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Purchase & Sale Agreement-oil Fund 100 LLC

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PURCHASE AND SALE AGREEMENT


BETWEEN


OIL FUND 100 LLC


AND


LONE STAR INTERNATIONAL ENERGY, INC.


DATED APRIL 17, 1997 2
TABLE OF CONTENTS


PAGE ARTICLE I. PURCHASE AND SALE . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 THE PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 EXCLUDED PROPERTIES . . . . . . . . . . . . . . . . . . . . . 2


ARTICLE II. PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 ADJUSTMENTS TO PURCHASE PRICE . . . . . . . . . . . . . . . . 2
2.3 LIKE-KIND EXCHANGE . . . . . . . . . . . . . . . . . . . . . . 4


ARTICLE III. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . 4
3.1 SELLER'S REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . 4
3.2 BUYER'S REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . 12


ARTICLE IV. TITLE MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.1 DEFENSIBLE TITLE . . . . . . . . . . . . . . . . . . . . . . . 14
4.2 PERMITTED ENCUMBRANCES . . . . . . . . . . . . . . . . . . . . 14
4.3 NOTICE OF TITLE DEFECT . . . . . . . . . . . . . . . . . . . . 15
4.4 REMEDIES FOR TITLE DEFECTS: TITLE INCREASES . . . . . . . . . 15
4.5 VALUE OF LEASEHOLD INTEREST OR TITLE DEFECT . . . . . . . . . 16
4.6 CONSENTS; PREFERENTIAL RIGHTS . . . . . . . . . . . . . . . . 17
4.7 CASUALTY LOSS, CONDEMNATION . . . . . . . . . . . . . . . . . 17


ARTICLE V. ENVIRONMENTAL MATTERS . . . . . . . . . . . . . . . . . . . . . . 18
5.1 NOTICE OF ENVIRONMENTAL DEFECT . . . . . . . . . . . . . . . . 18
5.2 TERMINATION OPTION . . . . . . . . . . . . . . . . . . . . . . 18
5.3 ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . 18


ARTICLE VI. COVENANTS OF SELLER . . . . . . . . . . . . . . . . . . . . . . 19
6.1 ACCESS TO RECORDS . . . . . . . . . . . . . . . . . . . . . . 19
6.2 OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 PERMISSIONS . . . . . . . . . . . . . . . . . . . . . . . . . 20
6.4 RESIGNATION AS OPERATOR . . . . . . . . . . . . . . . . . . . 20


ARTICLE VII. COVENANTS OF BUYER . . . . . . . . . . . . . . . . . . . . . . 20
7.1 RETURN OF DATA . . . . . . . . . . . . . . . . . . . . . . . . 20
7.2 INDEMNITY REGARDING ACCESS . . . . . . . . . . . . . . . . . . 20


i 3 ARTICLE VIII. SELLER'S CONDITIONS OF CLOSING . . . . . . . . . . . . . . . . 20
8.1 REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . 20
8.2 PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.3 PENDING MATTERS . . . . . . . . . . . . . . . . . . . . . . . 21
8.4 BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21


ARTICLE IX. BUYER'S CONDITIONS OF CLOSING . . . . . . . . . . . . . . . . . 21
9.1 REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . 21
9.2 PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.3 PENDING MATTERS . . . . . . . . . . . . . . . . . . . . . . . 21
9.4 RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 21


ARTICLE X. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
10.1 TIME AND PLACE OF CLOSING . . . . . . . . . . . . . . . . . . 22
10.2 CLOSING OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . 22
10.3 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . . . . . 23


ARTICLE XI. ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . 23
11.1 CALCULATION OF ADJUSTED PURCHASE PRICE . . . . . . . . . . . . 23
11.2 SUSPENDED FUNDS . . . . . . . . . . . . . . . . . . . . . . . 23
11.3 RECEIPTS AND CREDITS . . . . . . . . . . . . . . . . . . . . . 23
11.4 RECOVERY OF TAXES PAID ON BEHALF OF OTHER OWNERS . . . . . . . 24
11.5 SIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.6 RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.7 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11.8 RECORDING DOCUMENTS . . . . . . . . . . . . . . . . . . . . . 25
11.9 RIGHT OF TERMINATION . . . . . . . . . . . . . . . . . . . . . 25
11.10 SALES TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 25
11.11 OTHER TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 25


ARTICLE XII. ASSUMPTION OF OBLIGATIONS; INDEMNIFICATION . . . . . . . . . . 26
12.1 DEFINITION OF LOSSES . . . . . . . . . . . . . . . . . . . . . 26
12.2 ASSUMPTION OF CONTRACTS . . . . . . . . . . . . . . . . . . . 26


ARTICLE XII. ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . 26
13.1 SELECTION OF ARBITRATORS . . . . . . . . . . . . . . . . . . . 26
13.2 DETERMINATION . . . . . . . . . . . . . . . . . . . . . . . . 26
13.3 DECISION BINDING . . . . . . . . . . . . . . . . . . . . . . . 26


ARTICLE XIV. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . 27
14.1 AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 27
14.2 GENDER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
14.3 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 27


ii 4

14.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 27
14.5 AMENDMENTS AND SEVERABILITY . . . . . . . . . . . . . . . . . 27
14.6 SURVIVABILITY . . . . . . . . . . . . . . . . . . . . . . . . 27
14.7 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 27
14.8 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . 27
14.9 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 28
14.10 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . 28


iii 5
EXHIBITS


EXHIBIT "A" OIL & GAS LEASES . . . . . . . . . . . . . . . . . 1, 2, 10, 14, 16


EXHIBIT "B" EXCLUDED PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 2


EXHIBIT "C" LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 5


EXHIBIT "D" NON-CANCELABLE CONTRACTS . . . . . . . . . . . . . . . . . . . . 5


EXHIBIT "E" ALLOCATED VALUE OF LEASES . . . . . . . . . . . . . . . . . . . 7


EXHIBIT "F" ASSIGNMENT, BILL OF SALE AND CONVEYANCE . . . . . . . . . . . . 10


EXHIBIT "G" IMBALANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . 16


EXHIBIT "H" EXECUTED ASSIGNMENT, BILL OF SALE AND CONVEYANCE . . . . . . . . 22


iv 6
PURCHASE AND SALE AGREEMENT


This Purchase and Sale Agreement ("Agreement") is entered into on the date shown hereinbelow by and between Oil Fund 100 LLC a Utah limited liability corporation, herein referred to as "Seller," and Lone Star International Energy, Inc., a Nevada corporation, herein referred to as "Buyer."


In consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows:


ARTICLE 1
PURCHASE AND SALE


1.1 THE PROPERTIES. Subject to the terms and conditions of this Agreement, Seller agrees to sell and convey to Buyer, and Buyer agrees to purchase and pay for, as hereinafter provided, effective as of 7:00 a.m. Central Standard time, April 1, 1997 (the "Effective Time"), all of Seller's right, title, and interest in and to the following:


(a) The oil, gas and mineral leases and the leasehold estates created thereby, described in Exhibit "A" attached hereto and made a part hereof (the "Leases"), insofar as the Leases cover and relate to the land and depths described in Exhibit "A" (the "Lands"), together with corresponding interest in and to all the property and rights incident thereto, including all rights in any pooled or unitized acreage by virtue of the Lands being a part thereof, all production from the pool or unit allocated to any such Lands, and all interests in any wells within the pool or unit associated with the Lands;


(b) All producing, nonproducing, shut-in and abandoned oil and gas wells, salt water disposal wells, injection wells, and water wells located on the Leases or Lands pooled or unitized therewith, as set forth on Exhibit "A", and all personal property, equipment, fixtures, facilities, and improvements located on and appurtenant to the Leases and Lands insofar as they are used in connection with the operation of the Leases INSOFAR AND ONLY INSOFAR as they cover the Lands or directly relate to the production, treatment, sale, or disposal of hydrocarbons or water produced therefrom or attributable thereto;


(c) To the extent transferable, all contracts, agreements, rights and interests in or under all contracts, agreements and leases of any kind, to the extent that same relate to the Leases and Lands described in Exhibit "A" (the "Contracts");


(d) All rights-of-way, easements, licenses, authorizations, permits, and similar rights that pertain to the Leases and Lands described in Exhibit "A;"


(e) All payments, and all rights to receive payments with respect to oil, condensate, natural gas, natural gas liquids, and other minerals produced after the Effective Time attributable to Seller's interests in the Properties; 7
(f) All of Seller's original files, records, information, and data relating to the Properties in the possession of Seller, including, without limitation, title records, contracts, correspondence, seismic data and interpretations, geological data and information (including maps and interpretations thereof), production records, electric logs, core data, pressure data, decline curves, graphical production curves, drilling reports, well completion reports, drill stem test charts and reports, engineering reports, regulatory reports, and all related materials, insofar and only insofar as the foregoing items constitute nonproprietary materials that may be lawfully conveyed to Buyer (the "Records").


All of Seller's right, title, and interest in and to the real and personal properties described in Subparagraphs (a) through (f) above, subject to the limitations and terms expressly set forth herein and in Exhibit "A," but excluding the Excluded Property, are herein collectively referred to as the "Properties" or, individually, a "Property."


1.2 EXCLUDED PROPERTIES. All trade credits, accounts receivable, notes receivable, and other receivables attributable to the Properties with respect to any period or time prior to the Effective Time shall remain the property of the Seller and shall be excluded from this sale, unless specified otherwise herein. Furthermore, Seller specifically excludes from this transaction the properties described in Exhibit "B" attached hereto and made a part hereof. All of the items described in this Section 1.2 are herein collectively referred to as the "Excluded Properties."


ARTICLE 2
PURCHASE PRICE


2.1 PURCHASE PRICE. The purchase price ("Purchase Price") for the Properties shall be six hundred thousand Dollars ($600,000), subject to adjustment as provided herein. At the Closing, the Purchase Price shall be paid to Seller by delivering two hundred thousand (200,000) fully paid non- assessable shares of Buyer's $.001 par value common stock ("Common Stock").


2.2 ADJUSTMENTS TO PURCHASE PRICE. Adjustments to the Purchase Price shall be as follows:


(a) The Purchase Price shall be increased by an amount equal to the sum of the following amounts (determined without duplication and on an accrual basis in accordance with generally accepted accounting principles consistently applied):


(i) The value, less taxes (other than taxes on net
income), of merchantable oil and other liquids in storage in the
tanks (above the pipeline connection, if applicable) as of the
Effective Time that is credited to the Properties, at the
prevailing market value at the time of sale in the area, adjusted
for grade and gravity;


2 8
(ii) The amount of all expenses incurred and paid or to
be paid by or on behalf of Seller, in connection with or
attributable to the ownership or operation of the Properties
during the period from the Effective Time to the Closing Date,
including, but not limited to, royalties, rentals, and other
charges and expenses billed under applicable operating
agreements, or in the absence of an operating agreement, expenses
of the sort customarily billed under such agreements, and
including the customary overhead charges related to the
Properties; and


(iii) An amount equal to all prepaid expenses
attributable to the Properties that are paid or to be paid by or
on behalf of Seller prior to the Closing Date and that are, in
accordance with generally accepted accounting principles,
attributable to the period after the Effective Time, including,
without limitation, prepaid ad valorem, property, production,
severance, and similar taxes (but not including income taxes)
based upon or measured by the ownership of property or the
production of hydrocarbons or the receipt of proceeds therefrom
(any refund of ad valorem tax attributable to the period before
the Effective Time and received by Buyer shall be paid to
Seller).


(iv) Any other amounts required under this Agreement or
otherwise agreed to by Seller and Buyer.


(b) The Purchase Price shall be decreased by an amount equal to the sum of the following amounts (determined without duplication and on an accrual basis in accordance with generally accepted accounting principles consistently applied):


(i) The amount of all proceeds received by Seller prior
to the Closing Date attributable to the Properties and that are
attributable to the time after the Effective Time;


(ii) An amount equal to all unpaid ad valorem, property,
production, severance, and similar taxes and assessments (but not
including income taxes) based upon or measured by the ownership
of property or the production of hydrocarbons or the receipt of
proceeds therefrom accruing to the Properties prior to the
Effective Time, which amount shall be computed based upon such
taxes assessed against the applicable portion of the Properties
for the preceding calendar year or, if such taxes are assessed on
other than a calendar year basis, for the tax-related year last
ended; and


(iii) Any other amounts required under this Agreement or
otherwise agreed to by Seller and Buyer.


3 9
2.3 LIKE-KIND EXCHANGE.


(a) Seller shall have the right at its option, to dispose of the Properties, or any portion thereof, through a transaction that is structured to qualify as a like-kind exchange of property within the meaning of Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"). Buyer agrees to cooperate with Seller in effecting a qualifying like-kind exchange through a trust, escrow, or other means as determined by Seller; provided, however, that Seller shall hold Buyer harmless from any expense, obligation, or liability, without limitation, which Buyer may suffer in connection with or arising out of Buyer's cooperation with Seller's treatment of the Properties as part of a like-kind exchange. Seller shall have the right to assign its rights, but not its obligations, under this Agreement, in whole or in part, to a "qualified intermediary" (as defined under the Code) or as otherwise necessary or appropriate to effectuate a like-kind exchange and Buyer agrees to recognize said qualified intermediary. Seller shall be solely responsible for assuring the effectiveness of the exchange for Seller's tax purposes and Buyer does not represent to Seller any particular tax treatment will result to Seller as a result thereof. In no event shall any like-kind exchange contemplated by this provision cause an extension of the Closing set forth herein.


(b) Buyer shall have the right at its option, to dispose of the Properties, or any portion thereof, through a transaction that is structured to qualify as a like-kind exchange of property within the meaning of Section 1031 of the Internal Revenue Code of 1986, as amended (the "Code"). Seller agrees to cooperate with Buyer in effecting a qualifying like-kind exchange through a trust, escrow, or other means as determined by Buyer; provided, however, that Buyer shall hold Seller harmless from any expense, obligation, or liability, without limitation, which Seller may suffer in connection with or arising out of Seller's cooperation with Buyer's treatment of the Properties as a part of a like-kind exchange. Buyer shall have the right to assign its rights, but not its obligations, under this Agreement, in whole or in part, to a "qualified intermediary" (as defined under the Code) or as otherwise necessary or appropriate to effectuate a like-kind exchange and Seller agrees to recognize said qualified intermediary. Buyer shall be solely responsible for assuring the effectiveness of the exchange for Buyer's tax purposes and Seller does not represent to Buyer any particular tax treatment will result to Buyer as a result thereof. In no event shall any like-kind exchange contemplated by this provision cause an extension of the Closing set forth herein.


ARTICLE 3
REPRESENTATIONS AND WARRANTIES


3.1 SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants to Buyer:


(a) EXISTENCE. Seller is a corporation duly organized, validly existing, and in good standing under the laws of the state of its incorporation, and is duly qualified to do business in the state in which the Properties are located.


4 10
(b) AUTHORIZATION. Seller has all requisite corporate or other power and authority, as applicable, to execute and deliver this Agreement, to consummate the transactions contemplated hereunder and to perform all of the terms and conditions hereof to be performed by it. The execution and delivery of this Agreement by Seller, the performance by Seller of all of the terms and conditions hereof to be performed by it and the consummation of the transactions contemplated hereunder have been duly authorized and approved by all necessary corporate action. This Agreement has been duly executed and delivered by Seller and constitutes the valid and binding obligation of Seller, enforceable in accordance with its respective terms, except to the extent enforceability may be affected by bankruptcy, reorganization, insolvency, or similar laws affecting creditors' rights generally.


(c) POWER. Subject to preferential rights and restrictions on assignment of the type typically found in the oil and gas industry, and to rights to consent by, required notices to, and filings with or actions by other governmental entities, Seller's execution, delivery, and performance of this Agreement and the transactions contemplated hereby will not: (i) violate or conflict with any provision of its certificate of incorporation, by-laws, or other governing documents; (ii) result in the breach of any term or condition of, or constitute a default or cause the acceleration of any obligation under any agreement or instrument to which it is a party or by which it is bound; or (iii) violate or conflict with any applicable judgment, decree, order, permit, law, rule, or regulation.


(d) BROKERS. Seller has incurred no liability, contingent or otherwise, for broker's or finder's fee in respect of this transaction, for which Buyer shall have any responsibility whatsoever.


(e) FOREIGN PERSON. Seller is not a "foreign person" within the meaning of the Code, Sections 1445 and 7701 (i.e., Seller is not a nonresident alien, foreign corporation, foreign partnership, foreign trust, or foreign estate as those terms are defined in the Code and any regulations promulgated thereunder).


(f) LITIGATION. Except as set forth on Exhibit "C" attached hereto and made a part hereof, Seller has not received written notice of any suit, claim, action, or other proceeding pending, or, to the knowledge of Seller, threatened, before any court or governmental agency as of the date of this Agreement that relates to the Properties.


(g) NON-CANCELABLE CONTRACTS. To the best of Seller's knowledge, with the exception of Exhibit "D" attached hereto and made a part hereof, none of the Properties, or production therefrom, is subject to any crude oil or gas purchase agreement, transportation, agreement, gathering agreement, or similar agreement not cancelable on thirty (30) days notice.


(h) NO TAKE-OR-PAY CONTRACTS. To the best of Seller's knowledge, Seller has not received any material advance, "take-or-pay" or other similar payments under gas production sales contracts that entitle the purchasers to "make up" or otherwise receive deliveries of


5 11 production at any time after the Effective Time without paying at such time the contract price therefor.


(i) NO CASUALTY LOSS. To the best of Seller's knowledge, since the Effective Time there has not been any material adverse change, damage, destruction, or other Casualty Loss (defined herein as any and all loss, damage, or reduction in value resulting from catastrophic occurrences or acts of God, which are not the result of normal wear and tear or of natural reservoir changes) of or to the Properties.


(j) NO VIOLATIONS. This Agreement and the execution and delivery hereof by Seller does not, and the fulfillment and compliance with the terms and conditions hereof and the consummation of the transactions contemplated hereby will not:


(i) Conflict with or require the consent of any person
under any of the terms, conditions or provisions of the
certificate of incorporation or bylaws of Seller;


(ii) Violate any provision of, or require any filing,
consent, authorization or approval under any law, statute,
ordinance, decree, requirement, order, judgment, rule,
regulation, license or permit applicable to or binding upon
Seller (assuming receipt of all routine governmental consents
typically received after consummation of transactions of the
nature contemplated by this Agreement);


(iii) Conflict with, result in a breach of, constitute a
default under or constitute an event which, with notice or lapse
of time or both, would constitute a default under, accelerate or
permit the acceleration of the performance required by, or
require any consent, authorization or approval under, (1) any
mortgage, indenture, loan, credit agreement or borrowed money to
which Seller is a party or by which Seller is bound or to which
any of its Properties is subject, (2) any order, judgment or
decree of any governmental authority, or (3) any other agreement,
contract, lease, license or other permit; or


(iv) Result in the creation or imposition of any lien,
charge or other encumbrance upon the Property.


(k) NO DEFAULT; COMPLIANCE WITH LAWS AND REGULATIONS.


(i) Seller is not in default under, and Seller is not
aware of any event that with notice or lapse of time or both
would constitute a default under, (1) any mortgage, indenture,
loan, credit agreement or other agreement or instrument
evidencing indebtedness for borrowed money to which Seller is a
party or by which Seller is bound or to which any of the Property
is subject, (2) any order, judgment or decree of any governmental
authority, or (3) to the best of Seller's


6 12
knowledge, any other agreement, contract, lease, license or other
instrument, which default or potential default might reasonably
be expected to have a material adverse effect on the value or
operation of the Properties; and


(ii) Seller is in compliance with all laws applicable to
its business and operations, noncompliance with which might
reasonably be expected to have a material adverse effect on the
value or operation of the Property.


(l) ABSENCE OF CERTAIN CHANGES. Since the Effective Time there has not been:


(i) Any sale, lease or other disposition of the
Property, other than the sale of hydrocarbons in the ordinary
course of Seller's business;


(ii) Any mortgage, pledge or grant of a lien or security
interest in any of the Property;


(iii) Any contract or commitment to do any of the
foregoing; or


(iv) Any equipment, facilities, material or other
personal property removed from the Property except for equipment
which was surplus to the operation of the Property.


(m) TAXES. All returns, statements and reports with respect to taxes based upon, measured by or imposed with respect to the ownership or operation of the Property which are required to be filed on or before the Closing have been (or will have been by the Closing) timely filed with the appropriate governmental authority and all such taxes have been (or will have been by the Closing) paid or deposited.
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