Document:

exhibit_10-19.htm

EXHIBIT 10.19

 

 

 

 

TERRA MINING CORPORATION AND SUBSIDIARY

Consolidated Financial Statement

October 31, 2010

 

 

 

 

 

 

 

 

 

1-26-2011

 

 

 

 

 

  

  

  

 

 

 

 

 

 

 

 

TERRA MINING CORPORATION AND SUBSIDIARY

	
TABLE OF CONTENTS

	  	  	
Page Number

	  	  	  
	  	

FINANCIAL INFORMATION

	  
	  	  	  
	  	

Financial Statements

	  
	  	  	  
	  	

Consolidated Balance Sheet as of October 31, 2010

	  2
	  	  	  
	  	

Consolidated Statements of Operations for the period of inception from March 25, 2010 to October 31, 2010

	  3
	 	 	 
	  	

Consolidated Statement of Stockholder’s Deficit for the period of inception from March 25, 2010 to October 31, 2010

	  4
	 	 	 
	  	

Consolidated Statements of Cash Flows for the period of inception from March 25, 2010 to October 31, 2010

	  5
	  	  	  
	  	

Notes to the Consolidated Financial Statements. 

	  6 - 14
	  	  	  

 

 

  

1

  

 

 

	
TERRA MINING CORPORATION AND SUBSIDIARY

	 
	
(An Exploration Stage Company)

	 
	
CONSOLIDATED BALANCE SHEET

	 
	  	 	 	 
	  	 	
October 31,

	 
	  	 	
2010

	 
	
ASSETS

	 	 	 
	  	 	 	 
	
CURRENT ASSETS:

	 	 	 
	
Cash and cash equivalents

	 	$	512,006	 
	
Prepaid expense

	 	 	2,500	 
	
Total Current Assets

	 	 	514,506	 
	  	 	 	 	 
	
OTHER ASSETS:

	 	 	 	 
	
Contractual right

	 	 	150,000	 
	
Mining claims

	 	 	11,275	 
	
Total Other Assets

	 	 	161,275	 
	  	 	 	 	 
	
TOTAL ASSETS

	 	$	675,781	 
	  	 	 	 	 
	
LIABILITIES AND STOCKHOLDERS' DEFICIT

	 	 	 	 
	  	 	 	 	 
	
CURRENT LIABILITIES:

	 	 	 	 
	
Accounts payable

	 	$	9,500	 
	
Accounts payable - related party

	 	 	61,728	 
	
Accrued liabilities

	 	 	80,000	 
	
Accrued interest

	 	 	12,369	 
	
Demand promissory notes

	 	 	150,000	 
	
TOTAL CURRENT LIABILITIES

	 	 	313,597	 
	  	 	 	 	 
	
LONG TERM  LIABILITIES:

	 	 	 	 
	
Derivative liability - warrants

	 	 	4,200	 
	
Convertible debentures

	 	 	625,000	 
	
TOTAL LONG TERM LIABILITIES

	 	 	629,200	 
	  	 	 	 	 
	
COMMITMENTS AND CONTINGENCIES

	 	 	-	 
	  	 	 	 	 
	
STOCKHOLDERS' DEFICIT:

	 	 	 	 
	  	 	 	 	 
	
Common stock, 16,000,002 issued and outstanding

	 	 	228,002	 
	
Accumulated deficit during exploration stage

	 	 	(495,018	)
	
TOTAL STOCKHOLDERS' DEFICIT

	 	 	(267,016	)
	  	 	 	 	 
	
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

	 	$	675,781	 

 

 

 

  

2

  

 

	
TERRA MINING CORPORATION AND SUBSIDIARY

	 
	
(An Exploration Stage Company)

	 
	
CONSOLIDATED STATEMENT OF OPERATIONS

	 
	  	 	
Period of

	 
	
 

	 	
Inception from

	 
	  	 	
March 25, 2010

	 
	  	 	
to October 31,

	 
	  	 	
2010

	 
	  	 	 	 
	
REVENUES

	 	$	-	 
	  	 	 	 	 
	
EXPENSES:

	 	 	 	 
	
Exploration expense

	 	 	160,950	 
	
General and administrative

	 	 	44,261	 
	
Officers and directors compensation

	 	 	100,000	 
	
Legal and professional

	 	 	87,248	 
	
Option fee

	 	 	50,000	 
	
Total Expenses

	 	 	442,459	 
	  	 	 	 	 
	
OPERATING LOSS

	 	 	(442,459	)
	  	 	 	 	 
	
OTHER INCOME (EXPENSE):

	 	 	 	 
	
Interest income

	 	 	10	 
	
Interest expense

	 	 	(12,369	)
	
Financing expense

	 	 	(40,200	)
	
Total Other Expense

	 	 	(52,559	)
	  	 	 	 	 
	
LOSS BEFORE INCOME TAXES

	 	 	(495,018	)
	  	 	 	 	 
	
INCOME TAXES

	 	 	-	 
	
NET LOSS

	 	$	(495,018	)
	  	 	 	 	 
	
BASIC AND DILUTED NET LOSS PER SHARE

	 	$	(0.04	)
	  	 	 	 	 
	
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING

	 	 	13,159,093	 

 

 

  

3

  

 

 

	
TERRA MINING CORPORATION AND SUBSIDIARY

	 
	
(An Exploration Stage Company)

	 
	
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

	 
	  	 	 	 	 	 	 	 	 	 	 	 	 
	  	 	
Common Stock

	 	 	 	 	 	 	 
	  	 	
Number

	 	 	 	 	 	
Accumulated

	 	 	
Total

	 
	  	 	
of Shares

	 	 	
Amount

	 	 	
Deficit

	 	 	
Stockholders' Deficit

	 
	  	 	 	 	 	 	 	 	 	 	 	 	 
	
Common stock issued as founders shares

	 	 	11,000,002	 	 	$	11,002	 	 	$	-	 	 	$	11,002	 
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Common stock issued in share exchange and assignment

	 	 	5,000,000	 	 	 	217,000	 	 	 	-	 	 	 	217,000	 
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Net loss for the period of inception from March 25, 2010 to October 31, 2010

	 	 	-	 	 	 	-	 	 	 	(495,018	)	 	 	(495,018	)
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Balance as of October 31, 2010

	 	 	16,000,002	 	 	$	228,002	 	 	$	(495,018	)	 	$	(267,016	)

 

 

 

  

4

  

 

 

	
TERRA MINING CORPORATION AND SUBSIDIARY

	 
	
(An Exploration Stage Company)

	 
	
CONSOLIDATED STATEMENT OF CASH FLOWS

	 
	  	 	 	 
	  	 	 	 
	  	 	
Period of

	 
	  	 	
Inception from

	 
	  	 	
March 25, 2010

	 
	  	 	
to October 31,

	 
	  	 	
2010

	 
	
CASH FLOWS FROM OPERATING ACTIVITIES:

	 	 	 
	
Net loss

	 	$	(495,018	)
	
Adjustments to reconcile net loss to net cash used by operating activities:

	 	 	 	 
	
Warrants issued for financing fees

	 	 	4,200	 
	
Stock issued for services and expenses

	 	 	44,002	 
	
Changes in assets and liabilities:

	 	 	 	 
	
Prepaid expense

	 	 	(2,500	)
	
Accounts payable

	 	 	71,228	 
	
Accrued interest

	 	 	12,369	 
	
Accrued liabilities

	 	 	80,000	 
	
Net cash used by operating activities

	 	 	(285,719	)
	  	 	 	 	 
	
CASH FLOWS FROM INVESTING ACTIVITIES:

	 	 	 	 
	
Cash paid for mining claims

	 	 	(11,275	)
	
Net cash used by investing activities

	 	 	(11,275	)
	  	 	 	 	 
	
CASH FLOWS FROM FINANCING ACTIVITIES:

	 	 	 	 
	
Proceeds from  convertible debentures

	 	 	625,000	 
	
Common stock issued for cash

	 	 	34,000	 
	
Proceeds from demand promissory notes

	 	 	150,000	 
	
Net cash provided by financing activities

	 	 	809,000	 
	  	 	 	 	 
	
NET INCREASE IN CASH

	 	 	512,006	 
	  	 	 	 	 
	
Cash and cash equivalents, beginning of period

	 	 	-	 
	  	 	 	 	 
	
Cash and cash equivalents, end of period

	 	$	512,006	 
	  	 	 	 	 
	
SUPPLEMENTAL CASH FLOW INFORMATION:

	 	 	 	 
	
Interest paid

	 	$	-	 
	
Income taxes paid

	 	$	-	 
	  	 	 	 	 
	
NON-CASH FINANCING AND INVESTING ACTIVITIES:

	 	 	 	 
	
Common stock issued to acquire contractual right

	 	$	150,000	 

 

 

 

  

5

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS

Terra Mining Corporation (“TMC”) was incorporated in British Columbia, on March 25, 2010 and is engaged in the acquisition, exploration and development of mining properties in the United States. Terra Mining Corporation has a wholly owned subsidiary, Terra Gold Corporation (“TGC”) that was incorporated in Alaska, on March 2, 2010 to manage operational activity in Alaska on the Terra Project.

TGC was acquired from American Mining Corporation (“AMC”) on May 17, 2010 by assignment of all 10,000 shares of TGC stock owned by AMC as part of the Share Exchange and Assignment Agreement between AMC and TMC. The shares of TGC stock have a nominal value. Our Chief Executive Officer served as President and a Director in February and March 2010 and our Chief Operating Officer served as Chief Operating Officer and a Director in March 2010 of AMC.

The Company is an exploration stage company, and its activities have been limited to exploring and acquiring rights to explore, develop and mine properties and that may be suitable for development into metal mines. The Company’s year-end is October 31.

Additional information can be found at www.terraminingcorp.com.

Going Concern

As shown in the accompanying financial statements, the Company had an accumulated deficit incurred through October 31, 2010.  The Company has relied primarily on small private sales of its common stock or loans from its officers and directors to fund the Company to date. The Company will continue to seek capital from outside sources through sales of common stock or loans from its officers, directors, or outside investors in order to remain in business and fund its intended operations.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

An estimated $1,100,000 is necessary to continue operations and fund minimum operations through the next fiscal year.  This estimated amount is for salaries of its officers, professional fees, land payments as well as claim maintenance fees, and work programs on it properties. Management intends to seek new capital from new equity securities issuances to provide funds needed to increase liquidity, fund internal growth, and fully implement its business plan. If the Company is successful in raising substantial new capital, it will implement a much more aggressive exploration program on its properties to further evaluate the mineral potential of the claims.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

This summary of significant accounting policies of TMC is presented to assist in understanding the Company’s consolidated financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.

Accounting Method

The Company’s financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

  

6

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

Principles of Consolidation

These consolidated financial statements include our consolidated financial position, results of operations, and cash flows. All material intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.

Foreign Currency Translation

The consolidated financial statements are presented in US dollars, which is the parent company’s and its subsidiary’s functional currency and the Company’s presentation currency. Transactions in foreign currencies are initially recorded in the functional currency at the rate in effect at the date of the transaction.  Monetary assets and liabilities denominated in foreign currencies are retranslated at the spot rate of exchange in effect at the reporting date. All differences are taken to the consolidated statement of operations and comprehensive loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction.

Cash and Cash Equivalents

The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.  As of October 31, 2010, the Company had uninsured amounts held in one bank of approximately $204,000.

Mineral Properties

Costs of acquiring mineral properties are capitalized by project area upon purchase of the associated claims. Costs to maintain the mineral rights and leases are expensed as incurred.  When a property reaches the production stage, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves.

Mineral properties are periodically assessed for impairment of value and any diminution in value.

Mine and Road Access-

The Company has access to the camp by airplane. There is no road access from camp to the project area where drilling and bulk sampling mining occurs. It is approximately 1 1/2 miles from camp to the project area.  Power generation is by diesel generator at the camp. Fuel is brought in for the generators by a cargo plane to the airstrip.

Long-Lived Assets

The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets under certain circumstances are reported at the lower of carrying amount or fair value. Assets to be disposed of and assets not expected to provide any future service potential to the Company are recorded at the lower of carrying amount or fair value (less the projected cost associated with selling the asset). To the extent carrying values exceed fair values, an impairment loss is recognized in operating results.  As of, October 31, 2010, there are no impairments recognized.

Fair Value of Financial Instruments

The Company has adopted FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements”, for assets and liabilities measured at fair value on a recurring basis. Topic 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, Topic 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

  

7

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

	  	
Level 1:

	
Observable inputs such as quoted market prices in active markets for

identical assets or liabilities

	  	  	  
	  	
Level 2:

	
Observable market-based inputs or unobservable inputs that are

corroborated by market data

	  	  	  
	  	
Level 3:

	
Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions. Determining which category an asset or liability falls within the hierarchy requires significant judgment.   The Company evaluates its hierarchy disclosures each quarter.

 

Assets and liabilities measured at fair value on a recurring basis are summarized as follows:

 

	 	 	 	 	 	 	 	 	 	 	 	Carying	 
	 	 	Fair Value Measurements Using Inputs	 	 	Amount at	 
	 Financial Instruments	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	October 31, 2010	 
	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Liabilities:	 	 	 	 	 	 	 	 	 	 	 	 
	 Derivatice Instruments - Warrants	 	$	-	 	 	$	-	 	 	$	4,200	 	 	$	4,200	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Total	 	$	-	 	 	$	-	 	 	$	4,200	 	 	$	4,200	 

 

All cash and cash equivalents include money market securities and commercial paper that are considered to be highly liquid and easily tradable as of October 31, 2010. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expense, accounts payable, accrued liabilities, accrued interest and demand promissory notes approximate their fair values because of the short maturity of these instruments. The Company’s convertible debentures approximate the fair value of such instrument based upon management’s best estimate of interest rates that would be available to the Company for a similar financial arrangement at October 31, 2010.

 

In addition, Topic 820 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter.

Alaska Reclamation and Remediation Liabilities

TMC operates in Alaska. Reclamation works in Alaska require a pool of funds from all permittees with exploration and mining projects to cover reclamation. There is a $750 per acre disturbance reclamation bond that is required for disturbance of 5 acres or more and/or removal of more the 50,000 cubic yards of material. In year one, TMC does not expect to exceed the minimum requirements and is not expected to be required to file a reclamation bond. As the project advances and feasibility justifies expansion, TMC may exceed the minimums outlined and may be required to file a reclamation plan and bond.  

The Company expects to record reclamation bond as a liability in the period in which the Company is required to pay a reclamation bond. A corresponding asset is also recorded and depreciated over the life of the asset. After the initial measurement of the asset retirement obligation, the liability will be adjusted at the end of each reporting period to reflect changes in reclamation bond.

  

8

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

Mineral Exploration and Development Costs

 

All exploration expenditures are expensed as incurred.  Significant property acquisition payments for active exploration properties are capitalized.  If no minable ore body is discovered, previously capitalized costs are expensed in the period the property is abandoned.  Expenditures to develop new mines, to define further mineralization in existing ore bodies, and to expand the capacity of operating mines, are capitalized and amortized on a unit of production basis over proven and probable reserves.

Should a property be abandoned, its capitalized costs are charged to operations.  The Company charges to operations the allocable portion of capitalized costs attributable to properties sold.  Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area.

Provision for Income Taxes

Income taxes are provided based upon the liability method of accounting pursuant to ASC 740-10-25 Income Taxes – Recognition.  Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.  A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more likely than not” standard imposed by ASC 740-10-25-5.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes.

Net Loss Per Share

Under the provisions of ASC 260, “Earnings Per Share,” basic loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the income of the Company, subject to anti-dilution limitations. As of October 31, 2010, the Company had warrants for the purchase of 300,000 common shares which were considered but were not included in the computation of loss per share at October 31, 2010 because they would have been anti-dilutive.

 

 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

  

9

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

Recent Accounting Pronouncements

Recent accounting pronouncements applicable to us are summarized below.

  

In April 2010,  the FASB issued  Accounting  Standard  Update  ("ASU")  2010-13, Compensation-Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based  Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier application is permitted.  The Company does not expect the provisions of ASU 2010-13 to have a material effect on the financial  position,  results of operations  or cash flows of the  Company. In March 2010, the FASB issued ASU No.2010-11, which is included in the Certification under ASC 815. This update clarifies the type of embedded credit derivative that is exempt from embedded derivative bifurcation requirements.  Only an embedded credit derivative that is related to the subordination of one financial instrument to another qualifies for the exemption.  This guidance became effective for the Company's interim and annual reporting periods beginning January 1, 2010.  The adoption of this guidance did not have a material impact on the Company's financial statements.

A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to our consolidated financial statements. 

NOTE 3 – AGREEMENTS

TMC can acquire a controlling interest in a high-grade gold vein system in the resource definition phase of project development gold with an inferred gold resource of 168,000 ounces. The critical agreements are detailed below.

Share Exchange and Assignment Agreement

On May 17, 2010, TMC entered into a Share Exchange and Assignment Agreement with AMC, a Company that our Chief Executive Officer served as President and a Director in February and March 2010 and our Chief Operating Officer served as Chief Operating Officer and a Director in March 2010.

Under the terms of the agreement TMC issued 5,000,000 shares of common stock to AMC for the outstanding shares in the capital of TGC and was assigned a Letter of Intent (“LOI”) on the Terra Project in Alaska, to which AMC was a party.

The LOI was independently valued by RWE Growth Partners Business Valuaters at $150,000 after conducting a Business Valuation and Fairness Opinion for the assignment of the LOI from AMC to TMC.

 

Exploration, Development and Mine Operating Agreement

 

On September 15, 2010, TMC, TGC and Raven Gold Alaska, Inc. (“Raven”) signed an Exploration, Development and Mine Operating Agreement (“JV Agreement”). The JV Agreement has a term of twenty years, which can continue longer as long as products are produced on a continuous basis and thereafter until all materials, equipment and infrastructure are salvaged and disposed of, environmental compliance is completed and accepted and the parties have completed a final accounting. The JV Agreement defines terms and conditions where TMC and TGC earns a 51% interest with the following payments and stock issuances-

 

  

10

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

Pay the following options payments-

 

Payment of $10,000 with the signing of the Letter of Intent in February 2010.

Payment of $40,000 with the signing of the JV Agreement.

Payment of $100,000 on or before December 31, 2011.

Payment of $150,000 on or before December 31, 2012.

 

Provide the following project funding-

Payment of $1 million in project expenses on or before December 31, 2011, including $100,000 to Raven.

Payment of $2.5 million in additional project expenses on or before December 31, 2012, including $100,000 to Raven.

Payment of $2.5 million in additional project expenses on or before December 31, 2013.

 

Issue the following common stock, which is subject to a two year trading restriction, upon the completion of a reverse merger-

Issue 250,000 shares of common stock no later than one year after the closing of the reverse merger.

Issue 250,000 shares of common stock on or before December 31, 2011 and December 31, 2012.

 

TMC and TGC then can increase its interest to 80% in the project with the following payments and stock issuances-

Payment of $150,000 on or before December 31, 2013.

Payment of $3.05 million in additional project expenses on or before December 31, 2014.

Issue 250,000 shares of common stock on or before December 31, 2014.

 

The failure to operate in accordance with the JV Agreement could result in our ownership being reduced or the JV Agreement being terminated.

As of October 31, 2010, the $50,000 due with the signing of the Letter of Intent in February 2010 and the signing of JV Agreement was paid. As of October 31, 2010, TMC incurred $164,722 of project expenses.

NOTE 4 – DEMAND PROMISSORY NOTES

On August 5, 2010, the Company issued Demand Promissory Notes (“Notes”) to West Mountain Index Advisor, Inc. (“WMTN”) totaling $50,000 and BOCO Investments, LLC (“BOCO”) totaling $100,000.   The Notes include interest of 15% per annum and are payable on November 3, 2011. The Notes are secured by the assets of the Company. If the notes should become default, they include additional interest of 29% per annum, compounded annually, above the rate that would otherwise be in effect.  As of October 31, 2010, $150,000 was outstanding and $4,999 in interest expense was accrued.

On January 12, 2011, the Company entered into Forbearance Agreements with WMTN and BOCO. Under the terms of the Forbearance Agreements, the Company, WMTN and BOCO agreed to not exercise their rights under the Notes until the earlier of February 2, 2011, the date of an event of default occurs under the Notes or the date the Company fails to comply with the terms and conditions of the Forbearance Agreement.

In addition, the Company issued warrants to acquire 300,000 shares of common stock to the lenders. See Note 7 for additional details.

NOTE 5 – CONVERTIBLE DEBENTURES

During September and October, 2010, the Company issued interest bearing non-secured Convertible Debenture Notes (“Debenture Notes”) totaling $625,000. During November 2010, an additional Debenture Note was issued for $5,000, increasing the total to $630,000.The Debenture Notes have a term of three years and include interest of 12% per year.  The outstanding principal and interest are convertible at a rate of $0.0125.  The Company accrued $7,369 in interest expense as of October 31, 2010.

  

11

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

NOTE 6 – CAPITAL STOCK

The Company is authorized to issue an unlimited number of shares of common stock with no par value.  All shares have equal voting rights, are non-assessable and have one vote per share.  Voting rights are not cumulative and, therefore, the holders of more than 50% of the common stock could, if they choose to do so, elect all of the directors of the Company.

During the period from inception of March 25, 2010 to October 31, 2010, the Company issued 5,000,000 shares of its common stock for contractual rights valued at $150,000, services valued at $44,000 and cash of $23,000. In addition the Company issued 11,000,002 shares of its common stock for $11,002 in cash, to the Company’s founders $.

NOTE 7 – DERIVATIVE LIABILITIY - WARRANTS

On August 5, 2010, the Company issued warrants to acquire 300,000 shares of common stock in connection with Demand Promissory Notes. The warrants are exercisable at $.001 per share and expire on August 4, 2015. These warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation.

These Warrants were issued with a down-round provision whereby the exercise price would be adjusted downward in the event that, during additional shares of the Company’s common stock or securities exercisable, convertible or exchangeable for the Company’s common stock were issued at a price less than the exercise price. Therefore, according to the guidance provided in FASB ASC 815-40-15-5 through 815-40-15-8, which was adopted by the Company on March 25, 2010, the Company accounted for these warrants as derivative liabilities. All changes in the fair value of these warrants were recognized in the consolidated statements of operations until they are exercised or expire or otherwise extinguished. 

The fair value of the warrants as of October 31, 2010 was estimated at $4,200 using the Black Scholes Option Price Calculation. The following assumptions were made to value the warrants: price of $.014 per share, risk free interest rate of 1.17%; expected life of 4.75 years; expected volatility of 132.83%; with no dividends expected to be paid. The risk-free rate of return reflects the interest rate for United States Treasury Note with similar time-to-maturity to that of the warrants.

The Company’s common stock is not publicly traded therefore, the fair value of the Company’s common stock as of August 5, 2010 and October 31, 2010 has not been determined based on market price.  As the Company’s stock is not publicly traded, historical volatility information is limited and considered not representative of the expected volatility. In accordance with ASC 718-10-30-2 (formerly SFAS No. 123R, “Accounting for Stock-Based Compensation”), the Company identified similar public entities for which share and option price information was available, and considered the historical volatilities of those public entities’ share prices in calculating the expected volatility appropriate to the Company (i.e. the calculated value).

The risk-free rate of return reflects the interest rate for United States Treasury Note with similar time-to-maturity to that of the warrants.

NOTE 8 – RELATED PARTY TRANSACTIONS

The Company received a non-interest bearing, unsecured loan from an officer on June 14, 2010 totaling $3,600. The Company used the proceeds for general working capital.  The $3,600 was paid as of October 31, 2010.

Accounts payable includes related party payables of $61,728 to Minex Exploration, a party affiliated with an officer.

 

On May 17, 2010, TMC entered into a Share Exchange and Assignment Agreement with AMC, a company that our Chief Executive Officer served as President and a Director in February and March 2010 and our Chief Operating Officer served as Chief Operating Officer and a Director in March 2010. (See Note 3).

  

12

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

NOTE 9 – COMMITMENTS AND CONTINGENCIES

Employment Agreements

On October 1, 2010, the Company signed an Employment Agreement with Gregory Schifrin (“Schifrin Agreement”). Under the terms of the Schifrin Agreement, Mr. Schifrin was appointed Chief Executive Officer for an indefinite period at a salary of $120,000 per year. Mr. Schifrin is eligible for annual bonuses and incentive plans as determined by the Company’s Compensation Committee. Mr. Schifrin received a $10,000 bonus for entering into the Schifrin Agreement and is eligible for employee benefit programs, including 4 weeks vacation per year, medical benefits and $500 per day spent on the Company’s project sites. Mr. Schifrin may resign with 60 days notice. If Mr. Schifrin is terminated without cause, including a change in control (after six months), he is to receive in a lump sum, two times his annual salary, two times his targeted annual bonus, two times his last year’s bonus and any accrued vacation.

On October 1, 2010, the Company signed an Employment Agreement with James Baughman (“Baughman Agreement”). Under the terms of the Baughman Agreement, Mr. Baughman was appointed Chief Operations Officer for an indefinite period at a salary of $120,000 per year. Mr. Baughman is eligible for annual bonuses and incentive plans as determined by the Company’s Compensation Committee. Mr. Baughman received a $10,000 bonus for entering into the Schifrin Agreement and is eligible for employee benefit programs, including 4 weeks vacation per year, medical benefits and $500 per day spent on the Company’s project sites. Mr. Baughman may resign with 60 days notice. If Mr. Baughman is terminated without cause, including a change in control (after six months), he is to receive in a lump sum, two times his annual salary, two times his targeted annual bonus, two times his last year’s bonus and any accrued vacation.

On December 9, 2010, the Company signed a Letter of Understanding with Mark Scott (“Scott Agreement”). Under the terms of the Scott Agreement, Mr. Scott agreed to consult on the TMC reorganization and complete the filing of certain SEC filings during the period ending April 8, 2011.  Mr. Scott will receive $4,000 per month in cash and receive 6,000 shares of common stock. The terms of his appointment as CFO are to be finalized at the conclusion of the Scott Agreement.

Leases

On October 22, 2010, the Company entered into a Commercial Lease Agreement (“Lease”) with 2186 South Holly LLC for the rent of 460 square feet of office space. The Lease provides for a monthly rent of $560 per month for the period November 1, 2010 through October 31, 2011. There was no rent expense from the period of inception to October 31, 2010. A security deposit of $513 was previously paid by James Baughman.

NOTE 10 – INCOME TAXES

The Company has incurred losses since inception, which have generated net operating loss carryforwards.  The net operating loss carryforwards arise from both United States and Canadian sources.  Pretax losses arising from domestic operations (United States) were $282,818 for the period of inceptions from March 25, 2010 to October 31, 2010.  Pretax losses arising from foreign operations (Canada) were $212,200, for the period of inceptions from March 25, 2010 to October 31, 2010.  As of October 31, 2010, the Company has net operating loss carryforwards in Terra Mining Corporation of approximately $282,818, which expire 2030, in Terra Gold Corporation of approximately $212,200, which expire in 2030.

For the period ended October 31, 2010, the Company’s effective tax rate differs from the federal statutory rate principally due to net operating losses.

  

13

  

TERRA MINING CORPORATION

(AN EXPLORATION STAGE COMPANY)

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

The principal components of the Company’s deferred tax assets at October 31, 2010 are as follows:

 

	
U.S. operations loss carry forward at statutory rate of 34%

	 	$	96,158	 
	Non-U.S. operations loss carry forward at statutory rate of 20.5%	 	 	43,501	 
	Total	 	 	139,659	 
	Less Valuation Allowance	 	 	(139,659	)
	Net Deferred Tax Assets	 	 	-	 
	Change in Valuation allowance	 	$	(139,659	)

 

A reconciliation of the United States Federal Statutory rate to the Company’s effective tax rate for the period ended October 31, 2010 is as follows:

 

	 	 	2010	 
	Federal Statutory Rate	 	 	-34.0	%
	Increase in Income Taxes Resulting from:	 	 	 	 
	
Change in Valuation allowance

	 	 	34.0	%
	Effective Tax Rate	 	 	0	%

 

NOTE 11 - SUBSEQUENT EVENTS

The Company evaluated subsequent events, for the purpose of adjustment or disclosure, up through the date the financial statements were available to be issued.

On December 22, 2010, the Company issued a Demand Promissory Note (“Promissory Note”) to BOCO in the amount of $400,000.  The note bears no interest except in the event of default.  The default interest rate is 29 % per annum, compounded annually.  The Promissory Note is collateralized by the assets of the Company and shares of a Company affiliated with an Officer of the Company. The Promissory Note is due on March 22, 2011. In connection with this Promissory Note, the Company issued a warrant to acquire 800,000 shares of common stock to BOCO. The warrant is exercisable at $.001 per share and expires on December 22, 2015.

The fair value of the warrants as of December 22, 2010 was estimated at $11,400 using the Black Scholes Option Price Calculation. The following assumptions were made to value the warrants: price of $.014 per share; risk free interest rate of 2.02%; expected life of 5 years; expected volatility of 118.95%; with no dividends expected to be paid. The risk-free rate of return reflects the interest rate for United States Treasury Note with similar time-to-maturity to that of the warrants.

 

14exhibit10-23.htm

Execution Copy 

 

 

 

 

 

 

 

Exhibit 10.23 

 

PURCHASE AND SALE AGREEMENT 

 

BETWEEN 

 

COG OPERATING LLC

 

AS SELLER 

 

 

 

AND 

 

 

 

LEGACY RESERVES OPERATING LP 

 

AS BUYER 

 

 

November 5, 2010 

 

 

TABLE OF CONTENTS 

 

	              	 	       	 	     	Page No.
	Article I Definitions and Usage	 	1
	 	Section 1.01	 	Definitions	 	1
	 	Section 1.02	 	Usage	 	4
	Article II Assets	 	6
	 	Section 2.01	 	Agreement to Sell and Purchase	 	6
	 	Section 2.02	 	Assets	 	6
	 	Section 2.03	 	Excluded Assets	 	7
	Article III Purchase Price	 	9
	 	Section 3.01	 	Purchase Price	 	9
	 	Section 3.02	 	Deposit	 	9
	 	Section 3.03	 	Effective Time	 	10
	Article IV Title Matters	 	10
	 	Section 4.01	 	Examination Period	 	10
	 	Section 4.02	 	Defensible Title and Permitted Encumbrances	 	11
	 	Section 4.03	 	Title Defect	 	14
	 	Section 4.04	 	Notice of Title Defects	 	14
	 	Section 4.05	 	Remedies for Title Defects	 	15
	 	Section 4.06	 	Special Warranty of Title	 	17
	 	Section 4.07	 	Preferential Rights To Purchase	 	17
	 	Section 4.08	 	Consents to Assignment	 	18
	 	Section 4.09	 	Title Benefits; Remedies	 	18
	Article V Environmental Matters	 	19
	 	Section 5.01	 	Environmental Review	 	19
	 	Section 5.02	 	Environmental Definitions	 	20
	 	Section 5.03	 	Notice of Environmental Defects	 	21
	 	Section 5.04	 	Remedies for Environmental Defects	 	22
	 	Section 5.05	 	No Warranty Regarding Environmental Matters	 	23
	 	Section 5.06	 	Physical Condition of the Assets	 	23
	 	Section 5.07	 	NORM	 	23
	Article VI Representations and Warranties of Seller	 	23
	 	Section 6.01	 	Seller’s Existence	 	23
	 	Section 6.02	 	Legal Power	 	24
	 	Section 6.03	 	Execution	 	24
	 	Section 6.04	 	Brokers	 	24
	 	Section 6.05	 	Bankruptcy	 	24
	 	Section 6.06	 	Proceedings	 	24
	 	Section 6.07	 	Royalties	 	24

- i - 

 

 

	              	Section 6.08	       	Taxes	     	25
	 	Section 6.09	 	Contracts	 	25
	 	Section 6.10	 	Governmental Authorizations	 	25
	 	Section 6.11	 	No Violations of Laws	 	25
	 	Section 6.12	 	No Prepayments	 	25
	 	Section 6.13	 	AFE’s	 	25
	 	Section 6.14	 	Litigation	 	25
	 	Section 6.15	 	Suspense Accounts	 	25
	 	Section 6.16	 	Hydrocarbon Sales Agreements	 	25
	 	Section 6.17	 	Records	 	26
	Article VII Representations and Warranties of Buyer	 	26
	 	Section 7.01	 	Buyer’s Existence	 	26
	 	Section 7.02	 	Legal Power	 	26
	 	Section 7.03	 	Execution	 	26
	 	Section 7.04	 	Brokers	 	26
	 	Section 7.05	 	Bankruptcy	 	27
	 	Section 7.06	 	Proceedings	 	27
	 	Section 7.07	 	Qualifications	 	27
	 	Section 7.08	 	Investment	 	27
	 	Section 7.09	 	Funds	 	27
	 	Section 7.10	 	Independent Investigation	 	27
	Article VIII Tax-Deferred Exchange	 	28
	 	Section 8.01	 	Election	 	28
	 	Section 8.02	 	Qualified Intermediary	 	28
	 	Section 8.03	 	Additional Costs	 	28
	 	Section 8.04	 	Indemnification	 	28
	Article IX Seller’s Conditions to Close	 	28
	 	Section 9.01	 	Representations	 	28
	 	Section 9.02	 	Performance	 	28
	 	Section 9.03	 	Pending Matters	 	28
	Article X Buyer’s Conditions to Close	 	28
	 	Section 10.01	 	Representations	 	29
	 	Section 10.02	 	Performance	 	29
	 	Section 10.03	 	Pending Matters	 	29
	Article XI Purchase Price Allocation and Tax Matters	 	29
	 	Section 11.01	 	Purchase Price Allocation	 	29
	 	Section 11.02	 	Transfer Taxes	 	29
	 	Section 11.03	 	Audit Rights	 	29
	Article XII The Closing	 	30
	 	Section 12.01	 	Time and Place of the Closing	 	30
	 	Section 12.02	 	Adjustments to Purchase Price at the Closing	 	30

- ii - 

 

 

	              	Section 12.03	       	Closing Statement	 	32
	 	Section 12.04	 	Actions of Seller at the Closing	 	32
	 	Section 12.05	 	Actions of Buyer at the Closing	 	33
	Article XIII Termination	 	33
	 	Section 13.01	 	Right of Termination	 	33
	 	Section 13.02	 	Effect of Termination	 	34
	 	Section 13.03	 	Termination Damages	 	34
	 	Section 13.04	 	Return of Documents and Confidentiality	 	35
	 	Section 13.05	 	Damages	 	35
	Article XIV Post Closing Obligations	 	35
	 	Section 14.01	 	Gas Imbalances	 	35
	 	Section 14.02	 	Final Accounting Statement	 	35
	 	Section 14.03	 	Further Cooperation	 	36
	 	Section 14.04	 	After the Closing	 	36
	Article XV Operation of the Assets	 	37
	 	Section 15.01	 	Operations	 	37
	 	Section 15.02	 	Limitations on the Operational Obligations and Liabilities of Seller	 	38
	 	Section 15.03	 	Operation of the Assets after the Closing	 	38
	 	Section 15.04	 	Change in Circumstances; Casualty Loss	 	39
	Article XVI Obligations and Indemnification	 	39
	 	Section 16.01	 	Retained Obligations	 	39
	 	Section 16.02	 	Assumed Obligations	 	40
	 	Section 16.03	 	Buyer’s Indemnification	 	40
	 	Section 16.04	 	Seller’s Indemnification	 	41
	 	Section 16.05	 	Notices and Defense of Indemnified Matters	 	41
	Article XVII Limitations on Representations and Warranties	 	43
	 	Section 17.01	 	Disclaimers of Representations and Warranties	 	43
	 	Section 17.02	 	Sale “As Is” “Where Is”	 	43
	 	Section 17.03	 	DISCLAIMER REGARDING THE ASSETS	 	44
	 	Section 17.04	 	DISCLAIMER REGARDING INFORMATION	 	44
	Article XVIII Dispute Resolution	 	44
	 	Section 18.01	 	Scope; Appointment of Independent Expert	 	44
	 	Section 18.02	 	Additional Procedures	 	45
	 	Section 18.03	 	Waiver	 	46
	 	Section 18.04	 	Binding Nature	 	46
	 	Section 18.05	 	Confidentiality	 	46
	Article XIX Miscellaneous	 	46
	 	Section 19.01	 	Names	 	46
	 	Section 19.02	 	Expenses	 	46

- iii - 

 

 

	              	Section 19.03	       	Filings, Notices and Certain Governmental Approvals	     	46
	 	Section 19.04	 	Document Retention	 	47
	 	Section 19.05	 	Entire Agreement	 	47
	 	Section 19.06	 	Waiver	 	47
	 	Section 19.07	 	Construction	 	47
	 	Section 19.08	 	No Third Party Beneficiaries	 	47
	 	Section 19.09	 	Assignment	 	47
	 	Section 19.10	 	Governing Law	 	48
	 	Section 19.11	 	Jurisdiction	 	48
	 	Section 19.12	 	Notices	 	48
	 	Section 19.13	 	Severability	 	48
	 	Section 19.14	 	Survival	 	49
	 	Section 19.15	 	Time of the Essence	 	49
	 	Section 19.16	 	Counterpart Execution	 	49
	 	Section 19.17	 	Knowledge	 	49

 

 

EXHIBITS AND SCHEDULES 

 

Exhibit A – Subject Interests (Listing of Leases)

Exhibit B – Wells and Interests 

Exhibit C – Contracts

Exhibit D – Purchase Price Allocation 

Exhibit E – Assignment and Bill of Sale 

Exhibit F – Title Indemnity Agreement 

Exhibit G – Environmental Indemnity Agreement 

 

 

Schedule 6.11 – Violations of Laws 

Schedule 6.13 – AFE’s 

Schedule 6.15 – Suspense Accounts 

Schedule 6.16 – Hydrocarbon Sales Agreements 

Schedule 14.01 – Gas Imbalances 

 

- iv - 

 

 

PURCHASE AND SALE AGREEMENT 

 

     This Purchase and Sale Agreement (this “Agreement”) is made and entered into this 5th day of November, 2010, by and between COG OPERATING LLC, a Delaware limited liability company (“Seller”), and LEGACY RESERVES OPERATING LP, a Delaware limited partnership (“Buyer”). Buyer and Seller are collectively referred to as the “Parties” and individually as a “Party.” 

 

W I T N E S S E T H: 

 

     WHEREAS, Seller is willing to sell to Buyer, and Buyer is willing to purchase from Seller, the Assets (as defined in Section 2.02), all upon the terms and conditions set forth in this Agreement. 

 

     NOW, THEREFORE, in consideration of the mutual benefits derived and to be derived from this Agreement by each Party, Seller and Buyer agree as follows: 

 

Article I 

Definitions and Usage 

 

     Section 1.01 Definitions. For purposes of this Agreement, the following terms and their variations have the meanings specified or referred to in this Section 1.01: 

 

     “Accounting Statement” — as defined in Section 14.02(a). 

 

     “Advisor” — as defined in Section 2.03(g). 

 

     “Affiliate” — as defined in Section 2.03(h). 

 

     “Agreed Imbalance” — as defined in Section 14.01. 

 

     “Agreement” — as defined in the first paragraph of this Agreement. 

 

     “Allocated Value” — as defined in Section 4.04(c)(ii). 

 

     “Asset” or “Assets” — as defined in Section 2.02. 

 

     “Assignment” — as defined in Section 4.06. 

 

     “Assumed Environmental Obligations” — as defined in Section 5.02(a). 

 

     “Assumed Obligations” — as defined in Section 16.02. 

 

     “Business Day” — as defined in Section 4.01. 

 

     “Buyer” — as defined in the first paragraph of this Agreement. 

 

     “Buyer’s Auditor” – as defined in Section 11.03. 

 

- 1 - 

 

 

     “Buyer Indemnitees” — as defined in Section 16.04. 

 

     “Buyer’s Environmental Consultant” — as defined in Section 5.01(a). 

 

     “Buyer’s Environmental Review” — as defined in Section 5.01(a). 

 

     “Claim” — as defined in Section 16.05(b). 

 

     “Claim Notice” — as defined in Section 16.05(b). 

 

     “Closing” — as defined in Section 12.01. 

 

     “Closing Date” — as defined in Section 12.01. 

 

     “Closing Statement” — as defined in Section 12.03. 

 

     “Code” — as defined in Section 8.01. 

 

     “Confidentiality Agreement” — as defined in Section 4.01. 

 

     “Contracts” — as defined in Section 2.02(f). 

 

     “control” — as defined in Section 2.03(h). 

 

     “Defensible Title” — as defined in Section 4.02(a). 

 

     “Deposit” — as defined in Section 3.02(a). 

 

     “Dispute” or “Disputes” — as defined in Section 18.01. 

 

     “Documents” — as defined in Section 19.04. 

 

     “Easements” — as defined in Section 2.02(c). 

 

     “Effective Time” — as defined in Section 3.03. 

 

     “Election Notice” — as defined in Section 18.01. 

 

     “Environmental Defect” — as defined in Section 5.02(b). 

 

     “Environmental Defect Notice” — as defined in Section 5.03. 

 

     “Environmental Defect Value” — as defined in Section 5.02(c). 

 

     “Environmental Indemnity Agreement” — as defined in Section 5.04(a)(ii). 

 

     “Environmental Information” — as defined in Section 5.01(b). 

 

     “Environmental Laws” — as defined in Section 5.02(d). 

 

- 2 - 

 

 

     “Examination Period” — as defined in Section 4.01. 

 

     “Excluded Assets” — as defined in Section 2.03. 

 

     “Final Statement” — as defined in Section 14.02(b). 

 

     “Final Settlement Date” — as defined in Section 14.02(a). 

 

     “Gas Imbalances” — as defined in Section 14.01. 

 

     “Governmental Authority” — as defined in Section 4.02(b)(v) 

 

     “Governmental Authorizations” — as defined in Section 6.10. 

 

     “Hazardous Substances” — as defined in Section 5.02(e). 

 

     “Hydrocarbons” — as defined in Section 2.02(d). 

 

     “Indemnified Environmental Defect” — as defined in Section 5.02(f). 

 

     “Indemnified Party” — as defined in Section 16.05(a). 

 

     “Indemnified Title Defect” — as defined in Section 4.05(a)(ii). 

 

     “Indemnifying Party” — as defined in Section 16.05(a). 

 

     “Independent Expert” — as defined in Section 18.01. 

 

     “Knowledge” — as defined in Section 19.17. 

 

     “Law” — as defined in Section 1.02(a)(v). 

 

     “Leases” — as defined in Section 2.02(a). 

 

     “Loss” or “Losses” — as defined in Section 16.03. 

 

     “Net Revenue Interest” or “NRI” — as defined in Section 4.02(a)(i). 

 

     “NORM” — as defined in Section 5.07. 

 

     “Notice of Disagreement” — as defined in Section 14.02(a). 

 

     “Parties” — as defined in the first paragraph of this Agreement. 

 

     “Permitted Encumbrances” — as defined in Section 4.02(b). 

 

     “Person” — as defined in Section 2.03(h). 

 

     “Personal Property” — as defined in Section 2.02(d). 

 

- 3 - 

 

 

     “PPRs” — as defined in Section 4.07(a). 

 

     “Purchase Price” — as defined in Section 3.01. 

 

     “Purchase Price Adjustments” — as defined in Section 12.02(c). 

 

     “Records” — as defined in Section 2.02(g). 

 

     “Retained Obligations” — as defined in Section 16.01. 

 

     “Rules” — as defined in Section 18.01. 

 

     “Seller” — as defined in the first paragraph of this Agreement. 

 

     “Seller Indemnitees” — as defined in Section 15.02(b). 

 

     “Seller Ownership Period” — as defined in Section 6.07. 

 

     “Subject Interest” or “Subject Interests” — as defined in Section 2.02(a). 

 

     “Subject Property” — as defined in Section 5.02(a). 

 

     “Tangible Property” — as defined in Section 17.03. 

 

     “Taxes” — as defined in Section 2.03(c). 

 

     “Third Party” — as defined in Section 4.02(b)(ix). 

 

     “Title Benefit” — as defined in Section 4.09. 

 

     “Title Defect” — as defined in Section 4.03. 

 

     “Title Defect Notice” — as defined in Section 4.04(a). 

 

     “Title Defect Value” — as defined in Section 4.04(c). 

 

     “Title Indemnity Agreement” — as defined in Section 4.05(a)(ii). 

 

     “Transfer Taxes” — as defined in Section 11.02. 

 

     “Unadjusted Purchase Price” — as defined in Section 3.01. 

 

     “Working Interest” or “WI” — as defined in Section 4.02(a)(ii). 

 

     Section 1.02 Usage. 

 

     (a) In this Agreement, unless a clear contrary intention appears: 

 

     (i) the singular number includes the plural number and vice versa; 

 

- 4 - 

 

 

(ii) reference to any Person includes that Person’s successors and assigns but, if applicable, only if those successors and assigns are not prohibited by this Agreement, and reference to a Person in a particular capacity excludes that Person in any other capacity or individually; 

 

(iii) reference to any gender includes each other gender; 

 

(iv) reference to any agreement, document or instrument means that agreement, document or instrument as amended or modified and in effect from time to time in accordance with its terms; 

 

(v) reference to any law, rule, regulation, order or decree of any Governmental Authority including any legislative body, court or administrative agency (“Law”) means that Law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated under it, and reference to any section or other provision of any Law means that provision of that Law from time to time in effect and constituting the amendment, modification, codification, replacement or reenactment of that section or other provision; 

 

(vi) “hereunder,” “hereof,” “hereto,” and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Article, Section or other provision of this Agreement; 

 

(vii) “including” (and with correlative meaning “include”) means including without limiting the generality of any description preceding that term; 

 

(viii) “or” is used in the inclusive sense of “and/or”; 

 

(ix) with respect to the determination of any period of time, “from” means “from and including” and “to” means “to but excluding”; and 

 

(x) references to documents, instruments or agreements shall be deemed to refer as well to all addenda, exhibits, schedules or amendments to them. 

 

     (b) Unless otherwise specified, all accounting terms used in this Agreement shall be interpreted, and all accounting determinations under this Agreement shall be made, in accordance with United States generally accepted accounting principles. 

 

     (c) This Agreement was negotiated by the parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation of this Agreement. 

 

- 5 - 

 

 

Article II 

Assets 

 

     Section 2.01 Agreement to Sell and Purchase. Subject to and in accordance with the terms and conditions of this Agreement, Buyer agrees to purchase the Assets from Seller, and Seller agrees to sell the Assets to Buyer. 

 

     Section 2.02 Assets. Subject to Section 2.03, the term “Assets” (or in the singular “Asset”) means all of Seller’s right, title and interest in and to: 

 

(a) the oil, gas and/or mineral leases described in Exhibit A, only insofar as said leases cover the lands described in Exhibit A (collectively, the “Leases”), and all overriding royalty interests, operating rights, record title and other similar interests in the Leases (collectively, the “Subject Interests” or, singularly, a “Subject Interest”); 

 

(b) except to the extent as may be limited by the Subject Interests, all rights, privileges, benefits and powers conferred upon Seller as holder of the Subject Interests, with respect to (i) all rights of use and occupation of the surface of and the subsurface depths under the Subject Interests; (ii) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof, including all Hydrocarbon production after the Effective Time attributable to the Subject Interests or any such pool or unit allocated to any such Subject Interest; 

 

(c) to the extent assignable or transferable by Seller, all easements, rights-of-way, surface leases, servitudes, permits, licenses, franchises and other estates or similar rights and privileges directly related to or used in connection with the Subject Interests, including without limitation those described or referred to in Exhibit A (the “Easements”); 

 

(d) to the extent assignable or transferable by Seller, all personal property, equipment, fixtures, inventory and improvements located on and used directly in connection with the Subject Interests or the Easements or with the production, treatment, sale, or disposal of oil, gas or other hydrocarbons produced from or attributable to the Subject Interests (collectively, “Hydrocarbons”), byproducts or waste produced from or attributable to the foregoing, including all wellhead equipment, pumps, pumping units, flowlines, gathering systems, piping, tanks, buildings, treatment facilities, disposal facilities, compression facilities, and other materials, supplies, equipment, facilities and machinery (collectively, “Personal Property”); 

 

(e) all wells located on the lands covered by the Subject Interests or on lands with which the Subject Interests may have been pooled, communitized or unitized (whether producing, shut in or abandoned), including the wells described in Exhibit B; 

 

(f) to the extent assignable or transferable by Seller, all contracts, warranties, agreements and other arrangements, and all express and implied rights that directly relate to the Subject Interests, the Leases or the Easements, including communitization, unitization or pooling agreements, production sales contracts, farmout agreements, subleases, joint venture or partnership agreements, operating agreements, service agreements and the contracts, agreements and other arrangements, including without limitation those described or referred to in Exhibit C (the “Contracts”); and 

 

- 6 - 

 

 

(g) to the extent assignable or transferable by Seller, all books, records, files, muniments of title, reports and similar documents and materials, including lease records, well records, and division order records, well files, well logs, title records (including abstracts of title, title opinions and memoranda, and title curative documents related to the Assets), contracts and contract files, correspondence, that relate to the foregoing interests in the possession of, and maintained by, Seller (collectively, the “Records”). 

 

     Section 2.03 Excluded Assets. Notwithstanding the foregoing, the Assets shall not include, and there is excepted, reserved and excluded from the sale contemplated by this Agreement (collectively, the “Excluded Assets”): 

 

(a) all fee mineral, royalty and other similar non-leasehold oil, gas or other mineral interests and estates in the lands covered by the Leases; 

 

(b) all trade credits and all accounts, accounts receivable, checks, funds, promissory notes, instruments and general intangibles (as those terms are defined in the Texas Uniform Commercial Code) attributable to the Assets with respect to any period of time prior to the Effective Time; 

 

(c) all claims of Seller for, and rights of Seller to, refunds of or loss carryovers with respect to (i) any Taxes with respect to the Assets for any taxable year or period, or portion thereof, that ends at or before the Effective Time, (ii) any Taxes with respect to the Excluded Assets, or (iii) those other refunds, and rights to them, for amounts paid in connection with the Assets and attributable to the period prior to the Effective Time, including refunds of amounts paid under any Hydrocarbon gathering or transportation agreement; and for purposes of this Agreement, the term “Taxes” means any and all taxes, including any interest, penalties or other additions to tax that may become payable in respect of any tax, imposed by any Governmental Authority, which taxes shall include, without limiting the generality of the foregoing, all income taxes, profits taxes, margin taxes, alternative minimum taxes, estimated taxes, payroll taxes, employee withholding taxes, unemployment insurance taxes, social security taxes, welfare taxes, disability taxes, severance taxes, license charges, sales taxes, use taxes, ad valorem taxes, value added taxes, excise taxes, franchise taxes, gross receipts taxes, real or personal property taxes, stamp taxes, production taxes, environmental taxes, transfer taxes, workers’ compensation taxes, windfall taxes, net worth taxes, and other taxes, fees, duties, levies, customs, tariffs, imposts, assessments, obligations and charges of the same or of a similar nature to any of the foregoing; 

 

(d) all proceeds, income, royalties or revenues (and any security or other deposits made) attributable to (i) the Assets for any period prior to the Effective Time or (ii) any other Excluded Assets;

 

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     (e) all Hydrocarbons produced from or attributable to the Subject Interests with respect to all periods prior to the Effective Time, together with all proceeds from the sale of those Hydrocarbons; 

 

     (f) all geophysical data, interpretations and information related to the Assets, and all of Seller’s proprietary computer software, technology, patents, trade secrets, copyrights, names, trademarks, logos and other intellectual property; 

 

     (g) all documents and instruments of Seller (other than title opinions) (i) that may be protected by an attorney-client, work product or other privilege; (ii) prepared by or for counsel; or (iii) received from RBC Richardson Barr, RBC Capital Markets or any other financial, commercial or legal advisor of Seller (each, an “Advisor”); 

 

     (h) all (i) agreements and correspondence between Seller or any of its Affiliates and any Advisor relating to the transactions contemplated in this Agreement; (ii) lists of prospective purchasers for those transactions compiled by Seller or any of its Affiliates or any Advisor; (iii) bids submitted by other prospective purchasers of the Assets; (iv) analyses by Seller or any of its Affiliates or any Advisor of any bids submitted by any prospective purchaser; (v) correspondence between Seller or any of its Affiliates or any Advisor, or any of their respective representatives, and any prospective purchaser other than Buyer; and (vi) correspondence between Seller or any of its Affiliates or any Advisor or any of their respective representatives with respect to any of the bids, the prospective purchasers, the engagement or activities of any Advisor, or the transactions contemplated in this Agreement; and for purposes of this Agreement, the term “Affiliate” means, with respect to any Person, any other Person controlling, controlled by or under common control with that Person, where the term “control” (and correlative terms) means the power, whether by contract, equity ownership or otherwise, to direct the policies or management of a Person; and the term “Person” means an individual, corporation, partnership, limited liability company, association, trust, unincorporated organization or other entity; 

 

     (i) all data and other information that may not be disclosed or assigned to Buyer as a result of confidentiality or similar arrangements under agreements with Persons not Affiliates of Seller, even if such data or other information is inadvertently disclosed or provided to Buyer (in which case Buyer shall promptly return such data or information to Seller); 

 

     (j) all audit rights arising under any of the Contracts or otherwise with respect to any period prior to the Effective Time or to any of the Excluded Assets; 

 

     (k) all corporate, partnership and limited liability company financial and income tax books, accounts, records and documents of Seller or any of its Affiliates; 

 

     (l) all claims and causes of action of Seller (i) arising from acts, omissions or events related to, or damage to or destruction of, the Assets, occurring prior to the Effective Time; (ii) arising under or with respect to any of the Contracts that are attributable to periods of time prior to the Effective Time (including claims for adjustments or refunds); or (iii) with respect to any of the Excluded Assets; 

 

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(m) all rights and interests of Seller (i) under any policy or agreement of insurance or indemnity; (ii) under any bond; or (iii) to any insurance or condemnation proceeds or awards arising, in each case, from acts, omissions or events related to, or damage to or destruction of, the Assets occurring prior to the Effective Time;

 

(n) all amounts due or payable to any Seller as adjustments to insurance premiums related to the Assets with respect to any period prior to the Effective Time; 

 

(o) all amounts resulting from derivative contracts or similar agreements used to manage oil, natural gas, products or other commodity prices whether deemed a hedge, non-hedge or ineffective hedge transaction; 

 

(p) all proceeds, income, revenues or other benefits (including any benefit attributable to any future laws or regulations with respect to “royalty relief” or other similar measures) not otherwise enumerated above, as well as any security or other deposits made, attributable to (i) the Assets for any period prior to the Effective Time; or (ii) the Excluded Assets; 

 

(q) all funds held in suspense accounts related to the Assets;

 

(r) all vehicles, vessels, trailers, software, computers and associated peripherals and all radio, telephone and other communication equipment, except for any such equipment attached to a well located on a Lease;

 

(s) all oil, gas or other mineral reserve reports, and all environmental site assessments, reports and related data and information; and 

 

(t) all rights or benefits under or in connection with any State or Federal candidate conservation agreements or similar agreements. 

 

Article III

Purchase Price 

 

     Section 3.01 Purchase Price. The total consideration for the purchase, sale and conveyance of the Assets to Buyer is Buyer’s payment to Seller of the sum of $105,000,000.00 (the “Unadjusted Purchase Price”), as adjusted in accordance with the provisions of this Agreement (the “Purchase Price”). 

 

     Section 3.02 Deposit. 

 

(a) Within one (1) Business Day following the execution of this Agreement by Buyer and Seller, Buyer shall deliver to Seller a performance guarantee deposit in an amount equal to 10% of Unadjusted Purchase Price (the “Deposit”). The Deposit shall be paid by Buyer to Seller by means of a completed federal funds transfer to an account designated by Seller. If the Deposit is not paid to Seller within such period, this Agreement shall be null and void and neither Party shall have any further rights or obligations under this Agreement. 

 

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(b) If the Closing occurs, the Deposit shall be retained by Seller and shall be applied as part of the payment of the Purchase Price, and the amount payable by Buyer at the Closing shall be reduced by that amount in accordance with Section 12.03. 

 

(c) If the Agreement is terminated without the Closing having occurred, the Deposit shall be applied as provided in Article XIII. 

 

     Section 3.03 Effective Time. If the transactions contemplated by this Agreement are consummated in accordance with the terms and provisions of this Agreement, the ownership of the Assets shall be transferred from Seller to Buyer on the Closing Date, and effective as of 7:00 a.m. local time where the Assets are located on October 1, 2010 (the “Effective Time”). 

 

Article IV

Title Matters 

 

     Section 4.01 Examination Period. The Examination Period shall run from the date of this Agreement until December 17, 2010 at Noon, local time in Midland, Texas (the “Examination Period”). During the Examination Period, Seller shall permit Buyer and/or its authorized representatives to examine, during normal business hours, in the offices of Seller, all abstracts of title, title opinions, title files, ownership maps, lease files, contract files, assignments, division orders and royalty accounting records pertaining to the Assets insofar as same may now be in existence and in the possession of Seller or its Affiliates, subject to such restrictions on disclosure as may exist under confidentiality agreements or other agreements binding on Seller or such data. Such examination shall be upon reasonable notice and shall not unreasonably disrupt the personnel and operations of Seller or otherwise impede the efforts of Seller to comply with its other obligations under this Agreement. Any such examination by Buyer shall be at Buyer’s sole cost and expense. All information made available to Buyer, whether disclosed pursuant to this Agreement or otherwise, shall be maintained confidential by Buyer as provided in the Confidentiality Agreement dated September 27, 2010, between Seller and Buyer (the “Confidentiality Agreement”), the terms of which are incorporated into this Agreement by this reference and made a part of this Agreement. Buyer shall take whatever reasonable steps as may be necessary to ensure that Buyer’s employees, consultants, representatives and agents comply with the provisions of the Confidentiality Agreement, and shall be responsible for any disclosure or other breach of such provisions by any such Persons. Buyer shall not contact any of the customers or suppliers of Seller or Seller’s working interest co-owners or operators, in connection with the transactions contemplated by this Agreement, whether in person or by telephone, mail or other means of communication, without the specific prior written consent of Seller, which consent may be withheld at Seller’s sole discretion. For the purpose of this Agreement, the term “Business Day” means any calendar day excluding Saturdays, Sundays and other days on which national banks are closed for business in Midland, Texas. 

 

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     Section 4.02 Defensible Title and Permitted Encumbrances. 

 

     (a) For purposes of this Agreement, the term “Defensible Title” means, with respect to a given Asset, such ownership by Seller in that Asset that, subject to and except for Permitted Encumbrances: 

 

(i) with respect to each well, unit, well location or Lease shown on Exhibit B, entitles Seller to receive not less than the percentage or decimal interest set forth in Exhibit B as Seller’s “Net Revenue Interest” or “NRI” of all Hydrocarbons produced, saved or marketed from (A) the applicable well or unit as set forth in Exhibit B as to the currently producing interval in that well or unit, and (B) the interval or zone identified in Exhibit B with respect to any non-producing well, unit, well location or Lease set forth in Exhibit B; 

 

(ii) with respect to each well, unit, well location or Lease shown in Exhibit B, obligates Seller to bear not greater than the percentage or decimal interest set forth in Exhibit B as Seller’s “Working Interest” or “WI” of the costs and expenses relating to the maintenance, development and operation of (A) the applicable well or unit set forth in Exhibit B as to the currently producing interval in that well or unit, and (B) the interval or zone identified in Exhibit B with respect to any non-producing well, unit, well location or Lease set forth in Exhibit B, and except to the extent any such increase is accompanied by a proportionate increase in the applicable Net Revenue Interest; and 

 

(iii) is free and clear of all liens, encumbrances, security interests, pledges and material defects in title. 

 

     (b) The term “Permitted Encumbrances” means any of the following matters to the extent the same are valid and subsisting and affect the Assets: 

 

(i) the Leases and Contracts; 

 

(ii) any (A) undetermined or inchoate liens or charges constituting or securing the payment of expenses that were incurred incidental to the maintenance, development, production or operation of the Assets or for the purpose of developing, producing or processing Hydrocarbons from or in them, and (B) materialman’s, mechanics’, repairman’s, employees’, contractors’, operators’ liens or other similar liens, privileges or charges for liquidated amounts arising in the ordinary course of business (1) that Seller has agreed to assume or pay pursuant to the terms of this Agreement; or (2) for which Seller is responsible for paying or releasing at or after the Closing pursuant to the terms of this Agreement; 

 

(iii) any liens for Taxes and assessments not yet delinquent or that are being contested in good faith; 

 

(iv) the terms, conditions, restrictions, exceptions, reservations, limitations and other matters contained in (including any liens or security interests created by law or reserved in oil, gas and other mineral leases for royalty, bonus or rental, or created to secure compliance with the terms of) the agreements, instruments and documents that create or reserve to Seller its interests in the Assets; 

 

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(v) any obligations or duties affecting the Assets to any federal, state, county, municipal or local government authority or judicial or regulatory agency or instrumentality (“Governmental Authority”) with respect to any franchise, grant, license or permit and all applicable Law or any Governmental Authority; 

 

(vi) any (A) easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations, pipelines, grazing, hunting, lodging, canals, ditches, reservoirs or the like, and (B) easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways and other similar rights-of-way on, over or in respect of property owned or leased by Seller or over which Seller owns rights-of-way, easements, permits or licenses, to the extent that they do not materially interfere with the operations currently conducted on the Assets; 

 

(vii) all royalties, overriding royalties, net profits interests, carried interests, production payments, reversionary interests and other burdens on or deductions from the proceeds of Hydrocarbon production created or in existence as of the Effective Time, whether recorded or unrecorded, provided that such matters do not operate to reduce the Net Revenue Interests of Seller below those set forth in Exhibit B or increase the Working Interests of Seller above those set forth in Exhibit B without a corresponding increase in the Net Revenue Interests; 

 

(viii) subject to Section 4.07, preferential rights to purchase or similar agreements with respect to which (A) waivers or consents are obtained from the appropriate parties for the transaction contemplated by this Agreement, or (B) required notices have been given for the transaction contemplated by this Agreement to the holders of such rights and the appropriate period for asserting such rights has expired without an exercise of such rights; 

 

(ix) required Third Party consents to assignment or similar agreements with respect to which (A) waivers or consents are obtained from the appropriate parties for the transaction contemplated by this Agreement; (B) required notices have been given for the transaction contemplated by this Agreement to the holders of those rights and the appropriate period for asserting such rights has expired without an exercise of such rights; or (C) there is no provision expressly stating that an assignment in violation thereof (1) is void or voidable, (2) triggers the payment of specified liquidated damages, or (3) causes a termination of the Lease or other Asset to be assigned; and for purposes of this Agreement, the term “Third Party” means any Person or entity, governmental or otherwise, other than Seller, Buyer, and their respective Affiliates and includes other working interest owners, royalty owners, lease operators, landowners, service contractors and governmental agencies;

 

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(x) all rights to consent by, required notices to, filings with, or other actions by Governmental Authorities in connection with the sale or conveyance of oil, gas or other mineral leases or interests in them that are customarily obtained or made subsequent to such sale or conveyance; 

 

(xi) production sales contracts; division orders; contracts for sale, purchase, exchange, refining or processing of Hydrocarbons; unitization and pooling designations, declarations, orders and agreements; operating agreements; agreements of development; area of mutual interest agreements; gas balancing or deferred production agreements; processing agreements; plant agreements; pipeline, gathering and transportation agreements; injection, repressuring and recycling agreements; carbon dioxide purchase or sale agreements; salt water or other disposal agreements; seismic or geophysical permits or agreements; and any and all other agreements that have terms that are ordinary and customary to the oil, gas, sulphur and other mineral exploration, development, processing or extraction business or in the business of processing of gas and gas condensate or liquids production for the extraction of products from them;

 

(xii) farmout or farmin agreements, to the extent they do not reduce the Net Revenue Interests of Seller below those set forth in Exhibit B or increase the Working Interests of Seller above those set forth in Exhibit B without a corresponding increase in the Net Revenue Interests; 

 

(xiii) liens and security interests that will be released at Closing as provided in Section 12.04(g); 

 

(xiv) rights reserved to or vested in any Governmental Authority to control or regulate any of the Assets and the applicable Law;

 

(xv) all defects and irregularities affecting the Assets that, individually or in the aggregate, (A) do not operate to (1) reduce the Net Revenue Interests of Seller, (2) increase the proportionate share of costs and expenses of leasehold operations attributable to or to be borne by the Working Interests of Seller, or (3) otherwise interfere materially with the operation, value or use of the Assets; (B) operate to increase the proportionate share of costs and expenses of leasehold operations attributable to or to be borne by the Working Interest of Seller, so long as there is a proportionate increase in Seller’s Net Revenue Interests; or (C) that would not be considered material when applying general industry standards;

 

(xvi) all Title Defects expressly waived by Buyer in writing or that have been deemed to have been waived or not otherwise to be Title Defects under Section 4.04(a) or Section 4.05(d) or any other provision of this Agreement; and 

 

(xvii) Title Defects that are defensible by possession under applicable statutes of limitation for adverse possession or for prescription. 

 

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     Section 4.03 Title Defect. The term “Title Defect,” as used in this Agreement, means any encumbrance, encroachment, irregularity, defect in or objection to Seller’s ownership of any Asset (excluding Permitted Encumbrances) that causes Seller not to have Defensible Title to that Asset. Notwithstanding any other provision in this Agreement to the contrary, the following matters shall not constitute, and shall not be asserted as a Title Defect: (a) defects or irregularities arising out of lack of corporate authorization or a variation in corporate name, unless Buyer provides affirmative evidence that such corporate action or variation was not authorized and results in another Person’s superior claim of title to the relevant Asset; (b) defects or irregularities that have been cured or remedied by the passage of time, including applicable statues of limitation and statutes for prescription or preemption; (c) defects or irregularities in the chain of title consisting of the failure to recite marital status in documents or omissions of heirship proceedings; (d) defects or irregularities in title which for a period of seven (7) years or more have not delayed or prevented Seller (or Seller’s predecessor, if owned by Seller less than seven (7) years) from receiving its Net Revenue Interest share of the proceeds of production and have not caused Seller to bear a share of expenses or costs greater than its Working Interest share from any Lease, unit or well; (e) defects or irregularities resulting from or related to probate proceedings or the lack of probate proceedings if the defects or irregularities have been outstanding for seven (7) years or more; or (e) conventional rights or reassignment normally actuated by an intent to abandon or release a Lease and requiring notice to the holders of such rights and any defect or irregularity as would normally be waived by Persons engaged in the oil and gas business when purchasing producing properties. 

 

     Section 4.04 Notice of Title Defects. 

 

     (a) If Buyer discovers any Title Defect affecting any Asset, Buyer shall notify Seller of the alleged Title Defect as promptly as possible but no later than the expiration of the Examination Period. To be effective, this notice (a “Title Defect Notice”) must (i) be in writing; (ii) be received by Seller prior to the expiration of the Examination Period; (iii) describe the Title Defect in sufficient, specific detail (including any alleged variance in the Net Revenue Interest or Working Interest); (iv) identify the specific Asset or Assets affected by the Title Defect; and (v) include the value of the Title Defect as determined by Buyer. Any matters that otherwise may have constituted Title Defects, but that are not so described in a timely Title Defect Notice complying and delivered in accordance with this Section 4.04(a), shall be deemed to have been waived by Buyer for all purposes and shall constitute Permitted Encumbrances. 

 

     (b) After receipt of an effective Title Defect Notice, Seller shall have the option, but not the obligation, to attempt to cure the Title Defect at any time prior to the Closing and to postpone the Closing Date up to thirty (30) days beyond the date set forth in Section 12.01 to facilitate the cure. 

 

     (c) The value attributable to each Title Defect (the “Title Defect Value”) that is asserted by Buyer in a Title Defect Notice shall be determined in good faith based upon the criteria set forth below: 

 

     (i) If the Title Defect is a lien on any Asset, the Title Defect Value is the amount necessary to be paid to remove the lien from the affected Asset. 

 

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(ii) If the Title Defect asserted is that the Net Revenue Interest attributable to any well, unit, well location or Lease is less than that stated in Exhibit B or the Working Interest attributable to any well, unit or well location is greater than that stated in Exhibit B, then the Title Defect Value shall take into account the relative change in the interest from Exhibit B and the appropriate Allocated Value of such Asset. For purposes of this Agreement, the term “Allocated Value” means, with respect to any Asset, the amount allocated to that Asset under Section 11.01. 

 

(iii) If the Title Defect represents an obligation, encumbrance, burden or charge on the affected Asset (including any increase in Working Interest for which there is not a proportionate increase in Net Revenue Interest) for which the economic detriment to Buyer is unliquidated, the amount of the Title Defect Value shall be determined by taking into account the Allocated Value of the affected Asset, the portion of the Asset affected by the Title Defect, the legal effect of the Title Defect, the potential discounted economic effect of the Title Defect over the life of the affected Asset and the Title Defect Value placed upon the Title Defect by Buyer and Seller. 

 

(iv) If a Title Defect is not in effect or does not adversely affect an Asset throughout the entire productive life of such Asset, the consequences of that fact shall be taken into account in determining the Title Defect Value. 

 

(v) The Title Defect Value of a Title Defect shall be determined without duplication of any costs or losses included in another Title Defect Value. 

 

(vi) Notwithstanding anything in this Agreement to the contrary, in no event shall a Title Defect Value exceed the Allocated Value of the wells, units, well locations or other Assets affected by it. 

 

(vii) To give Seller an opportunity to commence reviewing possible Title Defects, Buyer shall use reasonable efforts to give Seller, on or before 5:00 p.m. Central Time each Friday prior to the expiration of the Examination Period, notice of all Title Defects discovered by Buyer during the preceding week, which notice may be preliminary in nature and supplemented prior to the expiration of the Examination Period. 

 

     Section 4.05 Remedies for Title Defects. 

 

     (a) Subject to the continuing right of Seller to dispute the existence of an asserted Title Defect and/or the asserted Title Defect Value and subject to the rights of the Parties under Section 13.01(f), if any Title Defect timely asserted by Buyer in accordance with Section 4.04(a) is not waived in writing by Buyer or cured on or before Closing, Seller shall, at its sole option, elect to: 

 

(i) subject to Section 4.05(d), reduce the Purchase Price by the Title Defect Value for the Title Defect as determined in accordance with Section 4.04(c) or Article XVIII (which shall cause such asserted Title Defect to become an Assumed Obligation under Section 16.02); 

 

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(ii) indemnify Buyer against all claims resulting from the Title Defect (an “Indemnified Title Defect”) pursuant to an indemnity agreement (the “Title Indemnity Agreement”) in the form attached to this Agreement as Exhibit F; provided, however, that without Buyer’s consent, Seller shall not be entitled to elect to indemnify Buyer under this Section 4.05(a)(ii) for any Title Defect that is a discrepancy in the Net Revenue Interest and/or Working Interest of a well, unit, well location or Lease (as compared to the Net Revenue Interest and/or Working Interest set forth in Exhibit B with respect to such Asset); or 

 

(iii) retain the entirety of the Asset that is subject to the Title Defect, together with all associated Assets, in which event the Purchase Price shall be reduced by an amount equal to the Allocated Value of the Asset and the associated Assets. 

 

(b) If any Title Defect is in the nature of an unobtained consent to assignment or other restriction on assignability, the provisions of Section 4.08 shall apply. 

 

(c) If at or before the Closing Buyer and Seller have not agreed on the validity of any asserted Title Defect or the Title Defect Value attributable to the Title Defect and Seller has not elected to indemnify Buyer with respect to the Title Defect under Section 4.05(a)(ii) or to retain the Assets associated with the Title Defect under Section 4.05(a)(iii), Buyer or Seller shall have the right to elect to have the Dispute regarding the validity of the Title Defect or the Title Defect Value determined by an Independent Expert in accordance with Article XVIII. In that event, the Purchase Price paid at Closing shall not be reduced by virtue of the disputed Title Defect or Title Defect Value, but upon the final resolution of the Dispute, the Title Defect Value, if any, found to be attributable to the Title Defect shall, subject to Section 4.05(d), be refunded by Seller to Buyer within three (3) Business Days of such resolution. 

 

(d) Notwithstanding anything to the contrary in this Agreement, but subject to Section 4.05(e), (i) if the value of a particular individual Title Defect (or individual Title Benefit, except for an Asset on which there is a Title Defect exceeding $25,000) does not exceed $25,000, then it shall be deemed to be a Permitted Encumbrance and no adjustment to the Purchase Price shall be made for the Title Defect (or Title Benefit), (ii) if the aggregate adjustment to the Purchase Price determined in accordance with this Agreement for Title Defects (after taking into account clause (i)) does not exceed two percent (2%) of the Unadjusted Purchase Price prior to any other adjustments, then they shall be deemed to be Permitted Encumbrances and no adjustment of the Purchase Price shall be made on account of Title Defects, and (iii) if the aggregate adjustment to the Purchase Price determined in accordance with this Agreement for Title Defects (after taking into account clause (i)) does exceed two percent (2%) of the Unadjusted Purchase Price prior to any other adjustments, then the Purchase Price shall be adjusted only by the amount of the excess.

 

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     (e) Notwithstanding the provisions of Section 4.05(d) and the other provisions of this Agreement, in the event Buyer asserts a Title Defect as a result of Seller’s Net Revenue Interest in any well, unit, well location or Lease being less than that stated in Exhibit B and Seller owns a fee mineral, royalty or other similar non-leasehold oil, gas or other mineral interest in such well, unit, well location or Lease, then (i) the Assets shall be deemed to include such fee mineral, royalty or other similar non-leasehold oil, gas or other mineral interest; (ii) such fee mineral, royalty or other similar non-leasehold oil, gas or other mineral interest shall be conveyed by Seller to Buyer at the Closing; (iii) to the extent the inclusion of such fee mineral, royalty or other similar non-leasehold oil, gas or other mineral interest eliminates such Net Revenue Interest deficiency, the deficiency shall not constitute a Title Defect; and (iv) to the extent the inclusion of such fee mineral, royalty or other similar non-leasehold oil, gas or other mineral interest in the Assets results in Seller’s Net Revenue Interest being greater than that stated in Exhibit B, the excess shall constitute a Title Benefit. 

 

     Section 4.06 Special Warranty of Title. The documents to be executed and delivered by Seller to Buyer transferring title to the Assets as required hereby, including the Assignment and Bill of Sale attached hereto as Exhibit E (the “Assignment”), shall provide for a special warranty of title warranting title by, through and under Seller, but not otherwise, subject to the Permitted Encumbrances and the terms of this Agreement. Buyer’s remedy for breach of Seller’s special warranty of title in the Assignment shall be limited to an amount not exceeding the Allocated Value of the affected Asset, and any claims for such breach must be asserted within eighteen (18) months from the Closing Date. Any such claims not asserted within such eighteen (18) month period shall be deemed to be Assumed Obligations. 

 

     Section 4.07 Preferential Rights To Purchase.

 

     (a) Seller shall use reasonable efforts, but without any obligation to incur any additional cost or expense, to comply with all preferential right to purchase provisions relative to any Asset (“PPRs”) prior to the Closing. Prior to the Closing, Seller shall notify Buyer of the existence of any known PPRs and if any PPRs are exercised or if the requisite period has elapsed without said rights having been exercised.

 

     (b) If, as of the Closing Date, a Third Party holder of a PPR has timely and properly notified Seller that it elects to exercise its PPR with respect to the Assets to which its PPR applies (determined by and in accordance with the agreement in which the PPR arises), then the Assets covered by that PPR will be sold to such holder of the PPR subject to the terms and conditions of this Agreement, and will not be sold to the Party originally executing this Agreement as “Buyer” (subject to the remaining provisions in this Article) and the Unadjusted Purchase Price will be reduced by the Allocated Value of such Assets. Buyer shall remain obligated to purchase the remainder of the Assets not affected by an exercised PPR. Upon the consummation of the sale of any Assets to the holder of such PPR, any such Assets shall be deemed for all purposes to constitute “Excluded Assets”. 

 

     (c) After the Closing, if for any reason the purchase and sale of the Assets covered by a PPR exercised prior to Closing under (b) above is not or cannot be 

 

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consummated with the holder of the PPR that exercised its PPR, Seller may so notify Buyer and within ten (10) Business Days after Buyer’s receipt of such notice, Seller shall sell, assign and convey to Buyer and Buyer shall purchase and accept from Seller such Assets pursuant to the terms of this Agreement and for the Allocated Value of such Assets (except the Closing Date with respect to such Assets will be the date of assignment of such Assets from Seller to Buyer). 

 

     (d) Any interest in the Assets covered by any unexercised PPRs (whether due to the PPR notice period or otherwise) shall be conveyed to Buyer at the Closing subject to any PPRs, and Buyer shall assume all duties, obligations and liabilities arising from the PPR. Without limiting the foregoing, if any Third Party elects to purchase all or a part of an interest in any Asset subject to a PPR after the Closing Date, Buyer shall be obligated to convey that interest to that Third Party and shall be entitled to the consideration for the sale of that interest. 

 

     Section 4.08 Consents to Assignment. Seller shall use reasonable efforts to obtain all necessary consents from Third Parties to assign the Assets prior to the Closing (other than approvals of any relevant Governmental Authority that are customarily obtained after the Closing), and Buyer shall assist Seller with those efforts. To the extent any such consents are not obtained prior to Closing and an express provision of the document providing for the consent would render the assignment of some or all of the Assets void or voidable, give rise to a claim for specified liquidated damages or cause the termination of the Lease or other Asset to be assigned as a result of the failure to obtain that consent, then that failure shall constitute a Title Defect as to the portion of the Assets affected thereby, and the provisions of Section 4.05(a) shall apply thereto. In all other cases, such unobtained consents shall not constitute Title Defects. 

 

     Section 4.09 Title Benefits; Remedies.

 

     (a) If either Party discovers any Title Benefit during the Examination Period affecting the Assets, it shall promptly notify the other Party at or before the expiration of the Examination Period. Subject to Section 4.05(d), Seller shall be entitled to an upward adjustment to the Purchase Price pursuant to Section 12.02(a)(iii) with respect to the Title Benefit, in an amount mutually agreed upon by the Parties. For purposes of this Agreement, the term “Title Benefit” means the Seller’s interest in any Asset that is greater than or in addition to that set forth in Exhibit B, including a Net Revenue Interest that is greater than that set forth in Exhibit B or Seller’s Working Interest in any Asset that is less than the Working Interest set forth in Exhibit B (without a corresponding decrease in the Net Revenue Interest). 

 

     (b) If, with respect to a Title Benefit, Buyer and Seller have not agreed on the amount of the upward Purchase Price Adjustment or have not otherwise agreed on such amount at or prior to the Closing, Seller or Buyer shall have the right to elect to have the Dispute regarding the Purchase Price Adjustment determined by an Independent Expert in accordance with Article XVIII. In that event, Buyer shall pay the undisputed portion of the Purchase Price with respect to the Asset affected by the Title Benefit at the Closing and, subject to Section 4.05(d), upon determination of the amount of the adjustment, shall pay to Seller any unpaid portion within three (3) Business Days of such determination. 

 

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Article V

Environmental Matters 

 

     Section 5.01 Environmental Review. 

 

     (a) Buyer shall have the right to conduct or cause a consultant reasonably acceptable to Seller (“Buyer’s Environmental Consultant”) to conduct an environmental review of the Assets prior to the expiration of the Examination Period (“Buyer’s Environmental Review”). The cost and expense of Buyer’s Environmental Review, if any, shall be borne solely by Buyer. The scope of work comprising Buyer’s Environmental Review shall be limited to a Phase I review and otherwise as may be agreed by Buyer and Seller prior to commencement. The Environmental Review shall not include any intrusive test or procedure without the prior written consent of Seller, which consent will not be unreasonably withheld. Buyer shall, and shall cause Buyer’s Environmental Consultant to, (i) consult with Seller before conducting any work comprising Buyer’s Environmental Review, (ii) perform all such work in a safe and workmanlike manner and so as to not unreasonably interfere with Seller’s operations and (iii) comply with all applicable Law. Buyer shall be solely responsible for obtaining any consents from a Third Party that are required to perform any work comprising Buyer’s Environmental Review, and Buyer shall consult with Seller prior to requesting each such consent. Seller shall have the right to have a representative or representatives accompany Buyer and Buyer’s Environmental Consultant at all times during Buyer’s Environmental Review. With respect to any samples taken in connection with Buyer’s Environmental Review, Buyer shall take split samples, providing one of each such sample, properly labeled and identified, to Seller without charge. Buyer releases, and shall defend, indemnify and hold harmless, Seller Indemnitees from and against all claims, losses, damages, costs, expenses, causes of action and judgments of any kind or character (INCLUDING THOSE RESULTING FROM SELLER’S SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY, BUT SPECIFICALLY EXCLUDING THOSE RESULTING FROM SELLER’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT) arising out of or relating to Buyer’s Environmental Review. 

 

     (b) Unless otherwise required by applicable Law, Buyer shall, and shall cause Buyer’s Environmental Consultant to, treat confidentially any matters revealed by Buyer’s Environmental Review and any reports or data generated from such review (the “Environmental Information”), and Buyer shall not, and shall cause Buyer’s Environmental Consultant to not, disclose any Environmental Information to any Governmental Authority or other Third Party without the prior written consent of Seller. Buyer may use the Environmental Information only in connection with the transactions contemplated by this Agreement. If Buyer, Buyer’s Environmental Consultant or any Third Party to which Buyer has provided any Environmental Information become legally compelled to disclose any of the Environmental Information, Buyer shall provide Seller with prompt notice sufficiently prior to any such disclosure so as to allow Seller to file any protective order or seek any other remedy, as any Seller deems appropriate under the circumstances. If this Agreement is terminated prior to the Closing, Buyer shall deliver the Environmental Information to Seller, which Environmental Information shall become the sole property of Seller without charge. 

 

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     Section 5.02 Environmental Definitions. 

 

     (a) Assumed Environmental Obligations. For purposes of this Agreement, the term “Assumed Environmental Obligations” means, with respect to Seller’s ownership and operation of the Assets or the condition of the Assets and any surface or subsurface depths used in connection with the Assets, including any pooled, communitized or unitized acreage by virtue of the Assets being a part of the pooled, communitized or unitized area (collectively, the “Subject Property”), all liabilities, losses, claims, obligations, costs or expenses arising from or relating to the following: (i) any violation or alleged violation of, or non-compliance with applicable Environmental Law prior to, on, or after the Effective Time, including the cost of correcting such violations or noncompliance and any fines or penalties arising out of such violations or noncompliance; (ii) the release, discharge or disposal of Hazardous Substances prior to, on, or after the Effective Time, at, on, in, under, from or migrating to or from the Subject Property, including claims for property damage, loss, injury, damage to natural resources, bodily injury or wrongful death, and any investigation, remediation or monitoring with respect to said Hazardous Substances; (iii) any Environmental Defects that are not Indemnified Environmental Defects; and (iv) those matters that would otherwise be Environmental Defects but for the provisions of Section 5.04(c).

 

     (b) Environmental Defects. For purposes of this Agreement, the term “Environmental Defect” means, with respect to any given Asset, an individual environmental condition identified with specificity in Buyer’s Environmental Review that constitutes a material violation of Environmental Laws in effect as of the date of this Agreement in the jurisdiction in which the affected Asset is located, excluding, however any environmental conditions deemed not to be Environmental Defects by application of Section 5.04(c).

 

     (c) Environmental Defect Value. For purposes of this Agreement, the term “Environmental Defect Value” means, with respect to any Environmental Defect, the value, as of the Closing Date, of the estimated costs and expenses to correct the Environmental Defect in the most cost-effective manner reasonably available, consistent with Environmental Laws, taking into account that non-permanent remedies (such as mechanisms to contain or stabilize hazardous materials, including monitoring site conditions, natural attenuation, risk-based corrective action, institutional controls or other appropriate restrictions on the use of property, caps, dikes, encapsulation, leachate collection systems, etc.) may be the most cost-effective manner reasonably available.

 

     (d) “Environmental Laws” means all Laws pertaining to health (as relates to exposure to Hazardous Substances) or the environment, including the Clean Air Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended, the Federal Water Pollution Control Act, as amended, the Resources Conservation and Recovery Act, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendment and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and comparable state and local laws. 

 

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     (e) Hazardous Substances. For purposes of this Agreement, the term “Hazardous Substances” means (i) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and transformers or other equipment that contain dielectric fluid which may contain levels of polychlorinated biphenyls, (ii) any chemicals, materials, or substances defined as or included in the definition of “hazardous substances,” “hazardous wastes,” “restricted hazardous materials,” “extremely hazardous substances,” “toxic substances,” “contaminants” or “pollutants” or words of similar meaning and regulatory effect or (iii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any applicable Environmental Law. 

 

     (f) Indemnified Environmental Defects. For purposes of this Agreement, the term “Indemnified Environmental Defect” means an Environmental Defect as to which Seller has elected to indemnify Buyer in accordance with Section 5.04(a)(ii).

 

     Section 5.03 Notice of Environmental Defects. If Buyer discovers any Environmental Defect affecting any Asset, Buyer shall notify Seller of the alleged Environmental Defect as promptly as possible but no later than the expiration of the Examination Period. To be effective, this notice (an “Environmental Defect Notice”) must (i) be in writing; (ii) be received by Seller prior to the expiration of the Examination Period; (iii) describe the Environmental Defect in sufficient, specific detail, including (A) the written conclusion of Buyer’s Environmental Consultant that an Environmental Defect exists, which conclusion shall be reasonably substantiated by the factual data gathered in Buyer’s Environmental Review; and (B) a separate specific citation of the provisions of Environmental Laws alleged to be violated and the related facts that substantiate such violation; (iv) identify the specific Asset or Assets affected by the Environmental Defect, including a site plan showing the location of all sampling events, boring logs and other field notes describing the sampling methods utilized and the field conditions observed, chain-of-custody documentation and laboratory reports; (v) identify the procedures recommended to correct the Environmental Defect, together with any related recommendations from Buyer’s Environmental Consultant; and (vi) state Buyer’s estimate of the Environmental Defect Value, including the basis for such estimate, for which Buyer would agree to adjust the Purchase Price to accept such Environmental Defect if Seller elected Section 5.04(a)(i) as the remedy for it. Any matters that may otherwise have constituted Environmental Defects, but that are not so described in a timely Environmental Defect Notice complying with this Section 5.03, together with any environmental matter that does not constitute an Environmental Defect, shall be deemed to have been waived by Buyer for all purposes and constitute an Assumed Obligation. After receipt of an effective Environmental Defect Notice, Seller shall have the option, but not the obligation, to attempt to cure the Environmental Defect at any time prior to the Closing and to postpone the Closing Date up to thirty (30) days beyond the date set forth in Section 12.01 to facilitate the cure. 

 

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     Section 5.04 Remedies for Environmental Defects. 

 

     (a) Subject to the continuing right of Seller to dispute the existence of an asserted Environmental Defect and/or the asserted Environmental Defect Value and subject to the rights of the Parties under Section 13.01(f), if any Environmental Defect timely asserted by Buyer in accordance with Section 5.03 is not waived in writing by Buyer or cured on or before Closing, Seller shall, at its sole option, elect to: 

 

     (i) subject to Section 5.04(c), reduce the Purchase Price by the Environmental Defect Value for the Environmental Defect as determined in accordance with Section 5.02(c) or Article XVIII (which shall cause such alleged Environmental Defect to become an Assumed Obligation under Section 16.02); 

 

     (ii) indemnify Buyer against all claims resulting from the Environmental Defect pursuant to an indemnity agreement (the “Environmental Indemnity Agreement”) in the form attached to this Agreement as Exhibit G; or 

 

     (iii) retain the entirety of the Asset that is subject to such Environmental Defect, together with all associated Assets, in which event the Purchase Price shall be reduced by an amount equal to the Allocated Value of the Asset and the associated Assets. 

 

     (b) If at or before the Closing Buyer and Seller have not agreed on the validity of any asserted Environmental Defect or the Environmental Defect Value attributable to the Environmental Defect and Seller has not elected to indemnify the Buyer with respect to the Environmental Defect under Section 5.04(a)(ii) or to retain the Assets associated with the Environmental Defect under Section 5.04(a)(iii), Buyer or Seller shall have the right to elect to have the Dispute regarding the validity of the Environmental Defect or the Environmental Defect Value determined by an Independent Expert in accordance with Article XVIII. In that event, the Purchase Price paid at Closing shall not be reduced by virtue of the disputed Environmental Defect or Environmental Defect Value, but on the final resolution of the Dispute the Environmental Defect Value, if any, found to be attributable to the Environmental Defect shall, subject to Section 5.04(c), be refunded by Seller to Buyer within three (3) Business Days of such resolution. 

 

     (c) Notwithstanding anything to the contrary in this Agreement (i) if the Environmental Defect Value for a particular individual Environmental Defect does not exceed $25,000, then no adjustment to the Purchase Price shall be made for the Environmental Defect, (ii) if the aggregate adjustment to the Purchase Price determined in accordance with this Agreement for Environmental Defects (exceeding $25,000) does not exceed two percent (2%) of the Unadjusted Purchase Price prior to any other adjustments, then no adjustment of the Purchase Price shall be made on account of Environmental Defects, and (iii) if the aggregate adjustment to the Purchase Price determined in accordance with this Agreement for Environmental Defects (exceeding $25,000) does exceed two percent (2%) of the Unadjusted Purchase Price prior to any other adjustments, then the Purchase Price shall be adjusted only by the amount of the excess. 

 

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     Section 5.05 No Warranty Regarding Environmental Matters. SELLER WILL CONVEY THE ASSETS TO BUYER WITHOUT ANY WARRANTY OF ANY KIND WITH RESPECT TO ENVIRONMENTAL MATTERS OR ENVIRONMENTAL DEFECTS, EXPRESS, STATUTORY OR IMPLIED, NOT EVEN FOR RETURN OF THE PURCHASE PRICE. BUYER’S SOLE REMEDY FOR ENVIRONMENTAL DEFECTS OR OTHER ENVIRONMENTAL MATTERS IS THE ENVIRONMENTAL DEFECT PROCEDURE UNDER THIS ARTICLE V. 

 

     Section 5.06 Physical Condition of the Assets. Buyer acknowledges that the Assets have been used by Seller for oil and gas drilling and production operations and related field operations, and that physical changes in the Assets (or adjacent lands) may have occurred as a result of those uses. In this regard, the Assets may also contain unplugged or improperly plugged wells, wellbores or buried pipelines or other equipment, whether or not of a similar nature, the locations of which may not now be known by Seller or be readily apparent by a physical inspection of the property. Buyer understands that Seller does not have the requisite information with which to determine the exact condition of the Assets or the effect that any such use has had on the physical condition of the Assets, and Seller does not make any representation or warranty with respect to those matters and Buyer expressly assumes all liability for those matters (INCLUDING THOSE RESULTING FROM SELLER’S SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY). 

 

     Section 5.07 NORM. Buyer acknowledges that some oilfield production equipment comprising the Assets may contain asbestos and/or naturally occurring radioactive material (“NORM”). In this regard, Buyer specifically acknowledges that NORM may affix or attach itself to the inside of wellbores, materials and equipment as scale or in other forms, and that wells, materials and equipment comprising the Assets or located on a Lease may contain NORM and that NORM containing materials may have been disposed of on a Lease. Buyer expressly understands that special procedures may be required for the removal and disposal of asbestos and NORM from the Assets if and where they may be found, and Buyer assumes Seller’s liability for or in connection with the assessment, remediation, removal, transportation or disposal of any such materials present on the Assets at or after the Effective Time in accordance with all requirements of any Governmental Authority (INCLUDING THOSE RESULTING FROM SELLER’S SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY). 

 

Article VI

Representations and Warranties of Seller 

 

     Seller represents and warrants to Buyer that: 

 

     Section 6.01 Seller’s Existence. Seller is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware, and has full legal power, right and authority to carry on its business as such is now being conducted and as contemplated to be conducted. 

 

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     Section 6.02 Legal Power. Seller has the legal power and right to enter into and perform this Agreement and the transactions it contemplates for Seller. The consummation of the transactions contemplated by this Agreement will not violate, or be in conflict with: 

 

     (a) any provision of Seller’s charter and operating agreement or other governing documents; 

 

     (b) except for any preferential purchase rights and consents to assignment, any material agreement or instrument to which Seller is a party or by which Seller is bound that affects any of the Assets; or 

 

     (c) any judgment, order, ruling or decree applicable to Seller as a party in interest or any Law applicable to Seller’s interest in any of the Assets. 

 

     Section 6.03 Execution. The execution, delivery and performance of this Agreement and the transactions it contemplates for Seller are duly and validly authorized by the requisite limited liability company action, as applicable, on the part of Seller. This Agreement has been duly executed and delivered by Seller (and all documents this Agreement requires be executed and delivered by Seller at Closing will be duly executed and delivered by Seller) and this Agreement constitutes, and at the Closing those other documents will constitute, the valid and binding obligations of Seller, enforceable against Seller 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). 

 

     Section 6.04 Brokers. No broker or finder is entitled to any brokerage or finder’s fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Seller or any Affiliate of Seller for which Buyer has or will have any liabilities or obligations (contingent or otherwise). 

 

     Section 6.05 Bankruptcy. There are no bankruptcy, reorganization, or similar arrangement proceedings pending, being contemplated by or, to Seller’s Knowledge, threatened against Seller. 

 

     Section 6.06 Proceedings. There is no suit, action, claim, investigation or inquiry by any Person or entity or by any administrative agency or Governmental Authority and no legal, administrative or arbitration proceeding pending or, to Seller’s Knowledge, threatened against Seller or any Affiliate of Seller or the Assets, or any of them, that has materially affected or will materially affect Seller’s ability to consummate the transactions contemplated by this Agreement. 

 

     Section 6.07 Royalties. To Seller’s Knowledge, during the Seller Ownership Period all rentals, royalties and other payments due under the Subject Interests have been paid in all material respects, except those amounts in suspense and where failure to so pay would not have a material adverse effect on the Assets, taken as a whole. The term “Seller Ownership Period” means, with respect to each Asset, the period beginning on the effective date Seller acquired ownership of the Asset and ending at the Effective Time. 

 

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     Section 6.08 Taxes. To Seller’s Knowledge, during the Seller Ownership Period, all ad valorem, property, production, severance, excise and similar taxes and assessments based on or measured by the ownership of the Assets or the production of Hydrocarbons or the receipt of proceeds of production that have become due and payable have been paid in all material respects prior to becoming delinquent, unless contested in good faith. 

 

     Section 6.09 Contracts. To Seller’s Knowledge, all of Seller’s material Contracts (a) are in full force and effect, and (b) Seller is not in default with respect to any of its material obligations under any of them. 

 

     Section 6.10 Governmental Authorizations. To Seller’s Knowledge, it has obtained and is maintaining all material federal, state and local governmental licenses, permits, franchises, orders, exemptions, variances, waivers, authorizations, certificates, consents, rights, privileges and applications for any of them (the “Governmental Authorizations”) that are presently necessary or required by Seller for its ownership and operation of the Assets as currently owned and operated by it (excluding matters arising under Environmental Laws or relating to Taxes, which are addressed exclusively under Article V and Section 6.08, respectively). 

 

     Section 6.11 No Violations of Laws. To Seller’s Knowledge, except as set forth on Schedule 6.11, Seller has not violated any applicable Law (excluding Environmental Laws and Laws relating to Taxes, which are addressed exclusively under Article V and Section 6.08, respectively) with respect to the ownership and operation of the Assets, except where such violations would not have a material adverse effect on the Assets, taken as a whole. 

 

     Section 6.12 No Prepayments. There have been no advance, take or pay or other prepayments received by Seller with respect to its interest in the Assets that would obligate Buyer to deliver Hydrocarbon production from the Assets after the Effective Time without receiving full payment.

 

     Section 6.13 AFE’s. With respect to the joint, unit or other operating agreements relating to the Assets, except as set forth in Schedule 6.13, there are no outstanding calls or payments in excess of $50,000 (net to Seller’s interest) under authorities for expenditures for payments relating to the Assets which are due or which Seller has committed to make which have not been made. 

 

     Section 6.14 Litigation. There is no suit or action pending, arising out of, or to Seller’s Knowledge threatened that would have a material adverse affect upon the ownership, operation or value of the Assets. 

 

     Section 6.15 Suspense Accounts. To Seller's Knowledge, Schedule 6.15 sets forth a true and complete listing, as of September 1, 2010, of all Third Party proceeds of Hydrocarbon production attributable to the Assets operated by Seller being held in suspense by Seller. 

 

     Section 6.16 Hydrocarbon Sales Agreements. To Seller’s Knowledge, except as set forth in Schedule 6.16, there are no sales, purchase or marketing Contracts that are currently in effect and under which Seller is a seller of Hydrocarbons produced from the Assets that provide for a fixed price and that cannot be cancelled at any time upon ninety (90) days (or less) prior notice. 

 

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     Section 6.17 Records. The Records have been maintained in the ordinary course of Seller’s business without material deletion or removal therefrom in connection with the transactions contemplated by this Agreement. 

 

Article VII

Representations and Warranties of Buyer 

 

     Buyer represents and warrants to Seller that: 

 

     Section 7.01 Buyer’s Existence. Buyer is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware, and is qualified to conduct business and in good standing in the States in which the Assets are located. Buyer has full legal power, right and authority to carry on its business as such is now being conducted and as contemplated to be conducted. 

 

     Section 7.02 Legal Power. Buyer has the legal power and right to enter into and perform this Agreement and the transactions it contemplates for Buyer. The consummation of the transactions contemplated by this Agreement will not violate, or be in conflict with: 

 

     (i) any provision of Buyer’s partnership agreement and other governing documents; 

 

     (ii) any material agreement or instrument to which Buyer is a party or by which Buyer is bound; or 

 

     (iii) any judgment, order, ruling or decree applicable to Buyer as a party in interest or any Law applicable to Buyer. 

 

     Section 7.03 Execution. The execution, delivery and performance of this Agreement and the transactions it contemplates for Buyer are duly and validly authorized by all requisite limited partnership or other action on the part of Buyer and its general partner. This Agreement has been duly executed and delivered by Buyer (and all documents this Agreement requires be executed and delivered by Buyer at Closing will be duly executed and delivered by Buyer) and this Agreement constitutes, and at the Closing those other documents will constitute, the legal, valid and binding obligation of Buyer enforceable against Buyer 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). 

 

     Section 7.04 Brokers. No broker or finder is entitled to any brokerage or finder’s fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Buyer or any Affiliate of Buyer for which Seller has or will have any liabilities or obligations (contingent or otherwise). 

 

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     Section 7.05 Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or, to Buyer’s knowledge, threatened against Buyer or any Affiliate of Buyer. 

 

     Section 7.06 Proceedings. There is no suit, action, claim, investigation or inquiry by any Person or entity or by any administrative agency or Governmental Authority and no legal, administrative or arbitration proceeding pending or, to Buyer’s knowledge, threatened against Buyer or any Affiliate of Buyer that has materially affected or will materially affect Buyer’s ability to consummate the transactions contemplated by this Agreement. 

 

     Section 7.07 Qualifications. Buyer is now, and after the Closing shall continue to be, qualified with all applicable Governmental Authorities to own and operate the Assets and has, and shall maintain, all necessary bonds to own and operate the Assets. 

 

     Section 7.08 Investment. Buyer is an “accredited investor,” as that term is defined in Regulation D of the Securities Act of 1933, as amended, and will acquire the Assets for its own account and not with a view to a sale or distribution in violation of the Securities Act of 1933, as amended, and the rules and regulations under that statute, any applicable state blue sky laws or any other applicable securities laws. Buyer understands and acknowledges that if any of the Assets were held to be securities, they would be restricted securities and could not be transferred without registration under applicable state and federal securities laws or the availability of an exemption from such registration. 

 

     Section 7.09 Funds. Buyer has arranged to have available by the Closing Date sufficient funds to enable Buyer to pay in full the Purchase Price as provided in this Agreement and otherwise to perform its obligations under this Agreement. 

 

     Section 7.10 Independent Investigation. Buyer is an experienced and knowledgeable investor in the oil, gas and mineral resources industry that has previously expended substantial amounts in the acquisition and development of oil, gas and mineral properties. Prior to entering into this Agreement, Buyer was advised by and has relied solely on its own legal, tax and other professional counsel concerning this Agreement, the Assets and their value. Buyer is knowledgeable of the usual and customary practices of producers such as Seller, including reliance on the advice of experts (e.g., reservoir and facility engineers, attorneys, tax advisors, accountants, valuation specialists and environmental consultants), and it has had (or will have prior to the Closing) access to the Assets, the officers and employees of Seller, and the books, records and files of Seller relating to the Assets, and in making the decision to enter into this Agreement and consummate the transactions contemplated by this Agreement, Buyer has relied solely on the basis of its own independent due diligence investigation of the Assets, upon the representations and warranties in Article VI and upon the covenants of Seller in this Agreement, and not on any other representations, warranties or covenants of Seller or any other Person or entity. 

 

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Article VIII

Tax-Deferred Exchange 

 

     Section 8.01 Election. At or before the Closing, Seller may elect, by notice to Buyer, to effect a tax-deferred exchange, pursuant to section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), of those Assets it owns and is transferring for other qualifying properties in accordance with this Article VIII; provided, however, that notwithstanding anything to the contrary in this Article VIII, under no circumstances shall the consummation of the transactions contemplated by this Agreement be delayed, directly or indirectly, as a result of any such tax-deferred exchange. 

 

     Section 8.02 Qualified Intermediary. If Seller makes a tax-deferred exchange election under this Article VIII, Seller may elect, by notice to Buyer delivered on or before the Closing Date, to have all or a portion of the Purchase Price paid to a qualified intermediary.

 

     Section 8.03 Additional Costs. If Seller makes a tax-deferred exchange election under this Article VIII, Buyer shall not be required to incur any additional cost, liability or obligation. 

 

     Section 8.04 Indemnification. If Seller makes a tax-deferred exchange election, it shall release, indemnify, defend and hold harmless Buyer from any responsibility or liability related to such election.

 

Article IX

Seller’s Conditions to Close 

 

     The obligations of Seller to consummate the transaction provided for in this Agreement are subject, at the option of Seller, to the fulfillment on or prior to the Closing Date of each of the following conditions: 

 

     Section 9.01 Representations. The representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and on the Closing Date as though made on and as of those dates. 

 

     Section 9.02 Performance. Buyer shall have performed all material obligations, covenants and agreements contained in this Agreement to be performed or complied with by it at or prior to the Closing. 

 

     Section 9.03 Pending Matters. No suit, action or other proceeding shall be pending or threatened against any Party that seeks to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by this Agreement. 

 

Article X

Buyer’s Conditions to Close 

 

     The obligations of Buyer to consummate the transaction provided for in this Agreement are subject, at the option of Buyer, to the fulfillment on or prior to the Closing Date of each of the following conditions: 

 

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     Section 10.01 Representations. The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and on the Closing Date as though made on and as of those dates. 

 

     Section 10.02 Performance. Seller shall have performed all material obligations, covenants and agreements contained in this Agreement to be performed or complied with by it at or prior to the Closing. 

 

     Section 10.03 Pending Matters. No suit, action or other proceeding shall be pending or threatened against any Party that seeks to restrain, enjoin, or otherwise prohibit the consummation of the transactions contemplated by this Agreement. 

 

Article XI

Purchase Price Allocation and Tax Matters 

 

     Section 11.01 Purchase Price Allocation. The Unadjusted Purchase Price has been allocated among the Assets by Buyer as set forth in Exhibit D. Buyer represents that the Allocated Values constitute reasonable and good faith allocations of the Unadjusted Purchase Price among the Assets. Seller and Buyer agree that the Allocated Values shall be used to compute any adjustments to the Unadjusted Purchase Price pursuant to this Agreement. 

 

     Section 11.02 Transfer Taxes. Buyer shall be responsible for the timely payment of, and shall indemnify and hold harmless Seller (and its members, managers, officers, employees and agents) from and against, all Transfer Taxes, if any, arising out of or in connection with the transactions contemplated by this Agreement, including any and all legal costs associated with them. Buyer shall prepare and file when due all necessary documentation and Tax Returns with respect to any such Transfer Taxes; provided, however, that Seller shall cooperate with Buyer and take any action reasonably requested by Buyer which does not cause Seller to incur any cost or inconvenience to minimize any such Transfer Taxes. For purposes of this Agreement, the term “Transfer Taxes” means any and all transfer Taxes (excluding Taxes measured in whole or in part by net income), including sales, use, excise, stock, conveyance, gross receipts, registration, business and occupation, securities transactions, real estate, stamp, documentary, notarial, filing, recording, permit, license, authorization and similar Taxes, fees, duties, levies, customs, tariffs, imposts, assessments, obligations and charges. 

 

     Section 11.03 Audit Rights. Seller shall cooperate with Buyer and make available, during normal business hours, to Buyer and its representatives prior to and following the Closing any and all existing information and documents relating to revenues and expenses attributable to the Assets and in the possession of Seller (subject to the rights of Third Parties) that Buyer may reasonably require to comply with Buyer’s tax and financial reporting requirements and audits, including any filings with any Governmental Authority and filings that may be required by the Securities and Exchange Commission under the Securities Act of 1933 and/or the Securities Exchange Act of 1934. Without limiting the generality of the foregoing, Seller will use its commercially reasonable efforts after execution of this Agreement and following Closing to cooperate with the independent auditors chosen by Buyer (“Buyer’s Auditor”) in connection with their audit or review of any revenue and expense records pertaining to the Assets that Buyer or any of its Affiliates requires to comply with their tax, financial and other reporting requirements. Seller’s cooperation will include (i) reasonable access during normal business hours to Seller’s employees and representatives designated by Seller who were responsible for preparing or maintaining the revenue and expense records and work papers and other supporting documents used in the preparation of such financial statements as may be required by Buyer’s Auditor to perform an audit or conduct a review in accordance with generally accepted auditing standards or to otherwise verify such financial statements; and (ii) delivery of one or more customary representation letters from Seller to Buyer’s Auditor that are reasonably requested by Buyer to allow such auditors to complete an audit (or review of any financial statements), and to allow Buyer’s Auditor to issue an opinion with respect to its audit or review. Buyer will pay or, if paid, reimburse Seller, within ten (10) Business Days after demand therefor, for any reasonable out-of-pocket and overhead costs incurred by Seller in complying with the provisions of this Section 11.03. 

 

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Article XII

The Closing 

 

     Section 12.01 Time and Place of the Closing. If the conditions referred to in Articles IX and X of this Agreement have been satisfied or waived in writing, and subject to any extensions pursuant to Sections 4.04(b), 5.03 or 13.01(f) or by written agreement of the Parties or as the Parties otherwise may agree in writing, the transactions contemplated by this Agreement (the “Closing”) shall take place at the offices of Seller, whose address is 550 W. Texas Ave., Suite 100, Midland, Texas 79701, or at such other place reasonably designated by Seller, on December 22, 2010 (the “Closing Date”). 

 

     Section 12.02 Adjustments to Purchase Price at the Closing. 

 

     (a) At the Closing, the Purchase Price shall be increased by the following amounts: 

 

     (i) an amount equal to all prepaid ad valorem, property and similar taxes and assessments based upon or measured by the ownership of the Assets, and any prepaid costs, including rentals and insurance premiums, insofar as such prepaid taxes and costs relate to periods of time after the Effective Time; 

 

     (ii) an amount equal to all operating and capital costs and expenses (including without limitation rentals, royalties drilling costs, capital expenditures, lease operating expenses, expenses incurred under applicable operating agreements and overhead charges allowable under applicable accounting procedures (COPAS), and including any charges incurred by Seller as non-operator, or in the absence of an operating agreement, those customarily billed under such agreements) previously paid by Seller that are attributable to the Assets and attributable to the period of time from and after the Effective Time; 

 

     (iii) all increases to the Purchase Price for Title Benefits provided in Section 4.09;

 

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     (iv) the value of all merchantable Hydrocarbons produced prior to the Effective Time but in storage above the sales connection or upstream of the applicable sales meter as of the Effective Time, such value to be the actual price received for such Hydrocarbons upon the first sale thereof or absent a sale, then such value shall be based upon the average market price posted in the area for Hydrocarbons of similar quality and grade in effect as of the Effective Time, less all applicable royalties, taxes, gravity adjustments and transportation expenses necessary to market such production;

 

     (v) all proceeds actually paid to Buyer from sales of Hydrocarbons that are produced and saved prior to the Effective Time and any other revenues paid to Buyer that arise out of the ownership or operation of the Assets prior to the Effective Time; 

 

     (vi) an amount equal to all Taxes (other than income taxes, ad valorem, property and similar taxes) that are incurred and paid by Seller in connection with the ownership or operation of the Assets from and after the Effective Time; 

 

     (vii) for all wells located on the Leases and operated by Seller or any of its Affiliates, a monthly overhead fee of $800.00, prorated for partial months, per well while Seller is operating the Assets from and after the Effective Time; and 

 

     (viii) any other amounts provided for in this Agreement or agreed by Buyer and Seller. 

 

(b) At the Closing, the Purchase Price shall be decreased by the following amounts: 

 

     (i) an amount equal to all unpaid ad valorem, property and similar taxes and assessments based upon or measured by the ownership of the Assets insofar as such unpaid taxes relate to periods of time prior to the Effective Time, which amount shall, to the extent not actually assessed, be computed based on such taxes and assessments for the preceding taxable year (such amount to be prorated for the period of Seller’s ownership prior to the Effective Time); 

 

     (ii) all proceeds actually collected by Seller from sales of Hydrocarbons that are produced and saved from and after the Effective Time and any other cash receipts of Seller arising out of the ownership or operation of the Assets from and after the Effective Time; 

 

     (iii) the Allocated Value of any Subject Interest covered by an exercised PPR pursuant to Section 4.07(b); 

 

     (iv) all reductions in the Purchase Price for Title Defects provided in Article IV and for Environmental Defects provided in Article V; 

 

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(v) an amount equal to all cash in, or attributable to, suspense accounts relative to the Assets for which Buyer has assumed responsibility under Section 16.02; and 

 

(vi) any other amount provided for in this Agreement or agreed by Buyer and Seller. 

 

(c) The adjustments described in Sections 12.02(a) and (b) above are referred to as the “Purchase Price Adjustments.” To the extent that the amount of any Purchase Price Adjustment is not determinable with certainty by Seller prior to the Closing, the amount of such Purchase Price Adjustment shall be determined by Seller based upon Seller’s good faith estimate. 

 

     Section 12.03 Closing Statement. Not later than the third Business Day prior to the Closing Date, Seller shall prepare and deliver to Buyer a statement (the “Closing Statement”) of (a) the estimated Purchase Price Adjustments, and (b) a credit for the Deposit as described in Section 3.02(b). At the Closing, Buyer shall pay the Purchase Price as so estimated to Seller in immediately available federal funds, as adjusted by the Purchase Price Adjustments and the credit for the Deposit reflected on the Closing Statement. 

 

     Section 12.04 Actions of Seller at the Closing. At the Closing, Seller shall: 

 

(a) execute, acknowledge and deliver to Buyer the Assignment, in sufficient counterparts for filing in each appropriate county, and such other instruments (in form and substance agreed by Buyer and Seller) as may be reasonably necessary to convey the Assets to Buyer, including appropriate state and federal assignments of record title and operating rights; 

 

(b) upon request of Buyer, execute and deliver to Buyer letters in lieu of transfer or division orders directing all purchasers of Hydrocarbon production from the Subject Interests to make payment of proceeds attributable to such production to Buyer from and after the Effective Time; 

 

(c) execute and deliver to Buyer the Closing Statement; 

 

(d) deliver to Buyer possession of the Assets; 

 

(e) deliver to Buyer a certificate under Section 1445(b)(2) of the Code executed by Seller, providing that Seller is not a foreign Person; 

 

(f) execute and deliver to Buyer appropriate change of operator forms on those Assets operated by Seller or its Affiliates; 

 

(g) deliver to Buyer recorded or recordable releases of all mortgage liens, security interests and financing statements granted by Seller that encumber the Assets, if any; 

 

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     (h) deliver to Buyer a Closing Certificate dated as of the Closing Date, executed by an executive officer of Seller, certifying that all of the conditions set forth in Section 10.01 and Section 10.02 have been satisfied; and 

 

     (i) execute, acknowledge and deliver any other agreements provided for in this Agreement or necessary or desirable to effectuate the transactions contemplated by this Agreement as may be reasonably requested by Buyer.

 

     Section 12.05 Actions of Buyer at the Closing. At the Closing, Buyer shall: 

 

     (a) deliver to Seller the Purchase Price in immediately available federal funds (with the adjustments and credits provided in Section 12.03) by wire transfer to accounts designated by notice to Buyer from Seller on or before the second Business Day before the Closing; 

 

     (b) execute and deliver to Seller the Closing Statement; 

 

     (c) deliver to Seller evidence of Buyer’s compliance with the requirements of Section 7.07; 

 

     (d) deliver to Seller a Closing Certificate dated as of the Closing Date, executed by the general partner of Buyer, certifying that all of the conditions set forth in Section 9.01 and Section 9.02 have been satisfied; 

 

     (e) take possession of the Assets; and 

 

     (f) execute, acknowledge and deliver the Assignment and any other agreements provided for in this Agreement or necessary or desirable to effectuate the transactions contemplated by this Agreement. 

 

Article XIII

Termination 

 

     Section 13.01 Right of Termination. This Agreement may be terminated at any time at or prior to the Closing: 

 

     (a) by written consent of Buyer and Seller; 

 

     (b) by Seller on the Closing Date if the conditions set forth in Article IX have not been satisfied in all material respects or waived by Seller; 

 

     (c) by Buyer on the Closing Date if the conditions set forth in Article X have not been satisfied in all material respects or waived by Buyer; 

 

     (d) by Seller, by notice to Buyer on or after February 1, 2011, if the Closing shall not have occurred;

 

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     (e) by Buyer or Seller if any Governmental Authority shall have issued an order, judgment or decree or taken any other action challenging, delaying, restraining, enjoining, prohibiting or invalidating the consummation of any of the transactions contemplated by this Agreement; or 

 

     (f) by Buyer or Seller if (i) the aggregate amount of the Purchase Price Adjustments agreed by the Parties or otherwise finally determined pursuant to this Agreement with respect to Title Defect Values attributable to all uncured Title Defects (net of the aggregate amount of the Purchase Price Adjustments for all Title Benefits) determined in accordance with Article IV, plus (ii) the aggregate amount of the Purchase Price Adjustments agreed to by the Parties or otherwise finally determined pursuant to this Agreement with respect to Environmental Defect Values attributable to all uncured Environmental Defects determined in accordance with Article V, exceeds twenty percent (20%) of the Unadjusted Purchase Price; provided, however, that if a Dispute regarding the existence or value of any of the foregoing is subject to resolution in accordance with Article XVIII, Seller shall have the right and option to postpone the Closing Date, and if Seller exercises such right neither Party may terminate this Agreement pursuant to this Section 13.01(f), until each such Dispute is resolved; 

 

provided, however, that no Party shall have the right to terminate this Agreement pursuant to clause (b), (c), (d) or (f) above if that Party is at the time in material breach of any provision of this Agreement. 

 

     Section 13.02 Effect of Termination. If the Closing does not occur as a result of any Party exercising its right to terminate pursuant to Section 13.01, then except as provided in Sections 13.02, 13.04 and 13.05, this Agreement shall be null and void and no Party shall have any further rights or obligations under this Agreement, except that a Party shall continue to be liable for any breach of this Agreement or any liability that has accrued prior to the date of termination or results from any event occurring prior to termination. Notwithstanding anything to the contrary contained in this Agreement, upon any termination of this Agreement pursuant to this Article XIII, 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 person without any restriction under this Agreement or claim by Buyer hereunder. 

 

     Section 13.03 Termination Damages. 

 

     (a) If this Agreement is terminated as provided in Section 13.01(b), then Seller shall retain the Deposit as liquidated damages on account of such termination, which remedy shall be the sole and exclusive remedy available to Seller. Buyer and Seller acknowledge and agree that (i) Seller’s actual damages upon such a termination are difficult to ascertain with any certainty, (ii) that the Deposit is a reasonable estimate of such actual damages and (iii) such liquidated damages do not constitute a penalty. 

 

     (b) If this Agreement is terminated as provided in Sections 13.01 (a), (c), (d), (e) or (f), then within three (3) Business Days after termination Seller shall return to Buyer in immediately available funds the Deposit. 

 

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     Section 13.04 Return of Documents and Confidentiality. On termination of this Agreement, Buyer shall return to Seller all title, engineering and other data, reports, maps and other information furnished by Seller or any Affiliates or Advisors of Seller to Buyer or prepared by or on behalf of Buyer in connection with its due diligence investigation of the Assets, together with all copies of the foregoing, and an officer of Buyer shall certify same to Seller in writing. 

 

     Section 13.05 Damages. Notwithstanding anything to the contrary in this Agreement, in no event shall any Party be entitled to receive any punitive, indirect or consequential damages unless they are a part of a Third Party claim for which a Party is seeking indemnification under this Agreement, REGARDLESS OF WHETHER CAUSED OR CONTRIBUTED TO BY THE SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF THE OTHER PARTY. 

 

Article XIV

Post Closing Obligations 

 

     Section 14.01 Gas Imbalances. The Gas Imbalances attributable to the Subject Interests as of the Effective Time of which Seller has Knowledge are set forth on Schedule 14.01 (the “Agreed Imbalance”). For purposes of this Agreement, “Gas Imbalances” means overproduction or under-production subject to an imbalance or make-up obligation with respect to gas produced from or allocated to the Subject Interests, regardless of whether such overproduction or under-production, imbalance or make-up obligation arises at the wellhead, pipeline, gathering system, transportation or other location and regardless of whether the same arises under contract or by operation of Law. Buyer and Seller shall jointly verify the actual net gas imbalances as of the Effective Time in the Accounting Statement and any Agreed Imbalance shall be accounted for between the Parties in the Accounting Statement at the New York Mercantile Exchange (NYMEX) closing price per MCF on the third (3rd) Business Day preceding the Effective Time. This settlement shall be final and neither Party afterwards shall make claim upon the other Party concerning the Gas Imbalances. BUYER ASSUMES ALL RIGHTS AND LIABILITIES RELATING TO GAS IMBALANCES DISCOVERED AFTER THE FINAL STATEMENT INCLUDING ANY REVENUE ADJUSTMENT CAUSED BY SUCH SUBSEQUENTLY DISCOVERED GAS IMBALANCES AND AGREES TO DEFEND AND INDEMNIFY SELLER FROM AND AGAINST ANY CLAIM, BY ANYONE, ARISING OUT OF SUCH GAS IMBALANCES REGARDLESS OF SELLER’S NEGLIGENCE OR FAULT (INCLUDING STRICT LIABILITY). 

 

     Section 14.02 Final Accounting Statement. 

 

     (a) On or before the one hundred twentieth (120th) day after the Closing Date, Seller shall prepare and deliver to Buyer a revised Closing Statement setting forth a detailed calculation of the actual Purchase Price Adjustments (the “Accounting Statement”). The Accounting Statement shall include any adjustment or payment which was not finally determined as of the Closing Date, including any Gas Imbalances, and the allocation of revenues and expenses as determined in accordance with Section 12.02. Seller shall provide Buyer such data and information as Buyer reasonably may request supporting the amounts reflected on the Accounting Statement to permit Buyer to agree to the Accounting Statement. The Accounting Statement shall become final and binding on the Parties on the 31st day following receipt by Buyer (the “Final Settlement Date”) unless Buyer gives written notice of its disagreement (a “Notice of Disagreement”) to Seller prior to that date, and upon such Notice of Disagreement, the Accounting Statement will be final and binding with respect to all matters other than those specified in the Notice of Disagreement. Any Notice of Disagreement shall specify in detail the dollar amount, nature and basis of any disagreement so asserted. If a Notice of Disagreement is received by Seller in a timely manner, then the Parties shall resolve the Dispute evidenced by the Notice of Disagreement in accordance with Article XVIII. 

 

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     (b) If the amount of the Purchase Price as set forth on the Final Statement exceeds the amount of the estimated Purchase Price paid at the Closing, then Buyer shall pay to Seller the amount by which the Purchase Price as set forth on the Final Statement exceeds the amount of the estimated Purchase Price paid at the Closing on or before the third (3rd) Business Day after the Final Settlement Date (or within the third (3rd) Business Day of resolution of the Final Statement by an Independent Expert, if applicable). If the amount of the Purchase Price as set forth on the Final Statement is less than the amount of the estimated Purchase Price paid at the Closing, then Seller shall refund to Buyer the amount by which the Purchase Price as set forth on the Final Statement is less than the amount of the estimated Purchase Price paid at the Closing on or before the third (3rd) Business Day after the Final Settlement Date (or within the third (3rd) Business Day of resolution of the Final Statement by an Independent Expert, if applicable. For purposes of this Agreement, the term “Final Statement” means (i) the final Accounting Statement as finalized pursuant to Section 14.02(a), or (ii) upon resolution of any Dispute regarding a Notice of Disagreement, the final Accounting Statement reflecting those resolutions. 

 

     (c) The Parties agree that any and all payments pursuant to this Agreement shall, to the maximum extent permitted by applicable Law, be treated for all Tax purposes as an adjustment to the Purchase Price. 

 

     Section 14.03 Further Cooperation. Seller shall make the Records available to be picked up by Buyer at the offices of Seller during normal business hours within ten (10) Business Days after the Closing to the extent the Records are in the possession of Seller and are not subject to contractual restrictions on transferability. Seller shall have the right to retain copies of any of the Records and the rights granted under Section 19.04. 

 

     Section 14.04 After the Closing. After the Closing Date, Seller and Buyer, at the request of the other and without additional consideration, shall execute and deliver, or shall cause to be executed and delivered, from time to time such further instruments of conveyance and transfer and shall take such other action as the other reasonably may request to convey and deliver the Assets to Buyer and to accomplish the orderly transfer of the Assets to Buyer in the manner contemplated by this Agreement. After the Closing, the Parties will cooperate to have all proceeds received attributable to the Assets be paid to the proper Party under this Agreement and to have all expenditures to be made with respect to the Assets be made by the proper Party under this Agreement. To the extent a Party receives funds after the Closing Date, other than funds described in and allocated pursuant to Section 12.02(a) or (b), to which another Party is entitled, the receiving Party will promptly transfer such funds to the Party so entitled. To the 

extent a Party receives any invoice or statement after the Closing Date that is the responsibility of another Party, the receiving Party will promptly send the invoice or statement to the appropriate Party. 

 

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Article XV

Operation of the Assets 

 

     Section 15.01 Operations. From and after the date of this Agreement until the Closing, except as expressly contemplated by this Agreement, as expressly consented to in writing by Buyer (which consent will be conclusively presumed to have been given as of 5:00 p.m. Midland time on the third (3rd) Business Day following notice to Buyer requesting the consent unless Buyer has notified Seller that it does not consent), or in situations in which emergency action is taken in the face of risk to life, property or the environment, Seller shall: 

 

     (a) operate and maintain the Subject Interests operated by Seller or an Affiliate of Seller in the usual, regular and ordinary manner consistent with past practice; 

 

     (b) except to the extent necessary to maintain the Leases, not enter into a material Contract, or materially amend or change the terms of any such Contract that would involve individual commitments of more than $50,000, net to the Working Interest of Seller;

 

     (c) Except to the extent necessary or advisable to avoid forfeiture or penalties, not enter into agreements to drill new wells or to rework, plug back, deepen, plug or abandon any well located on the Leases, nor commence any drilling, reworking or completing or other operations on the Leases which requires estimated expenditures exceeding $50,000, net to the Working Interest of Seller, for each operation (except for emergency operations and operations required under presently existing authorizations for expenditures described on Schedule 6.13) without obtaining the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned); provided that the terms of this paragraph (c) shall not apply to any expenditures of Seller which will not be charged to Buyer; 

 

     (d) unless required by Law or a Governmental Authority, not plug or abandon any well located on the Subject Interests that is identified on Exhibit B as producing; 

 

     (e) not transfer, sell, mortgage, farmout, hypothecate, pledge or otherwise dispose of any material portion of the Subject Interests other than the sale and/or disposal of Hydrocarbons in the ordinary course of business and sales of equipment that is no longer necessary in the operation of the Subject Interests or for which replacement equipment has been obtained;

 

     (f) not release, terminate or materially amend any material Lease or Easement;

 

     (g) not voluntarily relinquish its position as Operator to anyone other than Buyer with respect to any of the operated Assets; and

 

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     (h) to the extent Seller has Knowledge thereof, provide Buyer with written notice of (i) any claims, demands, suits or actions made against Seller which materially affect the Assets; or (ii) any proposal from a Third Party to engage in any material transaction (e.g., a farmout) with respect to the Assets. 

 

     Section 15.02 Limitations on the Operational Obligations and Liabilities of Seller. 

 

     (a) Buyer acknowledges that Seller owns undivided interests in some or all of the Assets, and Buyer agrees that, as long as Seller has voted its interests in a manner that complies with the provisions of this Article XV, the acts or omissions of the other working interest owners shall not constitute a violation of the provisions of this Article XV, nor shall any action required by a vote of working interest owners constitute such a violation. To the extent that Seller or an Affiliate of Seller is not the operator of an Asset, the obligations of Seller in this Article XV shall be construed to require that Seller use reasonable efforts (without being obligated to incur any material expense or institute any cause of action) to cause the operator of that Asset to take such actions or render such performance within the constraints of the applicable operating agreements and other applicable agreements. 

 

     (b) Notwithstanding anything to the contrary in this Article XV, Seller shall have no liability to Buyer for, and Buyer agrees to release, defend, indemnify and hold harmless Seller, its members, managers, Affiliates, co-lessees, co-venturers and their respective officers, directors, managers, employees, agents, partners, representatives, members, shareholders, Affiliates, subsidiaries, successors and assigns (collectively, “Seller Indemnitees”) from, the incorrect payment of delay rentals, royalties, shut-in royalties or similar payments or for any failure to pay any such payments through mistake or oversight (INCLUDING THOSE RESULTING FROM SELLER INDEMNITEES’ SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY) to the extent that such payments relate to periods after the Effective Time. In no event shall Buyer’s remedy for Seller’s breach of its obligations under this Article XV exceed the Allocated Value of the Subject Interest affected by such breach. 

 

     Section 15.03 Operation of the Assets after the Closing. It is expressly understood and agreed that Seller shall not be obligated to continue operating any of the Assets following the Closing and Buyer assumes full responsibility for operating (or causing the operation of) all Assets following the Closing. Seller does not warrant or guarantee that Buyer will become the operator of the Assets or any portion of the Assets, as such matter will be controlled by the applicable joint operating agreement(s). Without implying any obligation on a Seller’s part to continue operating any Assets after the Closing, if a Seller elects to continue to operate any Assets following the Closing at the request of Buyer or any Third Party working interest owner, due to constraints of applicable joint operating agreement(s), failure of a successor operator to take over operations or other reasonable cause, the continued operation by Seller shall be for the account of Buyer, at the sole risk, cost and expense of Buyer. Buyer releases and agrees to indemnify Seller Indemnitees, as a part of the Assumed Obligations, from all claims, losses, damages, costs, expenses, causes of action and judgments of any kind or character (INCLUDING THOSE RESULTING FROM SELLER INDEMNITEES’ SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY) with respect to (a) continued operations by Seller, (b) Buyer’s assumption of operations from Seller, and (c) compliance with the terms of any applicable joint operating agreement related to the election of a successor operator. Buyer shall conduct or cause to be conducted all operations on the Assets after Closing in a good and workmanlike manner and in compliance with all applicable Law and agreements. 

 

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     Section 15.04 Change in Circumstances; Casualty Loss. 

 

     (a) Buyer shall assume all risk of loss with respect to, and any change in the condition of, the Assets from the Effective Time until the Closing, including with respect to the depletion of Hydrocarbons, the watering-out of any well, the collapse of casing, sand infiltration of wells and damage to and depreciation of property, including normal wear and tear. 

 

     (b) If after the Effective Time and prior to the Closing any part of the Assets shall be damaged or destroyed by fire or other casualty or if any part of the Assets shall be taken in condemnation or under the right of eminent domain or if proceedings for such purposes shall be pending or threatened, this Agreement shall remain in full force and effect notwithstanding any such destruction, taking or proceeding, or the threat of any such destruction, taking or proceeding, and the Parties shall proceed with the transactions contemplated by this Agreement notwithstanding such destruction or taking without reduction of the Purchase Price, but subject to Section 15.04(c). Seller shall maintain its insurance coverage with respect to the Assets from the date of this Agreement until Closing. 

 

     (c) Notwithstanding Section 15.04(a), in the event of any loss described in Section 15.04(b), at the Closing, Seller shall pay to Buyer all sums paid to Seller by Third Parties by reason of the destruction or taking of such Assets (up to the Allocated Value), including any sums paid pursuant to any policy or agreement of insurance or indemnity, and shall assign, transfer and set over unto Buyer all of the rights, title and interest of Seller in and to any claims, causes of action, unpaid proceeds or other payments from Third Parties, including any policy or agreement of insurance or indemnity, arising out of such destruction or taking (up to the Allocated Value).

 

Article XVI

Obligations and Indemnification 

 

     Section 16.01 Retained Obligations. Provided that the Closing occurs and subject to Section 16.04, Seller shall retain (but only to the extent Buyer has provided Seller with a timely Claim Notice in accordance with Section 16.04(a) and not otherwise, and only to the extent the same do not constitute Permitted Encumbrances, Indemnified Title Defects, Assumed Environmental Obligations or Indemnified Environmental Defects) all costs, expenses, liabilities and obligations of Seller related to (a) the payment or improper payment of royalties, rentals and other similar payments by Seller under the Leases accruing prior to the Effective Time; (b) claims of Third Parties for personal injury, death or property damage to the extent occurring prior to the Effective Time as a result of the operation of the Assets by Seller; (c) the 

 

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mispayment or non-payment of ad valorem, property, severance, production and similar taxes attributable to the Assets prior to the Effective Time; (d) claims of Third Parties arising in connection with the breach by Seller of any representation or warranty set forth in this Agreement that survives Closing; (e) claims against Seller by co-working interest owners in the Assets for matters occurring prior to the Effective Time in connection with Seller’s operation of the Assets; and (f) any contamination or condition that is a result of any off-site disposal by Seller of any Hazardous Substances produced from the Leases on, in or below any properties not included in the Assets prior to the Effective Time, for which, and to the extent, that remediation of such contamination or condition is required by any Environmental Law (collectively, the “Retained Obligations”). 

 

     Section 16.02 Assumed Obligations. Provided that the Closing occurs, Buyer hereby assumes all duties, obligations and liabilities of every kind and character with respect to the Assets or the ownership or operation of the Assets (other than the Retained Obligations), whether attributable to periods before, at or after the Effective Time REGARDLESS OF WHETHER CAUSED OR CONTRIBUTED TO BY THE SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF THE SELLER INDEMNITEES, including those arising out of (a) the terms of the Easements, Contracts, Leases, Personal Property or Subject Interests comprising part of the Assets; (b) Gas Imbalances; (c) suspense accounts; (d) the condition of the Assets, regardless of whether such condition arose before or after the Effective Time; (e) obligations to properly plug and abandon or re-plug or re-abandon or remove or bury wells, flowlines, gathering lines or other facilities, equipment or other personal property or fixtures comprising part of the Assets; (f) the Assumed Environmental Obligations; (g) alleged Title Defects that are deemed to constitute Assumed Obligations under Article IV; (h) the obligations and liabilities described in Section 16.01 to the extent Buyer does not provide Seller with a Claim Notice complying with Section 16.05 on or before the day occurring one (1) year after the Closing; (i) all unpaid ad valorem, property and similar taxes and assessments based upon or measured by the ownership of the Assets; (j) any other duty, obligation, event, condition or liability assumed by Buyer under the terms of this Agreement; and (k) any Retained Obligation as to which Seller does not have, or no longer has, an obligation to indemnify Buyer in accordance with the terms of this Agreement (collectively, the “Assumed Obligations”). 

 

     Section 16.03 Buyer’s Indemnification. PROVIDED THAT THE CLOSING OCCURS, BUYER SHALL RELEASE, DEFEND, INDEMNIFY AND HOLD HARMLESS SELLER INDEMNITEES FROM AND AGAINST ANY AND ALL CLAIMS, DAMAGES, LIABILITIES, LOSSES, CAUSES OF ACTION, COSTS AND EXPENSES (INCLUDING THOSE INVOLVING THEORIES OF NEGLIGENCE OR STRICT LIABILITY OR PRE-EXISTING DEFECTS AND INCLUDING COURT COSTS AND ATTORNEYS’ FEES) (COLLECTIVELY, THE “LOSSES” OR IN THE SINGULAR, A “LOSS”) AS A RESULT OF, ARISING OUT OF, OR RELATED TO THE ASSUMED OBLIGATIONS, REGARDLESS OF WHETHER CAUSED OR CONTRIBUTED TO BY THE SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF ANY OF THE SELLER INDEMNITEES. 

 

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     Section 16.04 Seller’s Indemnification. PROVIDED THAT THE CLOSING OCCURS, SELLER SHALL RELEASE, DEFEND, INDEMNIFY AND HOLD HARMLESS BUYER, ITS PARTNERS, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, MEMBERS, SHAREHOLDERS, AFFILIATES AND SUBSIDIARIES (COLLECTIVELY, THE “BUYER INDEMNITEES”) FROM AND AGAINST ANY AND ALL LOSSES AS A RESULT OF, ARISING OUT OF, OR RELATED TO THE RETAINED OBLIGATIONS, REGARDLESS OF WHETHER CAUSED OR CONTRIBUTED TO BY THE SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF ANY OF THE BUYER INDEMNITEES; provided, however, notwithstanding anything to the contrary contained in this Agreement, (a) Seller’s indemnification obligation under this Section 16.04 shall apply only if and to the extent Buyer provides Seller with a Claim Notice complying with Section 16.05 on or before the day occurring one (1) year after the Closing, (b) Buyer shall bear sole responsibility for the aggregate costs associated with all such claims up to a threshold percentage of two percent (2%) of the Unadjusted Purchase Price, it being intended by the Parties that Seller be obligated only to the extent of those costs exceed two percent (2%) of the Unadjusted Purchase Price, and (c) Seller’s aggregate indemnification liability is limited to an amount equal to fifty percent (50%) of the Unadjusted Purchase Price. INDEMNIFICATION UNDER THIS SECTION 16.04 SHALL BE BUYER’S SOLE AND EXCLUSIVE REMEDY WITH RESPECT TO ANY RETAINED OBLIGATION OR ANY BREACH OF ANY REPRESENTATION OR WARRANTY OF SELLER MADE IN ARTICLE VI, AND SELLER’S LIABILITY WITH RESPECT TO ANY RETAINED OBLIGATION OR BREACH OF ANY REPRESENTATION OR WARRANTY OF SELLER MADE IN ARTICLE VI SHALL BE SUBJECT TO THE PROCEDURES AND LIMITATIONS ON TIMING AND AMOUNT PROVIDED IN THIS SECTION 16.04 AND IN SECTION 16.05. 

 

     Section 16.05 Notices and Defense of Indemnified Matters. 

 

     (a) For purposes of this Section 16.05, the term “Indemnifying Party” when used in connection with particular Losses shall mean the party or parties having an obligation to indemnify another party or parties with respect to such losses pursuant to this Agreement, and the term “Indemnified Party” when used in connection with particular Losses shall mean the party or parties having the right to be indemnified with respect to such Losses by another party or parties pursuant to this Agreement. 

 

     (b) To make claim for indemnification under any of Section 16.03 or 16.04, an Indemnified Party must notify the Indemnifying Party of its claim under this Section 16.05, including the specific details of and specific basis under this Agreement for its claim (the “Claim Notice”). In the event that the claim for indemnification is based upon a claim by a third party against the Indemnified Party (a “Claim”), the Indemnified Party shall provide its Claim Notice promptly after the Indemnified Party has actual knowledge of the Claim and shall enclose a copy of all papers (if any) served with respect to the Claim; provided, however, that the failure of any Indemnified Party to give timely notice of a Claim as provided in this Section 16.05 shall relieve the Indemnifying Party of its obligations under Section 16.03 or 16.04 (as applicable) only to the extent that failure results in insufficient time being available to permit the Indemnifying Party to defend effectively against the Claim or otherwise materially prejudices the Indemnifying Party’s ability to defend against the Claim. 

 

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     (c) In the case of a claim for indemnification based upon a Claim, the Indemnifying Party, on or before the 30th day after its receipt of the Claim Notice, shall notify the Indemnified Party whether it admits or denies its liability to defend the Indemnified Party against the Claim at the sole cost and expense of the Indemnifying Party. The Indemnified Party is authorized, prior to and before the expiration of this 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 admits its liability, it shall have the right and obligation to diligently defend, at its sole cost and expense, the Claim. The Indemnifying Party shall have full control of such defense and proceedings, including any compromise or settlement of the Claim. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate in contesting any Claim which the Indemnifying Party elects to contest. The Indemnified Party may participate in, but not control, any defense or settlement of any Claim controlled by the Indemnifying Party pursuant to this Section 16.05. Without the written consent of the Indemnified Party, an Indemnifying Party shall not (i) settle any Claim or consent to the entry of any judgment with respect to any Claim which does not include an unconditional written release of the Indemnified Party from all liability in respect of such Claim or (ii) settle any Claim or consent to the entry of any judgment with respect any Claim 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 admit its liability or admits its liability but fails diligently to prosecute or settle the Claim, then the Indemnified Party shall have the right to defend against the Claim at the sole cost and expense of the Indemnifying Party, with counsel of the Indemnified Party’s choosing, subject to the right of the Indemnifying Party to admit its liability and assume the defense of the Claim at any time prior to its settlement or final determination. If the Indemnifying Party has not yet admitted its liability for a Claim, the Indemnified Party shall notify the Indemnifying Party of any proposed settlement and the Indemnifying Party shall have the option, on or before the tenth (10th) day following receipt of that notice (i) to admit in writing its liability for the Claim, and (ii) if liability is so admitted, to reject, in its reasonable judgment, the proposed settlement. 

 

     (f) In the case of a claim for indemnification not based upon a Claim, the Indemnifying Party shall have thirty (30) days from its receipt of the Claim Notice (i) to cure the Losses complained of, (ii) to admit its liability for those Losses, or (iii) to dispute the claim for those Losses. If the Indemnifying Party does not notify the Indemnified Party within this 30-day period that it has cured the Losses or that it disputes the claim for those Losses, the amount of those Losses shall conclusively be deemed a liability of the Indemnifying Party. 

 

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Article XVII

Limitations on Representations and Warranties

 

     Section 17.01 Disclaimers of Representations and Warranties. The express representations and warranties of Seller contained in this Agreement are exclusive and are in lieu of all other representations and warranties, express, implied or statutory. 

 

     Section 17.02 Sale “As Is” “Where Is”. BUYER REPRESENTS THAT IT HAS INSPECTED, OR WILL HAVE THE OPPORTUNITY TO INSPECT, THE ASSETS AND IF CLOSING OCCURS, WILL ACCEPT THE PHYSICAL AND ENVIRONMENTAL CONDITION OF SAME ON AN “AS IS-WHERE IS” BASIS, AND BUYER FOREVER RELEASES SELLER FROM ANY LIABILITY WITH RESPECT TO THE PHYSICAL AND ENVIRONMENTAL CONDITION OF THE ASSETS AT THE CLOSING, REGARDLESS OF WHETHER CAUSED BY OR ATTRIBUTABLE TO SELLER’S SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE, FAULT, OR STRICT LIABILITY, AND REGARDLESS OF WHETHER ARISING DURING THE PERIOD OF, OR FROM, OR IN CONNECTION WITH SELLER’S OWNERSHIP OF THE ASSETS OR USE OF THE PROPERTY DESCRIBED IN THE LEASES BEFORE OR AT THE CLOSING. WITHOUT LIMITING THE FOREGOING, BUYER WAIVES ANY RIGHT TO RECOVER FROM ANY SELLER AND FOREVER RELEASES AND DISCHARGES SELLER AND AGREES TO RELEASE, INDEMNIFY, DEFEND AND HOLD SELLER INDEMNITEES HARMLESS FROM ANY AND ALL DAMAGES, CLAIMS, LOSSES, LIABILITIES, PENALTIES, FINES, LIENS, JUDGMENTS, COSTS AND EXPENSES WHATSOEVER, INCLUDING ATTORNEYS’ FEES AND COSTS, WHETHER DIRECT OR INDIRECT, KNOWN OR UNKNOWN, FORESEEN OR UNFORESEEN, THAT MAY ARISE ON ACCOUNT OF OR IN ANY WAY BE CONNECTED WITH THE PHYSICAL AND ENVIRONMENTAL CONDITION OF THE ASSETS AT THE CLOSING OR ANY LAW OR REGULATION APPLICABLE TO THE ASSETS, INCLUDING THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT OF 1980, AS AMENDED (42 U.S.C. § 9601 et. seq.), THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 (42 U.S.C. § 6901 et. seq.), THE CLEAN WATER ACT (33 U.S.C. §§ 466 et. seq.), THE SAFE DRINKING WATER ACT (14 U.S.C. §§ 1401-1450), THE HAZARDOUS MATERIALS TRANSPORTATION ACT (49 U.S.C. § 7401 et. seq.), AS AMENDED, THE CLEAN AIR ACT AMENDMENTS OF 1990, AND ANY OTHER APPLICABLE FEDERAL, STATE OR LOCAL LAW, REGARDLESS OF WHETHER ARISING DURING THE PERIOD OF, OR FROM, OR IN CONNECTION WITH, SELLER’S OWNERSHIP OF THE ASSETS OR USE OF THE PROPERTY DESCRIBED IN THE LEASES AT OR PRIOR TO THE CLOSING, AND REGARDLESS OF WHETHER ATTRIBUTABLE TO THE STRICT LIABILITY OF SELLER OR TO THE SOLE, JOINT, COMPARATIVE OR CONCURRENT NEGLIGENCE OF SELLER, EVEN IF CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLER PRIOR TO CLOSING. NOTWITHSTANDING THE FOREGOING, BUYER AND SELLER AGREE THAT THE PROVISIONS OF THIS SECTION 17.02 ARE ALSO SUBJECT TO AND LIMITED BY THE EXPRESS OBLIGATIONS OF SELLER CONTAINED IN THIS AGREEMENT TO THE EXTENT THAT ANY OF THE FOREGOING RELATE TO THE PHYSICAL OR ENVIRONMENTAL CONDITION OF THE ASSETS AT THE CLOSING. 

 

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     Section 17.03 DISCLAIMER REGARDING THE ASSETS. BUYER ACKNOWLEDGES THAT SELLER HAS NOT MADE, AND SELLER HEREBY EXPRESSLY DISCLAIMS AND NEGATES, ANY COVENANT, REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, RELATING TO THE CONDITION OF ANY BUILDINGS, FACILITIES, WELLS, EQUIPMENT, INVENTORY, MACHINERY, FIXTURES AND PERSONAL/MOVABLE PROPERTY CONSTITUTING PART OF THE ASSETS (COLLECTIVELY, THE “TANGIBLE PROPERTY”), INCLUDING (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS, (d) ANY RIGHTS OF BUYER UNDER APPROPRIATE STATUTES TO CLAIM DIMINUTION OF CONSIDERATION OR RETURN OF THE PURCHASE PRICE, (e) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM PATENT OR TRADEMARK INFRINGEMENT, (f) ANY IMPLIED OR EXPRESS WARRANTY OF FREEDOM FROM HIDDEN DEFECTS OR OTHER DEFECTS, WHETHER KNOWN OR UNKNOWN, AND (g) ANY AND ALL IMPLIED WARRANTIES EXISTING UNDER APPLICABLE LAW IN EFFECT NOW OR IN THE FUTURE, IT BEING THE EXPRESS INTENTION OF SELLER AND BUYER THAT THE TANGIBLE PROPERTY SHALL BE CONVEYED TO BUYER AS IS AND IN THEIR PRESENT CONDITION AND STATE OF REPAIR. BUYER REPRESENTS TO SELLER THAT BUYER HAS MADE OR CAUSED TO BE MADE SUCH INSPECTIONS WITH RESPECT TO THE TANGIBLE PROPERTY AS BUYER DEEMS APPROPRIATE AND BUYER WILL ACCEPT THE TANGIBLE PROPERTY AS IS, WHERE IS, IN THEIR PRESENT CONDITION AND STATE OF REPAIR. 

 

     Section 17.04 DISCLAIMER REGARDING INFORMATION. SELLER HEREBY EXPRESSLY NEGATES AND DISCLAIMS, AND BUYER 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, DATA OR OTHER MATERIALS (WRITTEN, ELECTRONIC OR ORAL) NOW, IN THE PAST OR IN THE FUTURE FURNISHED TO BUYER BY OR ON BEHALF OF SELLER OR (b) PRODUCTION RATES, RECOMPLETION 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. 

 

Article XVIII

Dispute Resolution

 

     Section 18.01 Scope; Appointment of Independent Expert. All disputes among the Parties regarding Title Defects, Title Defect Values, Environmental Defects, Environmental Defect Values, Title Benefits or calculation of the Final Statement or revisions thereto (“Disputes”) shall be exclusively and finally resolved pursuant to this Article XVIII. If the Parties are unable to reach resolution as to any such outstanding Dispute within five (5) days following delivery of a written notice from either Buyer or Seller to the other Party that Buyer or Seller, as applicable, intends to submit such Dispute to the Independent Expert for resolution pursuant to this Article XVIII, then either Party may, by written notice to the other Party (an “Election Notice”), elect to submit such Dispute to a single arbitrator (the “Independent Expert”), who shall be selected by mutual agreement of Buyer and Seller within fifteen (15) days after the delivery of such Election Notice in accordance with following: 

 

     (a) in the case of any Dispute regarding Title Defects, Title Defect Values or Title Benefits, the Independent Expert shall be a title attorney with at least twenty (20) years experience in oil and gas titles involving properties in the regional area in which the Assets with respect to which such Title Defects or Title Benefits are alleged or with respect to which such Title Defect Values in dispute are located and who is licensed to practice law in the state in which such Assets are located; 

 

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     (b) in the case of any Dispute regarding Environmental Defects or Environmental Defect Values, the Independent Expert shall be an environmental consultant with at least 20 years experience involving properties in the regional area in which the Assets with respect to which such Environmental Defects are alleged or with respect to which such Environmental Defect Values in dispute are located;

 

     (c) in the case of any Dispute regarding the calculation of the Final Statement or revisions thereto, the Independent Expert shall be a senior partner of an independent accounting firm mutually acceptable to Buyer and Seller; and 

 

     (d) in the case of any Dispute, the Independent Expert shall not have had a substantial relationship with any Party or any Affiliate of either Party during the two (2) years prior to such selection; 

 

provided that, in any case, in the absence of such agreement within fifteen (15) days of the delivery of the Election Notice, the Independent Expert shall be selected as would a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the “Rules”) notwithstanding the selection method and criteria set forth in clauses (a)-(d) above. 

 

     Section 18.02 Additional Procedures. All proceedings under this Article XVIII shall be held in Midland, Texas and shall be conducted in accordance with the Rules, to the extent such Rules do not conflict with the terms of this Article XVIII. The Independent Expert’s final determination shall be made within twenty-one (21) days after submission of the matters in dispute to the Independent Expert, and the Independent Expert shall agree to comply with this schedule before accepting appointment. In making its determination, the Independent Expert shall be bound by terms of this Agreement, to the extent applicable, and, subject to the foregoing, may consider such other matters as in the opinion of the Independent Expert are necessary to make a proper determination. The Independent Expert, however, may not determine that (a) a Title Defect Value of a Title Defect is greater than the Title Defect Value claimed by Buyer in its applicable Title Defect Notice, or (b) an Environmental Defect Value is greater than the Environmental Defect Value claimed by Buyer in its applicable Environmental Defect Notice, or (c) the value of a Title Benefit is greater than the amount claimed by Seller. The Independent Expert shall act as an expert for the limited purpose of determining the specific disputed Title Defects, Title Defect Values, Title Benefits, Environmental Defects or Environmental Defect Values, or calculation of the Final Statement or revisions thereto submitted by either Party and may not award damages, interest or penalties to either Party with respect to any matter. Seller and Buyer shall each bear their own legal fees and other costs. Seller and Buyer shall each bear one-half of the costs and expenses of the Independent Expert.

 

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     Section 18.03 Waiver. Notwithstanding anything to the contrary in this Agreement, at any time Buyer may waive any Title Defect, Title Defect Value, Environmental Defect or Environmental Defect Value previously asserted by Buyer. 

 

     Section 18.04 Binding Nature. The decision and award of the Independent Expert with respect to any arbitration under this Article XVIII shall be binding upon the Parties and final and nonappealable to the maximum extent permitted by law, and judgment thereon may be entered in a court of competent jurisdiction and enforced by either Party as a final judgment of such court. 

 

     Section 18.05 Confidentiality. Except to the extent necessary to enforce a decision and award of the Independent Expert, to enforce other rights of the Parties hereunder, or as required by applicable law or the rules of any stock exchange on which the securities of either Party or any of its affiliates are listed or are in the process of being listed, the Independent Expert and Parties, and their counsel, consultants and other representatives, shall maintain as confidential the fact any proceedings are ongoing, or have been completed, under this Article XVIII, any decision and award of the Independent Expert and all documents prepared and submitted by either Party, or its counsel, consultants and other agents and representatives, in connection with any proceedings under this Article XVIII. 

 

Article XIX

Miscellaneous

 

     Section 19.01 Names. As soon as reasonably possible after the Closing, but in no event later than the 45th day after the Closing, Buyer shall remove the name of Seller and its Affiliates, or any variations on them, from all of the Assets and make the requisite filings with, and provide the requisite notices to, the appropriate federal, state or local agencies to place the title or other indicia of ownership, including operation of the Assets, in a name other than the name of Seller or any of its Affiliates, or any variations of them. 

 

     Section 19.02 Expenses. Except as otherwise provided in this Agreement, each Party shall be solely responsible for all expenses, including due diligence expenses, incurred by it in connection with this transaction, and neither Party shall be entitled to any reimbursement for such expenses from the other Party. 

 

     Section 19.03 Filings, Notices and Certain Governmental Approvals. Promptly after Closing, Buyer shall (a) record the Assignment of the Assets, all state/federal assignments and any lien releases related to the Assets executed or delivered at the Closing in all applicable real property records and/or, if applicable, all state or federal agencies; (b) send notices to vendors supplying goods and services for the Assets of the assignment of the Assets to Buyer and, if applicable, the designation of Buyer as the operator of the Assets; (c) actively pursue the unconditional approval of all applicable Governmental Authorities of the assignment of the Assets to Buyer and the designation of Buyer as the operator of the Assets; and (d) actively pursue all other consents and approvals that may be required in connection with the assignment of the Assets to Buyer and the assumption of the liabilities assumed by Buyer under this Agreement, that have not been obtained prior to Closing. Buyer shall take any and all action required by any Governmental Authority to obtain unconditional approval, including the posting of any and all bonds or other security that may be required in excess of its existing lease, pipeline or area-wide bond.

 

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     Section 19.04 Document Retention. As used in this Section 19.04, the term “Documents” means all files, documents, books, Records and other data delivered to Buyer by Seller pursuant to the provisions of this Agreement (other than those that Seller retained either the original or a copy of), including financial accounting and Tax records; land, title and division of interest files; contracts; engineering and well files; and books and records related to the operation of the Assets prior to the Closing Date. Buyer shall retain and preserve the Documents for a period of no less than seven (7) years following the Closing Date (or for such longer period as may be required by Law), and shall allow Seller or its representatives to inspect the Documents at reasonable times and upon reasonable notice during regular business hours during such time period. Seller shall have the right during such period to make copies of the Documents at its expense. 

 

     Section 19.05 Entire Agreement. This Agreement, the Confidentiality Agreement and the documents to be executed under this Agreement constitute the entire agreement between the Parties pertaining to the subject matter of this Agreement and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties pertaining to the subject matter of this Agreement, the Confidentiality Agreement and the documents to be entered into under this Agreement. Any supplement, amendment, alteration, modification or waiver of this Agreement shall be binding only if executed in writing by the Parties and specifically referencing this Agreement. 

 

     Section 19.06 Waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other of its provisions (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 

 

     Section 19.07 Construction. 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. The Parties acknowledge that they have participated jointly in the negotiation and drafting of this Agreement and as such the Parties agree that if an ambiguity or question of intent or interpretation arises under this Agreement, this Agreement shall not be construed more strictly against one Party than another on the grounds of authorship. 

 

     Section 19.08 No Third Party Beneficiaries. Except as provided in Section 16.04, nothing in this Agreement shall provide any benefit to any Third Party or entitle any Third Party to any claim, cause of action, remedy or right of any kind, it being the intent of the Parties that this Agreement shall otherwise not be construed as a Third Party beneficiary contract. 

 

     Section 19.09 Assignment. Except as otherwise provided in Article VIII, a Party may assign or delegate any of its rights or duties under this Agreement only with the prior written consent of the other Party, and any assignment made without such consent shall be void. Except as otherwise provided in this Agreement, this Agreement shall be binding upon and inure to the benefit of the Parties and their respective permitted successors, assigns and legal representatives.

 

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     Section 19.10 Governing Law. THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICT OF LAWS RULE OR PRINCIPLE THAT MIGHT REFER CONSTRUCTION OF SUCH PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION. 

 

     Section 19.11 Jurisdiction. THE PARTIES CONSENT TO THE EXERCISE OF JURISDICTION IN PERSONAM BY THE COURTS OF THE STATE OF TEXAS FOR ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE OTHER DOCUMENTS EXECUTED PURSUANT TO OR IN CONNECTION WITH THIS AGREEMENT. ALL ACTIONS OR PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS AGREEMENT OR THE OTHER DOCUMENTS EXECUTED PURSUANT TO OR IN CONNECTION WITH THIS AGREEMENT SHALL BE LITIGATED (IF AT ALL) ONLY IN THE DISTRICT COURTS OF TEXAS IN MIDLAND COUNTY OR (IF IT HAS JURISDICTION) THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS. EACH PARTY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. 

 

     Section 19.12 Notices. Any notice, communication, request, instruction or other document required or permitted under this Agreement shall be given in writing and delivered in person or by courier or facsimile to the addresses of Seller and Buyer set forth below. Any such notice shall be effective only upon receipt. 

 

	Seller:	COG Operating LLC
	 	550 W. Texas, Suite 100
	 	Midland, Texas 79701
	 	Attention: General Counsel
	 	Fax: 432-683-7441
	 	 
	Buyer:	Legacy Reserves Operating LP
	 	303 W. Wall, Suite 1400
	 	Midland, Texas 79701
	 	Attention: Kyle A. McGraw
	 	Fax: 432-684-3774

Any Party may, by written notice so delivered to the other Party, change its address for notice purposes under this Agreement. 

 

     Section 19.13 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect and the Parties shall negotiate in good faith to modify this Agreement so as to effect their original intent as closely as possible in an acceptable manner to the end that the transactions contemplated by this Agreement are fulfilled to the extent possible.

 

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     Section 19.14 Survival. The representations and warranties of Seller set forth in Sections 6.06 through 6.17 and the covenants and agreements of Seller and Buyer to be performed prior to or at the Closing shall terminate upon the Closing and be of no further force or effect. The representations and warranties of Seller set forth in Sections 6.01 through 6.05 shall survive the Closing for a period of one (1) year. All other representations, warranties, covenants and agreements shall survive the Closing indefinitely; provided that nothing herein shall extend the one (1) year period after Closing in which Buyer may send a Claim Notice claiming indemnification in accordance with Section 16.04(a). The obligations and covenants of Buyer under this Agreement that survive the Closing shall be deemed covenants running with the land. 

 

     Section 19.15 Time of the Essence. Time shall be of the essence with respect to all time periods and notice periods set forth in this Agreement. 

 

     Section 19.16 Counterpart Execution. This Agreement may be executed in any number of counterparts (including by facsimile transmission), and each such counterpart shall be effective as to each Party that executes the same whether or not all of Parties execute the same counterpart. If counterparts of this Agreement are executed, the signature pages from various counterparts may be combined into one composite instrument for all purposes. All counterparts together shall constitute only one Agreement, but each counterpart shall be considered an original. 

 

     Section 19.17 Knowledge. Whenever a statement in this Agreement is qualified by a phrase such as to Seller’s “Knowledge,” the Parties intend that the only information to be attributed to Seller is information actually known by a current officer of Seller who devotes attention to such matters during the course of his or her employment.

 

[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]

 

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     IN WITNESS WHEREOF, Seller and Buyer have executed and delivered this Agreement as of the date first set forth above. 

 

	
SELLER: 

 

COG OPERATING LLC 

	 	 
	By:  	/s/  	Timothy A. Leach
	 	 	Timothy A. Leach
	 	 	Chief Executive Officer

	
BUYER: 

 

LEGACY RESERVES OPERATING LP

	 	 
	By:  	Legacy Reserves Operating GP LLC,
	 	    	Its General Partner
	By:	Legacy Reserves LP,
	 	 	Its Sole Member
	By:	Legacy Reserves GP, LLC,
	 	 	Its General Partner

	 	 
	By:  	/s/  	Kyle A. McGraw
	 	 	Kyle A. McGraw
	 	 	Executive Vice President-Business

       Development and Land

Signature Page to

Purchase and Sale Agreement

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