FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
Under Section 12 (b) of (g) of the Securities Exchange Act of 1934
SW Ventures, Inc
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(Name of Small Business Issuer in its charter)
Nevada 87-0559453
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
455 East 400 South, Salt Lake City, Utah 84111
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (801) 355-6524
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be registered Each class is to be registered
None None
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Securities to be registered under Section 12(g) of the Act:
Common
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(Title of class)
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Inception and Purchase of Working Interest in Oil and Gas Properties
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SW Ventures, Inc. (the "Company") was organized as a Nevada corporation
on May 7, 1996. The Company's business purpose is that of seeking out and
investing in various oil and gas opportunities in the Western United States.
At inception, the Company issued "unregistered", "restricted" shares to its
founders in connection with the initial funding of the Company. In June of
1997, the Company commenced an offering of its common stock pursuant to an
exemption from the registration requirements of Section 5 of the Securities
Act of 1933, as amended, under Section 3(b), Regulation D, Rule 504, whereby
it raised $100,000 for the purchase of working interest in a drilling program
known as the Montana Prospect. In August of 1997, the Company purchased a
21.25% working interest in the Montana Prospect, a 320 acre oil lease in Crook
County, Wyoming (the "Prospect"), which purchase included the cost of drilling
and completion to the Company, based on its 21.25% working interest, of the
Montana Berger Well #1. The Company elected to participate in a second well
on the Montana Prospect, the Montana Berger Well #2 in late March 1998, which
well has been drilled and completed. The Company funded the drilling and
completion of the second well partially through funds raised in a second
offering conducted pursuant to the exemption provided for under Section 3(b),
Regulation D, Rule 504, which commenced on March 16, 1998, and will close on
or before sixty (60) days from the filing of this general registration
statement. To date, the Company has raised $45,397 in its second offering.
The funding of the second well required additional funds which were provided
by both revenues from operations and advances from an officer and director.
The Company intends to participate in other wells drilled on the Prospect; it
also intends to investigate other business opportunities in the oil and gas
industry such as purchasing overriding and/or working interest in other
wells, the purchase of interest in producing wells, and/or an investment in
other oil and gas related businesses. As of the date hereof, the Company has
invested in only one drilling program, the Montana Prospect Drilling Program,
and has participated in the drilling of two wells on that Prospect.
Forward Looking Information
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This registration statement contains certain forward-looking statements
information relating to the Company that are based upon beliefs of the
Company's Management as well as assumptions made by and information currently
available to the Management. When used in this registration statement, the
words anticipate, believe, estimate, expect, and similar expressions, as they
related to the Company and the Company's Management, are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to the future events and are subject to certain risks,
uncertainties, and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward looking statements.
Risk Factors Which Could Affect Future Profitability
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* Price of Oil Revenues generated from oil production are highly
dependent on the price of crude oil. Fluctuations in type and usage of energy
make it difficult to estimate future prices of crude oil which has taken a
dramatic fall in the past 6 months. Such fluctuations of prices are caused by
a number of factors beyond control, including regional and international
demand, energy legislation, and the abundance of alternative fuels.
International political and economic conditions have significant impact on the
price of crude oil.
* Imprecise Nature of Reserve Estimates The estimate of possible and
probable reserves of oil and gas are imprecise. While such estimations are
based on engineering and other data, the process is a subjective one
consisting of estimating underground accumulations of oil and/or gas that
cannot be measured in an exact way. Accuracy of estimates is based on the
quality of the available data and on engineering and geological interpretative
judgement. The accuracy of such estimates often changes as more data becomes
available. There is no assurance that information regarding reserves set
forth herein will be ultimately produced.
* Reliance on Others The Company is highly dependent on the operator
of its wells and must rely on such entity's expertise and competence in the
operation of the wells and sale of crude oil to distributors.
* Lack of Diversification The Company currently has only one business
that of oil and gas exploration and development. In that area, the Company
only has one material investment and no diversification into other areas of
oil and gas exploration or any other type of business. Failure of the Company
to continue seeing revenues from its current operations could have a material
adverse effect on the Company.
* Environmental Regulation The oil and gas industry is subject to
substantial regulation with respect to discharge of materials into the
environment or otherwise relating to the protection of the environment.
Exploration, development and production of oil and gas are regulated by
various government agencies with respect to storage and transportation of
hydrocarbons and clean-up of sites of wells. Many of these activities require
government approval before underwriting the costs associated with compliance
with applicable laws and regulations which have increased the costs associated
with planning, designing, drilling, installing, operating, and plugging and
abandoning a well. To the extent the Company owns an interest in a well, it
may be responsible for costs of environmental regulation compliance even well
after the plugging and abandoning of that well.
* Operating hazards/Uninsured Risks. Operation of an oil and gas
well is subject to risks such as blowouts, cratering, pollution, and fires,
any one of which could result in damage or destruction of the well or
production faults or persons working. The operator of the well may be unable
to purchase adequate insurance against all of the risks. Occurrence of a
significant event could have a material adverse effect on the Company's
business.
* Additional Problems Encountered with Water Pressurized Well The
Montana Prospect is located adjacent to a water flood which has increased
water pressure in the Minnelusa Upper "B" Sand where the Program will be
drilling. A previous successfully drilled well on the Montana Prospect
failed because the increased water pressure made capturing oil economically
unfeasible although efforts were made to overcome the problem. The same
water pressure will be encountered in each of the new holes the program
drills.. Although the Operator and the Sponsor were successfully able to
initiate certain steps to ensure that the increased water pressure did not
adversely affect the recovery of oil on the Montana Berger Well #1, there is
no assurance that even if oil is discovered on the new well, that the Operator
will be able to solve any water flood problems and economically recover the
oil.
* Competition The Company must compete with many other oil and gas
companies which are better capitalized and have more experience in the
industry than the Company does. The Company's lack of experience could
adversely affect its chances to compete in an industry dominated by larger
more experienced firms.
* High Degree of Risk for Oil and Gas Exploration for oil and gas by
nature involves a high degree of risk. There is no guarantee that the Company
will be successful in discovering oil and/or gas on any new wells; the
Company's entire investment could be at risk. Even if oil and gas are reached
on any new wells, and despite the fact the Company is receiving limited
revenues from the Montana Berger Well #1 and #2, there is no assurance that
oil and gas reserves will be obtained in sufficient quantities for the Company
to recover its investment in full or in part. Oil and gas exploration is
marked by unprofitable efforts, not only from dry holes, but from wells which,
although productive, do not return a profit on the amount expended. There are
a multitude of problems which can be encountered when drilling for oil/gas any
one of which could cause a total failure of the enterprise thus resulting in a
total loss on the part of the Company as a working interest partner especially
if the Company fails to diversify its business.
* Sources and Availability of Equipment/Raw Materials - In the past,
increased drilling activities from time to time have created certain shortages
of equipment necessary in the drilling and or completion of wells. Due to
shortage of such equipment and to generally inflationary trends, and the age
and condition of much of the existing equipment, prices at which equipment is
available have escalated. Although the Company has suffered no problems to
date as to equipment shortages, or unsatisfactory equipment, there is always
the possibility that current equipment in use due to age and/or lack of
proper maintenance could fail to perform properly forcing expensive repairs
and/or costly delays to the working interest participants, one of which will
be the Company, or the purchase of additional new or used equipment which
could be delayed if shortages of equipment exist. In addition, there is no
guarantee that equipment will be available at such times as the Program begins
developing other properties.
* Limited Operating History -- The Company is newly organized, and has
only seen limited revenues from operations and has only limited assets
approximating $146,000. The Company has also incurred certain liabilities
approximating $23,000. Accordingly, there can be no assurance that the
Company will operate at a profitable level.
* Limited Experience in the Oil and Gas Business The officers and
directors have very limited experience in the oil and gas industry and this
lack of experience could adversely affect the Company's chances of success.
(See "DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS", Part I,
Item 5, of this Registration Statement.)
* Management Devotes Only Part Time to Company's Affairs - Each of the
officers and directors of the Company have other business interests to which
they will devote much of their time. Management, therefore, will devote only
part of their time to the affairs of the Company.
* No Public Market for Company's Securities - At the present time
there is no public market for the Company's common stock, and there can be no
assurance that a public market will develop. Although the Company intends to
apply for a listing on the NASD OTC Bulletin Board, there is no guarantee that
such will be the case, or that if the Company succeeds in listing its common
stock on the NASD OTC Bulletin Board that a market for the Company's common
stock will develop.
* Penny Stock Regulation - If the Company succeeds in developing a
market for its common shares, it will be subject to the penny stock rules. The
Securities and Exchange Commission has adopted rules that regulate broker
dealer practices in connection with penny stocks. Penny stock are generally
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided current price and volume information with respect to
transactions in such securities is provided by the exchange system.) The
penny stock rule requires that a broker/dealer, prior to a transaction in a
penny stock not otherwise exempt under the rules, to deliver a standardized
risk disclosure document prepared by the SEC that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker dealer must also provide the customer with bid and offer quotations for
the penny stock, the compensation to the broker dealer and its salesperson in
the transaction, and monthly account statements showing the market value of
each penny stock held in the customer account. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise
exempt from such rules, the broker dealer must make a special written
determination that a penny stock is a suitable investment for the purchase and
receive the purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the penny
stock rules. The Company's common stock is currently subject to the penny
stock rules, and, accordingly, investors may find it difficult to sell their
shares if at all when and if a public market develops.
* Voting Control - As of this date, officers and directors maintain
voting control of the Company currently owning 58.65% of the Company's common
stock and are able, among other things, to direct the affairs of the Company.
Because the holders of shares of Common Stock of the Company do not have
cumulative voting rights, holders of more than fifty percent (50%) of such
outstanding shares, voting for the election of directors, can elect all of the
directors to be elected, if they so choose, and, in such event, the holders of
the remaining shares will not be able to elect any of the Company's directors.
If all shares in the current offering are sold, of which no assurance can be
given, Management's ownership position will be reduced to 46.4% of the then
issued and outstanding shares, provided none of those persons elect to
purchase stock in such offering. (See "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT", Part I, Item 4, of this Registration
Statement.)
* Sales of Shares by "Insiders" - Of the 3,392,646 common shares of the
Company's common stock currently issued and outstanding, 1,000,000 are owned
by public investors in the Company's prior offering, 302,646 are owned by
public investors in the Company's current offering and 2,090,000 are held by
officers, directors and other initial shareholders have been issued in
reliance on the "private placement" exemption of Section 4(2) of the
Securities Act of 1933, as amended. If a market for the Company's common
shares were to develop, such "restricted" shares will not be available for
sale in the open market without registration, except in reliance upon Rule 144
under the Act or some other applicable exemption. In general, under Rule 144,
a person or persons whose shares are aggregated, who beneficially owned shares
acquired in a non-public transaction for at least one year, including persons
who may be deemed "affiliates" of the Company as that term is defined under
the 1933 Act, would be entitled to sell within any three-month period, a
number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock or the average weekly reported trading
volume on all national securities exchanges and through NASDAQ during the four
calendar weeks preceding such sale provided current public information is then
available. If a substantial number of the shares owned by the initial
Shareholders were sold in the market, the market price of the Common Stock
could be adversely affected. As of the date hereof, 2,000,000 of the
2,090,000 shares issued in reliance upon Section 4(2)and therefore considered
"restricted", have been beneficially owned for more than one year, which
would make them eligible for resale under Rule 144 provided all of the
applicable terms and conditions were met, and provided a public market existed
for the Company's common shares. The additional 90,000 shares will have
been owned for a year on January 27, 1999. In addition, of the 1,000,000
shares offered and sold in the Company's first offering, 365,500 shares were
purchased by directors of the Company, one current director and one a former
director. Such shares are also "restricted" although not subject to a holding
period, and are subject to the provisions of Rule 144 that apply to affiliate
transactions. The majority of the outstanding shares of the Company which are
eligible for resale under Rule 144, when and if a market exists, are owned by
one director of the Company, Mr. Guido CLoetens. Mr. Cloetens owns 1,810,000
of the Company's outstanding shares which would limit the amount of shares
which could be sold under Rule 144 in any 90 day period considerably, if a
market develops. (See SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, Item 4 of this Registration Statement.)
BUSINESS OF THE REGISTRANT
Principal Products of the Company - the Montana Prospect Drilling Program
* The Montana Prospect Drilling Program * The Company's principal
product is oil and gas. As of the date hereof, the Company has invested in
only project, the Montana Prospect Drilling Program (the "Program"), which has
drilled and completed two wells: the Montana Berger Well #1 and the Montana
Berger Well #2. The Montana Prospect is in the northeastern Powder River
Basin in T. 53 N, R. 67 W, Section 17-18 and is part of an oil field known
as the Sidner Draw Field. The Program was formed for the purpose of engaging
in the acquisition of 320 acres of oil and gas lease located in Crook County,
Wyoming, and the drilling of a well or wells thereon; completing such well(s);
and, if warranted, operating of the same and distributing the revenues to the
Participants in the Program.
*Working Interest* In August/September 1997, the Company purchased its
21.25% working interest in the Program. The Company's initial investment in
the Program included the purchase of the leases and its estimated costs and
expenses for completion of the first well in the Program known as the Montana
Berger Well #1. Additional participants purchased 53.750% of the Program to
equal 75% of the Program. The working interest participants, including the
Company, who own an aggregate of 75% of the Program were responsible for
100% of the total land acquisition and drilling costs of the project up
through the drilling of the first well, the Montana Berger Well #1; the
Carried Working Interest Owners, which include the Sponsor (Triple B Energy -
9.375%), the geologist (Twiford International, Inc. - 6.250%), the Operator
(L& J Operating, Inc.- 3.125%), and Mr. Robert Haigh (who negotiated the
lease acquisition - 6.25%), have an aggregate 25% Carried Working Interest
(the Working Interest Participants and the Carried Working Interest
Participants are hereinafter sometimes collectively referred to as the
"Participants"). The Carried Working Interest Participants did not bear lease
acquisition costs which includes 25 separate leases on the Prospect, or
drilling costs of the first well, the Montana Berger Well #1. All of the
Participants, however, paid their proportionate share of completion costs once
casing point was set on the first well; each Participant will pay its
percentage share of all drilling and completion on any subsequent well they
elect to participate in. Each Participant has first right of refusal on
participation in each well the Program elects to drill, with a 300% penalty on
revenues to be received by a non-participating party on any well such party
chooses not to participate in. (Participating parties would receive a three
times the return of their investment before a non-participating party is
entitled to revenues on a well such party has not participated in.)
The following sets forth a breakdown of the working interest
participants on the Prospect before casing point was set on the first well,
("Promoted Gross Working Interest Owners" and after casing point was set on
the first well and on all subsequent wells ("Net Working Interest Owners").
<TABLE>
<CAPTION>
Promoted Gross Working Interest Owners Net Working Interest Owners
(cost bearing interest before (cost bearing interest after
casing point) for the Casing point) for the
Montana Berger Well #1 Montana Berger Well #1 and the
(Basis of 1/3 purchased 1/4) Remainder of the Montana Prospect
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<S> <C> <C>
Silver Petroleum Corporation 33.333% 25.000%
Sun Cementing of Wyoming, Inc. 16.667% 12.500%
James A. Nies 4.167% 3.125%
SW Ventures, Inc. 28.333% 21.250%
Triple B. Energy, Inc.(1) 17.500% 13.125%
Robert S. Haigh 0.000% 6.250%
Twiford International, Inc. 0.000% 6.250%
Triple B. Energy, Inc.(1) 0.000% 9.375%
L & J Operating 0.000% 3.125%
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100.000% 100.000%
(1) Triple B Energy owns both a 9.375% carried working interest and a 13.125% working interest
which equaled 17.50% of the costs until casing point was set on first well
</TABLE>
*Landowner Royalties * The leases on the Montana Prospect are three
year leases from private landowners (a total of 25 separate leases) at an
aggregate cost to the Program of $40,000. Each lease becomes perpetual
when and if a well is completed on the lease and during the life of the well.
The Montana Prospect is presently burdened by landowners royalties which vary
from landowner to landowner. The acreage on which the Montana Berger Well #1
was drilled is burdened by a landowners' royalty of 16% giving the Montana
Prospect Drilling Program a net interest of 84% . The Montana Berger Well #2
involves 15 separate landowners with varying royalties which equal 18.36%
leaving the Program a net interest of 81.64%.The Participants are entitled to
100% of the revenues after paying the landowners. Net revenues means the
percentage of oil and gas left to the Working Interest Participants after Land
Owners Royalty and any additional overriding royalties have been deducted from
the total oil or gas produced (approximately 17.85% to the Company on the
Montana Berger Well #1 and 17.35% to the Company on the Montana Berger Well
#2).
*Operating Agreement * The Company is a party to an operating agreement
(the "Operating Agreement") as is each Working Interest Participant, whereby
the Company appointed the Operator as the operator of the Montana Prospect
Drilling Program, its Montana Berger Wells #1 and #2, and any subsequent
wells the Program drills on the Montana Prospect, in all matters related to
the drilling and completion of the wells, and in the subsequent sale and
delivery of oil and gas therefrom, if any, into the marketplace. Each time
the Company elects to participate in the drilling and completion of a well, it
is given an itemized "Approval for Expenditures", which outlines the itemized
costs of drilling and completion as well as other costs anticipated to be
expended on the proposed well.
*Assignment of Lease * Subsequent to the execution of the Operating
Agreement, all of the subject leases comprising the Montana Prospect,
consisting of 25 separate leases, were held in the record name of Robert S.
and Marjorie Fern Haigh. The subject oil and gas leases were then assigned to
the Company (in its proportionate interest equal to 21.25%) on November 6,
1997 by the Haighs. Mr. Haigh was the negotiator on behalf of the Program
with the landowners and each of the 25 leases was originally assigned to him
prior to and during the sale of the working interest in the Program. The
leases were then assigned to the Participants in the Program subsequent to the
execution of the Operating Agreement between L & J Operating and the various
Participants in the Program, and recorded with the Crook County Recorder,
Connie D. Tschetter, on Nov. 6, 1997, Book 356, page 116. The leases are
three year leases, dated from the execution of the Operating Agreement,
unless a productive well is drilled and completed; at such time the lease
becomes perpetual for the life of the well. The Program must complete its
proposed drilling by as early as August 20, 1999 and as late as June 20,
2000, or renew those leases on undrilled acreage. The Company receives 21.25%
of the net revenues after payment of the landowner's royalty .
*The Producing Wells on the Prospect: Montana Berger Wells #1 and #2 *
The Montana Berger Well #1 is located in Township 53 North, Range 67 West, 6th
P.M. Section 17: SW/4SW/4 on 40 acres. Total acquisition, drilling and
completion costs up through the completion of the Montana Berger Well #1, were
$285,725. The working interest participants who own an aggregate of 75% of
the Program were responsible for all costs of land acquisition and drilling at
approximately $190,825; all of the Participants, however, paid their
proportionate share of completion costs once casing point was set equal to
$94,000 and will participate in any additional wells in accordance with their
working interest. The Company's initial payment of $ 74,233.66 to the
Program included the Company's purchase of the leases and drilling costs (on a
basis of 1/3 for 1/4), estimated at $54,067, and the Company's share of
completion costs estimated at $20,166. L & J Operating Company, the Operator
of the Program, began drilling of the Montana Berger Well #1 on September 9,
1997. The Operator began running casing at a depth of approximately 6,075
feet on September 15, 1997, and on October 4, 1997, it began the completion
of the Montana Berger Well #1. On October 6, 1997 a small amount of oil
surfaced and by the end of the day approximately 7 barrels of oil had flowed
and well was choked and shut down for the night. On October 7, 1997, oil
flowed at an estimated 2.7 barrels per hour at an 8/64ths choke. On October
8, 1997, the well flowed 49 barrels at no choke. Over the next few weeks the
Operator made certain adjustments on the Montana Berger Well #1 which
included, adjusting the choke, swabbing out sand, and drilling an additional
few feet. The well, as of the date hereof, is flowing at a rate of
approximately 130 barrels per day or 4,000 barrels per month The well was
considered completed as of October 10, 1997 and the Company received the
following gross revenues (17.85% of the total production after landowners
royalty of 16%) from production: from October 10 through April 30, 1998 -
$47,000 . Expenses (taxes, administration and well expenses) equaled
approximately $15,000.
The Montana Berger Well #2 is located in Township 53 North 67 West,
Crook County Wyoming, Section 17, SW NE SW. In late March, 1998, the
Company paid an additional $62,000 to the Program, its share of the drilling
and completion costs on the Montana Berger Well #2, the second well to be
drilled by the Program. Total drilling and completion costs for the Montana
Berger Well #2 were estimated at $163,000 for drilling and $129,000 for
completion, of which the Company paid 21.25% or $62,000. L & J Operating
Company began the drilling of the Montana Berger Well #2 on March 28, 1998.
They began running the casing on April 4, 1998,after reaching a depth of
approximately 6,110 feet. The completion unit was moved onto the property on
April 6, 1998. The well is currently flowing at approximately 115,000 barrels
per day. Although the Company has just begun limited revenues from production
from this second well, such revenues, to date, have been offset by the
Company's share of overages in completion costs which equal approximately
$7,500 to the Company.
*Well Completion * Both of the currently producing wells on the
Prospect, the Montana Berger Well #1 and #2 and the next proposed well to be
drilled on the Prospect, were or will be completed by the Operator in the
same fashion, without the necessity of using a heavy mud system by setting
casing prior to reaching the Minnelusa formation. A cased whole log is run
before the hole is drilled into the Upper "B" sand and this sand is not
penetrated more than a few feet. Installation of a secondary water flood is
not necessary because the Upper "B" sand in the producing wells is being
pressurized due to the adjacent water flood at the Deadman Creek Field.
Distribution Method of the Company's Product
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The Company is dependent on the Operator to market any oil production
from the Montana Berger Wells #1 and #2 and any subsequent production which
may be received from other wells which may be successfully drilled on the
Prospect. The Company must rely on the Operator's ability and expertise in
the industry to successfully market the same. Prices at which the Operator
sells gas/oil both in intrastate and interstate commerce, will be subject to
the availability of pipe lines, demand and other factors beyond the control of
the Operator. The Operator believes any oil produced can be readily sold to a
number of local buyers; however, no assurance can be given that the current
price of oil, which has decreased since the Company started realizing revenues
from operations from $16.49 per barrel @ 40 gravity to approximately $10.78
per barrel @ 40 gravity, will stabilize.
Competitive Position in the Industry
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There are a large number of companies and individuals engaged in the
exploration for and development of oil and gas properties. Competition is
intense for the acquisition of oil and gas leases suitable for exploration,
the purchase or sale of producing properties and the raising of capital.
Capital available for the investment in the oil and gas industry has declined
significantly as a result of decreases in oil prices and changes in federal
tax laws and adverse economic conditions generally affecting the oil and gas
industry. The Company is a small, inexperienced company and must compete
with much larger companies which are better capitalized and have considerably
more experience in the oil and gas industry and are better able to fund
drilling enterprises than the Company is.
Sources and Availability of Equipment/Raw Materials
- ---------------------------------------------------
In the past, increased drilling activities from time to time have created
certain shortages of equipment necessary in the drilling and or completion of
wells. Due to shortage of such equipment and to generally inflationary
trends, and the age and condition of much of the existing equipment, prices at
which equipment is available have escalated. Although the Company has
suffered no problems to date as to equipment shortages, or unsatisfactory
equipment, there is always the possibility that current equipment in use due
to age and/or lack of proper maintenance could fail to perform properly
forcing expensive repairs and/or costly delays to the working interest
participants, one of which will be the Company, or the purchase of additional
new or used equipment which could be delayed if shortages of equipment exist.
In addition, there is no guarantee that equipment will be available at such
times as the Program begins developing other properties.
Dependence on a Few Major Customers
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The Company is not dependent on a few major customers, but rather is dependent
on the Operator's ability to market crude oil to various purchasers.
Effect of Probable Government Regulations on the Company's Business
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The areas of oil and gas exploration have become highly regulated by the
State and Federal governmental agencies Although the Operator is experienced
in the area of oil and gas operations and has not encountered any unknown,
unanticipated or additional expenses or problems due to government
regulations there is no guarantee that new rules and regulations may not be
adopted either at a State or Federal level which would adversely affect the
Company's oil and gas operations. Recent changes in Wyoming statutes
affecting taxes on oil and gas have had certain effects on taxation of the
Company's oil revenues. During late 1997, the State of Wyoming eliminated its
2% severance tax rate on wells which were designated as "wild cat" wells.
Although newly discovered crude continues to receive a tax break of 2%, such
rate is applicable to the first 60 barrels of production per day, which
increases to 6% on any production over 60 barrels on a daily basis. Such tax
break is only for the first two years of production. This change has resulted
in increased taxation for the Company on production from oil and less
profitability from operations.
Costs and Effects of Compliance with Environmental Laws
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In the conduct of its drilling operations, the Operator may encounter
natural hazards, such as unusual or unexpected rock formations or pressures,
or other conditions not anticipated which could result in substantial cost
overruns or the inability of the Operator to drill and complete the well which
otherwise might be productive. The insurance against these hazards that the
Operator may carry may be insufficient to offset all such contingencies. The
Montana Project may also be subject to liabilities for pollution or other
damages, both environmental or otherwise, against which it cannot insure or
the Operator chooses not to insure, due to premium costs or other reasons.
Accordingly, it is possible that the Company could incur substantial
liabilities to third parties including liabilities for environmental clean-up
which could reduce funds available for exploration and development or reduce
revenues to the Company. The Company's current involvement with a drilling
program which is being drilled in the Minnelusa area, is burdened with is own
problems which involve potential water from the well. Although typically a
well that has excess water in production becomes economically unfeasible for
production and is subsequently capped, there are strict laws regarding
disposal of water from oil wells which can be extremely expensive to comply
with. As of the date hereof, the Operator of the wells has experience in
Minnelusa wells and operates the same in a manner which minimizes the risks
inherent in such a well.
Status of Publicly Announced New Products
- -----------------------------------------
The Company has made no public announcements on any new products or services
nor does it have any new products or services .
Patents/Trademarks/Licenses/Concessions/Franchises/Labor Contracts/Royalties.
- -----------------------------------------------------------------------------
The Company has no patents, trademarks or trade names nor does it
anticipate applying for the same. The Company does not have any licenses,
concessions, franchises, or labor contracts. The Company does not have any
royalty contracts other than those discussed under "Business of the
Registrant, Principal Products of the Company - the Montana Prospect Drilling
Program, *Landowner Royalties*."
Research and Development
- ------------------------
Other than the development of the various wells on the Montana Prospect,
the Company is conducting no research and development nor has it since its
inception. The Company's participation in the development of oil wells in the
Sidner Draw Field is further discussed elsewhere in this "Business" section
and under Item 3, Properties.
Number of Employees
- -------------------
The Company has no employees as of the date hereof other than one of its
officers. The Company compensates its Secretary/Treasurer for her services
rendered in her capacity as secretary and treasurer at a rate of $1,000 per
month. (See "Executive Compensation")
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The Company has received revenues from operations since December of 1997
when it received its first revenues from oil production from the Montana
Berger Well #1 which began oil production in October of 1997. From October
10, 1997 until April 30, 1998, the Company has received average gross monthly
revenues of $7,200 which also takes into account one partial month of
production from the Montana Berger #2 which began production in mid-April,
1998. After taking into consideration lifting costs, taxes, and
well/administration expenses, the Company received net monthly revenues
averaging approximately $ 4,500 per month for that same seven month period.
Presuming the Montana Berger Well #1 continues to average 130 barrels per day,
the Company expects to continue to receive minimum gross revenues from
production from that well of approximately $4,200 $5,000 per month. In
addition, if the Montana Berger Well #2 continues to flow at 115 per day, the
Company can expect an additional approximate $4,000 in revenues per month from
that well. Although the Company received $2,500 in revenues for April for
production from the second well, the Company owed the Operator for its share
of overages in drilling and completion costs equaling approximately $ 7,500.
All revenues from April production on both wells went to offset these costs.
The Company expects to realize revenues in the next twelve months from the two
producing wells that are more than sufficient to meet the Company's operating
capital requirements but insufficient for any immediate business expansion and
insufficient for the Company to elect to participate in additional wells in
the Program.
PLAN OF OPERATION
During the next 12 months the Company plans to participate in additional
wells on the Montana Prospect at an average cost for drilling and completion
of approximately $65,000 to the Company. In order to fund its share of the
Montana Berger #2, drilled and completed in April of 1998, as well as the
third well scheduled to be spudded in August/September 1998, the Company
commenced an offering of 1,200,000 shares of its common stock at $.15 per
share, which offering is believed to be exempt from the registration
requirements of Section 5 of the Securities Act of 1933, as amended (the "1933
Act"), under Section 3(b) of the 1933 Act, and Rule 504 of Regulation D,
promulgated thereunder and is scheduled to close on or before 60 days from
the filing of this General Registration Statement. Part of the use of
proceeds of such offering is the drilling and completion of the Company's
third well which is scheduled to commence in August/September of 1998. If the
Company is able to close the offering with all shares offered sold, it will
realize net proceeds of $170,000. The success of the offering, however, is
largely dependent on the Company's ability to attract European investors as
the offer is being made mostly to non-US residents. With the price of crude
oil at an all time ten year low, it could be difficult to attract such
investors. To date, the Company has only raised $45,397 in the offering which
was insufficient to fund the drilling and completion of the second well. The
funding of the Montana Berger Well #2 required the use of both operating
capital and cash advances from officers and directors in addition to the funds
raised in the second offering. The Company will need to raise a minimum of
$65,000 more in the offering in order to fund the third well although the
Company does expect it will have a certain amount of cash available from
revenues from operations which can be utilized for the third well.
In the next twelve months, the Company is considering the purchase of
additional working interest in the Montana Prospect Drilling Program or some
other similar drilling program, or acquiring an interest in other
oil/gas/mineral related entities in order to expand and diversify its
operations If the Company elects to participate in any one of the
opportunities it is investigating, or some other opportunity should it become
available, the Company will require additional funding. Such funding will be
obtained from operating revenues, private placements of the Company's stock,
or loans from officers and directors. In the alternative, especially if
larger amounts of capital are required to fund a transaction, the Company is
contemplating registering for sale shares of its common stock. There is no
guarantee, however, that the Company would be successful is such endeavor or
successful in attracting an underwriter.
The Company does not expect to hire any additional employees in the next
twelve months although the Company does have an understanding with Mr. Guido
Cloetens, an officer and director of the Company, that it will, in the near
future, enter into a consulting agreement with Mr. Cloetens or an entity to be
formed by Mr. Cloetens for such purpose, whereby the Company would pay Mr.
Cloetens, or the to-be-formed entity, $2,000 per month for consulting
services. Such agreement will not be consummated until the Company believes
that its cash flow from operations is sufficient.
ITEM 3. DESCRIPTION OF PROPERTY
The Company owns a 21.25% working interest in a drilling program on the
320 acre Montana Prospect, located on an oil field known as the Sidner Draw
Field.
DESCRIPTION OF FIELDS THE SIDNER DRAW FIELD
Geology
- -------
In contemplating its initial investment in the Montana Prospect
Drilling Program, the Company reviewed information contained in a geology
report by Twiford International Inc. The Prospect, located in the Sidner Draw
Filed in Township 53 North, Range 67 West, 6th P.M. of Section 17: W/2W/2,
SE/4NW/4, NE/4SW/4 and Section 18: E/2NE/4 (2- 40 acre parcels are in the NE
part of Section 18 and 6- 40 acre parcels are in Section 17), Crook County,
Wyoming is comprised of 320 acres located on two adjacent southwest plunging
anticlinal paleogeomorphic features. The productive formation is the Minnelusa
Upper "B" sand and is the primary target of this prospect area. The sand on
the Montana Berger Well #1 was anticipated and subsequently encountered at
depth of 6100 feet at the well location. The same Minnelusa Upper "B" sand
which is common to the Montana Prospect will be encountered on any wells
drilled. This particular sand was charged with a bottom hole pressure
approximately 800 lbs. above normal, or about 3200 pounds. The excessive
pressure is believed to be caused from water loss in the adjacent Deadman
Creek Field which is undergoing a water flood in the lower "B" Minnelusa sand.
The field is currently named the Sidner Draw Field.
The Minnelusa Upper "B" Sand is an eolian dunal complex which pinches
out in an easterly or up-dig direction. This pinch-out is due in part to
erosion or non-deposition of the Upper "B" sand. The impermeable Opeche shale
is the up-dig trapping mechanism for oil in the Upper "B" sand while the
underlying Middle "B" dolomite provides the bottom seal for the Upper "B"
sand. The lateral trapping mechanism may be a pinch out of the sand itself
which will become dolomitic approaching the barrier. This could be a
subsystem boundary trap for the Upper "B" sand thus allowing a large
accumulation of oil.
Analogy to Sidner Draw Field - the Edsel Field
- ----------------------------------------------
The Montana Prospect area which is located on the Sidner Draw FieLd is
adjacent to sections of similar geology such as the Edsel Field which is
located in sections 25,26, 27, 24, 36 of T.54N, R.68W, Crook County Wyoming
and contains wells which produce oil from Minesula Upper "B" sand.
According to the Wyoming Oil and Gas commission, as of May, 1996, the field
had produced 4,849,196 barrels of oil. Average porosity in the Edsel Field is
19.6% with net pay averaging 21.5 feet. The average water saturation is 47%.
The original oil in place was estimated at 6.25 million barrels and was
expected to produce 12.4% of this figure on a primary production increasing to
or 2.49 million barrels under a polymer augmented water flood. Since the
report to the Wyoming Oil and Gas Commission (1996- 4,849,196 barrels), there
have been six additional producing wells drilled in the field.
Stratigraphically, the Edsel Field is similar to the Montana Prospect. This
comparison is based, in part, on values taken from the Wyoming Geological
Association Guidebook 1984.
DRILLING ACTIVITY
Exploration, Site Testing and Conclusions
- -----------------------------------------
Five test holes were previously drilled by other programs on the Montana
Prospect. Of the five test holes, four were dry holes and one is currently a
shut-in well. The shut-in well is on the southern feature and was drilled by
EMC Energies, Inc. in the SW SW of Section 17 and had an initial production of
700 barrels of oil per day, flowing. Such well was shut-in due to too much
water. Subsequent to the Company's involvement in the Program, the Montana
Berger Well #1 was drilled and completed about 800 feet northeast of the
initial shut-in well, in NE SW SW of Section 17 and the Montana Berger Well #2
was drilled approximately 650 feet from the Montana Berger Well #1 in SW NE SW
of Section 17 (See "The Producing Wells on the Prospect: Montana Berger Well
#1 and #2" under BUSINESS").
The four dry holes drilled on the Montana Prospect had varying results.
Common to each of the test sites however was the presence of water in
sufficient quantities to prevent the recovery of any material amount of oil
in an economic fashion. The hole drilled in SE NE of section 18, appears to
be on the down dip edge of an oil accumulation, while the well drilled in the
SW SW of section 17 penetrated oil in a pool as evidenced from the production
from the well (shut-in because of too much water.) The hole drilled in the NE
NE of section 18 penetrated a tight Upper "B" and is therefore a barrier hole.
The hole drilled in the SE NW of section 17 penetrated a thin tight section of
Upper "B" interval is on the up-dip edge of the dunal complex . The hole
drilled in the SE SW of section 17 penetrated a Minnelusa section that is
dolomitic with the Upper "B" zone completely absent. This hole penetrated the
southern lateral barrier of the Prospect area.
A dunal complex is present in this area with the necessary parameters
present to form an accumulation of oil, i.e. sand with good oil shows as well
as production down dip, sand gone and/or tight up-dig and laterally. The
first producing well on the Prospect, the Montana Berger Well #1, was drilled
in the NE SW SW of section 17 and was high structurally to the original well
on the SW SW of section 17 (the shut in well).
Exploration and test drilling, has resulted in an estimated productive
area of 130 acres with an estimated average thickness of productive pay in
feet of 25 and an estimated porosity of 23.9%. The conclusion of an initial
report on the Montana Prospect performed by Twiford International, Inc.,
indicated that on the estimated 130 productive acreage, there was potentially
5,739,072 barrels of oil in place with estimated primary recovery under normal
conditions of 12.4%. A waterflood could increase that recovery. The high
pressure of the Upper "B" sand may be a waterflood in itself precluding the
necessity of the installation. Gravity of the oil is approximately 20
degrees.
Drilling Activity
- -----------------
The following tables sets forth the results of drilling activity by
the Company, net to its interest, for since its inception in 1996.
Year Ended December 31,
1996 1997 As of Date Hereof
______________________ __________________
Development Wells Gross:
Productive 0 1 2
Dry Holes 0 0 0
Total 0 1 2
Development Wells Net:
Productive 0 0.2125 0.425
Dry Holes 0 0 0
Exploratory Wells 0 0 0
PRODUCTION
The following table summarizes net volumes of oil produced and sold,
and the average prices received for such sales from all properties in which
the Company held an interest since its inception in 1996.
Year Ended December 31, Four months ended
1996 1997 April 30, 1998
_______________________ _________________
Average Sales Price ($/Bbl) 0 $ 13.15 $ 8.69
Production Data No. of Barrels(1) 0 1531.19 2232.10
Lifting Costs per barrel(2) 0 $ 2.31 $ 1.31
Taxes per barrel (3) 0 $ 1.46 $ 1.10
_____________________________________________________________________________
(1) Company's share of production of 8,578 bbls. total in 1997 and 17,838
bbls. total for four months ended April 30, 1998.
(2) Lifting costs includes monthly recurring costs of producing and marketing
oil and gas, including costs incurred for labor, fuel, repairs, hauling,
materials, supplies, utilities, and other costs incident thereto, insurance
and casualty loss expense, and compensation to well operators for other
services rendered in conducting such operations.
(3) Average taxes per barrel paid by the Company which include production
taxes, severance taxes and ad valorem taxes
PRODUCTIVE WELLS AND ACREAGE
As of the date hereof, the Company has two net productive wells each on 40
acres, only one of which was producing as of the last fiscal year, in which it
owns a 21.25% working interest net of landowners' royalty.
The following table sets forth information regarding the number of
productive wells in which the Company had a working interest as of the current
date (at December 31, 1997, the Company only had one well) Productive wells
are either producing wells or wells capable of production although currently
shut-in. One or more completions in the same bore hole are counted as one
well.
Gross Productive Wells Net Productive Wells
Total No. of Wells in which Sum of Total Amount of
Type Working Interest is Owned Working Interest in Gross Wells
- ---------- ---------------------------- --------------------------------
Oil 2 .425
The following table sets forth the approximate developed and undeveloped
acreage in which the Company held a leasehold, mineral or other interest as of
the current date. Undeveloped acreage includes leased acres on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of gas of oil, regardless of whether or nut such
acreage contains proved reserves. A gross acre is an acre in which interest is
owned. A net acre is deemed to exist when the sum of fractional ownership
interests in gross acres equals one. The number of net acres is the sum of
fractional interests owned in gross acres expressed in whole numbers and
fractions thereof.
Developed Developed Undeveloped Undeveloped
Location Gross Net Gross Net
- -------- --------- --------- ----------- -----------
Wyoming 80 17 240 51
RESERVES
Reserve Estimates
- -----------------
Although the Company has had reports prepared for it on estimated oil
reserves, no estimate of total proved net oil reserves of the Company has been
filed with or included in reports to any federal authority or agency.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting rates of production and future net cash
flows. The quantities of oil that are ultimately recovered, production and
operating costs, the amount and timing of future development expenditures, and
future oil sales prices may all differ from those assumed in these estimates.
Reserve assessment is a subjective process of estimating recovery from
underground accumulations of oil that cannot be measured precisely, and
estimates of other persons might differ from those of the Company.
Accordingly, reserve estimates are often different from the quantities of oil
that are ultimately recovered. Moreover, the discounted present value shown
below should not be construed as the current market value of the estimated oil
reserves attributed to the Company's properties. A market value determination
would take into account, among other things, the recovery of reserves not
presently classified as proved, anticipated future changes in prices and costs
and a discount factor more representative of the time value of money and the
risk s inherent in reserve estimates. The information included in this section
should be read in conjunction with the Company's Financial Statements
including the Notes thereto.
The Company's estimated proved oil reserves as of the date hereof are as
follows:
Proved Developed 79,460 barrels
Proved Undeveloped 0 barrels
The Company's estimated future net cash flows from proved developed oil
reserves as of the date hereof, and the discounted present value of such cash
flows before income taxes are as follows:
Proved Proved
Undeveloped(1) Developed
--------- -----------
December 31, 1998 0 $ 79,541.52
December 31, 1999 0 $ 58,501.22
December 31, 2000 0 $ 42,327.36
(1) The Company, as of the date hereof, has no proved undeveloped properties
and considers only those developed properties currently producing revenues
from oil production as proved.
Reserve Report on Montana Prospect
- ----------------------------------
The Working Interest Participants in the Program, subsequent to the
completion of the Company's audit of its year ended December 31, 1997, but
prior to the commencement of this Form 10SB Registration Statement, engaged a
petroleum engineer, Tony C. Stone, dba Jadasat Enterprises, to complete a
report on the probable oil reserves on the Montana Prospect. The report was
completed as a supplement to the Twiford International, Inc. Prospect Study
(see DESCRIPTION OF FIELDS THE SIDNER DRAW FIELD, Geology), and concluded
that recoverable reserves on the Montana Prospect less production to date is
estimated at 1,508,400 barrels. Mr. Stone's conclusions were based on the
Twiford International Report isopatch and structure maps, and the completion
and restricted production procedure used by the Operator on the Montana Berger
Well #1. Mr. Stone stated that the Upper "B" productive interval in the
Sidner Draw Field which was discovered with the currently shut in well, is
confirmed by the Montana Berger Well #1. The confirmation well has produced
approximately 14,000+ barrels as of January 31, 1998, water free, and is
currently flowing at 130 BOPD with 900 psi surface pressure on 6/64" choke.
It is produced on a restricted flow to limit wellborn draw down to 100 psi
maximum to avoid water "coming" or the fracturing of the semi-unconsolidated
sands coming through naturally fractured dolomite separating sands. Because
of oil price volatility at the time of the report, no economic analysis was
performed by Mr. Stone. Mr. Stone also indicated that one or more delineation
wells were required to totally validate the prospect structure
DELIVERY COMMITMENTS
The Operator has no delivery commitments on any of the production on either of
the Company's two producing wells.
PRESENT ACTIVITIES
The Company currently has no activities except sale of production on its two
producing wells. The Company intends to begin drilling a third development
well on the Prospect in August of 1998.
INVESTMENT POLICIES
The Company has no investment in any real estate interests or real
estate other than its working interest in the Montana Prospect. It has no
investment in any real estate mortgages, or securities or interests in persons
primarily engaged in real estate activities, nor, as of the date, hereof does
the Company intend to invest in any of the foregoing. The Company will,
however, continue to invest in oil and gas leases, when and if Management
deems it in the Company's best interests to do so. It may also invest in
production interest or other leases. In addition, the Company may elect to
invest in other oil and gas related enterprises which could consist of
acquiring companies which have business purposes or interests related to oil
and gas, and purchasing additional interest if available in the Montana
Prospect Drilling Program or other drilling programs.
OFFICES
The Company rents office space in Salt Lake City, Utah, on a month to
month basis at a monthly rate of $260 per month including telephone,
sufficient to conduct the day to day operations of its business.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the amount and nature of beneficial
ownership of each of the executive officers and directors of the Company. The
information below is based on 3,392,646 shares issued and outstanding as of
the date hereof and also includes a column setting forth percentage of class
upon completion of the offering currently being conducted by the Company (on
or before the 60 days from the filing date of this Registration Statement)
presuming all shares offered in the offering are sold, as to which there can
be no assurance.
<TABLE>
<CAPTION>
Amount and Percent After
Title Nature of Percent(1) Offering Assuming
of Principal Shareholders Beneficial of Class as Maximum
Class Name, Address & Position Ownership Current Date Sold(2)
- ----------- ------------------------- ------------ ------------- -----------------
<S> <C> <C> <C> <C>
Common Guido Cloetens(3) 1,810,000
Kampenhoutsebaan 100A Sole Voting
1982 Zemst, Belgium Power 53.35% 42.2%
President & Director
Common Terri Jackson 180,000
3483 South 3170 East Sole Voting
Salt Lake City, UT 84109 Power 5.3% 4.2%
Secretary/Treasurer &
Director
Common Keith Biesinger(4) 0 0 0
3200 South Cottonwood Canyon
Salt Lake City, Utah 84121
_______________________________________________
Officers and
Directors (3 Persons)(5) 1,990,000 58.65% 46.4%
(1) Based on 3,392,646 shares issued and outstanding as of the date hereof
(2) Based on 4,290,000 shares issued and outstanding if all shares offered are sold
in the current offering being conducted by the Company.
(3) Mr. Cloetens has made certain loans to the Company. In the past, he has elected
to convert similar loans into equity of the Company. If Mr. Cloetens wishes to
convert such current loans into stock of the Company, it is likely the Company will do
so. As of the date hereof, the Company owes Mr. Cloetens $8,889, which, if converted
at a rate of $.15 per share (the per share price in current offering), would result
in 59,260 additional shares issued to Mr. Cloetens for a total of 1,869,260 shares
beneficially owned by Mr. Cloetens or 54.15% of the then outstanding shares.
(4) Mr. Keith Biesinger currently holds no shares in the Company and, as of the date
hereof, there are no arrangements and/or agreements for Mr. Biesinger to receive any
shares of the Company's stock. Ms. Lise-Lotte Newell, a former director of the
Company, holds 15,500 shares of the Company's stock or 0.5%.
(5) Each of the officers and directors is entitled to purchase shares being offered
in the Company's current offering at a purchase price of $.15 per share; as of the
date hereof, none of the officers and directors has subscribed for shares in such
offering.
</TABLE>
SECURITY OWNERSHIP OF PERSONS OWNING 5% PERCENT OR MORE OF THE COMPANY'S
OUTSTANDING SHARES
The following table sets forth the amount and nature of beneficial
ownership of each person known to a beneficial owner of more than five
percent of the issued and outstanding shares of the Company. The following
information is based on 3,392,646 shares issued and outstanding as of the date
hereof and also includes a column setting forth percentage of class upon
completion of the offering currently being conducted by the Company (on or
before the 60 days from the filing date of this Registration Statement)
presuming all shares offered in the offering are sold, as to which no
assurance can be given.
<TABLE>
<CAPTION>
Amount and Percent After
Title Nature of Percent(1) Offering Assuming
of Principal Shareholders Beneficial of Class as Maximum
Class Name, Address & Position Ownership Current Date Sold(2)
- ----------- ------------------------- ------------ ------------- -----------------
<S> <C> <C> <C> <C>
Common Guido Cloetens(3) 1,810,000
Kampenhoutsebaan 100A Sole Voting
1982 Zemst, Belgium Power 53.35% 42.2%
President & Director
Common Terri Jackson 180,000
3483 South 3170 East Sole Voting
Salt Lake City, UT 84109 Power 5.3% 4.2%
Secretary/Treasurer &
Director
(1) Based on 3,392,646 shares issued and outstanding as of the date hereof.
(2) Based on 4,290,000 shares issued and outstanding if all shares offered are sold
in the current offering being conducted by the Company.
</TABLE>
CHANGES IN CONTROL
The Company has no arrangements which might result in a change in control.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
OFFICERS AND DIRECTORS
The names, addresses, ages and respective positions of the current
directors and officers of SW Ventures, Inc. are as follows:
Name Age Position Held & Since
- -------------------------------- ------ --------------------------
Guido Cloetens 33 President, Chairman of the
Kampenhoutsebaan 100A Board of Directors, Chief
1982 Elewijt Zemst, Belgium Executive Officer
Since May 1996
Terri Jackson 45 Secretary/Treasurer and a
3483 S. 3170 E. Director
Salt Lake City, UT 84109 Since May 1996
Keith Biesinger, Esq. 53 Director
3200 Big Cottonwood Rd. Since March 13, 1998
Salt Lake City, Utah 94121
BIOGRAPHICAL INFORMATION ON OFFICERS AND DIRECTORS
Guido Cloetens, age 33, is the President, Chief Executive Officer and
Chairman of the Board of Directors of the Company. From 1988 to 1989 Mr.
Cloetens was a representative of DAIWA Securities, Inc., in Brussels, Belgium,
engaged in selling Japanese equities. In 1990, Mr. Cloetens worked as an
investment advisor for PBI Securities, Inc. in Amsterdam, Holland. From 1991
to 1994, Mr. Cloetens was a manager of client accounts for institutional
investors with Kredietbank in Brussels. From May 1994 to November 1995, Mr.
Cloetens was the owner/manager of Pyros Consulting, a Belgium corporation
engaged in the financial consulting business. Pyros Consulting was sold in
1995. Since then, Mr. Cloetens has been self-employed as a businessman with an
interest in several private companies. The Company intends to employ Mr.
Cloetens, or an entity to be formed by Mr. Cloetens, as a consultant and/or
management/consulting firm in the immediate future. (See "Transactions
Between the Company and Management.") Mr. Cloetens successfully completed a
post university program as investment advisor at the EHSAL Management School
in Brussels in 1992. He also attended courses in economics and accounting at
the Catholic University of Leuven in Belgium followed with a post university
program "Corporate Finance and Investment and Financial Statements Analysis at
the University of Brussels in 1984 - 1986.
Terri Jackson, age 45, is the Secretary/Treasurer and a director of the
Company. Ms. Jackson is the author of "Glide's Garden", published in 1977 in
England by Oreal Press, London, England as well as a contributing writer to
the Hudson-Mohawk SIDS Alliance Newsletter. From 1977 to 1987, Ms. Jackson
worked as an employee of Intermountain Plant Works, and was promoted to
operations manager from 1984-1987. Ms. Jackson was a founding member and on
the Board of Trustees of the Broadway Stage from 1989-1991, a live theater in
Salt Lake City, Utah. From 1989 to the 1996, Ms. Jackson worked as a legal
assistant to an attorney in Salt Lake City, Utah specializing in corporate and
securities law. In late 1996, Ms. Jackson co-founded Data Electronic Filing
Service, LC, a company established to assist lawyers, accountants and public
companies with S.E.C. mandatory electronic filing requirements. Data
Electronic Filing Service LC is a registered S.E.C. EDGAR filing agent.
Currently, Ms. Jackson also works as an independent paralegal providing
services to various attorneys in the area of securities and corporate law.
Keith Biesinger, Esq., age 53, was appointed an interim Director by the
Company's Board of Directors on March 13, 1998, to serve the unexpired portion
of a term held by Ms. Lise-Lotte Ruzicka Newell who resigned on March 13,
1998. Mr. Biesinger is a member of the Utah State Bar Association and has
practiced law in Salt Lake City, Utah for numerous years. He is also a member
of Safari Club International, Sierra Club, Ducks Unlimited, and the World
Wildlife Fund. Currently, in addition to his position with the Company, he
serves as a trustee of The Gun Club, a Utah non-profit corporation. His
interests are shooting sporting clays, fly fishing, hiking and traveling.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Except as indicated below and or hereinbefore, to the knowledge of
Management, during the past five years, no present or former director,
executive officer, or person nominated to become a director or executive
officer of the Company:
(1) Filed a petition under federal bankruptcy laws or any state
insolvency law, now had a receiver, fiscal agent or similar officer appointed
by a court for the business or property of such person, or any partnership in
which he was a general partner at or within two years before the time of such
filing, or any corporation or business association of which he was an
executive officer at or within two years before the time of such filing;
(2) Was convicted in a criminal proceeding or named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offences);
(3) Was the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining him or her from or
otherwise limiting his involvement in any type of business, securities or
banking activities;
(4) Was found by a court of competent jurisdiction in a civil
action, by the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated any federal or state securities law, and
the judgment in such civil action or finding by the Securities and Exchange
Commission has not been subsequently reversed, suspended , or vacated.
FAMILIAL RELATIONSHIPS.
There are no family relationships among the Company's directors and/or
executive officers.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information as to the Company's
Chief Executive Officer and each of the Company's officers and directors who
have received compensation for the years ended December 31, 1996 and December
31, 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------------------------------------------------------
Annual Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Other
and Compensa- Stock Underlying LTIP Compensa-
Principal sation Award Options/ Payouts tion
Position Year Salary($) Bonus($) ($) ($) SAR's(#) ($) ($)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Guido Cloetens(1) 1996 -0- -0- -0- -0- -0- -0- -0-
Kampenhoutsebaan 100A 1997 -0- -0- -0- -0- -0- -0- -0-
1982 Elewijt-Zemst
Belgium
President, Chairman
of the Board, CEO
Terri Jackson(2) 1996 -0- -0- -0- -0- -0- -0- -0-
3483 South 3170 East 1997 -0- -0- -0- $2,750(3) -0- -0- -0-
Salt Lake City, UT
84109
Secretary/Treasurer
Director
Keith Biesinger 1996 -0- -0- -0- -0- -0- -0- -0-
3200 Big Cottonwood 1997 -0- -0- -0- -0- -0- -0- -0-
Salt Lake City, UT
84121
Director
Lise-Lotte (Ruzicka) 1996 -0- -0- -0- -0- -0- -0- $ 1000(5)
Newell(4) 1997 -0- -0- -0- -0- -0- -0- -0-
Director
(1) The Company has agreed to pay Mr. Cloetens or an entity yet to formed by Mr. Cloetnes,
$2000 per month for consulting services. As of the date hereof, the agreement between the
Company and Mr. Cloetens has not been finalized. (See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
(2) Terri Jackson has been receiving a salary of $1,000 per month starting in February 1998
for her services of Secretary/Treasurer of the Company. There is no employment agreement
in place with Ms. Jackson
(3) Ms. Jackson received 55,000 shares of the Company's unregistered common stock for
services rendered to the Company in her capacity of Secretary Treasurer for the period
from inception in May of 1996 through May of 1997. The shares were given a deemed value
of $0.05 per share based on the following: that the par value of the stock was $0.001,
that there was no trading market for the Company's common shares, and that the Company
was preparing to commence an offering of its common stock at $.10 per share. The price
of $.05 was the price utilized by Mr. Cloetens to convert various loans made to the
Company into stock as of that same date. Ms. Jackson currently owns 180,000 shares of
the Company.
(4) Lise-Lotte Ruzicka Newell resigned in early 1997.
(5) Lise-Lotte Ruzicka Newell received $1,000 for her assistance in organizing the Company.
The $1,000 was not paid until September of 1997.
</TABLE>
COMPENSATION OF DIRECTORS IN PERFORMANCE OF DUTIES
The Company pays no fees to members of the Company's Board of Directors
for the performance of their duties as directors. The Company has not
established committees of the Board of Directors.
EMPLOYMENT CONTRACTS/TERMINATION OF EMPLOYMENT/CHANGE-IN-CONTROL ARRANGEMENTS
The Company has no employment contracts in effect with any of the members
of its Board of Directors or its executive officers nor are there any
agreements or understandings with such persons regarding termination of
employment or change-in control arrangements. The Company has agreed to
compensate Ms. Jackson $1,000 per month for services rendered in her capacity
as Secretary/Treasurer of the Company. The Company has also agreed to enter
into a Consulting Agreement with Mr. Guido Cloetens, President, Chief
Executive Officer and a director of the Company, or an entity to be formed by
Mr. Cloetens for such purposes. The Company will compensate Mr. Cloetens or
such entity $2,000 per month when the agreement is consummated. (See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".)
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no material transactions in the past two years or
proposed transactions to which the Company has been or proposed to be a party
in which any officer, director, nominee for officer or director, or security
holder of more than 5% of the Company's outstanding securities is involved.
Although the Company has intends to enter into an consulting agreement with
Mr. Cloetens or an entity to be formed by him in which he retains a
controlling interest, the amount involved in the transaction will not be more
than $24,000 per year. Mr. Cloetens is currently serving as President of
the Company, Chief Executive Officer and Chairman of the Board. Mr. Cloetens,
or an entity to be formed by Mr. Cloetnes, will provide management and
consulting services to the Company, including, but not limited to, shareholder
relations for non-US shareholders, financial advice, investigating and
analyzing various business opportunities, etc. The Company has agreed to
pay Mr. Cloetens, or the to be formed entity, $2,000 a month for its
services. Although an agreement has not been consummated, the Company expects
to begin utilizing the services of Mr. Cloetens in such capacity at such time
as it believes revenues from operations are sufficient to do so.
The Company has no promoters other than its President and a director, Mr.
Guido Cloetens. Other than the consulting agreement discussed above which the
Company intends to enter into with Mr. Cloetens (or his yet to be formed
entity), there have been no transactions which have benefitted or will benefit
Mr. Cloetens either directly or indirectly.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, $.001 par value per share. The holders of Common Stock (i)
have equal ratable rights to dividends from funds legally available therefore,
when, as and if declared by the Board of Directors of the Company; (ii) are
entitled to share ratably in all of the assets of the Company available for
distribution or winding up of the affairs of the Company; (iii) do not have
preemptive subscription or conversion rights and there are no redemption or
sinking fund applicable thereto; and (iv) are entitled to one non-cumulative
vote per share, on all matters which shareholders may vote on at all meetings
of shareholders. The Company, however, does not anticipate paying dividends
on its Common Stock in the foreseeable future but plans to retain earnings, if
any, for the operation and expansion of its business.
NON-CUMULATIVE VOTING
The holders of shares of Common Stock of the Company do not have
cumulative voting rights which means that the holders of more than fifty
percent (50%) of such outstanding shares, voting for the election of
directors, can elect all of the directors to be elected, if they so choose,
and, in such event, the holders of the remaining shares will not be able to
elect any of the Company's directors. Management currently owns 58.65% of the
outstanding shares of the Company. At the completion of the current offering
on or before the effective date of this registration statement, Management's
position could be reduced to 46.4% provided no member of Management elects to
purchase shares in the offering and further provided all shares offered are
sold, of which no assurance can be given. It is likely that Management will
retain control of the Company once the current offering is closed.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
The Company has no public trading market for its common stock. Although
the Company intends to seek a quotation for its common shares on the NASD
Over-the-Counter Bulletin Board in the future, there is no assurance the
Company will do so, nor is there any assurance that should the Company
succeed in obtaining a listing for its securities on the NASD OTC Bulletin
Board or on some other exchange, that a trading market for the Company's stock
will develop. There are no outstanding options, warrants to purchase, or
securities convertible into common equity of the Company outstanding. The
Company has not agreed to register any shares of its common stock for any
shareholder.
The Company is currently offering a maximum of 1,200,000 of its common
shares at an offering price of $0.15 per share pursuant to an exemption from
the registration as promulgated under Section 3(b), Regulation D, Rule 504 of
the 1933 Act. The offering commenced on March 16, 1998, and, as of the date
hereof, the Company has sold 302,646 of its common shares for gross proceeds
to date of $45,397. The Company intends to close the current offering on or
before sixty days from the filing date of this Registration Statement. Such
shares being offered in the current offering are not restricted in accordance
with the provisions of Rule 504.
Of the 3,392,646 common shares of the Company's common stock currently
issued and outstanding, 1,000,000 are owned by public investors in the
Company's prior offering, 302,646 are owned by public investors in the
Company's current offering and 2,090,000 are held by officers, directors and
other initial shareholders have been issued in reliance on the "private
placement" exemption of Section 4(2) of the Securities Act of 1933, as
amended. If a market for the Company's common shares were to develop, such
"restricted" shares would not be available for sale in the open market without
registration, except in reliance upon Rule 144 under the Act or some other
applicable exemption. In general, under Rule 144, a person or persons whose
shares are aggregated, who beneficially owned shares acquired in a non-public
transaction for at least one year, including persons who may be deemed
"affiliates" of the Company as that term is defined under the 1933 Act, would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares of Common Stock or
the average weekly reported trading volume on all national securities
exchanges and through NASDAQ during the four calendar weeks preceding such
sale provided current public information is then available. As of the date
hereof, 2,000,000 of the 2,090,000 shares issued in reliance upon Section
4(2)and therefore considered "restricted", have been beneficially owned for
more than one year, which would make them eligible for resale under Rule 144
provided all of the applicable terms and conditions were met, and provided a
public market existed for the Company's common shares. The additional 90,000
shares will have been owned for a year on January 27, 1999. In addition, of
the 1,000,000 shares offered and sold in the Company's first offering, 365,500
shares were purchased by directors of the Company, one current director and
one a former director. Such shares are also "restricted" although not subject
to a holding period, and are subject to the provisions of Rule 144 that apply
to affiliate transactions. The majority of the outstanding shares of the
Company which are eligible for resale under Rule 144, when and if a market
exists, are owned by one director of the Company, Mr. Guido CLoetens. Mr.
Cloetens owns 1,810,000 of the Company's outstanding shares which would limit
the amount of shares which could be sold under Rule 144 in any 90 day period
considerably, if a market develops.
DIVIDENDS
The payment by the Company of dividends, if any, in the future, rests
within the discretion of its Board of Directors and will depend among other
things, upon the Company's earnings, its capital requirements and its
financial condition, as well as other relevant factors. The Company has not
paid or declared any dividends to date due to its present financial status.
The Company does not anticipate paying dividends on its Common Stock in the
foreseeable future but plans to retain earnings, if any, for the operation and
expansion of its business. There are no restrictions that limit the ability to
pay dividends on common equity or that are likely to limit the same in the
near future.
HOLDERS
There are approximately 48 shareholders of record of the Company's common
stock.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings and,
to the best of its knowledge, no such action by or against the Company has
been threatened. None of the Company's officers, directors, or beneficial
owners of 5% or more of the Company's outstanding securities is a party to
adverse to the Company nor do any of the foregoing individuals have a material
interest adverse to the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company has had no changes in or disagreements with its accountant,
Randy Simpson C.P.A.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued the following unregistered common shares in the
past three years.
(1) At inception the Company issued 1,590,000 unregistered common shares:
1,475,000 shares were issued for $11,000 in capital contributions from
founding shareholders and 115,000 shares were issued to legal counsel for the
Company for services rendered in the Company's organization. The shares were
issued pursuant to the exemption provided for under Section 4(2) of the
Securities Act of 1933, as amended , to 5 individuals, as a "transaction not
involving a public offering."
(2) In May 1997, an additional 410,000 unregistered common shares were issued
pursuant to the exemption provided under Section 4(2) of the Act to three
individuals: Terri Jackson, an officer and director of the Company received
55,000 shares; Max Tanner, the Company's counsel received 35,000 shares; and
Guido Cloetens, an officer and director of the Company received 320,000
shares. Each of the transactions was given a deemed value of $0.05 per share.
Ms. Jackson received her shares for services rendered to the Company from
inception through May of 1997; Mr. Tanner received his shares for additional
services rendered to the Company during 1997, and Mr. Cloetens received his
shares upon conversion of loans made by him to the Company from November 1996
through May of 1997, aggregating $13,000.
(3) In June of 1997, the Company conducted an offering of 1,000,000 of its
unregistered common shares at an offering price of $.10 per share for gross
proceeds of $100,000. The offering was conducted pursuant to an exemption
from the registration requirements of the Section 5 of the Act as promulgated
under Section 3(b), Regulation D, Rule 504 with offers and sales made to
residents of the State of Nevada and non-United States residents, mainly
individuals resident of Belgium. The offering closed on September 30, 1997
with all 1,000,000 shares sold and gross proceeds of $100,000.
(4) In January of 1998, Mr. Guido Cloetens, an officer and director of the
Company, was issued an additional 90,000 unregistered common shares of the
Company, upon conversion of a loan he made to the Company during the Company's
fiscal year ended December 31, 1997. The loan was for $9,000 and was
converted at a rate of $0.10 per share. Mr. Cloetens 90,000 shares were
issued in reliance on the exemption provided under Section 4(2) of the Act.
(5) On March 16, 1998, he Company commenced a second offering of its common
stock under Regulation D, Rule 504. The Company is offering up to 1,200,000
shares of its unregistered common stock at $.15 per share. To date, the
Company has sold 302,646 common shares in the offering with gross proceeds
of $45,396. Of the 302,646 shares sold, 12,240 shares were issued to satisfy
an outstanding balance due to the Company's attorney of $1,836. All of the
remaining shares in the offering were purchased for cash. The Company may
close its offering at any time, at its discretion, but prior to the effective
date of this Registration Statement (60 days after the filing hereof.)
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The only statutes, charter provisions, by-laws, contracts or other
arrangements under which any controlling person, director or officer of the
Company is insured or indemnified in any manner against any liability which he
may incur in his capacity as such, are as follows:
Sections 78.037, 78.751 and 78.752 of the Nevada Revised Statutes offer
limitation of liability protection for officers and directors and/or
indemnification protection of officers, directors, employees and agents of the
Company, and provide as follows:
78.037. Articles of incorporation: Optional provisions.
The articles of incorporation may also contain:
1. A provision eliminating or limiting the personal liability of a
director officer to the corporation or its stockholders for damages for breach
of fiduciary duty as a director or officer, but such a provision must not
eliminate or limit the liability of a director or officer for:
(a) Acts or omissions which involve intentional misconduct, fraud
or a knowing violation of law; or
(b) The payment of distributions in violation of NRS 78.300.
2. Any provision, not contrary to the laws of this state, for the
management of the business and for the conduct of the affairs of the
corporation, and any provision creating, defining, limiting or regulating the
powers of the corporation or the rights, powers or duties of the directors,
and the stockholders, or any class of the stockholders, or the holders of
bonds or other obligations of the corporation, or governing the distribution
or division of the profits of the corporation.
78.751. Indemnification of officers, directors, employees and agents;
advancement of expenses.
1. A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with the action, suit or proceeding if he acted in good faith
and in a manner which is reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
2. A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually
and reasonably incurred by him in connection with the defense or settlement of
the action or suit if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter
as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
3. To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense
of any claim, issue or matter therein, he must be indemnified by the
corporation against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
4. Any indemnification under subsections 1 and 2, unless ordered by a
court or advanced pursuant to subsection 5, must be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made:
a. By the stockholders;
b. By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit or proceeding;
c. If a majority vote of a quorum consisting of directors who
were not parties to the act, suit or proceeding so orders, by independent
legal counsel in a written opinion; or
d. If a quorum consisting of directors who were not parties to
the act, suit or proceeding cannot be obtained, by independent legal counsel
in a written opinion.
5. The articles of incorporation, the bylaws or an agreement made
by the corporation may provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an undertaking
by or on behalf of the director or officer to repay the amount if it is
ultimately determined by a court of competent jurisdiction that he is not
entitled to be indemnified by the corporation. The provisions of this
subsection do not affect any rights to advancement of expenses to which
corporate personnel other than directors or officers may be entitled under any
contract or otherwise by law.
6. The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:
a. Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the articles
of incorporation or any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, for either an action in his official
capacity or an action in another capacity while holding his office, except
that indemnification, unless ordered by a court pursuant to subsection 2 or
for the advancement of expenses made pursuant to subsection 5, may not be made
to or on behalf of any director or officer if a final adjudication establishes
that his acts or omissions involved intentional misconduct, fraud or a knowing
violation of the law and was material to the cause of action.
b. Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors
and administrators of such a person.
78.752. Insurance and other financial arrangements against liability of
directors, officers, employees and agents.
1. A corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise for
any liability asserted against him and liability and expenses incurred by him
in his capacity as a director, officer, employee or agent, or arising out his
status as such, whether or not the corporation has the authority to indemnify
him against such liability and expenses.
2. The other financial arrangements made by the corporation pursuant
to subsection 1 may include the following:
a. The creation of a trust fund.
b. The establishment of a program of self-insurance.
c. The securing of its obligation of indemnification by
granting a security interest or other lien on any assets of the corporation.
d. The establishment of a letter of credit, guaranty or surety.
No financial arrangement made pursuant to this subsection may provide
protection for a person adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable for intentional misconduct,
fraud or a knowing violation of law, except with respect to the advancement of
expenses or indemnification ordered by a court.
3. Any insurance or other financial arrangement made on behalf of a
person pursuant to this section may be provided by the corporation or any
other person approved by the board of directors, even if all or part of the
other person's stock or other securities is owned by the corporation.
4. In the absence of fraud:
a. The decision of the board of directors as to the propriety of
the terms and conditions of any insurance or other financial arrangement made
pursuant to this section and the choice of the person to provide the insurance
or other financial arrangement is conclusive; and
b. The insurance or other financial arrangement:
(1) Is not void or voidable; and
(2) Does not subject any director approving it to
personal liability for his action, even if a director approving the insurance
or other financial arrangement is a beneficiary of the insurance or other
financial arrangement.
5. A corporation or its subsidiary which provides self-insurance for
itself or for another affiliated corporation pursuant to this section is not
subject to the provisions of Title 57 of NRS.
B. The TENTH article of the Company's Articles of Incorporation
limits the liability exposure of officers and directors of the Company for
damages. It provides as follows:
Each officer and director of the Company is indemnified pursuant to
Article X of the Company's Articles of Incorporation as follows:
(1) the Company may indemnify any person who was or is a party,
or is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether criminal, civil, administrative, or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement, actually
and reasonably incurred by him in connection with the action, suite or
proceeding, if he acted in good faith and in a manner which he reasonably
believed to be in and not opposed to the best interests of the Company and
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding, by judgment, order, settlement, conviction or upon a plea of nolo
contendere, or its equivalent, does not of itself create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company, and
that, with respect to any criminal action or proceeding, he had reasonable
cause to believe that his conduct was unlawful.
(2) the Company may indemnify any person who was or is a party,
or is threatened to be made a party, to any threatened, pending or completed
action or suite by or in the right of the Company, to procure judgment in its
favor by reason of the fact that he is or was a director, officer, employee of
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses including the
amounts paid in settlement of attorneys' fees actually and reasonably incurred
by him in connection with the defense or settlement of the action or suit, if
he acted in good faith and in a manner which he reasonably believed to be in
and not opposed to the best interests if the Company. Indemnification may not
be made for any claim, issue or matter as to which such person has been
adjudged by a court of competent jurisdiction, after exhaustion of all appeals
therefrom, to be liable to the Company or for amounts paid in settlement to
the Company, unless and only to the extent that the court in which the action
or suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court
deems proper.
(3) to the extent that a director, officer, employee or agent of
the Company has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above , or in defense of any claim,
issue or matter therein, he must be indemnified by the Company against
expenses, including attorney's fees actually and reasonably incurred by him in
connection with the defense.
(4) any indemnification under (a) or (b) above unless ordered by a
court or advanced pursuant to (e) below, must be made by the Company only as
authorized in the specific case upon a determination that the indemnification
of the director, officer, employee or agent is proper in the circumstances.
The determination must be made (i) by the stockholders; (ii) by the board of
directors by majority vote of a quorum consisting of directors who were not
parties to the act, suit or proceeding; (iii) if a majority of a quorum
consisting of directors who were not parties to the act suit or proceeding so
orders, by independent legal counsel in a written opinion; or (iv) if a quorum
consisting of directors who were not parties to the act, suit or proceeding
cannot be obtained, by independent legal counsel in a written opinion.
(5) Expenses of officers and directors incurred in defending a
civil or criminal action, suit or proceeding must be paid by the Company as
they are incurred and in advance of final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the
Company. The provisions of this paragraph (e) do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
(6) the indemnification and advancement of expenses authorized in
or ordered by a court of competent jurisdiction pursuant to the Company's
Articles of Incorporation, Article X, section (f): (i) does not exclude any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under the Articles of Incorporation or any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, for
either an action in his official capacity while holding his office, except
that indemnification, unless ordered by a court pursuant to paragraph (b)
above, or for the advancement of expenses made pursuant to paragrpah (e)
above, may not be made to or on behalf of any director or officer if a final
adjudication establishes that his acts or omissions involved intentional
misconduct, fraud or knowing violation of the law and was material to the
cause of action; and (ii) continues for a person who has ceased to be a
director, officer, employee, or agent and inures to the benefit of the heirs,
executors, and administrators of such a person.
C. Section 7.01 of the Company's By-Laws provides for the following
indemnification protections:
Section 7.01 of the Company's bylaws provides that the Company, unless
prohibited by Nevada law, shall indemnify any person who is or was involved in
any manner or is threatened to be involved in any threatened, pending, ir
completed action suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative, including, without limitation, any action, suit,
proceeding brought by or in the right of the Company to procure a judgment in
its favor (collectively, "a Proceeding") by reason of the fact that he is a
director, officer, employee, or agent of the Company, or is or was serving at
the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan,
or other entity or enterprise, against all expenses and liabilities actually
and reasonably incurred by him in the Proceeding. The right to indemnification
conferred under Section 7.01 of the Company's bylaws is presumed to have been
relied upon by the directors, officers, employees, and agents of the Company
and shall be enforceable as a contract right and inure to the benefit of
heirs, executors, and administrators of such individuals.
As of the date hereof, the Company has no contracts in effect providing
any indemnitee with any specific rights of indemnification although the
Company's bylaws authorize its Board of Directors to enter into and deliver
such contracts to provide an indemnitee with specific rights of
indemnification in addition to the rights provided in the Articles and Bylaws
to the fullest extent provided under Nevada law. The Company has no special
insurance against liability although the Company's bylaws provide that the
Company may, unless prohibited by Nevada law, maintain such insurance.
PART F/S
The following financial statements are included herewith. The
Company's audited Financial Statements for its years ended December 31, 1997
and 1996 and the Company's unaudited financial statements for the four month
period ended April 30, 1998.
SW Ventures, Inc.
Audited Financial Statements
December 31, 1997 and December 31, 1996
Independent Auditor's Report
Balance Sheet at December 31, 1997 and December 31, 1996
Statement of Operations and Accumulated Deficit for the year ended December
31, 1997 and the period from inception on May 7, 1996 though December 31, 1996
Statement of Cash Flows for the year ended December 31, 1997 and the period
from inception on May 7, 1996 though December 31, 1996
Statement of Changes in Stockholder's Equity from May 7, 1996 to December 31,
1997
Notes to Financial Statements
Randy Simpson C.P.A. P.C.
11775 South Nicklaus Road
Sandy Utah 84092
Fax & Phone (801)572-3009
Independent Auditor's Report
- ----------------------------
The Board of Directors and Stockholders of SW Ventures, Inc.:
We have audited the accompanying balance sheets of SW Ventures, Inc. (the
Company) as pf December 31, 1997 and December 31, 1996 and the related
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 1997 and the period from May 7, 1996 (inception) through
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about wether the financial statements are free of
material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the above mentioned financial statements fairly present, in
all material respects, the financial position of SW Ventures, Inc. as of
December 31, 1997 and December 31, 1996 and the results of its operations and
its cash flows for the year ended December 31, 1997 and the period from
inception (May 7, 1996) through December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Randy Simpson CPA PC
RANDY SIMPSON, CPA
A Professional Corporation
March 5, 1998
Salt Lake City, Utah
<PAGE>
SW Ventures, Inc.
Balance Sheets
December 31, 1997 and December 31, 1996
December 31 December 31
1997 1996
------------- --------------
ASSETS
Current Assets:
Cash $ 8,424 $ 9,175
Accounts receivable 5,878 -
Inventory 1,870 -
------------- --------------
Total Current Assets 16,172 9,175
Mineral Property & Equipment:
Mineral property 74,325 -
Less cost depletion (1,705) -
Office equipment 1,953 -
Less accumulated depreciation (228) -
------------- --------------
Net Mineral Property &
Equipment 74,345 0
Other assets:
Deferred offering costs - 11,850
------------- ---------------
Total Assets $ 90,517 $ 21,025
============= ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,648 $ 10,903
Advances from officer 9,000 -
------------- --------------
Total Current Liabilities 21,648 10,903
Stockholders' Equity:
Common Stock, $.001 par value; authorized
50,000,000 shares, issued and outstanding
3,000,000 shares on December 31, 1997
and 1,850,000 on December 31, 1996 3,000 1,850
Paid-in capital 111,750 23,000
Accumulated deficit (45,881) (14,728)
------------- --------------
Total Stockholders' Equity 68,869 10,122
------------- --------------
Total Liabilities &
Stockholders' Equity $ 90,517 $ 21,025
============= =============
See accompanying notes to financial statements
<PAGE>
SW Ventures, Inc.
Statement of Operations and Accumulated Deficit
Year Ended December 31, 1997, and
the period from inception (May 7, 1996) though December 31, 1996
1997 1996
----------------- ---------------
Oil revenue $ 22,007 $ -
Oil production costs & taxes 7,409 -
General & administrative expenses 13,478 14,728
Legal & professional fees 30,340 -
Depreciation expense 228 -
Cost depletion 1,705 -
----------------- ---------------
Total expenses 53,160 14,728
----------------- ---------------
Net loss (31,153) (14,728)
Accumulated deficit -beginning of year (14,728)
----------------- ----------------
Accumulated deficit - end of year $ (45,881) $ (14,728)
================= ================
Net loss per common share $ (0.02) $ (0.01)
================= ================
Weighted average shares outstanding 2,202,083 1,615,232
See accompanying notes to financial statements
<PAGE>
SW Ventures, Inc.
Statement of Cash Flows
For the From May 7, 1996
Year (Inception)
Ended to
December 31, December 31,
1997 1996
-------------- ----------------
Cash flows used in operating activities:
Net loss $ (31,153) $ (14,728)
Adjustments to reconcile net loss
to net cash used in operating activities:
Common stock issued for services 4,500 850
Depreciation expense & cost depletion 1,933 -
Changes to operating assets & liabilities:
Increase in accounts receivable (5,878) -
Increase in inventory (1,870) -
Increase in accounts payable 1,745) 10,903
-------------- ---------------
Net cash used in operating activities (30,723) (2,975)
Cash flows used in investing activities:
Purchase of equipment & properties 76,278 -
-------------- ---------------
Net cash used in investing activities 76,278 -
Cash flows from financing activities:
Offering costs for common stock issuance (5,750) (11,850)
Common stock issued for cash 103,000 24,000
Advances from officers 9,000 -
-------------- ---------------
Cash provided by financing activities 106,250 12,150
Net increase in cash (751) 9,175
Cash, beginning period 9,175 -
-------------- ---------------
Cash, end of period $ 8,424 $ 9,175
============== ===============
No cash paid for income taxes or interest.
See accompanying notes to financial statements.
SW Ventures, Inc.
Statements of Changes in Stockholders' Equity
From May 7, 1996 (Inception) to December 31, 1996
and the year ending December 31, 1997
<TABLE>
<CAPTION>
$.001
Par value
Common Common Accumu-
Stock Stock Paid-in lated Total
Shares Amount Capital Deficit Equity
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Shares issued to founders
on May 7, 1996 1,475,000 $ 1,475 $ 9,525 $ - $ 11,000
Shares issued for legal fees
(securities registration)
on May 7, 1996 115,000 115 735 - 850
Shares issued for cash on
December 6, 1996 260,000 260 12,740 - 13,000
Net loss for the period from
May 7, 1996 (inception)
through December 31, 1996 (14,728) (14,728)
----------- ---------- ---------- --------- ----------
Balances, December 31, 1996 1,850,000 1,850 23,000 (14,728) 10,122
Shares issued for cash
May 16, 1997 60,000 60 2,940 - 3,000
Shares issued for compensation
May 16, 1997 55,000 55 2,695 - 2,750
Shares issued for legal fees
(securities registration)
on May 16, 1997 35,000 35 1,715 - 1,750
Shares issued for cash (private
placement offering) on
September 26, 1997 net of
offering costs of $17,600 1,000,000 1,000 81,400 - 82,400
Net loss for the year ended
December 31, 1997 (31,153) (31,153)
----------- --------- ---------- --------- ---------
Balances, December 31, 1997 3,000,000 $ 3,000 $111,750 $(45,881) $ 68,869
=========== ========= ========== ========= =========
</TABLE>
See accompanying notes to financial statements.
SW Ventures, Inc.
Notes to Financial Statements
A. Origination and Accounting Policies
-----------------------------------
SW Ventures, Inc. (the "Company") was incorporated May 7, 1996 as a
Nevada corporation. The Company reviewed certain business opportunities
during 1996 and on June 19, 1997 conducted a stock offering under Rule 504 of
Regulation D, Section 3(b) under the Securities Act of 1933, as amended. The
offering closed on September 26, 1997 with proceeds of $100,000 being received
by the Company.
The Company invested as a working interest partner in an oil drilling
program in Crook County, Wyoming. The Company invested $74,325 in the
drilling and completion of an oil well located in Crook County, Wyoming. The
Company owns a 21.25% working interest in the well. The well has produced
approximately 14,000 barrels of crude oil from its successful completion in
October, 1997 through January 1998. The well is currently producing
approximately 130 barrels of oil per day. The prospect includes a 320 acre
lease on which additional wells may be drilled.
B. Mineral Properties, Equipment, Accounts Receivable and Inventory
----------------------------------------------------------------
Mineral property and equipment are stated at cost. The Company
accounts for its oil and gas exploration activities utilizing the full cost
method of accounting. Exploration costs, including geological and
geophysical costs, costs for drilling and completing wells (both geophysical
costs, costs for drilling and completing wells (both successful and dry holes)
are capitalized and depleted to expense over the total recoverable oil and gas
reserves of the Company's properties.
Mineral properties include the acquisition costs of a 320 acre mineral
lease and an oil well which was drilled and completed on October 7, 1997. The
Company invested $74,325 for the drilling and completion of this well. The
total acreage acquisition costs were $11,330 and $62,995 was invested in the
drilling and completion of the oil well. The Company is depleting its
investment in oil an gas properties based on the yearly oil production (in
barrels) divided by the estimated recoverable reserves (in barrels) of the
well or more commonly referred to as the units of production method. The
Company recorded cost depletion of $1,705 based upon total production of 5,730
barrels through December 31, 1997. The total estimated reserves of the well
are 250,000 barrels.
Accounts receivable represent the net oil production received in January
1998 for December 1997 oil production and inventory represents the value of
the oil on site which was unsold on December 31, 1997.
C. Related Party Transactions.
---------------------------
The Company issued 1,475,000 shares to its founders in consideration of
$11,000 in cash at the inception of the Company. An additional 60,000 and
260,000 shares were issued for cash advances totaling $16,000 from the
president of the Company during 1996 and early 1997. Legal counsel was issued
150,000 shares for services in 1996 and 1997 and 55,000 shares to its
Secretary/Treasurer for services in 1997. Subsequent to year end, 90,000
shares were issued to an officer and director in satisfaction of a loan for
$9,000.
D. Operating Leases and Contingent Liabilities
-------------------------------------------
The Company rents its office space on a month to month basis at $240 per
month. This agreement is cancelable at any time without notice. The Company
is currently conducting a private placement to fund a second well on its
mineral acreage in Crook County, Wyoming. The Company's portion of expenses
for the drilling and completion of the second well on the prospect are
estimated at $62,000. The well is to commence drilling by April, 1998.
SW Ventures Inc.
Unaudited Balance Sheets
For the Four Months Ended April 30, 1998
Balance Sheet at April 30, 1998 and December 31, 1997
Statement of Operations and Accumulated Deficit for the four month period
ended April 30, 1998 and April 30, 1997
Statement of Cash Flows for the four month period ended April 30, 1998 and
April 30, 1997
Statement of Changes in Stockholder's Equity from May 7, 1996 to April 30,
1998
SW Ventures Inc.
Balance Sheet
For the Four Months Ended April 30, 1998
and the Year Ended December 31, 1997
April 30 December 31
1998 1997
----------- ----------------
(Unaudited)
Assets
Current Assets:
Cash $ 357 $ 8,424
Accounts Receivable 10,059 5,878
Inventory 1,870 1,870
----------- ----------------
Total Current Assets 12,286 16,172
Mineral Property & Equipment:
Mineral property 136,325 74,435
Less cost depletion (6,180) (1,705)
Office equipment 4,292 1,953
Less accumulated depreciation (398) (228)
------------- --------------
Net Mineral Property &
Equipment 134,039 74,345
------------- ---------------
Total Assets $ 146,325 $ 90,517
============= ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 12,081 $ 12,648
Advances from officer 11,200 9,000
------------- --------------
Total Current Liabilities 23,281 21,648
Stockholders' Equity:
Common Stock, $.001 par value; authorized
50,000,000 shares, issued and outstanding
3,365,000 shares on April 30, 1998
and 3,000,000 on December 31, 1997 3,365 3,000
Paid-in capital 159,779 111,750
Accumulated deficit (40,100) (45,881)
------------- --------------
Total Stockholders' Equity 123,044 68,869
------------- --------------
Total Liabilities & Stockholders' Equity $ 146,325 $ 90,517
============= =============
<PAGE>
SW Ventures, Inc.
Statement of Operations and Accumulated Deficit
For the four month period Ended April 30, 1998 and 1997
Four Months Ended
April 30, 1998 April 30, 1997
(Unaudited) (Unaudited)
----------------- ---------------
Oil revenue $ 27,603 $ 0
Oil production costs & taxes 8,494 -
General & administrative expenses 8,683 1,267
Depreciation expense 170 -
Cost depletion 4,475 -
----------------- ---------------
Total expenses 21,822 1,267
----------------- ---------------
Net gain/loss 5,781 (1,267)
Accumulated deficit -beginning of period (45,881) (14,728)
----------------- ----------------
Accumulated deficit - end of period $ (40,100) $ (15,995)
================= ================
Net loss per common share $ (0.01) $ (0.14)
================= ================
<PAGE>
SW Ventures, Inc.
Statement of Cash Flows
For the For the
Four Month Four Month
Period Ended Period Ended
April 30, 1998 April 30, 1997
(Unaudited) (Unaudited)
-------------- ----------------
Cash flows used in operating activities:
Net loss/gain $ 5,781 $ (1,267)
Adjustments to reconcile income(loss)
to net cash used in operating activities:
Depreciation expense & cost depletion 4,645 -
Changes to operating assets & liabilities:
Increase in accounts receivable (4,181) -
Decrease in accounts payable (567) (6,349)
-------------- ---------------
Net cash used in operating activities 5,678 (7,616)
Cash flows used in investing activities:
Purchase of equipment & mineral properties (64,339) -
-------------- ---------------
Net cash used in investing activities (64,339) -
Cash flows from financing activities:
Common stock issued for cash 39,394
Advances from officers 11,200 -
-------------- ---------------
Cash provided by financing activities 50,594
Net decrease in cash (8,067) (7,616)
Cash, beginning period 8,424 9,175
-------------- ---------------
Cash, end of period $ 357 $ 1,559
============== ===============
No cash paid for income taxes or interest.
Supplemental non cash activities:
Issuance of common stock for loan
From affiliate $ 9,000 $ -
============== ===============
<PAGE>
SW Ventures, Inc.
Statements of Changes in Stockholders' Equity
From May 7, 1996 (Inception) to the year ended December 31, 1997
and the four month period ended April 30, 1998
<TABLE>
<CAPTION>
$.001
Par value
Common Common Accumu-
Stock Stock Paid-in lated Total
Shares Amount Capital Deficit Equity
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Shares issued to founders
on May 7, 1996 1,475,000 $ 1,475 $ 9,525 $ - $ 11,000
Shares issued for legal fees
(securities registration)
On May 7, 1996 115,000 115 735 - 850
Shares issued for cash on
December 7, 1996 260,000 260 12,740 - 13,000
Net loss for the period from
May 7, 1996 (inception)
through December 31, 1996 (14,728) (14,728)
----------- ---------- ---------- --------- ----------
Balances, December 31, 1996 1,850,000 1,850 23,000 (14,728) 10,122
Shares issued for cash
May 16, 1997 60,000 60 2,940 - 3,000
Shares issued for compensation
May 16, 1997 55,000 55 2,695 - 2,750
Shares issued for legal fees
(securities registration)
on May 16, 1997 35,000 35 1,715 - 1,750
Shares issued for cash (private
placement offering) on
September 26, 1997 net of
offering costs of $17,600 1,000,000 1,000 81,400 - 82,400
Net loss for the year ended
December 31, 1997 (31,153) (31,153)
----------- --------- ---------- --------- ---------
Balances, December 31, 1997 3,000,000 $ 3,000 $111,750 $(45,881) $ 68,869
Shares issued to officer upon
conversion of loan 90,000 90 8,910 9,000
Shares issued for cash (in
private placement offering) net
of offering costs of $1856 275,000 275 39,119 39,394
Net gain for four months ended
April 30, 1998 5,781 5,781
---------- --------- --------- --------- ---------
Balance at April 30, 1998 3,365,000 $ 3,365 $159,779 $( 40,100) $123,044
========== ========== ========= ========= ===========
</TABLE>
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits are filed as part of this Registration Statement.
No. Description
- ---- -----------
3.1.1 Articles of Incorporation
3.2.1 Bylaws and Amendments thereto
10.1 Operating Agreement with L & J Operating Inc.
27 Financial Data Schedule
ITEM 2. DESCRIPTION OF EXHIBITS
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized.
SW VENTURES, INC.
By: /s/ Terri Jackson
----------------------------
Terri Jackson
Secretary/Treasurer and Director
By: /s/ Guido Cloetens
----------------------------------
Guido Cloetens
Chief Executive Officer, President
Chairman of the Board of Directors
By: /s/ Keith Biesinger
-------------------------------------
Keith Biesinger
Director
Exhibit 3.1
Filed
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
May 07 1996
10247-96
ARTICLES OF INCORPORATION
OF
SW VENTURES, INC.
KNOW ALL MEN BY THESE PRESENTS:
That we, the undersigned, have this day voluntarily associated ourselves
together for the purpose of forming a Corporation under and pursuant to the
laws of the State of Nevada, and we do hereby certify that:
ARTICLE I - NAME: The exact name of this Corporation is:
SW Ventures, Inc.
ARTICLE II - RESIDENT AGENT:
The Resident Agent of the Corporation is Max C. Tanner, Esq., The Law
Offices of Max C. Tanner, 2950 East Flamingo Road, Suite G, Las Vegas, Nevada
89121.
ARTICLE III - DURATION: The Corporation shall have perpetual existence.
ARTICLE IV - PURPOSES: The purpose, object and nature of the business for
which this Corporation is organized are:
(a) To engage in any lawful activity;
(b) To carry on such business as may be necessary, convenient, or
desirable to accomplish the above purposes, and to do all other things
incidental thereto which are not forbidden by law or by these Articles of
Incorporation.
ARTICLE V - POWERS: The powers of the Corporation shall be those powers
granted by 78.060 and 78.070 of the Nevada Revised Statutes under which this
corporation is formed. In addition, the Corporation shall have the following
specific powers:
(a) To elect or appoint officers and agents of the Corporation and to fix
their compensation;
(b) To act as an agent for any individual, association, partnership,
corporation or other legal entity;
(c) To receive, acquire, hold, exercise rights arising out of the
ownership or possession thereof, sell, or otherwise dispose of, shares or
other interests in, or obligations of, individuals, associations,
partnerships, corporations, or governments;
(d) To receive, acquire, hold, pledge, transfer, or otherwise dispose of
shares of the corporation, but such shares may only be purchased, directly or
indirectly, out of earned surplus;
(e) To make gifts or contributions for the public welfare or for
charitable, scientific or educational purposes, and in time of war, to make
donations in aid of war activities.
ARTICLE VI - CAPITAL STOCK:
Section 1. Authorized Shares. The total number of shares which this
Corporation is authorized to issue is 50,000,000 shares of Common Stock at
$.001 par value per share.
Section 2. Voting Rights of Shareholders. Each holder of the Common Stock
shall be entitled to one vote for each share of stock standing in his name on
the books of the Corporation.
Section 3. Consideration for Shares. The Common Stock shall be issued for such
consideration, as shall be fixed from time to time by the Board of Directors.
In the absence of fraud, the judgment of the Directors as to the value of any
property for shares shall be conclusive. When shares are issued upon payment
of the consideration fixed by the Board of Directors, such shares shall be
taken to be fully paid stock and shall be non-assessable. The Articles shall
not be amended in this particular.
Section 4. Pre-emptive Rights. Except as may otherwise be provided by the
Board of Directors, no holder of any shares of the stock of the Corporation,
shall have any preemptive right to purchase, subscribe for, or otherwise
acquire any shares of stock of the Corporation of any class now or hereafter
authorized, or any securities exchangeable for or convertible into such
shares, or any warrants or other instruments evidencing rights or options to
subscribe for, purchase, or otherwise acquire such shares.
Section 5. Stock Rights and Options. The Corporation shall have the power to
create and issue rights, warrants, or options entitling the holders thereof to
purchase from the corporation any shares of its capital stock of any class or
classes, upon such terms and conditions and at such times and prices as the
Board of Directors may provide, which terms and conditions shall be
incorporated in an instrument or instruments evidencing such rights. In the
absence of fraud, the judgment of the Directors as to the adequacy of
consideration for the issuance of such rights or options and the sufficiency
thereof shall be conclusive.
ARTICLE VII - ASSESSMENT OF STOCK: The capital stock of this Corporation,
after the amount of the subscription price has been fully paid in, shall not
be assessable for any purpose, and no stock issued as fully paid up, shall
ever be assessable or assessed. The holders of such stock shall not be
individually responsible for the debts, contracts, or liabilities of the
Corporation and shall not be liable for assessments to restore impairments in
the capital of the Corporation.
ARTICLE VIII - DIRECTORS: For the management of the business, and for the
conduct of the affairs of the Corporation, and for the future definition,
limitation, and regulation of the powers of the Corporation and its directors
and shareholders, it is further provided:
Section 1. Size of Board. The members of the governing board of the
Corporation shall be styled directors. The number of directors of the
Corporation, their qualifications, terms of office, manner of election, time
and place of meeting, and powers and duties shall be such as are prescribed by
statute and in the by-laws of the Corporation. The name and post office
address of the directors constituting the first board of directors, which
shall be one(l) in number are:
NAME ADDRESS
Max C. Tanner 2950 East Flamingo Road
Suite G
Las Vegas, NV 89121
Section 2. Powers of Board. In furtherance and not in limitation of the
powers conferred by the laws of the State of Nevada, the Board of Directors is
expressly authorized and empowered:
(a) To make, alter, amend, and repeal the By-Laws subject to the power of
the shareholders to alter or repeal the By-Laws made by the Board of
Directors.
(b) Subject to the applicable provisions of the ByLaws then in effect, to
determine, from time to time, whether and to what extent, and at what times
and places, and under what conditions and regulations, the accounts and books
of the Corporation, or any of them, shall be open to shareholder inspection.
No shareholder shall have any right to inspect any of the accounts, books or
documents of the Corporation, except as permitted by law, unless and until
authorized to do so by resolution of the Board of Directors or of the
Shareholders of the Corporation;
(c) To issue stock of the Corporation for money, property, services
rendered, labor performed, cash advanced, acquisitions for other corporations
or for any other assets of value in accordance with the action of the board of
directors without vote or consent of the shareholders and the judgment of the
board of directors as to value received and in return therefore shall be
conclusive and said stock, when issued, shall be fully-paid and
non-assessable.
(d) To authorize and issue, without shareholder consent, obligations of
the Corporation, secured and unsecured, under such terms and conditions as the
Board, in its sole discretion, may determine, and to pledge or mortgage, as
security therefore, any real or personal property of the Corporation,
including after-acquired property;
(e) To determine whether any and, if so, what part, of the earned surplus
of the Corporation shall be paid in dividends to the shareholders, and to
direct and determine other use and disposition of any such earned surplus;
(f) To fix, from time to time, the amount of the profits of the
Corporation to be reserved as working capital or for any other lawful purpose;
(g) To establish bonus, profit-sharing, stock option, or other types of
incentive compensation plans for the employees, including officers and
directors, of the Corporation, and to fix the amount of profits to be shared
or distributed, and to determine the persons to participate in any such plans
and the amount of their respective participation.
(h) To designate, by resolution or resolutions passed by a majority of
the whole Board, one or more committees, each consisting of two or more
directors, which, to the extent permitted by law and authorized by the
resolution or the By-Laws, shall have and may exercise the powers of the
Board;
(i) To provide for the reasonable compensation of its own members by
By-Law, and to fix the terms and conditions upon which such compensation will
be paid;
(j) In addition to the powers and authority herein before, or by statute,
expressly conferred upon it, the Board of Directors may exercise all such
powers and do all such acts and things as may be exercised or done by the
corporation, subject, nevertheless, to the provisions of the laws of the State
of Nevada, of these Articles of Incorporation, and of the By-Laws of the
Corporation.
Section 3. Interested Directors. No contract or transaction between this
Corporation and any of its directors, or between this Corporation and any
other corporation, firm, association, or other legal entity shall be
invalidated by reason of the fact that the director of the Corporation has a
direct or indirect interest, pecuniary or otherwise, in such corporation,
firm, association, or legal entity, or because the interested director was
present at the meeting of the Board of Directors which acted upon or in
reference to such contract or transaction, or because he participated in such
action, provided that: (1) the interest of each such director shall have been
disclosed to or known by the Board and a disinterested majority of the Board
shall have nonetheless ratified and approved such contract or transaction
(such interested director or directors may be counted in determining whether a
quorum is present for the meeting at which such ratification or approval is
given); or (2) the conditions of N.R.S. 78.140 are met.
ARTICLE IX - LIMITATION OF LIABILITY OF OFFICERS OR DIRECTORS: The personal
liability of a director or officer of the corporation to the corporation or
the Shareholders for damages for breach of fiduciary duty as a director or
officer shall be limited to acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law.
ARTICLE X - INDEMNIFICATION: Each director and each officer of the corporation
may be indemnified by the corporation as follows:
(a) The corporation may indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys, fees), judgments, fines and amounts paid in settlement, actually
and reasonably incurred by him in connection with the action, suit or
proceeding, if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation and
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suite or
proceeding, by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, does not of itself create a presumption that the
person did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, and that,
with respect to any criminal action or proceeding, he had reasonable cause to
believe that his conduct was unlawful.
(b) The corporation may indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action
or suit by or in the right of the corporation, to procure a judgment in its
favor by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by him in connection with the defense or settlement of the
action or suit, if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation.
Indemnification may not be made for any claim, issue or matter as to which
such a person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals there from, to be liable to the corporation or for
amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that in view of all the
circumstances of the case the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
Article, or in defense of any claim, issue or matter therein, he must be
indemnified by the corporation against expenses, including attorney's fees,
actually and reasonably incurred by him in connection with the defense.
(d) Any indemnification under subsections (a) and (b) unless ordered by a
court or advanced pursuant to subsection (e), must be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made:
(i) By the stockholders;
(ii) By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the act, suit or proceeding;
(iii) If a majority vote of a quorum consisting of directors who were
not parties to the act, suit or proceeding so orders, by independent legal
counsel in a written opinion; or
(iv) If a quorum consisting of directors who were not parties to the
act, suit or proceeding cannot be obtained, by independent legal counsel in a
written opinion.
(e) Expenses of officers and directors incurred in defending a civil or
criminal action, suit or proceeding must be paid by the corporation as they
are incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the
corporation. The provisions of this subsection do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
(f) The indemnification and advancement of expenses authorized in or
ordered by a court pursuant to this section:
(i) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
certificate or articles of incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, for either an action in
his official capacity or an action in another capacity while
holding his office, except that indemnification, unless ordered by a court
pursuant to subsection (b) or for the advancement of expenses made pursuant to
subsection (e) may not be made to or on behalf of any director or officer if a
final adjudication establishes that his acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law and was material to the
cause of action.
(ii) Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors
and administrators of such a person.
ARTICLE XI - PLACE OF MEETING; CORPORATE BOOKS: Subject to the laws of the
State of Nevada, the shareholders and the Directors shall have power to hold
their meetings, and the Directors shall have power to have an office or
offices and to maintain the books of the Corporation outside the State of
Nevada, at such place or places as may from time to time be designated in the
By-Laws or by appropriate resolution.
ARTICLE XII - AMENDMENT OF ARTICLES: The provisions of these Articles of
Incorporation may be amended, altered or repealed from time to time to the
extent and in the manner prescribed by the laws of the State of Nevada, and
additional provisions authorized by such laws as are then in force may be
added. All rights herein conferred on the directors, officers and shareholders
are granted subject to this reservation.
ARTICLE XIII - INCORPORATOR: The name and address of the sole incorporator
signing these Articles of Incorporation is as follows:
NAME POST OFFICE ADDRESS
1. Max C. Tanner 2950 East Flamingo Road,
Suite G
Las Vegas, Nevada 89121
IN WITNESS WHEREOF, the undersigned incorporator has executed these
Articles of Incorporation this 7th day of May, 1996.
/s/Max C. Tanner
-------------------------
Max C. Tanner
STATE OF NEVADA )
)SS:
COUNTY OF CLARK )
On May 7, 1996, personally appeared before me, a Notary Public, Max C. Tanner,
who acknowledged to me that he executed the foregoing Articles of
Incorporation for SW Ventures, Inc., a Nevada corporation.
/s/ Trisha Chapman
-----------------------------
Notary Public
<Notary Stamp of TRISHA CHAPMAN
96-1694-1
Notary Public - STATE OF Nevada
CLARK COUNTY
My Appt. expires March 20, 2000>
BY-LAWS OF
SW VENTURES, INC.
ARTICLE I
SHAREHOLDERS
Section 1.01 Annual Meeting. The annual meeting of the shareholders shall
be held at such date and time as shall be designated by the board of directors
and stated in the notice of the meeting or in a duly-executed waiver of notice
thereof. If the corporation shall fail to provide notice of the annual meeting
of the shareholders as set forth above, the annual meeting of the shareholders
of the corporation shall be held during the month of November or December of
each year as determined by the Board of Directors, for the purpose of electing
directors of the corporation to serve during the ensuing year and for the
transaction of such other business as may properly come before the meeting. If
the election of the directors is not held on the day designated herein for any
annual meeting of the shareholders, or at any adjournment thereof, the
president shall cause the election to be held at a special meeting of the
shareholders as soon thereafter as is convenient.
Section 1.02 Special Meetings. Special meetings of the shareholders may
be called by the president or the Board of Directors and shall be called by
the president at the written request of the holders of not less than 51% of
the issued and outstanding shares of capital stock of the corporation.
All business lawfully to be transacted by the shareholders may be transacted
at any special meeting at any adjournment thereof. However, no business shall
be acted upon at a special meeting, except that referred to in the notice
calling the meeting, unless all of the outstanding capital stock of the
corporation is represented either in person or by proxy. Where all of the
capital stock represented, any lawful business may be transacted and the
meeting shall be valid for all purposes.
Section 1.03 Place of Meetings. Any meeting of the shareholders of the
corporation may be held at its principal office in the State of Nevada or such
other place in or out of the United States as the Board of Directors may
designate. A waiver of notice signed by the shareholders entitled to vote may
designate any place for the holding of such meeting.
Section 1.04 Notice of Meetings.
(a) The secretary shall sign and deliver to all shareholders of
record written or printed notice of any meeting at least ten (10) days, but
not more than sixty (60) days, before the date of such meeting; which notice
shall state the place, date and time of the meeting, the general nature of the
business to be transacted, and, in the case of any meeting at which directors
are to be elected, the names of nominees, if any, to be presented for
election.
(b) In the case of any meeting, any proper business may be presented
for action, except that the following items shall be valid only if the general
nature of the proposal is stated in the notice or written waiver of notice:
(1) Action with respect to any contract or transaction between
the corporation and one or more of its directors or another firm, association,
or corporation in which one or more of its directors has a material financial
interest;
(2) Adoption of amendments to the Articles of Incorporation; or
(3) Action with respect to the merger, consolidation,
reorganization, partial or complete liquidation, or dissolution of the
corporation.
(c) The notice shall be personally delivered or mailed by first
class mail to each shareholder of record at the last known address thereof, as
the same appears on the books of the corporation, and the giving of such
notice shall be deemed delivered the date the same is deposited in the United
States mail, postage prepaid. If the address of any shareholder does not
appear upon the books of the corporation, it will be sufficient to address any
notice to such shareholder at the principal office of the corporation.
(d) The written certificate of the person calling any meeting, duly
sworn, setting forth the substance of the notice, the time and place the
notice was mailed or personally delivered to the several shareholders, and the
addresses to which the notice was mailed shall be prima facie evidence of the
manner and fact of giving such notice.
Section 1.05 Waiver of Notice. If all of the shareholders of the
corporation shall waive notice of a meeting, no notice shall be required, and,
whenever all of the shareholders shall meet in person or by proxy, such
meeting shall be valid for all purposes without call or notice, and at such
meeting any corporate action may be taken.
Section 1.06 Determination of Shareholders of Record.
(a) The Board of Directors may at any time fix a future date as a
record date for the determination of the shareholders entitled to notice of
any meeting or to vote or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any other lawful action. The record date so fixed shall not be more
than sixty (60) days prior to the date of such meeting nor more than sixty
(60) days prior to any other action. When a record date is so fixed, only
shareholders of record on that date are entitled to notice of and to vote at
the meeting or to receive the dividend, distribution or allotment of rights,
or to exercise their rights, as the case may be, notwithstanding any transfer
of any shares on the books of the corporation after the record date.
(b) If no record date is fixed by the Board of Directors, then (1)
the record date for determining shareholders entitled to notice of or to vote
at a meeting of shareholders shall be at the close of business on the business
day next preceding the day on which notice is given or, if notice is waived,
at the close of business on the day next preceding the day on which the
meeting is held; (2) the record date for determining shareholders entitled to
give consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which
written consent is given; and (3) the record date for determining shareholders
for any other purpose shall be at the close of business on the day on which
the Board of Directors adopts the resolution relating thereto, or the sixtieth
(60th) day prior to the date of such other action, whichever is later.
Section 1.07 Quorum: Adjourned Meetings.
(a) At any meeting of the shareholders, a majority of the issued and
outstanding shares of the corporation represented in person or by proxy, shall
constitute a quorum.
(b) If less than a majority of the issued and outstanding shares are
represented, a majority of shares so represented may adjourn from time to time
at the meeting, until holders of the amount of stock required to constitute a
quorum shall be in attendance. At any such adjourned meeting at which a quorum
shall be present, any business may be transacted which might have been
transacted as originally called. When a shareholders' meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken, unless the adjournment is for more than ten (10) days in
which event notice thereof shall be given.
Section 1.08 Voting.
(a) Each shareholder of record, such shareholder's duly authorized
proxy or attorney-in-fact shall be entitled to one (1) vote for each share of
stock standing registered in such shareholder's name on the books of the
corporation on the record date.
(b) Except as otherwise provided herein, all votes with respect to
shares standing in the name of an individual on the record date (included
pledged shares) shall be cast only by that individual or such individual's
duly authorized proxy or attorney-in-fact. With respect to shares held by a
representative of the estate of a deceased shareholder, guardian, conservator,
custodian or trustee, votes may be cast by such holder upon proof of capacity,
even though the shares do not stand in the name of such holder. In the case of
shares under the control of a receiver, the receiver may cast votes carried by
such shares even though the shares do not stand in the name of the receiver
provided that the order of the court of competent jurisdiction which appoints
the receiver contains the authority to cast votes carried by such shares. If
shares stand in the name of a minor, votes may be cast only by the
duly-appointed guardian of the estate of such minor if such guardian has
provided the corporation with written notice and proof of such appointment.
(c) With respect to shares standing in the name of a corporation on
the record date, votes may be cast by such officer or agents as the by-laws of
such corporation prescribe or, in the absence of an applicable by-law
provision, by such person as may be appointed by resolution of the Board of
Directors of such corporation. In the event no person is so appointed, such
votes of the corporation may be cast by any person (including the officer
making the authorization) authorized to do so by the Chairman of the Board of
Directors, President or any Vice President of such corporation.
(d) Notwithstanding anything to the contrary herein contained, no
votes may be cast by shares owned by this corporation or its subsidiaries, if
any. If shares are held by this corporation or its subsidiaries, if any, in a
fiduciary capacity, no votes shall be cast with respect thereto on any matter
except to the extent that the beneficial owner thereof possesses and exercises
either a right to vote or to give the corporation holding the same binding
instructions on how to vote.
(e) With respect to shares standing in the name of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, husband and wife as community property, tenants by the entirety,
voting trustees, persons entitled to vote under a shareholder voting agreement
or otherwise and shares held by two or more persons (including proxy holders)
having the same fiduciary relationship respect in the same shares, votes may
be cast in the following manner:
(1) If only one such person votes, the votes of such person
binds all.
(2) If more than one person casts votes, the act of the
majority so voting binds all.
(3) If more than one person casts votes, but the vote is
evenly split on a particular matter, the votes shall be deemed cast
proportionately as split.
(f) Any holder of shares entitled to vote on any matter may cast a
portion of the votes in favor of such matter and refrain from casting the
remaining votes or cast the same against the proposal, except in the case of
elections of directors. If such holder entitled to vote fails to specify the
number of affirmative votes, it will be conclusively presumed that the holder
is casting affirmative votes with respect to all shares held.
(g) If a quorum is present, the affirmative vote of holders of a
majority of the shares represented at the meeting and entitled to vote on any
matter shall be the act of the shareholders, unless a vote of greater number
or voting by classes is required by the laws of the State of Nevada, the
Articles of Incorporation and these By-Laws.
Section 1.09 Proxies. At any meeting of shareholders, any holder of
shares entitled to vote may authorize another person or persons to vote by
proxy with respect to the shares held by an instrument in writing and
subscribed to by the holder of such shares entitled to vote. No proxy shall be
valid after the expiration of six (6) months from the date of execution
thereof, unless coupled with an interest or unless otherwise specified in the
proxy. In no event shall the term of a proxy exceed seven (7) years from the
date of its execution. Every proxy shall continue in full force and effect
until its expiration or revocation. Revocation may be effected by filing an
instrument revoking the same or a duly-executed proxy bearing a later date
with the secretary of the corporation.
Section 1.10 Order of Business. At the annual shareholders meeting, the
regular order of business shall be as follows:
(1) Determination of shareholders present and existence of
quorum;
(2) Reading and approval of the minutes of the previous meeting
or meetings;
(3) Reports of the Board of Directors, the president, treasurer
and secretary of the corporation, in the order named;
(4) Reports of committee;
(5) Election of directors;
(6) Unfinished business;
(7) New business;
(8) Adjournment.
Section 1.11 Absentees Consent to Meetings. Transactions of any meeting
of the shareholders are as valid as though had at a meeting duly-held after
regular call and notice if a quorum is present, either in person or by proxy,
and if, either before or after the meeting, each of the persons entitled to
vote, not present in person or by proxy (and those who, although present,
either object at the beginning of the meeting to the transaction of any
business because the meeting has not been lawfully called or convened or
expressly object at the meeting to the consideration of matters not included
in the notice which are legally required to be included therein), signs a
written waiver of notice and/or consent to the holding of the meeting or an
approval of the minutes thereof. All such waivers, consents, and approvals
shall be filed with the corporate records and made a part of the minutes of
the meeting. Attendance of a person at a meeting shall constitute a waiver of
notice of such meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
if such objection is expressly made at the beginning. Neither the business to
be transacted at nor the purpose of any regular or special meeting of
shareholders need be specified in any written waiver of notice, except as
otherwise provided in Section 1.04(b) of these By-Laws.
Section 1.12 Action Without Meeting. Any action which may be taken by the
vote of the shareholders at a meeting may be taken without a meeting if
consented to by the holders of a majority of the shares entitled to vote or
such greater proportion as may be required by the laws of the State of Nevada,
the Articles of Incorporation, or these ByLaws. Whenever action is taken by
written consent, a meeting of shareholders needs not be called or noticed.
ARTICLE II
DIRECTORS
Section 2.01 Number. Tenure and Qualification. Except as otherwise
provided herein, the Board of Directors of the corporation shall consist of at
least one (1) but no more than nine (9) persons, who shall be elected at the
annual meeting of the shareholders of the corporation and who shall hold
office for one (1) year or until their successors are elected and qualify.
Section 2.02 Resignation. Any director may resign effective upon giving
written notice to the chairman of the Board of Directors, the president, or
the secretary of the corporation, unless the notice specifies a later time for
effectiveness of such resignation. If the Board of Directors accepts the
resignation of a director tendered to take effect at a future date, the Board
or the shareholders may elect a successor to take office when the resignation
becomes effective.
Section 2.03 Reduction in Number. No reduction of the number of directors
shall have the effect of removing any director prior to the expiration of his
term of office.
Section 2.04 Removal.
(a) The Board of Directors or the shareholders of the corporation,
by a majority vote, may declare vacant the office of a director who has been
declared incompetent by an order of a court of competent jurisdiction or
convicted of a felony.
Section 2.05 Vacancies.
(a) A vacancy in the Board of Directors because of death,
resignation, removal, change in number of directors, or otherwise may be
filled by the shareholders at any regular or special meeting or any adjourned
meeting thereof or the remaining director(s) by the affirmative vote of a
majority thereof. A Board of Directors consisting of less than the maximum
number authorized in Section 2.01 of ARTICLE II constitutes vacancies on the
Board of Directors for purposes of this paragraph and may be filled as set
forth above including by the election of a majority of the remaining
directors. Each successor so elected shall hold office until the next annual
meeting of shareholders or until a successor shall have been duly-elected and
qualified.
(b) If, after the filling of any vacancy by the directors, the
directors then in office who have been elected by the shareholders shall
constitute less than a majority of the directors then in of f ice, any holder
or holders of an aggregate of five percent (5%) or more of the total number of
shares entitled to vote may call a special meeting of shareholders to be held
to elect the entire Board of Directors. The term of office of any director
shall terminate upon such election of a successor.
Section 2.06 Regular Meetings. Immediately following the adjournment of,
and at the same place as, the annual meeting of the shareholders, the Board of
Directors, including directors newly elected, shall hold its annual meeting
without notice, other than this provision, to elect officers of the
corporation and to transact such further business as may be necessary or
appropriate. The Board of Directors may provide by resolution the place, date
and hour for holding additional regular meetings.
Section 2.07 Special Meetings. Special meetings of the Board of Directors
may be called by the chairman and shall be called by the chairman upon the
request of any two (2) directors or the president of the corporation.
Section 2.08 Place of Meetings. Any meeting of the directors of the
corporation may be held at its principal office in the State of Nevada, or at
such other place in or out of the United States as the Board of Directors may
designate. A waiver or notice signed by the directors may designate any place
for the holding of such meeting.
Section 2.09 Notice of Meetings. Except as otherwise provided in Section
2.06, the chairman shall deliver to all directors written or printed notice of
any special meeting, at least three (3) days before the date of such meeting,
by delivery of such notice personally or mailing such notice first class mail
or by telegram. If mailed, the notice shall be deemed delivered two (2)
business days following the date the same is deposited in the United States
mail, postage prepaid. Any director may waive notice of any meeting, and the
attendance of a director at a meeting shall constitute a waiver of notice of
such meeting, unless such attendance is for the express purpose of objecting
to the transaction of business threat because the meeting is not properly
called or convened.
Section 2.10 Quorum: Adjourned Meetings.
(a) A majority of the Board of Directors in office shall constitute
a quorum.
(b) At any meeting of the Board of Directors where a quorum is not
present, a majority of those present may adjourn, from time to time, until a
quorum is present, and no notice of such adjournment shall be required. At any
adjourned meeting where a quorum is present, any business may be transacted
which could have been transacted at the meeting originally called.
Section 2.11 Action Without Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if a written consent thereto is signed by all of
the members of the Board of Directors or of such committee. Such written
consent or consents shall be filed with the minutes of the proceedings of the
Board of Directors or committee. Such action by written consent shall have the
same force and effect as the unanimous vote of the Board of Directors or
committee.
Section 2.12 Telephonic Meetings. Meetings of the Board of Directors may
be held through the use of a conference telephone or similar communications
equipment so long as all members participating in such meeting can hear one
another at the time of such meeting. Participation in such a meeting
constitutes presence in person at such meeting.
Section 2.13 Board Decisions. The affirmative vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act
of the Board of Directors.
Section 2.14 Powers and Duties.
(a) Except as otherwise provided in the Articles of Incorporation or
the laws of the State of Nevada, the Board of Directors is invested with the
complete and unrestrained authority to manage the affairs of the corporation,
and is authorized to exercise for such purpose as the general agent of the
corporation, its entire corporate authority in such manner as it sees fit. The
Board of Directors may delegate any of its authority to manage, control or
conduct the current business of the corporation to any standing or special
committee or to any officer or agent and to appoint any persons to be agents
of the corporation with such powers, including the power to sub-delegate, and
upon such terms as may be deemed fit.
(b) The Board of Directors shall present to the shareholders at
annual meetings of the shareholders, and when called for by a majority vote of
the shareholders at a special meeting of the shareholders, a full and clear
statement of the condition of the corporation, and shall, at request, furnish
each of the shareholders with a true copy thereof.
(c) The Board of Directors, in its discretion, may submit any
contract or act for approval or ratification at any annual meeting of the
shareholders or any special meeting properly called for the purpose of
considering any such contract or act, provided a quorum is present. The
contract or act shall be valid and binding upon the corporation and upon all
the shareholders thereof, if approved and ratified by the affirmative vote of
a majority of the shareholders at such meeting.
(d) In furtherance and not in limitation of the powers conferred by
the laws of the State of Nevada, the Board of Directors is expressly
authorized and empowered to issue stock of the Corporation for money,
property, services rendered, labor performed, cash advanced, acquisitions for
other corporations or for any other assets of value in accordance with the
action of the Board of Directors without vote or consent of the shareholders
and the judgment of the Board of Directors as to the value received and in
return therefore shall be conclusive and said stock, when issued, shall be
fully-paid and non-assessable.
Section 2.15 Compensation. The directors shall be allowed and paid all
necessary expenses incurred in attending any meetings of the Board, but shall
not receive any compensation for their services as directors until such time
as the corporation is able to declare and pay dividends on its capital stock.
Section 2.16 Board Officers.
(a) At its annual meeting, the Board of Directors shall elect, from
among its members, a chairman to preside at the meetings of the Board of
Directors. The Board of Directors may also elect such other board officers and
for such term as it may, from time to time, determine advisable.
(b) Any vacancy in any board office because of death, resignation,
removal or otherwise may be filled by the Board of Directors for the unexpired
portion of the term of such office.
Section 2.17 Order of Business. The order of business at any meeting of
the Board of Directors shall be as follows:
(1) Determination of members present and existence of quorum;
(2) Reading and approval of the minutes of any previous meeting
or meetings;
(3) Reports of officers and committeemen;
(4) Election of officers;
(5) Unfinished business;
(6) New business;
(7) Adjournment.
ARTICLE III
OFFICERS
Section 3.01 Election. The Board of Directors, at its first meeting
following the annual meeting of shareholders, shall elect a president, a
secretary and a treasurer to hold office for one (1) year next coming and
until their successors are elected and qualify. Any person may hold two or
more offices. The Board of Directors may, from time to time, by resolution,
appoint one or more vice presidents, assistant secretaries, assistant
treasurers and transfer agents of the corporation as it may deem advisable;
prescribe their duties; and fix their compensation.
Section 3.02 Removal; Resignation. Any officer or agent elected or
appointed by the Board of Directors may be removed by it whenever, in its
judgment, the best interest of the corporation would be served thereby. Any
officer may resign at any time upon written notice to the corporation without
prejudice to the rights, if any, of the corporation under any contract to
which the resigning officer is a party.
Section 3.03 Vacancies. Any vacancy in any office because of death,
resignation, removal, or otherwise may be filled by the Board of Directors for
the unexpired portion of the term of such
office.
Section 3.04 President. The president shall be the general manager and
executive officer of the corporation, subject to the supervision and control
of the Board of Directors, and shall direct the corporate affairs, with full
power to execute all resolutions and orders of the Board of Directors not
especially entrusted to some other officer of the corporation. The president
shall preside at all meetings of the shareholders and shall sign the
certificates of stock issued by the corporation, and shall perform such other
duties as shall be prescribed by the Board of Directors.
Unless otherwise ordered by the Board of Directors, the president shall
have full power and authority on behalf of the corporation to attend and to
act and to vote at any meetings of the shareholders of any corporation in
which the corporation may hold stock and, at any such meetings, shall possess
and may exercise any and all rights and powers incident to the ownership of
such stock. The Board of Directors, by resolution from time to time, may
confer like powers on any person or persons in place of the president to
represent the corporation for these purposes.
Section 3.05 Vice President. The Board of Directors may elect one or more
vice presidents who shall be vested with all the powers and perform all the
duties of the president whenever the president is absent or unable to act,
including the signing of the certificates of stock issued by the corporation,
and the vice president shall perform such other duties as shall be prescribed
by the Board of Directors.
Section 3.06 Secretary. The secretary shall keep the minutes of all
meetings of the shareholders and the Board of Directors in books provided for
that purpose. The secretary shall attend to the giving and service of all
notices of the corporation, may sign with the president in the name of the
corporation all contracts authorized by the Board of Directors or appropriate
committee, shall have the custody of the corporate seal, shall affix the
corporate seal to all certificates of stock duly issued by the corporation,
shall have charge of stock certificate books, transfer books and stock
ledgers, and such other books and papers as the Board of Directors or
appropriate committee may direct, and shall, in general perform all duties
incident to the office of the secretary. All corporate books kept by the
secretary shall be open for examination by any director at any reasonable
time.
Section 3.07 Assistant Secretary. The Board of Directors may appoint an
assistant secretary who shall have such powers and perform such duties as may
be prescribed for him by the secretary of the corporation or by the Board of
Directors.
Section 3.08 Treasurer. The treasurer shall be the chief financial
officer of the corporation, subject to the supervision and control of the
Board of Directors, and shall have custody of all the funds and securities of
the corporation. When necessary or proper, the treasurer shall endorse on
behalf of the corporation for collection checks, notes and other obligations,
and shall deposit all monies to the credit of the corporation in such bank or
banks or other depository as the Board of Directors may designate, and shall
sign all receipts and vouchers for payments made by the corporation. Unless
otherwise specified by the Board of Directors, the treasurer shall sign with
the president all bills of exchange and promissory notes of the corporation,
shall also have the care and custody of the stocks, bonds, certificates,
vouchers, evidence of debts, securities and such other property belonging to
the corporation as the Board of Directors shall designate, and shall sign all
papers required by law, by these By-laws or by the Board of Directors to be
signed by the treasurer. The treasurer shall enter regularly in the books of
the corporation, to be kept for that purpose, full and accurate accounts of
all monies received and paid on account of the corporation and whenever
required by the is Board of Directors, the treasurer shall render a statement
of any or all accounts. The treasurer shall at all reasonable times exhibit
the books of account to any directors of the corporation and shall perform all
acts incident to the position of treasurer subject to the control of the Board
of Directors. The treasurer shall, if required by the Board of Directors, give
a bond to the corporation in such sum and with such security as shall be
approved by the Board of Directors for the faithful performance of all the
duties of the treasurer and for restoration to the corporation in the event of
the treasurer's death, resignation, retirement, or removal from office, of all
books, records, papers, vouchers, money and other property belonging to the
corporation. The expense of such bond shall be borne by the corporation.
Section 3.09 Assistant Treasurer. The Board of Directors may appoint an
assistant treasurer who shall have such powers and perform such duties as may
be prescribed by the treasurer of the corporation or by the Board of
Directors, and the Board of Directors may require the assistant treasurer to
give a bond to the corporation in such sum and with such security as it may
approve, for the faithful performance of the duties of assistant treasurer,
and for the restoration to the corporation, in the event of the assistant
treasurer's death, resignation, retirement or removal from office, of all
books, records, papers, vouchers, money and other property belonging to the
corporation. The expense of such bond shall be borne by the corporation.
ARTICLE IV
CAPITAL STOCK
Section 4.01 Issuance. Shares of capital stock of the corporation shall
be issued in such manner and at such times and upon such conditions as shall
be prescribed by the Board of Directors.
Section 4.02 Certificates. Ownership in the corporation shall be
evidenced by certificates for shares of stock in such form as shall be
prescribed by the Board of Directors, shall be under the seal of the
corporation and shall be signed by the president or the vice president and
also by the secretary or an assistant secretary. Each certificate shall
contain the name of the record holder, the number, designation, if any, class
or series of shares represented, a statement of summary of any applicable
rights, preferences, privileges, or restrictions thereon, and a statement that
the shares are assessable, if applicable. All certificates shall be
consecutively numbered. The name and address of the shareholder, the number of
shares, and the date of issue shall be entered on the stock transfer books of
the corporation.
Section 4.03 Surrender: Lost or Destroyed Certificates. All certificates
surrendered to the corporation, except those representing shares of treasury
stock, shall be canceled and no new certificates shall be issued until the
former certificate for a like number of shares shall have been canceled,
except that in case of a lost, stolen, destroyed or mutilated certificate, a
new one may be issued therefor. However, any shareholder applying for the
issuance of a stock certificate in lieu of one alleged to have been lost,
stolen, destroyed or mutilated shall, prior to the issuance of a replacement,
provide the corporation with his, her or its affidavit of the facts
surrounding the loss, theft, destruction or mutilation and an indemnity bond
in an amount and upon such terms as the treasurer, or the Board of Directors,
shall require. In no case shall the bond be in amount less than twice the
current market value of the stock and it shall indemnify the corporation
against any loss, damage, cost or inconvenience arising as a consequence of
the issuance of a replacement certificate.
Section 4.04 Replacement Certificate. When the Articles of Incorporation
are amended in any way affecting the statements contained in the certificates
for outstanding shares of capital stock of the corporation or it becomes
desirable for any reason, including, without limitation, the merger or
consolidation of the corporation with another corporation or the
reorganization of the corporation, to cancel any outstanding certificate for
shares and issue a new certificate therefor conforming to the rights of the
holder, the Board of Directors may order any holders of outstanding
certificates for shares to surrender and exchange the same for new
certificates within a reasonable time to be fixed by the Board of Directors.
The order may provide that a holder of any certificate(s) ordered to be
surrendered shall not be entitled to vote, receive dividends or exercise any
other rights of shareholders until the holder has complied with the order
provided that such order operates to suspend such rights only after notice and
until compliance.
Section 4.05 Transfer of Shares. No transfer of stock shall be valid as
against the corporation except on surrender and cancellation by the
certificate therefor, accompanied by an assignment or transfer by the
registered owner made either in person or under assignment. Whenever any
transfer shall be expressly made for collateral security and not absolutely,
the collateral nature of the transfer shall be reflected in the entry of
transfer on the books of the corporation.
Section 4.06 Transfer Agent. The Board of Directors may appoint one or
more transfer agents and registrars of transfer and may require all
certificates for shares of stock to bear the signature of such transfer agent
and such registrar of transfer.
Section 4.07 Stock Transfer Books. The stock transfer books shall be
closed for a period of ten (10) days prior to all meetings of the shareholders
and shall be closed for the payment of dividends as provided in Article V
hereof and during such periods as, from time to time, may be fixed by the
Board of Directors, and, during such periods, no stock shall be transferable.
Section 4.08 Miscellaneous. The Board of Directors shall have the power
and authority to make such rules and regulations not inconsistent herewith as
it may deem expedient concerning the issue, transfer and registration of
certificates for shares of the capital stock of the corporation.
ARTICLE V
DIVIDENDS
Section 5.01 Dividends may be declared, subject to the provisions of the
laws of the State of Nevada and the Articles of Incorporation, by the Board of
Directors at any regular or special meeting and may be paid in cash, property,
shares of corporate stock, or any other medium. The Board of Directors may f
ix in advance a record date, as provided in Section 1.06 of these By-laws,
prior to the dividend payment for the purpose of determining shareholders
entitled to receive payment of any dividend. The Board of Directors may close
the stock transfer books for such purpose for a period of not more than ten
(10) days prior to the payment date of such dividend.
ARTICLE VI
OFFICES; RECORDS; REPORTS; SEAL AND FINANCIAL MATTERS
Section 6.01 Principal Office. The principal office of the corporation
in the State of Nevada shall be the Law Offices of Max C. Tanner, 2950 East
Flamingo Road, Suite G, Las Vegas, Nevada 89121, and the corporation may have
an office in any other state or territory as the Board of Directors may
designate.
Section 6.02 Records. The stock transfer books and a certified copy of
the By-laws, Articles of Incorporation, any amendments thereto, and the
minutes of the proceedings of the shareholders, the Board of Directors, and
committees of the Board of Directors shall be kept at the principal office of
the corporation for the inspection of all who have the right to see the same
and for the transfer of stock. All other books of the corporation shall be
kept at such places as may be prescribed by the Board of Directors.
Section 6.03 Financial Report-on Request. Any shareholder or shareholders
holding at least five percent (5%) of the outstanding shares of any class of
stock may make a written request for an income statement of the corporation
for the three (3) month, six (6) month, or nine (9) month period of the
current fiscal year ended more than thirty (30) days prior to the date of the
request and a balance sheet of the corporation as of the end of such period.
In addition, if no annual report for the last fiscal year has been sent to
shareholders, such shareholder or shareholders may make a request for a
balance sheet as of the end of such fiscal year and an income statement and
statement of changes in financial position for such fiscal year. The statement
shall be delivered or mailed to the person making the request within thirty
(30) days thereafter. A copy of the statements shall be kept on file in the
principal office of the corporation for twelve (12) months, and such copies
shall be exhibited at all reasonable times to any shareholder demanding an
examination of them or a copy shall be mailed to each shareholder. Upon
request by any shareholder, there shall be mailed to the shareholder a copy of
the last annual, semiannual or quarterly income statement which it has
prepared and a balance sheet as of the end of the period. The f inancial
statements referred to in this Section 6.03 shall be accompanied by the report
thereon, if any, of any independent accountants engaged by the corporation or
the certificate of an authorized officer of the corporation that such
financial statements were prepared without audit from the books and records of
the corporation.
Section 6.04 Right of Inspection.
(a) The accounting books and records and minutes of proceedings of
the shareholders and the Board of Directors and committees of the Board of
Directors shall be open to inspection upon the written demand of any
shareholder or holder of a voting trust certificate at any reasonable time
during usual business hours for a purpose reasonably related to such holder's
interest as a shareholder or as the holder of such voting trust certificate.
This right of inspection shall extend to the records of the subsidiaries, if
any, of the corporation. Such inspection may be made in person or by agent or
attorney, and the right of inspection includes the right to copy and make
extracts.
(b) Every director shall have the absolute right at any reasonable
time to inspect and copy all books, records and documents of every kind and to
inspect the physical properties of the corporation and/or its subsidiary
corporations. Such inspection may be made in person or by agent or attorney,
and the right of inspection includes the right to copy and make extracts.
Section 6.05 Corporate Seal. The Board of Directors may, by resolution,
authorize a seal, and the seal may be used by causing it, or a facsimile, to
be impressed or affixed or reproduced or otherwise. Except when otherwise
specifically provided herein, any officer of the corporation shall have the
authority to affix the seal to any document requiring it.
Section 6.06 Fiscal Year. The fiscal year-end of the corporation shall
be the calendar year or such other term as may be fixed by resolution of the
Board of Directors.
Section 6.07 Reserves. The Board of Directors may create, by resolution,
out of the earned surplus of the corporation such reserves as the directors
may, from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends or to repair or maintain any property
of the corporation, or for such other purpose as the Board of Directors may
deem beneficial to the corporation, and the directors may modify or abolish
any such reserves in the manner in which they were created.
ARTICLE VII
INDEMNIFICATION
Section 7.01 Indemnification. The corporation shall, unless prohibited by
Nevada Law, indemnify any person (an "Indemnitee") who is or was involved in
any manner (including, without limitation, as a party or a witness) or is
threatened to be so involved in any threatened, pending or completed action
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, including without limitation, any action, suit or proceeding
brought by or in the right of the corporation to procure a judgment in its
favor (collectively, a "Proceeding") by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other entity or enterprise, against all Expenses and Liabilities actually
and reasonably incurred by him in connection with such Proceeding. The right
to indemnification conferred in this Article shall be presumed to have been
relied upon by the directors, officers, employees and agents of the
corporation and shall be enforceable as a contract right and inure to the
benefit of heirs, executors and administrators of such individuals.
Section 7.02 Indemnification Contracts. The Board of Directors is
authorized on behalf of the corporation, to enter into, deliver and perform
agreements or other arrangements to provide any Indemnitee with specific
rights of indemnification in addition to the rights provided hereunder to the
fullest extent permitted by Nevada Law. Such agreements or arrangements may
provide (i) that the Expenses of officers and directors incurred in defending
a civil or criminal action, suit or proceeding, must be paid by the
corporation as they are incurred and in advance of the final disposition of
any such action, suit or proceeding provided that, if required by Nevada Law
at the time of such advance, the officer or director provides an undertaking
to repay such amounts if it is ultimately determined by a court of competent
jurisdiction that such individual is not entitled to be indemnified against
such expenses, (iii) that the indemnitee shall be presumed to be entitled to
indemnification under this Article or such agreement or arrangement and the
corporation shall have the burden of proof to overcome that presumption, (iii)
for procedures to be followed by the corporation and the Indemnitee in making
any determination of entitlement to indemnification or for appeals therefrom
and (iv) for insurance or such other Financial Arrangements described in
Paragraph 7.02 of this Article, all as may be deemed appropriate by the Board
of Directors at the time of execution of such agreement or arrangement.
Section 7.03 Insurance and Financial Arrangements. The corporation may,
unless prohibited by Nevada Law, purchase and maintain insurance or make other
financial arrangements ("Financial Arrangements") on behalf of any Indemnitee
for any liability asserted against him and liability and expenses incurred by
him in his capacity as a director, officer, employee or agent, or arising out
of his status as such, whether or not the corporation has the authority to
indemnify him against such liability and expenses. Such other Financial
Arrangements may include (i) the creation of a trust fund, (ii) the
establishment of a program of self-insurance, (iii) the securing of the
corporation's obligation of indemnification by granting a security interest or
other lien on any assets of the corporation, or (iv) the establishment of a
letter of credit, guaranty or surety.
Section 7.04 Definitions. For purposes of this Article:
Expenses. The word "Expenses" shall be broadly construed and,
without limitation, means (i) all direct and indirect costs incurred, paid or
accrued, (ii) all attorneys, fees, retainers, court costs, transcripts, fees
of experts, witness fees, travel expenses, food and lodging expenses while
traveling, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service, freight or other transportation fees and expenses,
(iii) all other disbursements and out-of-pocket expenses, (iv) amounts paid in
settlement, to the extent permitted by Nevada Law, and (v) reasonable
compensation for time spent by the Indemnitee for which he is otherwise not
compensated by the corporation or any third party, actually and reasonably
incurred in connection with either the appearance at or investigation,
defense, settlement or appeal of a Proceeding or establishing or enforcing a
right to indemnification under any agreement or arrangement, this Article, the
Nevada Law or otherwise; provided, however, that "Expenses" shall not include
any judgments or fines or excise taxes or penalties imposed under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or other excise
taxes or penalties.
Liabilities. "Liabilities" means liabilities of any type
whatsoever, including, but not limited to, judgments or fines, ERISA or other
excise taxes and penalties, and amounts paid in settlement.
Nevada Law. "Nevada Law" means Chapter 78 of the Nevada Revised Statutes as
amended and in effect from time to time or any successor or other statutes of
Nevada having similar import and effect.
This Article. "This Article" means Paragraphs 7.01 through 7.04 of
these bylaws or any portion of them.
Power of Stockholders. Paragraphs 7.01 through 7.04, including this
Paragraph, of these Bylaws may be amended by the stockholders only by vote of
the holders of sixty-six and two-thirds percent (66 2/3%) of the entire number
of shares of each class, voting separately, of the outstanding capital stock
of the corporation (even though the right of any class to vote is otherwise
restricted or denied); provided, however, no amendment or repeal of this
Article shall adversely affect any right of any Indemnitee existing at the
time such amendment or repeal becomes effective.
Power of Directors. Paragraphs 7.01 through 7.04 and this Paragraph
of these Bylaws may be amended or repealed by the Board of Directors only by
vote of eighty percent (80%) of the total number of Directors and the holders
of sixty-six and two-thirds percent (66 2/3) of the entire number of shares of
each class, voting separately, of the outstanding capital stock of the
corporation (even though the right of any class to vote is otherwise
restricted or denied); provided, however, no amendment or repeal of this
Article shall adversely affect any right of any Indemnitee existing at the
time such amendment or repeal becomes effective.
ARTICLE VIII
BY-LAWS
Section 8.01 Amendment. Amendments and changes of these By-Laws may be
made at any regular or special meeting of the Board of Directors by a vote of
not less than all of the entire Board, or may be made by a vote of, or a
consent in writing signed by the holders of a majority of the issued and
outstanding capital stock.
Section 8.02 Additional By-Laws. Additional by-laws not inconsistent
herewith may be adopted by the Board of Directors at any meeting of the Board
of Directors at which a quorum is present by an affirmative vote of a majority
of the directors present or by the unanimous consent of the Board of Directors
in accordance with Section 2.11 of these By-laws.
CERTIFICATION
I, the undersigned, being the duly elected secretary of the Corporation,
do hereby certify that the foregoing By-laws were adopted by the Board of
Directors on the 7th day of May, 1996.
/s/ Max C. Tanner
-------------------------
Max C. Tanner, Secretary
Exhibit 10.1
A.A.P.L Form 610-1982
MODEL FORM OPERATING AGREEMENT
COPY
OPERATING AGREEMENT
DATED
August 15, 1997
OPERATOR L & J Operating, Inc.
CONTRACT AREA Township 53 North, Range 67 West, 6th P.M.
Section 17: W/2W/2, SE/4NW/4, NE/4SW/4 Section 18: E/2NE/4
Crook County, Wyoming
COUNTY OR PARISH OF Crook -STATE OF Wyoming
COPYRIGHT 1982 - ALL RIGHTS RESERVED AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 2408 CONTINENTAL LIFE BUILDING, FORT WORTH, TEXAS, 76102, APPROVED
FORM. A.A.P.L. NO.610 - 1982 REVISED
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
TABLE OF CONTENTS
Article Title Page
1. DEFINITIONS ... .................................... 1
II. EXHIBITS . ........ ..... ............... ......... 1
III. INTERESTS OF PARTIES ............................. 2
A. OIL AND GAS INTERESTS .......................... 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION .... 2
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES
AND OTHER PAYMENTS ............ ............... 2
D. SUBSEQUENTLY CREATED INTERESTS ................. 2
IV. TITLES ............................................ 2
A. Title EXAMINATION ... Option A Deleted ......... 2-3
B. LOSS OF TITLE ................. ................. 3
1. Failure of Title Deleted .... .............. 3
2. Loss by Non-Payment or Erroneous Payment
of Amount Due .............. Deleted...... 3
3. Other Losses .................. Amended ..... 3
V. OPERATOR ............................................ 4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR..... 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND
SELECTION OF SUCCESSOR .........Revised...... 4
1. Resignation or Removal of Operator ........... 4
2. Selection of Successor Operator ............. 4
C. EMPLOYEES ....................................... 4
D. DRILLING CONTRACTS .............................. 4
VI. DRILLING AND DEVELOPMENT .......................... 4
A. INITIAL WELL..................................... 4-5
B. SUBSEQUENT OPERATIONS .......................... 5
1. Proposed Operations .. ..... Revised ......... 5
2. Operations by Less than All Parties.. Revised. 5-6-7
3. Stand-By Time ............................... 7
4. Sidetracking ....................... Revised.. 7
C. TAKING PRODUCTION IN KIND ....................... 7
D. ACCESS TO CONTRACT AREA AND INFORMATION ......... 8
E. ABANDONMENT OF WELLS ............................ 8
1. Abandonment of Dry Holes..........Revised..... 8
2. Abandonment of Wells that have Produced....... 8-9
3. Abandonment of Non-Consent Operations ........ 9
VII. EXPENDITURES AND LIABILITY OF PARTIES ............ 9
A. LIABILITY OF PARTIES ............................ 9
B. LIENS AND PAYMENT DEFAULT'S ..................... 9
C. PAYMENTS AND ACCOUNTING ........................ 9
D. LIMITATION OF EXPENDITURES ...................... 9-10
1. Drill or Deepen .... Option No. 1 Deleted..... 9-10
2. Rework or Plug Back ... Revised............... 10
3. Other Operations ............................ 10
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM
ROYALTIES.................................... 10
F. TAXES .......................................... 10
G. INSURANCE ....................................... 11
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST... 11
A. SURRENDER OF LEASES ............................. 11
B. RENEWAL OR EXTENSION OF LEASES .................. 11
C. ACREAGE OR CASH CONTRIBU71ONS ................... 11-12
D. MAINTENANCE OF UNIFORM INTEREST ................. 12
E. WAIVER OF RIGHTS TO PARTITION.................... 12
F. PREFERENTIAL RIGHT TO PURCHASE Deleted........... 12
IX. INTERNAL REVENUE CODE ELECTION ...................... 12
X. CLAIMS AND LAWSUITS ................. ................ 13
XI. FORCE MAJEURE ....................................... 13
XII. NOTICES ............................ ............... 13
XIII. TERM OF AGREEMENT ..........Option No. 2-Deleted... 13
XIV. COMPLIANCE WITH LAWS AND REGULATIONS ............... 14
A. LAWS, REGULATIONS AND ORDERS .................... 14
B. GOVERNING LAW ................................... 14
C. REGULATORY AGENCIES.............................. 14
XV. OTHER PROVISIONS .................................... 14
XVI. MISCELLANEOUS... ......... ......................... 15
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and betwee L & J Operating, Inc.
hereinafter designated and referred to as "Operator", and the signatory party
or parties other than Operator, sometimes hereinafter referred to
individually herein as "Non-Operator", and collectively as "Non-Operators".
WITNESSETH:
WHEREAS, the parties to this agreement are owners of oil and gas leases
and/or oil and gas interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these leases
and/or oil and gas interests for the production of oil and gas to the extent
and as hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas
condensate, and all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
B. The terms "oil and gas lease", "law" and "leasehold" shall mean the
oil and gas leases covering tracts of land lying within the Contract Area
which ore owned by the parties to this agreement.
C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.
D. The term "Contract Area" shall mean all of the lands, oil and gas
leasehold interests and oil and gas interests intended to be developed and
operated for oil and gas purposes under this agreement. Such lands, oil and
gas leasehold interests and oil and gas interests are described in Exhibit
"A".
E. The term "drilling unit" shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority. If a
drilling unit is not fixed by any such rule or order, a drilling unit shall be
the drilling unit as established by the pattern of drilling in the Contract
Area or as fixed by express agreement of the Drilling Parties.
F. The term "drillsite" shall mean the oil and gas lease or interest on
which a proposed well is to be located.
G. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation
conducted under the provisions of this agreement.
H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a
party who elects not to participate in a proposed operation.
Unless the context otherwise clearly indicates. words used in the
singular include the plural, the plural includes the singular, and the neuter
gender includes the masculine and the feminine.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
[X] A. Exhibit "A", shall include the following information:
(1) Identification of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Percentages or fractional interests of parties to this
agreement,
(4) Oil and gas leases and/or oil and gas interests subject to this
agreement,
(5) <deleted>
[ ] B. Exhibit "B", Form of Lease.
[X] C. Exhibit "C", Accounting Procedure.
[X] D. Exhibit "D", Insurance.
[ ] E. Exhibit "E", Gas Balancing Agreement.
[ ] F. Exhibit "F", Non-Discrimination and Certification of Non-Segregated
Facilities.
[ ] G. Exhibit "G", Tax Partnership.
If any provision of any exhibit, except Exhibits "E" and "G", is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
-1-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE III.
INTERESTS OF PARTIES
A. Oil and Gas Interests:
If any party owns an oil and gas interest in the Contract Area, that
interest shall be treated for all purposes of this agreement and during the
term hereof as if it were covered by the form of oil and gas lease attached
hereto as Exhibit "B", and the owner thereof shall be deemed to own both the
royalty interest reserved in such lease and the interest of the lessee
thereunder.
B. Interests of Parties in Costs and Production:
Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A". In the same manner,
the parties shall also own all production of oil and gas from the Contract
Area subject to the payment of royalties as provide in the leases shown in
Exhibit "A" which shall be borne as hereinafter set forth.
Regardless of which party has contributed the lease(s) and/or oil and gas
interest(s) hereto on which royalty is due and payable, each party entitled to
receive a share of production of oil and gas from the Contract Area shall bear
and shall pay or deliver, or cause to be paid or delivered, to the extent of
its interest in such production, the royalty amount stipulated hereinabove and
shall hold the other parties free from any liability therefor. No party shall
ever be responsible, however, on a price basis higher than the price received
by such party, to any other party's lessor or royalty owner, and if any such
other party's lessor or royalty owner should demand and receive settlement on
a higher price basis, the party contributing the affected lease shall bear the
additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby.
C. Excess Royalties, Overriding Royalties and Other Payments:
Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty, production
payment or other burden on production in excess of the amount stipulated in
Article III.B., such party so burdened shall assume and alone bear all such
excess obligations and shall indemnify and hold the other parties hereto
harmless from any and all claims and demands for payment asserted by owners of
such excess burden.
D. Subsequently Created Interests:
If any party should hereafter create an overriding royalty, production
payment or other burden payable out of production attributable to its working
interest hereunder, or if such a burden existed prior to this agreement and is
not set forth in Exhibit "A", or was not disclosed in writing to all other
parties prior to the execution of this agreement by all parties, or is not a
jointly acknowledged and accepted obligation of all parties (any such interest
being hereinafter referred to as "subsequently created interest" irrespective
of the timing of its creation and the party out of whose working interest the
subsequently created interest is derived being hereinafter referred to as
"burdened party"), and:
1. If the burdened party is required under this agreement to assign
or relinquish to any other party, or parties, all or a portion of its working
interest and/or the production attributable thereto, said other party, or
parties, shall receive said assignment and/or production free and clear of
said subsequently created interest and the burdened party shall indemnify and
save said other party, or parties, harmless from any and all claims and
demands for payment asserted by owners of the subsequently created interest;
and,
2. If the burdened party fails to pay, when due, its share of
expenses chargeable hereunder, all provisions of Article VII.B. shall be
enforceable against the subsequently created interest in the same manner as
they are enforceable against the working interest of the burdened party.
ARTICLE IV.
TITLES
A. Title Examination:
Title examination shall be made on the drillsite of any proposed well
prior to commencement of drilling operations or, if the Drilling Parties so
request, title examination shall be made on the leases and/or oil and gas
interests included, or planned to be included, in the drilling unit around
such well. The opinion will include the ownership of the working interest.
minerals, royalty, overriding royalty and production payments under the
applicable leases. At the time a well is proposed, each party contributing
leases and/or oil and gas interests to the drillsite or to be included in such
drilling unit, shall furnish to Operator all abstracts (including federal
lease status reports), title opinions, title papers and curative material in
its possession free of charge. All such information not in the possession of
or made available to Operator by the parties, but necessary for the
examination of the title, shall be obtained by Operator. Operator shall cause
title to be examined by attorneys on its staff or by outside attorneys. Copies
of all title opinions shall be furnished to each party hereto. The cost
incurred by Operator in this title program shall be borne as follows:
-2-
PAGE
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE IV
continued
[ ] Option No. 1: Deleted
[ X] Option No. 2: Costs incurred by Operator in procuring abstracts and fees
paid outside attorneys for title examination (including preliminary,
supplemental, shut-in gas royalty opinions and division order title opinions)
shall be borne by the Drilling Parties in the proportion that the interest of
each Drilling Party bears to the total interest of all Drilling Parties as
such interests appear in Exhibit "A". Operator shall make no charge for
services rendered by its staff attorneys or other personnel in the performance
of the above functions.
Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with leases or oil and gas
interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations as well as
the conduct of hearings before governmental agencies for the securing of
spacing or pooling orders. This shall not prevent any party from appearing on
its own behalf at any such hearing.
No well shall be drilled on the Contract Area until after (1) the title to
the drillsite or drilling unit has been examined as above provided, and (2)
the title has been approved by the examining attorney or title has been
accepted by all of the parties who are to participate in the drilling of the
well.
B. Loss of Title:
LOSSES: All loss of title to an Interest In the CONTRACT AREA shall he
joint losses and shall be borne by all parties in proportion to their
interests. There shall be no readjustment of interests in the remaining
portion of the Contract Area.
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<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE V.
OPERATOR
A. Designation and Responsibilities of Operator:
L & J Operating, Inc. shall be the Operator of the Contract Area, and
shall conduct and direct and have full control of all operations on the
Contract Area as permitted and required by, and within the limits of this
agreement. It shall conduct all such operations in a good and workmanlike
manner, but it shall have no liability as Operator to the other parties for
losses sustained or liabilities incurred, except such as may result from gross
negligence or willful misconduct.
B. Resignation or Removal of Operator and Selection of Successor:
1. Resignation or Removal of Operator: Operator may resign at any time by
giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, or is no longer capable of serving as Operator, Operator
shall be deemed to have resigned without any action by Non-0perators, except
the selection of a successor. Operator may be removed if it fails or refuses
to carry out its duties hereunder, or becomes insolvent, bankrupt or is placed
in receivership, by the affirmative vote of two (2) or more Non-Operators
owning a majority interest based on ownership as shown on Exhibit "A"
remaining after excluding the voting interest of Operator. Such resignation or
removal shall not become effective until 7:00 o'clock A.M. on the first day of
the calendar month following the expiration of ninety (90) days after the
giving of notice of resignation by Operator or action by the Non-Operators to
remove Operator, unless a successor Operator has been selected and assumes the
duties of Operator at an earlier date. Operator, after effective date of
resignation or removal, shall be bound by the terms hereof as a Non-Operator.
A change of a corporate name or structure of Operator or transfer of
Operator's interest to any single subsidiary, parent or successor corporation
shall not be the basis for removal of Operator.
2. Selection of Successor Operator: Upon the resignation or removal of
Operator, a successor Operator shall be selected by the parties. The successor
Operator shall be selected from the parties owning an interest in the Contract
Area at the time such successor Operator is selected. The successor Operator
shall be selected by the affirmative vote of two (2) or more parties owning a
majority interest based on ownership as shown on Exhibit "A"; provided,
however, if an Operator which has been removed fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative
vote of two (2) or more parties owning a majority interest based on ownership
as shown on Exhibit "A" remaining after excluding the voting interest of the
Operator that was removed.
C. Employees:
The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall he determined by Operator, and all such employees
shall be the employees of Operator.
D. Drilling Contracts:
All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing rates in the area and the
rate of such charges shall be agreed upon by the parties in writing before
drilling operations are commenced, and such work shall be performed by
Operator under the same terms and conditions as are customary and usual in the
area in contracts of independent contractors who are doing work of a similar
nature.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. Initial Well:
On or before the day of 19 , Operator shall commence the drilling of a
well for oil and gas at the following location:
SW/4SW/4 of Section 17, T53N, R67W
and shall thereafter continue the drilling of the well with due diligence to a
depth adequate to test the Minnelusa formation or to
6,100 feet, whichever is lesser.
unless granite or other practically impenetrable substance or condition in the
hole, which renders further drilling impractical is encountered at a lesser
depth, or unless all parties agree to complete or abandon the well at a lesser
depth.
Operator shall make reasonable tests of all formations encountered during
drilling which give indication of containing oil and gas in quantities
sufficient to test, unless this agreement shall be limited in its application
to a specific formation or formations, in which event Operator shall be
required to test only the formation or formations to which this agreement may
apply.
-4-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI continued
If, in Operator's judgment, the well will not produce oil or gas in
paying quantities, and it wishes to plug and abandon the well as a dry hole,
the provisions of Article VI.E.1. shall thereafter apply.
B. Subsequent Operations:
1. Proposed Operations: Should any party hereto desire to drill any well
on the Contract Area other than the well provided for in Article VI.A., or to
rework, deepen or plug back a dry hole drilled at the joint expense of all
parties or a well jointly owned by all the parties and not then producing in
paying quantities, the party desiring to drill, rework, deepen or plug back
such a well shall give the other parties written notice of the proposed
operation, specifying the work to be performed, the location, proposed depth,
objective formation and the estimated cost of the operation. The parties
receiving such a notice shall have thirty (30) days after receipt of the
notice within which to notify the party wishing to do the work whether they
elect to participate in the cost of the proposed operation. If a drilling rig
is on location, notice of a proposal to rework, plug back or drill deeper may
be given by telephone and the response period shall be limited to twenty-four
(24) hours, exclusive of Saturday, Sunday and legal holidays. Failure of a
party receiving such notice to reply within the period above fixed shall
constitute an election by that party not to participate in the cost of the
proposed operation. Any notice or response given by telephone shall be
promptly confirmed in writing.
If all parties elect to participate in such a proposed operation,
Operator shall, within ninety (90) days after expiration of the notice period
of thirty (30) days (or as promptly as possible after the expiration of the
twenty-four (24) hour period when a drilling rig is on location, as the case
may be), actually commence the proposed operation and complete it with due
diligence at the risk and expense of all parties hereto; provided, however,
said commencement date may be extended upon written notice of same by Operator
to the other parties, for a period of up to thirty (30) additional days if, in
the sole opinion of Operator, such additional time is reasonably necessary to
obtain permits from governmental authorities, surface rights (including
rights-of-way) or appropriate drilling equipment, or to complete title
examination or curative matter required for title approval or acceptance.
Notwithstanding the force majeure provisions of Article XI, if the actual
operation has not been commenced within the time provided (including any
extension thereof as specifically permitted herein) and if any party hereto
still desires to conduct said operation, written notice proposing same must be
resubmitted to the other parties in accordance with the provisions hereof as
if no prior proposal had been made.
2. Operations by Less than All Parties: If any party receiving such
notice as provided in Article VI.B.1. or VII.D.1 (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such
other parties as shall elect to participate in the operation shall, within
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as possible after the expiration of the twenty-four (24) hour
period when a drilling rig is on location, as the case may be) actually
commence the proposed operation and complete it with due diligence. Operator
shall perform all work for the account of the Consenting Parties; provided,
however, if no drilling rig or other equipment is on location, and if Operator
is a Non-Consenting Party, the Consenting Parties shall either: (a) request
Operator to perform the work required by such proposed operation for the
account of the Consenting Parties, or (b) designate one (1) of the Consenting
Parties as Operator to perform such work. Consenting Parties, when conducting
operations on the Contract Area pursuant to this Article VI.B.2., shall comply
with all terms and conditions of this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period,
shall advise the Consenting Parties of the total interest of the parties
approving such operation and its recommendation as to whether the Consenting
Parties should proceed with the operation as proposed. Each Consenting Party,
within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after receipt of such notice, shall advise the proposing party of
its desire to (a) limit participation to such party's interest as shown on
Exhibit "A" or (b) carry its proportionate part of Non-Consenting Parties'
interests, and failure to advise the proposing party shall be deemed an
election under (a). In the event a drilling rig is on location, the time
permitted for such a response shall not exceed a total of twenty-four
(24)hours (inclusive of Saturday, Sunday and legal holidays). The proposing
party, at its election, may withdraw such proposal if there is insufficient
participation and shall promptly notify all parties of such decision.
The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same under
the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the Consenting
Parties shall plug and abandon the well and restore the surface location at
their sole cost, risk and expense. If any well drilled, reworked, deepened or
plugged back under the provisions of this Article results in a producer of oil
and/or gas in paying quantities, the Consenting Parties shall complete and
equip the well to produce at their sole cost and risk,
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<PAGE>
A.A,P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI
continued
and the well shall then be turned over to Operator and shall be operated by it
at the expense and for the account of the Consenting Parties. Upon
commencement of operations for the drilling, reworking, deepening or plugging
back of any such well by Consenting Parties in accordance with the provisions
of this Article, each Non-Consenting Party shall be deemed to have
relinquished to Consenting Parties, and the Consenting Parties shall own and
be entitled to receive, in proportion to their respective interests, all of
such Non-Consenting Party's interest in the well and share of production
therefrom until the proceeds of the sale of such share, calculated at the
well, or market value thereof if such share is not sold, (after deducting
production taxes, excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.D. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts) shall equal the total of the following:
(a) 100% of each such Non-Consenting Party's share of the cost of any
newly acquired surface equipment beyond the wellhead connections (including,
but not limited to, stock tanks, separators, treaters, pumping equipment and
piping), plus 100% of each such Non-Consenting Party's share of the cost of
operation of the well commencing with first production and continuing until
each such Non-Consenting Party's relinquished interest shall revert to it
under other provisions of this Article, it being agreed that each Non-
Consenting Party's share of such costs and equipment will be that interest
which would have been chargeable to such Non-Consenting Party had it
participated in the well from the beginning of the operations; and
(b) 300% of that portion of the costs and expenses of drilling,
reworking, deepening, plugging back, testing and completing, after deducting
any cash contributions received tinder Article VIII.C., and 300% of that
portion of the cost of newly acquired equipment in the well (to and including
the wellhead connections), which would have been chargeable to such
Non-Consenting Party if it had participated therein.
An election not to participate in the drilling or the deepening of a well
shall be deemed an election not to participate in any reworking or plugging
back operation proposed in such a well, or portion thereof, to which the
initial Non-Consent election applied that is conducted at any time prior to
full recovery by the Consenting Parties of the Non-Consenting Party's
recoupment account. Any such reworking or plugging back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the
Consenting Parties one hundred percent (100%) of that portion of the costs of
the reworking or plugging back operation which would have been chargeable to
such Non-Consenting Party had it participated therein. If such a reworking or
plugging back operation is proposed during such recoupment period, the
provisions of this Article VI.B. shall be applicable as between said
Consenting Parties in said well.
During the period of time Consenting Parties are entitled to receive
Non-Consenting Party's share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all production,
severance, excise, gathering and other taxes, and all royalty, overriding
royalty and other burdens applicable to Non-Consenting Party's share of
production not excepted by Article III.D.
In the case of any reworking, plugging back or deeper drilling operation,
the Consenting Parties shall be permitted to use, free of cost, all casing,
tubing and other equipment in the well, but the ownership of all such
equipment shall remain unchanged; and upon abandonment of a well after such
reworking, plugging back or deeper drilling, the Consenting Parties shall
account for all such equipment to the owners thereof, with each party
receiving its proportionate part in kind or in value, less cost of salvage.
Within sixty (60) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
deepening, plugging back, testing, completing, and equipping the well for
production; or, at its option, the operating party, in lieu of an itemized
statement of such costs of operation, may submit a detailed statement of
monthly billings. Each month thereafter, during the time the Consenting
Parties are being reimbursed as provided above, the party conducting the
operations for the Consenting Parties shall furnish the Non-Consenting Parties
with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of oil and
gas produced from it and the amount of proceeds realized from the sale of the
well's working interest production during the preceding month. In determining
the quantity of oil and gas produced during any month, Consenting Parties
shall use industry accepted methods such as, but not limited to, metering or
periodic well tests. Any amount realized from the sale or other disposition of
equipment newly acquired in connection with any such operation which would
have been owned by a Non-Consenting Party had it participated therein shall be
credited against the total unreturned costs of the work done and of the
equipment purchased in determining when the interest of such Non-Consenting
Party shall revert to it as above provided; and if there is a credit balance,
it shall be paid to such Non-Consenting Party.
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<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI
continued
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto,
and the production therefrom as such Non-Consenting Party would have been
entitled to had it participated in the drilling, reworking, deepening or
plugging back of said well. Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and the
Accounting Procedure attached hereto.
Notwithstanding the provisions of this Article VI.B.2., it is agreed that
without the mutual consent of all parties, no wells shall be completed in or
produced from a source of supply from which a well located elsewhere on the
Contract Area is producing, unless such well conforms to the then-existing
well spacing pattern for such source of supply.
The provisions of this Article shall have no application whatsoever to
the drilling of the initial well described in Article VI.A. except (a) as to
Article VII.D.1. (Option No. 2), if selected, or (b) as to the reworking,
deepening and plugging back of such initial well after it has been drilled to
the depth specified in Article VI.A. if it shall thereafter prove to be a dry
hole or, if initially completed for production, ceases to produce in paying
quantities.
3. Stand-By Time: When a well which has been drilled or deepened has
reached its authorized depth and all tests have been completed, and the
results thereof furnished to the parties, stand-by costs incurred pending
response to a party's notice proposing a reworking, deepening, plugging back
or completing operation in such a well shall be charged and borne as part of
the drilling or deepening operation just completed. Stand-by costs subsequent
to all parties responding, or expiration of the response time permitted,
whichever first occurs, and prior to agreement as to the participating
interests of all Consenting Parties pursuant to the terms of the second
grammatical paragraph of Article VI.B.2, shall be charged to and borne as part
of the proposed operation, but if the proposal is subsequently withdrawn
because of insufficient participation, such stand-by costs shall be allocated
between the Consenting Parties in the proportion each Consenting Party's
interest as shown on Exhibit "A" bears to the total interest as shown on
Exhibit "A" of all Consenting Parties.
4. Sidetracking: Except as hereinafter provided, those provisions of this
agreement applicable to a "deepening" operation shall also be applicable to
any proposal to directionally control and intentionally deviate a well from
vertical so as to change the bottom hole location (herein called
"sidetracking"), unless done to straighten the hole or to drill around junk in
the hole or because of other mechanical difficulties. Any party having the
right to participate in a proposed sidetracking operation that does not own an
interest in the affected well bore at the time of the notice shall, upon
electing to participate, tender to the well bore owners its proportionate
share (equal to its interest in the sidetracking operation) of the value of
thar portion of the existing well bore to be utilized as follows:
(a) If the proposal is for sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the
initial drilling of the well down to the depth at which the sidetracking
operation is initiated.
(b) if the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable materials
and equipment down to the depth at which the sidetracking operation is
initiated, determined in accordance with the provisions of Exhibit "C", less
the estimated cost of salvaging and the estimated cost of plugging and
abandoning.
In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be
limited to twenty-four (24) hours exclusive of Saturday, Sunday and legal
holidays; provided, however, any party may request and receive up to eight (8)
additional days after expiration of he twenty-four (24) hours within which to
respond by paying for all stand-by time incurred during such extended response
period. If more than one party elects to take such additional time to respond
to the notice, standby costs shall be allocated between the parties taking
additional time to respond on a day-to-day basis in the proportion each
electing party's interest as shown on Exhibit "A" bears to the total interest
as shown on Exhibit "A" of all the electing parties. In all other instances
the response period to a proposal for sidetracking shall be limited to thirty
(30) days.
C. TAKING PRODUCTION IN KIND:
Each party shall take in kind or separately dispose of its proportionate
share of all oil and gas produced from the Contact Area, exclusive of
production which may be used in development and producing operations and in
preparing and treating oil and/or gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the taking in kind or
separate disposition by any party of its proportionate share of the production
shall be borne by such party. Any party taking its share of production in all
be
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<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI
continued
required to pay for only its proportionate share of such part of Operator's
surface facilities which it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.B., shall be entitled to receive
payment directly from the purchaser thereof for its share of all production.
In the event any party shall fail to make the arrangements necessary to take
in kind or separately dispose of its proportionate share of the oil and gas
produced from the Contract Area, Operator shall have the right, subject to the
revocation at will by the party owning it, but not the obligation, to purchase
such oil and gas or sell it to others at any time and from time to time, for
the account of the nontaking party at the best price obtainable in the area
for such production. Any such purchase or sale by Operator shall be subject
always to the right of the owner of the production to exercise at any time its
right to take in kind, or separately dispose of, its share of all oil and gas
not previously delivered to a purchaser. Any purchase or sale by Operator of
any other party's share of oil and gas shall be only for such reasonable
periods of time as are consistent with the minimum needs of the industry under
the particular circumstances, but in no event for a period in excess of one
(1) year. Notwithstanding the foregoing, Operator shall not make a sale,
including one into interstate commerce, of any other party's share of gas
production without first giving such other party thirty (30) days notice of
such intended sale.
D. Access to Contract Area and Information:
Each party shall have access to the Contract Area at all reasonable
times, at its sole cost and risk to inspect or observe operations, and shall
have access at reasonable times to information pertaining in the development
or operation thereof, including Operator's books and records relating thereto.
Operator, upon request, shall furnish each of the other parties with copies of
all forms or reports filed with governmental agencies, daily drilling reports,
well logs, tank tables, daily gauge and run tickets and reports of stock on
hand at the first of each month, and shall make available samples of any cores
or cuttings taken from any well drilled on the Contract Area. The cost of
gathering and furnishing information to Non-Operator, other than that
specified above shall he charged to the Non-Operator that requests the
information.
E. Abandonment of Wells:
1. Abandonment of Dry Holes: Except for any well drilled or deepened
pursuant to Article VI.B.2., any well which has been drilled or deepened under
the terms of this agreement and is proposed to be completed as a dry hole
shall not be plugged and abandoned without the consent of all parties. Should
Operator, after diligent effort, be unable to contact any party, or should any
party fail to reply within twenty-four (24) hours (exclusive of Saturday,
Sunday and legal holidays) after receipt of notice of the proposal to plug and
abandon such well, such party shall be deemed to have consented to the
proposed abandonment. Any such wells shall be plugged and abandoned in
accordance with applicable regulations and at the cost, risk and expense of
the parties who participated in the cost of drilling or deepening such well.
Any party who objects to plugging and abandoning such well shall have the
right to take over the well and conduct further operations in search of oil
and/or gas subject to the provisions of Article VI.B.
2. Abandonment of Wells that have Produced: Except for any well in which a
Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and
at the cost, risk and expense of all the parties hereto. If, within
thirty (30) days after receipt of notice of the proposed abandonment of any
well, all parties do not agree to the abandonment of such well, those wishing
to continue its operation from the interval(s) of the formation(s) then open
to production shall tender to each of the other parties its proportionate
share of the valtic of the well's salvable material and equipment, determined
in accordance with the provisions of Exhibit "C", less the estimated cost of
salvaging and the estimated cost of plugging and abandoning. Each abandoning
party shall assign the non-abandoning parties, without warranty, express or
implied, as to title or as to quantity, or fitness for use of the equipment
and material, all of its interest in the well and related equipment, together
with its interest in the leasehold estate as to, but only as to, the interval
or intervals of the formation or formations then open to production. If the
interest of the abandoning party is or includes an oil and gas interest, such
party shall execute and deliver to the non-abandoning party or parties an oil
and gas lease, limited to the interval or intervals of the formation or
formations then open to production, for a term of one (1) year and so long
thereafter as oil and/or gas is produced from the interval or intervals of the
formation or formations covered thereby, such lease to be on the form attached
as Exhibit
-8-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI
Continued
"B". The assignments or leases so limited shall encompass the "drilling unit"
upon which the well is located. The payments by, and the assignments or leases
to, the assignees shall be in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate
of the percentages of participation in the Contract Area of all assignees.
There shall be no readjustment of interests in the remaining portion of the
Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
interval or intervals then open other than the royalties retained in any lease
made under the terms of this Article. Upon request, Operator shall continue to
operate the assigned well for the account of the non-abandoning parties at the
rates and charges contemplated by this agreement, plus any additional cost and
charges which may arise as the result of the separate ownership of the
assigned well. Upon proposed abandonment of the producing interval(s) assigned
or leased, the assignor or lessor shall then have the option to repurchase its
prior interest in the well (using the same valuation formula, and participate
in further operations therein subject to the provisions hereof.
3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.I. or
VI.E.2. above shall be applicable as between Consenting Parties in the event
of the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until
all parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article VI.E.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. Liability of Parties:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the
parties liable as partners.
B. Liens and Payment Defaults:
Each Non-0perator grants to Operator a lien upon its oil and gas rights
in the Contract Area, and a security interest in its share of oil and/or gas
when extracted and its interest in all equipment, to secure payment of its
share of expense, together with interest thereon at the rate provided in
Exhibit "C". To the extent that Operator has a security interest under the
Uniform Commercial Code of the state, Operator shall be entitled to exercise
the rights and remedies of a secured party under the Code. The bringing of a
suit and the obtaining of judgment by Operator for the secured indebtedness
shall not be deemed an election of remedies or otherwise affect the lien
rights or security interest as security for the payment thereof. In addition,
upon default by any Non-Operator in the payment of its share of expense,
Operator shall have the right, without prejudice to other rights or remedies,
to collect from the purchaser the proceeds from the sale of such
Non-Operator's share of oil and/or gas until the amount owed by such
Non-Operator, plus interest, has been paid. Each purchaser shall be entitled
to rely upon Operator's written statement concerning the amount of any
default. Operator grants a like lien and security interest to the
Non-Operators to secure payment of Operator's proportionate share of expense.
If any party fails or is unable to pay its share of expense within sixty (60)
days after rendition of a statement therefor by Operator, the non-defaulting
parties, including Operator, shall, upon request by Operator, pay the unpaid
amount in the proportion that the interest of each such party bears to the
interest of all such parties. Each party so paying its share of the unpaid
amount shall to obtain reimbursement thereof, be subrogated to the security
rights described in the foregoing paragraph.
C. Payments and Accounting:
Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Contract Area pursuant to this agreement and shall charge each of the parties
hereto with their respective proportionate shares upon the expense basis
provided in Exhibit "C". Operator shall keep an accurate record of the joint
account hereunder, showing expenses incurred and charges and credits made and
received.
Operator, at its election, shall have the right from time to time to
demand and receive from the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of
such estimated expense, together with an invoice for its share thereof. Each
such statement and invoice for the payment in advance of estimated expense
shall be submitted on or before the 20th day of the next preceding month. Each
party shall pay to Operator its proportionate share of such estimate within
fifteen (15) days after such estimate and invoice is received. If any party
fails to pay its share of said estimate within said time, the amount due shall
bear interest as provided in Exhibit "C" until paid. Proper adjustment shall
be made monthly between advances and actual expenses to the end that each
party shall bear and pay its proportionate shire of actual expenses incurred,
and no more.
D. Limitation of Expenditures:
1. Drill or Deepen: Without the consent of all parties, no well shall be
drilled or deepened, except any well drilled or deepened pursuant to the
provisions of Article VI.B.2. of this agreement. Consent to the drilling or
deepening shall include:
-9-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VII
continued
[ ] Option No. 1 - Deleted
[ X ] Option No. 2 All necessary expenditures for the drilling or deepening
and testing of the well. When such well has reached its authorized depth, and
all tests have been completed, and the results thereof furnished to the
parties, Operator shall give immediate notice to the Non-Operators who have
the right to participate in the completion costs. The parties receiving such
notice shall have twenty-four (24) hours (exclusive of Saturday, Sunday and
legal holidays) in which to elect to participate in the setting of casing and
the completion attempt. Such election, when made, shall include consent to all
necessary expenditures for the completing and equipping of such well,
including necessary tankage and/or surface facilities. Failure of any party
receiving such notice to reply within the period above fixed shall constitute
an election by that party not to participate in the cost of the completion
attempt. If one or more, but less than all of the parties, elect to set pipe
and to attempt a completion, the provisions of Article hereof (the phrase
"reworking, deepening or plugging back" as contained in Article shall be
deemed to include "completing") shall apply to the operations thereafter
conducted by less than all parties.
2. Rework or Plug Back: Without the consent of all parties, no well shall he
reworked or plugged back except a well reworked or plugged back pursuant to
the provisions of Aricle VI.B.2. of this agreement. Consent to the reworking
or plugging back of a well shall include all necessary expenditures in
conducting such operations and completing and equipping of said well,
including necessary tankage and/or surface facilities.
3. Other Operations: Without the consent of all parties, Operator shall not
undertake any single project reasonably estimated to require an expenditure in
excess of ***Ten Thousand and 00/100*** Dollars ($10,0000.00*) except in
connection with a well, the drilling, reworking, deepening, completing,
recompleting, or plugging back of which has been previously authorized by or
pursuant to this agreement; provided, however, that, in case of explosion,
fire, flood or other sudden emergency, whether of the same or different
nature, Operator may take such steps and incur such expenses as in its opinion
are required to deal with the emergency to safeguard life and property but
Operator, as promptly as possible, shall report the emergency to the other
parties. If Operator prepares an authority for expenditure (AFE) for its own
use, Operator shall furnish any Non-Operator so requesting an information copy
thereof for any single project costing in excess of ***TEN THOUSAND AND
00/100*** Dollars ($10,000.00) but less than the amount first set forth above
in this paragraph.
E. Rentals, Shut-in Well Payments and Minimum Royalties:
Rentals, shut-in well payments and minimum royalties which may be required
under the terms of any lease shall be paid by the party or parties who
subjected such lease to this agreement at its or their expense. In the event
two or more parties own and have contributed interests in the same lease to
this agreement, such parties may designate one of such parties to make said
payments for and on behalf of all such parties. Any party may request and
shall be entitled to receive, proper evidence of all such payments. In the
event of failure to make proper payment of any rental shut-in well payment or
minimum royalty through mistake or oversight where such payment is required to
continue the lease in force any loss which results from such non-payment shall
be borne in accordance with the provisions of Article IV.B.2.
Operator shall notify Non-Operator of the anticipated completion of a
shut-in gas well, or the shutting in or return to production of a producing
gas well, at least five (5) days (excluding Saturday, Sunday and legal
holidays), or at the earliest opportunity permitted by circumstances, prior to
taking such action but assumes no liability for failure to do so. In the event
of failure by Operator to so notify Non-Operator, the loss of any lease
contributed hereto by Non-Operator for failure to make timely payments of any
shut-in well payment shall be borne jointly by the parties hereto under the
provisions of Article IV.B.3.
F. Taxes:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties
and production payments) on leases and oil and gas interests contributed by
such Non-Operator. If the assessed valuation of any leasehold estate is
reduced by reason of its being subject to outstanding excess royalties, over-
riding royalties or production payments, the reduction in ad valorem taxes
resulting therefrom shall inure to the benefit of the owner or owners of such
leasehold estate, and Operator shall adjust the charge to such owner or owners
so as to reflect the benefit of such reduction. If the ad valorem taxes are
based in whole or in part upon separate valuations of each party's working
interest, then notwithstanding anything to the contrary herein, charges to the
joint account shall be made and paid by the parties hereto in accordance with
the tax value generated by each party's working interest. Operator shall bill
the other parties for their proportionate shares of all tax payments in the
manner provided in Exhibit "C".
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and
prosecute the protest to a final determination, unless, all parties agree to
abandon the protest prior to final determination. During the pendency of
administrative or judicial proceedings, Operator may elect to pay, under
protest, all such taxes and any interest and penalty. When any such protested
assessment shall have been finally determined, Operator shall pay the tax for
the joint account, together with any interest and penalty accrued, and the
total cost shall then be assessed against the parties, and be paid by them, as
provided in Exhibit "C".
Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes imposed upon or with respect to the
production or handling of such party's share of oil and/or gas produced under
the terms of this agreement.
-10-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VII
continued
G. Insurance:
At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations
are being conducted; provided, however, that Operator may be a self-insurer
for liability under said compensation laws in which event the only charge that
shall he made to the joint account shall be as provided in Exhibit "C".
Operator shall also carry or provide insurance for the benefit of the
joint account of the parties as outlined in Exhibit "D", attached to and made
a part hereof. Operator shall require all contractors engaged in work on or
for the Contract Area to comply with the workmen's compensation law of the
state where the operations are being conducted and to maintain such other
insurance as Operator may require.
In the event automobile public liability insurance is specified in said
Exhibit "D", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automotive equipment.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. Surrender of Leases:
The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any lease
or in any portion thereof, and the other parties do not agree or consent
thereto, the party desiring to surrender shall assign, without express or
implied warranty of title, all of its interest in such lease, or portion
thereof, and any well, material and equipment which may be located thereon and
any rights in production thereafter secured, to the parties not consenting to
such surrender. If the interest of the assigning party is or includes in oil
and gas interest, the assigning party shall execute and deliver to the party
or parties not consenting to such surrender an oil and gas lease covering such
oil and gas interest for a term of one (1) year and so long thereafter as oil
and/or gas is produced from the land covered thereby, such lease to be on the
form attached hereto is Exhibit "B". Upon such assignment or lease, the
assigning party shall be relieved from all obligation, thereafter accruing but
not theretofore accrued with respect to the interest assigned or leased and
the operation of any well attributable thereto, and the assigning party shall
have no further interest in the assigned or leased premises and its equipment
and production other than the royalties retained in any lease made under the
terms of this Article. The party assignee or lessee shall pay to the party
assignor or lessor the reasonable salvage value of the latter's interest in
any wells and equipment attributable to the assigned or leased acreage. The
value of all material shall be determined in accordance with the provisions of
Exhibit "C", less the estimated cost of salvaging and the estimated cost of
plugging and abandoning. If the assignment or lease is in favor of more than
one party, the interest shall be shared by such parties in the proportions
that the interest of each bears to the total interest of all such parties.
Any assignment, lease or surrender made under this provision shall not reduce
or change the assignor's, lessor's or surrendering party's interest as it was
immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and
provisions of this agreement.
B. Renewal or Extension of Leases:
If any party secures a renewal of any oil and gas lease subject to this
agreement all other parties shall be notified promptly, and shall have the
right for a period of thirty (30) days following receipt of such notice in
which to elect to participate in the ownership of the renewal lease, insofar
as such lease affects lands within the Contract Area, by paying to the party
who acquired it their several proper proportionate shares of the acquisition
cost allocated to that part of such lease within the Contract Area, which
shall be in proportion to the interests held at that time by the parties in
the Contract Area.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate
of the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal lease. Any renewal lease in
which less than all parties elect to participate shall not be subject to this
agreement.
Each party who participates in the purchase of a renewal lease shall be
given an assignment of its proportionate interest therein by the acquiring
party.
The provisions of this Article shall apply to renewal leases whether they
are for the entire interest covered by the expiring lease or cover only a
portion of its area or an interest therein any renewal lease taken before the
expiration of its predecessor lease, or taken or contracted for within six (6)
months after the expiration of the existing lease shall be subject to this
provision; but any lease taken or contracted for more than six (6) months
after the expiration of an existing lease shall not be deemed a renewal lease
and shall not be subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
oil and gas leases.
C. Acreage or Cash Contributions:
While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost of
such drilling or other operation. If the contribution be in the form of
acreage, the party to whom the contribution is made shall promptly tender an
assignment of the acreage, without warranty of title, to the Drilling
Parties in the proportions
-11-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VIII
continued
said Drilling Parties shared the cost of drilling the well. Such acreage shall
become a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions
shall also be applicable to optional rights to earn acreage outside the
Contract Area which are in support of a well drilled inside the Contract Area.
If any party contracts for any consideration relating to disposition of such
party's share of substances produced hereunder, such consideration shall not
be deemed a contribution as contemplated in this Article VIII.C.
D. Maintenance of Uniform Interest:
For the purpose of maintaining uniformity of ownership in the oil and gas
leasehold interests covered by this agreement, no party shall sell, encumber,
transfer or make other disposition of its interest in the leases embraced
within the Contract Area and in wells, equipment and production unless such
disposition shall be made expressly subject to this agreement and shall be
made without prejudice to the right of the other parties. Any extra,
reasonable and customary, expenditure incurred as a result of a partial
disposition including any additional marketing or metering expense, shall be
borne by the party to which such interest is transferred. If at any time the
interest of any party is devided among and owned by are three or more
co-owners, Operator, at its discretion, may require such co-owners to appoint
a single trustee or agent with full authority to receive notices, approve
expenditures, receive billings for and approve and pay such party's share of
the joint expenses, and to deal generally with, and with power to bind, the
co-owners of such party's interest within the scope of the operations embraced
in this agreement; however, all such co-owners shall have the right to enter
into and execute all contracts or agreements for the disposition of their
respective shares of the oil and gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.
E. Waiver of Rights to Partition:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in
the Contract Area waives any and all rights it may have to partition and have
set aside to it in severalty its undivided interest therein.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the rights
and liabilities hereunder are several and not joint or collective, or that
this agreement and operations hereunder shall not constitute a parnership, if,
for federal income tax purposes, this agreement and the operations hereunder
are regarded as a partnership, each party hereby affected elects to be
excluded from the application of all of the provisions of Subchapter "K",
Chapter 1, Subtitle "A", of the Internal Revenue Code of 1954, as permitted
and authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, but not by way of limitation, all of the
returns, statements, and the data required by Federal Regulations 1.761.
Should there be any requirement that each party hereby affected give further
evidence of this election, each such party shall execute such documents and
furnish such other evidence as may be required by the Federal Internal Revenue
Service or as may be necessary to evidence this election. No such party shall
give any notices or take any other action inconsistent with the election made
hereby. If any present or future income tax laws of the state or states in
which the Contract Area is located or any future income tax laws of the United
States contain provisions similar to those in Subchapter "K" Chapter 1,
Subtitle "A", of the Internal Revenue Code of 1954 under which an election
similar to that provided by Section 761 of the Code is permitted, each party
hereby affected shall make such election as may be permitted or required by
such laws. In making the foregoing election, each such party states that the
income derived by such party from operations hereunder can be adequately
determined without the computation of partnership taxable income.
* In the event a disposition is made to a third party who, at the time of
disposition is in receivership or has filed for or has been petitioned into
bankruptcy, the disposing party shall also be liable to the other parties
after disposition for all amounts accruing for operations in which the
disposing party chose to participate under this Agreement attributable to the
disposed interest prior to the effective date of the disposition.
-12-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed ***TEN
THOUSAND AND 00/100*** ---Dollars ($10,000.00*) and if the payment is in
complete settlement of such claim or suit. If the amount required for
settlement exceeds the above amount, the parties hereto shall assume and take
over the further handling of the claim or suit, unless such authority is
delegated to Operator. All costs and expenses of handling, settling, or
otherwise discharging such claim or suit shall be at the joint expense of the
parties participating in the operation from which the claim or suit arises. If
a claim is made against any party or if any party is sued on account of any
matter arising from operations hereunder over which such individual has no
control because of the rights given Operator by this agreement, such party
shall immediately notify all other parties, and the claim or suit shall be
treated as any other claim or suit involving operations hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
make money payments, that party shall give to all other parties prompt written
notice of the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of the party giving the notice, so far as they are
affected by the force majeure, shall be suspended during, but no longer than,
the continuance of the force majeure. The affected party shall use all
reasonable diligence to remove the force majeure situation as quickly as
practicable.
The requirement that any force majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the party involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.
The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy,
war, blockade, public riot, lightning, fire, storm, flood, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties and required by any
of (he provisions of this agreement, unless otherwise specifically provided,
shall be given in writing by mail or telegram, postage or charges prepaid, or
by telex or telecopier and addressed to the parties, to whom the notice is
given it the addresses listed on Exhibit "A". The originating notice given
under any provision hereto shall be deemed given only when received by the
party to whom such notice is directed, and the time for such party to give any
notice in response thereto shall run from the date the originating notice is
received. The second or any responsive notice shall be deemed given when
deposited in the mail or with the telegraph company, with postage or charges
prepaid, or sent by telex or telecopier. Each party shall have the right to
change its address at any time, and from time to time, by giving written
notice thereof to all other parties.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the oil and
gas leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas interest
contributed by any other party beyond the term of this agreement.
[X] Option No. 1: So long as any of the oil and gas leases subject to this
agreement remain or are continued in force as to any part of the Contract
Area, whether by production, extension, renewal or otherwise.
[ ] Option No. 2: Deleted
It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached
prior to the date of such termination.
-13-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. Laws, Regulations and Orders:
This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and
orders of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations, and
orders.
B. Governing Law:
This agreement and all matters pertaining hereto, including, but not
limited to, matters of performance, non-performance, breach, remedies,
procedures, rights, duties and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state
of WYOMING shall govern.
C. Regulatory Agencies:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production
of wells, on tracts offsetting or adjacent to the Contract Area.
With respect to operations hereunder. Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of
action &rising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or predecessor or successor agencies to the
extent such interpretation or application was made in good faith. Each
Non-Operator further agrees to reimburse Operator for any amounts applicable
to such Non-Operator's share of production that Operator may be required to
refund, rebate or pay as a result of such an incorrect interpretation or
application, together with interest and penalties thereon owing Operator as a
result of such incorrect interpretation or application.
Non Operators authorized Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold
hereunder or to any other person or entity pursuant to the requirements of the
"Crude Oil Windfall Profit Tax Act of 1980", as same may be amended from time
to time ("Act" ), and any valid regulation or rules which may be issued by the
Treasury Department from time to time pursuant to said Act. Each party hereto
agrees to furnish any and all certifications or other information which is
required to be furnished by said Act in a timely manner and in sufficient
detail to permit compliance with said Act.
ARTICLE XV.
OTHER PROVISIONS
1. After formal execution of this Agreement and upon commencement of
operations for the Initial Well as provided tinder Article VI.A. and Paragraph
2 below, the Operator or its agent will prepare and record in Crook County
formal assignments of the Oil and Gas Leases subject to this Agreement
(recited in Exhibit "A") to the Net Working Interest Owners (or their
assignees) in the percentages reflected in Exhibit"A". The cost of preparing
and recording said assignments shall be charge against the Drilling AFE for
the Montana Berger #1 Well as a Miscellaneous Expense.
2. It is agreed among the parties hereto that no funds will be expended
and drilling will not commence until all funds are in place from the Promoted
Gross Working Interest Owners (or their assignees) and this Agreement is
executed by said Owners.
3. It is further agreed and understood among the parties hereto that the
Promoted Gross Working Interest Owners will pay 100% of the costs of drilling
the Initial Well to the casing point as defined in Article VII.D. D. After
casing point, the Net Working Interest Owners who elect to complete the
Initial Well will pay 100% of the completion costs pursuant to Article VII.
-14-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE XVI.
MISCELLANEOUS
This agreement shall be binding upon and inure to the benefit of the
parties hereto and to their respective heirs, devises, legal representatives,
successors and assigns.
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
IN WITNESS WHEREOF, this agreement shall be effective as of the 25th day
of August, 1997.
OPERATOR
L & J Operating, Inc.
/s/ Sherilyn J. Samuels
- -------------------------
By: Sherilyn J. Samuels
Title: President
NON-OPERATORS
Silver Petroleum Corporation Sun Cementing of Wyoming, Inc.
____________________________ ______________________________
By:_________________________ By:___________________________
Title:______________________ Title:________________________
SW Ventures, Inc. Triple B. Energy, Inc.
/s/ Terri Jackson ______________________________
- -----------------------------
By: Terri Jackson By: Joe Banks
Title: Secretary/Treasurer Title: Secretary/Treasurer
_____________________________ ______________________________
James A. Nies Robert S. Haigh
Twiford International, Inc.
_____________________________
By: Forest Twiford
Title:_______________________
-15-
<PAGE>
ACKNOWLEDGMENT
State of Indiana )
)ss
County of ___________ )
On this ____ day of _______________, 199_, before me personally appeared
_________________, to me personally known, who, being by me duly sworn, did
say that he is the President of Silver Petroleum Corporation and that said
instrument was signed on behalf of said corporation and acknowledged said
instrument to be the free act and deed of said corporation.
Witness my hand and this seal this ___ day of _____ 199__.
__________________________
Notary Public
My commission expires:___________________
____________________________________________________________________________
State of Wyoming )
)ss
County of ___________ )
On this ____ day of _______________, 199_, before me personally appeared
_________________, to me personally known, who, being by me duly sworn, did
say that he(she) is the ______________ of Sun Cementing of Wyoming, Inc., and
that said instrument was signed on behalf of said corporation and acknowledged
said instrument to be the free act and deed of said corporation.
Witness my hand and this seal this ___ day of _____ 199__.
__________________________
Notary Public
My commission expires:___________________
____________________________________________________________________________
State of Utah )
)ss
County of Utah )
On this 8th day of September, 1997, before me personally appeared Terri
Jackson, to me personally known, who, being by me duly sworn, did say that she
is the Secretary/Treasurer of SW Ventures, Inc. and that said instrument was
signed on behalf of said corporation and acknowledged said instrument to be
the free act and deed of said corporation.
Witness my hand and this seal this 8th day of September 1997.
/s/ Claire Lippett
<Notary Stamp Appears here> --------------------
Notary Public
My commission expires: 6/25/2000
____________________________________________________________________________
State of Wyoming )
)ss
County of ___________ )
On this ____ day of _______________, 199_, before me personally appeared Joe
Banks, to me personally known, who, being by me duly sworn, did say that he is
the Secretary/Treasurer of Triple B Energy, Inc., and that said instrument was
signed on behalf of said corporation and acknowledged said instrument to be
the free act and deed of said corporation.
Witness my hand and this seal this ___ day of _____ 199__.
__________________________
Notary Public
My commission expires:___________________
____________________________________________________________________________
State of Wyoming )
)ss
County of Natrona )
On this ____ day of _______________, 199_, before me personally appeared
Forrest Twiford, to me personally known, who, being by me duly sworn, did say
that he is the President of Twiford International, Inc. , and that said
instrument was signed on behalf of said corporation and acknowledged said
instrument to be the free act and deed of said corporation.
Witness my hand and this seal this ___ day of _____ 199__.
__________________________
Notary Public
My commission expires:___________________
____________________________________________________________________________
State of Wyoming )
)ss
County of ___________ )
The foregoing instrument was acknowledged before me by James A Nies, this
___ day of _____, 199__.
Witness my hand and official seal.
__________________________
Notary Public
My commission expires:___________________
____________________________________________________________________________
State of Wyoming )
)ss
County of Natrona )
The foregoing instrument was acknowledged before me by Robert S. Haigh,
this __ of ___________, 199__.
Witness my hand and official seal.
__________________________
Notary Public
My commission expires:___________________
____________________________________________________________________________
-15-
EXHIBIT "A"
---------------
(Attached to and made part of Operating Agreement dated August 15, 1997
between L & J Operating, Inc., Operator and Silver Petroleum Corporation, et
al, as Non-Operators)
CONTRACT AREA (LANDS SUBJECT TO THIS AGREEMENT)
- ----------------------------------------------
Township 53 North- Range 67 West, 6th P.M.
------------------------------------------
Section 17: W/2W/2, SE/4NW/4, NE/4SW/4
Section 18: E/2NE/4
Crook County, Wyoming
WORKING INTEREST OWNERSHIP OF PARTIES
- --------------------------------------
Promoted Gross Working Interest Owners
(cost bearing interest before casing point)
for the Berger No. 1 Well
Silver Petroleum Corporation 33.333%
Sun Cementing of Wyoming, Inc. 16.667%
James A. Nies 4.167%
Triple B Energy, Inc. 17.500%
SW Ventures, Inc. 28.333%
---------
100.000%
Net Working Interest Owners
(cost bearing interest after casing point) for the Berger No. 1 Well
and the remainder of the Contract Area ("Montana" Prospect)
Silver Petroleum Corporation 25.000%
Sun Cementing of Wyoming, Inc. 12.500%
James A. Nies 3.125%
SW Ventures, Inc. 21.250%
Triple B Energy, Inc. 13.125%
Robert S. Haigh 6.250%
Twiford International Inc. 6.250%
Triple B Energy, Inc. 9.375%
L & J Operating, Inc. 3,125%
--------
100.000%
LEASES SUBJECT TO THIS AGREEMENT
- --------------------------------
(1) Oil and Gas Lease dated November 26, 1996, from Harry J. Berger and
Montana V. Berger to Robert S. Haigh covering the W/2SW/4 of Section
17,Township 53 North, Range 67 West, Crook County, Wyoming recorded in Book
347, Page 386.
(2) Oil and Gas Lease dated January 15,1997, from Judie Ann Cotton to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North, Range
67 West, Crook County, Wyoming recorded in Book 348, Page 663.
(3) Oil and Gas Lease dated January 15, 1997, from Michael K. Hughes to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North,
Range 67 West, Crook County, Wyoming recorded in Book 348, Page 667.
(4) Oil and Gas Lease dated January 15, 1997, from Mark L. Hughes to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North, Range
67 West, Crook County, Wyoming recorded in Book 348, Page 673.
(5) Oil and Gas Lease dated January 15, 1997, from Carla K. Brown to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North, Range
67 West, Crook County, Wyoming recorded in Book 348, Page 677.
(6) Oil and Gas Lease dated January 15,1997, from Hoby D. Hughes to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North, Range
67 West, Crook County, Wyoming recorded in Book 348, Page 675.
(7) Oil and Gas Lease dated January 15, 1997, from Robin L. Hughes to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North, Range
67 West, Crook County, Wyoming recorded in Book 348, Page 671.
(8) Oil and Gas Lease dated January 15, 1997, from Leslie Ann Waggener to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North,
Range 67 West, Crook County, Wyoming recorded in Book 348, Page 669.
(9) Oil and Gas Lease dated January 15, 1997, from Judie Ann Cotton to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North, Range
67 West, Crook County, Wyoming recorded in Book 348, Page 663.
(10) Oil and Gas Lease dated December 10, 1996, from Eric Robert Hundahl
to Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North,
Range 67 West, Crook County, Wyoming recorded in Book _, Page _.
(11) Oil and Gas Lease dated December 10, 1996, from Heidi A. M. Hundahl
to Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North,
Range 67 West, Crook County, Wyoming recorded in Book 351, Page 431.
(12) Oil and Gas Lease dated December 10, 1996, from Scott Alfred Hundahl
to Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North,
Range 67 West, Crook County, Wyoming recorded in Book 352, Page 154.
(13) Oil and Gas Lease dated December 10, 1996, from Mark Eugene Hundahl
to Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53
North, Range 67 West, Crook County, Wyoming recorded in Book 351, Page
434.
(14) Oil and Gas Lease dated December 10, 1996, from Ernest Calvin
Hundahl to Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53
North, Range 67 West, Crook County, Wyoming recorded in Book 351, Page
428.
(15) Oil and Gas Lease dated September 10, 1996, from John P. Ellbogen to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North,
Range 67 West, Crook County, Wyoming recorded in Book 346, Page 765.
(16) Oil and Gas Lease dated September 10, 1996, from L. M. Grace, Jr. to
Robert S. Haigh covering the NE/4SW/4 of Section 17, Township 53 North,
Range 67 West, Crook County, Wyoming recorded in Book 346, Page 771.
(17) Oil and Gas Lease dated August 20, 1996, from Harry J. Berger and
Montana V. Berger to Robert S. Haigh covering the NE/4SW/4 of Section 17
and the SE/4NE/4 of Section 18, Township 53 North, Range 67 West, Crook
County, Wyoming recorded in Book 345, Page 487.
(18) Oil and Gas Lease dated August 20,1996, from Ruby L. Powers, aka
Ruby Powers and James P. Powers to Robert S. Haigh covering the SE/4NW/4,
SW/4NW/4, NW/4NW/4 of Section 17 and the NE/4NE/4 of Section 18,
Township 53 North, Range 67 West, Crook County, Wyoming recorded in
Book 346, Page 777.
(19) Oil and Gas Lease dated August 20, 1996, from Wilhemina M. Kelly to
Robert S. Haigh covering the SE/4NW/4, SW/4NW/4, NW/4NW/4 of Section
17 and the NE/4NE/4 of Section 18, Township 53 North, Range 67 West,
Crook County, Wyoming recorded in Book 346, Page 773.
(20) Oil and Gas Lease dated August 20, 1996, from Jean E. McDonough to
Robert S. Haigh covering the SE/4NW/4, SW/4NW/4, NW/4NW/4 of Section
17 and the NE/4NE/4 of Section 18, Township 53 North, Range 67 West,
Crook County, Wyoming recorded in Book 346, Page 769.
(21) Oil and Gas Lease dated August 20, 1996, from The Cox Company, a
Montana Partnership to Robert S. Haigh covering the SE/4NW/4,
SW/4NW/4, NW/4NW/4 of Section 17 and the NE/4NE/4 of Section 18,
Township 53 North, Range 67 West, Crook County, Wyoming recorded in
Book 348, Page 260.
(22) Oil and Gas Lease dated August 20, 1996, from Doris M. Poppler to
Robert S. Haigh covering the SE/4NW/4, SW/4NW/4, NW/4NW/4 of Section 17 and
the NE/4NE/4 of Section 18, Township 53 North, Range 67 West, Crook
County, Wyoming recorded in Book 346, Page 775.
(23) Oil and Gas Lease dated August 20, 1996, from Robert C. Balsam and
Mary F. Balsam to Robert S. Haigh covering the SE/4NW/4, SW/4NW/4,
NW/4NW/4 of Section 17 and the NE/4NE/4 of Section 18, Township 53
North, Range 67 West, Crook County, Wyoming recorded in Book 346, Page
767.
(24) Oil and Gas Lease dated August 20, 1996, from Vesta Louisa Wesley to
Robert S. Haigh covering the SE/4NW/4, SW/4NW/4, NW/4NW/4 of Section
17 and the NE/4NE/4 of Section 18, Township 53 North, Range 67 West,
Crook County, Wyoming recorded in Book 345, Page 491.
(25) Oil and Gas Lease dated August 20, 1996, from Vesta Louisa Wesley to
Robert S. Haigh covering the SE/4NW/4, SW/4NW/4, NW/4NW/4 of Section
17 and the NE/4NE/4 of Section 18, Township 53 North, Range 67 West,
Crook County, Wyoming recorded in Book 345, Page 489.
ADDRESS OF THE PARTIES FOR NOTICE PURPOSES
- ------------------------------------------
Silver Petroleum Corporation
P.O. Box 476
Bluffton, IN 46714
Ph. 219-824-2220
Fax 219-824-2223
Sun Cementing of Wyoming, Inc.
P.O. Box 266
Gillette, WY 82717-0266
Ph. 307-682-5258
Fax 307-687-0477
James A. Nies
P.O. Box 3785
Gillette, Wy 82717
Ph. 307-682-5502
Robert S. Haigh
Box 1640
Casper, Wy 82602
Ph. 307-237-3716
Triple B Energy, Inc.
P.O. Box 487
Gillette, WY 82717
Ph. 307-682-4475
Fax307-687-3109
SW Ventures, Inc.
455 E. 400 St., Suite 100
Salt Lake City, UT 84111
Ph. 801-355-6524
Fax 801-355-6505
Twiford International, Inc.
330 S. Center St., Suite 319
Casper, Wy 82601
Ph. 307-472-5695
Fax 307-472-5695
L & J Operating, Inc.
P.O. Box 6859
Gillette, Wy 82717
Ph. 307-682-8722
COPAS-1995
Recommended by the Council
Kraftbilt 601-95 BOX 800 of Petroleum Accountants
TULSA, OK 74101 Societies
COPAS
EXHIBIT "C"
Attached to and made a part of Operating Agreement dated August 15, 1997
between L & J Operating Inc., Operator and Silver Petroleum Corporation, et
al, as Non-Operators.
ACCOUNTING PROCEDURE
JOINT OPERATIONS
I. GENERAL PROVISIONS
1. DEFINITIONS
"Joint Property" shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached.
"Joint Operations" shall mean activities required to handle specific operating
conditions and problems for the exploration, development, production,
protection, maintenance, abandonment, and restoration of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and that are to be shared by
the Parties.
"Operator" shall mean the Party designated to conduct the Joint Operations.
"Non-Operators" shall mean the Parties to this agreement other than the
Operator.
"Material" shall mean personal property, equipment, supplies, or consumables
acquired or held for use on the Joint Property.
"Controllable Material" shall mean Material that at the time is so classified
in the Material Classification Manual as most recently recommended by the
Council of Petroleum Accountants Societies (COPAS).
"Parties" shall mean legal entities signatory to the agreement, or their
successors or assigns, to which this Accounting Procedure is attached.
"Affiliate" shall Mean, with respect to the Operator, any party directly or
indirectly controlling, controlled by, or under common control with the
Operator.
2. STATEMENTS AND BILLINGS
The Operator shall bill Non-Operators on or before the last day of the month
for their proportionate share of the Joint Account for the preceding month.
Such bills shall be accompanied by statements that identify the authority for
expenditure, lease or facility, and all charges and credits summarized by
appropriate categories of investment and expense. Controllable Material shall
be summarized by major Material classifications. Intangible drilling costs and
audit exceptions shall be separately and clearly identified.
3. ADVANCES AND PAYMENTS BY NON-OPERATORS
A. If gross expenditures for the Joint Account arc expected to exceed $7,500
in the next succeeding month's operations, the Operator may require the Non-
Operators to advance their share of the estimated cash outlay for the month's
operations. Unless otherwise provided in the agreement, any billing for such
advance shall be payable within 15 days after receipt of the advance request
or by the first day of the month for which the advance is required, whichever
is later. The Operator shall adjust each monthly billing to reflect advances
received from the Non-Operators for such month.
B. Each Non-Operator shall pay its proportion of all bills within 15 days
of receipt date. If payment is not made within such time, the unpaid balance
shall bear interest compounded monthly using the U.S. Treasury three-month
discount rate plus 3% in effect on the first day of the month for each month
that the payment is delinquent or the maximum contract rate permitted by the
applicable usury laws in the state in which the Joint Property is located,
whichever is the lesser, plus attorney's fees, court costs, and other costs in
connection with the collection of unpaid amounts. Interest shall begin
accruing on the first day of the month in which the payment was due.
4. ADJUSTMENTS
A. Payment of any such bills shall not prejudice the right of any Non-
Operator to protest or question the correctness thereof, however, all bills
and statements (including payout status statements) related to expenditures
tendered to Non-Operators by the Operator during any calendar year shall
conclusively be presumed to be true and correct after 24 months following the
end of any such calendar year, unless within the said period a Non-Operator
takes specific detailed written exception thereto and makes claim an the
Operator for adjustment.
<PAGE>
COPAS
B. All adjustments initiated by the Operator except those described in
(1) through (4) below are limited to the 24-month period following the end of
the calendar year in which the original charge appeared or should have
appeared on the Joint Account statement or payout status statement.
Adjustments made beyond the 24-month period are limited to the following:
(1) a physical inventory of Controllable Material as provided for in
Section VII
(2) an offsetting entry (whether in whole or in part), which is the
direct result of a specific joint interest audit exception granted by the
Operator relating to another property
(3) a government/regulatory audit
(4) working interest ownership adjustments
5. EXPENDITURE AUDITS
A. A Non-Operator, upon notice in writing to the Operator and other Non-
Operators, shall have the right to audit the Operator's accounts and records
relating to the Joint Account for any calendar year within the 24-month period
following the end of such calendar year; however, conducting an audit shall
not extend the time for the taking of written exception to and the adjustment
of accounts as provided for in Paragraph 4 of this Section 1. Where there are
two or more Non-Operators, the Non-Operators shall make every reasonable
effort to conduct a joint audit in a manner that will result in a minimum of
inconvenience to the Operator. The Operator shall bear no portion of the Non-
Operators' audit cost incurred under this Paragraph unless agreed to by the
Operator. The audits shall not be conducted more than once each year without
prior approval of the Operator, except upon the resignation or removal of the
Operator, and shall be made at the expense of those Non-Operators approving
such audit. The lead audit company's audit report shall be issued within 180
days after completion of the audit field work; however, the 180-day time
period shall not extend the 24-month requirement for taking specific detailed
written exception as required in Paragraph 4.A. above. All claims shall be
supported with sufficient documentation. Failure to issue the report within
the prescribed time will preclude the Non-Operator from taking exception to
any charge billed within the time period audited.
A timely filed audit report or any timely submitted response thereto shall
suspend the running of any applicable statute of limitations regarding claims
made in the audit report. While any audit claim is being resolved, the
applicable statute of limitations will be suspended; however, the failure to
comply with the deadlines provided herein shall cause the statute to commence
running again.
B. The Operator shall allow or deny all exceptions in writing to an audit
report within 180 days after receipt of such report. Denied exceptions should
be accompanied by a substantive response. Failure to respond to an exception
with substantive information on denials within the time provided will result
in the Operator paying interest on that exception, if ultimately granted, from
the date of the audit report. The interest charged shall be calculated in the
same manner as used in Section I, Paragraph 3.B.
C. The lead audit company shall reply to the Operator's response to an
audit report within 90 days of receipt, and the Operator shall reply to the
lead audit company's follow-up response within 90 days of receipt. If the lead
audit company does not provide a substantive response to an exception within
90 days, that unresolved audit exception will be disallowed. If the Operator
does nor provide a substantive response to the lead auditor's follow-up
response within 90 days, that unresolved audit exception will be allowed and
credit given the Joint Account.
D. The lead audit company or Operator may call an audit resolution
conference for the purpose of resolving audit issues/exceptions that are
outstanding at least 18 months after the date of the audit report. The meeting
will require one month's written notice to the Operator and all audit
participants, be held at the Operator's office or other mutually agreed upon
location, and require the attendance of representatives of the Operator and
each audit participant responsible for the area(s) in which the exceptions are
based and who have authority to resolve issues on behalf of their company. Any
party who fails to attend the resolution conference shall be bound by any
resolution reached at the conference. The lead audit Company will coordinate
the response/position of the Non-Operators and continue to maintain its
traditional role throughout the audit resolution process.
Attendees will make good faith efforts to resolve outstanding issues, and each
Party will be required to present substantive information supporting its
position. An audit resolution conference may be held as often as agreed to by
the Parties. Issues unresolved at one conference can be discussed at
subsequent conferences until each such issue is resolved.
6. AFFILIATES
Charges to the Joint Account for any services or Materials provided by an
Affiliate shall not exceed average commercial rates for such services or
Materials.
Unless otherwise indicated below, Affiliates performing services or providing
Materials for Joint Operations shall provide the Operator with written
agreement to make their records relating to the work performed for the Joint
Account available for audit upon request by a Non-Operator under this
Accounting Procedure. These records shall include, but not be limited to,
invoices, field work tickets, equipment use records, employee time reports,
and payroll summaries relating to the work performed for the Joint Account.
All audits will be conducted pursuant to Section I, Paragraph 5.
[ ] The Parties agree that records relating to the work performed by
Affiliates will not be made available for audit.
<PAGE>
COPAS
7. APPROVAL BY PARTIES
An affirmative vote of 2 or more Parties having a combined working interest of
FIFTY-0NE percent (51%) shall be required for all items in this Accounting
Procedure requiring approval by the Parties. This vote shall be taken in
writing, in a meeting, or by telephone and results shall be binding on all
Parties. All votes must be confirmed in writing by each Party to the Operator
within two business days. The Operator shall give notice to all Parties of the
results.
8. AMENDMENT OF RATES
All rates provided in Fixed Rate (Section II, Paragraph 1), Facilities
(Section IV, Paragraph 1), and/or Overhead (Section V, Paragraph 1.A.) shall
be adjusted each year as of the first day of the production month of April
following the effective date of the agreement to which this Accounting
Procedure is attached. The adjustment shall be computed by multiplying the
rate currently in use by the percentage increase or decrease recommended by
COPAS each year. The adjusted rates shall be the rates currently in use, plus
or minus the computed adjustment.
The Operator may, at intervals of at least two years, elect to review the
Costs associated with any fixed rate and calculate a new rate. At intervals of
at least four years, Non-Operators with 50% or more of the Non-Operators'
working interest may challenge any rate subject to this provision provided
such challenge is supported by factual data. If a rate is so challenged, the
Operator shall calculate a new rate. The calculation of any new rate shall be
in accordance with COPAS recommendations or other procedures approved by the
Parties. The new rate shall then be proposed for approval by the Parties.
II. METHOD OF CHARGES TO JOINT ACCOUNT
The Operator shall charge the joint Account for the costs of Joint Operations
in accordance with only one of the following options. The method of charges to
the Joint Account may be changed if approved by the Parties in accordance with
Section I, Paragraph 7.
1. [ X ] FIXED RATE
A fixed rate of $500.00 month per active well
Active wells are those wells that qualify for a producing overhead charge as
specified in Section V, Paragraph 1.A.(3) of this procedure.
The fixed rate will compensate the Operator for all costs applicable to Joint
Operations except for royalties, ad valorem taxes, and production/severance
taxes paid by the Operator for the Joint Operations and except downhole well
work, Controllable Material, and all projects that qualify for drilling,
construction, and/or catastrophe overhead as specified in Section V of this
procedure. These exception costs shall be charged as specified in Sections I
II, IV, and V of this procedure.
2. [ ] COSTS
Costs as specified in Sections III, IV, and V of this procedure.
III. COSTS INCURRED ON THE JOINT PROPERTY
The Operator shall charge the Joint Account for the following items less
discounts taken, which are incurred on the Joint Property for Joint
Operations. Employees and contract personnel who spend substantially all their
time in offices that are not Joint Property are not chargeable under this
Section while working in those offices.
1. RENTALS AND ROYALTIES
Lease rentals and royalties paid by the Operator
2. LABOR
Salaries and wages of the Operator's employees directly employed on the Joint
Property in the conduct of Joint Operations or while in transit to/from the
Joint Property, provided such costs are excluded from the calculation of
overhead rates in Section V
Other expenses associated with these employees to the extent the employees'
salaries and wages are chargeable are also chargeable as follows:
A. The Operator's cost of holiday, vacation, sickness, and disability
benefits and other customary allowances available to all employees, but
specifically excluding severance compensation programs and all employee
relocation expenses
Such costs may be charged on a "when and as-paid basis" or by "percentage
assessment" on the amount of salaries and wages chargeable to the Joint
Account. If percentage assessment is used, the rate shall be based on the
Operator's recent cost experience.
B. Expenditures or contributions made pursuant to assessments imposed by
governmental authority incurred by the Operator associated with salaries,
wages, and benefits charged to the Joint Account
<PAGE>
COPAS
If ad valorem taxes paid by the Operator are based in whole or in part upon
separate valuations of each Party's working interest, then notwithstanding any
contrary provisions, the charges to Parties will be made in accordance with
the tax value generated by each Party's working interest.
9. INSURANCE
Net premiums paid for insurance required to be carried for the protection of
the Parties
If Joint Operations are conducted at locations where the Operator acts as
self-insurer the Operator shall charge the Joint Account manual rates as
regulated by the state in which the Joint Property is located, or in the case
of offshore operations, the adjacent state as adjusted for offshore operations
by the U.S. Longshoreman and Harbor Workers (USL&H) or Jones Act surcharge, as
appropriate.
10. COMMUNICATIONS
Cost of acquiring, leasing, instilling, operating, repairing, and maintaining
communication systems
11. ECOLOGICAL AND ENVIRONMENTAL
Costs of surveys as well as pollution containment, actual control, and
resulting responsibilities as required by applicable laws or resulting from
statutory regulations
12. ABANDONMENT AND RECLAMATION
Costs incurred for abandonment and reclamation of the Joint Property,
including costs required by governmental or other regulatory authority
IV. COSTS INCURRED OFF THE JOINT PROPERTY
The Operator shall charge the Joint Account for the following items, which are
incurred off the Joint Property for Joint Operations.
1. FACILITIES N/A
A. PRODUCTION-HANDLING FACILITIES
(1) ALLOCATED
The Operator shall allocated charges to the Joint Account on an
equitable and consistent basis for facilities that handle substances extracted
from or injected into the real property subject to the agreement to which this
Accounting Procedure is attached if such facilities are not listed in
Paragraph (2) below or covered by a separate facility agreement. Allocable
charges for such facilities that are leased or rented shall be at the
Operator's cost. All allocable charges for such facilities owned by the
Operator shall be operating costs as defined in Section III incurred on the
facility site plus depreciation, interest on investment (less gross
accumulated depreciation) not to exceed ___% per annum, and estimated
dismantling and abandonment costs. Charges for depreciation will no longer be
allowable once the equipment has been fully depreciated. Such rates shall not
exceed average commercial rates prevailing in the area of the Joint Property,
in lieu of charges in Paragraph 1.A.(1) above for Operator-owned facilities,
the Operator may elect to charge average commercial rates prevailing in the
immediate area of the Joint Property. If average commercial rates are used,
the Operator shall adequately document and support the rates.
(2) FIXED RATE
The Operator shall charge the joint Account monthly for the following
facilities based on the rates and units provided:
FACILITY TYPE FIXED RATE UNITS
(function performed) (Well, MCF, BOE, etc.)
- --------------------------------------------------------------------------
[-----------------------------] [--------------] [------------------------]
[-----------------------------] [--------------] [------------------------]
[-----------------------------] [--------------] [------------------------]
[-----------------------------] [--------------] [------------------------]
[-----------------------------] [--------------] [------------------------]
<PAGE>
COPAS
B. OTHER FACILITIES N/A
The Operator shall charge the joint Account for use of other facilities
not covered by Section IV, Paragraph 1.A. (such as shore bases, field offices,
telecommunication equipment, and computer equipment) as listed below or if
subsequently approved by the Parties. (Choose and complete only one
methodology for each facility type.)
FACILITY TYPE AVG COM- FIXED RATE BASIS ACTUAL COST
(function MERCIAL ALLOCATION
performed) RATES
- ----------------------------------------------------------------------------
UNITS
RATE (Well, MCI, BOE, etc.) Basis
---- ---------------------- -----
_______________ [ ] [ ] __ ______________________ [ ] ________
_______________ [ ] [ ] __ ______________________ [ ] ________
_______________ [ ] [ ] __ ______________________ [ ] ________
_______________ [ ] [ ] __ ______________________ [ ] ________
- --------------------------------------------------------------------------
If the Actual Cost Allocation method is chosen, all allocable charges for such
facilities owned by the Operator shall be operating costs as defined in
Section III incurred on the facility site plus depreciation, interest on
investment (less gross accumulated depreciation) not to exceed _% per annum,
and estimated dismantling and abandonment costs. Charges for depreciation will
no longer be allowable once the equipment has been fully depreciated. Such
rates shall not exceed average commercial rates prevailing in the area of the
Joint Property.
2. ECOLOGICAL AND ENVIRONMENTAL
Ecological and environmental costs are those that arise from compliance with
governmental or regulatory requirements or prudent operations. These costs
that are incurred off the Joint Property shall be
[ X ] allocated directly to the Joint Account
[ ] included in the Overhead rates provided in Section V
3. LEGAL EXPENSE
The Operator may not charge for services of the Operator's legal staff or fees
and expense of outside attorneys unless approved by the Parties in writing.
Other expenses of handling, settling, or otherwise discharging litigation,
claims, liens, title examinations, and curative work necessary to protect or
recover the Joint Property shall be chargeable.
4. TRAINING
Training mandated by governmental authorities for those employees who would be
chargeable to the Joint Account under Section III, Paragraph 2, of this
Accounting Procedure if they were not attending the training shall be
chargeable to the Joint Account. This training charge shall include costs as
defined in Section III, Paragraph 2.D. but incurred off the Joint Property.
5. ENGINEERING, DESIGN, AND DRAFTING
Engineering, design, and drafting costs associated with major construction or
catastrophes, as defined in Section V, Paragraph 2, of this Accounting
Procedure, may be charged to the Joint Account only when the Operator elects
to charge overhead for major construction or catastrophes per Section V,
Paragraph 2.B. Such charges shall be determined in a manner consistent with
those defined in Section III, Paragraphs 2 and 5.
V. OVERHEAD
The Operator shall be compensated for costs not chargeable in Section III
(Costs Incurred On The Joint Property) or Section IV (Costs Incurred Off The
Joint Property) that are incurred in connection with and in support of Joint
Operations.
1. OVERHEAD-DRILLING AND PRODUCING OPERATIONS
As compensation for overhead in connection with drilling and producing
operations, the Operator shall charge on either a Fixed Rate Basis, Paragraph
1.A., or Percentage Basis, Paragraph 1.B.
A. OVERHEAD-FIXED RATE BASIS
(1) The Operator shall charge the joint Account at the following rates per
well month:
Drilling well rate per month $ 5400.00 (Prorated for less than a full month)
Producing well rate per month $ 500.00
<PAGE>
COPAS
(2) Application of overhead--drilling well rate shall be as follows:
(a) Charges for onshore drilling wells shall begin on spud date and
terminate on the date the drilling or completion equipment is released,
whichever occurs later. Charges for offshore drilling wells shall begin on the
date drilling or completion equipment arrives on location and terminate on the
date the drilling or completion equipment moves off location or the rig is
released, whichever occurs first. No charge shall be made during suspension of
drilling or completion operations for 15 or more consecutive calendar days.
(b) Charges for wells undergoing any type of workover, recompletion, or
abandonment for a period of five consecutive work days or more shall be made
at the drilling well rate. Such charges shall be applied for the period from
the date workovcr operations, with the rig or other units used in workover,
commence through the date of the rig or other unit release, except that no
charges shall be made during suspension of operations for 15 or more
consecutive calendar days.
(3) Application of overhead - producing well rate shall be as follows:
(a) An active well completion for any portion of the month shall qualify
for a one-well charge for the entire month. An active completion is one that
is
[1] produced,
[2] injected into for recovery or disposal, or
[3] used to obtain a water supply to support production operations.
(b) Each active completion in a multi-completed well in which production
is not commingled downhole shall qualify for a one-well charge providing each
completion is considered a separate well by the governing regulatory
authority.
(c) A one-well charge shall be made for the month in which plugging and
abandonment operations are completed on any well. This one-well charge shall
be made whether or not the well has produced except when the drilling well
rate applies.
(d) All wells not meeting the criteria set forth in this Paragraph A (3)
(a), (b), or (c) shall not qualify for a producing overhead charge.
B. OVERHEAD-PERCENTAGE BASIS
(1) The Operator shall charge the Joint Account at the following rates:
(a) Development rate ____ percent (__ %) of the cost of development of
the Joint Property exclusive of costs provided under Section IV, Paragraph 3
and 4 salvage credits.
(b) Operating rate _____ percent (____%) of the cost of operating the
Joint Property exclusive of costs provided under Section III, Paragraph 1 and
Section IV, Paragraph 3; all salvage credits; the value of injected substances
purchased for secondary recovery; and all taxes and assessments that are
levied, assessed, and paid upon the mineral interest in and to the Joint
Property
(2) Application of overhead-percentage basis shall be as follows:
(a) Development shall include all costs in connection with
[1] drilling, redrilling, plugging back, or deepening of any or all
wells
[2] workovcr operations requiring a period of five consecutive work
days or more on any or all wells
[3] preliminary expenditures necessary in preparation for drilling
[4] expenditures incurred in abandoning when the well is nor completed
as a producer
[5] original construction or installation of fixed assets, expansion
of fixed assets, and any other project clearly discernible as a fixed asset,
except major construction as defined in Section V, Paragraph 2
(b) Operating shall include all other costs in connection with Joint
Operations except that catastrophe costs shall be assessed overhead as
provided in Section V, Paragraph 2.
2. OVERHEAD--MAJOR CONSTRUCTION AND CATASTROPHES
Major construction is defined as any project in excess of $ 10,000.00 required
for the construction and installation of fixed assets, the expansion of fixed
assets, or in the dismantling for abandonment of fixed assets as required for
the development and operation of the Joint Property.
Catastrophe is defined as a calamitous event bringing damage, loss, or
destruction resulting from a single occurrence requiring expenditures in
excess of $ 10,000.00 to restore the Joint Property to the equivalent
condition that existed prior to the event causing the damage.
To compensate the Operator for overhead costs incurred in connection with
major construction and catastrophes, the Operator shall either negotiate a
rate prior to beginning the work or shall charge the Joint Account for
overhead based on the following rates:
A. If the Operator absorbs engineering, design, and drafting costs related to
the project, the overhead assessment will be 30 % of total project costs.
<PAGE>
COPAS
B. If the Operator charges engineering, design, and drafting costs related to
the project directly to the Joint Account, the overhead assessment will be 15%
of total project costs.
For each project, the Operator shall provide advance notice to the Non-
Operators in writing if option A or B above will be used for calculating
construction or catastrophe overhead. For purposes of calculating overhead,
the cost of drilling and workover wells shall be excluded and catastrophe
expenditures to which these rates apply shall not be reduced by insurance
recoveries. Overhead assessed under the construction and catastrophe
provisions shall be in lieu of all other overhead provisions.
VI. MATERIAL PURCHASES, TRANSFERS, AND DISPOSITIONS
The Operator is responsible for Joint Account Material and shall make proper
and timely charges and credits for direct purchases, transfers, and
dispositions. The Operator normally provides all Material for use on the Joint
Property but does not warrant the Material furnished. At the Operator's
option, Material may be supplied by Non-Operators.
1. DIRECT PURCHASES
Direct purchases shall be charged to the Joint Account at the price paid by
the Operator after deduction of all discounts received. A direct purchase is
determined to occur when an agreement is made between an Operator and a third
parry for the acquisition of Materials for a specific well site or location.
Material provided by the Operator under "vendor stocking programs," where the
initial use is for a Joint Property and title of the Material does not pass
from the vendor until usage, is considered a direct purchase. If Material is
found to be defective or is returned to the vendor for any other reason,
credit shall be passed to the Joint Account when adjustments have been
received by the Operator from the manufacturer, distributor, or agent.
2. TRANSFERS
A transfer is determined to occur when the Operator furnishes Material from
its storage facility or from another operated property. Additionally, the
Operator has assumed liability for the storage costs and changes in value and
has previously secured and held title to the transferred Material. Similarly,
the removal of Material from a Joint Property to the Operator's facility or to
another operated property is also considered a transfer. Material that is
moved from the Joint Property to a temporary storage location pending
disposition may remain charged to the Joint Account and is not considered a
transfer.
A. PRICING
The value of Material transferred to/from the Joint Property should generally
reflect the market value on the date of transfer.
Transfers of new Material will be priced using one of the following new
Material bases:
(1) Published prices in effect on the date of movement as adjusted by the
appropriate COPAS Historical Price Multiplier (HPM) or prices provided by the
COPAS Computerized Equipment Pricing System (CEPS)
The HPMs and the associated date of published price to which they should be
applied will be published by COPAS periodically.
(a) For oil country tubulars and line pipe, the published price
shall be based upon eastern mill (Houston for special end) carload base
prices effective as of the date of movement, plus transportation cost as
defined in Section VI, Paragraph 2.B,
(b) For other Material, the published price shall be the published
list price in effect at the date of movement, as listed by a supply store
nearest the Joint Property or point of manufacture, plus transportation costs
as defined in Section VI, Paragraph 2.B.
(2) A price quotation that reflects a current realistic acquisition cost
may be obtained from a supplier/manufacturer.
(3) Historical purchase price may be used, providing it reflects a
current realistic acquisition cost on the date of movement. Sufficient price
documents should be available to Non-Operators for purposes of verifying
Material transfer valuation.
(4) As agreed to by the Parties
B. FREIGHT
Transportation roses should be added to the Material transfer price based on
one of the following:
(1) Transportation costs for oil country tubulars and line pipe shall
be calculated using the distance from eastern mill to the railway receiving
point nearest the Joint Property based on the carload weight basis as
recommended by COPAS in Bulletin 21 and current interpretations.
(2) Transportation roses for special mill items shall be calculated
from that mill's shipping point to the railway receiving point nearest the
Joint Property. For transportation costs from other than eastern mills, the
30,000-pound Specialized Motor Carriers interstate truck rate shall be used.
Transportation costs for macaroni tubing shall be calculated based on the
Specialized Motor Carriers rate per weight of tubing transferred to the
railway receiving point nearest the Joint Property.
(3) Transportation costs for special end tubular goods shall be
calculated using the 30,000-pound Specialized Motor Carriers interstate truck
rate from Houston, Texas, to the railway receiving point nearest the Joint
Property.
<PAGE>
COPAS
(4) Transportation costs for Material other than that described in
Section VI, Paragraphs 2.B(l) through (3), if applicable, shall be calculated
from the supply store or point of manufacture, whichever is appropriate, to
the railway receiving point nearest the Joint Property.
C. CONDITION
(1) Condition "A"-New and unused Material in sound and serviceable
condition shall be charged at one hundred percent of the price as determined
in Section VI, Paragraphs 2.A and B. Material transferred from the Joint
Property that was not placed in service on the Joint Property shall be
credited as charged without gain or loss. Any unused Material that was charged
to the Joint Account through a direct purchase will be credited to the Joint
Account at the original cost paid. All refurbishing costs necessary to correct
handling or transportation damages and other related costs will be borne by
the divesting property. The Joint Account is responsible for Material
preparation, handling, and transportation costs for new and unused Material
charged to the property either through a direct purchase or transfer. Any
preparation costs performed, including any internal or external coating and
wrapping, will be credited on new Material provided these costs were not
repeated for the receiving property.
(2) Condition "B"-Used Material in sound and serviceable condition and
suitable for reuse without reconditioning shall be priced at the condition
percentage most recently recommended by COPAS times the price determined by
the pricing guidelines in Section VI, Paragraphs 2.A and B. Any cost of
reconditioning to return the Material to Condition B will be absorbed by the
divesting property.
If the Material was originally charged to the Joint Account as used Material
and placed in service on the Joint Property, the Material will be credited at
the condition percentage most recently recommended by COPAS times the price as
determined in Section VI, Paragraphs 2.A and B.
Used Material transferred from the Joint Property that was not placed in
service on the property shall be credited as charged without gain or loss.
(3) Condition "C"-Material that is not in sound and serviceable
condition and not suitable for its original function until after
reconditioning shall be priced at the condition percentage most recently
recommended by COPAS times the price determined in Section VI, Paragraphs 2.A
and B. The cost of reconditioning shall be charged to the receiving property
provided Condition C value, plus cost of reconditioning, does not exceed
Condition B value.
(4) Condition "D"-Other Material chat is no longer suitable for its
original purpose but usable for some other purpose is considered Condition D
Material. Included under Condition "D" is also obsolete items or Material
that does not meet original specifications but still has value and can be used
in ocher services as a substitute for items with different specifications. Due
to the condition or value of other used and obsolete items, it is not possible
to price these items under Section VI, Paragraph 2.A. The price used should
result in the Joint Account being charged or credited with the value of the
service rendered or use of the Material. In some instances, it may be
necessary or desirable to have the Material specially priced as agreed to by
the parties.
(5) Condition "E"-Junk shall be priced at prevailing scrap value
prices.
D. OTHER PRICING PROVISIONS
(1) Preparations Costs
Costs incurred by the Operator in making Material serviceable including
inspection, third parry surveillance services, and other similar services
will be charged to the Joint Account at prices reflective of the Operator's
actual costs of the services. Documentation must be retained to support the
cost of service. New coating and/or wrapping may be charged per Section III,
Paragraph 2.A.
(2) Loading and Unloading Costs
Loading and unloading costs related to the movement of the Material to the
Joint Property shall be charged in accordance with the methods specified in
COPAS Bulletin 21.
3. DISPOSITION OF SURPLUS
Surplus Material is that Material, whether new or used, that is no longer
required for Joint Operations. The Operator may purchase, but shall be under
no obligation to purchase, the interest of the Non-Operator in surplus
Material.
Dispositions for the purpose of this procedure are considered to be the
relinquishment of title of the Material from the Joint Property to either a
third party, a Non-Operator, or to the Operator. To avoid the accumulation of
surplus Materials, the Operator should make good faith efforts to dispose of
surplus within 12 months through buy/sale agreements, trade, sale to a third
parry, division in-kind, or other dispositions as agreed to by the Parties.
An Operator may, through a sale to an unrelated third party or entity, dispose
of surplus Material having a gross sale value that is less than or equal to
the Operator's expenditure limit as set forth in the Operating Agreement to
which this Accounting Procedure is attached without the prior approval of the
Non-Operator. If the gross sale value exceeds the Operating Agreement
expenditure limit, the disposal must be agreed to by the Parties.
The Operator may dispose of Condition D and E Material under procedures
normally utilized by the Operator without prior approval.
<PAGE>
COPAS
4. SPECIAL PRICING PROVISIONS
A. PREMIUM PRICING
Whenever Material is not readily replaceable due to national
emergencies, strikes, or other unusual causes over which the Operator
has no control, the Operator may charge the Joint Account for the required
Material at the Operator's actual cost incurred in providing such Material,
in making it suitable for use, and in moving it to the Joint Property provided
notice in writing is furnished to Non-Operators of the proposed charge prior
to use and to billing Non-Operators for such Material. During premium pricing
periods, each Non-Operator shall have the right to furnish in-kind all or part
of his share of such Material suitable for use and acceptable to the Operator
by so electing and notifying the Operator within ten days after receiving
notice from the Operator.
B. SHOP-MADE ITEMS
Shop-made items may be priced using the value of the Material used to
construct the item plus labor costs. If the Material is from a scrap or junk
account, the Material may be priced at either 25% of the current price as
determined in Section VI, Paragraph 2.A. or scrap value, whichever is higher,
plus estimated labor costs to fabricate the item.
C. MILL REJECTS
Mill rejects purchased as "limited service" casing or tubing shall be
priced at 80% of K-55/J-55 price as determined in Section VI, Paragraphs 2.A
and B. Line pipe converted to casing or tubing with casing or tubing couplings
attached shall be priced as K-55/J55 casing or tubing at the nearest size and
weight.
VII. INVENTORIES OF CONTROLLABLE MATERIAL
The Operator shall maintain records of Controllable Material charged to the
Joint Account, as defined in the COPAS Material Classification Manual, with
sufficient detail to perform the physical inventories requested unless
directed otherwise by the Non-Operators.
Adjustments to the Joint Account by the Operator resulting from a physical
inventory of jointly owned Controllable Material are limited to the six months
following the taking of the inventory. Charges and credits for overages or
shortages will be valued for the Joint Account based on Condition B prices in
effect on the date of physical inventory and determined in accordance with
Section VI, Paragraphs 2.A. and B. unless the inventorying Parties can prove
another Material condition applies.
1. DIRECTED INVENTORIES
With an interval of not less than five years, physical inventories shall be
performed by the Operator upon written request of a majority in working
interests of the Non-Operators.
Expenses of directed inventories will be borne by the joint Account and May
include the following:
A. Audit per them rate for each inventory person in line with the auditor
rates determined, adjusted, and published each April by COPAS
The per them should also be applied to a reasonable number of days for pre-
inventory work and for report preparation. The amount of time required for
this additional work may vary from inventory to inventory.
B. Actual travel including Operator-provided transportation and personal
expenses for the inventory team
C. Reasonable charges for report typing and processing
The Operator is expected to exercise judgment in keeping expenses within
reasonable limits. Unless otherwise agreed, costs associated with any post
report follow-up work in settling the inventory will be absorbed by the Non
Operator incurring such costs. Any anticipated disproportionate costs should
be discussed and agreed upon prior to commencement of the inventory.
When directed inventories are performed, all Parties shall be governed by such
inventory.
2. NON-DIRECTED INVENTORIES
A. OPERATOR INVENTORIES
Periodic physical inventories that are not requested by the Non-Operator may
be performed by the Operator at the Operator's discretion. The expenses of
conducting such Operator inventories shall not be charged to the Joint Account
B. NON-OPERATOR INVENTORIES
Any Non-Operator(s) may conduct a physical inventory at reasonable times
with prior notification to the Operator. Such inventories shall be conducted
at the sole cost and risk of the participating Non-Operator(s).
C. OTHER INVENTORIES
Other physical inventories may be taken whenever there is any sale or change
of interest. When possible, the selling Parry should notify all other owners
30 days prior to the anticipated closing date. When there is a Change in
Operator of the Joint Property, an inventory by the former and new Operator
should be taken. The expenses of conducting such other inventories shall be
charged to the Joint Account
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's audited financial statements for its year ended December 31, 1997
and from and its unaudited financial statements for the four month period ended
April 30, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 4-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> APR-30-1998 DEC-31-1997
<CASH> 357 8,424
<SECURITIES> 0 0
<RECEIVABLES> 10,059 5,878
<ALLOWANCES> 0 0
<INVENTORY> 1,870 1,870
<CURRENT-ASSETS> 12,286 16,172
<PP&E> 134,039 74,345
<DEPRECIATION> 6,578 1,933
<TOTAL-ASSETS> 146,325 90,517
<CURRENT-LIABILITIES> 23,281 21,648
<BONDS> 0 0
0 0
0 0
<COMMON> 3,365 3,000
<OTHER-SE> 119,679 65,869
<TOTAL-LIABILITY-AND-EQUITY> 146,325 90,517
<SALES> 27,603 22,007
<TOTAL-REVENUES> 27,603 22,007
<CGS> 8,494 7,409
<TOTAL-COSTS> 8,494 7,409
<OTHER-EXPENSES> 13,328 45,751
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 5,781 (31,153)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 5,781 (31,153)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,781 (31,158)
<EPS-PRIMARY> (0.01) (0.02)
<EPS-DILUTED> (0.01) (0.02)
</TABLE>
