Document:

Exhibit 4.1 - 2007 Equity Incentive Plan

    
      

      

    

    

    EXHIBIT
      4.1

    

    MEDICAL
      TECHNOLOGY & INNOVATIONS, INC.

    2007
      Equity Incentive Plan

     

    Adopted:
      January 12, 2007

    Termination
      Date: January 12, 2017

     

    1.
      PURPOSES.

     

    (a)
      Eligible Equity Award Recipients.
      Subject
      to the terms of this Plan, the persons eligible to receive Equity Awards are
      the
      Employees, Directors and Consultants of the Company and its
      Affiliates.

     

    (b)
      Available Equity Awards. The
      purpose of this Plan is to provide a means by which eligible recipients of
      Equity Awards may be given an opportunity to benefit from increases in value
      of
      the Common Stock through the granting of the following Equity Awards: (i)
      Incentive Stock Options, (ii) Nonstatutory Stock Options, and (iii) Stock
      Grants.

     

    (c)
      General Purpose. The
      Company, by means of this Plan, seeks to retain the services of the group of
      persons eligible to receive Equity Awards, to secure and retain the services
      of
      new members of this group and to provide incentives for such persons to exert
      maximum efforts for the success of the Company and its Affiliates.

     

    2.
      DEFINITIONS.

     

    (a)
      “Affiliate”
      means
      any “parent corporation” or “subsidiary corporation” of the Company, whether now
      or hereafter existing, as those terms are defined in Sections 424(e) and (f),
      respectively, of the Code.

     

    (b)
      “Board”
      means
      the Board of Directors of the Company.

     

    (c)
      “Code” means
      the
      Internal Revenue Code of 1986, as amended.

     

    (d)
      “Committee”
      means a
      committee of one or more members of the Board appointed by the Board in
      accordance with Section 3(c) of this Plan.

     

    (e)
      “Common Stock”
      means
      the common capital stock of the Company.

     

    (f)
      “Company” means
      Medical Technology & Innovations, Inc., a Florida corporation.

     

    (g)
      “Consultant” means
      a
      natural person, including an advisor, (i) who is engaged by the Company or
      an
      Affiliate to render bona fide consulting or advisory services which are not
      in
      connection with the offer or sale of securities in a capital-raising transaction
      and do not directly or indirectly promote or maintain a market for the Company’s
      securities, and (ii) who is compensated for such services or (iii) who is a
      member of the Board of Directors of an Affiliate. However, the term “Consultant”
shall not include either Directors who are not compensated by the Company for
      their services as Directors or Directors who are merely paid a director’s fee by
      the Company for their services as Directors.

    

    
      
        
           

        

        
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    (h)
      “Continuous Service”
      means
      that the Participant’s service with the Company or an Affiliate, whether as an
      Employee, Director or Consultant, is not interrupted or terminated. The
      Participant’s Continuous Service shall not be deemed to have terminated merely
      because of a change in the capacity in which the Participant renders service
      to
      the Company or an Affiliate as an Employee, Consultant or Director or a change
      in the entity for which the Participant renders such service, provided that
      there is no interruption or termination of the Participant’s service with the
      Company or an Affiliate. For example, a change in status from an Employee of
      the
      Company to a Consultant of an Affiliate or a Director will not constitute an
      interruption of Continuous Service. The Board, in its sole discretion, may
      determine whether Continuous Service shall be considered interrupted in the
      case
      of any Company approved leave of absence, including sick leave, military leave
      or any other personal leave.

     

    (i)
      “Corporate Transaction” means
      the
      occurrence, in a single transaction or in a series of related transactions,
      of
      any one or more of the following events:

     

    (i)
      a
      sale, lease, license or other disposition of all or substantially all of the
      consolidated assets of the Company and its subsidiaries;

     

    (ii)
      a
      sale or other disposition of at least ninety percent (90%) of the outstanding
      securities of the Company;

     

    (iii)
      a
      merger, consolidation or similar transaction following which the Company is
      not
      the surviving corporation; or

     

    (iv)
      a
      merger, consolidation or similar transaction following which the Company is
      the
      surviving corporation but the shares of Common Stock outstanding immediately
      preceding the merger, consolidation or similar transaction are converted or
      exchanged by virtue of the merger, consolidation or similar transaction into
      other property, whether in the form of securities, cash or
      otherwise.

     

    (j)
      “Covered Employee” means
      the
      chief executive officer and the four (4) other highest compensated officers
      of
      the Company for whom total compensation is required to be reported to Company
      stockholders under the Exchange Act, as determined for purposes of Section
      162(m) of the Code.

     

    (k)
      “Director”
      means a
      member of the Board of Directors of the Company.

     

    (l)
      “Disability”
      or
“Disabled”
      means,
      with respect to any Participant, the Participant is unable to perform his or
      her
      normal employment functions or other service functions due to any medically
      determinable physical or mental disability which can be expected to result
      in
      death or which has lasted or can be expected to last for a continuous period
      of
      not less than twelve (12) months. A Participant shall not be considered to
      be
“Disabled” or suffering from a “Disability” unless he furnishes proof of the
      existence thereof in such form and manner, and at such times, as the Board
      shall
      determine.

    

    
      
        
           

        

        
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    (m)
      “Employee”
      means
      any person employed by the Company or an Affiliate. Mere service as a Director
      or payment of a director’s fee by the Company or an Affiliate shall not be
      sufficient to constitute “employment” by the Company or an
      Affiliate.

     

    (n)
      “Equity Award”
      means
      any right granted under this Plan, including an Option and a Stock
      Grant.

     

    (o)
      “Exchange Act”
      means
      the Securities Exchange Act of 1934, as amended.

     

    (p)
      “Fair Market Value”
      means,
      as of any date, the value of the Common Stock determined as
      follows:

     

    (i)
      If
      the Common Stock is listed on any established stock exchange or traded on the
      Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value
      of a
      share of Common Stock shall be the closing sales price for such stock (or the
      closing bid, if no sales were reported) as quoted on such exchange or market
      (or
      the exchange or market with the greatest volume of trading in the Common Stock)
      on the last market trading day prior to the day of determination, as reported
      in
The
      Wall Street Journal or
      such
      other source as the Board deems reliable.

     

    (ii)
      In
      the absence of such markets for the Common Stock, the Fair Market Value shall
      be
      determined in good faith by the Board.

     

    (q)
      “Incentive Stock Option”
      means an
      Option intended to qualify as an incentive stock option within the meaning
      of
      Section 422 of the Code and the regulations promulgated thereunder.

     

    (r)
      “Non-Employee Director” means
      a
      Director who either (i) is not a current Employee or Officer of the Company
      or
      its parent or a subsidiary, does not receive compensation (directly or
      indirectly) from the Company or its parent or a subsidiary for services rendered
      as a consultant or in any capacity other than as a Director (except for an
      amount as to which disclosure would not be required under Item 404(a) of
      Regulation S-K promulgated pursuant to the Securities Act (“Regulation S-K”)),
      does not possess an interest in any other transaction as to which disclosure
      would be required under Item 404(a) of Regulation S-K and is not engaged in
      a
      business relationship as to which disclosure would be required under Item 404(b)
      of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for
      purposes of Rule 16b-3.

     

    (s)
      “Nonstatutory Stock Option”
      means an
      Option not intended to qualify as an Incentive Stock Option.

     

    (t)
      “Officer”
      means a
      person who is an officer of the Company within the meaning of Section 16 of
      the
      Exchange Act and the rules and regulations promulgated thereunder.

     

    (u)
      “Option”
      means an
      Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to this
      Plan.

     

    (v)
      “Option Agreement”
      means a
      written agreement between the Company and an Optionholder evidencing the terms
      and conditions of an individual Option grant. Each Option Agreement shall be
      subject to the terms and conditions of this Plan.

    

    
      
        
           

        

        
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    (w)
      “Optionholder”
      means a
      person to whom an Option is granted pursuant to this Plan or, if applicable,
      such other person who holds an outstanding Option.

     

    (x)
      “Outside Director”
      means a
      Director who either (i) is not a current employee of the Company or an
“affiliated corporation” (within the meaning of Treasury Regulations promulgated
      under Section 162(m) of the Code), is not a former employee of the Company
      or an
“affiliated corporation” receiving compensation for prior services (other than
      benefits under a tax qualified pension plan), was not an officer of the Company
      or an “affiliated corporation” at any time and is not currently receiving direct
      or indirect remuneration from the Company or an “affiliated corporation” for
      services in any capacity other than as a Director or (ii) is otherwise
      considered an “outside director” for purposes of Section 162(m) of the
      Code.

     

    (y)
      “Participant”
      means a
      person to whom an Equity Award is granted pursuant to this Plan or, if
      applicable, such other person who holds an outstanding Equity
      Award.

     

    (z)
      “Plan”
      means
      this Medical Technology & Innovations, Inc. 2007 Equity Incentive
      Plan.

     

    (aa)
      “Rule 16b-3”
      means
      Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3,
      as
      in effect from time to time.

     

    (bb)
      “Securities Act”
      means
      the Securities Act of 1933, as amended.

     

    (cc)
      “Stock Grant”
      means
      any award of Common Stock pursuant to Section 7 of this Plan.

     

    (dd)
      “Stock Award Agreement”
      means a
      written agreement between the Company and a holder of an Equity Award evidencing
      the terms and conditions of an individual Equity Award grant. Each Equity Award
      Agreement shall be subject to the terms and conditions of this
      Plan.

     

    (ee)
      “Ten Percent Stockholder”
      means a
      person who owns (or is deemed to own pursuant to Section 424(d) of the Code)
      stock possessing more than ten percent (10%) of the total combined voting power
      of all classes of stock of the Company or of any Affiliates.

     

    3.
      ADMINISTRATION. 

     

    (a)
      Administration by Board.
      The
      Board shall administer the Plan unless and until the Board delegates
      administration to a Committee, as provided in Section 3(c) this
      Plan.

     

    (b)
      Powers of Board. The
      Board
      shall have the power, subject to, and within the limitations of, the express
      provisions of this Plan:

     

    (i)
      To
      determine from time to time which of the persons eligible under this Plan shall
      be granted an Equity Award; when and how each Equity Award shall be granted;
      what type or combination of types of Equity Award shall be granted; the terms
      and provisions of each Equity Award granted (which need not be identical),
      including, without limitation, the time or times when a person shall be
      permitted to receive Common Stock pursuant to an Equity Award, the exercise,
      base or purchase price of an Equity Award (if any), the time or times at which
      an Equity Award will become vested, exercisable or payable, the performance
      goals and other conditions of an Equity Award, the duration of an Equity Award
      and all other terms of an Equity Award; and the number of shares of Common
      Stock
      with respect to which an Equity Award shall be granted to each such
      person.

    

    
      
        
           

        

        
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    (ii)
      To
      construe and interpret this Plan and Equity Awards granted under it, and to
      establish, amend and revoke rules and regulations for its administration. The
      Board, in the exercise of this power, may correct any defect, omission or
      inconsistency in this Plan or in any Equity Award Agreement, in a manner and
      to
      the extent it shall deem necessary or expedient to make this Plan fully
      effective.

     

    (iii)
      To
      amend this Plan or any Equity Award as provided in Section 12 of this Plan.
      

     

    (iv)
      To
      terminate or suspend this Plan as provided in Section 13 of this
      Plan.

     

    (v)
      Generally, to exercise such powers and to perform such acts as the Board deems
      necessary or expedient to promote the best interests of the Company which are
      not in conflict with the provisions of this Plan.

     

    (c)
      Delegation to Committee.

     

    (i)
      General.
      The
      Board may delegate administration of this Plan to a Committee or Committees
      of
      one (1) or more members of the Board, and the term “Committee” shall apply to
      any person or persons to whom such authority has been delegated. If
      administration is delegated to a Committee, the Committee shall have, in
      connection with the administration of this Plan, the powers theretofore
      possessed by the Board, including the power to delegate to a subcommittee any
      of
      the administrative powers the Committee is authorized to exercise (and
      references in this Plan to the Board shall thereafter be to the Committee or
      subcommittee), subject, however, to such resolutions, not inconsistent with
      the
      provisions of this Plan, as may be adopted from time to time by the Board.
      The
      Board may abolish the Committee at any time and revest in the Board the
      administration of the Plan.

     

    (ii)
      Committee
      Composition when Common Stock is Publicly Traded.
      At such
      time as the Common Stock is publicly traded, in the discretion of the Board,
      a
      Committee may consist solely of two or more Outside Directors, in accordance
      with Section 162(m) of the Code, and/or solely of two or more Non-Employee
      Directors, in accordance with Rule 16b-3. Within the scope of such authority,
      the Board or the Committee may (1) delegate to a committee of one or more
      members of the Board who are not Outside Directors the authority to grant Equity
      Awards to eligible persons who are either (a) not then Covered Employees and
      are
      not expected to be Covered Employees at the time of recognition of income
      resulting from such Equity Award or (b) not persons with respect to whom the
      Company wishes to comply with Section 162(m)(4)(C) of the Code, and/or (2)
      delegate to a committee of one or more members of the Board who are not
      Non-Employee Directors the authority to grant Equity Awards to eligible persons
      who are not then subject to Section 16 of the Exchange Act.

     

    (d)
      Effect of Board’s Decision. With
      respect to this Plan or any Equity Award, all determinations, interpretations
      and constructions made by the Board in good faith shall not be subject to review
      by any person and shall be final, binding and conclusive on all
      persons.

     

    4.
      SHARES SUBJECT TO THE PLAN. 

     

    (a)
      Share Reserve. Subject
      to the provisions of Section 11 of this Plan relating to adjustments upon
      changes in Common Stock, the Common Stock that may be issued pursuant to Equity
      Awards shall not exceed in the aggregate two million three hundred thousand
      (2,300,000) shares of Common Stock.

    

    
      
        
           

        

        
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    (b)
      Reversion of Shares to the Share Reserve.
      If any
      Equity Award shall for any reason expire or otherwise terminate, in whole or
      in
      part, without having been exercised in full, the shares of Common Stock not
      acquired under such Equity Award shall revert to and again become available
      for
      issuance under this Plan.

     

    (c)
      Source of Shares.
      The
      shares of Common Stock subject to this Plan may be unissued shares or reacquired
      shares, bought on the market or otherwise.

     

    5.
      ELIGIBILITY.

     

    (a)
      Eligibility for Specific Equity Awards.
      Incentive Stock Options may be granted only to Employees. Equity Awards other
      than Incentive Stock Options may be granted to Employees, Directors and
      Consultants.

     

    (b)
      Ten Percent Stockholders.  A
      Ten
      Percent Stockholder shall not be granted an Incentive Stock Option unless the
      exercise price of such Option is at least one hundred ten percent (110%) of
      the
      Fair Market Value of the Common Stock at the date of grant and the Option is
      not
      exercisable after the expiration of five (5) years from the date of
      grant.

     

    (c)
      Consultants. A
      Consultant shall not be eligible for the grant of an Equity Award if, at the
      time of grant, a Form S-8 Registration Statement under the Securities Act (“Form
      S-8”) is not available to register either the offer or the sale of the Company’s
      securities to such Consultant because of the nature of the services that the
      Consultant is providing to the Company, or because the Consultant is not a
      natural person, or as otherwise provided by the rules governing the use of
      Form
      S-8, unless the Company determines both (i) that such grant (A) shall be
      registered in another manner under the Securities Act (e.g.,
      on a
      Form S-3 Registration Statement) or (B) does not require registration under
      the
      Securities Act in order to comply with the requirements of the Securities Act,
      if applicable, and (ii) that such grant complies with the securities laws of
      all
      other relevant jurisdictions. 

     

    6.
      OPTION PROVISIONS.

     

    Each
      Option shall be in such form and shall contain such terms and conditions as
      the
      Board shall deem appropriate. All Options shall be separately designated
      Incentive Stock Options or Nonstatutory Stock Options at the time of grant,
      and,
      if certificates are issued, a separate certificate or certificates will be
      issued for shares of Common Stock purchased on exercise of each type of Option.
      The provisions of separate Options need not be identical, but each Option shall
      include (through incorporation of provisions hereof by reference in the Option
      or otherwise) the substance of each of the following provisions:

     

    (a)
      Term.
      Subject
      to the provisions of Section 5(b) regarding Ten Percent Stockholders, no
      Incentive Stock Option shall be exercisable after the expiration of ten (10)
      years from the date it was granted.

     

    (b)
      Exercise Price of an Option.
      Subject
      to the provisions of Section 5(b) regarding Ten Percent Stockholders, the
      exercise price of each Incentive Stock Option and Nonstatutory Stock Option
      shall be not less than one hundred percent (100%) of the Fair Market Value
      of
      the Common Stock subject to the Option on the date the Option is granted.

    

    
      
        
           

        

        
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    (c)
      Exercise; Consideration.
      Subject
      to the terms and conditions of this Plan and the applicable Option Agreement,
      vested Options may be exercised in whole or in part by giving written notice
      of
      exercise to the Company, specifying the number shares to be purchased,
      accompanied by payment of the applicable exercise or purchase price. The
      exercise or purchase price of Common Stock acquired pursuant to an Option shall
      be paid, to the extent permitted by applicable statutes and regulations, either
      (i) in cash at the time the Option is exercised or (ii) at the discretion of
      the
      Board determined at the time of the grant of the Option (1) by delivery to
      the
      Company of other Common Stock, (2) according to a deferred payment or other
      similar arrangement with the Optionholder, or (3) in any other form of legal
      consideration that may be acceptable to the Board. Unless otherwise specifically
      provided in the Option Agreement, the exercise or purchase price of Common
      Stock
      acquired pursuant to an Option that is paid by delivery to the Company of other
      Common Stock acquired, directly or indirectly from the Company, shall be paid
      only by shares of the Common Stock of the Company that have been held for more
      than six (6) months (or such longer or shorter period of time required to avoid
      a charge to earnings for financial accounting purposes). 

     

    In
      the
      case of any deferred payment arrangement, interest shall be compounded at least
      annually and shall be charged at the minimum rate of interest necessary to
      avoid
      the treatment as interest, under any applicable provisions of the Code, of
      any
      amounts other than amounts stated to be interest under the deferred payment
      arrangement. 

     

    (d)
      Transferability of an Incentive Stock Option.
      An
      Incentive Stock Option shall not be transferable except by will or by the laws
      of descent and distribution and shall be exercisable during the lifetime of
      the
      Optionholder only by the Optionholder. Notwithstanding the foregoing, the
      Optionholder may, by delivering written notice to the Company, in a form
      satisfactory to the Company, designate a third party who, in the event of the
      death of the Optionholder, shall thereafter be entitled to exercise the
      Option.

     

    (e)
      Transferability of a Nonstatutory Stock Option.
      A
      Nonstatutory Stock Option shall be transferable to the extent provided in the
      Option Agreement. If the Option Agreement pertaining to the Nonstatutory Stock
      Option does not provide for transferability, then the Nonstatutory Stock Option
      shall not be transferable except by will or by the laws of descent and
      distribution and shall be exercisable during the lifetime of the Optionholder
      only by the Optionholder. Notwithstanding the foregoing, the Optionholder may,
      by delivering written notice to the Company, in a form satisfactory to the
      Company, designate a third party who, in the event of the death of the
      Optionholder, shall thereafter be entitled to exercise the Option.

     

    (f)
      Vesting Generally.
      The
      total number of shares of Common Stock subject to an Option may, but need not,
      vest and therefore become exercisable in periodic installments that may, but
      need not, be equal. The Option may be subject to such other terms and conditions
      on the time or times when it may be exercised (which may be based on performance
      or other criteria) as the Board may deem appropriate. The vesting provisions
      of
      individual Options may vary and shall be determined by the Board.

    

    
      
        
           

        

        
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    (g)
      Termination of Continuous Service. In
      the
      event an Optionholder’s Continuous Service terminates (other than for Cause and
      other than upon the Optionholder’s death or Disability), the Optionholder may
      exercise his or her Option (to the extent that the Optionholder was entitled
      to
      exercise such Option as of the date of termination (i.e.,
      to the
      extent that such Option is vested)) but only within such period of time ending
      on the earlier of (i) the date three (3) months following the termination of
      the
      Optionholder’s Continuous Service (or such longer or shorter period specified in
      the Option Agreement), or (ii) the expiration of the term of the vested Option
      as set forth in the Option Agreement. If, after termination, the Optionholder
      does not exercise his or her vested Option(s) (if any) within the time specified
      in the Option Agreement, the vested Option(s) shall terminate.

     

    (h)
      Extension of Termination Date.
      An
      Optionholder’s Option Agreement may also provide that if the exercise of the
      vested Option following the termination of the Optionholder’s Continuous Service
      (other than for Cause and other than upon the Optionholder’s death or
      Disability) would be prohibited at any time solely because the issuance of
      shares of Common Stock would violate the registration requirements under the
      Securities Act, then the vested Option shall terminate on the earlier of (i)
      the
      expiration of the term of the vested Option set forth in Section 6(a) or (ii)
      the expiration of a period of three (3) months after the termination of the
      Optionholder’s Continuous Service during which the exercise of the vested Option
      would not be in violation of such registration requirements.

     

    (i)
      Disability of Optionholder.
      In the
      event that an Optionholder’s Continuous Service terminates as a result of the
      Optionholder’s Disability, the Optionholder may exercise his or her Option (to
      the extent that the Optionholder was entitled to exercise such Option as of
      the
      date of termination (i.e.,
      to the
      extent that such Option is vested)), but only within such period of time ending
      on the earlier of (i) the date twelve (12) months following such termination
      (or
      such longer or shorter period specified in the Option Agreement) or (ii) the
      expiration of the term of the vested Option as set forth in the Option
      Agreement. If, after termination, the Optionholder does not exercise his or
      her
      vested Option(s) (if any) within the time specified herein, the vested Option(s)
      shall terminate.

     

    (j)
      Death of Optionholder.
      In the
      event (i) an Optionholder’s Continuous Service terminates as a result of the
      Optionholder’s death or (ii) the Optionholder dies within the period (if any)
      specified in the Option Agreement after the termination of the Optionholder’s
      Continuous Service for a reason other than death or for Cause, then the Option
      may be exercised (to the extent the Optionholder was entitled to exercise such
      Option as of the date of death (i.e.,
      to the
      extent that such Option is vested)) by the Optionholder’s estate, by a person
      who acquired the right to exercise the Option by bequest or inheritance or
      by a
      person designated to exercise the option upon the Optionholder’s death pursuant
      to Section 6(d) or 6(e), but only within the period ending on the earlier of
      (1)
      the date eighteen (18) months following the date of death (or such longer or
      shorter period specified in the Option Agreement) or (2) the expiration of
      the
      term of such Option as set forth in the Option Agreement. If, after death,
      the
      vested Option(s) (if any) is not exercised within the time specified herein,
      the
      vested Option(s) shall terminate.

     

    (k)
      Termination of Continuous Service for Cause. Except
      as
      otherwise provided in the Option Agreement, in the event that an Optionholder’s
      Continuous Service terminates for Cause (which determination shall be made
      in
      the sole discretion of the Board), any and all outstanding Options (whether
      vested or not vested at such time) held by such Optionholder shall immediately
      terminate and be forfeited to the Company upon the relevant date of termination
      of Continuous Service for Cause, as determined by the Board. 

     

     

    

    
      
        
           

        

        
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    For
      purposes of this Plan, “Cause” shall, subject to the following sentence, mean a
      determination by the Board that an Optionholder (i) has been convicted of,
      or
      entered into a plea of nolo contendere to, a crime that constitutes a felony
      under Federal or state law, (ii) has engaged in willful gross misconduct in
      the
      performance of the Optionholder’s duties to the Company or any Affiliate, or
      (iii) has committed a material breach of any written agreement with the Company
      or any Affiliate with respect to confidentiality, noncompetition,
      nonsolicitation or similar restrictive covenant. In the event that the
      Optionholder is a party to an employment agreement with the Company or any
      Affiliate that defined a termination on account of “Cause” (or a term having a
      similar meaning), such definition shall apply as the definition of a termination
      on account of “Cause” for purposes hereof.

     

    (l)
      Options
      not Vested at Termination.
      Any and
      all Options held by the Participant which are not vested on or before the
      effective date of termination of Continuous Service of the Optionholder shall
      immediately be forfeited to the Company (and shall once again become available
      for grant under this Plan).

     

    7.
      PROVISIONS OF STOCK GRANTS. 

     

    (a)
      Stock Grants. Subject
      to the terms and provisions of this Plan, the Board, at any time and from time
      to time, may make Stock Grants to persons in such amounts and upon such terms
      and conditions as the Board shall determine.

     

    (i)
      Stock
      Award Agreement.
      The
      Board may require, as a condition to a Stock Grant, that a recipient of a Stock
      Grant enter into a Stock Award Agreement, setting forth the terms and conditions
      of the Stock Grant. In lieu of a Stock Award Agreement, the Board may provide
      the terms and conditions of a Stock Grant in a notice to the Participant of
      the
      Stock Grant, on the Stock certificate representing the Stock Grant, in the
      resolution approving the Stock Grant, or in such other manner as it deems
      appropriate.

     

    (ii)
      Transferability.
      Except
      as otherwise provided in this Section 7, the Common Stock granted pursuant
      to
      the Stock Grant may not be sold, transferred, pledged, assigned, or otherwise
      alienated or hypothecated until the end of the applicable Restriction Period
      (as
      hereinafter defined), if any. For purposes of this Plan, “Restriction Period”
means the applicable period during which the Common Stock granted pursuant
      to
      the Stock Grant are subject to any restrictions or conditions established by
      the
      Board. Except as otherwise provided in this Section 7, shares of Common Stock
      covered by each Stock Grant made under this Plan shall become freely
      transferable by the Participant after the last day of the Restriction Period,
      if
      any, and completion of all conditions to vesting, if any. 

     

    (iii)
      Other
      Restrictions.
      The
      Board may impose such other conditions and/or restrictions on any shares of
      Common Stock granted pursuant to a Stock Grant under this Plan as it may deem
      advisable including, without limitation, a requirement that Participants pay
      a
      stipulated purchase price for each share of Common Stock granted and/or
      restrictions under applicable Federal or state securities laws; and may legend
      the certificates representing the Common Stock to give appropriate notice of
      such restrictions.

    

    

    
      
        
           

        

        
          9

          
            

          

        

        
           

        

      

    

    

    The
      Company shall also have the right to retain the certificates representing shares
      of Stock Grants in the Company’s possession until such time as all conditions
      and/or restrictions applicable to such shares have been satisfied.

     

    (iv)
      Termination
      of Participant’s Continuous Service.
      In the
      event a Participant’s Continuous Service terminates, the Company may reacquire
      any or all of the shares of Common Stock held by the Participant which have
      not
      vested as of the date of termination under the terms of the Stock
      Grant.

     

    (v)
      Voting
      Rights, Dividends and Other Distributions.
      During
      the Restriction Period (if any), Participants holding shares of Common Stock
      granted pursuant to Stock Grants may exercise full voting rights and shall
      receive all regular cash dividends paid with respect to such shares.

     

    8.
      COVENANTS OF THE COMPANY.

     

    (a)
      Availability of Shares.
      During
      the terms of the Equity Awards, the Company shall keep available at all times
      the number of shares of Common Stock required to satisfy such Equity
      Awards.

     

    (b)
      Securities Law Compliance.
      The
      Company shall seek to obtain from each regulatory commission or agency having
      jurisdiction over this Plan such authority as may be required to grant Equity
      Awards and to issue and sell shares of Common Stock upon exercise of the Equity
      Awards; provided, however, that this undertaking shall not require the Company
      to register under the Securities Act this Plan, any Equity Award or any Common
      Stock issued or issuable pursuant to any such Equity Award. If, after reasonable
      efforts, the Company is unable to obtain from any such regulatory commission
      or
      agency the authority which counsel for the Company deems necessary for the
      lawful issuance and sale of Common Stock under this Plan, the Company shall
      be
      relieved from any liability for failure to issue and sell Common Stock upon
      exercise of such Equity Awards unless and until such authority is
      obtained.

     

    9.
      USE OF PROCEEDS FROM STOCK. 

     

    Proceeds
      from the sale of Common Stock pursuant to Equity Awards shall constitute general
      funds of the Company.

     

    10.
      MISCELLANEOUS

     

    (a)
      Stockholder Rights. No
      Optionholder shall be deemed to be the holder of, or to have any of the rights
      of a holder with respect to, any shares of Common Stock subject to the Option
      unless and until such Participant has satisfied all requirements for exercise
      of, and has exercised, the Option pursuant to its terms.

     

     

    
 

    
      
        
           

        

        
          10

          
            

          

        

        
           

        

      

    

    

     

    (b)
      No Employment or other Service Rights.
      Nothing
      in this Plan or any instrument executed or Equity Award granted pursuant thereto
      shall confer upon any Participant any right to continue to serve the Company
      or
      an Affiliate in the capacity in effect at the time the Equity Award was granted
      or shall affect the right of the Company or an Affiliate to terminate (i) the
      employment of an Employee with or without notice and with or without cause,
      (ii)
      the service of a Consultant pursuant to the terms of such Consultant’s agreement
      with the Company or an Affiliate or (iii) the service of a Director pursuant
      to
      the bylaws of the Company or an Affiliate, and any applicable provisions of
      the
      corporate law of the state in which the Company or the Affiliate is
      incorporated, as the case may be. No Employee, Consultant or Director shall
      have
      the right to be selected as a participant in this Plan, or having been so
      selected, to be selected again as a Participant in this Plan.

     

    (c)
      Incentive Stock Option $100,000 Limitation.
      To the
      extent that the aggregate Fair Market Value (determined at the time of grant)
      of
      Common Stock with respect to which Incentive Stock Options are exercisable
      for
      the first time by any Optionholder during any calendar year (under all plans
      of
      the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000),
      the Options or portions thereof which exceed such limit (according to the order
      in which they were granted) shall be treated as Nonstatutory Stock
      Options.

     

    (d)
      Investment Assurances. The
      Company may require a Participant, as a condition of exercising or acquiring
      Common Stock under any Equity Award, (i) to give written assurances satisfactory
      to the Company as to the Participant’s knowledge and experience in financial and
      business matters and/or to employ a purchaser representative reasonably
      satisfactory to the Company who is knowledgeable and experienced in financial
      and business matters and that he or she is capable of evaluating, alone or
      together with the purchaser representative, the merits and risks of exercising
      the Equity Award; and (ii) to give written assurances satisfactory to the
      Company stating that the Participant is acquiring Common Stock subject to the
      Equity Award for the Participant’s own account and not with any present
      intention of selling or otherwise distributing the Common Stock. The foregoing
      requirements, and any assurances given pursuant to such requirements, shall
      be
      inoperative if (1) the issuance of the shares of Common Stock upon the exercise
      or acquisition of Common Stock under the Equity Award has been registered under
      a then currently effective registration statement under the Securities Act
      or
      (2) as to any particular requirement, a determination is made by counsel for
      the
      Company that such requirement need not be met in the circumstances under the
      then applicable securities laws. The Company may, upon advice of counsel to
      the
      Company, place legends on stock certificates issued under this Plan as such
      counsel deems necessary or appropriate in order to comply with applicable
      securities laws, including, but not limited to, legends restricting the transfer
      of the Common Stock.

     

    (e)
      Withholding Obligations. 

     

    (i)
      Payment
      by Participant.
      Each
      Participant shall, no later than the date as of which the value of an Equity
      Award or other amounts received thereunder first becomes includable in the
      gross
      income of the Participant for Federal income tax purposes, pay to the Company,
      or make arrangements satisfactory to the Board regarding payment of, any
      federal, state, or local taxes of any kind required by law to be withheld with
      respect to such income. The Company and any Affiliate shall, to the extent
      permitted by law, have the right to deduct any such taxes from any payment
      of
      any kind otherwise due to the Participant.

    

    
      
        
           

        

        
          11

          
            

          

        

        
           

        

      

    

    

     

    (ii)
      Payment
      in Stock.
      Subject
      to approval by the Board, a Participant may elect to have the minimum required
      tax withholding obligation satisfied, in whole or in part, by (i) authorizing
      the Company to withhold from shares of Common Stock to be issued pursuant to
      any
      Equity Award a number of shares with an aggregate Fair Market Value (as of
      the
      date the withholding is effected) that would satisfy such minimum withholding
      amount due, or (ii) transferring to the Company shares of Common Stock owned
      by
      the Participant with an aggregate Fair Market Value (as of the date the
      withholding is effected) that would satisfy such minimum withholding amount
      due.

     

    (f)
      Compliance with Laws and Regulations. Notwithstanding
      anything in this Plan to the contrary, the Board, in its sole discretion, may
      bifurcate this Plan so as to restrict, limit or condition the use of any
      provision of this Plan to Participants who are officers or Directors subject
      to
      Section 16 of the Exchange Act without so restricting, limiting or conditioning
      this Plan with respect to other Participants. Additionally, in interpreting
      and
      applying the provisions of this Plan, any Option granted as an Incentive Stock
      Option pursuant to this Plan shall, to the extent permitted by law, be construed
      as an “incentive stock option” within the meaning of Section 422 of the Code.

     

    (g)
      Severability. If
      any
      provision of this Plan or any Equity Award is determined to be invalid, illegal
      or unenforceable in any jurisdiction, or as to any person, or would disqualify
      this Plan or any Equity Award under any law deemed applicable by the Board,
      such
      provision shall be construed or deemed amended to conform to applicable laws,
      or, if it cannot be so construed or deemed amended without, in the Board’s
      determination, materially altering the intent of this Plan or the Equity Award,
      such provision shall be stricken as to such jurisdiction, person or Equity
      Award, and the remainder of this Plan and any such Equity Award shall remain
      in
      full force and effect.

     

    (h)
      Headings. Any
      section, subsection, paragraph or other subdivision headings contained herein
      are for purpose of convenience only and are not intended to expand, limit or
      otherwise define the content of such subdivisions. 

     

    (i)
      Requirement of Notification of Election under Section 83(b) of the Code.
If
      any
      Participant shall, in connection with the acquisition of shares of Common Stock
      under this Plan, make the election permitted under section 83(b) of the Code
      (i.e.,
      an
      election to include in gross income in the year of transfer the amounts
      specified in Section 83(b) of the Code), such Participant shall notify the
      Company of such election within ten (10) days of filing notice of the election
      with the Internal Revenue Service, in addition to any filing and notification
      required pursuant to regulations issued under the authority of Code Section
      83(b).

     

    (j)
      Requirement of Notification Upon Disqualifying Disposition.
In
      order
      to obtain certain tax benefits afforded to Incentive Stock Options under Section
      422 of the Code, the Participant must hold the shares acquired upon the exercise
      of an Incentive Stock Option for two (2) years after the applicable grant date
      and one (1) year after the applicable date of exercise. The Participant shall
      give the Company prompt notice of any disposition of shares acquired on the
      exercise of an Incentive Stock Option prior to the expiration of such holding
      periods. 

     

    

    

    
      
        
           

        

        
          12

          
            

          

        

        
           

        

      

    

    

     

    11.
      ADJUSTMENTS UPON CHANGES IN STOCK.

     

    (a)
      Capitalization Adjustments.
      If any
      change is made in, or other event occurs with respect to, the Common Stock
      subject to this Plan, or subject to any Equity Award, without the receipt of
      consideration by the Company (through merger, consolidation, reorganization,
      recapitalization, reincorporation, stock dividend, dividend in property other
      than cash, stock split, liquidating dividend, combination of shares, exchange
      of
      shares, change in corporate structure or other transaction not involving the
      receipt of consideration by the Company), the Plan will be appropriately
      adjusted in the class(es) and maximum number of securities subject to this
      Plan
      pursuant to Section 4(a), and the outstanding Equity Awards will be
      appropriately adjusted in the class(es) and number of securities and price
      per
      share of Common Stock subject to such outstanding Equity Awards. The Board
      shall
      make such adjustments, and its determination shall be final, binding and
      conclusive. The conversion of any convertible securities of the Company shall
      not be treated as a transaction “without receipt of consideration” by the
      Company.

     

    (b)
      Dissolution or Liquidation.
      In the
      event of a dissolution or liquidation of the Company, then all outstanding
      Equity Awards shall terminate immediately prior to the completion of such
      dissolution or liquidation.

     

    (c)
      Corporate Transaction.
      In the
      event of a Corporate Transaction, any surviving corporation or acquiring
      corporation may assume any or all Equity Awards outstanding under the Plan
      or
      may substitute similar stock awards for Equity Awards outstanding under the
      Plan
      (it being understood that similar stock awards include awards to acquire the
      same consideration paid to the stockholders or the Company, as the case may
      be,
      pursuant to the Corporate Transaction). In the event any surviving corporation
      or acquiring corporation does not assume any or all such outstanding Equity
      Awards or substitute similar stock awards for such outstanding Equity Awards,
      then with respect to Equity Awards that have been neither assumed nor
      substituted and that are held by Participants whose Continuous Service has
      not
      terminated prior to the effective time of the Corporate Transaction, the vesting
      of such Equity Awards (and, if applicable, the time at which such Equity Awards
      may be exercised) shall (contingent upon consummation of such Corporate
      Transaction) be accelerated in full to a date prior to the consummation of
      such
      Corporate Transaction as the Board shall determine (or, if the Board shall
      not
      determine such a date, to the date that is five (5) days prior to the
      consummation of the Corporate Transaction), and the Equity Awards shall
      terminate if not exercised (if applicable) at or prior to such event effective
      time. With respect to any other Equity Awards outstanding under the Plan, that
      have been neither assumed nor substituted, the vesting of such Equity Awards
      (and, if applicable, the time at which such Equity Award may be exercised)
      shall
      not be accelerated unless otherwise provided in a written agreement between
      the
      Company or any Affiliate and the holder of such Equity Award, and such Equity
      Awards shall terminate if not exercised (if applicable) prior to the effective
      time of the Corporate Transaction.

     

    12.
      AMENDMENT OF THE PLAN AND EQUITY AWARDS.

     

    (a)
      Amendment of Plan.
      The
      Board at any time, and from time to time, may amend this Plan. However, except
      as provided in Section 11 relating to adjustments upon changes in Common Stock,
      no amendment shall be effective unless approved by the stockholders of the
      Company to the extent stockholder approval is necessary to satisfy the
      requirements of Section 422 of the Code.

    

    
      
        
           

        

        
          13

          
            

          

        

        
           

        

      

    

    

     

    (b)
      Stockholder Approval.
      The
      Board may, in its sole discretion, submit any other amendment to this Plan
      for
      stockholder approval, including, but not limited to, amendments to the Plan
      intended to satisfy the requirements of Section 162(m) of the Code and the
      regulations thereunder regarding the exclusion of performance-based compensation
      from the limit on corporate deductibility of compensation paid to certain
      executive officers.

     

    (c)
      Contemplated Amendments.
      It is
      expressly contemplated that the Board may amend this Plan in any respect the
      Board deems necessary or advisable to provide eligible Employees with the
      maximum benefits provided or to be provided under the provisions of the Code
      and
      the regulations promulgated thereunder relating to Incentive Stock Options
      and/or to bring the Plan and/or Incentive Stock Options granted under it into
      compliance therewith.

     

    (d)
      No Impairment of Rights.
      Rights
      under any Equity Award granted before amendment of this Plan shall not be
      materially impaired by any amendment of this Plan unless (i) the Company
      requests the consent of the Participant and (ii) the Participant consents in
      writing.

     

    (e)
      Amendment of Equity Awards.
      The
      Board at any time, and from time to time, may amend the terms of any one or
      more
      Equity Awards; provided, however, that the rights under any Equity Award shall
      not be materially impaired by any such amendment unless (i) the Company requests
      the consent of the Participant and (ii) the Participant consents in
      writing.

     

    (f)
      Code Section 409A. Any
      action of the Board that in any way alters or affects the tax treatment of
      any
      Equity Award or that in the sole discretion of the Board is necessary to prevent
      an Equity Award from being subject to tax under Code Section 409A shall not
      be
      considered to materially impair any rights of any Participant. Any modification
      or amendment of this Plan or any Equity Award in a manner that would cause
      this
      Plan or any Equity Award to be subject to tax under Section 409A shall be deemed
      null and void.

     

    13.
      TERMINATION OR SUSPENSION OF THE PLAN.

     

    (a)
      Plan Term. The
      Board
      may suspend or terminate this Plan at any time. Unless sooner terminated, this
      Plan shall terminate on the day before the tenth (10th) anniversary of the
      date
      this Plan is adopted by the Board or approved by the stockholders of the
      Company, whichever is earlier. No Equity Awards may be granted under this Plan
      while the Plan is suspended or after it is terminated.

     

    (b)
      No Impairment of Rights.
      Suspension or termination of this Plan shall not impair rights and obligations
      under any Equity Award granted while this Plan is in effect except with the
      written consent of the Participant.

     

    14.
      CHOICE OF LAW.

     

    The
      law
      of the State of Florida shall govern all questions concerning the construction,
      validity and interpretation of this Plan, without regard to such state’s
      conflict of laws rules.

    

    *   
      *    *    *    *

    
 

    14Exhibit
10.1

EXECUTION
COPY

PURCHASE AND SALE AGREEMENT

BETWEEN

 

SMITH PRODUCTION INC.

AS SELLER

 

AND

 

EDGE PETROLEUM EXPLORATION
COMPANY

AS PURCHASER

 

TABLE OF
CONTENTS

	
  

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  
	
  ARTICLE I PURCHASE AND SALE

  	
   

  	
  5

  
	
  Section 1.1  Purchase and Sale

  	
   

  	
  5

  
	
  Section 1.2  Assets

  	
   

  	
  6

  
	
  Section 1.3  Excluded Assets

  	
   

  	
  7

  
	
  Section 1.4  Effective Time

  	
   

  	
  8

  
	
  Section 1.5  Delivery and Maintenance of Records

  	
   

  	
  8

  
	
  Section 1.6  Proration of Costs and Revenues

  	
   

  	
  8

  
	
   

  	
   

  	
   

  
	
  ARTICLE II PURCHASE PRICE

  	
   

  	
  9

  
	
  Section 2.1  Purchase Price

  	
   

  	
  9

  
	
  Section 2.2  Adjustments to Purchase Price

  	
   

  	
  9

  
	
  Section 2.3  Allocation of Purchase Price

  	
   

  	
  10

  
	
  Section 2.4  Deposit

  	
   

  	
  11

  
	
   

  	
   

  	
   

  
	
  ARTICLE III TITLE MATTERS

  	
   

  	
  11

  
	
  Section 3.1  Seller’s Title

  	
   

  	
  11

  
	
  Section 3.2  Defensible Title

  	
   

  	
  12

  
	
  Section 3.3  Permitted Encumbrances

  	
   

  	
  13

  
	
  Section 3.4  Notice of Title Defects

  	
   

  	
  14

  
	
  Section 3.5  Remedies for Title Defects

  	
   

  	
  15

  
	
  Section 3.6  Consents to Assignment and Preferential
  Rights to Purchase

  	
   

  	
  17

  
	
  Section 3.7  Casualty Loss

  	
   

  	
  18

  
	
  Section 3.8  Condemnation Loss

  	
   

  	
  18

  
	
  Section 3.9  Limitations on Applicability

  	
   

  	
  18

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV ENVIRONMENTAL MATTERS

  	
   

  	
  18

  
	
  Section 4.1  Environmental Assessment

  	
   

  	
  18

  
	
  Section 4.2  Notice of Material Adverse Environmental
  Condition

  	
   

  	
  19

  
	
  Section 4.3  Environmental Remedies

  	
   

  	
  19

  
	
  Section 4.4  Limitations

  	
   

  	
  20

  
	
   

  	
   

  	
   

  
	
  ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER

  	
   

  	
  21

  
	
  Section 5.1  Disclaimers

  	
   

  	
  21

  
	
  Section 5.2  Existence and Qualification

  	
   

  	
  22

  
	
  Section 5.3  Power

  	
   

  	
  22

  
	
  Section 5.4  Authorization and Enforceability

  	
   

  	
  23

  
	
  Section 5.5  No Conflicts

  	
   

  	
  23

  
	
  Section 5.6  Purchaser’s Liability for Brokers’ Fees

  	
   

  	
  23

  
	
  Section 5.7  Litigation

  	
   

  	
  23

  
	
  Section 5.8  Taxes and Assessments

  	
   

  	
  23

  
	
  Section 5.9  Outstanding Capital Commitments

  	
   

  	
  24

  
	
  Section 5.10  Compliance with Laws

  	
   

  	
  24

  
	
  Section 5.11  Contracts

  	
   

  	
  24

  
	
  Section 5.12  Payments

  	
   

  	
  24

  
	
  Section 5.13  Gas Imbalances

  	
   

  	
  24

  

 

 i
 

 

 

	
  

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  
	
  Section 5.14  Governmental Authorizations

  	
   

  	
  25

  
	
  Section 5.15  Consents to Assignments and Preferential
  Purchase Rights

  	
   

  	
  25

  
	
  Section 5.16  Non-foreign Person

  	
   

  	
  25

  
	
  Section 5.17  Payout Balances

  	
   

  	
  25

  
	
  Section 5.18  Condemnation

  	
   

  	
  25

  
	
  Section 5.19  Bankruptcy

  	
   

  	
  25

  
	
  Section 5.20  NGA

  	
   

  	
  26

  
	
  Section 5.21  Investment Company

  	
   

  	
  26

  
	
  Section 5.22  Suspense Accounts

  	
   

  	
  26

  
	
  Section 5.23  Material Changes

  	
   

  	
  26

  
	
  Section 5.24  Calls on Production

  	
   

  	
  26

  
	
  Section 5.25  No Forward Sales

  	
   

  	
  26

  
	
  Section 5.26  Wells to Be Plugged and Abandoned

  	
   

  	
  26

  
	
  Section 5.27  No Sale or Hypothecation

  	
   

  	
  27

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI REPRESENTATIONS AND WARRANTIES OF
  PURCHASER

  	
   

  	
  27

  
	
  Section 6.1  Existence and Qualification

  	
   

  	
  27

  
	
  Section 6.2  Power

  	
   

  	
  27

  
	
  Section 6.3  Authorization and Enforceability

  	
   

  	
  27

  
	
  Section 6.4  No Conflicts

  	
   

  	
  27

  
	
  Section 6.5  Seller’s Liability for Brokers’ Fees

  	
   

  	
  28

  
	
  Section 6.6  Litigation

  	
   

  	
  28

  
	
  Section 6.7  Financing

  	
   

  	
  28

  
	
  Section 6.8  Texas Deceptive Trade Practices-Consumer
  Protection Act

  	
   

  	
  28

  
	
  Section 6.9  No Reliance

  	
   

  	
  28

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII COVENANTS OF THE PARTIES

  	
   

  	
  29

  
	
  Section 7.1  Access

  	
   

  	
  29

  
	
  Section 7.2  Government Reviews

  	
   

  	
  29

  
	
  Section 7.3  Notification of Breaches

  	
   

  	
  30

  
	
  Section 7.4  Assignments and Bills of Sale

  	
   

  	
  30

  
	
  Section 7.5  Public Announcements

  	
   

  	
  30

  
	
  Section 7.6  Operation of Business Pending Closing

  	
   

  	
  31

  
	
  Section 7.7  Indemnity Regarding Access

  	
   

  	
  32

  
	
  Section 7.8  Gas Imbalances and Take-or-Pay Make-up
  Obligations

  	
   

  	
  32

  
	
  Section 7.9  Consents and Preferential Rights

  	
   

  	
  33

  
	
  Section 7.10  Tax Matters

  	
   

  	
  35

  
	
  Section 7.11  Further Assurances

  	
   

  	
  35

  
	
  Section 7.12  Replacement of Bonds, Letters of Credit and
  Guarantees

  	
   

  	
  35

  
	
  Section 7.13  Like-Kind Exchange

  	
   

  	
  35

  
	
  Section 7.14  Arbitration

  	
   

  	
  36

  
	
  Section 7.15  Delivery of Financial Statements and Reserve
  Information

  	
   

  	
  36

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII CONDITIONS TO CLOSING

  	
   

  	
  37

  
	
  Section 8.1  Conditions of Seller to Closing

  	
   

  	
  37

  

 

 ii
 

 

 

	
  

  	
   

  	
  PAGE

  
	
   

  	
   

  	
   

  
	
  Section 8.2  Conditions of Purchaser to Closing

  	
   

  	
  38

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX CLOSING

  	
   

  	
  39

  
	
  Section 9.1  Time and Place of Closing

  	
   

  	
  39

  
	
  Section 9.2  Obligations of Seller at Closing

  	
   

  	
  39

  
	
  Section 9.3  Obligations of Purchaser at Closing

  	
   

  	
  40

  
	
  Section 9.4  Closing Payment and Post-Closing Purchase
  Price Adjustments

  	
   

  	
  40

  
	
   

  	
   

  	
   

  
	
  ARTICLE X TERMINATION

  	
   

  	
  41

  
	
  Section 10.1  Termination

  	
   

  	
  41

  
	
  Section 10.2  Effect of Termination

  	
   

  	
  41

  
	
  Section 10.3  Distribution of Deposit Upon Termination

  	
   

  	
  42

  
	
   

  	
   

  	
   

  
	
  ARTICLE XI POST-CLOSING OBLIGATIONS;
  INDEMNIFICATION; LIMITATIONS; DISCLAIMERS AND WAIVERS

  	
   

  	
  42

  
	
  Section 11.1  Receipts

  	
   

  	
  42

  
	
  Section 11.2  Expenses

  	
   

  	
  43

  
	
  Section 11.3  Assumption and Indemnification

  	
   

  	
  43

  
	
  Section 11.4  Indemnification Actions

  	
   

  	
  47

  
	
  Section 11.5  Survival

  	
   

  	
  49

  
	
  Section 11.6  Recording

  	
   

  	
  50

  
	
  Section 11.7  Independent Investigation

  	
   

  	
  50

  
	
  Section 11.8  Disclaimer Regarding Information

  	
   

  	
  51

  
	
  Section 11.9  Waiver of Trade Practices Acts

  	
   

  	
  51

  
	
  Section 11.10  Post-Closing Audit Rights

  	
   

  	
  51

  
	
   

  	
   

  	
   

  
	
  ARTICLE XII MISCELLANEOUS

  	
   

  	
  51

  
	
  Section 12.1  Counterparts

  	
   

  	
  51

  
	
  Section 12.2  Notice

  	
   

  	
  51

  
	
  Section 12.3  Binding Agreement

  	
   

  	
  52

  
	
  Section 12.4  Expenses

  	
   

  	
  52

  
	
  Section 12.5  Change of Name

  	
   

  	
  52

  
	
  Section 12.6  Construction

  	
   

  	
  53

  
	
  Section 12.7  Governing Law

  	
   

  	
  53

  
	
  Section 12.8  Captions

  	
   

  	
  53

  
	
  Section 12.9  Waivers

  	
   

  	
  53

  
	
  Section 12.10  Assignment

  	
   

  	
  53

  
	
  Section 12.11  Entire Agreement

  	
   

  	
  53

  
	
  Section 12.12  Amendment

  	
   

  	
  53

  
	
  Section 12.13  No Third-Party Beneficiaries

  	
   

  	
  54

  
	
  Section 12.14  References

  	
   

  	
  54

  
	
  Section 12.15  Severability

  	
   

  	
  54

  

 

 iii

PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement is executed on this
the 16th day of November, 2006, to be effective as of the Effective Time, by
and between Smith Production Inc., a Texas corporation, and Edge Petroleum
Exploration Company, a Delaware corporation.

In consideration of the mutual promises and other
valuable consideration recited herein, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:

DEFINITIONS

“AFE” shall mean authority for expenditure as used in
Section 5.9.

“Adjustment Period” shall mean the period of time
commencing at the Effective Time and ending on the Closing Date as discussed in
Section 2.2.

“Adjusted Purchase Price” shall mean the Purchase
Price after calculating and applying the adjustments set forth in Section 2.2.

“Affiliates” with respect to any Person, means any
person that directly or indirectly controls, is controlled by or is under
common control with such Person.

“Agreement” shall mean this Purchase and Sale Agreement.

“Allocated Value” shall mean the allocation of the
unadjusted Purchase Price among each of the Assets as described in Section 2.3.

“Assets” shall mean the property and property rights
set forth in Section 1.2.

“Assignment and Bill of Sale” shall mean the
conveyance document by which Seller conveys the Assets to Purchaser as
described in Section 3.1(b).

“Assignment of Pipeline Assets” shall mean the
conveyance document by which Seller conveys the Pipeline Assets to Purchaser as
described in Section 3.1(d).

“Assumed Obligations” has the meaning set forth in
Section 11.3(a).

“Business Day” means each calendar day except
Saturdays, Sundays, and Federal holidays.

“Closing” has the meaning set forth in Section 9.1(a).

“Closing Date” has the meaning set forth in Section
9.1(b).

“Closing Payment” has the meaning set forth in Section
9.4(a).

“Code” has the meaning set forth in Section 2.3.

“Confidentiality Agreement” has the meaning set forth
in Section 7.1(a).

 

“Contracts” has the meaning set forth in Section 1.2(d).

“Damages” has the meaning set forth in Section
11.3(e).

“Defensible Title” has the meaning set forth in
Section 3.2.

“Deposit” has the meaning set forth in Section 2.4.

“DTPA” has the meaning set forth in Section 6.8.

“Effective Time” has the meaning set forth in Section
1.4.

“Environmental Assessment” has the meaning set forth
in Section 4.1.

“Environmental Laws” means, as the same have been
amended as of the Effective Time, the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.; the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; the Federal
Water Pollution Control Act, 33 U.S.C. Section 1251 et seq.; the Clean Air Act,
42 U.S.C. Section 7401 et seq.; the Hazardous Materials Transportation Act, 49
U.S.C. Section 1471 et seq.; the Toxic Substances Control Act, 15 U.S.C.
Sections 2601 through 2629; the Oil Pollution Act, 33 U.S.C. Section 2701 et
seq.; the Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section
11001 et seq.; and the Safe Drinking Water Act, 42 U.S.C. Sections 300f through
300j; and all similar Laws as of the Effective Time of any Governmental Body
having jurisdiction over the Properties addressing pollution or protection of
the environment and all regulations implementing the foregoing.

“Environmental Liabilities” shall mean, with respect
to the Properties, any and all environmental response costs, costs to cure,
restoration costs, costs of remediation, settlements, penalties, fines,
attorney fees, and Damages (i) related to a Material Adverse Environmental
Condition regardless of whether same occurred PRIOR TO, AT OR AFTER THE
EFFECTIVE TIME and/or (ii) incurred or imposed pursuant to any claim or cause
of action by a Governmental Body or other Person for remediation or response
costs or any remediation obligation or Damages arising out of any violation of
any Environmental Law which is attributable to the ownership or operation of
the Properties PRIOR TO, AT OR AFTER THE EFFECTIVE TIME.

“Equipment” has the meaning set forth in Section
1.2(f).

“Excluded Assets” has the meaning set forth in Section
1.3.

“Governmental Authorization” has the meaning set forth
in Section 5.14.

“Governmental Body” means any federal, state, local,
municipal or other governmental regulatory agency, administrative agency,
commission, court, tribunal, body or other authority exercising or entitled to
exercise any administrative, executive, judicial, legislative, police,
regulatory or taxing powers.

 2
 

 

“HSR Act” means the Hart-Scott Rodino Antitrust
Improvements Act of 1976 as discussed in Section 7.2.

“Hydrocarbons” shall mean oil, gas, condensate, other
gaseous and liquids products and all products attributable thereto, produced
from or attributable to the Properties.

“Indemnification Notice” has the meaning set forth in
Section 11.4(b).

“Indemnify” has the meaning set forth in Section
11.3(b).

“Indemnified Party” has the meaning set forth in
Section 11.4(a).

“Indemnifying Party” has the meaning set forth in
Section 11.4(a).

“Lands” has the meaning set forth in Section 1.2(a).

“Laws” means all statutes, rules, regulations,
ordinances, orders, and codes of Governmental Bodies.

“Leases” has the meaning set forth in Section 1.2(a).

“Litigation Expenses” has the meaning set forth in Section
11.3(b)(ix).

“Material Adverse Environmental Condition” shall mean,
with respect to the Properties, any violations of Environmental Laws; any
condition that is required to be remediated or cured under applicable
Environmental Laws in effect at the time of the Environmental Assessment; the
failure to remediate or cure any condition that is required to be remediated or
cured under applicable Environmental Laws in effect at the time of the
Environmental Assessment; any action or proceeding before any Governmental Body
alleging potential liability arising out of or resulting from any actual or
alleged violation of, or any remedial obligation under, any Environmental Law
with respect to the Properties or notice of same to Seller by any Person.

“Net Revenue Interest” shall mean an ownership
interest, expressed either as a decimal or percentage, in the stream of
revenues attributable to the Assets, net of all burdens, as discussed in
Section 3.2(a).

“Permitted Encumbrances” has the meaning set forth in
Section 3.3.

“Person” means any individual, firm, corporation,
partnership, limited liability company, joint venture, association, trust,
unincorporated organization, government or agency or subdivision thereof or any
other entity.

“Pipeline Assets” has the meaning set forth in Section
1.2(i).

“Properties” shall mean the Units, Leases, Lands and
Wells.

“Property Costs” shall mean all operating expenses and
capital expenditures incurred in the ownership and operation of the Assets and,
where applicable, in accordance with the relevant operating or unit agreement,
and overhead costs charged to the Assets under the relevant

 3
 

 

operating agreement or
unit agreement, if any. Property Costs shall include costs of insurance and ad
valorem, property, severance, production and similar Taxes based upon or
measured by the ownership or operation of the Assets or the production of
Hydrocarbons therefrom, but excluding any other Taxes.  Property Costs shall not include liabilities
and expenses attributable to (i) claims, investigations, administrative
proceedings or litigation directly or indirectly arising out of or resulting
from actual or claimed personal injury or death, property damage or violation
of any Law, (ii) obligations to plug wells, dismantle facilities, close pits and
restore the surface around such wells, facilities and pits, (iii) obligations
to remediate or cure any contamination of groundwater, surface water, soil or
Equipment under applicable Environmental Laws, (iv) obligations to furnish
make-up gas according to the terms of applicable gas sales, gathering or
transportation contracts, (v) gas balancing obligations, (vi) obligations
related to the Excluded Assets and (vii) obligations to pay Working Interests,
royalties, overriding royalties or other interests held in suspense.

“PUD” shall mean a geographic area on lands covered by
the Leases which is a potential drilling location to be determined by Seller
containing the greater of (i) the lands described in an applicable Railroad
Commission of Texas Form W-1, or (ii) forty (40) acres.

“Purchase Price” has the meaning set forth in Section
2.1.

“Purchaser” shall mean Edge Petroleum Exploration
Company.

“Purchaser Indemnitees” shall mean Purchaser, its
officers, directors, shareholders, members, employees, agents, representatives,
Affiliates and subsidiaries.

“Purchaser’s Indemnification Obligations” shall mean
those obligations described in Section 11.3(b).

“Records” has the meaning set forth in Section 1.2(h).

“Secondary Purchase and Sale Agreement” shall mean
that certain Purchase and Sale Agreement between Seller and Purchaser having an
Effective Time of January 1, 2007 at 12:01 a.m. local time at the location of
the Properties covering all of Seller’s interest in the Assets described
therein which was prepared and executed contemporaneously with the preparation
and execution of this Agreement.

“Seller” shall mean Smith Production Inc.

“Seller Operated Assets” shall mean Assets operated by
Seller.

“Seller Indemnitees” shall mean Seller, its officers,
directors, shareholders, members, employees, agents, representatives,
Affiliates and subsidiaries.

“Seller’s Indemnification Obligations” shall mean
those obligations described in Section 11.3(c).

“Surface Contracts” has the meaning set forth in
Section 1.2(e).

 4
 

 

“Tax(es)” means all federal, state, local and foreign
income, profits, franchise, sales, use, ad valorem, property, severance,
production, excise, stamp, documentary, real property transfer or gain, gross
receipts, goods and services, registration, capital, transfer, or withholding
Taxes or other governmental fees or charges imposed by any taxing authority,
including any interest, penalties or additional amounts which may be imposed
with respect thereto.

“Tax Returns” has the meaning set forth in Section
5.8.

“Third Party Claim” has the meaning set forth in
Section 11.4(b).

“Title Benefit” shall mean any right or condition that
operates to increase the Net Revenue Interest of Seller in any Property above
the Net Revenue Interest shown on Exhibit 1.2(b), without causing a
proportionate increase in Seller’s Working Interest as shown in Exhibit 1.2(b)
as discussed in Section 3.2.

“Title Benefit Amount” has the meaning set forth in
Section 3.4(c).

“Title Benefit Notice” has the meaning set forth in
Section 3.4(b).

“Title Claim Date” has the meaning set forth in
Section 3.4(a).

“Title Defect” has the meaning set forth in Section
3.2.

“Title Defect Amount” has the meaning set forth in
Section 3.5(a)(i).

“Title Defect Notice” has the meaning set forth in
Section 3.4(a).

“Title Defect Property” has the meaning set forth in
Section 3.4(a).

“Units” has the meaning set forth in Section 1.2(c).

“Wells” has the meaning set forth in Section 1.2(b).

“Working Interest” shall mean the gross leasehold
ownership interest in the Leases, or, as the case may be, the gross ownership
interest in fee minerals or other types of interests which are included within
the Assets, as discussed in Section 3.2(b).

ARTICLE I

PURCHASE AND SALE

Section 1.1         Purchase and Sale.

At the Closing, and upon the terms
and subject to the conditions of this Agreement,
Seller agrees to sell and convey the Assets to Purchaser and Purchaser agrees
to purchase, accept and pay for the Assets.

 5
 

 

Section 1.2         Assets.

As used herein, “Assets” means all of Seller’s
interests in the following property rights described in 1.2(a) through 1.2(i),
inclusive, as follows:

(a)         Oil, gas and mineral leases; subleases
and other leaseholds; royalties, overriding royalties, net profit interests,
mineral fee interests, carried interests; farmout rights; options; and other
properties and interests (collectively, the “Leases”) as more particularly
described on Exhibit 1.2(a) attached hereto, subject to such depth limitations,
exclusions and other restrictions as described on Exhibit 1.2 (a) and all
tenements, hereditaments and appurtenances belonging to the Leases, together
with each and every kind and character of right, title, claim, and interest
that Seller has in and to the Leases and the lands covered thereby, pooled,
unitized or communitized therewith (the “Lands”);

(b)        Oil, gas, water, disposal, or injection
wells located on the Lands, whether producing, not producing, shut-in,
temporarily abandoned or permanently abandoned, including the interests in the
wells as described on Exhibit 1.2(b) attached hereto (the “Wells”);

(c)         Units which include all or portions of
the Leases, Lands or Wells as described on Exhibit 1.2(c) attached hereto (the “Units”)
including production from any such Unit, whether such Unit production comes
from Wells located on or off of a Lease, and all tenements, hereditaments and
appurtenances belonging to the Units;

(d)        Contracts, agreements, orders and
instruments by which the Assets are bound or to which the Assets are subject,
or that relate to or are otherwise applicable to the Assets, to the extent
applicable to the Assets rather than Seller’s other properties, including,
without limitation, operating agreements, unitization, pooling and
communitization agreements, declarations and orders, joint venture agreements,
farmin and farmout agreements, water rights agreements, exploration agreements,
participation agreements, exchange agreements, transportation or gathering
agreements, agreements for the sale and purchase of oil, gas, casinghead gas or
processing agreements to the extent applicable to the Assets or the production
of oil and gas and other minerals and products produced in association
therewith from the Assets (all of which are hereinafter collectively referred
to as “Contracts”) but excluding any Contracts to the extent transfer is
restricted by third-party agreement or applicable law and the necessary
consents to transfer are not obtained pursuant to Section 7.9; provided that “Contracts”
shall not include the Leases;

(e)         Easements, permits, licenses, servitudes,
rights-of-way, surface leases and other surface rights (“Surface Contracts”)
appurtenant to, and used or held for use primarily in connection with the
Properties, excluding any Surface Contracts to the extent transfer is
restricted by third-party agreement or applicable law and the necessary
consents to transfer are not obtained pursuant to Section 7.9;

(f)         Equipment, machinery, fixtures,
facilities and improvements located on the Properties including, without
limitation, all tanks, boilers, injection facilities, saltwater disposal
facilities, compression facilities, pumping units and engines, flow

 6
 

 

lines, pipelines, gathering systems, gas and
oil treating facilities, machinery, power lines, telephone and telegraph lines,
roads, and other appurtenances, but excluding (i) vehicles, (ii) computers and
related peripheral equipment, (iii) communications equipment and (iv)
communications licenses granted by the Federal Communications Commission or
other governmental agency (subject to such exclusions, the “Equipment”);

(g)        Hydrocarbons produced from or
attributable to the Properties from and after the Effective Time and all oil,
gas, condensate and imbalances with co-owners and with pipelines and all
make-up rights with respect to take-or-pay payments;

(h)        To the extent transferable, all lease
files; land files; well files; gas and oil sales contract files; gas processing
files; division order files; abstracts; title opinions; land surveys; and
non-confidential logs related to the Assets listed above in subsections
(a)-(g), inclusive, but excluding (i) any books, records, data, files, maps and
accounting records to the extent disclosure or transfer is restricted by
third-party agreement or applicable law and the necessary consents to transfer
are not obtained pursuant to Section 7.9, (ii) proprietary engineering data,
maps and reserve studies, (iii) computer software, (iv) work product of Seller’s
legal counsel (other than title opinions), (v) records and documents relating
to the negotiation and consummation of the sale of the Assets and (vi)
corporate, financial, income and franchise tax and legal records of Seller that
relate to Seller’s business generally (whether or not relating to the Assets)
(subject to such exclusions, the “Records”); provided, however, that Seller may
retain the originals of such files and other records as Seller has determined
may be required for litigation, Tax, accounting, and auditing purposes and
provide Purchaser with copies thereof, excluding, however, the Excluded Assets
(as defined in Section 1.3); and

(i)          The pipeline systems (the “Pipeline
Assets”) more particularly described on Exhibit 1.2(i), including all pipes,
facilities, equipment, easements, rights-of-way, gas in pipes, including line
pack, other property associated with the Pipeline Assets, and related files,
subject to the restrictions and limitations set forth in 1.2(h) above.

Section 1.3         Excluded Assets.  Notwithstanding the foregoing, the Assets
shall not include the following listed items which are excepted and reserved to
Seller and excluded from this Agreement (collectively, the “Excluded Assets”):

(a)         The documents, files, records and
information excluded in 1.2(h) above;

(b)        The equipment, machinery, licenses,
fixtures and other tangible personal property excluded in 1.2(f) above;

(c)         All rights to any refund of Taxes or
other costs or expenses borne by Seller or Seller’s predecessors in interest
and title attributable to periods prior to the Effective Time;

(d)        All rights relating to the existing
claims and causes of action described in Exhibit 5.7 hereto;

 7
 

 

(e)         Seller’s bonds, letters of credit,
guarantees, permits and licenses;

(f)         All trade credits, account receivables,
note receivables, take-or-pay amounts receivable, and other receivables
attributable to the Assets with respect to any period of time prior to the
Effective Time;

(g)        All seismic, geological, and geophysical
data covering the Properties; and

(h)        All surface estate fee located on the
Properties, including, without limitation, all buildings, structures, and
improvements located on the surface estate fee.

(i)          All other items listed in Exhibit 1.3.

Section 1.4         Effective Time.  Seller shall transfer possession of the
Assets to Purchaser at the Closing, but the effective time of the transfer of
the Assets shall be January 1, 2007, at 12:01 a.m., local time at the location
of the Properties (the “Effective Time”).

Section 1.5         Delivery and Maintenance of Records.

(a)         Seller shall deliver the Records to
Purchaser within ten (10) days following Closing. Seller may retain original
Records as set forth in Section 1.2(h) and copies of any Records.

(b)        For four (4) years following Closing,
Purchaser shall (i) retain the Records, (ii) provide Seller, its officers,
employees and representatives with access to the Records during normal business
hours for review and copying at Seller’s expense and (iii) provide Seller, its
officers, employees and representatives with access to materials received or
produced after Closing related to any claim for indemnification made under
Section 11.3 of this Agreement (excluding, however, attorney work product and
attorney-client communications with respect to any such claim being brought by
Purchaser and information subject to an applicable confidentiality restriction
in favor of third parties) for review and copying at Seller’s expense.

Section 1.6         Proration of Costs and Revenues.

(a)         Purchaser shall be entitled to all (i)
Hydrocarbons produced from or attributable to the Properties at and after the
Effective Time, (ii) proceeds from the sale of Hydrocarbons at and after the
Effective Time and (iii) other income, proceeds, receipts and credits earned
with respect to the Assets at or after the Effective Time. Purchaser shall be
liable and responsible for (and entitled to any refunds with respect to) all
Property Costs incurred at and after the Effective Time.

(b)        Seller shall be entitled to all (i)
Hydrocarbons produced from or attributable to the Properties prior to the
Effective Time, (ii) proceeds from the sale of Hydrocarbons prior to the
Effective Time and (iii) other income, proceeds, receipts and credits earned
with respect to the Assets prior to the Effective Time. Seller shall be liable
and responsible for (and entitled to any refunds with respect to) all Property
Costs incurred prior to the Effective Time.

 8
 

 

(c)         Right-of-way fees, insurance premiums
and other Property Costs that are paid periodically and cannot be accurately
identified as being incurred when paid shall be prorated based on the number of
days in the applicable period falling before and the number of days in the
applicable period falling at or after the Effective Time.

(d)        Ad valorem, production, severance and
similar Taxes shall be prorated based on the number of units actually produced,
purchased or sold or proceeds of sale, as applicable, before, and at or after,
the Effective Time. In each case, Purchaser shall be responsible for the
portion allocated to the period at and after the Effective Time, and Seller
shall be responsible for the portion allocated to the period before the
Effective Time.

(e)         For purposes of allocating production
(and accounts receivable with respect thereto), under this Section 1.6, (i)
liquid Hydrocarbons shall be deemed to be “from or attributable to” the
Properties when they pass through the pipeline connecting into the storage
facilities into which they are run and (ii) gaseous Hydrocarbons shall be
deemed to be “from or attributable to” the Properties when they pass through
the delivery point sales meters on the pipelines through which they are
transported. Seller shall utilize reasonable interpolative procedures to arrive
at an allocation of production when exact meter readings or gauging and
strapping data is not available. Seller shall provide to Purchaser, no later
than four (4) Business Days prior to Closing, all data necessary to support any
estimated allocation, for purposes of establishing the adjustment to the
Purchase Price pursuant to Section 2.2 hereof that will be used to determine
the Closing Payment.

ARTICLE
II

PURCHASE PRICE

Section 2.1         Purchase Price.  The purchase price for the Assets (the “Purchase
Price”) shall be Two Hundred Ninety-five Million Eight Hundred Eighty Thousand
Dollars (U.S. $295,880,000.00) adjusted as provided in Section 2.2.

Section 2.2         Adjustments to Purchase Price.  The Purchase Price for the Assets shall be
adjusted as follows:

(a)         Reduced by the aggregate amount of the
proceeds received by Seller from the sale of Hydrocarbons and other proceeds
earned and attributable to the Assets during the Adjustment Period;

(b)        Reduced in accordance with Section 3.5,
by an amount equal to the Allocated Value of those Properties (i) with respect
to which preferential purchase rights have been exercised prior to Closing or
(ii) that cannot be transferred at Closing because consents to the assignments
of those Properties have not been obtained;

(c)         Reduced by the aggregate amounts
payable to owners of working interests, royalties and overriding royalties and
other interests in the Properties held in suspense by Seller as of the Closing
Date unless the suspended funds are transferred by Seller to Purchaser on the
Closing Date;

 9
 

 

(d)        Reduced by Seller’s pro-rata share of ad
valorem taxes;

(e)         Reduced in accordance with Article 3 by
amounts as remedies for Title Defects;

(f)         Reduced in accordance with Article 4
pursuant to Section 4.3 regarding environmental matters;

(g)        Increased by the amount of all Property
Costs which have been paid by Seller and incurred during the Adjustment Period,
except for any Property Costs and other such costs already deducted in the
determination of proceeds in Section 2.2(a);

(h)        Increased or decreased, as appropriate,
pursuant to the provisions of Section 7.8 dealing with gas imbalances and/or
take-or-pay make-up obligations; and

(i)          Increased by the amount of any Title
Benefit pursuant to Section 3.5(c).

(j)          Increased or decreased by other
amounts mutually agreed to by Seller and Purchaser.

All such adjustments shall be determined in accordance
with generally accepted accounting principles and Council of Petroleum
Accountants Society (COPAS) standards.

The adjustment described in Section 2.2(a) shall serve
to satisfy, up to the amount of the adjustment, Purchaser’s entitlement under
Section 1.6 to Hydrocarbon production from or attributable to the Properties
during the Adjustment Period, and to the other income, proceeds, receipts and
credits earned with respect to the Assets during the Adjustment Period.
Purchaser shall not have any separate rights to receive any production or
income, proceeds, receipts and credits with respect to which an adjustment has
been made.  Similarly, the adjustment
described in Section 2.2(g) shall serve to satisfy, up to the amount of the
adjustment, Purchaser’s obligation under Section 1.6 to pay Property Costs and
other costs attributable to the ownership and operation of the Assets which are
incurred during the Adjustment Period. Purchaser shall not be separately
obligated to pay for any Property Costs or other such costs with respect to
which an adjustment has been made.

Section 2.3         Allocation of Purchase Price.

Attached hereto as Exhibit 2.3 is an agreed
allocation of the unadjusted Purchase Price among each of the Assets, which has
been made in compliance with the principles of Section 1060 of the Internal
Revenue Code of 1986, as amended (the “Code”), and the Treasury regulations
thereunder.  The “Allocated Value” for
any Asset shall equal the portion of the unadjusted Purchase Price allocated to
such Asset on Exhibit 2.3, increased or decreased by its respective proportionate
share of the price adjustments described in Section 2.2.  Seller, however, makes no representation or
warranty to Purchaser as to the accuracy of such values.  Seller and Purchaser agree (i) that the
Allocated Values shall be used by Seller and Purchaser as the basis for notices
to holders of preferential rights to purchase and (ii) that neither Seller nor
Purchaser will take positions inconsistent with the Allocated Values in notices
to government

 10
 

 

authorities, in audit or
other proceedings with respect to Taxes, in notices to holders of preferential
rights to purchase.

Section 2.4         Deposit.  Concurrently with the execution of this
Agreement, Purchaser shall wire transfer to Seller an earnest money deposit in
an amount equal to Ten Million Dollars ($10,000,000) (the “Deposit”). The
Deposit shall be applied against the Purchase Price if the Closing occurs or
shall be otherwise distributed in accordance with the terms of this Agreement.

ARTICLE
III

TITLE MATTERS

Section 3.1         Seller’s Title.

(a)         Seller represents and warrants to
Purchaser that Seller’s title to the Wells shown on Exhibit 1.2(b) and the
Units shown on Exhibit 1.2 (c) as of the Effective Time is (and as of the
Closing Date shall be) Defensible Title. 
For purposes of this Article 3 references to Wells shall include both
Wells and PUDs.

(b)        The Assignment and Bill of Sale to be
delivered by Seller to Purchaser shall be in form identical to the assignment
shown on Exhibit 3.1(b) attached hereto and shall contain a special warranty of
title by, through and under Seller, but not otherwise, to the Leases shown on
Exhibit 1.2(a), subject to the Permitted Encumbrances. Otherwise, the
Assignment and Bill of Sale shall be without warranty of title, express,
implied, statutory or otherwise.  The
Assignment and Bill of Sale shall transfer to Purchaser all rights or actions
on title warranties given or made by Seller’s predecessors (other than
Affiliates of Seller), to the extent Seller may legally transfer such rights.

(c)         Purchaser shall not be entitled to
protection under Seller’s special warranty of title in the Assignment and Bill
of Sale against any Title Defect reported by Purchaser to Seller under this
Article 3.  All reported Title Defects
shall be covered by the provisions of Article 3 and are expressly excluded from
protection under Seller’s special warranty of title in the Assignment and Bill
of Sale.

(d)        Seller represents and warrants to
Purchaser that Seller has, and will have at Closing, marketable title, subject
to the Permitted Encumbrances, to all of the Pipeline Assets; and, with respect
to the easements, rights of way, licenses and permits, Seller will, as of
Closing have title free and clear of all liens and claims of third parties and
that Seller shall have as of Closing title sufficient to allow Purchaser to use
and operate the Pipeline Assets in the manner operated by Seller immediately
prior to Closing, without interference by third parties arising from defects in
title.  The Pipeline Assets shall be
conveyed by Seller to Purchaser on an Assignment of Pipeline Assets in a form
identical to the assignment shown on Exhibit 3.1(d) attached hereto.  The Assignment of Pipeline Assets shall
transfer to Purchaser all rights or actions on title warranties given or made
by Seller’s predecessors (other than Affiliates of Seller), to the extent
Seller may legally transfer such rights. Notwithstanding anything to the
contrary contained herein, Purchaser’s exclusive remedy for a breach of the
representation and

 11
 

 

warranty made in this Section 3.1(d) shall be
the option to delete the Pipeline Assets from this Agreement in which case the
Purchase Price shall be reduced by Five Million Dollars ($5,000,000); provided
that, it is understood and agreed that Purchaser may, for any reason and at any
time prior to Closing, elect to delete the Pipeline Assets from this Agreement
in which case the Purchase Price shall be reduced by Five Million Dollars
($5,000,000) and Seller shall retain the Pipeline Assets.

Section 3.2         Defensible Title.

As used in this Agreement, the term “Defensible Title”
means that title of Seller which, subject to Permitted Encumbrances:

(a)         Entitles Seller to receive a share of
the Hydrocarbons produced, saved and marketed from any Unit or Well throughout
the duration of the productive life of such Unit or Well after satisfaction of
all royalties, overriding royalties, nonparticipating royalties, net profits
interests or other similar burdens on or measured by production of Hydrocarbons
(“Net Revenue Interest”) of not less than the Net Revenue Interest share shown
in Exhibit 1.2(b) for the Wells and Exhibit 1.2(c) for the Units, except
decreases in connection with those operations in which Seller may after the
Effective Time be a non-consenting co-owner, decreases resulting from the
establishment or amendment after the Effective Time of units, and decreases
required to allow other working interest owners to make up past underproduction
or pipelines to make up past under deliveries;

(b)        Obligates Seller to bear a percentage of
the Property Costs relating to any Unit or Well not greater than the “Working
Interest” shown in Exhibit 1.2(b) for Wells and Exhibit 1.2(c) for Units
without increase throughout the productive life of such Wells or Units except
increases resulting from contribution requirements with respect to defaulting
co-owners under applicable operating agreements and increases that are
accompanied by at least a proportionate increase in Seller’s Net Revenue
Interest; and

(c)         Is free and clear of liens,
encumbrances, obligations, security interests, pledges or other defects.

The term “Title Defect” shall mean any liens,
encumbrances, obligations, security interests, pledges, insufficient or
defective legal description, lease termination, gaps in the chain of title or
other defects, including, without limitation, discrepancies in Net Revenue
Interest or Working Interest, that cause or if asserted would cause a breach of
Seller’s representation and warranty of Defensible Title in Section 3.1(a) or
marketable title in Section 3.1(d).  For purposes
hereof, if any Well or Unit is in an illegal or unauthorized location, then
such condition shall be treated as a Title Defect for purposes of this
Agreement.

The term “Title Benefit” shall mean any right,
circumstance or condition that operates to increase the Net Revenue Interest of
Seller in any Property above that shown on Exhibit 1.2(b) and Exhibit 1.2(c),
without causing a greater than proportionate increase in Seller’s Working
Interest above that shown in Exhibit 1.2(b) and Exhibit 1.2(c).

 12
 

 

Section 3.3         Permitted Encumbrances.

As used herein, the term “Permitted Encumbrances”
shall mean any or all of the following:

(a)         Royalties and any overriding royalties,
reversionary interests and other burdens to the extent that they do not,
individually or in the aggregate, reduce Seller’s Net Revenue Interest below
that shown in Exhibit 1.2(b) and Exhibit 1.2(c) or increase Seller’s Working
Interest above that shown in Exhibit 1.2(b) and Exhibit 1.2(c) without a
corresponding increase in the Net Revenue Interest;

(b)        All Leases, unit agreements, pooling
agreements, operating agreements, production sales contracts, division orders
and other Contracts applicable to the Assets, to the extent that they do not,
individually or in the aggregate, reduce Seller’s Net Revenue Interest below
that shown in Exhibit 1.2(b) and Exhibit 1.2(c) or increase Seller’s Working
Interest above that shown in Exhibit 1.2(b) and Exhibit 1.2(c) without a
corresponding increase in the Net Revenue Interest;

(c)         Preferential rights to purchase the
Assets with respect to which, prior to Closing, (i) waivers are obtained from
the holders of such preferential rights to purchase and/or (ii) the appropriate
time period for asserting such rights has expired without an exercise of such
rights;

(d)        Third-party consent to assignment
requirements and similar restrictions with respect to which waivers or consents
are obtained by Seller from the appropriate parties prior to the Closing Date
or the appropriate time period for asserting the right has expired or which
need not be satisfied prior to a transfer;

(e)         Liens for current Taxes or assessments
not yet delinquent or, if delinquent, being contested in good faith by
appropriate actions;

(f)         Liens or charges arising in the
ordinary course of business for amounts not yet delinquent (including any
amounts being withheld as provided by law), or if delinquent, being contested
in good faith by appropriate actions;

(g)        All rights to consent, by required
notices to, filings with, or other actions by Governmental Bodies in connection
with the sale or conveyance of oil and gas leases or interests therein if they
are not required prior to the sale or conveyance;

(h)        Rights of reassignment arising upon
final intention to abandon or release the Assets, or any of them;

(i)          Easements, rights-of-way, servitudes,
permits, surface leases and other rights in respect of surface operations to
the extent that they do not, individually or in the aggregate, reduce Seller’s
Net Revenue Interest below that shown in Exhibits 1.2(b) and Exhibit 1.2(c) or
increase Seller’s Working Interest above that shown in Exhibits 1.2(b) and
Exhibit 1.2(c) without a corresponding increase in Net Revenue Interest;

(j)          To the extent disclosed on Exhibit
5.24, calls on production under existing Contracts;

 13
 

 

(k)         All rights reserved to or vested in any
Governmental Body to control or regulate any of the Assets in any manner and
all obligations and duties under all applicable laws, rules and orders of any
such Governmental Body or under any franchise, grant, license or permit issued
by any such Governmental Body;

(l)          Any encumbrance affecting the Assets
which is discharged by Seller prior to or at Closing or which is expressly
assumed, bonded or paid by Purchaser prior to or at Closing;

(m)        Any matters shown on Exhibit 1.2(a),
Exhibit 1.2(b) and Exhibit 1.2(c); and

(n)        Any other liens, charges, encumbrances,
defects or irregularities which do not, individually or in the aggregate,
materially detract from the value of or materially interfere with the use or
ownership of the Assets subject thereto or affected thereby (as currently used
or owned), which would be accepted by a reasonably prudent Purchaser engaged in
the business of owning and operating oil and gas Assets, and which do not
reduce Seller’s Net Revenue Interest below that shown in Exhibit 1.2(b) and
Exhibit 1.2(c), or increase Seller’s Working Interest above that shown in
Exhibit 1.2(b) and Exhibit 1.2(c) without a corresponding increase in Net
Revenue Interest.

Section 3.4         Notice of Title Defects.

(a)         To assert a claim arising out of a
breach of Seller’s representation and warranty of Defensible Title in Section
3.1(a), Purchaser must deliver claim notices to Seller (each a “Title Defect
Notice”) on or before twelve (12) Business Days prior to the Closing Date (the “Title
Claim Date”), except as otherwise provided in Sections 3.5, 3.6, 3.7, or
3.8.  Each Title Defect Notice shall be
in writing and shall include (i) a description of the alleged Title Defect(s),
(ii) the Leases, Units or Wells affected by the Title Defect (each a “Title
Defect Property”), (iii) the Allocated Values of each Title Defect Property,
(iv) supporting documents reasonably necessary for Seller (as well as any title
attorney or examiner hired by Seller) to verify the existence of the alleged
Title Defect(s) and (v) the amount by which Purchaser reasonably believes the
Allocated Values of each Title Defect Property are reduced by the alleged Title
Defect(s) and the computations and information upon which Purchaser’s belief is
based. Purchaser shall be deemed to have waived all breaches of Seller’s
representation and warranty of Defensible Title in Section 3.1(a) of which
Seller has not been given notice on or before the Title Claim Date.

(b)        Seller shall have the right, but not the
obligation, to deliver to Purchaser on or before the Title Claim Date with
respect to each Title Benefit a notice (a “Title Benefit Notice”) including (i)
a description of the Title Benefit, (ii) the Leases, Units or Wells affected,
(iii) the Allocated Values of the Units or Wells subject to such Title Benefit
and (iv) the amount by which the Seller reasonably believes the Allocated Value
of those Units or Wells is increased by the Title Benefit, and the computations
and information upon which Seller’s belief is based.  Seller shall be deemed to have waived all
Title Benefits of which it has not given notice on or before the Title Claim
Date.

 14
 

 

(c)         In the event that Seller receives a
Title Defect Notice, Seller shall have the right, but not the obligation, to
attempt, at its sole cost, to cure or remove any Title Defects of which it has
been advised by Purchaser in the Title Defect Notice prior to Closing.

Section 3.5         Remedies for Title Defects.

(a)         In the event that any Title Defect is
not waived by Purchaser or cured on or before Closing Seller shall, at its sole
election, select one of the following options which shall apply regarding
uncured Title Defects:

(i)            The Purchase Price shall be reduced
by an amount agreed upon (“Title Defect Amount”) pursuant to Section 3.5(d) or
3.5(f) by Purchaser and Seller as being the value of such Title Defect, taking
into consideration the Allocated Value of the Property subject to such Title
Defect, the portion of the Property subject to such Title Defect, and the legal
effect of such Title Defect on the Property affected thereby; or

(ii)           Seller may retain the affected
Property, in which event the affected Property shall be deleted from this
Agreement and the Purchase Price shall be reduced by an amount equal to the Allocated
Value of such affected Property; provided, however, that if the Title Defect
affecting the affected Property is cured within six (6) months of Closing and
Seller gives written notice to Purchaser of its election within such time
period, Seller shall have the option to sell the affected Property to Purchaser
and Purchaser shall have the obligation to buy the affected Property for the
Allocated Value thereof, subject to the terms and conditions of this Agreement
as if the transaction had occurred at Closing; or

(b)        If after a reasonable time for good
faith negotiation, Purchaser and Seller have failed to agree on the amount by
which the Purchase Price should be reduced pursuant to Section 3.5(d)(i), and
Seller has not selected the option provided for in 3.5(a)(ii) prior to two
Business Days prior to Closing, the dispute shall be submitted to binding
arbitration as provided in Section 7.14.

(c)         With respect to each Unit or Well
affected by Title Benefits reported under Section 3.4(b), the Purchase Price shall
be increased by an amount (the “Title Benefit Amount”) equal to the increase in
the Allocated Value for such Unit or Well caused by such Title Benefits, as
determined pursuant to Section 3.5(e). 
The Closing Payment shall be increased by such Title Benefit Amount.

(d)        Section 3.5(d) shall be the exclusive
right and remedy of Purchaser with respect to Seller’s breach of its warranty
and representation of Defensible Title in Section 3.1(a).  The Title Defect Amount resulting from a
Title Defect shall be determined as follows:

(i)            if Purchaser and Seller mutually
agree upon the Title Defect Amount, that amount shall be the Title Defect
Amount;

 15
 

 

(ii)           if the Title Defect is a lien,
encumbrance or other charge which is undisputed and the amount of same can be
exactly determined and agreed upon by Purchaser and Seller, then the Title
Defect Amount shall be the amount necessary to be paid to remove the Title
Defect from the Title Defect Property;

(iii)          if the Title Defect represents a
discrepancy between (A) the Net Revenue Interest for any Title Defect Property
(which has been agreed to by Seller and Purchaser) and (B) the Net Revenue
Interest or percentage stated on Exhibit 1.2(b) and Exhibit 1.2(c), then the
Title Defect Amount shall equal the following: 
The Allocated Value of such Title Defect Property minus the product of
the Allocated Value of such Title Defect Property multiplied by a fraction, the
numerator of which is the Net Revenue Interest for the Title Defect Property
and the denominator of which is the Net Revenue Interest or percentage
ownership stated on Exhibit 1.2(b) and Exhibit 1.2(c); and

(iv)          if the Title Defect represents an
obligation, encumbrance, burden or charge upon or other defect in title to the
Title Defect Property of a type not described in subsections (i), (ii) or (iii)
above, the Title Defect Amount shall be determined by taking into account the
Allocated Value of the Title Defect Property, the portion of the Title Defect
Property affected by the Title Defect, the legal effect of the Title Defect,
the potential economic effect of the Title Defect over the life of the Title
Defect Property, the values placed upon the Title Defect by Purchaser and
Seller and such other factors as are necessary to make a proper evaluation.

(e)         The Title Benefit Amount for any Title
Benefit shall be the product of (a) the Allocated Value of the affected Unit or
Well multiplied by (b)(i) a fraction, the numerator of which is the upwardly
revised Net Revenue Interest and the denominator of which is the Net Revenue
Interest stated on Exhibit 1.2(b) and Exhibit 1.2(c) minus (ii) one.

(f)         Seller and Purchaser shall attempt to
agree on all Title Defect Amounts and Title Benefit Amounts prior to Closing.
If Seller and Purchaser are unable to agree by no later than two (2) Business
Days prior to Closing, the dispute shall be submitted to binding arbitration as
provided in Section 7.14.

(g)        Notwithstanding anything to the
contrary, there shall be no adjustments to the Purchase Price or other remedies
provided by Seller for Title Defects unless (i) each individual Title Defect
exceeds $25,000.00 and (ii) the aggregate amount of all uncured Title Defects
exceeds a deductible in an amount equal to one percent (1%) of the Purchase
Price, after which point Purchaser shall be entitled to adjustments to the
Purchase Price or other remedies only with respect to Title Defects in excess
of such deductible. Notwithstanding anything to the contrary contained herein,
the aggregate Title Defect Amounts attributable to the effects of all Title
Defects upon any Title Defect Property shall not exceed the Allocated Value of
the Title Defect Property. 
Notwithstanding anything to the contrary contained herein, in the event
that the cumulative reduction to the Purchase Price for Title Defects pursuant
to Article 3

 16
 

 

exceeds three percent (3%) of the unadjusted
Purchase Price, Purchaser may unilaterally terminate this Agreement without
liability to Seller. If Purchaser terminates this Agreement pursuant to this
section, Purchaser shall be entitled to a prompt refund of the full amount of
the Deposit from Seller.

Section 3.6         Consents to Assignment and
Preferential Rights to Purchase.

(a)         Seller shall exercise reasonable
efforts to obtain all such permissions, approvals and consents by governmental
authorities and others which are reasonably obtainable by Closing and are
required to vest Defensible Title to the Assets in Purchaser.  Seller shall notify Purchaser at least five
(5) Business Days prior to Closing of all required third-party consents to the
assignment of the Assets to Purchaser which have not been obtained and the
Assets to which they pertain. In no event shall there be included in the
Assignment and Bill of Sale at Closing any Asset subject to a consent
requirement that provides that transfer of the Asset without consent will
result in a termination or other material impairment of any rights in relation
to such Asset.  In cases where the Asset
subject to such a requirement is a Contract and Purchaser is assigned the
Assets to which the Contract relates, but the Contract is not transferred to
Purchaser due to the unwaived consent requirement, Seller shall continue after
Closing to use reasonable efforts to obtain such consent so that such Contract
can be transferred to Purchaser upon receipt of such consent. In cases where
the Asset subject to such a requirement is a Property and the third-party
consent to the sale and transfer of the Property is not obtained prior to the
Closing Date, Purchaser may elect to treat the unsatisfied consent requirement
as a Title Defect by giving Seller notice thereof in accordance with Section
3.4(a), except that such notice must be given at least two (2) Business Days
prior to the Closing Date.  In such
event, the failure to obtain such consent to assignment shall be treated as if
the affected Assets were subject to a Title Defect that resulted in the
complete loss of title to such Assets, the affected Assets shall be excluded
from the Assignment and Bill of Sale and the Purchase Price shall be reduced under
Section 2.2(b) by the Allocated Value for such Assets. If a consent requirement
with respect to which a Purchase Price adjustment is made under Section 3.4 is
subsequently satisfied prior to the date of the final adjustment to the
Purchase Price under Section 9.4(b), subject to the same terms and provisions
hereof as if such Property had been conveyed at Closing, Purchaser shall pay to
Seller the amount of the previous reduction in the Purchase Price and the
affected Assets shall be assigned to Purchaser.

(b)        If any preferential rights to purchase
any Assets are exercised prior to Closing, those Assets transferred to a holder
of preferential right to purchase as a result of the exercise of such
preferential rights shall be treated as if those Assets were subject to a Title
Defect that resulted in the complete loss of title to such Assets, and the
Purchase Price shall be reduced under Section 2.2(b) by the Allocated Value for
such Assets. Seller shall convey such Assets to the holder of preferential right
to purchase exercising the preferential right to purchase, and Seller shall
retain the consideration paid by the holder of preferential right to purchase
for such Assets.

 17
 

 

Section 3.7         Casualty Loss.

After the date this Agreement is executed but prior to
the Closing Date, if any portion of the Assets is destroyed by fire or other
casualty, this transaction shall nevertheless close.  In the event that the loss resulting from the
casualty is an amount less than five percent (5%) of the unadjusted Purchase
Price, this transaction shall nevertheless close and Seller shall have no
obligation regarding the casualty. In the event that the resulting loss is an
amount equal to or greater than five percent (5%) of the unadjusted Purchase
Price, Seller, at Seller’s sole election, shall select one of the following
options which shall apply to the casualty: (i) Seller shall cause the Assets
affected by such casualty to be repaired or restored to at least its condition
prior to such casualty, at Seller’s sole cost, as promptly as reasonably
practicable (which work may extend after the Closing Date); or (ii) Seller
shall, at Closing, pay to Purchaser all sums paid to Seller by third parties by
reason of such casualty and shall assign to Purchaser all of Seller’s right,
title and interest (if any) in insurance claims, unpaid awards, and other
rights against third parties other than Seller Indemnitees arising out of the
casualty; or (iii) Seller may treat such casualty as a Title Defect with
respect to the affected Assets. In the event that Seller elects (i) or (iii)
above, Seller shall retain all rights to insurance and other claims against
third parties with respect to the casualty.

Section 3.8         Condemnation Loss.

After the date this Agreement is executed but prior to
the Closing Date, if any portion of the Assets is taken in condemnation or
under right of eminent domain, this transaction shall nevertheless close.  In such event, Seller, at Seller’s sole
election, shall select one of the following options which shall apply to the
taking: (i) Seller shall, at Closing, pay to Purchaser all sums paid to Seller
by third parties by reason of such taking and shall assign, transfer and set
over to Purchaser all of Seller’s right, title and interest (if any) in
insurance claims, unpaid awards, and other rights against third parties other
than Seller Indemnitees arising out of the taking; or (ii) Seller shall treat
the taking as if the affected Assets were subject to a Title Defect that
resulted in the complete loss of title to such Assets, and the Purchase Price
shall be reduced under Section 2.2 by the Allocated Value for such Assets.  In the case of (ii) above, Seller shall
retain all rights to insurance and other claims against third parties with respect
to the taking.

Section 3.9         Limitations on Applicability.

The Seller’s representation and warranty of Defensible
Title in Section 3.1(a) shall terminate as of the Title Claim Date and shall
have no further force and effect thereafter. 
Thereafter, Purchaser’s sole and exclusive remedies with regard to title
to the Assets shall be the special warranty of title to the Leases contained in
the Assignment and Bill of Sale.

ARTICLE
IV

ENVIRONMENTAL MATTERS

Section 4.1         Environmental Assessment.

Purchaser may, at its option, inspect the Properties
and cause a Phase I environmental
assessment (the “Environmental Assessment”) of all or any portion of the
Properties to be conducted by a reputable environmental consulting or
engineering firm approved in advance in

 18
 

 

writing by Seller.  An Environmental Assessment shall be
conducted at a time agreed to by Seller with a representative of Seller
present.  Purchaser shall provide Seller
with a correct copy of any Environmental Assessment and all findings made in
connection therewith. In the events that
Purchaser conducts a Phase I Environmental Assessment and, based upon the
results of the Phase I Environmental Assessment, Purchaser is of the opinion
that a Phase II Environmental Assessment is required, then, in such events,
Purchaser shall obtain the written consent of Seller prior to conducting a
Phase II Environmental Assessment on the Assets. Only in the event that Seller
consents in writing, Purchaser may cause Phase II Environmental Assessments to
be conducted on the Assets by a reputable
environmental consulting or engineering firm. Except for such disclosure
to Seller, Purchaser shall maintain the results of any Environmental Assessment
and all findings made in connection therewith as strictly confidential. All
information related an Environmental Assessment and all findings made in
connection therewith shall be subject to the terms of the Confidentiality
Agreement. Without the prior written consent of Seller, Purchaser shall not
disclose the results of any Environmental Assessment and all findings made in
connection therewith to any Person other than (i) the consultant that conducts
the Environmental Assessment, (ii) Purchaser’s lender (only in the events that
(a) Purchaser’s lender is lending money to Purchaser in connection with this
Agreement and (b) provided Purchaser’s lender first agrees in writing to keep
such information confidential) and (iii) Seller.  Any Environmental Assessment shall be
conducted at the sole risk, cost and expense of Purchaser, and Purchaser shall
Indemnify Seller from and against any and all losses arising from the
Environmental Assessment as provided in Section 7.7 and Section 11.3(b).  Notwithstanding anything to the contrary
contained herein, if Purchaser properly requests to conduct a Phase II
Environmental Assessment and Seller fails to consent, Purchaser shall have the
option to delete the affected Property from this Agreement and the Purchase
Price shall be reduced by an amount equal to the Allocated Value of such
affected Property.

Section 4.2         Notice of Material Adverse
Environmental Condition.

Purchaser may notify Seller in writing on or before
ten (10) Business Days prior to Closing of any environmental matters disclosed
by the Environmental Assessment that Purchaser reasonably believes in good
faith may constitute a Material Adverse Environmental Condition. Such notice
shall include a reasonably detailed description of all matters disclosed by the
Environmental Assessment.

Section 4.3         Environmental Remedies.

If Purchaser delivers to Seller a notice pursuant to
Section 4.2 that describes a Material Adverse Environmental Condition and Seller confirms to its reasonable satisfaction
that any matter described in the notice delivered pursuant to Section 4.2
constitutes a Material Adverse
Environmental Condition, then Seller
shall, at its sole election, select one of the following options which shall
apply to all Material Adverse
Environmental Conditions:

(a)         Seller shall perform or cause to be
performed prior to Closing, at the sole expense of Seller, such operations as
may be necessary to remediate or cure such Material Adverse Environmental
Condition;

 19
 

 

(b)        Seller
shall reduce the Purchase Price by an amount agreed upon in writing by
Purchaser and Seller as being a reasonable estimate of the cost of remediating
or curing such Material Adverse
Environmental Condition;

(c)         Seller
shall retain the Property that is subject to such Material Adverse Environmental Condition, in which event the affected Property shall be
deleted from this Agreement and the Purchase Price shall be reduced by an
amount equal to the Allocated Value of such affected Property; provided,
however, that if the Material Adverse Environmental Condition affecting the
affected Property is cured within six (6) months of Closing and Seller gives
written notice to Purchaser of its election within such time period, Seller
shall have the option to sell the affected Property to Purchaser and Purchaser
shall have the obligation to buy the affected Property for the Allocated Value
thereof, subject to the terms and conditions of this Agreement as if the
transaction had occurred at Closing;

In the event that Seller has not exercised its option
pursuant to Section 4.3(b) or Section 4.3(c) and the Parties have failed to
agree on the amount by which the Purchase Price shall be reduced (which
agreement Seller and Purchaser shall use good faith efforts to reach) by
Closing, then, in such event, the dispute shall be submitted to arbitration as
provided in Section 7.14.

Notwithstanding the foregoing, in the events that (i)
Purchaser conducts an Environmental Assessment on the Properties which
discloses environmental matters that Purchaser reasonably believes in good
faith may constitute a Material Adverse Environmental Condition; (ii) Purchaser
delivers a notice to Seller as required in Section 4.2; (iii) the cost of
remediating the Material Adverse Environmental Condition that is described in
Purchaser’s notice pursuant to Section 4.2 and/or the Environmental Liabilities
attributable to the Material Adverse Environmental Condition that is described
in Purchaser’s notice pursuant to Section 4.2 exceed three percent (3%) of the
unadjusted Purchase Price; and (iv) Purchaser delivers to Seller written notice
of termination of this Agreement at least five (5) Business Days prior to
Closing Date, then, in the event of the completion and satisfaction of each of
the four conditions listed above, Purchaser may unilaterally terminate this
Agreement without liability to Seller. If Purchaser terminates this Agreement
pursuant to this section, Purchaser shall be entitled to a prompt refund of the
full amount of the Deposit from Seller.

Section 4.4         Limitations.

(a)         This Article 4 is intended to be the
sole and exclusive remedy that Purchaser Indemnitees shall have against Seller
Indemnitees with respect to any matter or circumstance relating to Material
Adverse Environmental Conditions, Environmental Liabilities, Environmental
Laws, the release of materials into the environment, the protection of the
environment or health or any matters that Purchaser could have included in a
notice delivered pursuant to Section 4.2.

(b)        Purchaser, on behalf of itself and each
of the other Purchaser Indemnitees, hereby fully releases and discharges the
Seller Indemnitees from any and all claims at Law or in equity, known or
unknown, whether occurring before the Effective Time, existing at the Effective
Time or arising after the Effective Time, contingent or

 20
 

 

otherwise, with respect to all matters
relating to Material Adverse Environmental Conditions, Environmental Liabilities,
Environmental Laws, the release of materials into the environment, the
protection of the environment or health or any matters that Purchaser could
have included in a notice delivered pursuant to Section 4.2 EVEN IF SUCH
DAMAGES OR CLAIMS ARE CAUSED IN WHOLE OR IN PART BY THE NEGLIGENCE (WHETHER
SOLE, JOINT OR CONCURRENT) OF SELLER INDEMNITEES OR THE STRICT LIABILITY OF
SELLER INDEMNITEES.

(c)         Purchaser acknowledges that Seller has
not made and will not make any representation or warranty regarding any matter
or circumstance relating to Material Adverse Environmental Conditions,
Environmental Laws, the release of materials into the environment or protection
of the environment or health, and that nothing in Article 5 or otherwise shall
be construed as such a representation or warranty.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF SELLER

Section 5.1         Disclaimers.

(a)         Except as set forth in Articles 3 and 5
of this Agreement, the certificate of Seller to be delivered pursuant to
Section 9.2(c) or in the Assignment and Bill of Sale to be delivered by Seller
to Purchaser hereunder, (i) SELLER MAKES NO REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE AND (ii) SELLER EXPRESSLY DISCLAIMS
ALL LIABILITY AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, STATEMENT OR
INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO PURCHASER OR ANY OF
ITS AFFILIATES, EMPLOYEES, AGENTS, CONSULTANTS OR REPRESENTATIVES (INCLUDING,
WITHOUT LIMITATION, ANY OPINION, INFORMATION, PROJECTION OR ADVICE THAT MAY
HAVE BEEN PROVIDED TO PURCHASER BY ANY OFFICER, DIRECTOR, EMPLOYEE, AGENT,
ATTORNEY, CONSULTANT, REPRESENTATIVE OR ADVISOR OF SELLER OR ANY OF SELLER’S
AFFILIATES).

(b)        EXCEPT AS EXPRESSLY REPRESENTED
OTHERWISE IN ARTICLE 3 OR THIS ARTICLE 5, WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE AS TO (i) TITLE TO ANY OF THE
ASSETS, (ii) THE CONTENTS, CHARACTER OR NATURE OF ANY DESCRIPTIVE MEMORANDUM,
DOCUMENTS, REPORTS OF ANY PETROLEUM ENGINEERING CONSULTANT OR ANY GEOLOGICAL,
GEOPHYSICAL OR SEISMIC DATA OR INTERPRETATION RELATING TO THE ASSETS, (iii) THE
QUANTITY, QUALITY OR RECOVERABILITY OF HYDROCARBONS OR PETROLEUM SUBSTANCES IN
OR FROM THE ASSETS, (iv) ANY ESTIMATES OF THE VALUE OF THE ASSETS OR FUTURE
REVENUES THAT MAY BE ATTRIBUTABLE TO THE ASSETS, (v) THE PRODUCTION OF
HYDROCARBONS OR PETROLEUM SUBSTANCES FROM THE ASSETS, (vi) THE MAINTENANCE,
STATE OR REPAIR OR LACK

 21
 

 

THEREOF, PHYSICAL CONDITION, QUALITY,
SUITABILITY FOR ANY PURPOSE, DESIGN OR MARKETABILITY OF THE ASSETS, (vii) THE
CONTENT, CHARACTER OR NATURE OF ANY DESCRIPTIVE MEMORANDUM, REPORTS, BROCHURES,
CHARTS OR STATEMENTS PREPARED BY THIRD PARTIES, (viii) THE ACCURACY AND/OR THE
COMPLETENESS OF ANY OTHER MATERIALS OR INFORMATION THAT MAY HAVE BEEN MADE
AVAILABLE OR COMMUNICATED TO PURCHASER, ITS AFFILIATES OR ITS EMPLOYEES,
AGENTS, CONSULTANTS, REPRESENTATIVES OR ADVISORS IN CONNECTION WITH THIS
AGREEMENT OR ANY DISCUSSION OR PRESENTATION RELATING THERETO, (ix) ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR CONFORMITY TO MODELS OR
SAMPLES OF MATERIALS OF ANY EQUIPMENT OR (x) ANY IMPLIED OR EXPRESS WARRANTY OF
FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT. 
IT IS EXPRESSLY UNDERSTOOD AND AGREED BY THE PARTIES HERETO THAT
PURCHASER SHALL BE DEEMED TO BE PURCHASING THE EQUIPMENT AND PERSONAL PROPERTY
IN ITS PRESENT STATUS, CONDITION AND STATE OF REPAIR, “AS IS” AND “WHERE IS,”
WITH ALL FAULTS.

(c)         Any representation “to the knowledge of
Seller” or “to Seller’s knowledge” is limited to matters within the actual
knowledge of the officers or management employees, including, without
limitation those with titles of “Manager”, “Vice President” and “President,” of
Seller. Actual knowledge includes information actually personally known or
information which should have been ascertained had a reasonable inquiry or
investigation been undertaken.  The
standard of reasonableness is that which would be exercised by a reasonably
prudent person who has been advised that the person is expected to make
representations and warranties with respect to conditions and information
relating to the Assets which are to be conveyed.

(d)        Subject to the foregoing provisions of
this Section 5.1, Seller represents and warrants to Purchaser the matters set
out in this Article 5.

Section 5.2         Existence and Qualification.

Seller is a corporation duly
organized, validly existing and in good standing
under the Laws of the State of Texas. 
Seller is duly qualified to do business as a corporation in the
respective jurisdictions where the Assets are located.

Section 5.3         Power.

Seller has the corporate power to enter into this
Agreement, perform the terms of this Agreement and consummate the transactions
contemplated by this Agreement.

 22
 

 

Section 5.4         Authorization
and Enforceability.

The execution, delivery and performance of this
Agreement have been or by Closing will have been duly authorized by all
necessary corporate action on the part of Seller.  This Agreement has been duly executed and
delivered by Seller (and all documents required hereunder to be executed and
delivered by Seller at Closing will be duly executed and delivered by Seller)
and this Agreement constitutes the valid and binding obligation of Seller,
enforceable in accordance with its terms except as such enforceability may be
limited by applicable bankruptcy or other similar laws affecting the rights and
remedies of creditors generally as well as to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). As evidence of the foregoing, Seller has delivered to
Purchaser simultaneous with the execution of this Agreement a unanimous consent
executed, adopted and approved by the board of directors of Seller which
specifically approves the terms of this Agreement, the execution of this
Agreement by Seller and the completion of the transaction contemplated by this
Agreement.

Section 5.5         No Conflicts.

The execution, delivery
and performance of this Agreement by Seller will not (i) violate any provision
of the certificate of incorporation or bylaws of Seller, (ii) result in default
(with due notice or lapse of time or both) or the creation of any lien or
encumbrance or give rise to any right of termination, cancellation or
acceleration under any of the terms, conditions or provisions of any note,
bond, mortgage or indenture to which Seller is a party or which affect the
Assets, (iii) violate any judgment, order, ruling, or decree applicable to
Seller as a party in interest or (iv) violate any Laws, rule or decree
applicable to Seller or any of the Assets, except for rights to consent by,
required notices to, and filings with or other actions by Governmental Bodies
where the same are not required prior to the assignment of oil and gas
interests.

Section 5.6         Purchaser’s Liability for Brokers’
Fees.

Purchaser shall not have any responsibility, liability
or expense, as a result of undertakings or agreements of Seller, for brokerage
fees, finder’s fees, agent’s commissions or other similar forms of compensation
in connection with this Agreement or any agreement or transaction contemplated
hereby.

Section 5.7         Litigation.

Except as set forth in Exhibit 5.7, (a) no
investigation, proceeding, action, suit, or other legal proceeding of any kind
or nature before any Governmental Body or arbitrator (including any take-or-pay
claims) is pending and (b) no written notice from any Governmental Body or any
other Person has been received by Seller claiming any violation of or
noncompliance with any Laws with respect to the Assets.

Section 5.8         Taxes and Assessments.

With respect to all Taxes related to the Assets,
Seller warrants and represents that (a) all reports, returns, statements
(including estimated reports, returns or statements), and other similar filings
(the “Tax Returns”) relating to the Assets required to be filed on or before
the Closing Date by Seller with respect to any Taxes have been or will be timely
filed with the appropriate Governmental Body in all jurisdictions in which such
Tax Returns are required to be filed;

 23
 

 

(b) such Tax Returns are
true and correct in all material respects, and all Taxes reported on such Tax
Returns have been paid; (c) there are not currently in effect any extension or
waiver of any statute of limitations of any jurisdiction regarding the
assessment or collection of any Tax; (d) there are no administrative
proceedings or lawsuits pending against the Assets or Seller by any taxing
authority; and (e) there are no liens on any of the Assets except for liens for
Taxes not yet due.

Section 5.9         Outstanding Capital Commitments.

As of the Effective Time,
there were no outstanding AFEs or other commitments, either singly or in the
aggregate, to make capital expenditures in excess of $200,000.00 which are
binding on the Assets.

Section 5.10       Compliance with Laws.

To the knowledge of
Seller, the Assets operated by Seller have been and are currently in
substantial compliance with the provisions and requirements of all Laws of all
Governmental Bodies having jurisdiction with respect to the Assets.

Section 5.11       Contracts.

Exhibit 5.11 contains a list of all material Contracts
pertaining to the Assets.  Seller has
paid its share of all costs including without limitation, Property Costs,
payable by Seller and is not in default under any Leases and Contracts, except
those being contested in good faith.

Section 5.12       Payments.

With respect to all Seller Operated Assets, all
rentals, royalties, overriding royalty interests, production payments, and
other payments due and/or payable by Seller to mineral, royalty and other
interest owners prior to the Effective Time with respect to the Assets and the
Hydrocarbons produced therefrom or attributable thereto have been properly and
timely paid. Seller is not obligated under any contract or agreement for the
sale of gas from the Assets containing a take-or-pay, advance payment,
prepayment, or similar provision, or under any gathering, transmission, or any other
contract or agreement with respect to any of the Assets to gather, deliver,
process, or transport any gas without then or thereafter receiving full payment
therefor.

Section 5.13       Gas Imbalances.

Exhibit 5.13 sets forth all of Seller’s pipeline and
production imbalances and penalties as of the Effective Time arising with
respect to the Assets. Except as disclosed in Exhibit 5.13, as of the Effective
Time, (i) no Person is entitled to receive any portion of the Seller’s
Hydrocarbons produced from the Assets or to receive cash or other payments to “balance”
any disproportionate allocation of Hydrocarbons produced from the Assets under
any operating agreement, gas balancing or storage agreement, gas processing or
dehydration agreement, gas transportation agreement, gas purchase agreement, or
other agreements, whether similar or dissimilar, (ii) Seller is not obligated
to deliver any quantities of gas or to pay any penalties or other amounts, in
connection with the violation of any of the terms of any gas contract or other
agreement with

 24
 

 

shippers with respect to
the Assets, and (iii) Seller is not obligated to pay any penalties or other
payments under any gas transportation or other agreement as a result of the
delivery of quantities of gas from the Wells in excess of the contract
requirements.

Section 5.14       Governmental Authorizations.

Seller has obtained and
is maintaining all federal, state and local governmental licenses, permits,
franchises, orders, exemptions, variances, waivers, authorizations, certificates,
consents, rights, privileges and applications therefor (the “Governmental
Authorizations”) that are presently necessary or required for the ownership and
operation of the Seller Operated Assets. Seller has operated the Seller
Operated Assets in accordance with the conditions and provisions of such
Governmental Authorizations, and Seller has not received any notices of
violations. No proceedings are pending or, to Seller’s knowledge, threatened,
that might result in any modification, revocation, termination or suspension of
any such Governmental Authorizations or which would require any corrective or
remediation action by Seller.

Section 5.15       Consents to Assignments and
Preferential Purchase Rights.

Except as set forth on Exhibit 5.15, none of the
Assets are subject to any preferential rights to purchase, restrictions on
assignment or required third-party consents to assignment, which may be
applicable to the transactions contemplated by this Agreement, except for
governmental consents and approvals of assignments that are customarily
obtained after Closing.

Section 5.16       Non-foreign Person.

Seller is not a “foreign Person” within the meaning of
Sections 1445 and 7701 of the Code.

Section 5.17       Payout Balances.

Exhibit 5.17 contains a complete and accurate list of
the status of any “payout” balances, as of the Effective Time, for the Wells
and Units subject to any reversion, adjustment at some level of cost recovery,
payout or other event other than termination of a Lease by its terms.

Section 5.18       Condemnation.

To Seller’s knowledge, there is no actual or
threatened taking of any part of the Assets by reason of condemnation or
eminent domain proceeding.

Section 5.19       Bankruptcy.

There are no bankruptcy, reorganization, or similar
arrangement proceedings pending, being contemplated by or, to Seller’s
knowledge, threatened against Seller or any Affiliate of Seller.

 25
 

 

Section 5.20       NGA.

No consent is required in connection with the
transaction contemplated hereby under the Natural Gas Policy Act of 1978, as
amended. Seller is not an interstate pipeline company within the meaning of the
Natural Gas Act of 1938.

Section 5.21       Investment Company.

Seller is not (a) an
investment company or a company controlled by an investment company within the
meaning of the Investment Company Act of 1940, as amended, or (b) subject in
any respect to the provisions of said act.

Section 5.22       Suspense Accounts.

Except as described on Exhibit 5.22 attached hereto,
there are no obligations to pay any interests of any kind held by Seller in suspense.

Section 5.23       Material Changes.

Except as provided for or disclosed in Exhibit 5.23
attached hereto and made a part hereof, between the date of execution of this
Agreement and the Closing Date, there has not been and will not be any material
adverse changes in the operations of the Properties by Seller, which change was
not the result of an industry-wide development affecting other companies in the
oil or gas industries.

Section 5.24       Calls on Production.

Except as disclosed on
Exhibit 5.24 there are no calls upon, option to purchase, or similar
right with respect to any portion of Seller’s production from the Assets and
there are no contracts or agreements providing for the sale, transportation,
gathering or other marketing related contracts with respect to any portion of
Seller’s production from the Assets, except that may be cancelled on less than
thirty-one (31) days written notice.

Section 5.25       No Forward Sales.  

Except as disclosed in Exhibit 5.25, Seller is not
obligated by virtue of a take-or-pay payment, advance payment or other similar
payment (other than royalties, overriding royalties and similar arrangements
applicable to the Properties reflected on Exhibit 1.2(a)), to deliver
hydrocarbons, or proceeds from the sale thereof, attributable to the Lease at
some future time without receiving payment therefore at or within 60 days after
delivery.

Section 5.26       Wells to Be Plugged and
Abandoned.  

Except as set forth in Exhibit 5.26, to Seller’s
knowledge as of the Effective Time there are no Wells that Seller is currently
obligated by applicable law, or contract to plug and abandon because they are
incapable of producing.  Seller has not
received any notification stating that wells have been plugged and abandoned in
a manner that does not comply with all applicable requirements of each
Governmental Authority having jurisdiction over the Properties.

 26
 

 

Section 5.27       No Sale or Hypothecation.  

Prior to Closing Seller
shall not sell, convey, transfer or encumber the Properties without the written
consent of Purchaser.

ARTICLE VI

REPRESENTATIONS AND WARRANTIES OF PURCHASER.

Purchaser represents and warrants to Seller the
following:

Section 6.1         Existence and Qualification.

Purchaser is a corporation organized, validly existing
and in good standing under the laws of the state of its incorporation.  Purchaser is duly qualified to do business as
a corporation in the respective jurisdictions where the Assets are located.

Section 6.2         Power.

Purchaser has the corporate power to enter into this
Agreement, perform the terms of this Agreement and consummate the transactions
contemplated by this Agreement.

Section 6.3         Authorization and Enforceability.

The execution, delivery and performance of this
Agreement have been or by Closing will have been duly authorized by all
necessary corporate action on the part of Purchaser.  This Agreement has been duly executed and
delivered by Purchaser (and all documents required hereunder to be executed and
delivered by Purchaser at Closing will be duly executed and delivered by Purchaser)
and this Agreement constitutes the valid and binding obligations of Purchaser,
enforceable in accordance with their terms except as such enforceability may be
limited by applicable bankruptcy or other similar laws affecting the rights and
remedies of creditors generally as well as to general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). As evidence of the foregoing, Purchaser has delivered to
Seller simultaneous with the execution of this Agreement either a resolution or
a unanimous consent executed, adopted and approved by the board of directors of
Purchaser which specifically approves the terms of this Agreement, the
execution of this Agreement by Purchaser and the completion of the transaction
contemplated by this Agreement.

Section 6.4         No Conflicts.

The execution, delivery and performance of this
Agreement by Purchaser, and the transactions contemplated by this Agreement
will not (i) violate any provision of the certificate of incorporation or
bylaws of Purchaser, (ii) result in a material default (with due notice or
lapse of time or both) or the creation of any lien or encumbrance or give rise
to any right of termination, cancellation or acceleration under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license
or agreement to which Purchaser is a party, (iii) violate any judgment, order,
ruling, or regulation applicable to Purchaser as a party in interest, or (iv)
violate any Law, rule or decree applicable to Purchaser or any of the Assets,
except for rights to

 27
 

 

consent by, required
notices to, and filings with or other actions by Governmental Bodies where the
same are not required prior to the assignment of oil and gas interests.

Section 6.5         Seller’s Liability for Brokers’ Fees.

Seller shall not have any
responsibility, liability or expense, as a result of undertakings or agreements
of Purchaser, for brokerage fees, finder’s fees, agent’s commissions or other
similar forms of compensation in connection with this Agreement or any
agreement or transaction contemplated hereby.

Section 6.6         Litigation.

As of the date of the execution of this Agreement
there are (and as of the Closing Date there will be) no actions, suits or
proceedings pending, or to Purchaser’s knowledge, threatened in writing, before
any Governmental Body or brought by any Person against Purchaser or any
Affiliate of Purchaser with respect to this Agreement, the transaction
contemplated by this Agreement or the Assets.

Section 6.7         Financing.

Purchaser has sufficient cash, available lines of
credit or other sources of immediately available funds in United States dollars
to enable it to pay the Closing Payment to Seller at the Closing.

Section 6.8         Texas Deceptive Trade
Practices-Consumer Protection Act.

With respect to the Texas Deceptive Trade
Practices-Consumer Protection Act, Tex. Bus. & Com. Code Ann. Section 17.41
et seq. (the “DTPA”), Purchaser acknowledges, represents and warrants that
Purchaser is purchasing the goods and/or services covered by this Agreement for
commercial or business use; that Purchaser has assets of $5 million or more
according to its most recent financial statement prepared in accordance with
generally accepted accounting principles; that Purchaser has knowledge and
experience in financial and business matters that enable Purchaser to evaluate
the merits and risks of a transaction such as this; and that Purchaser is not
in a significantly disparate bargaining position with Seller.

Section 6.9         No Reliance.

Purchaser represents and warrants that Purchaser is
knowledgeable of the oil and gas business and of the usual and customary
practices of producers such as Seller. 
Purchaser has been granted access to the Assets and the Records of
Seller relating to the Assets. In making the decision to enter into this
Agreement and consummate the transactions contemplated hereby, Purchaser has
relied exclusively on Purchaser’s own investigation and analysis of the
condition, value, characteristics and qualities of the Assets. Accordingly,
Purchaser acknowledges that Seller has not made and Purchaser shall not rely
upon any representation or warranty, express, implied, at common law, by
statute or otherwise, other than the warranty made in Section 3.1, the express
representations and warranties made in Article 5, the certificate of Seller to
be delivered pursuant to Section 9.2(c) and the special warranty of title in
the Assignment and Bill of Sale relating to the Assets.

 28

 

ARTICLE
VII

COVENANTS OF THE PARTIES

Section 7.1           Access.

(a)                          Between
the date of execution of this Agreement and the Closing Date, Seller will give
Purchaser and its representatives access to the Assets and the right to copy,
at Purchaser’s expense, the Records in Seller’s possession, for the purpose of
conducting an investigation of the Assets, but only to the extent that Seller
may do so without violating any obligations to any third party and to the
extent that Seller has authority to grant such access without breaching any
restriction binding on Seller. Such access by Purchaser shall be limited to
Seller’s normal business hours, and any weekends and after hours requested by
Purchaser that can be reasonably accommodated by Seller, and Purchaser’s
investigation shall be conducted in a manner that minimizes interference with
the operation of the Assets. All information obtained by Purchaser and its
representatives under this Section 7.1 shall be subject to the terms of Section
7.7 and the terms of that certain confidentiality agreement between Seller and
Purchaser dated February 2, 2005 (the “Confidentiality Agreement”).

(b)                         PURCHASER
ACKNOWLEDGES THAT EXCEPT TO THE EXTENT CONTAINED IN AN EXPRESS REPRESENTATION
IN ARTICLES 3 AND 5 OF THIS AGREEMENT, THE CERTIFICATE OF SELLER TO BE
DELIVERED PURSUANT TO SECTION 9.2(c) OR THE ASSIGNMENT AND BILL OF SALE, SELLER
HAS MADE NO REPRESENTATIONS OR WARRANTIES, WHETHER ORAL OR WRITTEN.  SELLER DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED,
STATUTORY OR OTHERWISE AS TO THE ACCURACY OR COMPLETENESS OF INFORMATION
OBTAINED BY PURCHASER FROM SELLER OR AS TO SELLER’S TITLE TO THE ASSETS. IN
ENTERING INTO AND PERFORMING THIS AGREEMENT, PURCHASER HAS RELIED AND WILL RELY
SOLELY UPON ITS INDEPENDENT INVESTIGATION OF, AND JUDGMENT WITH RESPECT TO, THE
ASSETS, THE VALUE OF THE ASSETS, AND SELLER’S TITLE THERETO AND UPON THOSE
REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN ARTICLES 3 AND 5 OF THIS
AGREEMENT, THE CERTIFICATE OF SELLER TO BE DELIVERED PURSUANT TO SECTION 9.2(c)
OR THE ASSIGNMENT AND BILL OF SALE.

Section 7.2                           Government
Reviews.

If applicable, this Agreement is subject to and
conditioned upon compliance by Seller and Purchaser with the HSR Act.  If required, Seller and Purchaser shall in a
timely manner (a) make all required filings, if any, with and prepare
applications to and conduct negotiations with, each governmental agency as to
which such filings, applications or negotiations are necessary or appropriate
in the consummation of the transactions contemplated hereby specifically
including but not limited to the HSR Act, (b) provide such information as each
may reasonably request to make such filings, prepare such applications and
conduct such negotiations and (c) request early termination or waiver of any
applicable waiting period under the HSR Act. 
Purchaser shall bear the cost of the HSR Act filing fee made in
connection with this Agreement.  Each
party shall 

 29
 

 

cooperate with and use
all reasonable efforts to assist the other with respect to such filings, applications
and negotiations.

Section 7.3                           Notification
of Breaches.

Until the Closing,

(a)                          Purchaser
shall notify Seller promptly after Purchaser obtains actual knowledge that any
representation or warranty of Seller contained in this Agreement is untrue in any
material respect or will be untrue in any material respect as of the Closing
Date or that any covenant or agreement to be performed or observed by Seller
prior to or on the Closing Date has not been so performed or observed in any
material respect.

(b)                         Seller
shall notify Purchaser promptly after Seller obtains actual knowledge that any
representation or warranty of Purchaser contained in this Agreement is untrue
in any material respect or will be untrue in any material respect as of the
Closing Date or that any covenant or agreement to be performed or observed by
Purchaser prior to or on the Closing Date has not been so performed or observed
in a material respect.

If any of Purchaser’s or Seller’s representations or
warranties is untrue or shall become untrue in any material respect between the
date of execution of this Agreement and the Closing Date, or if any of
Purchaser’s or Seller’s covenants or agreements to be performed or observed
prior to or on the Closing Date shall not have been so performed or observed in
any material respect, but if such breach of representation, warranty, covenant
or agreement shall (if curable) be cured by the Closing (or, if the Closing
does not occur, by the date set forth in Section 9.1), then such breach shall
be considered not to have occurred for all purposes of this Agreement.

Section 7.4                           Assignments
and Bills of Sale.

On the Closing Date, Seller shall execute and deliver
to Purchaser Assignments and Bills of Sale in sufficient number of originals to
facilitate recording in each county in which the Properties are located and
Assignments and Bills of Sale necessary to convey to Purchaser all federal or
state leases, if any, in the form as prescribed by the applicable Governmental
Body and otherwise acceptable to Purchaser and Seller.

Section 7.5                           Public
Announcements.

Neither party shall make any press release, public
announcement or public disclosure regarding the existence of this Agreement,
the contents hereof or the transaction contemplated hereby until this Agreement
has been signed by Seller and Purchaser. 
In such event, either party may make a press release, public
announcement or public disclosure regarding this Agreement after the form and
contents of the press release, public announcement or public disclosure have
been approved in writing by the other party. 
In the event that the transaction contemplated by this Agreement closes,
either party may make a press release, public announcement or public disclosure
regarding this Agreement after the form and contents of the press release,
public announcement or public disclosure have been approved in writing by the
other party.  The foregoing provision
shall not restrict disclosures by Purchaser or Seller which are required by 

 30
 

 

applicable securities or
other Laws or regulations of the applicable rules of any stock exchange having
jurisdiction over the disclosing party or its Affiliates.

Section 7.6                           Operation
of Business Pending Closing.

Prior to the Closing Date, Seller will (except as
consented to in writing by Purchaser or otherwise permitted under this
Agreement):

(a)                          operate
its business in the ordinary course of business consistent with recent past
practices, and will use reasonable efforts to cause the operator of any
Property (if not the Seller) to operate the same in substantially the same
manner as they have been operated previously;

(b)                         not
terminate, materially amend, or extend any material Contracts or liens affected
the Properties, or enter into or commit to enter into any new material
Contracts or liens relating to the Properties, or settle, compromise or waive
any material right relating to the Properties;

(c)                          maintain
insurance coverage on the Properties in amounts and of the types presently in
force;

(d)                         use
reasonable efforts to (or cause the operator to, if Seller is not the operator)
maintain in full force and effect the Leases, and pay all costs and expenses
and perform all material obligations of the owner of the Properties promptly
when due;

(e)                          use
reasonable efforts to (or cause the operator to, if Seller is not the operator)
to maintain all permits, not transfer, sell, hypothecate, encumber, or
otherwise dispose of any Properties except for sales and dispositions of
hydrocarbons in the ordinary course of business consistent with past practices;

(f)                            not
grant or create any preferential right to purchase, right of first refusal
opportunity or other transfer restriction or requirement with respect to the
Properties except in connection with the renewal or extension of Leases after
the Effective Time if granting or creating such right or requirement is a
condition of such renewal or extension;

(g)                         use
reasonable efforts to (or cause the operator to, if Seller is not the operator)
maintain the Equipment associated with the Properties;

(h)                         not make
any change in any method of accounting or accounting practices or policy with
the respect to the Properties;

(i)                             not
incur or enter into any forward sales of gas or other sales out of the ordinary
course of business or suffer or permit to be created any gas imbalances
affecting the Properties;

 31
 

 

(j)                             not
incur any indebtedness or take or omit to take any action that would cause a
lien or encumbrance to arise or exist on the Properties or otherwise allow a
lien to attach or encumber the Properties;

(k)                          not
commit to participate in any operation on the Properties estimated to exceed
$200,000 without first consulting with Purchaser in good faith and after first
furnishing Purchaser will all available technical, economical, and other
factual support for Seller’s recommendation and attempting to reach an
agreement as to the election to be made which is in the best interest of the
Parties.

Section 7.7                           Indemnity
Regarding Access.

PURCHASER, ON BEHALF OF ITSELF AND THE PURCHASER
INDEMNITEES, SHALL INDEMNIFY, HOLD HARMLESS, DEFEND, SAVE, RELEASE AND
COVENANTS NOT TO SUE SELLER INDEMNITEES, THE OTHER OWNERS OF INTERESTS IN THE
ASSETS, AND ALL SUCH PERSONS’ DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND
REPRESENTATIVES, FROM AND AGAINST ANY AND ALL DAMAGES ARISING FROM OR RELATED
TO ACCESS TO THE ASSETS BY THE PURCHASER INDEMNITEES PURSUANT TO SECTION 7.1.

WITHOUT LIMITING THE FOREGOING, PURCHASER’S
INDEMNIFICATION OF SELLER INDEMNITEES, THE OTHER OWNERS OF INTERESTS IN THE
ASSETS, AND ALL SUCH PERSONS’ DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND
REPRESENTATIVES, SHALL INCLUDE INDEMNIFICATION AGAINST DAMAGES ARISING FROM OR
RELATED TO PERSONAL INJURIES, DEATH, PROPERTY DAMAGE AND CLAIMS MADE BY
LANDOWNERS WHO OWN LAND ADJACENT TO THE PROPERTIES ARISING FROM OR IN
CONNECTION WITH ACTIVITIES, TESTS, ENVIRONMENTAL ASSESSMENTS OR OTHER
OPERATIONS CONDUCTED BY PURCHASER OR PURCHASER’S REPRESENTATIVES RELATED TO
THIS AGREEMENT.

PURCHASER’S INDEMNIFICATION OF SELLER INDEMNITEES, THE
OTHER OWNERS OF INTERESTS IN THE ASSETS, AND ALL SUCH PERSONS’ DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS AND REPRESENTATIVES, SHALL BE PURSUANT TO AND IN
ACCORDANCE WITH ALL OF THE INDEMNIFICATION PROVISIONS SET OUT IN SECTION
11.3(b) AND SHALL INCLUDE, WITHOUT LIMITATION, INDEMNIFICATION AGAINST DAMAGES
AND LITIGATION EXPENSES.

Section 7.8                           Gas
Imbalances and Take-or-Pay Make-up Obligations.

Subject to the adjustment to the Purchase Price as
provided in this Section 7.8, Purchaser expressly assumes Purchaser’s
proportionate share of any and all obligations attributable to gas production
imbalances with co-owners of the Properties and gas take-or-pay make-up
obligations with purchasers or sellers of natural gas from the Properties.  Should Purchaser (i) determine that the gas
imbalance information set out on Exhibit 5.13 is inaccurate and (ii) deliver a
written notice regarding the gas imbalance to Seller at least five (5) Business
Days prior to Closing, Seller shall review Purchaser’s information regarding
the alleged gas imbalance.  If it is 

 32
 

 

determined that there is
an inaccuracy as of the Effective Time in the gas imbalance set forth on
Exhibit 5.13, then the Purchase Price shall be either increased (if there is
aggregate underproduction) or decreased (if there is aggregate overproduction)
on the basis of $4.00 per MMBtu. This adjustment to the Purchase Price shall be
in full settlement of all production imbalances on the Assets. Notwithstanding
anything to the contrary contained in this Section 7.8, there shall be no
adjustment to the Purchase Price if it is determined that actual imbalance
volumes are within 15% above or below those shown on Exhibit 5.13.

The adjustment to the Purchase Price as set forth in
this Section 7.8 is Purchaser’s exclusive remedy for (i) any gas imbalance,
(ii) any breach of Seller’s representation in Section 5.13 and (iii) any
affirmation of such representations in the certificate of Seller to be
delivered pursuant to Section 9.2(c), and, at Closing, Purchaser shall assume
Purchaser’s proportionate share of Seller’s overproduced or underproduced position
in the Wells as of the Effective Date, including the responsibility for the
payment of royalties with respect to any imbalance and any obligation to
balance, whether in cash or in kind. Purchaser shall be deemed to have waived
any breaches of Section 5.13 if Purchaser fails to give timely written notice
to Seller as provided above.

Section 7.9                           Consents
and Preferential Rights.

(a)                          Seller
shall promptly prepare and send notices to the holders of any required consents
to assignment of any Assets requesting such consents. Seller shall use
reasonable efforts to obtain all such consents which are reasonably obtainable
by Closing and are required to vest Defensible Title to the Assets in
Purchaser.  Purchaser shall cooperate
with Seller in seeking to obtain such consents. In the event that Seller is
unable to obtain such consents that are required to vest Defensible Title to
the Assets, Purchaser may elect to treat the unsatisfied consent requirement as
a Title Defect and the procedures set forth in Section 3.5(a) shall apply.

(b)                         Seller
shall promptly prepare and send notices to the holders of any applicable
preferential rights to purchase any Asset requesting waivers of such
preferential rights to purchase. The consideration payable under this Agreement
for any particular Assets for purposes of preferential purchase right notices
shall be the Allocated Value for such Assets. Seller shall use reasonable
efforts to cause such waivers of preferential rights to purchase (or the
exercise thereof) to be obtained and delivered prior to Closing. Purchaser
shall cooperate with Seller in seeking to obtain such waivers of preferential
rights.

If the holder of a preferential right to purchase
exercises such right, Seller shall tender to such third party the required interest
in the affected Asset at a price equal to the Allocated Value (reduced
appropriately, as determined by mutual agreement of Purchaser and Seller, if
less than the entire Asset must be tendered), and to the extent that such
preferential right to purchase is exercised and such interest in such Asset is
actually sold to the third party so exercising such right, the Assets
transferred will be treated as if subject to a Title Defect and the procedures
set forth in Section 3.5(d) shall apply.

 33
 

 

Should a holder of a preferential right to purchase
fail to exercise its preferential right to purchase as to any portion of the
Assets prior to Closing and the time for exercise or waiver has not yet expired
prior to Closing, subject to the remaining provisions of this Section 7.9, such
Assets shall be included in the transaction contemplated by this Agreement at
Closing and the following procedures shall be applicable:

(i)                                     An
Assignment and Bill of Sale from Seller to Purchaser of the Assets affected by
such preferential right to purchase shall be delivered into an escrow account,
Purchaser shall take beneficial possession of the affected Assets and Purchaser
shall be entitled to all production, income, proceeds, receipts and credits to
which Purchaser would be entitled under Section11.1. Purchaser shall Indemnify
Seller Indemnitees against Damages for which Purchaser would be liable under
the terms of Sections 11.2 and 11.3 with respect to the affected Assets. Record
title to the affected Assets shall not be transferred and the Assignment and
Bill of Sale shall not be released to Purchaser from the escrow account until
such preferential right to purchase has been waived or has expired. PURCHASER’S
INDEMNIFICATION OF SELLER INDEMNITEES SHALL BE PURSUANT TO AND IN ACCORDANCE
WITH THE INDEMNIFICATION PROVISIONS SET OUT IN SECTION 11.3(b) AND SHALL
INCLUDE, WITHOUT LIMITATION, INDEMNIFICATION AGAINST DAMAGES AND LITIGATION
EXPENSES.

(ii)                                  Seller
shall continue to use reasonable efforts to obtain the waiver of the
preferential right to purchase and shall continue to be responsible for the
compliance with the preferential right to purchase.

(iii)                               Should
the holder of the preferential right to purchase exercise same, Purchaser and
Seller agree to cause the affected Assets to be transferred to such holder on
the terms and provisions set out herein and in the applicable preferential
right to purchase provision. In such event, Seller shall pay the Allocated
Value, subject to applicable adjustments, for such Asset to Purchaser, and Seller
shall be entitled to retain the consideration paid for the affected Asset by
the holder of the preferential right to purchase.

(iv)                              If
the preferential right to purchase is waived after the Closing Date or if the
time limit for the exercise of the preferential right to purchase expires
without being exercised, Seller and Purchaser shall take all reasonable actions
necessary to ensure that the affected Assets are promptly conveyed out of
escrow to Purchaser.

(v)                                 Once
the provisions of subparagraph (iv) have been satisfied and all obligations in
connection therewith have been fulfilled, the Closing shall be deemed to have
occurred for all purposes hereunder with respect to the affected Assets.

Should any third party bring any suit, action or other
proceeding seeking to restrain, enjoin or otherwise prohibit the consummation
of the transactions contemplated hereby in 

 34
 

 

connection with a claim
to enforce preferential rights, the Assets affected by such suit, action or
other proceeding shall be excluded from the Assets transferred at Closing and
the Purchase Price shall be reduced by the Allocated Value of such excluded
Assets.  Promptly after the suit, action
or other proceeding is dismissed or settled or a judgment is rendered, Seller
shall sell to Purchaser and Purchaser shall purchase from Seller all such
Assets not being sold to the third party for a purchase price equal to the
Allocated Value of such Assets, adjusted as provided in Section 2.2.

Section 7.10                     Tax
Matters.

(a)                          Subject
to the provisions below, Seller shall be responsible for all Taxes attributable
to all times prior to Effective Time, including without limitation, income
Taxes arising as a result of the gain recognized on the transfer of the Assets.
Purchaser shall be responsible for Purchaser’s proportionate share of all such
Taxes attributable to all periods of time at and after the Effective Time.

(b)                         Purchaser
shall pay any sales, use, excise, registration, documentary, stamp or transfer
Taxes, recording fees incurred and imposed with respect to the conveyance of
the Properties contemplated hereby.

Section 7.11                     Further
Assurances.

After Closing, Seller and Purchaser shall take such
further actions and execute, acknowledge and deliver all such further documents
as are reasonably requested by the other party for carrying out the purposes of
this Agreement or of any document delivered pursuant to this Agreement.

Section 7.12                     Replacement
of Bonds, Letters of Credit and Guarantees.

None of the bonds,
letters of credit and guarantees, if any, posted by Seller with Governmental
Bodies and relating to the Assets shall be transferred to Purchaser.

Section 7.13                     Like-Kind
Exchange.

Purchaser and Seller agree to use reasonable
cooperation so that the transfer of the Properties shall, at either party’s election,
be accomplished in a manner enabling the transfer of the Properties to qualify
as a like-kind exchange of property within the meaning of Section 1031 of the
Code.  If such an election is made, the
parties shall reasonably cooperate to effect such like-kind exchange, which
cooperation shall include (i) having any cash payment be paid directly from a
1031 account which has been established with a qualified intermediary, as that
term is defined in Section 1031 of the Code, in a manner which enables such
transfer of the Properties to qualify as part of a like-kind exchange of
property within the meaning of Section 1031 of the Code and (ii) assigning
rights to the Properties to a qualified intermediary or an escrow agent acting
as a qualified intermediary for the purpose of receiving an assignment of the
Properties in a manner which enables such transfer of the Properties to qualify
as part of a like-kind exchange of property within the meaning of Section 1031
of the Code. In such events, the parties shall cooperate in the negotiation and
execution of such additional documents.

 35
 

 

Section 7.14                     Arbitration.

Disputed matters related to Allocated Values in
Section 2.3, remedies for Title Defect Amounts in Section 3.5(d), Title
Benefits Amounts in Section 3.5(e), downward adjustment to the Purchase Price
to reflect the costs of remediation in Section 4.3 and the final settlement
statement in Section 9.4(b) may be submitted, as provided in the respective
Sections listed above, to arbitration pursuant to the following provisions:

(a)                          The
parties shall jointly select a mutually acceptable person as the sole
arbitrator under this Agreement.  If the
parties are unable to agree upon the designation of one person as arbitrator,
then each party shall appoint one arbitrator and the two arbitrators so chosen
shall appoint a third arbitrator and the three arbitrators shall arbitrate any
dispute.

(b)                         Any
arbitration hearing shall be held in Houston, Texas at a location acceptable to
the arbitrator.

(c)                          The
arbitrator shall settle disputes in accordance with the Texas General
Arbitration Act and the Rules of the American Arbitration Association. The
decision of the arbitrator shall be binding upon the parties and may be
enforced in any court of competent jurisdiction.  Seller and Purchaser, respectively, shall
bear their own legal fees and other costs incurred in presenting their
respective cases.  The charges and
expenses of the arbitrator shall be shared equally by Seller and Purchaser.

(d)                         In
fulfilling his duties hereunder, the arbitrator shall be bound by the terms of
this Agreement. In fulfilling any of his arbitration duties, the arbitrator may
consider such other matters as in the opinion of the arbitrator are necessary
or helpful to make a proper evaluation. 
Additionally, the arbitrator may consult with and engage disinterested
third parties, including, without limitation, petroleum engineers, attorneys
and consultants, to advise the arbitrator.

(e)                          If any
arbitrator selected hereunder should die, resign or be unable to perform his
duties hereunder, the parties selecting such arbitrator shall select a
replacement arbitrator. The aforesaid procedure shall be followed from time to
time as necessary.

Section 7.15                     Delivery
of Financial Statements and Reserve Information.

(a)                          To the
extent requested by Purchaser, Seller shall provide to Purchaser as promptly as
reasonably practical any financial statements, schedules or information
(including without limitation access to the work papers of Seller’s accountants
related to the financial statements described in this Section 7.15) relating to
the Assets that are required to be included in any filing by Purchaser or its
Affiliates under the Securities Exchange Act of 1934, registration statement
filed or to be filed by Purchaser or any of its Affiliates under the Securities
Act of 1933 and any additional financial or operating data relating to any of
the financial statements, schedules or information referred to in this Section
7.15 or relating to any of the Assets.

 36
 

 

(b)                         Seller
shall use reasonable efforts to cause to be delivered to Purchaser (or its
Affiliates) “comfort letters” of Seller’s accountants and Seller’s independent
reserve engineers dated as of the Effective Time and the Closing Date and
addressed to the underwriters in any offering of securities for which such
comfort letters are required by underwriters with regard to certain financial
information regarding the Assets or the reserves relating to the Assets as the
case may be, in form reasonably satisfactory to Purchaser and customary in
scope and substance for “comfort” letters delivered by independent public
accountants and reserve engineers in connection with registration statements
similar to Purchaser’s or its Affiliates registration statement and to use
reasonable efforts to cause Seller’s accountant and Seller’s reserve engineer
to consent to inclusion of the information described in this Section 7.15 and
to be named in Purchaser’s and its Affiliates filings with the Securities and
Exchange Commission as is customary for such consents.

(c)                          Seller
shall use reasonable efforts to provide any relevant historical accounting or
financial information in Seller’s possession, custody or control related to the
Assets that Purchaser may reasonably request.

(d)                         Purchaser
shall bear all out-of-pocket costs paid to any third party for preparation of
any of the items described in Section 7.15(a), Section 7.15(b) and Section
7.15(c) above.

ARTICLE VIII

CONDITIONS TO CLOSING

Section 8.1                           Conditions
of Seller to Closing.

The obligations of Seller to consummate the
transactions contemplated by this Agreement are subject, at the option of
Seller, to the satisfaction on or prior to Closing of each of the following
conditions:

(a)                          Representations.  The representations and warranties of
Purchaser set forth in Article 6 shall be true and correct in all material
respects as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date;

(b)                         Performance.  Purchaser shall have performed and observed,
in all material respects, all covenants and agreements to be performed or
observed by it under this Agreement prior to or on the Closing Date;

(c)                          Pending
Litigation.  No suit, action or other
proceeding by a third party, including any Governmental Body, seeking to restrain,
enjoin or otherwise prohibit the conveyance of the Assets or the consummation
of the transactions contemplated by this Agreement shall be pending;

(d)                         Deliveries.  Purchaser shall have delivered to Seller duly
executed counterparts of the Assignment and Bill of Sale and the other
documents and certificates to be delivered by Purchaser under Section 9.3;

 37
 

 

(e)                          Payment.  Purchaser shall have paid the Closing
Payment;

(f)                            HSR
Act.  Only if applicable, any waiting
period applicable to the consummation of the transaction contemplated by this
Agreement under the HSR Act shall have lapsed or terminated (by early
termination or otherwise);

(g)                         Approval by Board of Directors.  Purchaser shall have delivered
to Seller either (i) a certified copy of a resolution of the board of directors
of Purchaser which approves the terms of this Agreement, the execution of this
Agreement by Purchaser, and the completion of the transaction contemplated by
this Agreement or (ii) a unanimous consent of the board of directors of
Purchaser which approves the terms of this Agreement, the execution of this
Agreement by Purchaser, and the completion of the transaction contemplated by
this Agreement; and

(h)                         Secondary Purchase and Sale Agreement. Contemporaneously with
the preparation and execution of this Agreement, Purchaser and Seller have
prepared and executed a second Purchase and Sale Agreement referred to herein
as the Secondary Purchase and Sale
Agreement. The Closing of the transaction contemplated by this Agreement
shall occur simultaneously with the Closing of the transaction contemplated by
the Secondary Purchase and Sale Agreement
or not at all.

Section 8.2                           Conditions
of Purchaser to Closing.

The obligations of Purchaser to consummate the
transactions contemplated by this Agreement are subject, at the option of
Purchaser, to the satisfaction on or prior to Closing of each of the following
conditions:

(a)                          Representations.  The representations and warranties of Seller
set forth in Article 5 shall be true and correct as of the date of this
Agreement and as of the Closing Date as though made on and as of the Closing
Date (other than any representations and warranties that refer to a specified
date which need only be true and correct on and as of such specified date);

(b)                         Performance.  Seller shall have performed and observed, in
all material respects, all covenants and agreements to be performed or observed
by it under this Agreement prior to or on the Closing Date;

(c)                          Pending
Litigation.  No suit, action or other
proceeding by a third party (including any Governmental Body) seeking to
restrain, enjoin or otherwise prohibit the conveyance of the Assets or the
consummation of the transactions contemplated by this Agreement shall be
pending;

(d)                         Deliveries.  Seller shall have delivered to Purchaser duly
executed counterparts of the Assignment and Bill of Sale and the other
documents and certificates to be delivered by Seller under Section 9.2;

 38
 

 

(e)                          HSR
Act.  Only if applicable, any waiting
period applicable to the consummation of the transaction contemplated by this
Agreement under the HSR Act shall have lapsed or terminated (by early
termination or otherwise);

(f)                            Approval by Board of Directors.  Seller shall have delivered to
Purchaser either (i) a certified copy of a resolution of the board of directors
of Seller which approves the terms of this Agreement, the execution of this
Agreement by Seller, and the completion of the transaction contemplated by this
Agreement or (ii) a unanimous consent of the board of directors of Seller which
approves the terms of this Agreement, the execution of this Agreement by
Seller, and the completion of the transaction contemplated by this Agreement;
and

(g)                         Secondary Purchase and Sale Agreement. Contemporaneously with
the preparation and execution of this Agreement, Purchaser and Seller have
prepared and executed a second Purchase and Sale Agreement referred to herein
as the Secondary Purchase and Sale
Agreement. The Closing of the transaction contemplated by this Agreement
shall occur simultaneously with the Closing of the transaction contemplated by
the Secondary Purchase and Sale Agreement
or not at all.

ARTICLE IX

CLOSING

Section 9.1                           Time
and Place of Closing.

(a)                          Consummation
of the purchase and sale transaction as contemplated by this Agreement (the “Closing”),
shall take place at the offices of Seller located at 14425 Torrey Chase, Suite
190 Houston, Texas 77014, at 10:00 a.m., local time, on or before January 31,
2007 unless otherwise agreed to in writing by Purchaser and Seller.

(b)                         The date
on which the Closing occurs is herein referred to as the “Closing Date.”

Section 9.2                           Obligations
of Seller at Closing.

At the Closing, Seller shall deliver or cause to be
delivered to Purchaser, among other things, the following:

(a)                          Assignment
and Bill of Sale of the Assets, in sufficient number of originals to allow
recording in all counties in which the Properties are located and other
appropriate jurisdictions and offices, as applicable, duly executed by Seller;

(b)                         assignments,
on appropriate forms, of state and of federal leases, if any, comprising
portions of the Assets, duly executed by Seller;

(c)                          a
certificate duly executed by an authorized corporate officer of Seller, dated
as of Closing, certifying on behalf of Seller that the conditions set forth in
Sections 8.2(a) and 8.2(b) have been fulfilled;

 39
 

 

(d)                         letters-in-lieu
of transfer orders covering the Properties, duly executed by Seller;

(e)                          where
appropriate, evidence of Seller’s resignation as operator, including Railroad
Commission of Texas Form P-4s executed by Seller; and

(f)                            Assignment
of Pipeline Assets, in sufficient number of originals to allow recording in all
counties in which the Pipeline Assets are located and other appropriate
jurisdictions and offices, as applicable, duly executed by Seller;

Section 9.3                           Obligations
of Purchaser at Closing.

At the Closing, Purchaser
shall deliver or cause to be delivered to Seller, among other things, the
following:

(a)                          a wire
transfer of the Closing Payment in immediately available U.S. dollars;

(b)                         copies of
the Assignment and Bill of Sale of the Assets, duly executed by Purchaser;

(c)                          a
certificate duly executed by an authorized corporate officer of Purchaser dated
as of Closing, certifying on behalf of Purchaser that the conditions set forth
in Sections 8.1(a) and 8.1(b) have been fulfilled; and

(d)                         copies of
the Assignment of Pipeline Assets, duly executed by Purchaser.

Section 9.4                           Closing
Payment and Post-Closing Purchase Price Adjustments.

(a)                          Not
later than two (2) Business Days prior to the Closing Date, Seller shall
prepare and deliver to Purchaser, based upon the best information available to
Seller, a preliminary settlement statement estimating the Adjusted Purchase
Price after giving effect to all Purchase Price adjustments set forth in
Section 2.2 and the Deposit. The preliminary settlement statement delivered in
accordance with this Section 9.4(a) shall constitute the dollar amount to be
paid by Purchaser to Seller at the Closing (the “Closing Payment”).

(b)                         As soon
as reasonably practicable after the Closing but not later than one hundred
twenty (120) days following the Closing Date, Seller shall prepare and deliver
to Purchaser a final settlement statement setting forth the final calculation
of the Adjusted Purchase Price and showing the calculation of each adjustment,
based, to the extent possible on actual credits, charges, receipts and other
items before and after the Effective Time and taking into account all Title
Defect and Title Benefit adjustments under Section 3.5.  Seller shall, at Purchaser’s request, supply
reasonable documentation available to support any credit, charge, receipt or
other item. Not later than the thirty (30) days following receipt of the final
settlement statement, Purchaser shall deliver to Seller a written report containing
any changes that Purchaser proposes be made to the final settlement statement.
The parties shall undertake to agree on the final statement of 

 40
 

 

the Adjusted Purchase Price no later than one
hundred eighty (180) days after the Closing Date. In the event that the parties
cannot reach agreement within such period of time, either party may refer the
remaining matters in dispute to arbitration as provided in Section 7.14.

(c)                          All
payments made or to be made hereunder to Seller shall be by electronic transfer
of immediately available funds in U.S. dollars to:

JPMorgan
Chase Bank

For
account of Smith Production Inc.

Account
No. 034 000 25957

ABA No. 113 0006 09

All payments made or to be made hereunder to Purchaser
shall be by electronic transfer of immediately available funds to a bank and
account specified by Purchaser in writing to Seller.

ARTICLE X

TERMINATION

Section 10.1                     Termination.

This Agreement may be terminated as follows:

(a)                          by the
mutual prior written consent of Seller and Purchaser prior to Closing;

(b)                         by Seller
in the events that (i) Closing has not occurred on the Closing Date; (ii)
Seller is not otherwise in default under the provisions of this Agreement; and
(iii) the Conditions of Seller to Closing in Section 8.1 have not been
satisfied;

(c)                          by
Purchaser in the events that (i) Closing has not occurred on the Closing Date;
(ii) Purchaser is not otherwise in default under the provisions of this
Agreement; and (iii) the Conditions of Purchaser to Closing in Section 8.2 have
not been satisfied; and

(d)                         by
Purchaser pursuant to 4.3.

Section 10.2                     Effect of
Termination.

If this Agreement is terminated pursuant to Section
10.1, this Agreement shall become void and of no further force or effect except
for the provisions of Section 5.6 (Purchaser’s Liability for Brokers’ Fees),
Section 6.5 (Seller’s Liability for Brokers’ Fees), Section 7.7 (Indemnity
Regarding Access) and Section 12.4 (Expenses) and the Confidentiality
Agreement. The provisions and agreements listed in the preceding sentence shall
survive the termination of this Agreement and shall continue in full force and
effect. Seller shall be free immediately to enjoy all rights of ownership of
the Assets and to sell, transfer, encumber or otherwise dispose of the Assets
to any party without any restriction under this Agreement.

 41
 

 

Section 10.3                     Distribution
of Deposit Upon Termination.  

(a)                          If
Seller terminates this Agreement pursuant to Section 10.1(b), then Seller may
retain the Deposit as liquidated damages free of any claims by Purchaser. Purchaser
and Seller agree that the actual amount of damages resulting from such a
termination would be difficult if not impossible to determine accurately
because of the unique nature of this Agreement, the unique nature of the
Assets, the uncertainties of applicable commodity markets and differences of
opinion with respect to such matters, and the liquidated damages provided for
herein are a reasonable estimate by the parties of such damages.

(b)                         If this
Agreement is terminated for any reason other than the reasons set forth in
Section 10.1(b), then Seller shall deliver the Deposit to Purchaser immediately
free of any claims by Seller.

(c)                          Notwithstanding
anything to the contrary in this Agreement, Purchaser shall not be entitled to
receive interest on the Deposit, whether the Deposit is applied against the
Purchase Price or returned to Purchaser pursuant to this Section 10.3.

(d)                         The
retention of the Deposit by Seller as described above shall constitute the only
remedies of Seller in the event of termination or breach of this Agreement.
Seller hereby waives all other remedies that might be available to Seller,
including, without limitation, remedies available in equity, at common law and
by statute including litigation and specific performance.

(e)                                  The
return of the Deposit to Purchaser as described above shall be in addition to
all other remedies available to Purchaser in the event of termination or breach
of this Agreement.  Purchaser expressly
reserves all other remedies that might be available to it, including, without
limitation, remedies available in equity, at common law and by statute
including litigation and specific performance.

ARTICLE XI

POST -CLOSING OBLIGATIONS; INDEMNIFICATION; LIMITATIONS; 

DISCLAIMERS AND WAIVERS

Section 11.1                     Receipts.

(a)                          All production
from or attributable to the Assets (and all products and proceeds attributable
thereto) and all other income, proceeds, receipts and credits earned with
respect to the Assets which are not reflected in the final settlement statement
to which Purchaser is entitled under Section 1.6 shall be the sole property and
entitlement of Purchaser, and, to the extent received by Seller, Seller shall
fully disclose, account for and remit the same promptly to Purchaser.

(b)                         All
production from or attributable to the Assets (and all products and proceeds
attributable thereto) and all other income, proceeds, receipts and credits
earned with respect to the Assets which are not reflected in the final
settlement statement to which Seller is entitled under Section 1.6 shall be the
sole property and entitlement of 

 42
 

 

Seller and, to the extent received by
Purchaser, Purchaser shall fully disclose, account for and remit the same
promptly to Seller.

Section 11.2                     Expenses.

(a)                          All
Property Costs which are not reflected in the final settlement statement for
which Seller is responsible under Section 1.6 shall be the sole obligation of
Seller, and Seller shall promptly pay same, or if same have been paid by
Purchaser, Seller shall promptly reimburse Purchaser for and hold Purchaser
harmless from and against same.

(b)                         All
Property Costs which are not reflected in the final settlement statement for
which Purchaser is responsible under Section 1.6 shall be the sole obligation
of Purchaser, and Purchaser shall promptly pay same, or if same have been paid
by Seller, Purchaser shall promptly reimburse Seller for and hold Seller
harmless from and against same.

(c)                          Seller
is entitled to resolve all joint interest audits and other audits of Property
Costs covering periods prior to the Effective Time.

Section 11.3                     Assumption
and Indemnification.

(a)                          In the
event of Closing, as of the Effective Time, Purchaser shall become liable for,
assume, perform and discharge all of the obligations and liabilities of Seller,
known or unknown, with respect to the Assets, regardless of whether such
obligations or liabilities arose prior to the Effective Time, at the Effective
Time or after the Effective Time. Said obligations and liabilities are referred
to as the “Assumed Obligations.” Purchaser, however, does not assume any
obligations or liabilities of Seller to the extent that they are attributable
to or arise out of the:

(i)                                     Excluded
Assets; or

(ii)                                  actions,
suits or proceedings, if any, set forth on Exhibit 5.7, or

(iii)                               claims
for wrongful death and/or personal injury related to the Properties which
claims arose before the Effective Time; or

(iv)                              continuing
responsibility of the Seller under Section 11.2 or matters for which Seller is
required to Indemnify Purchaser under this Article 11.

(b)                         PURCHASER SHALL INDEMNIFY, COVENANT NOT TO
SUE, SAVE, RELEASE, DEFEND, DISCHARGE AND HOLD SELLER INDEMNITEES HARMLESS
(COLLECTIVELY, “INDEMNIFY”) FROM AND AGAINST DAMAGES, INCURRED OR SUFFERED BY
SELLER INDEMNITEES THAT ARE CAUSED BY, OR ARISE OUT OF OR RESULT FROM:

(i)                                     THE
ASSUMED OBLIGATIONS; OR

 43
 

 

(ii)                                  THE
OWNERSHIP, USE OR OPERATION OF THE ASSETS AT AND AFTER THE EFFECTIVE TIME; OR

(iii)                               ENVIRONMENTAL
LIABILITIES; OR

(iv)                              ACCESS
TO THE ASSETS IN SECTION 7.7; OR

(v)                                 PREFERENTIAL
RIGHTS TO PURCHASE IN SECTION 7.9(b)(i); OR

(vi)                              PURCHASER’S
OBLIGATIONS UNDER THIS AGREEMENT; OR

(vii)                           THE
BREACH OF ANY OF PURCHASER’S COVENANTS OR AGREEMENTS CONTAINED IN ARTICLE 7 OF
THIS AGREEMENT, SAVE AND EXCEPT FOR COVENANTS OR AGREEMENTS CONTAINED IN
SECTION 7.1 (ACCESS) AND SECTION 7.9(b)(i)(RELATED TO PREFERENTIAL RIGHTS TO
PURCHASE) WHICH ARE COVERED ABOVE; OR

(viii)                        THE BREACH
OF ANY REPRESENTATION OR WARRANTY MADE BY PURCHASER IN ARTICLE 6 OF THIS
AGREEMENT OR IN THE CERTIFICATE DELIVERED BY PURCHASER AT CLOSING PURSUANT TO
SECTION 9.3(c)(CERTIFICATE OF CORPORATE OFFICER OF PURCHASER); OR

(ix)                                THE
LITIGATION EXPENSES (DEFINED BELOW).

THE INDEMNIFICATION OBLIGATIONS OF PURCHASER IN THIS
PARAGRAPH SHALL BE REFERRED TO HEREIN AS “PURCHASER’S INDEMNIFICATION
OBLIGATIONS.”

PURCHASER SHALL INDEMNIFY SELLER INDEMNITEES AGAINST
DAMAGES FOR MATTERS COVERED BY PURCHASER’S INDEMNIFICATION OBLIGATIONS ARISING
OUT AND RESULTING FROM:

1.                                       THE
NEGLIGENCE OF SELLER, WHETHER THE NEGLIGENCE IS ORDINARY, ACTIVE, PASSIVE,
JOINT, CONCURRENT OR SOLE BUT EXCLUDING CLAIMS BASED ON GROSS NEGLIGENCE AND
WILLFUL MISCONDUCT; AND

2.                                       THE
STRICT LIABILITY OF SELLER, BUT EXCLUDING CLAIMS BASED ON THE GROSS NEGLIGENCE
AND WILLFUL MISCONDUCT OF SELLER.

COSTS OF ATTORNEY FEES, COSTS OF COURT, EXPENSES FOR
HIRING INVESTIGATORS AND INVESTIGATING, DEFENDING LITIGATION, PROSECUTING
LITIGATION, HIRING EXPERT WITNESSES, COSTS OF SETTLEMENT AND ANY AND 

 44
 

 

ALL COSTS AND EXPENSES
PERTAINING TO ANY LITIGATION SHALL COLLECTIVELY BE REFERRED TO AS THE “LITIGATION
EXPENSES.”  PURCHASER SHALL INDEMNIFY
SELLER INDEMNITEES FROM AND AGAINST ALL LITIGATION EXPENSES ARISING FROM, BASED
UPON, RELATED TO OR IN ANY WAY CONNECTED WITH PURCHASER’S INDEMNIFICATION
OBLIGATIONS

IT IS UNDERSTOOD AND AGREED THAT PURCHASER’S
OBLIGATION TO INDEMNIFY SELLER INDEMNITEES FROM AND AGAINST THE LITIGATION
EXPENSES IS (I) SEPARATE AND APART FROM PURCHASER’S OBLIGATION TO INDEMNIFY
SELLER INDEMNITEES FROM DAMAGES AND (II) IS NOT DEPENDENT UPON PURCHASER’S
SUBSTANTIVE OBLIGATION TO INDEMNIFY SELLER INDEMNITEES FROM AND AGAINST
DAMAGES. PURCHASER’S OBLIGATION TO INDEMNIFY SELLER INDEMNITEES FROM AND
AGAINST THE LITIGATION EXPENSES SHALL APPLY IRRESPECTIVE OF WHETHER THE
SUBSTANTIVE INDEMNITY OBLIGATION COMPLIES IN ALL RESPECTS WITH THE EXPRESS
NEGLIGENCE RULE. PURCHASER AND SELLER BOTH AGREE AND STIPULATE THAT THIS
INDEMNIFICATION AGREEMENT COMPLIES WITH AND SATISFIES ALL OF THE REQUIREMENTS
SET FORTH IN ETHYL CORP. V. DANIEL CONSTRUCTION CO.,
725 S.W.2d 705 (TEX.1987) AND ALL SUBSEQUENT CASES, DRESSER
INDUSTRIES, INC. V. PAIGE PETROLEUM, INC., 853 S.W. 2d 505 (TEX.
1993) AND ALL SUBSEQUENT CASES AND ALL OTHER APPLICABLE REQUIREMENTS OF TEXAS
LAW.

PURCHASER’S INDEMNITY OBLIGATIONS TO SELLER
INDEMNITEES HEREUNDER SHALL BE LIMITED TO THE EXTENT OF PURCHASER’S PROPORTIONATE
INTEREST IN ANY AFFECTED ASSETS.

PURCHASER AND SELLER BOTH AGREE AND STIPULATE THAT
THIS INDEMNIFICATION AGREEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE TEST, AND
THAT THE PARTIES CLEARLY INTEND TO TRANSFER THE RISK OF LOSS FOR THE INDEMNITEE’S
NEGLIGENCE.

PURCHASER AND SELLER BOTH AGREE AND STIPULATE THAT
THESE INDEMNIFICATION PROVISIONS ARE CONSPICUOUS.

(c)                          SELLER SHALL INDEMNIFY PURCHASER
INDEMNITEES AGAINST AND FROM ALL DAMAGES INCURRED OR SUFFERED BY PURCHASER
INDEMNITEES THAT ARE CAUSED BY, OR ARISE OUT OF OR RESULT FROM:

(i)                                     THE
OBLIGATIONS AND LIABILITIES DESCRIBED IN SECTION 11.3(a)(i), 11.3(a)(ii) AND
11.3(a)(iii); OR

(ii)                                  SELLER’S
BREACH OF ANY OF SELLER’S COVENANTS OR AGREEMENTS CONTAINED IN ARTICLE 7 OF
THIS AGREEMENT; OR

(iii)                               THE
BREACH OF ANY REPRESENTATION OR WARRANTY MADE BY SELLER IN ARTICLE 5 OF THIS
AGREEMENT OR IN THE 

 45
 

 

CERTIFICATE DELIVERED BY SELLER AT CLOSING
PURSUANT TO SECTION 9.2(c)(CERTIFICATE OF CORPORATE OFFICER OF SELLER); OR

(iv)                              SELLER’S
OBLIGATIONS UNDER THIS AGREEMENT; OR

(v)                                 LITIGATION
EXPENSES.

THE INDENMIFICATION OBLIGATIONS OF SELLER IN THIS
PARAGRAPH SHALL BE REFERRED TO HEREIN AS “SELLER’S INDEMNIFICATION OBLIGATIONS.”

SELLER SHALL INDEMNIFY PURCHASER INDEMNITEES AGAINST
DAMAGES FOR MATTERS COVERED BY SELLER’S INDEMNIFICATION OBLIGATIONS ARISING OUT
OF AND RESULTING FROM:

1.                                       THE
NEGLIGENCE OF PURCHASER, WHETHER THE NEGLIGENCE IS ORDINARY, ACTIVE, PASSIVE,
JOINT, CONCURRENT OR SOLE BUT EXCLUDING CLAIMS BASED ON GROSS NEGLIGENCE AND
WILLFUL MISCONDUCT; AND

2.                                       THE
STRICT LIABILITY OF PURCHASER, BUT EXCLUDING CLAIMS BASED ON THE GROSS
NEGLIGENCE AND WILLFUL MISCONDUCT OF PURCHASER.

SELLER SHALL INDEMNIFY PURCHASER INDEMNITEES FROM AND
AGAINST THE LITIGATION EXPENSES ARISING FROM, BASED UPON, RELATED TO OR IN ANY
WAY CONNECTED WITH SELLER’S INDEMNIFICATION OBLIGATIONS.

IT IS UNDERSTOOD AND AGREED THAT SELLER’S OBLIGATION
TO INDEMNIFY PURCHASER INDEMNITEES FROM AND AGAINST THE LITIGATION EXPENSES IS
(I) SEPARATE AND APART FROM SELLER’S OBLIGATION TO INDEMNIFY PURCHASER INDEMNITEES
FROM DAMAGES AND (II) IS NOT DEPENDENT UPON SELLER’S SUBSTANTIVE OBLIGATION TO
INDEMNIFY PURCHASER INDEMNITEES FROM AND AGAINST DAMAGES.  SELLER’S OBLIGATION TO INDEMNIFY PURCHASER
INDEMNITEES FROM AND AGAINST THE LITIGATION EXPENSES SHALL APPLY IRRESPECTIVE
OF WHETHER THE SUBSTANTIVE INDEMNITY OBLIGATION COMPLIES IN ALL RESPECTS WITH
THE EXPRESS NEGLIGENCE RULE. PURCHASER AND SELLER BOTH AGREE AND STIPULATE THAT
THIS INDEMNIFICATION AGREEMENT COMPLIES WITH AND SATISFIES ALL OF THE
REQUIREMENTS SET FORTH IN ETHYL CORP. V. DANIEL
CONSTRUCTION CO., 725 S.W.2d 705 (TEX.1987) AND ALL SUBSEQUENT
CASES, DRESSER INDUSTRIES, INC. V. PAIGE PETROLEUM, INC.,
853 S.W. 2d 505 (TEX. 1993) AND ALL SUBSEQUENT CASES AND ALL OTHER APPLICABLE
REQUIREMENTS OF TEXAS LAW.

 46
 

 

SELLER’S INDEMNITY OBLIGATIONS TO PURCHASER
INDEMNITEES HEREUNDER SHALL BE LIMITED TO THE EXTENT OF SELLER’S PROPORTIONATE
INTEREST IN ANY AFFECTED ASSETS.

SELLER AND PURCHASER BOTH AGREE AND STIPULATE THAT
THIS INDEMNIFICATION AGREEMENT COMPLIES WITH THE EXPRESS NEGLIGENCE TEST AND
THAT THE PARTIES CLEARLY INTEND TO TRANSFER THE RISK OF LOSS FOR THE INDEMNITEE’S
NEGLIGENCE.

SELLER AND PURCHASER BOTH AGREE AND STIPULATE THAT
THESE INDEMNIFICATION PROVISIONS ARE CONSPICUOUS.

(d)                         Notwithstanding
anything to the contrary contained in this Agreement, in the event that Closing
occurs, thereafter, this Section 11.3 shall be deemed to contain the parties’
exclusive remedies against each other with respect to breaches of the
representations, warranties, covenants and agreements of the parties contained
in Articles 5, 6 and 7 and the affirmations of such representations,
warranties, covenants and agreements contained in the certificate delivered by
each party at Closing pursuant to Sections 9.2(c) or 9.3(c), as applicable.

The parties shall have all other remedies at law or in
equity for breaches of all provisions of this Agreement other than Articles 5,
6 and 7. Notwithstanding anything to the contrary contained herein, none of
Purchaser, Seller or any of their respective Affiliates shall be entitled to
either punitive or consequential damages as a remedy in connection with a
breach of any provision of this Agreement and/or the transactions contemplated
hereby, and each of Purchaser and Seller, for itself and on behalf of its
Affiliates, hereby expressly waives any right to punitive or consequential
damages in connection with a breach of any provision of this Agreement and/or
the transactions contemplated hereby.

(e)                          “Damages”
shall mean the amount of any and all liability, loss, cost, diminution in
value, expense, claim, demand, notice of violation, investigation by any
Governmental Body, cause of action, administrative proceeding, payment, charge,
obligation, fine, penalty, deficiency, award or judgment incurred or suffered
by any Indemnified Party arising out of or resulting from the indemnified
matter, including reasonable fees and expenses of attorneys, consultants,
accountants or other agents and experts reasonably incident to matters
indemnified against, and the costs of investigation and/or monitoring of such
matters, and the costs of enforcement of the indemnity.

Section 11.4                     Indemnification
Actions.

All claims for indemnification under Section 11.3
shall be asserted and resolved as follows:

(a)                          For
purposes of this Article 11, the term “Indemnifying Party” shall mean the party
having an obligation to indemnify the other party pursuant to this Article 11,
and the term “Indemnified Party” shall mean the party having the right to be
indemnified by the other party pursuant to this Article 11.

 47
 

 

(b)                         To make a
claim for indemnification under Section 11.3, an Indemnified Party shall
provide to the Indemnifying Party a written notice (the “Indemnification Notice”)
which specifies the basis of the Indemnified Party’s entitlement to
indemnification under this Agreement.  In
the event that the Indemnification Notice is based upon a claim by a third
party against the Indemnified Party (a “Third Party Claim”), the Indemnified
Party shall provide its Indemnification Notice promptly after the Indemnified
Party has actual knowledge of the Third Party Claim and shall enclose a copy of
all papers (if any) served with respect to the Third Party Claim; provided that
the failure of any Indemnified Party to give notice of a Third Party Claim as
provided in this Section 11.4 shall not relieve the Indemnifying Party of its
obligations under Section 11.3 except to the extent such failure results in
insufficient time being available to permit the Indemnifying Party to
effectively defend against the Third Party Claim or otherwise prejudices the
Indemnifying Party’s ability to defend against the Third Party Claim.

(c)                          The
Indemnifying Party shall have thirty (30) days from its receipt of an
Indemnification Notice to notify the Indemnified Party whether it will assume
the defense of the Indemnified Party against such Third Party Claim at the sole
cost and expense of the Indemnifying Party. 
The Indemnified Party is authorized, prior to and during such thirty
(30) day period, to file any motion, answer or other pleading that it shall
deem necessary or appropriate to protect its interests or those of the
Indemnifying Party and that is not prejudicial to the Indemnifying Party.

(d)                         If the
Indemnifying Party assumes the defense of a Third Party Claim pursuant to an
Indemnification Notice, the Indemnifying Party shall diligently defend, at its
sole cost and expense, the Indemnified Party against the Third Party Claim. The
Indemnifying Party shall have full control of such defense and proceedings, including
any compromise or settlement thereof.  If
requested by the Indemnifying Party, the Indemnified Party agrees to cooperate
in contesting any Third Party Claim which the Indemnifying Party elects to
contest.  The Indemnified Party may
participate in, but not control, any defense or settlement of any Third Party
Claim controlled by the Indemnifying Party pursuant to this Section
11.4(d).  An Indemnifying Party shall
not, without the written consent of the Indemnified Party, (i) settle any Third
Party Claim or consent to the entry of any judgment with respect thereto which
does not include an unconditional written release of the Indemnified Party from
all liability in respect of such Third Party Claim or (ii) settle any Third
Party Claim or consent to the entry of any judgment with respect thereto in any
manner that may materially and adversely affect the Indemnified Party (other
than as a result of money damages covered by the indemnity).

(e)                          If the
Indemnifying Party does not assume the defense of the Indemnified Party against
a Third Party Claim or assumes the defense, but fails to diligently prosecute
or settle the Third Party Claim, then the Indemnified Party shall have the
right to defend against the Third Party Claim at the sole cost and expense of the
Indemnifying Party, with counsel of the Indemnified Party’s choice, subject to
the right of the Indemnifying Party to assume the defense of the Third Party
Claim at any time prior to settlement or final determination thereof. If the
Indemnifying Party has not yet assumed 

 48
 

 

the defense of the Indemnified Party, the
Indemnified Party shall send written notice to the Indemnifying Party of any
proposed settlement or final determination of the Third Party Claim and the
Indemnifying Party shall have the option for ten (10) days following receipt of
such notice to (i) assume defense against the Third Party Claim in writing and
(ii) if so assumed, reject, in its reasonable judgment, the proposed settlement
or final determination of the Third Party Claim.

(f)                            In the
event that the Indemnification Notice sets forth a claim for Damages based upon
an inaccuracy or breach of a representation, warranty or covenant or obligation
in this Agreement, the Indemnification Notice shall specify the representation,
warranty, covenant or obligation which was inaccurate or breached. In such
case, the Indemnifying Party shall have thirty (30) days from its receipt of
the Indemnification Notice to (i) cure the Damages complained of, (ii) accept
the claim for such Damages or (iii) dispute the claim for such Damages. If the
Indemnifying Party does not notify the Indemnified Party within such thirty
(30) day period that it has cured the Damages or that it disputes the claim for
such Damages, the amount of such Damages shall conclusively be deemed a
liability of the Indemnifying Party hereunder.

Section 11.5                     Survival.

In the event of
Closing:

(a)                          The
representation and warranty of Seller in Section 3.1(a)(Defensible Title) shall
terminate on the Title Claim Date (3.4(a)). The remainder of the
representations, warranties, covenants and agreements provided for in this
Agreement shall terminate upon Closing except as may otherwise be expressly
provided herein.

(b)                         Purchaser’s
Indemnification Obligations in Section 11.3(b) shall terminate as of the times
set out below except in each case as to matters for which a specific written
claim for indemnity has been delivered to the Indemnifying Party on or before
such termination date: 9.4, 11.3(b)(i), 11.3(b)(ii), 11.3(b)(iii) and
11.3(b)(iv) shall not terminate and shall continue without time limit;
11.3(b)(v) shall terminate six months after the end of the term of the escrow
described in 7.9(b)(i); 11.3(b)(vi), 11.3(b)(vii) and 11.3(b)(viii) shall
terminate six months after Closing; and 11.3(b)(ix) shall continue in force and
effect until the termination of the survival period of each of the other
Purchaser’s Indemnification Obligations in 11.3(b)(i)-11.3(b)(viii), inclusive.

(c)                          Seller’s
Indemnification Obligations in Section 11.3(c) shall terminate as of the times
set out below except as to matters for which a specific written claim for
indemnity has been delivered to the Indemnifying Party on or before such
termination date: 11.3(c)(i) and 11.3(c)(v) shall not terminate and shall
continue without time limit; 11.3(c)(ii), 11.3(c)(iii) and 11.3(c)(iv) shall
terminate six months after Closing; and 11.3(c)(vi) shall continue in force and
effect until the termination of the survival period of each of the other Seller’s
Indemnification Obligations in 11.3(c)(i)-11.3(c)(v), inclusive.

(d)                         The
Confidentiality Agreement shall survive Closing.

 49
 

 

(e)                          Except
as provided above, all other provisions in this Agreement shall terminate at
Closing except for the following provisions which shall survive Closing:

(i)                                     Section
7.5 - Prohibition against Public Announcements

(ii)                                  
Section 7.11 - Further Assurances

(iii)                               Section
9.4 – Closing Payment and Post-Closing Purchase Price Adjustments

(iv)                              Section
11.1 - Receipts

(v)                                 Section
11.2 - Expenses

(vi)                              Section
11.4 - Indemnification Actions

(vii)                           Section
11.7 - Independent Investigation

(viii)                        Section
11.8 - Disclaimer Regarding Information

(ix)                                Section
11.9 - Waiver of Trade Practices Acts

(x)                                   Section
11.10 - Post-Closing Audit Rights

(xi)                                Section
12.5 - Change of Name

(xii)                             Section
12.7 - Governing Law

Section 11.6                     Recording.

As soon as practicable after Closing, Purchaser shall
record the (i) Assignment and Bill of Sale in the appropriate counties as well
as with all appropriate governmental agencies, (ii) forms prescribed by the
applicable Governmental Body to transfer status of operator from Seller to
Purchaser with respect to Seller Operated Assets that are wholly owned by
Seller, and (iii) assignments necessary to convey to Purchaser all federal or
state leases, if any, in the form as prescribed by the applicable Governmental
Body and provide Seller with copies of all recorded or approved instruments.

Section 11.7                     Independent
Investigation.

In making the decision to enter into this Agreement
and consummate the transactions contemplated hereby, Purchaser has relied
exclusively on Purchaser’s own investigation and analysis of the condition,
value, characteristics and qualities of the Assets. Seller hereby expressly
disclaims and negates any representation or warranty, express, implied, at
common law, by statute or otherwise, other than the warranty made in Section
3.1, the express representations and warranties made in Article 5, the
certificate of Seller to be delivered pursuant to Section 9.2(c) and the
special warranty of title in the Assignment and Bill of Sale relating to the
Assets.

 50
 

 

Section 11.8                     Disclaimer
Regarding Information.

Except as set forth in
this Agreement, Seller hereby expressly negates and disclaims, and Purchaser
hereby waives and acknowledges that Seller has not made, any representation or
warranty, express or implied, relating to (a) the accuracy, completeness or
materiality of any information, Records, data or other materials (written or
oral) now, heretofore, or hereafter furnished to Purchaser by or on behalf of
Seller or (b) production rates, recompletion or rework opportunities, decline
rates, geological or geophysical data or interpretations, the quality,
quantity, recoverability or cost of recovery of any Hydrocarbon reserves, any
product pricing assumptions, or the ability to sell or market any Hydrocarbons
after Closing.

Section 11.9                     Waiver of
Trade Practices Acts.

(a)                          The
Purchaser’s rights and remedies with respect to this Agreement and with respect
to all acts or practices of Seller, past, present or future, in connection with
this Agreement shall be governed by legal principles other than the DTPA.
Purchaser hereby waives the applicability of the DTPA to this Agreement and any
and all duties, rights or remedies that might be imposed by the DTPA, whether
such duties, rights and remedies are applied directly by the DTPA itself or
indirectly in connection with other statutes; provided, however, Purchaser does
not waive Section 17.555 of the DTPA.

(b)                         Purchaser
expressly recognizes that the price for which Seller has agreed to perform
Seller’s obligations under this Agreement has been predicated upon the
inapplicability of the DTPA and Purchaser’s agreement to waive the
applicability of the DTPA. Purchaser further recognizes that Seller, in
determining to proceed with the entering into of this Agreement, has expressly
relied on such waiver by Purchaser and the inapplicability of the DTPA.

Section 11.10               Post-Closing
Audit Rights.

Following Closing, Seller shall have the same rights
of a non-operator as Purchaser has under joint operating agreements covering
the Assets to audit the books and records of the operators of any of the
Assets. Seller shall be entitled to collect from operators all amounts claimed
due for any period of time prior to the Effective Time as a result of audits.

ARTICLE XII

MISCELLANEOUS

Section 12.1                     Counterparts.

This Agreement may be executed in counterparts, each
of which shall be deemed an original instrument, but all such counterparts
together shall constitute but one agreement.

Section 12.2                     Notice.

All notices which are required or may be given
pursuant to this Agreement shall be sufficient in all respects if given in
writing and delivered personally, by facsimile or by registered or certified
mail, postage prepaid, as follows:

 51
 

 

If to Seller:

Smith Production
Inc.

14425 Torrey Chase, Suite 190

Houston, Texas 77014

Attention: Glenn R. Smith

Telephone:
281.583.0196

Facsimile: 281.893.6396

If to Purchaser:

Edge Petroleum Exploration Company

Attention: Robert C. Thomas

1301 Travis, Suite 2000

Houston, TX  77002

Telephone: (713) 427-8814

Telecopy: (713) 654-8910

Either Party may change its address by notice to the
other in the manner set forth above. All notices shall be deemed to have been
duly given at the time of receipt by the party to which such notice is
addressed.

Section 12.3                     Binding
Agreement.

This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.

Section 12.4                     Expenses.

All expenses incurred by Seller in connection with or
related to the authorization, preparation or execution of this Agreement, the
Assignment and Bill of Sale delivered hereunder and the Exhibits hereto, and
all other matters related to the Closing, including without limitation, all
fees and expenses of counsel, accountants and financial advisers, shall be
borne solely and entirely by the party incurring same.

Section 12.5                     Change of
Name.

As promptly as practicable, but in any case within
thirty (30) days after the Closing Date, Purchaser shall eliminate Seller’s
name and any variants thereof from the Assets acquired pursuant to this
Agreement and, except with respect to such grace period for eliminating
existing usage, Purchaser shall have no right to use any logos, trademarks or
trade names belonging to Seller or any of its Affiliates.

 52
 

 

Section 12.6                     Construction.

Both Seller and Purchaser
have had (i) substantial input into the drafting and preparation of this
Agreement and (ii) the opportunity to exercise business discretion in relation
to the negotiation of the details of the transaction contemplated hereby. This
Agreement is the result of arm’s-length negotiations from equal bargaining
positions and shall not be construed against either party.

Section 12.7                     Governing
Law.

This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Texas without regard to principles of conflicts of laws otherwise
applicable to such determinations.

Section 12.8                     Captions.

The captions in this Agreement are for convenience
only and shall not be considered a part of or affect the construction or
interpretation of any provision of this Agreement.

Section 12.9                     Waivers.

Any failure by any party or parties to comply with any
of its or their obligations, agreements or conditions herein contained may be
waived in writing, but not in any other manner, by the party or parties to whom
such compliance is owed. No waiver of, or consent to a change in, any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of,
or consent to a change in, other provisions hereof (whether or not similar),
nor shall such waiver constitute a continuing waiver unless otherwise expressly
provided.

Section 12.10               Assignment.

No party shall assign all or any part of this
Agreement, nor shall any party assign or delegate any of its rights or duties
hereunder, without the prior written consent of the other party and any
assignment or delegation made without such consent shall be void.

Section 12.11               Entire
Agreement.

The Confidentiality Agreement, this Agreement and the
documents to be executed hereunder and the Exhibits attached hereto constitute
the entire agreement between the parties pertaining to the subject matter
hereof, and supersede all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties pertaining to the subject
matter hereof.

Section 12.12               Amendment.

(a)                          This
Agreement may be amended or modified only by an agreement in writing executed
by both parties.

 53
 

 

(b)                         No waiver
of any right under this Agreement shall be binding unless executed in writing
by the party to be bound thereby.

Section 12.13               No Third-Party
Beneficiaries.

Nothing in this Agreement shall entitle any Person
other than Purchaser and Seller to any claims, cause of action, remedy or right
of any kind.

Section 12.14               References.

In this Agreement:

(a)                          References
to any gender include a reference to all other genders;

(b)                         References
to the singular include the plural, and vice versa;

(c)                          Reference
to any Article or Section means an Article or Section of this Agreement;

(d)                         Reference
to any Exhibit means an Exhibit that is incorporated into and made a part of
this Agreement;

(e)                          Unless
expressly provided to the contrary, “hereunder”, “hereof”, “herein” and words
of similar import are references to this Agreement as a whole and not any
particular Section or other provision of this Agreement; and

(f)                            “Include”
and “including” shall mean include or including without limiting the generality
of the description preceding such term.

Section 12.15               Severability

The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.

 54
 

 

IN WITNESS WHEREOF, this Agreement has been executed
by each of the undersigned as of the date first written above, to be effective
as of the Effective Time.

	
  SELLER:

  	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  
	
  Smith Production
  Inc.

  	
   

  	
  Edge Petroleum Exploration Company

  
	
   

  	
   

  	
   

  
	
  By:

  	
       /s/
  GLENN R. SMITH

  	
   

  	
   

  	
  By:

  	
       /s/ JOHN W. ELIAS

  	
   

  
	
  Name: Glenn R.
  Smith

  	
   

  	
  Name: John W. Elias

  
	
  Title: President

  	
   

  	
  Title: Chairman, President and CEO

  
	
  Date: November
  16, 2006

  	
   

  	
  Date: November 16, 2006

  
							

 

 

 55

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