections or testings cause or create a material EnvironmentalDefect, such indemnification shall not extend to any Environmental Defectdiscovered in the course of such inspections and testings, shall expire uponthe Closing and shall not in any way affect or limit the responsibilities ofthe parties with respect to any Environmental Defect.

 

Section 5.5             Environmental Defects.

 

(a)           Buyer’sAssertions of Environmental Defects. As promptly as reasonably practicable during the Examination Period and,in any event, prior to the expiration thereof, Buyer shall notify Seller inwriting (the “Environmental Defect Notice”) of any matters, which, in Buyer’sreasonable opinion, constitute Environmental Defects.  Except with regard to an Offsite Environmental Matter, Buyershall be deemed to have waived any Environmental Defect, which Buyer fails toassert as an Environmental Defect in the Environmental Defect Notice given toSeller on or before the expiration of the Examination Period.  With respect to each Environmental Defectasserted, Buyer’s Environmental Defect Notice shall include: (i) a specificdescription of each Asset (or portion thereof) that is affected by the allegedEnvironmental Defect or a description of each Asset (or portion thereof) thatBuyer reasonably believes could be affected by the alleged EnvironmentalDefect; (ii) a description of the alleged Environmental Defect and the factsand circumstances giving rise thereto, including all evidence compiled by Buyerwhich supports the existence of such alleged Environmental Defect; and (iii) acalculation of the Remediation Amount (itemized in reasonable detail if suchremediation is susceptible to itemizing in detail) that Buyer asserts isattributable to such Environmental Defect. Buyer’s calculation of the Remediation Amount must describe asaccurately as possible the Remediation proposed for the Environmental Conditionthat gives rise to the asserted Environmental Defect and identify all materialassumptions used by the Buyer in calculating the Remediation Amount, includingthe standards the Buyer asserts must be met to comply with Environmental Laws.

 

(b)           Seller’s andBuyer’s Rights and Elections.  IfBuyer timely notifies Seller of an Environmental Defect as required by Section5.5(a), Seller may elect, at or prior to the Closing and subject to Section5.5(d) below, one of the following options with respect to the Asset affectedby the alleged Environmental Defect (the “Environmental Defect Property”):

 

(i)            leave such Environmental Defect Property in the Assetsand assume responsibility for the Remediation of such Environmental Defect,provided that all costs for such Remediation shall first be borne by Buyer tothe extent Seller elects to apply any of the Environmental Defect Deductible tosuch costs; or

 

11

----

 

(ii)           leave such Environmental Defect Property in the Assets andreduce the Purchase Price by the Environmental Defect Amount with respect tosuch Environmental Defect (taking into account any application of theEnvironmental Defect Deductible which Seller elects to make with respectthereto).

 

If Sellerelects the option set forth in clause (ii) above, Buyer shall be deemed to haveassumed responsibility for Remediation of such Environmental Defects and, uponClosing, the responsibility for such matters shall be an Assumed Liability.  If Seller elects the option set forth inclause (i) above, Seller shall use commercially reasonable efforts to implementsuch Remediation in a manner that is consistent with the requirements ofEnvironmental Laws and the provisions of any applicable Lease, and Seller shallhave access to the Environmental Defect Property after the Closing Date toimplement and complete such Remediation in accordance with this Section.  Seller will be deemed to have adequatelycompleted the Remediation required in the immediately preceding paragraph:

 

(A)          either (i) upon receipt of acertificate or approval from the applicable state or federal authority that theRemediation has been implemented to the extent necessary to comply withexisting regulatory requirements; or (ii) upon receipt of a certificate from alicensed professional engineer, chosen jointly by Seller and Buyer, if the approval or certification specifiedin (i) above cannot be obtained because provision for such approval orcertification is not provided under federal or state law (the fees of suchlicensed professional engineer shall be paid by Seller) or if the approval orcertification specified in (i) above has not been obtained within six monthsafter the Closing Date; and

 

(B)           to the extent express approval fromthe lessor is required under any applicable Lease, upon receipt of suchapproval.

 

(c)           Environmental Defect Amount.  Subject to the provisions of Section 5.5(d)below, if Seller elects the option set forth in Section 5.5(b)(ii) with respectto one or more Environmental Defects, then, as Buyer’s sole and exclusiveremedy with respect to such Environmental Defects, Buyer shall be entitled toreduce the Purchase Price by the amount (the “Environmental Defect Amount”), ifany, by which the aggregate Remediation Amount with respect to theEnvironmental Conditions giving rise to such Environmental Defects exceeds$100,000 (the “Environmental Defect Deductible”).  Seller may also apply any part of the Environmental DefectDeductible to the cost of any Remediation undertaken by Seller pursuant to theoption set forth in Section 5.5(b)(i). Any Remediation costs to which Seller elects to apply the EnvironmentalDefect Deductible shall be borne by Buyer. It is expressly understood and agreed that the Environmental DefectDeductible represents an aggregate deductible for Environmental Defects, whichmay be apportioned as provided in this Section 5.5(c) rather than as a separatedeductible for each individual Environmental Claim.

 

(d)           Deferred Assets.  If Buyer timely notifies Seller of any EnvironmentalDefect under Section 5.5(a) with respect to which either (i) the RemediationAmount specified in the Environmental Defect Notice exceeds $500,000 or (ii)the Allocated Values attributable to the Assets affected by the allegedEnvironmental Defect exceed $500,000, then subject to Section 8.1(d) andSection 8.2(d) and except as provided in Section 5.5(e) below, Closing shallproceed in accordance with the terms of this Agreement with respect to theAssets other than the

 

12

----

 

Assets affected by suchEnvironmental Defect (the “Deferred Assets”), and the Purchase Price shall bereduced by the allocated values attributable to the Deferred Assets.  Seller and Buyer shall have a period of six(6) months from the Closing Date to negotiate a mutually satisfactory agreementregarding the Deferred Assets and the terms under which the Deferred Assetswill be purchased by Buyer.  If amutually satisfactory agreement regarding such purchase of the Deferred Assetsis reached within such six (6) month period, then the parties shall proceed andclose such sale in accordance with such agreement.  If no such mutually satisfactory agreement has been reachedwithin such six (6) month period then the Deferred Assets shall be excludedfrom this transaction and retained by Seller. Nothing contained herein shall be construed to obligate either party toreach an agreement regarding the purchase and sale of the Deferred Assets underthis Section 5.5(d).  Further, theparties agree that all negotiations, as well as the circumstances and detailsregarding the alleged Environmental Defect affecting the Deferred Assets shallbe kept and remain confidential in accordance with Section 5.2 followingClosing.

 

(e)           Seller’s Right to Terminate.  Seller shall have the right to terminatethis Agreement if Buyer notifies Seller of any Environmental Defect underSection 5.5(a) with respect to which either (i) the Remediation Amountspecified in the Environmental Defect Notice exceeds $1,000,000 or (ii) theAllocated Values attributable to the Assets affected by the allegedEnvironmental Defect exceed $1,000,000. Such termination right shall be exercised by Seller giving writtennotice of termination to Buyer within five (5) Business Days of receipt ofBuyer’s Environmental Defect Notice.

 

Article 6

Title Adjustments

 

Section 6.1             No Title Warranty orRepresentation.

 

Without limiting Buyer’s rightto adjust the Purchase Price by operation of Section 6.2, Seller makes nowarranty or representation, express, implied, statutory or otherwise, withrespect to Seller’s title to any of the Assets, and Buyer hereby acknowledgesand agrees that Buyer’s sole remedy for any defect of title, including anyTitle Defect, with respect to any of the Assets shall be pursuant to theprocedures set forth in this Article 6. Notwithstanding the foregoing, the Assignment, Conveyance, and Bill ofSale to be delivered by Seller at Closing shall contain a special warranty oftitle and a pass-through warranty provision as set forth on Exhibit C attachedhereto.

 

Section 6.2             Buyer’s Title Review.

 

(a)           Buyer’s Assertionof Title Defects.  As promptly asreasonably practicable during the Examination Period and, in any event, priorto the expiration thereof, Buyer shall furnish Seller written notice meetingthe requirements of this Section 6.2(a) (a “Title Defect Notice”) setting forthany matters which, in Buyer’s reasonable opinion, constitute Title Defects andwhich Buyer asserts as Title Defects with respect to any of the Assets pursuantto this Article 6.  Except to the extentcovered by the warranties set forth in the Assignment attached hereto asExhibit C, Buyer shall be deemed to have waived any Title Defect that Buyerfails to assert as a Title Defect in a Title Defect Notice given to Sellerprior to the expiration of the Examination Period.  To be effective, Buyer’s Title Defect Notice of a Title Defectmust include (i) a brief description of the matter constituting the assertedTitle Defect, (ii) the claimed Title Defect 

 

13

----

 

Amount attributable thereto,and (iii) supporting documents reasonably necessary for Seller (as well as anytitle attorney or examiner hired by Seller) to verify the existence of suchasserted Title Defect.

 

(b)           Purchase PriceAllocations.  The Purchase Price hasbeen allocated to the Assets in accordance with the respective values set forthin Exhibit “B” attached hereto (the “Allocated Values”).  Such allocations shall be used indetermining Title Defect Amounts pursuant to Section 6.2(d) hereof.  If any adjustment is made to the PurchasePrice pursuant to this Section 6.2 or Section 5.5, a corresponding adjustmentshall be made to the portion of the Purchase Price allocated to the affectedAsset.

 

(c)           Seller’s Rightand Opportunity to Cure.  If Buyertimely gives Seller Title Defect Notice(s) of one or more Title Defects, Sellershall have the right to then or thereafter dispute the existence of such TitleDefect and/or the alleged Title Defect Amount asserted with respect thereto inaccordance with the provisions of Section 6.5 of this Agreement.  In addition, the following terms andconditions shall apply with respect to Title Defects asserted by Buyer in atimely Title Defect Notice:

 

(i)            Seller shall have until five (5) Business Days prior tothe Closing Date, at its cost and expense, if it so elects but withoutobligation, to cure all or a portion of such asserted Title Defects.  Any asserted Title Defect that is waived byBuyer within such time shall be deemed a “Permitted Encumbrance” hereunder.Subject to Sections 6.2(c)(ii) and 6.2(c)(iii) and Seller’s continuing right todispute the existence of a Title Defect and/or the Title Defect Amount assertedwith respect thereto under Section 6.5, if Seller within such time fails tocure any Title Defect of which Buyer has given timely written notice asrequired above, and Buyer has not and does not waive same on or before the dayimmediately preceding the Closing Date, the Assets affected by such uncured andunwaived Title Defect shall be “Title Defect Property.”

 

(ii)           If Buyer furnishes to Seller timely Title Defect Notice(s)of one or more Title Defects and the same are not waived or cured as providedin Section 6.2(c)(i), Seller may elect to delay Closing for a period of up tothirty (30) calendar days to afford Seller the opportunity, if it so elects, toattempt to cure any properly asserted Title Defect prior to Closing.  Subject to Section 6.2(c)(iii), and Seller’scontinuing right to dispute the existence of a Title Defect and/or the TitleDefect Amount asserted with respect thereto under Section 6.5, if Seller withinsuch period fails or refuses to cure any Title Defect and Buyer has not waivedand does not waive the same before the delayed Closing, the Assets affected bysuch uncured and unwaived Title Defect shall be a “Title Defect Property.”

 

(iii)          If Buyer furnishes to Seller timely Title Defect Notice(s)of one or more Title Defects and the same are not waived or cured as providedin Section 6.2(c)(i) or Section 6.2(c)(ii), as applicable, Seller may elect toclose the transactions contemplated hereby and retain the right to cure anysuch Title Defect after Closing (whether or not Seller elects to delay Closingpursuant to Section 6.2(c)(ii) above). In such event, but subject to Seller’s continuing right to dispute theexistence of a Title Defect and/or the Title Defect Amount asserted

 

14

----

 

with respect thereto under Section 6.5, thePurchase Price shall be subject to reduction pursuant to Section 6.2(d) takinginto account all Title Defect Amounts attributable to the Title DefectProperties affected by the Title Defects which Seller may elect to cure afterClosing.  Seller shall have ninety (90)calendar days after the Closing Date (as may be delayed pursuant to Section6.2(c)(ii) above) in which to attempt to cure any such Title Defect.  If Seller cures any such Title Defect, thenBuyer shall promptly pay Seller the Title Defect Amount with respect to theTitle Defect that is so cured, but not exceeding the aggregate amount of thereductions in the Purchase Price that Buyer received as a result of any TitleDefects.

 

The TitleDefect Deductible under Section 6.2(d) below, including any increase thereinattributable to Seller Title Credits under Section 6.4 below, shall be restoredto the extent any portion thereof is applied against a Title Defect Amountattributable to a Title Defect that is subsequently cured by Seller ordetermined not to constitute a Title Defect.

 

(d)           Buyer’s TitleAdjustments.  Except to the extentcovered by the special warranty provision contained in the Assignment attachedhereto as Exhibit “C”, as Buyer’s sole and exclusive remedy with respect toTitle Defects, Buyer shall be entitled to reduce the Purchase Price by theamount, if any, by which the aggregate amount of Title Defect Amounts withrespect to all Title Defect Properties exceeds $100,000.00 (the “Title DefectDeductible”).  “Title Defect Amount”shall mean, with respect to a Title Defect Property, the amount by which thevalue of such Title Defect Property is impaired as a result of the existence ofone or more uncured and unwaived Title Defects, which amount shall bedetermined as follows and subject to the following conditions:

 

(i)            If the Title Defect results from Seller having a lesserNet Revenue Interest in such Title Defect Property than the Net RevenueInterest specified therefor in Exhibit “A-2,” the Title Defect Amount shall beequal to the product obtained by multiplying the portion of the Purchase Priceallocated to such Title Defect Property in Exhibit “B” by a fraction, thenumerator of which is the reduction in the Net Revenue Interest and thedenominator of which is the Net Revenue Interest specified for such TitleDefect Property in Exhibit “A-2.”

 

(ii)           If the Title Defect results from Seller having a greaterWorking Interest in a Title Defect Property than the Working Interest specifiedtherefor in Exhibit “A-2,” the Title Defect Amount shall be equal to theproduct obtained by multiplying the portion of the Purchase Price allocated tosuch Title Defect Property in Exhibit “B” by a fraction, the numerator of whichis the increase in the Working Interest and the denominator of which is the WorkingInterest specified for such Title Defect Property in Exhibit “A-2.”

 

(iii)          If the Title Defect results from the existence of a lien,mortgage or similar encumbrance, the Title Defect Amount shall be an amountsufficient to discharge such lien, mortgage or encumbrance.

 

(iv)          If the Title Defect results from any matter not describedin paragraphs (i), (ii) or (iii) above, the Title Defect Amount shall be anamount

 

15

----

 

equal to the difference between the value ofthe Title Defect Property affected by such Title Defect with such Title Defectand the value of such Title Defect Property without such Title Defect (takinginto account the portion of the Purchase Price allocated in Exhibit “B” to suchTitle Defect Property); provided, that if such Title Defect is reasonablysusceptible of being cured, the Title Defect Amount shall be the reasonablecost and expense of curing such Title Defect, if less.

 

(v)           If a Title Defect is not effective or does not affect aTitle Defect Property throughout the entire productive life of such TitleDefect Property, such fact shall be taken into account in determining the TitleDefect Amount.

 

(vi)          The Title Defect Amount attributable to a Title DefectProperty shall not exceed the portion of the Purchase Price allocated to suchTitle Defect Property in Exhibit “B.”

 

(vii)         No Title Defect Amount shall be allowed on account of and tothe extent that an increase in Seller’s Working Interest in a Well has theeffect of proportionately increasing Seller’s Net Revenue Interest in suchWell.

 

(viii)        Notwithstanding the foregoing, if the Title Defect Amountdetermined pursuant to the foregoing with respect to a Title Defect Property isequal to or less than $10,000.00, after taking into account any curative workperformed by or on behalf of Seller, then the Title Defect Amount with respectto such Title Defect Property shall be deemed to be zero.

 

Section 6.3             Determination of Title Defects.

 

An Asset shall not be deemed tohave a “Title Defect” if the following statements are true in all materialrespects with respect to such Asset as of the Closing Date:

 

(i)            Seller has Defensible Title thereto.

 

(ii)           All rentals, Pugh clause payments, shut-in gas paymentsand other similar payments (including royalties, overriding royalties and othersimilar payments on production) due with respect to such Asset have beenproperly and timely paid.

 

(iii)          Seller is not in default under the material terms of anyLease, farmout agreement or other contract or agreement with respect to suchAsset that could (a) prevent Seller from receiving the proceeds of productionattributable to Seller’s interest therein, or (b) result in cancellation ofSeller’s interest therein.

 

Notwithstanding any otherprovision in this Agreement to the contrary, the following matters shall not beasserted as, and shall not constitute, Title Defects:

 

(a)           defects in the chain of title such asminor name discrepancies, the mere failure to recite marital status in adocument, or omissions of successions of heirship

 

16

----

 

proceedings, unless Buyerprovides affirmative evidence that such failure or omission results in anotherparty’s superior claim of title to the relevant Asset portion thereof;

 

(b)           defects arising out of lack ofsurvey;

 

(c)           defects arising outof a lack of corporate authorization, unless Buyer provides affirmativeevidence that such lack of authorization results in another party’s superiorclaim of title to the relevant Assets or portion thereof;

 

(d)           the failure toobtain or absence of any federal patent or conveyance with respect to any landsover which any state has claimed ownership and which have been covered by astate lease for more than (10) ten years;

 

(e)           defects that havebeen cured by possession under the applicable statutes of limitations orstatutes for prescription; and

 

(f)            other defects of atype expected to be encountered in the area involved and customarily acceptableto prudent operators and interest owners.

 

If a Title Defect results from any matter that could also result in thebreach of any representation or warranty of Seller set forth in Section 4.1,then Buyer shall only be entitled to assert such matter as a Title Defectpursuant to this Article 6 and shall be precluded from also asserting suchmatter as the basis of the breach of any such representation or warranty.  However, Buyer shall not be precluded fromasserting such matter as a breach of the special warranty provision included inthe Assignment attached hereto as Exhibit C.

 

In determining the existence ofa Title Defect, due consideration shall be given to the length of timehydrocarbons have been produced from the affected property in an undisputed“pay status” without any adverse claim, even though such period may be lessthan the period of possession or use required under applicable limitations orprescription statutes.  (As used herein,“pay status” shall mean payment is being made by a third party for productionfrom the affected Asset without indemnity from Seller except such indemnitiesas are customarily included in division orders, transfer orders, productpurchase agreements and similar documents commonly used in connection with thepayment of proceeds from production.)

 

Section 6.4             Seller Title Credit.

 

A “Seller Title Credit” shallmean, with respect to an Asset, the amount by which the value of such Asset isenhanced by virtue of (a) Seller having a greater Net Revenue Interest in suchAsset than the Net Revenue Interest specified therefor in Exhibit “A-2”; or (b)Seller having a lesser Working Interest in such Asset than the Working Interestspecified therefor in Exhibit “A-2”, which amount shall be determined asfollows:

 

(i)            If the Seller Title Credit results from Seller having agreater Net Revenue Interest in such Asset than the Net Revenue Interestspecified therefor in Exhibit “A-2,” the Seller Title Credit shall be equal tothe product obtained by multiplying the portion of the Purchase Price allocatedto such Asset in Exhibit “B” by a fraction, the numerator of which is theincrease in the Net Revenue

 

17

----

 

Interest and the denominator of which is theNet Revenue Interest specified for such Asset in Exhibit “A-2.”

 

(ii)           If the Seller Title Credit results from Seller having alesser Working Interest in an Asset than the Working Interest specifiedtherefor in Exhibit “A-2,” the Seller Title Credit shall be equal to theproduct obtained by multiplying the portion of the Purchase Price allocated tosuch Asset in Exhibit “B” by a fraction, the numerator of which is the decreasein the Working Interest and the denominator of which is the Working Interestspecified for such Asset in Exhibit “A-2.”

 

(iii)          No Seller Title Credit shall be allowed on account of andto the extent that a decrease in the Company’s Working Interest in an Asset hasthe effect of proportionately decreasing Seller’s Net Revenue Interest in suchAsset.

 

(iv)          Notwithstanding the foregoing, if the Seller Title Creditdetermined pursuant to the foregoing with respect to any Asset is $10,000 orless, then the Seller Title Credit with respect thereto shall be deemed zero.

 

The TitleDefect Deductible under Section 6.2(d) above shall be increased dollar fordollar by the aggregate amount of all Seller Title Credits.  Seller Title Credits shall not be used toincrease the Purchase Price

 

Section 6.5             Deferred Claims and Disputes.

 

In the eventthat Buyer and Seller have not agreed upon (i) the existence of one or moreTitle Defects or Seller Title Credits or one or more adjustments, credits oroffsets claimed by Buyer or Seller pursuant to and in accordance with therequirements of this Article 6, or (ii) the existence of one or moreEnvironmental Defects and if the Asset in question has not been excluded fromthis transaction under the terms of Section 5.5(d) of this Agreement, any suchdispute or claim (a “Deferred Adjustment Claim”) shall be settled pursuant tothis Section 6.5 and, except as provided in Sections 8.1(d) or 8.2(d), shallnot prevent or delay Closing.

 

With respect to each potentialDeferred Adjustment Claim, Buyer and Seller shall deliver to the other awritten notice describing each such potential Deferred Adjustment Claim, theamount in dispute and a statement setting forth the facts and circumstancesthat support such party’s position with respect to such Deferred AdjustmentClaim.  At Closing, the Purchase Priceshall not be adjusted on account of, and no effect shall be given to, theDeferred Adjustment Claim.  On or priorto the thirtieth (30th) consecutive calendar day following theClosing Date (the “Deferred Matters Date”), Seller and Buyer shall attempt ingood faith to reach agreement on the Deferred Adjustment Claims and,ultimately, to resolve by written agreement all disputes regarding the DeferredAdjustment Claims.  Any DeferredAdjustment Claims that is not so resolved on or before the Deferred MattersDate may be submitted by either party to final and binding arbitration inaccordance with Section 15.15 hereof. The amount of any reduction in the Purchase Price to which Buyer becomesentitled under the final and binding written decision of the Tribunal shall bepromptly refunded by Seller to Buyer.

 

18

----

 

Article 7

Certain Agreements of Seller and Buyer

 

Section 7.1             Maintenance of Assets.

 

From the Effective Date untilClosing, Seller agrees that it shall:

 

(a)           Administer andoperate the Wells in accordance with the applicable operating agreements.

 

(b)           Not introduce anynew methods of management, operation or accounting with respect to any or allof the Assets.

 

(c)           Use commerciallyreasonable efforts to maintain and keep the Assets in full force and effect;and fulfill all contractual or other covenants, obligations and conditionsimposed upon Seller with respect to the Assets, including, but not limited to,payment of royalties, delay rentals, shut-in gas royalties and other requiredpayments.

 

(d)           Not, except to theextent necessary or advisable to avoid forfeiture or penalties, enter intoagreements to drill new wells or to rework, plug back, deepen, plug or abandonany Well, nor commence any drilling, reworking or completing or otheroperations on the Leases which requires expenditures exceeding Twenty ThousandDollars ($20,000) for each operation (except for emergency operations andoperations required under presently existing contractual obligations) withoutobtaining the prior written consent of Buyer (which consent shall not beunreasonably withheld, delayed or conditioned); provided that the terms of thisparagraph shall not apply to any expenditures of Seller which will not becharged to Buyer.

 

(e)           Not voluntarilyrelinquish its position as operator to anyone other than Buyer with respect toany of the Wells or voluntarily abandon any of the Wells other than as requiredpursuant to the terms of a Lease or by regulation.

 

(f)            Not, without theprior written consent of Buyer (which consent shall not be unreasonablywithheld, delayed or conditioned), (i) enter into any agreement or arrangement(other than one constituting a Permitted Encumbrance) transferring, selling orencumbering any of the Assets (other than in the ordinary course of business,including ordinary course sales of production, inventory or salvage or pursuantto any agreements existing on the date hereof); (ii) grant any preferential orother right to purchase or agree to require the consent of any party nototherwise required to consent to the transfer and assignment of the Assets to Buyer;(iii) enter into any new sales contracts or supply contracts which cannot becancelled upon thirty (30) days prior notice; or (iv) incur or agree to incurany contractual obligation or liability (absolute or contingent) with respectto the Assets except as otherwise provided herein (including ordinary coursesales of production, inventory or salvage or pursuant to any disclosed AFE’scovering the Assets).

 

(g)           To the extent knownto Seller, provide Buyer with written notice of (i) any claims, demands, suitsor actions made against Seller which materially affect the Assets; or (ii) anyproposal from a third party to engage in any material transaction (*e.g.*, a farmout) with respect to theAssets.

 

19

----

 

(h)           Continue to payinvoices with respect to the Assets and operations thereon in a timely manner.

 

Section 7.2             Qualifications on Conduct.

 

(a)           Emergencies;Legal Requirements.  Seller may take(or not take, as the case may be) any of the actions mentioned in Section 7.1above if Seller determines that such actions (i) are reasonably necessary tosafeguard life, property, and the environment in case of an actual orimminently threatened blow-out, explosion, accident, fire, flood, storm,hurricane, catastrophe, or other emergency, or (ii) are reasonably required bylaw, regulation, order, or permit condition or by a governmental authorityhaving jurisdiction.  In such event,Seller shall promptly notify Buyer of its determination and of the actiontaken.

 

(b)           Non-OperatedProperties.  If Seller is not theoperator of a particular Asset, the obligations of Seller in Section 7.1 abovewith respect to such Asset which have reference to operations that are normallyperformed by the operator, shall be construed to require only that Seller usereasonable diligence (without being obligated to incur any expense or instituteany cause of action) to cause the operator of such Asset to take such actionsor render such performance within the constraints of the applicable operatingagreements and other applicable agreements.

 

Section 7.3             Public Announcements.

 

Neither partywill issue any press release or otherwise make any public statements withrespect to this Agreement and the transactions contemplated hereby without theprior consent of the other party, which consent shall not be unreasonablywithheld.  If a party is required by lawto make any such disclosure, it must first provide to the other party thecontent of the proposed disclosure, the reasons that such disclosure isrequired by law and the time and place that the disclosure will be made andafford such other party a reasonable opportunity to comment upon and requestchanges in the disclosure. Notwithstanding the foregoing, Seller or Seller’s Affiliates shall bepermitted in the context of public financing or otherwise to disclose thedetails of and information regarding the transaction contemplated by thisAgreement to Canadian and U.S. securities regulators, stock exchanges, itsadvisors (including, but not limited to, underwriters and their counsel),potential investors or the investing public, whether by way of prospectus,information memorandum, filing with securities regulatory authorities orotherwise.

 

Section 7.4             Actions by Parties.

 

Each of the parties agrees touse reasonable diligence to satisfy the conditions to Closing set forth inArticle 8 and to refrain from taking any action within its control which wouldcause a breach by such party of a representation or warranty set forth herein.

 

20

----

 

Section 7.5             Further Assurances.

 

Seller andBuyer each agree that, from time to time prior to and after the Closing Date,they will execute and deliver such further documents and instruments, and takeor cause to be taken, such other actions, as may be necessary to effect thetransactions under and carry out the purposes and intents of this Agreement.

 

Section 7.6             Records.

 

Buyer agrees to maintain theRecords until the seventh (7th) anniversary of the Closing Date (orfor such longer period of time as Seller shall advise Buyer is necessary inorder to have the Records available with respect to open years for tax auditpurposes), or, if any of the Records pertain to any claim or dispute pending onthe seventh (7th) anniversary of the Closing Date, Buyer shallmaintain any of the Records designated by Seller until such claim or dispute isfinally resolved and the time for all appeals has been exhausted.  Buyer shall provide Seller and itsrepresentatives reasonable access at reasonable times to and the right to copyall or any portion of the Records.

 

Section 7.7             Like-Kind Exchange.

 

Seller shallhave the right, at its option, to dispose of the Assets, or any portionthereof, through a transaction that is structured to qualify as a like-kindexchange of property within the meaning of Section 1031 of the Internal RevenueCode of 1986, as amended (the “Code”). Buyer agrees to cooperate with Seller in effecting a qualifyinglike-kind exchange through a trust, escrow, or other means as determined bySeller.  Seller shall have the right toassign its rights, but not its obligations, under this Agreement, in whole orin part, to a “qualified intermediary” (as defined under the Code) or asotherwise necessary or appropriate to effectuate a like-kind exchange and Buyeragrees to recognize said qualified intermediary.  Seller represents that any such like-kind exchange will notviolate any agreements to which Seller is subject.  Buyer does not represent to Seller that any particular taxtreatment will be given to Seller as a result of any such like-kindexchange.  Seller will be responsiblefor all costs and obligations directly or indirectly associated with Seller’selection to accomplish a like-kind exchange. If Seller elects to consummate the sale as a like-kind exchange, Selleragrees to hold harmless and indemnify Buyer from and against all claims, lossesand liabilities, if any, resulting from the like-kind exchange.  Notwithstanding anything contained to thecontrary in this Section 7.7, the conveyance to Buyer of the Assets shall bedirectly from Seller, and Buyer shall not take title at any time to anylike-kind exchange property.

 

Article 8

Closing Conditions

 

Section 8.1             Seller’s Closing Conditions.

 

The obligation of Seller toproceed with the Closing contemplated hereby is subject, at the option ofSeller, to the satisfaction on or prior to the Closing Date of all of thefollowing conditions:

 

(a)           Representations, Warranties andCovenants.  (1) The representationsand warranties of Buyer contained in this Agreement shall be true and correctin all material respects

 

21

----

 

on and as of the Closing Dateas though made as of the Closing Date; and (2) the covenants and agreements ofBuyer to be performed on or before the Closing Date in accordance with thisAgreement shall have been duly performed in all material respects.

 

(b)           Closing Documents.  On or prior to the Closing Date, Buyer shallhave delivered, or be standing ready to deliver at Closing, all agreements,instruments and other documents required to be delivered by Buyer pursuant toSection 9.1.

 

(c)           No Action.  On the Closing Date, no suit, action orother proceeding (excluding any such matter initiated by Seller) shall bepending or threatened before any court or governmental agency of competentjurisdiction seeking to enjoin or restrain the consummation of the Closing orrecover damages from Seller resulting therefrom.

 

(d)           Adjustments.  The reductions in the Purchase Price onaccount of the aggregate (net) amount of all Environmental Defect Amounts andTitle Defect Amounts (including any such amounts claimed by Buyer with respectto unresolved Deferred Adjustment Claims) shall not exceed ten percent (10%) ofthe Purchase Price.

 

Section 8.2             Buyer’s Closing Conditions.

 

The obligations of Buyer toproceed with the Closing contemplated hereby is subject, at the option ofBuyer, to the satisfaction on or prior to the Closing Date of all of thefollowing conditions:

 

(a)           Representations, Warranties andCovenants.  (1) The representationsand warranties of Seller contained in this Agreement shall be true and correctin all material respects on and as of the Closing Date as though made as of theClosing Date; and (2) the covenants and agreements of Seller to be performed onor before the Closing Date in accordance with this Agreement shall have beenduly performed in all material respects.

 

(b)           Closing Documents.  On or prior to the Closing Date, Sellershall have delivered, or be standing ready to deliver at the Closing, allagreements, instruments and documents required to be delivered by Sellerpursuant to Section 9.1.

 

(c)           No Action.  On the Closing Date, no suit, action orother proceeding (excluding any such matter initiated by Buyer) shall bepending or threatened before any court or governmental agency of competentjurisdiction seeking to enjoin or restrain the consummation of the Closing orrecover damages from Buyer or resulting therefrom.

 

(d)           Adjustments.  The reductions in the Purchase Price onaccount of the aggregate (net) amount of all Environmental Defect Amounts andTitle Defect Amounts (including any such amounts claimed by Buyer with respectto unresolved Deferred Adjustment Claims) shall not exceed ten percent (10%) ofthe Purchase Price.

 

Section 8.3             Deferred Adjustment ClaimsExtension.

 

Notwithstanding Section 8.2(d),if Buyer elects not to proceed with the Closing as a result of thenon-satisfaction of the condition set forth in Section 8.2(d) and such conditionwould have been satisfied but for the amount of Environmental Defect Amountsand Title Defect Amounts

 

22

----

 

claimed by Buyer with respectto unresolved Deferred Adjustment Claims, Seller may elect to delay the Closinguntil the tenth (10th) Business Day following the date when asufficient amount of such Deferred Adjustment Claims have been resolvedpursuant to Section 6.5 to determine that such condition has been satisfied orhas not been satisfied.  A DeferredAdjustment Claim will be deemed resolved pursuant to Section 6.5 when a finaland binding written decision of the Tribunal is made with respect thereto inaccordance with Section 15.15 hereof.

 

Article 9

Closing

 

Section 9.1             Closing.

 

The Closingshall be held on or before March 18, 2003 (the “Closing Date”), at 10:00 a.m.,Mountain Daylight Time, at the offices of Seller in Denver, Colorado, or onsuch other date, time and place as Seller and Buyer may otherwise agree to inwriting.  At Closing, the Parties shallexecute and deliver, or cause to be executed and delivered, the following:

 

(a)           Seller shall execute and deliver (i)an Assignment, Conveyance and Bill of Sale in the form attached as Exhibit “C”(in sufficient counterparts to facilitate recording) conveying the Assets,subject to the Permitted Encumbrances; (ii) a non-foreign affidavit, as suchaffidavit is referred to in Section 1445(b)(2) of the Code, dated as of theClosing Date, and (iii) such other instruments as may reasonably be required toconvey the Assets to Buyer and otherwise effectuate the transactionscontemplated by this Agreement.

 

(b)           Seller and Buyer shall execute anddeliver a preliminary settlement statement (the “Preliminary SettlementStatement”) prepared by Seller and confirmed by Buyer, setting forth theAdjusted Purchase Price and the calculation of each adjustment used todetermine the Adjusted Purchase Price as provided in Section 3.3.  Seller shall prepare the Preliminary SettlementStatement and furnish same to Buyer at least two (2) business days prior to theClosing Date.

 

(c)           Buyer shall deliver to Seller or toSeller’s account (at such place as may be designated by Seller in a writtennotice delivered to Buyer not less than two (2) Business Days prior to ClosingDate) the Adjusted Purchase Price in immediately available funds (wire transferor certified check).

 

(d)           Seller shall deliver on formssupplied by Buyer transfer orders or letters in lieu thereof, directing theoperator and/or purchaser of production to make payment of proceedsattributable to production from the Assets after the Effective Date to Buyer.

 

(e)           With respect to any of the Assets forwhich Seller serves as Operator, Seller shall cooperate fully within thelimitations of the applicable operating agreements to cause Buyer to succeedSeller as operator.

 

(f)            Seller shall deliver to Buyer theRecords (originals to the extent available) provided that Seller may, at itsexpense, make and retain copies thereof. All such Records shall be delivered not later than two (2) weeks afterthe Closing Date.

 

23

----

 

Article 10

Post Closing Matters

 

Section 10.1           Final Settlement Statement**.**

 

As soon aspracticable after the Closing, but in no event later than sixty (60) days afterClosing, Seller shall prepare and deliver to Buyer, in accordance with thisAgreement and generally accepted accounting principles, a statement (“FinalSettlement Statement”) setting forth each adjustment, (other than adjustmentsfor unresolved Deferred Adjustment Claims) finally determined as of Closing andshowing the calculation of such adjustments. Within thirty (30) days after receipt of the Final Settlement Statement,Buyer shall deliver to Seller a written report containing any changes thatBuyer proposes be made in good faith to resolve any questions with respect tothe amounts due pursuant to such Final Settlement Statement no later thanninety (90) days after the Closing. Within 10 days following agreement of the parties as to the FinalSettlement Statement the net amount due to either Seller or Buyer shall bepaid.

 

Section 10.2           Unpaid Third Party Funds.

 

At such time as Buyer andSeller agree on a Final Settlement Statement, Seller will transfer to Buyer allfunds held by Seller which are owed to a third party owner of royalty,overriding royalty, working interests, mineral interests or other similarinterests, attributable to the Assets, and will deliver all records in Seller’spossession which may be useful to determine proper disbursement.  Buyer shall thereafter be responsible fordetermining the proper payment of such amounts and shall indemnify and holdharmless Seller from and against any and all cost, loss or expense of whatever kind,including attorney’s fees, arising from or in connection with the claim of anyperson with respect to the funds transferred to Buyer pursuant to this Section10.2, but only to the extent of such funds.

 

Section 10.3           Survival.

 

Except as provided in thisSection 10.3, no representations, warranties, covenants and agreements madeherein shall survive the Closing.  Eachrepresentation, warranty, covenant and agreement made herein shall terminateand cease to be of further force and effect as of the Closing or such laterdate after Closing as is expressly stipulated in this Section 10.3 for thesurvival thereof.  Following the Closingor such later date stipulated in this Section 10.3 for the survival thereof,such representation, warranty, covenant or agreement shall not form the basisfor or give rise to any claim, demand, cause of action, counterclaim, defense,damage, indemnity, obligation or liability which is asserted, claimed, made orfiled following the Closing or such later date stipulated for survival.  It is expressly agreed that the terms andprovisions of Sections 4.1(a) through (p), 4.3(a) through (j), 5.3, 5.5,Articles 6, 7, 10, 11, 12, 13, 14 and 15 and Buyer’s indemnity under Sections5.1 and 5.4 shall survive the Closing indefinitely or for such shorter periodof time as may be stipulated in such provisions or elsewhere herein.  In addition, the definitions set forth inAppendix A to this Agreement shall survive the Closing to the extent necessaryto give operative effect to the representations, warranties, covenants andagreements that survive Closing.

 

24

----

 

Article 11

Limitations

 

Section 11.1           Disclaimer of Warranties.

 

NOTWITHSTANDINGANYTHING CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, ITIS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT SELLER IS NOT MAKING ANYREPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS, IMPLIED, STATUTORY OROTHERWISE, BEYOND THOSE REPRESENTATIONS OR WARRANTIES EXPRESSLY GIVEN IN THISAGREEMENT, AND IT IS UNDERSTOOD THAT, SUBJECT TO SUCH EXPRESS REPRESENTATIONSAND WARRANTIES, BUYER TAKES THE ASSETS “AS IS” AND “WHERE IS.”  WITHOUT LIMITING THE GENERALITY OF THEIMMEDIATELY PRECEDING SENTENCE, SELLER HEREBY (i) EXPRESSLY DISCLAIMS ANDNEGATES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT COMMON LAW, BYSTATUTE OR OTHERWISE, RELATING TO (a) THE CONDITION OF THE ASSETS (INCLUDING,WITHOUT LIMITATION, ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR OFCONFORMITY TO MODELS OR SAMPLES OF MATERIAL, OR THE PRESENCE OR ABSENCE OF ANYHAZARDOUS MATERIAL IN OR ON, OR DISPOSED OF OR DISCHARGED FROM, THE ASSETS), or(b) ANY INFRINGEMENT BY SELLER OF ANY PATENT OR PROPRIETARY RIGHT OF ANY THIRDPARTY, and (ii) NEGATE ANY RIGHTS OF BUYER UNDER STATUTES TO CLAIM DIMINUTIONOF CONSIDERATION AND CLAIMS BY BUYER FOR DAMAGES BECAUSE OF REDHIBITORY VICESOR DEFECTS, WHETHER KNOWN OR UNKNOWN, IT BEING THE INTENTION OF THE PARTIESTHAT THE ASSETS ARE TO BE ACCEPTED BY BUYER IN THEIR PRESENT CONDITION AND STATEOF REPAIR.

 

Section 11.2           Damages.

 

NOTWITHSTANDINGANYTHING CONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT,SELLER AND BUYER AGREE THAT THE RECOVERY OF ANY DAMAGES SUFFERED OR INCURRED ASA RESULT OF ANY BREACH BY EITHER PARTY OF ANY OF ITS REPRESENTATIONS,WARRANTIES OR OBLIGATIONS UNDER THIS AGREEMENT SHALL BE LIMITED TO THE ACTUALDAMAGES SUFFERED OR INCURRED AS A RESULT OF THE BREACH BY THE BREACHING PARTYOF ITS REPRESENTATIONS, WARRANTIES OR OBLGIATIONS HEREUNDER AND IN NO EVENTSHALL THE BREACHING PARTY BE LIABLE TO THE NON-BREACHING PARTY FOR ANYINDIRECT, CONSEQUENTIAL, SPECIAL, EXEMPLARY OR PUNITIVE DAMAGES (INCLUDING,WITHOUT LIMITATION, ANY DAMAGES ON ACCOUNT OF LOST PROFITS OR OPPORTUNITIES ORLOST OR DELAYED PRODUCTION) SUFFERED OR INCURRED BY THE NON-BREACHING PARTY ASA RESULT OF THE BREACH BY THE BREACHING PARTY OF ANY OF ITS REPRESENTATIONS,WARRANTIES OR OBLIGATIONS HEREUNDER. PROVIDED, HOWEVER, IF AS A RESULT OF THE BREACH BY A PARTY OF ITSREPRESENTATIONS, WARRANTIES OR OBLIGATIONS HEREUNDER, INDIRECT, CONSEQUENTIAL,SPECIAL, EXEMPLARY OR PUNITIVE DAMAGES ARE AWARDED AGAINST OR PAID BY THENON-BREACHING PARTY TO ANY THIRD PARTY, THEN 

 

25

----

 

IF OTHERWISE ENTITLED TO INDEMNITYHEREUNDER, SUCH NON-BREACHING PARTY SHALL BE ENTITLED TO BE INDEMNIFIED FOR ALLDAMAGES PAYABLE TO THE THIRD PARTY, INCLUDING ALL ACTUAL AND ANY INDIRECT,CONSEQUENTIAL, SPECIAL, EXEMPLARY OR PUNITIVE DAMAGES AWARDED AGAINST OR PAIDBY THE NON-BREACHING PARTY.

 

Section 11.3           Plugging and Abandonment.

 

NOTWITHSTANDING ANYTHINGCONTAINED TO THE CONTRARY IN ANY OTHER PROVISION OF THIS AGREEMENT, IT ISEXPRESSLY AGREED FOR ALL PURPOSES OF THIS AGREEMENT THAT (i) NEITHER EXISTING P& A OBLIGATIONS NOR PLUGGING AND ABANDONMENT OBLIGATIONS SHALL CONSTITUTEENVIRONMENTAL CONDITIONS, ENVIRONMENTAL CLAIMS, ENVIRONMENTAL LIABILITIES,ENVIRONMENTAL DEFECTS, OR ENVIRONMENTAL MATTERS, (ii) EXCEPT AS PROVIDED INSECTION 4.1(g), SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED,WITH RESPECT TO EXISTING P & A OBLIGATIONS OR PLUGGING AND ABANDONMENTOBLIGATIONS, (iii) SELLER SHALL HAVE NO LIABILITIES OR OBLIGATIONS WITH RESPECTTO THE PLUGGING AND ABANDONMENT OBLIGATIONS AND ALL SUCH OBLIGATIONS SHALL BE ASSUMEDOBLIGATIONS EFFECTIVE AS OF THE EFFECTIVE DATE UPON CLOSING, and (iv) SELLERSHALL HAVE NO LIABILITIES OR OBLIGATIONS WITH RESPECT TO EXISTING P & AOBLIGATIONS EXCEPT AS PROVIDED IN SECTIONS 13.1(a) AND 13.1(d).

 

Section 11.4           Environmental Release.

 

Except for an OffsiteEnvironmental Matter, from and after Closing, Buyer shall have no rights torecovery or indemnification for Environmental Liabilities or any EnvironmentalMatters under this Agreement or law, and all rights or remedies which Buyer mayhave at or under law with respect to any Environmental Liabilities orEnvironmental Matters are expressly waived. EXCEPT FOR AN OFFSITE ENVIRONMENTAL MATTER, FROM AND AFTER CLOSING,BUYER HEREBY AGREES, WARRANTS AND CONVENANTS TO RELEASE, ACQUIT AND FOREVERDISCHARGE SELLER FROM ANY AND ALL CLAIMS, DEMANDS AND CAUSES OF ACTION OFWHATSOEVER NATURE, INCLUDING, WITHOUT LIMITATION, ALL CLAIMS, DEMANDS ANDCAUSES OF ACTION FOR CONTRIBUTION AND INDEMNITY UNDER STATUTE OR COMMON LAW,WHICH COULD BE ASSERTED NOW OR IN THE FUTURE AND THAT RELATE TO OR IN ANY WAYARISE OUT OF ENVIRONMENTAL LIABILTIES OR ENVIRONMENTAL MATTERS.  EXCEPT FOR AN OFFSITE ENVIRONMENTAL MATTER,FROM AND AFTER CLOSING, BUYER WARRANTS, AGREES AND COVENANTS NOT TO SUE ORINSTITUTE ARBITRATION AGAINST SELLER UPON ANY CLAIM, DEMAND OR CAUSE OF ACTIONFOR INDEMNITY AND CONTRIBUTION THAT HAVE BEEN ASSERTED OR COULD BE ASSERTED FORANY ENVIRONMENTAL LIABILITIES OR ENVIRONMENTAL MATTERS.

 

26

----

 

Article 12

Preference Rights and Transfer Requirements

 

Section 12.1           Preference Rights and Requirements.

 

Buyer shall notify Seller if itdiscovers that any Assets are subject to Preference Rights or TransferRequirements (other than those set forth on Schedule 4.1(f)), and Seller shallmake a good-faith effort to obtain waivers of any such Preference Rights andTransfer Requirements that are not ordinarily obtained after Closing.  If a Preference Right is exercised prior toClosing, the Purchase Price shall be adjusted downward in an amount equal tothe price paid to Seller for the Asset with respect to which the PreferenceRight has been exercised (based on the Allocated Value for the affected Asseton Exhibit “B”) and such Asset shall be deleted from this Agreement.  As to any Asset with respect to which aTransfer Requirement has not been obtained prior to Closing, Buyer may waivesuch Transfer Requirement and accept an assignment covering such Asset.  If Buyer does not waive the TransferRequirement, an adjustment shall be made to the Purchase Price based upon theAllocated Value of the Asset so affected and, if the Transfer Requirement isobtained after Closing, Buyer shall pay Seller such Allocated Value and receivean assignment of such Asset from Seller pursuant to this Agreement.  If a Preference Right burdening an Asset hasnot been exercised or waived by Closing, Buyer shall pay for and accept anassignment covering such Asset and, if the Preference Right is exercised afterClosing, Buyer shall be entitled to all proceeds paid for such interest by thethird party exercising such Preference Right. Buyer shall be responsible for conveying title to the Asset affected bysaid Preference Right to the party exercising the same and shall indemnify andhold Seller harmless from and against any claim or liability for Buyer’sfailure to make such conveyance.

 

Article 13

Indemnification

 

Section 13.1           Indemnification by Seller.

 

Upon Closing, Seller shall tothe fullest extent permitted by law, release, defend, indemnify and holdharmless Buyer, its Affiliates and their respective directors, officers,employees, agents and other representatives from and against the following:

 

(a)           All claims, demands, liabilities,judgments, losses and reasonable costs, expenses and attorneys’ fees(individually a “Loss” and collectively, the “Losses”) arising from the breachby Seller of any representation or warranty set forth in this Agreement thatsurvives Closing;

 

(b)           All Losses arising from the breach bySeller of any covenant set forth in this Agreement; and

 

(c)           All Losses arising from the ownershipand operation of the Assets prior to the Effective Date directly associatedwith the following matters:

 

(i)            Damages to persons;

 

(ii)           Damages to property;

 

27

----

 

(iii)          The violation by Seller of any law or regulation or theterms of any agreement binding upon Seller;

 

(iv)          Claims of Seller’s co-owners, partners, joint venturers andother participants in the Wells; and

 

(v)           Offsite EnvironmentalMatters.

 

(d)           Notwithstanding the above, thefollowing limitations shall apply to Seller’s indemnification obligations:

 

(i)            Except as set forth in Section 13.1(d)(ii), Seller shallnot be obligated to indemnify Buyer for any Loss unless Buyer has delivered awritten notice of such Loss within one (1) year after Closing.  Except as to Losses relating to mattersunder Section 13.1(c)(i) and Section 13.1(c)(v), any Loss for which Seller doesnot receive written notice before the end of one (1) year after Closing shallbe deemed to be an Assumed Liability.

 

(ii)           As to the indemnities under Section 13.1(c)(i) and Section13.1(c)(v), Seller shall not be obligated to indemnify Buyer for any Lossunless Buyer has delivered a written notice of such Loss within three (3) yearsafter Closing.  Any Loss relating tomatters under Section 13.1(c)(i) and Section 13.1(c)(v) for which Seller doesnot receive written notice before the end of three (3) years after Closing shallbe deemed to be an Assumed Liability.

 

(iii)          Except as otherwise provided in this Section 13.1, Seller’sindemnification obligations shall not cover Losses relating to (a) the Pluggingand Abandonment Obligations; (b) Environmental Liabilities which shall begoverned by Article 5 hereof; or (c) Title Defects which shall be governed byArticle 6 hereof.

 

(iv)          Buyer acknowledges and agrees that the claim procedures setforth in Articles 5 and 6, the indemnification provisions in this Article 13and the termination rights in Article 14, shall be the exclusive remedies ofBuyer with respect to the transactions contemplated by this Agreement;provided, however, Buyer shall not be precluded from asserting its rights underthe special warranty provision contained in the Assignment attached hereto as Exhibit“C”.

 

Section 13.2           Indemnification by Buyer.

 

Upon Closing, Buyer shall tothe fullest extent permitted by law, release, defend, indemnify, and holdharmless Seller, its Affiliates and their respective directors, officers,employees, agents and other representatives from and against the following:

 

(a)           All Losses arising from the breach byBuyer of any representation or warranty set forth in this Agreement thatsurvives Closing;

 

(b)           All Losses arising from the breach byBuyer of any covenant set forth in this Agreement;

 

28

----

 

(c)           All Losses arising from the AssumedLiabilities; and

 

(d)           All Losses arising from the ownershipand operation of the Assets after the Effective Date, provided that Buyer shallnot indemnify Seller with respect to any Loss attributable to or arising out of(i) any breach by Seller of any covenant provided for in Article 7 of thisAgreement or (ii) Seller’s gross negligence or willful misconduct.

 

Section 13.3           Common Limitations on Indemnities.

 

The followingadditional limitations on indemnity obligations shall apply:

 

(a)           The parties’ indemnificationobligations under this Agreement shall be subject to the limitations set forthin Section 11.2 of this Agreement regarding damages.

 

(b)           Any Losses required to be paid asindemnity under this Article 13 shall be reduced to the extent of any amountsactually received by the indemnified party under the terms of insurancepolicies covering such claim.

 

Section 13.4           Notification.

 

As soon as reasonablypractical, an indemnified party shall notify the indemnifying party of anyclaim or demand which the indemnified party has determined has given or couldgive rise to a claim for indemnification under this Article 13.  Such notice shall specify the agreement,representation or warranty with respect to which the claim is made, the factsgiving rise to the claim and the alleged basis therefor, and the amount (to theextent then determinable) of liability for which indemnity is asserted.  If any action, suit or proceeding is broughtwith respect to which a party may be liable under this Article 13, the defenseof the action, suit or proceeding (including settlement negotiations, appeals,and other proceedings) shall be at the discretion of and conducted by theindemnifying party.  If an indemnifiedparty shall settle any such action, suit or proceeding without the writtenconsent of the indemnifying party (which consent shall not be unreasonablywithheld), the right of the indemnified party to make any claim against theindemnifying party on account of such settlement shall be deemed conclusivelydenied. An indemnified party shall have the right to be represented by its owncounsel at its own expense in any such action, suit or proceeding, and if anindemnified party is named as the defendant in any action, suit or proceedings,it shall be entitled to have its own counsel and defend such action, suit orproceeding with respect to itself at its own expense.  Subject to the foregoing, neither party shall, without the otherparty’s written consent, settle, compromise, confess judgment or permitjudgment by default in any action, suit or proceeding if such action wouldcreate or attach any liability or obligation to the other party.  The parties agree to make available to eachother, and to their respective counsel and accountants, all information anddocuments reasonably available to them which relate to any action, suit orproceeding, and the parties agree to render to each other such assistance as theymay reasonably require of each other in order to ensure the proper and adequatedefense of any such action, suit or proceeding.

 

29

----

 

Article 14

Termination;Remedies; Limitations

 

Section 14.1           Termination.

 

(a)           Termination of Agreement.  This Agreement and the transactionscontemplated hereby may be terminated at any time at or prior to the Closing:

 

(i)            by mutual written consent of Seller and Buyer;

 

(ii)           by Seller if any condition specified in Section 8.1 hasnot been satisfied on or before Closing and shall not have been waived bySeller;

 

(iii)          by Seller’s election to terminate under Section 5.5(e); or

 

(iv)          by Buyer if any condition specified in Section 8.2 has notbeen satisfied on or before Closing and shall not have been waived by Buyer.

 

(b)           Effect of Termination.  Without limiting Seller’s and Buyer’srespective remedies and rights with respect to the Deposit under Section 14.2,in the event of termination of this Agreement pursuant to Section 14.1(a),written notice thereof shall forthwith be given by the terminating party to theother party hereto and to Escrow Agent, and this Agreement shall thereuponterminate; provided, however, that following such termination Buyer willcontinue to be bound by its obligations set forth in Section 5.2.  If this Agreement is terminated as providedherein all filing, applications and other submissions made to any governmentalauthority shall, to the extent practicable, be withdrawn from the governmentalauthority to which they were made.

 

Section14.2           Remedies.

 

(a)           Seller’s Remedies.  Notwithstanding anything herein provided tothe contrary, upon the failure by Buyer to satisfy the conditions to Closing orthe Closing obligations, as the case may be, on account of breaches of any ofthe representations and warranties made by Buyer in this Agreement, or thefailure to comply with the covenants or other obligations of Buyer set forthherein, Seller, at its sole option, may: (i) enforce specific performance ofthis Agreement; or (ii) terminate this Agreement and, without waiving orreleasing Buyer’s obligations under Section 5.2, retain the Deposit togetherwith interest earned thereon as liquidated damages, as Seller’s sole andexclusive remedy for such failure, all other remedies being expresslywaived.  The  parties agree upon the amount of the Deposit, together withinterest earned thereon, as liquidated damages due to the difficulty andinconvenience of measuring actual damages and the uncertainty thereof, and theparties further agree that such amount is a reasonable estimate of Seller’sloss in the event of any such failure by Buyer.

 

(b)           Buyer’s Remedies.  Notwithstanding anything herein provided tothe contrary, upon failure of Seller to satisfy the conditions to Closing orthe Closing obligations, as the case may be, on account of breaches of any ofthe representations and warranties made by Seller in this Agreement, or thefailure by Seller to comply with the covenants or other obligations of Sellerset forth herein, Buyer, at its sole option, may (i) enforce specificperformance of this Agreement, or (ii) terminate this Agreement and receiveback the Deposit, together with interest earned thereon, as Buyer’s sole andexclusive remedy for such failure, all

 

30

----

 

other remedies being expresslywaived by Buyer.  If this Agreement isterminated pursuant to Section 14.1(a)(i) or Section 14.1(a)(iii), or as aresult of a condition to Closing under Section 8.1(d) or Section 8.2(d) notbeing satisfied, Buyer shall receive back the Deposit together with interestearned thereon.

 

Article 15

Miscellaneous

 

Section 15.1           Counterparts.

 

This Agreement and any documentor other instrument delivered hereunder may be executed in counterparts, eachof which shall be deemed an original instrument, but which together shallconstitute but one and the same instrument. Any counterpart of this Agreement or any document or other instrumentdelivered hereunder may be delivered by facsimile. Any facsimile signatureshall be replaced with an original signature as promptly as practical.

 

Section 15.2           Governing Law; Jurisdiction;Process.

 

(a)           THIS AGREEMENT AND THE TRANSACTIONSCONTEMPLATED HEREBY SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THELAWS OF THE STATE OF NEW MEXICO WITHOUT GIVING EFFECT TO PRINCIPLES THEREOFRELATING TO CONFLICTS OF LAW RULES THAT WOULD DIRECT THE APPLICATION OF THELAWS OF ANOTHER JURISDICTION; PROVIDED THAT THE LAWS OF THE JURISDICTION WHERETHE LANDS ARE LOCATED SHALL GOVERN WITH RESPECT TO TITLE MATTERS OR MATTERSRELATING TO THE LANDS, WELLS OR LEASES.

 

(b)           BUYER AND SELLER CONSENT TO PERSONALJURISDICTION IN ANY LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO THISAGREEMENT IN ANY COURT, FEDERAL OR STATE, WITHIN THE CITY AND COUNTY OF SANTAFE, NEW MEXICO, HAVING SUBJECT MATTER JURISDICTION AND WITH RESPECT TO ANY SUCHCLAIM, BUYER AND SELLER IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BYLAW, ANY CLAIM, OR ANY OBJECTION THAT BUYER OR SELLER MAY NOW OR HEREAFTERHAVE, THAT VENUE OR JURISDICTION IS NOT PROPER WITH RESPECT TO ANY SUCH LEGALACTION, SUIT OR PROCEEDING BROUGHT IN SUCH COURT IN THE CITY AND COUNTY OFSANTA FE, NEW MEXICO, INCLUDING ANY CLAIM THAT SUCH LEGAL ACTION, SUIT OR PROCEEDINGBROUGHT IN SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM AND ANY CLAIMTHAT BUYER OR SELLER IS NOT SUBJECT TO PERSONAL JURISDICTION OR SERVICE OFPROCESS IN SUCH CITY AND COUNTY OF SANTA FE, NEW MEXICO, FORUM.

 

Section 15.3           Entire Agreement.

 

This Agreement (including theConfidentiality Agreement) and the Appendices, Schedules and Exhibits heretocontain the entire agreement between the parties with respect to the subjectmatter hereof and there are no agreements, understandings, representations orwarranties between the parties other than those set forth or referred toherein.

 

31

----

 

Section 15.4           Expenses.

 

Buyer shall beresponsible for all recording, filing or registration fees for any assignmentor conveyance delivered to Buyer under or pursuant to this Agreement, and Buyershall reimburse Seller for costs incurred in copying documents requested byBuyer in connection with its due diligence under Articles 5 and 6.  All other costs and expenses incurred byeither party hereto in connection with all things required to be done by ithereunder, including attorneys’ fees, accountant fees and the expense ofenvironmental and title examination, shall be borne by the party incurringsame.

 

Section 15.5           Notices.

 

All noticeshereunder shall be sufficiently given for all purposes hereunder if in writingand delivered personally, sent by documented overnight delivery service or, tothe extent receipt is confirmed, by United States mail, telecopy, telefax orother electronic transmission service to the appropriate address or number asset forth below.

 

To Seller:              Carbon Energy Corporation(USA)

1700 Broadway, Suite 1150

Denver, Colorado 80290

Attention: Ronald A. Bookman

Telephone:  (303) 863-1555, extension 226

Fax:  (303) 863-1558

 

To Buyer:              Fasken Acquisitions 02, Ltd., aTexas limited partnership

303 W. Wall Street, Suite 1800

Midland, Texas 79701

Attention: Sally Kvasnicka

Telephone:  (915) 687-1777

Fax:  (915) 687-0669

 

Or at suchother address and to the attention of such other person as a party maydesignate by written notice to the other party.

 

Section 15.6           Successors and Assigns.

 

This Agreementshall be binding upon and inure to the benefit of the parties hereto and theirrespective successors and permitted assigns. This Agreement may not be assigned by any party hereto except with theprior written consent of the other party hereto, which consent shall not beunreasonably withheld or delayed, and any such assignment made withoutobtaining the written consent of the other party shall be void and of no forceor effect.

 

Section 15.7           Amendments and Waivers.

 

This Agreement may not bemodified or amended except by an instrument or instruments in writing signed bythe party against whom enforcement of any such modification or amendment issought.  Any party hereto may, only byan instrument in writing, waive compliance by another party hereto with anyterm or provision of this Agreement on the part of such other party hereto tobe performed or complied with.  Thewaiver by any party hereto of a

 

32

----

 

breach of any term or provisionof this Agreement shall not be construed as a waiver of any subsequent breach.

 

Section 15.8           Appendices, Schedules and Exhibits.

 

All Appendices, Schedules andExhibits hereto which are referred to herein are hereby made a part hereof andincorporated herein by such reference.

 

Section 15.9           References, Gender, Number.

 

All referencesin this Agreement to an “Article,” “Section,” or “subsection” shall be to anArticle, Section, or subsection of this Agreement, unless the context requiresotherwise.  Unless the context otherwiserequires, the words “this Agreement, “hereof,” “hereunder,” “herein,” “hereby,”or words of similar import shall refer to this Agreement as a whole and not toa particular Article, Section, subsection, clause or other subdivisionhereof.  Whenever the context requires,the words used herein shall include the masculine, feminine and neuter gender,and the singular and the plural.

 

Section 15.10         Interpretation.

 

It is expressly agreed thatthis Agreement shall not be construed against any party, and no considerationshall be given or presumption made, on the basis of who drafted this Agreementor any particular provision hereof or who supplied the form of Agreement.  Each party agrees that it has beenpurposefully drawn and correctly reflects their understanding of thetransactions that it contemplates.  Inconstruing this Agreement:

 

(a)           examples shall not be construed tolimit, expressly or by implication, the matter they illustrate;

 

(b)           the word “includes” and itsderivatives means “includes, but is not limited to” and correspondingderivative expressions;

 

(c)           a defined term has its definedmeaning throughout this Agreement and each Appendix, Exhibit and Schedule tothis Agreement, regardless of whether it appears before of after the placewhere it is defined;

 

(d)           each Exhibit and Schedule to thisAgreement is a part of this Agreement, but if there is any conflict orinconsistency between the main body of this Agreement (including Appendiceswhich shall be considered part of the main body of this Agreement) and anyExhibit or Schedule, the provisions of the main body of this Agreement shallprevail, and

 

(e)           the headings and titles herein arefor convenience only and shall have no significance in the interpretationhereof.

 

33

----

 

Section 15.11         Attorneys’ Fees.

 

The prevailingparty in any legal or other proceeding brought under or to enforce thisAgreement shall be additionally entitled to recover court costs and reasonableattorneys’ fees from the nonprevailing party.

 

Section 15.12         Severability.

 

If any term or other provisionof this Agreement is invalid, illegal or incapable of being enforced by anyrule of law or public policy, all other conditions and provisions of thisAgreement shall nevertheless remain in full force and effect so long as theeconomic or legal substance of the transactions contemplated hereby is notaffected in any adverse manner to any party. Upon such determination that any term or other provision is invalid,illegal or incapable of being enforced, the parties shall negotiate in goodfaith to modify this Agreement so as to effect the original intent of theparties as closely as possible in an acceptable manner to the end that thetransactions contemplated hereby are fulfilled to the extent possible.

 

Section 15.13         No Recordation.

 

Without limiting any party’sright to file suit to enforce its rights under this Agreement, Buyer and Sellerexpressly covenant and agree not to record or place of record this Agreement orany copy or memorandum hereof.

 

Section 15.14         Time of Essence.

 

Time is of the essence in thisAgreement.  If the date specified inthis Agreement for giving any notice or taking any action is not a Business Day(or if the period during which any notice is required to be given or any actiontaken expires on a date which is not a Business Day), then the date for givingsuch notice or taking such action (and the expiration date of such periodduring which notice is required to be given or action taken) shall be the nextday which is a Business Day.

 

Section 15.15         Arbitration.

 

Any dispute, controversy, orclaim (a “Dispute”) arising out of or in connection with this Agreement shallbe referred to and determined by a binding arbitration, as the sole andexclusive remedy of the parties as to the Dispute, conducted in accordance withthe American Arbitration Association (“AAA”) arbitration rules for commercialdisputes (the “Rules”), which are deemed to be incorporated by reference,except that in the event of any conflict between those Rules and thearbitration provisions set forth below, the provisions set forth below shallgovern and control.  The arbitraltribunal (“Tribunal”) shall apply the law referred to in Section 15.2 inresolving the Dispute.  The Tribunalshall be composed of three (3) arbitrators, with Buyer and Seller eachappointing one arbitrator, and the two (2) arbitrators so appointed appointingthe third arbitrator who shall act as a Chairman of the Tribunal.  Should any arbitrator fail to be appointedas aforesaid, then such arbitrator shall be appointed by the AAA in accordancewith the Rules.  The arbitration shallbe held in Santa Fe, New Mexico, and the proceedings shall be conducted andconcluded as soon as reasonably practicable, based upon the scheduleestablished by the Tribunal, but in any event the decision of the Tribunalshall be rendered within ninety (90) days following the selection of theChairman of the Tribunal.  The decisionof the Tribunal shall be

 

34

----

 

final and binding upon theparties.  Judgment upon the awardrendered by the Tribunal may be entered in, and enforced by, any court ofcompetent jurisdiction.  If thearbitration involves the Final Settlement Statement, the parties shall eachbear their own expenses including attorneys’ fees and share the fees of theChairman of the Tribunal.  If the arbitrationconcerns any other disputes then the prevailing party(s) shall be awarded itsexpenses, including attorneys’ fees.

 

IN WITNESSWHEREOF, this Agreement has been signed by or on behalf of each of the partiesas of the day first above written.

 
|   | SELLER:                                                              |
|--------|----------------------------------------------------------------------|
|   |                                                                 |
|   | CARBON ENERGY  CORPORATION (USA)  f/k/a Bonneville Fuels Corporation |
|   |                                                                 |
|   |                                                                 |
|   | By:                                                                  |   |
|   |                                                                 | Patrick R.  McDonald, President |
|   |                                                                 |
|   |                                                                 |
|   | BUYER:                                                               |
|   |                                                                 |
|   | FASKEN  ACQUISITIONS 02, LTD.                                        |
|   | By:   Fasken Management, LLC, its General Partner               |
|   |                                                                 |
|   | By:                                                                  |   |
|   |                                                                 | Benjamin L.  Blake, Vice President |

 

35

----

 

APPENDIX ATOASSET PURCHASE AND SALE AGREEMENT

 

DEFINITIONS

 

“Adjusted Purchase Price” isdefined in Section 3.1.

 

“Affiliate” means, as to theparty specified, any entity controlling, controlled by or under common controlwith such specified party.  Control,controlling or controlled as used herein means the possession, direct orindirect, of the power to direct or cause the direction of the management andpolicies of another, whether through the ownership of voting securities, bycontract or otherwise.

 

“Agreement” means the AssetPurchase and Sale Agreement to which this Appendix A is attached.

 

“Allocated Values” is definedin Section 6.2(b).

 

“Assets” is defined in Section2.1

 

“Assumed Liability” means anyLiability for which Buyer is responsible under the Agreement upon Closing orupon a certain period of time after Closing as provided in Section 13.1(d).

 

“Business Day” means any daywhich is not a Saturday, Sunday or legal holiday recognized in Santa Fe, NewMexico.

 

“Buyer’s Environmental Review”is defined in Section 5.4.

 

“Closing” is the consummationof the transaction contemplated by Article 9.

 

“Closing Date” is defined inSection 9.1.

 

“Code” is defined in Section7.7.

 

“Contract Rights” is defined inSection 2.1(d).

 

“Defensible Title” means,respectively as to each Lease or Well, such title held by Seller that (i)entitles Seller to receive not less than the applicable Net Revenue Interest orNet Revenue Interests specified for such Lease or Well in Exhibit “A-2”; (ii)obligates Seller to bear the costs and expenses attributable to themaintenance, development, and operation of such Lease or Well in an amount notgreater than the applicable Working Interest or Working Interests specified forsuch Lease or Well; and, (iii) except for Permitted Encumbrances, is free andclear of all liens and encumbrances.

 

“Deferred Adjustment Claim” isdefined in Section 6.5.

 

1

----

 

“Deferred Assets” is defined inSection 5.5(d).

 

“Deferred Matters Date” isdefined in Section 6.5.

 

“Deposit” is defined in Section3.2.

 

“Dispute” is defined in Section15.15.

 

“Effective Date” is defined inSection 2.3.

 

“Environmental Claim” means anyaction or written notice threatening same by any third party alleging potentialliability of Seller arising out of or resulting from any actual or allegedviolation of, or liability under, or any remedial obligation under, anyEnvironmental Law as a result of an Environmental Condition with respect to theAssets.

 

“Environmental Condition” meansa condition or circumstance existing at the Effective Date (or prior to theClosing Date as a result of a breach by Seller of Section 7.1) with respect tothe air, soil, subsurface, surface waters, groundwaters, and/or sediments thatcauses (i) an Asset or Seller not to be in compliance with any EnvironmentalLaw, including any permits issued thereunder, in all material respects, or (ii)an Asset to be required to be remediated (or other corrective action taken withrespect to such Asset) under any Environmental Law.

 

“Environmental Defect” means anEnvironmental Condition with respect to the Assets; provided that if, aftertaking into account any Remediation performed by or on behalf of Seller, thereasonably anticipated Remediation Amount with respect to such EnvironmentalCondition (or all Environmental Conditions with respect to an Asset) is not inexcess of $5,000, such Environmental Conditional shall not constitute an EnvironmentalDefect.

 

“Environmental Defect Amount”is defined in Section 5.5(c).

 

“Environmental DefectDeductible” is defined in Section 5.5(c).

 

“Environmental Defect Notice”is defined is Section 5.5(a).

 

“Environmental Defect Property”is defined in Section 5.5(b).

 

“Environmental Laws” means allLaws relating to (a) the control of any potential pollutant, or protection ofthe air, water, land, wetlands, natural resources, wildlife and endangeredspecies, (b) solid, gaseous or liquid waste generation, handling, treatment,storage, disposal or transportation, and (c) exposure to hazardous, toxic,radioactive or other substances alleged to be harmful.  “Environmental Laws” shall include, but arenot limited to, the Clean Air Act, the Clean Water Act, the ResourceConservation Recovery Act, the Superfund Amendments and Reauthorization Act,the Toxic Substances Control Act, the Safe Drinking Water Act, and CERCLA andshall also include all state, local and municipal Laws dealing with the subjectmatter of the above listed Federal statutes or promulgated by any governmentalor quasigovernmental agency thereunder in order to carry out the purposes ofany Federal, state, local or municipal Law.

 

2

----

 

“Environmental Liabilities”means any and all costs (including costs of Remediation), damages, settlements,expenses, penalties, fines, taxes, prejudgment and post-judgment interest,court costs and attorneys’ fees incurred or imposed (i) pursuant to any order,notice of responsibility, directive (including requirements embodied inEnvironmental Laws), injunction, judgment or similar act (includingsettlements) by any Governmental Authority to the extent arising out of orunder Environmental Laws or (ii) pursuant to any claim or cause of action by aGovernmental Authority or third party for personal injury, property damage,damage to natural resources, remediation or response costs to the extentarising out of or attributable to any violation of, or any remedial obligationunder, any Environmental Law.

 

“Environmental Matters” means(i) any order, notice of responsibility, directive (including requirementsembodied in Environmental Laws), injunction, judgment or similar act (includingsettlements) by any Governmental Authority arising out of or under anyEnvironmental Laws or (ii) pursuant to any claim or cause of action by aGovernmental Authority or third party for personal injury, property damage,damage to natural resources, remediation or response costs arising out of or attributableto any Hazardous Materials or any violation of, or any remedial obligationunder, any Environmental Law.

 

“Equipment” is defined inSection 2.1(b).

 

“Examination Period” means thatperiod of time commencing with the execution of this Agreement and terminatingat 5:00 p.m., Mountain Daylight Time, on March 3, 2003.

 

“Existing P & AObligations” means (i) obligations arising out of the failure to plugand abandon a well located on the Leases and Lands in accordance withapplicable Laws where Seller owned a working interest in such well at the timeit was plugged and abandoned, and (ii) obligations arising out of Seller’sfailure to plug and abandon any Well located on the Leases or Lands where, onor before the Effective Date, Seller received notice from a GovernmentalAuthority or an AFE requiring that such Well be plugged and abandoned inaccordance with applicable Laws.

 

“Final Settlement Statement” isdefined in Section 10.1.

 

“Governmental Authority” means(i) the United States of America, (ii) any state, county, municipality or othergovernmental subdivision within the United States of America, and (iii) anycourt or any governmental department, commission, board, bureau, agency orother instrumentality of the United States of America or of any state, county,municipality or other governmental subdivision within the United States ofAmerica.

 

“Hazardous Materials” means anyexplosives, radioactive materials, asbestos material, urea formaldehyde,hydrocarbon contaminants, underground tanks, pollutants, contaminants,hazardous, corrosive or toxic substances, special waste or waste of any kind,including compounds known as chlorobiophenyls and any material or substance thestorage, manufacture, disposal, treatment, generation, use, transport, mediationor release into the environment of which is prohibited, controlled, regulatedor licensed under Environmental Laws, including, but not limited to, (i) all“hazardous substances” as that term is defined in Section 101(14) of theComprehensive Environmental Response, Compensation and Liability Act, asamended, and (ii) petroleum and petroleum products.

 

3

----

 

“Lands” is defined in Section2.1(a).

 

“Law” means any applicablestatute, law (including common law), ordinance, regulation, rule, ruling,order, writ, injunction, decree or other official act of or by any GovernmentalAuthority.

 

“Leases” is defined in Section2.1(a).

 

“Liabilities” means (i) thePlugging and Abandonment Obligations, and (ii) any and all debts, losses,liabilities, duties, claims, ad valorem taxes, severance taxes and otherproduction related taxes, costs and expenses (including, without limitation,any attorneys’ fees and any and all expenses whatsoever incurred in connectiontherewith), absolute or contingent, accrued or unaccrued, liquidated orunliquidated, known or unknown arising out of or attributable to the ownership,use, construction, maintenance or operation of any of the Assets, including,without limitation, any and all Environmental Liabilities arising out of orattributable to any Environmental Matter.

 

“Losses” is defined in Section13.1(a).

 

“Material Contracts” is definedin Section 4.1(i).

 

“Net Revenue Interest” shallmean an interest (expressed as a percentage or decimal fraction) in and to alloil and gas produced and saved from or attributable to a Lease or Well.

 

“Offsite Environmental Matter”means any Environmental Condition resulting from Hazardous Materialsoriginating from the Assets that have been transported for disposal,reclamation or recycling from the Assets prior to the Effective Date (or priorto the Closing Date as a result of a breach by Seller of Section 7.1) toproperties owned by third parties.

 

“Permitted Encumbrances” meansany of the following matters:

 

(a)                                  all agreements,instruments, documents, liens, encumbrances, and other matters which aredescribed in any Schedule or Exhibit to the Agreement;

 

(b)                                 any (i) undeterminedor inchoate liens or charges constituting or securing the payment of expenseswhich were incurred incidental to maintenance, development, production oroperation of the Assets or for the purpose of developing, producing orprocessing oil, gas or other hydrocarbons therefrom or therein and (ii)materialman’s, mechanics’, repairman’s, employees’, contractors’, operators’ orother similar liens, security interests or charges for liquidated amountsarising in the ordinary course of business incidental to construction,maintenance, development, production or operation of the Assets or theproduction or processing of oil, gas or other hydrocarbons therefrom, that arenot delinquent and that will be paid in the ordinary course of business or, ifdelinquent, that are being contested in good faith;

 

(c)                                  any liens for advalorem taxes, severance taxes and other production related taxes not yetdelinquent or, if delinquent, that are being contested in good faith in theordinary course of business;

 

4

----

 

(d)                                 any liens or securityinterests created by Law or reserved in oil, gas and/or mineral leases forroyalty, bonus or rental or for compliance with the terms of the Leases othermaterial contracts related to the Assets;

 

(e)                                  all Preference Rightsand Transfer Requirements with respect to which (i) waivers or consents areobtained from the appropriate parties, or (ii) the appropriate time period forasserting such rights has expired without an exercise of such rights;

 

(f)                                    any easements,rights-of-way, servitudes, permits, licenses, surface leases and other rightswith respect to surface operations to the extent such matters do not interferein any material respect with the operation of the portion of the Assetsburdened thereby;

 

(g)                                 all agreements andobligations relating to (i) imbalances with respect to the production,transportation or processing of gas, (ii) calls or purchase options on oil, gasor other minerals exercisable only at current fair market prices or the postedprices of such purchaser, or (iii) processing rights or commitments;

 

(h)                                 all royalties,overriding royalties, net profits interests, carried interests, reversionaryinterests and other burdens to the extent that the net cumulative effect ofsuch burdens, as to a particular Lease or Well, does not operate to reduce theNet Revenue Interest of the Seller in such Lease or Well as specified inExhibit “A-2”;

 

(i)                                     all liens,charges, encumbrances, contracts, agreements, instruments, obligations,defects, irregularities and other matters affecting any Asset whichindividually or in the aggregate are not such as to interfere materially withthe operation, value or use of such Asset;

 

(j)                                     any encumbrance,title defect or other matter (whether or not constituting a Title Defect)waived or deemed waived by Buyer pursuant to Article 6;

 

(k)                                  rights reserved to orvested in any Governmental Authority to control or regulate any of the Wellsincluded in the Assets and all applicable Law, rules, regulations and orders ofsuch authorities so long as the same have not been applied to decrease Seller’sNet Revenue Interest below the Net Revenue Interest shown in Exhibit “A-2”;

 

(l)                                     rights ofreassignment requiring notice and/or the reassignment (or granting anopportunity to receive a reassignment) of a leasehold interest to the holdersof such reassignment rights prior to surrendering or releasing such leaseholdinterest; and

 

(m)                               any liens and otherencumbrances securing indebtedness to the extent such indebtedness will bereleased or removed at or prior to Closing.

 

“Plugging andAbandonment Obligations” means any obligation to plug or abandon any welllocated on the Leases or Lands other than Existing P & A Obligations.

 

5

----

 

“Preference Right” means anyright or agreement that enables or may enable any third party to purchase oracquire any Asset or any interest therein or portion thereof as a result of orin connection with the sale to Buyer of such Asset.

 

“Preliminary SettlementStatement” is defined in Section 9.1(b).

 

“Purchase Price” is defined in Section3.1.

 

“Records” is defined in Section2.1(c).

 

“Remediation” means, withrespect to an Environmental Condition, the implementation and completion of anyactions required under Environmental Laws to correct or remove suchEnvironmental Condition.

 

“Remediation Amount” means,with respect to an Environmental Condition, the present value as of the ClosingDate (using an annual discount rate of 10%) of the cost of the most costeffective Remediation of such Environmental Condition which is reasonable underthe circumstances.

 

“Reserved Interests” is definedin Section 2.2.

 

“Seller Title Credit” isdefined in Section 6.4.

 

“Taxes” means any federal,state, local or foreign income, gross receipts, license, excise, severance,franchise, real property, personal property, sales, use, alternative or add-onminimum, estimated tax or other tax of any kind whatsoever, including anyinterest, fines, penalty or other like assessment or addition thereto, whetherdisputed or not, including such item for which a liability arises as atransferee or successor-in-interest.

 

“Title Defect” is defined inSection 6.3.

 

“Title Defect Amount” isdefined in Section 6.2(d).

 

“Title Defect Deductible” isdefined in Section 6.2(d).

 

“Title Defect Notice” isdefined in Section 6.2(a).

 

“Title Defect Property” isdefined in Section 6.2(c).

 

“Transfer Requirement” meansany consent, approval, authorization or permit of, or filing with ornotification to, any third party which is required to be obtained, made orcomplied with for or in connection with the sale of the Assets to Buyer ascontemplated by this Agreement.

 

“Tribunal” is defined inSection 15.15.

 

“Unscheduled (Negative)Imbalance” means, respectively as to each Well and without duplication, the sum(expressed in Mcf) of (i) the aggregate make-up, prepaid or other volumes ofnatural gas, not described on Schedule 3.3(c), that Seller was obligated as ofthe Effective Date, on account of prepayment, advance payment, take-or-pay, gasbalancing or similar obligations, to deliver from such Well or Unit after theEffective Date without then or thereafter

 

6

----

 

being entitled to receive fullpayment therefor and (ii) the aggregate pipeline or processing plant imbalancesor overdeliveries for which Seller is obligated to pay or deliver natural gasor cash to any pipeline, gatherer, transporter, processor, co-owner orpurchaser in connection with any other natural gas attributable to the Assets.

 

“Unscheduled (Positive)Imbalance” shall mean, respectively as to each Well and without duplication,the sum (expressed in Mcf) of (i) the aggregate make-up, prepaid or othervolumes of natural gas, not described on Schedule 3.3(c), that Seller wasentitled as of the Effective Date, on account of prepayment, advance payment,take-or-pay, gas balancing or similar obligations, to receive from such Well orUnit after the Effective Date and (ii) the aggregate pipeline or processingplant imbalances or underdeliveries for which Seller is entitled to receivenatural gas or cash from any pipeline, gatherer, transporter, processor,co-owner or purchaser in connection with any natural gas attributable to theAssets.

 

“Well” means each well, wellcompletion, multiple well completion, unit or other subdivision of propertydescribed in Exhibit “A-2.”

 

“Working Interest” shall meanthe percentage of costs and expenses attributable to the maintenance,development and operation of a Well.

 

7

----