As Filed with the Securities and Exchange Commission on March 10, 1998
Registration No. 333-
---------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
-------------------------
FAN ENERGY INC.
--------------------------------------------
(Name of small business issuer in its charter)
Nevada 1311 77-0140428
--------------------- ------------------------- -------------------
(State or jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
George H. Fancher Jr.
1801 Broadway, Suite 720 1801 Broadway, Suite 720
Denver, Colorado 80202 Denver, Colorado 80202
(303) 296-6600 (303) 296-6600
---------------------------- ---------------------------
(Address and telephone number (Name, address and telephone
of principal executive offices number of agent for service)
and address of principal place
of business)
With Copies to:
Alan W. Peryam, LLC
1120 Lincoln Street, Suite 1000
Denver, Colorado 80203
(303) 866-0900
Approximate date of proposed sale to the public: As soon as practicable
following the date on which the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities To Be Registered(1) Registered Per Share Offering Price Fee
- ------------------------------ ------------ ----------- ---------------- ------------
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Common Stock, $0.001 par value........... 3,000,000 shares(1) $1.00 $ 3,000,000 $ 885.00
Common Stock, $0.001 par value........... 5,680,000 shares(2) $1.00 $ 5,680,000 $1,675.60
--------- ---- ---------- --------
Total 8,680,000 XXX $ 8,680,000 $2,560.60
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(1) To be offered by the Registrant.
(2) To be offered by Selling Securityholders. Includes 2,000,000 shares of
Common Stock purchased in a private placement and 3,680,000 shares of
Common Stock issuable upon exercise of outstanding warrants acquired in
private placements.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
(ii)
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Fan Energy Inc.
Cross Reference Sheet
PART I
INFORMATION REQUIRED IN THE PROSPECTUS
Item
Number Form SB-2 Item Number Caption or Location in Prospectus
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1. Front of Registration Statement and Outside Front of Registration Statement and Outside
Front Cover of Prospectus Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of
of Prospectus Prospectus
3. Summary Information and Risk Factors Prospectus Summary and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Risk Factors
6. Dilution Comparative Data
7. Selling Security Holders Principal and Selling Securityholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Not Applicable
10. Directors, Executive Officers, Promoters and Management
Control Persons
11. Security Ownership of Certain Beneficial Principal Shareholders
Owners and Management
12. Description of Securities Description of Securities
13. Interests of Named Experts and Counsel Experts, Legal Matters
14. Disclosure of Commission Position on Plan of Distribution
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Not Applicable
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis or Plan
Plan of Operation of Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market for Common Equity and Related Dividend Policy and Related Stockholder
Stockholder Matters Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Experts
Accountants on Accounting and Financial
Disclosure
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(iii)
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SUBJECT TO COMPLETION DATED MARCH 10, 1998
PROSPECTUS
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3,000,000 Shares
FAN ENERGY INC.
Common Stock
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Fan Energy Inc., a Nevada corporation (the "Company"), is offering a
minimum of 300,000 shares ("Minimum Offering") of the Common Stock, $0.001 par
value (the "Common Stock") and up to 3,000,000 shares of Common Stock ("Maximum
Offering"), by this Prospectus (the "Offering"). The Prospectus also relates to
the resale of up to 5,680,000 shares of Common Stock by the Selling
Securityholders identified under the caption "Principal and Selling
Securityholders."
Prior to this Offering, there has been no public market for the Common
Stock of the Company, and there is no assurance that any such market will
develop. See "Risk Factors--Offering Price Determination" for a discussion of
the factors considered in determining the initial public offering price.
The Common Stock will not be listed in the NASDAQ stock market and may be
included in the OTC Bulletin Board maintained by the National Association of
Securities Dealers, Inc. ("NASD").
SEE "RISK FACTORS" ON PAGES 7 TO 13 FOR A DISCUSSION OF MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)(3)
-------- ------------- ------------
Per Share ................. $ 1.00 $ 0.10 $ 0.90
Total Minimum ............. $ 300,000 $ 30,000 $ 270,000
Total Maximum.............. $ 3,000,000 $ 300,000 $ 2,700,000
- --------------------------------------------------------------------------------
(1) The shares of Common Stock are being offered by the Company on a
"best-efforts" basis by the officers and directors of the Company who will
offer and sell the securities for no commission or other compensation. The
Company also may engage the services of brokers and dealers which are
members of the National Association of Securities Dealers, Inc. ("NASD")
and which are registered as such with the United States Securities and
Exchange Commission to act as nonexclusive agents to sell the securities.
Any such participating brokers and dealers may be paid a commission of up
to 10% of the purchase price of securities sold by them. To the extent the
securities are not sold through participating brokers and dealers, the
proceeds to the Company would be higher. Persons who sell the securities
may be deemed to be underwriters as the term is defined under the
Securities Act of 1933.
(2) The first 300,000 shares are being offered by the Company on a
"best-efforts, all or none" basis ("Minimum Offering"). All proceeds from
subscriptions to purchase the shares offered by the Company will be
transmitted to an escrow account at ___________________,
_____________________, _________, Colorado ("Escrow Agent") by noon of the
first business day following receipt. If at least $300,000 for
subscriptions for the Minimum Offering is not deposited with the Escrow
Agent within 180 days from the date of this Prospectus (which period may be
extended for an additional 60 days without notice by the Company), all
monies received will be refunded promptly to subscribers, without deduction
for commissions or expenses and without interest thereon. The minimum
investment in the Offering is $1,000. Subscribers have no right to return
of subscriptions during the term of the escrow. After proceeds from the
Minimum Offering have been deposited with the Escrow Agent, the Offering
may be continued on a "best- efforts" basis, but without any refund
provisions, until all shares offered by the Company are sold or until the
Company determines to terminate the Offering, whichever first occurs. See
"Plan of Distribution."
(3) The proceeds to the Company are before deduction of the expenses of this
Offering, which are estimated to be approximately $29,000. Proceeds to the
Company assume commissions are paid on all proceeds received. See "Use of
Proceeds."
March __, 1998
<PAGE>
INSIDE FRONT COVER
The Registration Statement of which this Prospectus is a part has
registered for resale up to 5,680,000 shares of Common Stock of the Company
which may be offered from time to time by holders of such securities. See
"Principal and Selling Securityholders." Two million of such shares are issued
and outstanding and held by 10 persons as of the date of this Prospectus and the
balance of such securities are issuable upon exercise of outstanding stock
purchase warrants held by 21 persons. See "Description of Securities." Shares of
Common Stock could be sold by the holders directly, through agents, dealers or
underwriters, in the over-the-counter market, or otherwise, including privately
negotiated transactions by the holders, on terms and conditions determined at
the time of any such sale by the selling holder. No broker, dealer or other
person has undertaken to purchase or sell any of the securities to be offered by
the holders. Expenses of any such sales of Common Stock will be borne by the
parties as they may agree. See "Plan of Distribution."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
COMMON STOCK. SUCH TRANSACTIONS MAY STABILIZE OR MAINTAIN THE MARKET PRICES OF
THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN AN OPEN
MARKET. SUCH STABILIZING ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
Prior to the date of this Prospectus, the Company has not been a reporting
company under the Securities Exchange Act of 1934, as amended. The Company
intends to furnish its shareholders with annual reports containing audited
financial statements.
2
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PROSPECTUS SUMMARY
This Prospectus and documents incorporated herein by reference contain
certain "forward-looking statements" within the meaning of Section 27A of the
Securities Act that involve substantial risks and uncertainties. When used in
this Prospectus the forward-looking statements are often identified by the use
of such terms and phrases as "anticipates," "believes," "intends," "estimates,"
"plans," "expects," "seeks," "scheduled," "foreseeable futures" and similar
expressions as they relate to the Company or its business or the management of
the Company. While the Company believes the assumptions on which the
forward-looking statements are based are reasonable, the Company's actual
results, performances and achievements could differ materially from the results
in, or implied by, these forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors."
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. Unless otherwise indicated, information in this Summary and
elsewhere in this Prospectus reflects the 10-into-1 reverse stock split effected
by the Company in March 1997, and assumes that outstanding exercisable warrants
or options have not been exercised. Certain terms relating to the oil and
natural gas industry are defined in "Glossary of Oil and Natural Gas Terms."
The Company
Fan Energy Inc. (the "Company") is an independent energy company engaged in
the exploration and acquisition of crude oil and natural gas reserves.
Originally formed as an Idaho corporation in the early 1900s, the Company's
predecessor was not successful in the exploration of mining properties. In 1988
the predecessor was merged into a newly-formed Nevada corporation as Eastern
Star Mining, Inc. and it was inactive thereafter, with no assets or liabilities
through the end of 1996. In early 1997 the corporation was reactivated when the
holder of a majority of the outstanding Common Stock transferred control of the
inactive corporation. The transferee elected new directors and officers and
caused the Company to effect a 10-into-1 reverse stock split. Thereafter, the
Company raised capital through the sale of its securities and acquired an
interest in its oil and gas properties for cash and Common Stock. The name of
the corporation was changed to Fan Energy Inc. in December 1997.
The Company holds an undivided 25% working interest in two exploratory
prospects located in Yolo and Solano Counties in the Sacramento Basin near
Sacramento, California. The prospects total approximately 30,000 acres. The
operator of the prospects, a nonaffiliated independent oil and gas company, has
completed most aspects of a three dimensional seismic data survey ("3-D
Seismic") and has identified several potential drilling sites where natural gas
presence is anticipated. The initial exploratory well on the prospects was
plugged and abandoned as a dry hole in January 1998. See "Business--Properties."
The Company anticipates that as many as 40 natural gas wells may be drilled
to depths from 2,000 to 8,000 feet on the two prospects over the next one to
three years, depending upon initial drilling successes, natural gas prices,
availability of capital and other factors. Until and unless such wells are
drilled and completed as successful natural gas producers (of which there can be
no assurance) or the Company acquires or develops other oil or natural gas
production or reserves, the Company will have no production and no oil or
natural gas reserves.
The Company intends to acquire interests in producing oil or natural gas
properties and exploratory prospects from others in the oil and gas business,
including persons or entities with whom members of management of the Company may
have an affiliation or other relationship.
3
<PAGE>
Business Strategy
The Company's intended strategy, which includes the following key elements,
is to develop and increase oil and natural gas reserves, production and revenue
for the Company.
o Utilize State-of-the-Art Technologies. Certain of the Company's
officers, directors and consultants have experience in utilizing 3-D
Seismic data and related "state-of-the-art "technologies for analyzing
oil and natural gas drilling and development opportunities. The
Company intends to continue to analyze and review oil and natural gas
prospects in which it acquires or may acquire an interest based on
acquisition and analysis of 3-D Seismic data and related technologies,
including "amplitude versus offset" or "AVO" analysis, in an effort to
improve drilling success rates and accelerate the development of oil
and natural gas reserves.
o Develop Drillsite Inventory. The Company's initial interests in the
Bali and Fiji prospects include an inventory of up to approximately 40
potential exploratory and development natural gas wells, based on an
initial review of the 3-D Seismic which has been completed. The
Company believes that the present cash resources, proceeds from this
Offering and anticipated proceeds from the exercise of outstanding
warrants will enable the Company to pay its anticipated share of
drilling and completion costs for at least 12 exploratory wells on the
these prospects. The Company intends to continue to seek and acquire
interests in other prospects in the United States and Canada.
o Acquire Interests in Oil and Natural Gas Properties. The Company will
continue to evaluate potential acquisitions of interests in oil and
natural gas properties in the United States and Canada which may
become available on terms which the Company believes will be
attractive and which have the potential to add to the Company's
reserves and production through the application of lower risk
exploitation and exploration techniques. The Company will evaluate and
may acquire interests in producing oil and natural gas properties
which may become available on terms acceptable to the Company. Such
acquisitions will be subject to the availability of properties deemed
suitable by the Board of Directors, availability of financial
resources, location and other factors.
o Operate Oil and Natural Gas Properties Only When Justified. Initially,
the Company will not operate any of the oil or natural gas properties
which it holds or may acquire, and will rely upon other qualified oil
and gas companies for operations. The Company does not intend to
become the operator of properties until such time, if ever, as it has
developed oil and natural gas reserves and recurring revenue and such
activities would be economically justifiable.
o Maintain Low Overhead Expenses. The Company currently has no full time
employees and does not intend to become obligated to incur substantial
cash operating expenses, until such time as available capital or cash
resources generated from operations are sufficient to justify
expanding the number of employees and related expenses. Until such
time as the Company has developed significant and steady cash flow
from the production of oil and natural gas, the Company intends that
its management and directors will provide services to the Company
primarily for non-cash compensation.
o Become an Operating Oil and Natural Gas Company. At such time as the
Company establishes sufficient oil and natural gas reserves and
revenue from production, the Company plans to become an operating oil
and natural gas exploration and development company. As continuing
revenue from operations is achieved, the Company expects to obtain
separate office space and facilities, full time employees and
consultants and to begin to develop and acquire its own oil or natural
gas prospects while seeking to increase reserves and production. No
assurances can be made as to when or whether such plans may be
achieved.
4
<PAGE>
The Company's executive offices are located at 1801 Broadway, Suite 720,
Denver, Colorado 80202, where it shares offices with George H. Fancher Jr., the
Company's Chairman. The telephone number is (303) 296-6600. The Company also
shares an office at 14555 North Scottsdale Road, Suite 200, Scottsdale, Arizona
85254 with Arizona Corporate Management, Inc., a business owned by William E.
Grafham, President. The phone number is (602) 483-8848.
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<CAPTION>
The Offering
<S> <C>
Common Stock Offered:
By the Company.................................. 3,000,000 shares.
By the Selling Securityholders.................. Up to 5,680,000 shares, including up to 3,680,000
shares issuable upon exercise of outstanding warrants
held by 21 persons. See "Plan of Distribution."
Shares outstanding prior to Offering..................... 7,771,704 shares of Common Stock.
After Minimum Offering.......................... 8,071,704 shares of Common Stock (assuming no
outstanding warrants are exercised).
After Maximum Offering ......................... 10,771,704 shares of Common Stock (assuming no
outstanding warrants are exercised).
Use of proceeds.......................................... The Company would receive net proceeds of approxi-
mately $241,000 if only the Minimum Offering is sold,
or $2,671,000 if all shares offered ("Maximum
Offering") are sold, which would be utilized to fund
the Company's anticipated drilling obligations and
acquisition and exploration of additional oil and
natural gas properties. The Company will not receive
any proceeds from the sale of shares of Common Stock by
the Selling Securityholders. If outstanding warrants
are all exercised by holders, the Company would receive
$1,190,000.
Risk factors............................................. An investment in the shares of Common Stock offered by
this Prospectus involves a high degree of risk and
should be considered only by persons who can afford the
loss of their entire investment. Prospective investors
should review carefully the entire Prospectus and
should consider, among other things, the matters
described in "Risk Factors."
Trading ................................................. The Company's Common Stock is expected to be listed on
the OTC Bulletin Board Market maintained by the NASD.
</TABLE>
5
<PAGE>
Summary Financial Information
(Dollars in thousands, except per share data)
The following summary financial data for the periods set forth below have
been derived from the Company's financial statements included elsewhere in this
Prospectus. The summary financial data should be read in conjunction with
Management's Plan of Operations and the Financial Statements and the related
Notes thereto included elsewhere in this Prospectus.
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Fiscal Year Ended
December 31,
----------------------------
1996 1997
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Statement of Operations Data:
Revenue...................................................................... $ - 0 - $ - 0 -
Costs and expenses........................................................... - 0 - 199,232
Net(loss).................................................................... - 0 - (199,232)
Net loss per share........................................................... - 0 - (0.03)
Net cash provided by (used in) operating activities.......................... - 0 - (51,468)
<CAPTION>
December 31, Pro forma
-------------- as
1996 1997 Adjusted(1)
---- ---- ----------
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Balance Sheet Data:
Working capital ............................................................. $ - 0 - $ 419,402 $ 700,785
Total assets................................................................. - 0 - 1,710,591 1,976,276
Total liabilities............................................................ - 0 - 5,315 - 0 -
Shareholders' equity......................................................... - 0 - 1,705,276 1,976,276
- --------------------
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(1) Reflects December 31, 1997 balance sheet data on a pro forma basis adjusted
to reflect the completion of the Minimum Offering. Assumes that outstanding
exercisable warrants are not exercised.
6
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risks, in addition to the other information contained in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby.
New Business. Although the Company has existed since 1988, the Company was
substantially reorganized and entered a new line of business in 1997. Through
December 31, 1997 the only business conducted by the Company was to acquire an
undivided minority interest in two natural gas exploratory prospects, on one of
which one unsuccessful exploratory well was drilled and abandoned as a dry hole
in January 1998. The Company plans to initially conduct limited operations,
primarily by continuing to participate as a minority owner in the exploration of
the two natural gas prospects. The Company also intends to acquire similar
interests in other oil or natural gas exploratory prospects in the United
States. The Company's business operations are subject to all the risks inherent
in the establishment of a new business enterprise, including the absence of an
operating history, shortage of cash, lack of cash flow, undercapitalization and
similar problems. The Company does not anticipate that it will receive
substantial cash flow from its initial exploratory activities until and unless
at least several successful wells have been drilled, completed and placed on
production. The Company presently anticipates that its available cash will be
devoted toward acquisition of interests in other oil and gas properties and
participating in drilling activities. See "Business." Various problems,
expenses, complications and delays may be encountered in connection with the
development of the intended business. The Company also faces substantial
competitive and regulatory obstacles and other risks, some of which are
described below.
Operating Losses and Need for Additional Financing. For the year ended
December 31, 1997, the Company incurred operating losses of approximately
$199,000 and at such date had available working capital of approximately
$419,000. The Company intends to use its available cash resources and proceeds
of this Offering and the proceeds, if any, from the exercise of outstanding
stock purchase warrants to continue to participate in the exploratory drilling
of its two existing natural gas prospects and to acquire similar interests in
other oil and natural gas properties. None of such properties have been
identified as of the date of this Prospectus. The Company initially intends to
participate in the drilling of at least 10 additional wells on its existing
natural gas prospects. The Company's anticipated share in the expenses of
drilling 10 wells and completing any successful wells exceeds the Company's
present cash resources and therefore there can be no assurance the Company will
have sufficient funds available to complete its intended exploration drilling.
If the Company completes the sale of the Minimum Offering, and if outstanding
stock purchase warrants which expire during 1998 are exercised (see "Description
of Securities--Warrants"), the Company would have sufficient funds available to
complete the initial portion of its exploratory drilling plan and participate in
drilling approximately 12 wells. There can be no assurance that required
additional financing will be obtained or that any other financing would be
available to the Company from other sources.
Early Stages of Development Activities. The Company's initial strategy
includes (i) the use of 3-D Seismic and other state-of-the-art technologies to
maximize the potential of its properties, (ii) the drilling of exploratory wells
in the Sacramento Basin, and (iii) subject to the evaluation of the results of
seismic data and drilling, drilling of additional exploratory and development
wells in the area. The success of the project will be materially dependent on
whether the Company's initial few exploratory wells are commercially productive
wells and whether the Company can successfully acquire interests in additional
exploratory prospects. Although the Company believes the geologic
characteristics and results of its 3-D data survey of its two present prospects
reduce the risk of drilling nonproductive wells, there can be no assurance that
the Company will drill enough productive wells to establish natural gas reserves
and positive cash flow. If the Company drills a significant number of
nonproductive wells, the Company's business, financial condition and results of
operations would be materially adversely affected. Accordingly, due to the early
stage of development, the Company is unable to predict whether its exploration
activities in the Sacramento Basin will meet its expectations. In the event the
7
<PAGE>
Company's exploration activities do not effectively establish reserves and
production, the Company's business, financial condition and results of operation
will be materially adversely affected.
Limited Management Participation. The Company's officers and directors are
presently compensated primarily with Common Stock of the Company and are not
employed on a full time basis by the Company. Each of such persons are expected
to devote only a portion of their time to the business and affairs of the
Company and all of the Company's officers and directors presently have other
business affairs to which they each devote most of their time. This limited time
availability of management may adversely affect the Company's ability to
identify and acquire interest in other oil and gas properties or to efficiently
oversee the day-to-day development of the existing exploratory endeavors. See
"Conflicts of Interest" below and"Management."
Dependence Upon Management. The success of the Company in developing
reserves of oil and natural gas and cash flow from the production therefrom is
dependent primarily upon the active participation of George H. Fancher Jr., the
Company's Chairman and William E. Grafham, the President of the Company. Both of
Messrs. Fancher and Grafham have substantial experience in the oil and gas
business but both also have significant and demanding outside personal business
interests, the effect of which will be to minimize the amount of time that
either has to devote to the business or affairs of the Company. If the services
of either of Messrs. Fancher or Grafham are unavailable to the Company for any
reason, the Company's business may be adversely affected. The Company does not
have key may life insurance on the lives of, nor any employment agreement with,
any of its officers or directors.
Conflicts of Interests. The directors and officers of the Company are
involved in other businesses, and have other interests in the oil and gas
business which may present conflicts of interest with respect to the activities
of the Company. Chairman George H. Fancher Jr. is involved on a full time basis
for his own account as an independent oil and gas producer. Mr. Fancher often
permits others to participate (i.e., acquire a working interest) in his oil and
gas projects. Mr. Fancher has represented to the Company that oil or natural gas
prospects which he offers to third parties for participation, and which Mr.
Fancher, in his sole discretion, believes to be appropriate for the Company,
will be offered to the Company on terms no less favorable to the Company than
are available to any third party. Also, oil and gas business opportunities
generated by others and made available to Mr. Fancher for his participation,
which Mr. Fancher, in his sole discretion, believes to be appropriate for the
Company, will be made available to the Company on the same terms as are offered
to Mr. Fancher. Mr. Fancher may or may not participate in such ventures for his
own account. The Company will participate in an oil or natural gas prospect made
available by Mr. Fancher only if a majority of the Company's directors, other
than Mr. Fancher, approve the investment. Each of the other directors has
existing personal interests in various aspects of the oil and gas business and
each intends to continue such activities on his own behalf. However, each of the
directors has represented that any business opportunity in the oil or natural
gas business involving property located within 50 miles of any existing property
in which the Company holds an interest will be first offered to the Company
before the director pursues the opportunity for his own benefit.
Limited Operating History. The Company has a limited operating history upon
which investors may base their evaluation of the Company's prospects. As a
result of its brief history and recently commenced drilling program, the
financial results from the Company's historical periods are not indicative of
future results. There can be no assurance that the Company will experience
growth of revenue, oil and natural gas reserves or production. Any future growth
of the Company's oil and natural gas reserves, production and operations would
place significant demands on the Company's financial, operational and
administrative resources. See "Management's Plan of Operations."
Volatility of Oil and Natural Gas Prices. The Company's future revenue,
operating results, profitability and growth and the carrying value of any oil
and natural gas properties it acquires or develops are substantially dependent
upon the prices available for oil and natural gas. Historically, the markets for
oil and natural gas have been volatile and such volatility may continue or recur
in the future. Various factors beyond the control of the Company will affect
prices of oil and natural gas, including the worldwide and domestic supplies of
oil and natural gas, the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production controls,
8
<PAGE>
political instability or armed conflict in oil or natural gas producing regions,
the price and level of foreign imports, the level of consumer demand, the price,
availability and acceptance of alternative fuels, the availability of pipeline
capacity, weather conditions, domestic and foreign governmental regulations and
taxes and the overall economic environment.
Any significant decline in the price of oil or natural gas would adversely
affect the Company and could require an impairment in the carrying value of any
reserves which the Company develops. See "Business and Properties--Competition"
and "Business and Properties--Regulation."
Lack of Control Over Oil and Gas Operations. The Company does not initially
expect to be the Operator of any of its oil or natural gas interests. All of the
Company's oil and natural gas properties presently consist of minority undivided
interests in properties operated by an unaffiliated entity. For the most part,
the Company will not have the right to determine the means, timing or
expenditures made in connection with operations, although the Company's
agreement with the Operator entitles the Company, or any other owner of an
undivided interest, to propose certain exploration activities and to become the
Operator for that activity if the Operator declines to act. Thus, the Company
will be unable to control material aspects of commercialization of its principal
assets and will be dependent upon the expertise, experience, ability, diligence
and financial condition of those who operate the various properties. An
independent operator's failure to properly perform could adversely affect the
Company.
Substantial Capital Requirements. The Company's current exploration plans
in the Sacramento Basin will require it to make substantial capital expenditures
in connection with the exploration and exploitation of those oil and natural gas
properties. The Company anticipates that the net proceeds from the Minimum
Offering and present working capital will be sufficient to meet its estimated
capital expenditure requirements for approximately 12 months following the
Offering. Exercise of outstanding warrants which expire in 1998 would generate
up to $1,190,000 of additional capital. The Company believes that it will
require a combination of additional financing and cash flow from operations to
continue to implement its future plans. The Company currently does not have any
other arrangements with respect to, or sources of, additional financing, and
there can be no assurance that any additional financing will be available to the
Company on acceptable terms or at all. Future cash flows and the availability of
financing will be subject to a number of variables, such as the level of
production from any existing wells, prices of oil and natural gas and the
Company's success in locating and producing new reserves. To the extent that
future financing requirements are satisfied through the issuance of equity
securities, the Company's existing shareholders may experience dilution that
could be substantial. The incurrence of debt financing could result in a
substantial portion of the Company's operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render the Company
more vulnerable to competitive pressures and economic downturns and could impose
restrictions on the Company's operations. If revenue, once established, were to
decrease as a result of lower oil or natural gas prices, decreased production or
otherwise, and the Company has no other capital sources available, the Company
could have a reduced ability to execute its exploration or development plans,
replace reserves, if any, or to maintain production levels, which could result
in decreased production and revenue over time. See "Management's Plan of
Operation."
Drilling and Operating Risks. Oil and natural gas drilling activities are
subject to many risks, including the risk that no commercially productive
reservoirs will be encountered. There can be no assurance that wells drilled by
the Company or in which the Company participates will be productive or that the
Company will recover all or any portion of its drilling costs. Drilling for oil
and natural gas may involve unprofitable efforts, not only from dry wells, but
from wells that are productive but do not produce sufficient net revenues to
return a profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond the Company's control, including economic
conditions, title problems, water shortages, weather conditions, compliance with
governmental and tribal requirements and shortages or delays in the delivery of
equipment and services. The Company's future drilling activities may not be
successful and, if unsuccessful, such failure may have a material adverse effect
on the Company's future results of operations and financial conditions.
9
<PAGE>
The Company's operations are subject to hazards and risk inherent in
drilling for and producing and transporting oil and natural gas, such as fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of the Company and others. As protection against
operating hazards, the Company intends to maintain insurance coverage against
some, but not all, potential losses. The Company may elect to self-insure in
circumstances in which management believes that the cost of insurance, although
available, is excessive relative to the risks presented. The occurrence of an
event that is not covered, or not fully covered, by third party insurance could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Compliance With Governmental Regulations. Oil and natural gas operations
are subject to extensive federal, state and local laws and regulations relating
to the exploration for, and the development, production and transportation of,
oil and natural gas, as well as safety matters, which may be changed from time
to time in response to economic or political conditions. Matters subject to
regulation by federal, state and local authorities include permits for drilling
operations, road and pipeline construction, reports concerning operations, the
spacing of wells, unitization and pooling of properties, taxation and
environmental protection. There can be no assurance that delays will not be
encountered in the preparation or approval of such assessments, or that the
results of such regulations will not require the Company to alter its
development plans. Any delays in obtaining approvals or material alternations to
the Company's development plans could have a material adverse effect on the
Company's operations. From time to time, regulatory agencies have imposed price
controls and limitations on production by restricting the rate of flow of oil
and natural gas wells below actual production capacity in order to conserve
supplies of oil and natural gas. Although the Company believes it is in and will
continue to be in substantial compliance with all applicable laws and
regulations, the requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and the Company is unable to
predict the ultimate cost of compliance with these requirements or their effect
on its operations. Significant expenditures may be required to comply with
governmental and tribal laws and regulations and may have a material adverse
effect on the Company's financial condition and results of operations. See
"Business and Properties--Regulation."
Compliance With Environmental Regulations. Operation of exploratory and
other wells are subject to complex and changing environmental laws and
regulations adopted by federal, state and local governmental authorities. The
implementation of new, or the modification of existing, laws or regulations
could have a material adverse effect on properties in which the company may have
an interest. The discharge of oil, natural gas or other pollutants into the air,
soil or water may give rise to significant liabilities on the part of the
Company to the government and third parties and may require the Company to incur
substantial costs of remediation. Moreover, the Company may agree to indemnify
sellers of properties purchased by the Company against certain liabilities for
environmental claims associated with such properties. No assurance can be given
that existing environmental laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations will not materially
adversely affect the Company's results of operations and financial condition or
that material indemnity claims will not arise against the Company with respect
to properties acquired by the Company. See "Business and
Properties--Regulation."
Reserve Replacement Risk. The Company's future success depends upon its
ability to find, develop or acquire oil and natural gas reserves that are
economically recoverable. Once established, proved reserves of the Company would
decline as reserves are depleted by production, except to the extent that the
Company conducts successful exploration or development activities, enhanced oil
recovery activities or acquires properties containing proved reserves. In order
to establish reserves and production, the Company must continue its exploration
drilling program or undertake other acquisition activities. The Company's
strategic plan includes increasing its reserve base through exploratory
drilling, development and exploitation of its existing property and acquiring
other producing properties. There can be no assurance, however, that the
10
<PAGE>
Company's planned development and exploitation projects will result in
significant additional reserves or that the Company will have success drilling
productive wells at anticipated finding and development costs.
Control by Existing Shareholders. Upon completion of the Minimum Offering,
directors and executive officers beneficially own approximately 47.9% of the
Company's outstanding Common Stock (approximately 37.2% if the Maximum Offering
is completed). Accordingly, these shareholders, as a group, will be able to
control the outcome of shareholder votes, including votes concerning the
election of directors, the adoption or amendment of provisions in the company's
Certificate of Incorporation or Bylaws and the approval of mergers and other
significant corporate transactions. These factors may also have the effect of
delaying or preventing a change in the management or voting control of the
Company, including transactions that otherwise could involve payment of a
premium over prevailing market prices to holders of Common Stock. See "Principal
Shareholders" and "--Certain Anti-Takeover Provisions."
Competition. The Company operates in the highly competitive areas of oil
and natural gas exploration, exploitation and acquisition with many other
companies, most of which have substantially larger financial resources,
operations, staffs and facilities. In seeking to acquire desirable producing
properties or new leases for future exploration and in marketing its oil and
natural gas production, the Company faces intense competition from both major
and independent oil and natural gas companies. Many of these competitors have
financial and other resources substantially in excess of those available to the
Company. The effects of this highly competitive environment could have a
material adverse effect on the Company. See "Business and
Properties--Competition."
Acquisition Risks. The Company expects that it may from time to time
evaluate and acquire interests in properties in areas where various members of
management have experience or knowledge which provide attractive investment
opportunities for the addition of production and reserves and that meet
selection criteria established at the time. Successfully acquiring producing
properties or undeveloped acreage would require an assessment of recoverable
reserves, future oil and natural gas prices, operating costs, potential
environmental and other liabilities and other factors beyond the Company's
control. Such an assessment is necessarily inexact and its accuracy is
inherently uncertain. In connection with such an assessment, the Company will
perform a review of the subject properties in a manner which management believes
to be generally consistent with industry practices. Such review, however, may
not reveal all existing or potential problems, nor would it permit a buyer to
become sufficiently familiar with the properties to assess fully their
deficiencies and capabilities. Inspections may not be performed on every well,
and structural and environmental problems are not necessary observable even when
an inspection is undertaken. The Company generally would expect to assume
preclosing liabilities, including environmental liabilities and generally
acquire interests in the properties on an "as is" basis. With respect to its
only acquisition to date, the Company has no material commitments for capital
expenditures to comply with existing environmental requirements. There can be no
assurance that any acquisitions will be successful. Any unsuccessful acquisition
could have a material adverse effect on the Company.
Certain Anti-Takeover Provisions. The Company's Certificate of
Incorporation authorizes the Board of Directors to issue up to 5,000,000 shares
of preferred stock without shareholder approval and to set the rights,
preferences and other designations, including voting rights, of those shares as
the Board of Directors may determine. These provisions with the matters
described in "Risk Factors--Control by Existing Shareholders," may discourage
transactions involving actual or potential changes of control of the Company,
including transactions that otherwise could involve payment of a premium over
prevailing market prices to holders of Common Stock. The Company also is subject
to provisions of the Nevada General Corporation Law that may make some business
combinations more difficult. See "Description of Capital Stock--Certain
Provisions of the Company's Charter and Bylaws," and "--Nevada Law Provisions."
11
<PAGE>
Absence of Dividends on Common Stock. The Company has never declared or
paid cash dividends on its Common Stock and anticipates that future earnings, if
any, will be retained for development of its business. See "Dividend Policy."
Shares Eligible for Future Sale; Registration Rights. Upon completion of
the Minimum Offering, the Company will have a total of 8,071,704 shares
outstanding (10,771,704 shares if the Maximum Offering is completed). Of these
shares, the shares offered hereby and 2,623,533 presently outstanding shares
will be freely tradeable without restriction or registration under the
Securities Act of 1933, as amended (the "Securities Act"), by persons other than
"affiliates" of the Company, as defined under the Securities Act. The remaining
5,148,171 outstanding shares of Common Stock will be "restricted securities" as
that term is defined by Rule 144 as promulgated under the Securities Act, of
which 2,000,000 "restricted" outstanding shares, and up to 3,680,000 additional
restricted shares of Common Stock issuable upon exercise of outstanding
warrants, will be registered for resale. See "Principal and Selling
Securityholders." Upon completion of the Minimum Offering, the Company will also
have options outstanding to purchase an aggregate of 810,000 shares of Common
Stock. See "Executive Compensation and Other Information," "Shares Eligible for
Future Sale" and "Description of Securities."
Prior to the Offering, there has been no public market for the Common Stock
and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock in any market which may develop. Nevertheless,
sales of substantial amounts of such shares in any public market, or the
perception that such sales could occur, could materially and adversely affect
the market price of the Common Stock and could impair the Company's future
ability to raise capital through an offering of its equity securities.
Immediate and Substantial Dilution. Purchasers of Common Stock in the
Offering will experience an immediate and substantial dilution in net tangible
book value per share of approximately $0.76 if only the Minimum Offering is
completed, or $0.59 if all shares offered by the Company are sold. See
"Comparative Data."
Offering Price Determination. The offering price of the Common Stock being
offered was established by the Company based on such factors as the Company's
capital requirements, financial condition and prospects, percentage ownership to
be held by investors following this Offering, management and the general
condition of securities markets at the time of the Offering. The offering price
does not necessarily bear any relationship to the Company's assets, book value,
earnings history or other established criteria of value. The public offering
price of the Common Stock should not be considered an indication of the actual
value of the Company's securities.
No Prior Public Market; Possible Stock Price Volatility. Before the
Offering, there has been no public market for the Common Stock. The initial
public offering price has been determined by the Company, based on several
factors that may not be indicative of future market prices. There can be no
assurance that the Common Stock will be actively traded on any public market or
that, if trading does develop, it will be sustained. The market price of the
Common Stock and the price at which the Company may sell securities in the
future could be subject to large fluctuations in response to changes and
variation in the Company's operating results, litigation, general market
conditions, the prices of oil and natural gas, the liquidity of the Company and
the Company's ability to raise additional funds, the number of market makers for
the Company's Common Stock and other factors. In the event that the Company's
operating results are below the expectations of public market analysts and
investors in one or more future periods, it is likely that the price of the
Common Stock will be materially adversely affected. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many energy
companies, particularly emerging and new companies and that often have been
unrelated to the operating performance of such companies. General market
fluctuations may also adversely affect the market price of the Common Stock.
12
<PAGE>
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a "penny
stock." The Commission's regulations generally define a penny stock to be an
equity security that has a price of less than $5.00 per share, subject to
certain exceptions (such exceptions include an equity security listed on NASDAQ
or issued by an issuer that has (1) net tangible assets of at least $2 million,
if such issuer has been in continuous operation for three years, (2) net
tangible assets of at least $5 million, if such issuer has been in continuous
operation for less than three years, or (3) average annual revenues of at least
$6 million, if such issuer has been in continuous operation for less than three
years). None of such exceptions are applicable to the Company. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
In addition, unless and until the securities of the Company are listed for
trading on NASDAQ or the Company has $2 million in net tangible assets, trading
in the Company's securities will be subject to Rule 15c2-6 promulgated under the
Securities Exchange Act of 1934 for non-NASDAQ and nonexchange listed
securities. Under this rule, broker-dealers who recommend such securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to the sale of such
securities. Securities would be exempt from this rule if the market price is at
least $5.00 per share.
Because the Common Stock would be characterized as penny stock, the market
liquidity for the Company's securities could be adversely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's securities and the ability of purchasers in this Offering
or other shareholders to sell their securities in the secondary market.
Limitations on Director Liability. The Company's Restated Articles of
Incorporation ("Restated Articles of Incorporation") provide, as permitted by
Nevada law, that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, with certain exceptions. These provisions may discourage
stockholders from bringing suit against a director for breach of fiduciary duty
and may reduce the likelihood of derivative litigation brought by stockholders
on behalf of the Company against directors. In addition, the Company's Restated
Articles of Incorporation and bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Nevada law.
13
<PAGE>
USE OF PROCEEDS
The estimated net proceeds to the Company from this Offering, after
deduction of assumed 10% selling commissions and the estimated expenses of this
Offering, will be approximately $2,671,000 if all shares offered are sold and
$241,000 if only the Minimum Offering is completed. The Company anticipates that
the proceeds of this Offering will be applied and allocated over the next 12
months following this offering in approximately the amounts set forth below:
<TABLE>
<CAPTION>
Minimum Maximum
Shares Sold Shares Sold
----------- -----------
<S> <C> <C>
General and Administrative Expenses
(Officer and employee compensation and benefits, facilities, furniture
and equipment, and other professional expenses) .......................... $ - 0 - $ 200,000
Oil and natural gas drilling and other exploration or acquisition
expenses ................................................................. 241,000 2,471,000
--------- -----------
Total ................................................................. $ 241,000 $ 2,671,000
========= ===========
</TABLE>
Pending their use for the foregoing purposes, the Company may invest the
proceeds in whole or in part in short term, interest bearing obligations. Any
funds received by the Company upon exercise of warrants will be added to working
capital.
The foregoing represents the Company's best estimate of its use of the net
proceeds of this Offering based on present planning and business conditions. The
Company may change its use of the proceeds as unanticipated events or
occurrences, such as increased expenses, successful or unsuccessful drill
targets or acquisition opportunities, may cause the Company to redirect its
priorities and reallocate the use of proceeds. The Company does not currently
have any commitments, agreements, or understandings with respect to any
acquisitions.
14
<PAGE>
COMPARATIVE DATA
All of the Company's presently outstanding shares of Common Stock were
issued at prices substantially lower than the price of the shares being offered
hereby.
As of December 31, 1997, the net tangible book value of the Company was
approximately $1,694,893 or $0.22 per share. If all shares offered by the
Company are sold, after deducting underwriting commissions and other offering
expenses, the pro forma net tangible book value of the Company would be
approximately $4,376,276 or $0.41 per share, which represents an immediate
increase of approximately $0.19 per share to present shareholders and an
immediate dilution of approximately $0.59 per share (59%) per share to the
investors in this Offering. If only the Minimum Offering is sold, after
deducting commissions and other Offering expenses, the pro forma net tangible
book value of the Company as of December 31, 1997, would be approximately
$1,946,276 or $0.24 per share, which represents an immediate increase of
approximately $0.02 per share to present shareholders and an immediate dilution
of approximately $0.76 per share (76%) to the persons purchasing shares pursuant
to the Offering being made hereby.
The following data illustrates the per share dilution to the investors
purchasing the shares being offered hereby:
Minimum Maximum
Offering Sold Offering Sold
------------- -------------
Offering price ..................................... $ 1.00 $ 1.00
Net tangible book value:
Before offering ................................ 0.22 0.22
After offering ................................. 0.24 0.41
Increase attributable to payment by investors..... 0.02 0.19
Dilution to investors(1)............................ 0.76 0.59
- -----------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offering from the amount paid per share by investors in
this Offering. Dilution will be increased by the amount of the Company's
operating losses for the period from December 31, 1997, to the completion
of the Offering.
The following tables compare the respective investments of current
shareholders and of investors in this Offering assuming the maximum and minimum
shares offered are sold:
<TABLE>
<CAPTION>
Percent of
Total
Outstanding Average Price
Number of Shares of Per Share of Cash
Minimum Offering Shares Common Stock Common Stock Consideration
- ---------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
New investors........................ 300,000 3.9% $ 1.00 $ 300,000
Existing shareholders................ 7,771,704 96.3% 0.23 1,800,000(1)
--------- ------ ----------
8,071,704 100.0% $ 2,100,000
========= ====== =========
<CAPTION>
Percent of
Total
Outstanding Average Price
Number of Shares of Per Share of Cash
Maximum Offering Shares Common Stock Common Stock Consideration
- ---------------- --------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
New investors........................ 3,000,000 27.9% $ 1.00 $ 3,000,000
Existing shareholders................ 7,771,704 72.1% 0.23 1,800,000(1)
--------- ------ ----------
10,771,704 100.0% $ 4,800,000
========== ====== =========
</TABLE>
- --------------------
(1) Includes $300,000, the net cost incurred by Mr. Fancher in connection with
acquisition and exploration of the Company's properties in excess of the
cash payment from the Company to Mr. Fancher for his interest in the
properties. See "Certain Transactions." Does not include the value of
services for which 250,000 shares were issued in 1997. Also, does not
include consideration paid to the Company prior to 1996 for 135,004 shares
now held by approximately 500 shareholders.
15
<PAGE>
The dilution figures and other comparative data contained herein do not
take into account the possible exercise of outstanding warrants or options.
DIVIDEND POLICY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is not presently traded on any public market. It
is anticipated that the Common Stock may be listed on the NASD's OTC Bulletin
Board Market.
Dividend Policy. The Company has neither declared nor paid any dividends on
its Common Stock, nor does the Company anticipate that dividends will be paid on
its Common Stock in the foreseeable future. The Company's board of directors
presently intends to cause the Company to follow a policy of retaining earnings,
if any, to expand the Company's oil and natural gas business. Any future
determination to pay dividends on the Common Stock will depend on the Company's
results of operations, financial condition and capital requirements. No
assurance can be given that any holder of Common Stock will ever receive
dividends in respect of the holder's shares of Common Stock.
Stockholders. As of the date hereof, the Company had 522 holders of record
of the Company's Common Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
The following discussion is intended to provide an analysis of the
Company's financial condition and Plan of Operation and should be read in
conjunction with the Company's financial statements and the notes thereto
contained elsewhere in this Prospectus. The matters discussed in this section
that are not historical or current facts deal with potential future
circumstances and developments. Such forward-looking statements include, but are
not limited to, the drilling plans for natural gas, trends in the results of the
Company's operations, anticipated rates of production, natural gas prices,
operating expenses and the Company's anticipated capital requirements and
capital resources. The Company's actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below as well as those
discussed under the caption "Risk Factors."
Plan of Operation
The Company has not generated revenues in any of the last two fiscal years.
The Company plans to generate future revenue through its participation in
drilling with others in the Sacramento basin of cenral California.
The Company plans to identify drilling locations for natural gas that bear
consistent analytical data using 3-D Seismic and AVO technologies. Once such
drilling targets are identified, the Company anticipates participating with a
25% working interest. The cost to the Company to drill a dry hole is expected to
be approximately $65,000. The estimated annual cost for general and
administrative expenses of the Company is anticipated to be approximately
$135,000 and other capital costs associated with the existing properties may
approximate $200,000. At December 31, 1997, the Company had approximately
$419,000 in cash.
Based upon the available working capital at the beginning of 1998, the
Company could cover its anticipated general and administrative costs, capital
lease costs and participate in drilling a maximum of two exploratory wells
before additional funds would be required. If a drilled well is successful,
after payment of the Company's share of completion expenses, the Company would
expect to be able to drill a second well using the proceeds from production of
the successful well in approximately six months after it began producing,
assuming anticipated rates of production and current natural gas prices.
16
<PAGE>
The Company's anticipated share of the additional costs to complete a
successful natural gas well in the Sacramento Basin would be approximately
$40,000. From a successful well the Company anticipates net monthly revenue of
approximately $13,000, based upon expected average monthly gross gas production
of 45,000 mcf at a price of $1.80 per mcf. Direct costs for drilling and
completing a successful well may be recovered in approximately eight months. The
expected producing life of wells in the area is anticipated to be three to ten
years.
The Company expects at least a portion of outstanding warrants to be
exercised by warrant holders if drilling results in one or more successful wells
producing at anticipated rates. If all outstanding warrants were exercised, the
Company would receive $500,000 by June 2,1998 and an additional $690,000 by
October 31, 1998, the dates of expiration.
Results of Operations
For Year Ended December 31, 1997 Compared to Prior Fiscal Years
During 1996 the Company had no revenue or expenses and limited its
activities to seeking a management team that would add value to the Company. The
Company was successful in identifying an investor during 1996 that purchased a
controlling interest in the Company during 1997.
During 1997, the Company became active as the result of a significant
change in ownership and newly appointed officers and directors. It incurred
$17,856 in legal fees, consulting fees of $50,400 and travel and entertainment
expenses of $14,632. Accounting costs of $25,205 were incurred to prepare the
Company's records for an audit of the fiscal year of 1997 and for internal
management use.
The Company was dormant and had no activity during the years ended December
31, 1996 and December 31, 1995. Through December 31, 1996, the Company incurred
$6,367 of liability to a former officer who paid Company expenses incurred in
maintaining the Company's status. The Company issued 636,700 shares to the
former officer in December 1996 in satisfaction of the obligation.
Liquidity and Capital Resources
At December 31, 1997, the Company's current assets of $424,717 exceeded
current liabilities of $5,315, resulting in working capital of $419,402. The net
proceeds from private placements received by the Company during 1997 was
$1,451,676 for 4,500,000 shares of Common Stock and warrants to purchase an
additional 3,680,000 shares. The Company would receive $1,190,000 during 1998 if
all outstanding warrants are exercised.
On November 11, 1997 the Company completed purchase of its 25% undivided
working interest in two natural gas exploration prospects in California. The
Company disbursed $907,951 in cash and issued 2,250,000 common shares valued at
$300,000 to acquire the prospects. In December 1997 the Company prepaid the
Operator of the properties a nonrefundable deposit of $60,625 to cover the
Company's anticipated drilling costs to drill a targeted exploratory gas well,
drilled in January 1998.
The Company believes that the net proceeds from the Minimum Offering,
together with existing cash and proceeds from the exercise of outstanding
warrants will be sufficient to meet its anticipated cash needs for at least the
next 12 months. Thereafter, if cash generated from anticipated producing wells
is insufficient to satisfy the Company's capital needs, the Company expects that
it will require additional capital in the future for funding working capital and
drilling additional equity or debt securities or complete other financing. The
Company has no commit ments in place to provide additional capital. In the event
financing is needed in the future, there can be no assurance that it will be
available to the Company in an amount and on terms acceptable to the Company.
See "Risk Factors--Operating Losses and Need for Additional Financing."
17
<PAGE>
BUSINESS AND PROPERTIES
General
The Company is an independent energy company engaged in the exploration,
development and acquisition of crude oil and natural gas reserves. Since
reestablishing its business in 1997 the Company has acquired a 25% working
interest in two exploration prospects, totaling approximately 30,000 acres,
helped to review 3-D Seismic on most of the acreage and participated in one
exploratory well. The Company intends to seek to develop properties in regions
with known producing horizons, significant available undeveloped acreage and
considerable opportunities to increase reserves, production and ultimate
recoveries through exploratory and development drilling and acquisition of
producing properties. The Company's present activities are focused in the
Sacramento Basin in central California where its two exploration prospects are
located. The Company anticipates participating in the drilling of 6 to 12
exploratory or development wells in 1998 in the these properties and, depending
upon the success of the initial drilling, the market for natural gas, the
availability of capital and other factors, that as many as 40 wells may be
drilled to fully test and exploit these two prospects. The Company intends to
use its present cash assets, the proceeds of this Offering, and the anticipated
proceeds from the exercise of outstanding stock purchase warrants to meet the
capital requirements for exploration and development of its two current
properties and to acquire similar types of interests in other oil and natural
gas properties in the United States and Canada. The initial well, drilled to
test for the presence of hydrocarbons at approximately 7,400 feet on one of the
prospects, was a dry hole. It is intended that the next well will be drilled in
the second quarter of 1998.
The Company presently has no reserves of oil or natural gas, no production
and no cash flow and it is not anticipated that any will develop unless and
until the exploratory drilling program presently commencing is successful, and
the Company participates in the development of reserves and production from this
property. The Company does not serve as the Operator in its two present
prospects. As described below, a nonaffiliated independent oil and gas producer
serves as the Operator pursuant to an operating agreement standard in the
industry. As a result, the Company is not generally in a position to make
determinations with respect to where and when exploratory or other wells will be
drilled, the timing of properties, the conduct of day-to-day activities and
related management of the exploitation of the properties. However, the Company,
or any other owner of an undivided interest, is authorized to propose certain
exploration activities and to become the operator for that activity if the
Operator declined to act. The Company does not presently intend to operate oil
and gas properties, but instead will focus upon acquiring and holding properties
which management of the Company believes have a good potential to develop
significant oil or natural gas production and reserves utilizing 3-D Seismic and
other state-of-the-art technologies. The Company presently has not identified
any such properties for acquisition and it is not likely that additional
properties will be acquired until the Company has attained additional
capitalization, either with the proceeds of this Offering, the exercise of
outstanding warrants or from other sources.
Business Strategy
The Company's intended strategy, which includes the following key elements,
is to develop and increase oil and natural gas reserves, production and revenue
for the Company.
o Utilize State-of-the-Art Technologies. Certain of the Company's
officers, directors and consultants have experience in utilizing 3-D
Seismic data and related "state-of-the-art"technologies for analyzing
oil and natural gas drilling and development opportunities. The
Company intends to continue to analyze and review oil and natural gas
prospects in which it acquires or may acquire an interest based on
acquisition and analysis of 3-D Seismic data and related technologies,
including "amplitude versus offset" or "AVO" analysis, in an effort to
improve drilling success rates and accelerate the development of oil
and natural gas reserves.
18
<PAGE>
o Develop Drillsite Inventory. The Company's initial interests in the
Bali and Fiji prospects include an inventory of up to approximately 40
potential exploratory and development natural gas wells, based on an
initial review of the 3-D Seismic which has been completed. The
Company believes that the present cash resources, proceeds from this
Offering and anticipated proceeds from the exercise of outstanding
warrants will enable the Company to pay its anticipated share of
drilling and completion costs for at least 12 exploratory wells on the
these prospects. The Company intends to continue to seek and acquire
interests in other prospects in the United States and Canada.
o Acquire Interests in Oil and Natural Gas Properties. The Company will
continue to evaluate potential acquisitions of interests in oil and
natural gas properties in the United States and Canada which may
become available on terms which the Company believes will be
attractive and which have the potential to add to the Company's
reserves and production through the application of lower risk
exploitation and exploration techniques. The Company will evaluate and
may acquire interests in producing oil and natural gas properties
which may become available on terms acceptable to the Company. Such
acquisitions will be subject to the availability of properties deemed
suitable by the Board of Directors, availability of financial
resources, location and other factors.
o Operate Oil and Natural Gas Properties Only When Justified. Initially,
the Company will not operate any of the oil or natural gas properties
which it holds or may acquire, and will rely upon other qualified oil
and gas companies for operations. The Company does not intend to
become the operator of properties until such time, if ever, as it has
developed oil and natural gas reserves and recurring revenue and such
activities would be economically justifiable.
o Maintain Low Overhead Expenses. The Company currently has no full time
employees and does not intend to become obligated to incur substantial
cash operating expenses, until such time as available capital or cash
resources generated from operations are sufficient to justify
expanding the number of employees and related expenses. Until such
time as the Company has developed significant and steady cash flow
from the production of oil and natural gas, the Company intends that
its management and directors will provide services to the Company
primarily for non-cash compensation.
o Become an Operating Oil and Natural Gas Company. At such time as the
Company establishes sufficient oil and natural gas reserves and
revenue from production, the Company plans to become an operating oil
and natural gas exploration and development company. As continuing
revenue from operations is achieved, the Company expects to obtain
separate office space and facilities, full time employees and
consultants and to begin to develop and acquire its own oil or natural
gas prospects while seeking to increase reserves and production. No
assurances can be made as to when or whether such plans may be
achieved.
Principal Properties
Sacramento Basin. The Sacramento Basin is an asymmetrical trough roughly
160 miles long, 50 miles wide and up to 30,000 feet deep. Sacramento, California
is located in the southern portion of the basin. The majority of the reserves in
the basin are natural gas which occurs in sandstone reservoirs of Late
Cretaceous, Paleocene and Eocene geologic ages. The productive sands are very
porous and permeable ranging in depth from 2000 to 8000 feet. It is generally
assumed that the gas was generated from deeply buried Cretaceous shales during
the early to mid Tertiary period when such shales reached depths of 12,000' or
greater. Over time the gas migrated upward along geologic structures through
faults and continuous sands where porosity and permeability allowed such
migration. Most reservoirs appear to be water driven and are capable of
producing at relatively high rates until the water production becomes excessive,
resulting in termination of production of natural gas. The primary formations of
interest in the Fiji and Bali Prospects are, in the order of importance, as
follows:
19
<PAGE>
The Winters formation is the deepest and least explored due to
the inadequacy of 2-D seismic in defining prospective drilling
locations. This formation produces natural gas within and on all sides
of each prospect. Average reserves for wells producing from this
formation in the area are 2,500,000 mcf per well ranging in depth
between 6,000 to 8,000 feet.
The Starkey formation Is located immediately above the Winters.
The average reserves for wells producing from this formation are
1,800,000 mcf per well at 4,000 to 6,000 feet.
The Mokelumme formation is located at a depth of approximately
3,000 to 4,000 and the average reserves for wells producing from this
zone are 500,000 mcf per well.
The Domengine formation is located at a dept of approximately
2,000 to 3,000 feet, and the average reserves for a producing well in
this formation are 400,000 mcf per well.
In August 1997, the Company entered into an agreement with George H.
Fancher Jr. pursuant to which the Company agreed to acquire Mr. Fancher's
undivided 25% working interest in two exploratory gas prospects in the
Sacramento Basin of central California. The Company completed this transaction
in early November 1997 at which time Fancher assigned to the Company his
interest in two Participation Agreements with Slawson Exploration Company, Inc.
(the "Operator"), an unaffiliated independent oil and gas producing company. See
"Certain Transactions." Fancher reserved a 0.625% net overriding royalty
interest in the properties conveyed to the Company. Under the Participation
Agreements, the Company is entitled to receive a 25% net working interest
(approximately a 18.75% net revenue interest) in oil and natural gas leases and
other property interests obtained by the Operator in two prospects, designated
the "Fiji" prospect and the "Bali" prospect, included in an area of mutual
interest defined in each Participation Agreement ("AMI"). The two AMIs total
approximately 70 square miles and the Operator has obtained oil and gas leases
or lease options totaling approximately 30,000 net acres on the two prospects.
The Operator may continue to acquire additional lease acreage in the AMI. The
Company is obligated to pay 33.75% of leasehold acquisition costs, oil and gas
lease rentals and renewals, and costs incurred in connection with acquisition of
3-D Seismic data within the two AMI's surrounding the two prospects, for the
Company's 25% working interest in the prospects. Through December 31, 1997 the
Operator had incurred approximately $3.6 million for land acquisition and 3-D
Seismic data expenses, of which the Company and its predecessor had paid
approximately $1.2 million.
The Operator holds title to all leasehold agreements, including oil and gas
leases, farmin agreements or other leasehold acquisitions, beneficially for the
Company and other participants in the prospects until such time as production is
established. Therefore the Company does not anticipate that it will be a record
holder of most of the acreage in which it holds an undivided beneficial
interest. The Operator has retained a 3.5% royalty interest in all the
properties covered by the AMI. The Operator is also entitled to an additional
fee from the Company of $2,500 per well commenced in either prospect. The
Company is entitled, at its sole election, to decline to participate in any
particular well proposed to be drilled by the Operator. If the Company should
elect not to participate in a proposed well, it shall forfeit all of its
interest in the leasehold and any agreements relating to the lands within in the
revenue sharing unit for the proposed well. Once the land acquisition and 3-D
Seismic acquisition is completed, the Operator will operate the exploration,
development and exploitation activities under the terms of a standard Operating
Agreement. The Company will generally be obligated to pay its portion of the
expenditures incurred by the Operator in operating activities, including
drilling expenses and similar expenditures and will be entitled to receive
approximately 18.75% of any production which might be obtained from the
prospects (after provisions for land owner and overriding royalties).
20
<PAGE>
The Company has a working interest (approximately 18.75% net revenue
interest) in 16,182 gross acres (14,551 net acres) and 15,476 gross acres
(14,551 net acres) in the Fiji and Bali Prospects, respectively. A 3-D seismic
exploration program has been conducted by the Operator on each prospect and the
data has been processed and evaluated. It is anticipated that drilling activity
will resume in the second quarter of 1998.
Acreage
The following table sets forth, as of December 31, 1997, the gross and net
acres of undeveloped oil and natural gas leases which the Company beneficially
holds or has the right to acquire. The Company has no interest in any developed
oil or natural gas leases.
Prospect Area Developed Undeveloped
- ------------- ----------------- -----------------
Gross Net Gross Net
----- --- ----- ---
Sacramento Basin:
Bali Prospect ............. - 0 - - 0 - 15,476 3,638
Fiji Prospect ............. - 0 - - 0 - 16,182 3,638
------ ------ ------ -----
Total ............... -- -- 31,658 7,276
Exploration and Development Activities
In January 1998, the Company participated in the drilling of its first
exploratory well which resulted in a dry hole. The Company paid approximately
$61,000 as its 25% portion of drilling and exploratory well expenses.
No reserves or oil or natural gas have been established attributable to the
Company's interests in the above acreage.
Acquisitions
The Company expects that it may evaluate and pursue from time to time
acquisitions of interests in producing, exploratory or development oil and gas
properties that provide attractive investment opportunities for the addition of
production and reserves and that meet the Company's selection criteria. The
successful acquisition of such properties requires an assessment of potential
reserves or oil or natural gas, future oil and natural gas prices, operating
costs, potential environmental and other liabilities and other factors beyond
the Company's control. Such an assessment is necessarily inexact and its
accuracy would be inherently uncertain. The Company intends that upon any such
acquisition, management will perform a review of the subject properties
generally consistent with industry practices. Such a review, however, will not
reveal all existing or potential problems, nor will it permit a buyer to become
sufficiently familiar with the properties to assess fully their deficiencies or
potential value. Inspections of the properties may not be performed and problems
with existing properties may not be observable even in those cases where an
inspection is undertaken. The Company may assume existing liabilities, including
environmental liabilities, upon any such acquisition and would likely acquire
interests in such properties on an "as is" basis.
The Company's Chairman, George H. Fancher Jr., who has substantial
experience as an operator of exploration and development of oil and gas
properties, may become the operator of properties in which the Company acquires
an interest. In such event, charges to the Company for such services will not
exceed usual and customary charges to unaffiliated persons and will be at a rate
no higher than operating charges made to any other participant in a given
project.
Marketing of Production
The price to be received by the Company for any oil and natural gas
production which may be established on Company properties will depend upon
numerous factors beyond the Company's control, including seasonality, the
21
<PAGE>
condition of the national and international economies, the availability of
foreign imports, political conditions in other oil and natural gas producing
countries, domestic governmental regulations, legislation and policies,
decreases in the prices of oil or natural gas could have an adverse affect on
the value of any reserves established by the Company and the Company's cash flow
from any production which may be established. For March 1998, the price paid by
natural gas purchasers in the Sacramento Basin of central California was
approximately $2.00 per mcf. Such prices could be higher or lower at the time
that any production from the Company's exploratory activities is available for
sale, depending upon the above factors and other unforseen circumstances.
Competition
The Company operates in the highly competitive areas of oil and natural gas
exploration, exploitation, acquisition and production with other companies, many
of which have substantially larger financial resources, operations, staffs and
facilities. In seeking to acquire desirable producing properties or production,
the Company faces intense competition from both major and independent oil and
natural gas companies. The company expects that the inventory of unproved
drilling locations in the two prospects in which the Company has an interest
will be the primary source of new reserves, production and cash flow during the
next year. There can be no assurance that the two prospects will yield
substantial economic returns. Failure of the two prospects to yield significant
quantities of economically attractive reserves in production could have a
material adverse impact on the Company's future financial condition and could
result in a writeoff of a significant portion of its investment in the oil and
gas properties. In addition, recent drilling activity by a number of operators
in the Sacramento Basin may reduce or limit the availability of equipment and
supplies or reduce demand for the Company's production, either of which would
impact the Company more adversely than if the Company were geographically
diversified.
The Company's competitors include major integrated oil and natural gas
companies and numerous independent oil and natural gas companies, individuals
and drilling and income programs. Many of its competitors are large, well
established companies with substantially larger operating staffs and greater
capital resources than the Company's and which, in many instances, have been
engaged in the energy business for a much longer time than the Company. Such
companies may be able to pay more for productive oil and natural gas properties
and exploratory prospects and to define, evaluate, bid for and purchase a
greater number of properties and prospects than the Company's financial or human
resources permit. The Company's ability to acquire additional properties and to
discover reserves in the future will be dependent upon its ability to evaluate
and select suitable properties and to consummate transactions in a highly
competitive environment.
Regulation
Regulation of Oil and Natural Gas Production. The Company's oil and natural
gas exploration, production and related operations are subject to extensive
rules and regulations promulgated by federal, state and local authorities and
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and natural gas industry
increases the Company's cost of doing business and affects its profitability.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, because such rules and regulations are
frequently amended or reinterpreted, the Company unable to predict the future
cost or impact of complying with such laws.
The state of California and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural gas.
Such states also have statues or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from wells, and the
regulation of spacing, plugging and abandonment of such wells.
22
<PAGE>
Federal Regulation of Natural Gas. The Federal Energy Regulatory Commission
("FERC") regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by the Company,
as well as the revenues received by the Company for sales of such production.
Since the mid-1980's, FERC has issued a series of orders that have significantly
altered the marketing and transportation of natural gas. These orders mandate a
fundamental restructuring of interstate pipeline sales and transportation
service, including the unbundling by interstate pipelines of the sale,
transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of FERC's purposes in issuing the
orders was to increase competition within all phases of the natural gas
industry. Certain aspects of these orders may be modified as a result of various
appeals and related proceedings and it is difficult to predict the ultimate
impact of the orders on the Company and others. Generally, the orders eliminate
or substantially reduce the interstate pipelines' traditional role as
wholesalers of natural gas in favor of providing only storage and transportation
service, and has substantially increased competition and volatility in natural
gas markets.
The price which the Company may receive for the sale of oil and natural gas
liquids would be affected by the cost of transporting products to markets. FERC
has implemented regulations establishing an indexing system for transportation
rates for oil pipelines, which, generally, would index such rates to inflation,
subject to certain conditions and limitations. The Company is not able to
predict with certainty the effect, if any, of these regulations on any future
operations. However, the regulations may increase transportation costs or reduce
well head prices for oil and natural gas liquids.
Environmental Matters. The Company's operations and properties will be
subject to extensive and changing federal, state and local laws and regulations
relating to environmental protection, including the generation, storage,
handling, emission, transportation and discharge of materials into the
environment, and relating to safety and health. The recent trend in
environmental legislation and regulation generally is toward stricter standards,
and this trend will likely continue. These laws and regulations may(i) require
the acquisition of a permit or other authorization before construction or
drilling commences and for certain other activities; (ii)limit or prohibit
construction, drilling and other activities on certain lands lying within
wilderness and other protected areas; and (iii) impose substantial liabilities
for pollution resulting from the Company's operations. The permits required for
various of the Company's operations are subject to revocation, modification and
renewal by issuing authorities. Governmental authorities have the power to
enforce their regulations, and violations are subject to fines or injunctions,
or both. In the opinion of management, the Company is in substantial compliance
with current applicable environmental laws and regulations, and the Company has
no material commitments for capital expenditures to comply with existing
environmental requirements. Nevertheless, changes in existing environmental laws
and regulations or in interpretations thereof could have a significant impact on
the Company, as well as the oil and natural gas industry in general.
The Comprehensive Environmental, Response, Compensation, and Liability Act
("CERCLA") and compar able state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of "hazardous substances" found at such sites. It is
not uncommon for the neighboring land owners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. The Federal resource Conservation and
Recovery Act ("RCRA") and comparable state statutes govern the disposal of
"solid waste" and "hazardous waste" and authorize the imposition of substantial
fines and penalties for noncompliance. Although CERCLA currently excludes
petroleum from its definition of "hazardous substance," state laws affecting the
Company's operations impose clean-up liability relating to petroleum and
petroleum related products. In addition, although RCRA classifies certain oil
field wastes as "non-hazardous," such exploration and production wastes could be
reclassified as hazardous wastes thereby making such wastes subject to more
stringent handling and disposal requirements.
The Company has acquired leasehold interests in numerous properties that
for many years have produced oil and natural gas. Although the previous owners
of these interests may have used operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have been
disposed of or released on or under the properties. In addition, some of the
23
<PAGE>
Company's properties may be operated in the future by third parties over whom
the Company has no control. Notwithstanding the Company's lack of control over
properties operated by others, the failure of the operator to comply with
applicable environmental regulations may, in certain circumstances, adversely
impact the Company.
NEPA. The National Environmental Policy Act ("NEPA") is applicable to many
of the Company's planned activities and operations. NEPA is a broad procedural
statute intended to ensure that federal agencies consider the environmental
impact of their actions by requiring such agencies to prepare environmental
impact statements ("EIS") in connection with all federal activities that
significantly affect the environment. Although NEPA is a procedural statute only
applicable to the federal government, a significant portion of the Company's
Sacramento Basin acreage is located either on federal land. The Bureau of Land
Management's issuance of drilling permits and the Secretary of the Interior's
approval of plans of operation and lease agreements all constitute federal
action within the scope of NEPA. Consequently, unless the responsible agency
determines that the Company's drilling activities will not materially impact the
environment, the responsible agency will be required to prepare an EIS in
conjunction with the issuance of any permit or approval.
ESA. The Endangered Species Act ("ESA") seeks to ensure that activities do
not jeopardize endangered or threatened animal, fish and plant species, nor
destroy or modify the critical habitat of such species. Under ESA, exploration
and production operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat. ESA provide for
criminal penalties for willful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to the
Company's operations include, but are not necessarily limited to, the Fish and
Wildlife Coordination Act, the Fishery Conservation and Management Act, the
Migratory Bird Treaty Act and the National Historic Preservation Act. Although
the Company believes that its operations are in substantial compliance with such
statutes, any change in these statutes or any reclassification of a species as
endangered could subject the Company to significant expense to modify its
operations or could force the Company to discontinue certain operations
altogether.
Title to Properties
The Company has the right to acquire from the Operator satisfactory title
to all interest in the two prospects where it holds an interest in accordance
with standards generally accepted in the oil and natural gas industry. The
Company's properties will be subject to customary royalty interests, liens
incident to operating agreements, liens for current taxes and other burdens
which the Company believes do not materially interfere with the use of or affect
the value of such properties. The remaining acreage is held by lease rentals and
similar provisions and requires production in paying quantities prior to
expiration of various time periods to avoid lease termination.
Office Facilities
The Company currently uses approximately 750 square feet of office space in
Scottsdale Arizona which it shares with Arizona Corporate Management, Inc. and
shares offices with its Chairman, George H. Fancher Jr. in Denver, Colorado. The
Company pays $2,000 per month, on a month-to-month basis, for each office for
rent and related services. See "Certain Transactions."
Employees
As of the date of this Prospectus, the Company had no employees. The
Company's four directors and four part time consultants provide management and
other services.
24
<PAGE>
MANAGEMENT
The following table sets forth the names and ages of the current directors
and executive officers of the Company, the principal offices and positions with
the Company held by each person and the date such person became a director or
executive officer of the Company. Each director has served since 1997 and will
serve a one year term and until the director's successor is elected or until the
director's death, resignation or removal.
Names of Executive
Officers and Directors Age Position
- ---------------------- --- --------
George H. Fancher Jr. ..... 58 Chairman of the Board, Chief Operating
Officer and Director
William E. Grafham......... 60 President, Chief Executive Officer and Director
Jeffrey J. Scott........... 35 Vice President and Director
Rex L. Utsler ............. 52 Vice President and Director
Albert A. Golusin.......... 43 Secretary and Treasurer
George H. Fancher Jr. Mr. Fancher has been a self employed independent oil
producer, operator and consultant in the Rocky Mountain Area since 1969, doing
business as Fancher Oil Company since 1980. He was employed by Chevron as a
Petroleum Engineer, in Casper, Wyoming, and Denver, Colorado from 1962 until
1966. In 1966, he joined Ball Brothers Research Corporation in Boulder,
Colorado, followed by two years with an independent oil company before forming
Smith-Fancher, independent producers in the Rocky Mountain and Mid-Continent
regions. In 1980, he formed Fancher Oil Company and has operated as a sole
proprietor since that time.
George Fancher has been a director of the Independent Petroleum Association
of America (IPAA), the Independent Petroleum Association of Mountain States
(IPAMS) and the Rocky Mountain Oil and Gas Association (RMOGA). He is a
registered Petroleum Engineer and a member of the Society of Petroleum
Engineers. He also serves on the Crude Oil Policy Committee, Improved Oil
Recovery Task Force Committee, and Public Lands Committee of the IPAA. He is
also a member of the Liaison Committee of Cooperating Oil and Gas Associations,
and currently is Chairman of the Rocky Mountain Producers Advisory Group and on
the Board of Directors of the Petroleum Technology Transfer Council (PTTC).
William E. Grafham. Mr. Grafham has an investment banking background having
worked for two major national Canadian Brokerage houses from 1963 until 1977. In
1977 he established operating companies representing West German partnerships
investing in natural resources. Offices were set up in Calgary, Alberta; Denver,
Colorado; and Vancouver, BC. The Calgary and Vancouver operating companies were
eventually merged into larger entities; while the main assets of the Denver
operation were sold in 1988.
Since 1988 Mr. Grafham, a private investor, has participated in the
formation of a number of businesses investing in technology, oil and gas,
precious metals and mining, and real estate. Most of these investments have
resulted in the companies going public, with involvements in a number of
countries. Mr. Grafham has been active as a director in various companies during
the last five years. He is currently a director or officer of the following
publicly-traded Canadian companies:
25
<PAGE>
<TABLE>
<CAPTION>
Company Public Exchange Type of Business
<S> <C> <C>
Viceroy Research Corporation Toronto Stock Exchange Gold mining
Jerez Energy International, Inc. Alberta Stock Exchange Oil and gas
Jettstar Resource Services Inc. Alberta Stock Exchange Service rigs-oil
Walking Bear Resources Inc. Alberta Stock Exchange Technology
Tellis Gold Mining Company Inc. Vancouver Stock Exchange Mining
</TABLE>
Jeffrey J. Scott. Mr. Scott is currently President and Chief Operating
Officer of Calgary-based Jerez Energy International Inc. Jerez is a Canadian
international oil and gas exploration and development company focused in West
Africa. He has held this position since May 1995. Mr. Scott is also Vice
President of Operations of Postell Energy Co. Ltd., a privately held Canadian
oil and gas company with net production of 700 BOE per day. He has held this
position since 1986. Mr. Scott is a graduate of the University of Calgary and
has been active in the oil and gas industry since 1979 and has experience in the
areas of production, operations and management.
Rex L. Utsler. Mr. Utsler has over twenty years of executive management
experience in the energy and retail services industries. From 1971 to 1980, Mr.
Utsler was employed by Western Crude Oil Inc., a large independent crude oil
transportation and marketing company in various senior management and executive
positions. In 1980, he founded a company that specialized in the purchasing,
transportation and marketing of crude oil. As president and chief executive
officer, he directed the development of this company into a profitable
organization with an excess of $300 million in annual sales. This business was
sold to a large pubic utility in 1988. In 1991, Mr. Utsler led an investment
group in the acquisition of a controlling interest in Grease Monkey Holding
Corporation, a public company, specializing in automotive services through both
company operated and franchised retail outlets. As president and chief executive
officer from 1991 to 1997, he managed this company through a turnaround period,
which resulted in a return to growth and profitability.
Albert A. Golusin. Mr. Golusin has been a Certified Public Accountant since
1981. From 1985 to 1992, Mr. Golusin was the Controller of a public company
called N-W Group, Inc. which later became Glenayre Electronics. He was
responsible for assisting in the public reporting to regulatory agencies in the
United States and Canada for the company. From 1993 to the present, Mr. Golusin
has consulted to companies in the process of becoming publicly traded. He shares
an office with Arizona Corporate Management, Inc. in Scottsdale, Arizona.
Consultant
Adrian H. Goodisman. Mr. Goodisman has 12 years of exploration and
production experience primarily in the U.S. and Western Canada, as well as
international experience in the UK, Egypt, Australia and Japan. He is a
petroleum engineer and has gained technical excellence in field exploitation,
acquisition/divestment's, reserve determinations and economic evaluations. He
has a Bachelor of Science (honors) degree in mathematics from the University of
Salford, UK and a Master of Science degree in petroleum engineering from the
University of Texas at Austin. Mr. Goodisman is also actively involved with the
Society of Petroleum Engineers (SPE) and is presently on the SPE National
Membership Committee, and a director of the Gulf Coast (Houston) Section. For
the 1995/96 year, he served as Chairman of the Board of Directors for the SPE
Canadian Section.
26
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid by the Company for services rendered in all capacities to the
Company for the fiscal year ended December 31, 1997 (there was no compensation
in prior years) of the chief executive officer at December 31, 1997 and all
officers and directors, as a group.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
------------------------------- ------------
Securities
Name and Principal Other Annual Underlying All Other
Positions at 12/31/97 Salary Bonus Compensation Options Compensation
- --------------------- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
William E. Grafham ................... - 0 - - 0 - - 0 - 200,000 None
President
All officers and directors, .......... $10,027(1) - 0 - $30,000(2) 800,000 -0-
as a group
- ---------------------
</TABLE>
(1) Paid to Albert A. Golusin, Secretary, for services as a consultant.
(2) Includes 150,000 shares of Common Stock, valued at $30,000, issued to three
persons for services as officers, directors and representatives of the
Company.
The Company has an agreement to pay Albert A. Golusin a monthly retainer of
$2,500, as a consultant, for part time accounting and financial reporting
services. In addition, Mr. Golusin will receive 15,000 shares of Common Stock on
July 1, 1998 for services he provides to the Company through June 30, 1998.
Value of Options at December 31, 1997
<TABLE>
<CAPTION>
Aggregate Fiscal Year End Option Values
-------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End
Exercisable/Unexercisable Exercisable/Unexercisable(1)
--------------------------- ----------------------------
<S> <C> <C>
William E. Grafham............ 150,000/50,000 $104,000/$39,000
All officers and directors
as a group................... 735,000/65,000 $435,500/$50,700
- ----------------------
</TABLE>
(1) Because there is no trading market, the estimated value is based on the
offering price of $1.00 of the Company's Common Stock less the exercise
price of the options.
Option Grants in the Last Fiscal Year
The Company granted options during 1997 to the following officers and
directors:
<TABLE>
<CAPTION>
Percent of Total
Number of Shares Options Granted Exercise Price Expiration
Name Underlying Options During Year ($/sh) Date
- ---- ------------------ ---------------- -------------- ----------
<S> <C> <C> <C> <C>
William E. Grafham.............. 100,000(1) 12.3% $0.22 07/02/02
President 100,000(2) 12.3% $0.35 10/30/07
George H. Fancher Jr. .......... 250,000(2) 30.1% $0.35 10/30/07
Rex L. Utsler .................. 100,000 12.3% $0.35 10/30/07
Jeffrey J. Scott ............... 150,000 18.5% $0.35 10/30/07
Albert A. Golusin .............. 30,000(1) 3.7% $0.20 07/02/07
70,000 8.6% $0.35 10/30/07
- ----------------------
</TABLE>
27
<PAGE>
(1) These options become exercisable as to one-half of the shares six months
from the date of grant (July 1, 1997) and as to the balance, on July 1,
1998. All other options are presently exercisable.
(2) The options are nonstatutory ("nonqualified") options. All other options
are intended to be incentive stock options under Section 422A of the
Internal Revenue Code of 1986.
Stock Option Plan
The Company has adopted its 1997 Statutory and Non-Statutory Incentive
Stock Option Plan ("Plan") which authorizes the Company to grant incentive stock
options within the meaning of Section 422A of the Internal Revenue Code of 1986,
as amended, and to grant nonstatutory stock options. The Plan relates to a total
of 1,000,000 shares of Common Stock. Options relating to 810,000 shares have
been issued and outstanding. The options for 130,000 shares vest in two equal
installments at six months from the date of grant and at the first anniversary
of the grant. Other outstanding options become vested at December 31, 1997. The
options are exercisable at $0.20 per share for 30,000 shares, $0.22 per share
for 100,000 shares and $0.35 per share for 680,000 shares. The outstanding
options must be exercised within 10 years from the date of grant and no later
than three months after termination of employment, except that any optionee who
is unable to continue employment or service as a director due to total and
permanent disability may exercise such options within one year of termination
and the options of an optionee who is employed or disabled and who dies must be
exercised within one year after the date of death.
The Plan requires that the exercise prices of options granted must be at
least equal to the fair market value of a share of Common Stock on the date of
grant, provided that for incentive options if an employee owns more than 10% of
the Company's outstanding Common Stock then the exercise price of an incentive
option must be at least 110% of the fair market value of a share of the
Company's Common Stock on the date of grant, and the maximum term of such option
may be no longer than five years. The aggregate fair market value of Common
Stock, determined at the time the option is granted, for which incentive stock
options become exercisable by an employee during any calendar year is limited to
$100,000.
The Plan is to be administered by the Company's Board of Directors or a
committee thereof which determines the terms of options granted, including the
exercise price, the number of shares of Common Stock subject to the option, and
the terms and conditions of exercise. No option granted under the Plan is
transferrable by the optionee other than by will or the laws of descent and
distribution, and each option is exercisable during the lifetime of the optionee
only by such optionee.
Compensation of Directors
The Company does not pay cash compensation to directors. Each of the four
directors of the Company will be issued 50,000 shares of restricted Common Stock
of the Company on July 1, 1998 as compensation for services furnished to the
Company as an officer or director through June 30, 1998. The right to receive
such shares will be forfeited if a director is unable or unwilling to perform
the services. The Company has granted each director options to purchase shares
of Common Stock at $0.35 per share, as shown in the table above. The options
were granted under the Plan and must be exercised within 10 years from the date
of grant.
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<PAGE>
PRINCIPAL AND SELLING SECURITYHOLDERS
The following table sets forth, as of March 1, 1998, and as adjusted to
reflect the sale of the shares of Common Stock offered by the Company pursuant
to this Prospectus, certain information with respect to the beneficial ownership
of the Company's Common Stock by (i) each person known to the Company to be the
beneficial owner of 5% or more of the outstanding shares of Common Stock, with
such person's address, (ii) each director and officer of the Company, (iii) each
person whose shares have been registered for resale in the Registration
Statement of which this Prospectus is a part (the "Selling Securityholders"),
and (iv) all of the directors and executive officers as a group. Unless
otherwise indicated, the person or entity listed in the table is the beneficial
owner of the shares and has sole voting and investment power with respect to the
shares indicated.
<TABLE>
<CAPTION>
Shares beneficially
owned after offering
---------------------------
Percent
-----------------
owned prior to offering(1) Shares Minimum Maximum
Name of Beneficial Owner ------------------------- being offered Offering Offering
or Name of Officer or Director Number Percent for sale Number Sold Sold
- -------------------------------------------- ------ ------- ------------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
William E. Grafham, Director................ 843,568(2) 10.5% 300,000 543,568 6.5% 4.9%
Grandview Condominiums #412
Seven Mile Beach
Grand Cayman, BWI
George H. Fancher Jr., Director................ 3,000,000(3) 35.2% 500,000 2,500,000 30.1% 22.7%
1801 Broadway, Suite 720
Denver, Colorado 80202
Rex L. Utsler, Director ....................... 350,000(4) 4.4% 100,000 250,000 3.1% 2.3%
Jeffrey J. Scott, Director .................... 200,000(5) 2.5% -- 200,000 2.5% 1.8%
Albert A. Golusin, Secretary and Treasurer .... 185,000(6) 2.4% 50,000 135,000 1.7% 1.2%
David Grafham ................................. 650,000(7) 8.0% 325,000(7) 325,000 3.9% 2.9%
1307 West 8th Avenue
Vancouver, B.C.
Canada V5H 3W4
Roger Duffield................................. 625,000((9) 7.8% 225,000(9) 400,000 4.8% 3.6%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)
Euro Securities Ltd. .......................... 650,000(7) 8.0% 325,000(7) 325,000 3.9% 2.9%
c/o Euro Bank Corporation
5th Floor, Anderson Square
Grand Cayman, BWI(8)
Linda Kemble .................................. 650,000(7) 8.0% 325,000(7) 325,000 3.9% 2.9%
#59 Temple Hill Dr. N.E.
Calgary, Alberta
Canada T1Y 404
Don Stewart ................................... 738,000(10) 9.0% 413,000(10) 325,000 3.8% 2.9%
P. O. Box 245
Grand Cayman, BWI(8)
Adrian Goodisman............................... 250,000(11) 3.2% 100,000(11) 150,000 1.8% 1.4%
David Calabrigo................................ 325,000(11) 4.1% 100,000(11) 225,000 2.8% 2.1%
Aldridge Holdings, Ltd......................... 300,000(11) 3.7% 300,000(11) - 0 - -- --
29
<PAGE>
<CAPTION>
Shares beneficially
owned after offering
---------------------------
Percent
-----------------
owned prior to offering(1) Shares Minimum Maximum
Name of Beneficial Owner ------------------------- being offered Offering Offering
or Name of Officer or Director Number Percent for sale Number Sold Sold
- -------------------------------------------- ------ ------- ------------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Bank Lips, Ltd................................. 372,000(12) 4.7% 372,000(12) - 0 - -- --
Colony Investments Limited..................... 320,000(13) 4.1% 320,000(13) - 0 - -- --
EMB Management Consultants..................... 300,000(11) 3.8% 300,000(11) - 0 - -- --
Hartford Securities............................ 300,000(11) 3.8% 300,000(11) - 0 - -- --
Charles Maddin................................. 300,000(11) 3.8% 300,000(11) - 0 - -- --
Alex Whiteside................................. 405,000(14) 5.1% 405,000(14) - 0 - -- --
1530--1001 13 Avenue, S.W.
Calgary, Alberta, Canada T2R 0L5
Susan Scott ................................... 415,000(15) 5.2% 415,000(15) - 0 - -- --
#2 2109 4th Avenue, N.W.
Calgary, Alberta, Canada T2N 0N6
Sue Bowers..................................... 45,000(16) .6% 10,000(16) 35,000 .4% .3%
Wadeco, Inc.................................... 345,000(17) 4.4% 195,000(17) 150,000 1.8% 1.4%
All officers and directors as a group (5 persons) 4,578,568(18) 49.5% 950,0004,578,568(19) 47.9% 37.2%
- ----------------------
</TABLE>
(1) All securities are owned directly and beneficially unless otherwise noted.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options and warrants currently exercisable or exercisable within 60 days
of March 1, 1998 are deemed outstanding for computing the percentage of the
person or entity holding such securities but are not outstanding for
computing the percentage of any other person or entity.
(2) Includes 250,000 shares of Common Stock underlying presently exercisable
options and warrants.
(3) Includes 750,000 shares underlying presently exercisable stock purchase
warrants and options. In addition, the Company will be required to issue
and deliver to Mr. Fancher an additional 500,000 shares of Common Stock if
the Company receives gross revenue from its interest in the Bali and Fiji
prospects at least equal to all direct costs incurred in acquiring the
prospects, and drilling the wells, including cash amounts paid to Mr.
Fancher at the time of acquisition. See "Certain Transactions."
(4) Includes 200,000 shares of Common Stock underlying presently exercisable
stock purchase warrants
(5) Includes presently exercisable options to purchase up to 150,000 shares.
(6) Includes 135,000 shares of Common Stock underlying presently exercisable
options and stock purchase warrants.
(7) Includes 325,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(8) Euro Securities Ltd. is controlled by Euro Bank, a bank in Georgetown,
Grand Cayman Island, British West Indies, of which Don Stewart is a
director. Mr. Stewart has no other relationship with, or control over, Euro
Securities Ltd.
(9) Includes 225,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(10) Includes 413,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(11) Includes 100,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(12) Includes 172,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(13) Includes 120,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(14) Includes 135,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(15) Includes 215,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
(16) Includes 10,000 shares of Common Stock underlying presently exercisable
options and stock purchase warrants.
(17) Includes 65,000 shares of Common Stock underlying presently exercisable
stock purchase warrants.
30
<PAGE>
(18) Includes 750,000 shares underlying presently exercisable stock purchase
warrants and 735,000 shares of Common Stock underlying presently
exercisable options
(19) Assumes no shares are sold by officers and directors as Selling
Securityholders.
CERTAIN TRANSACTIONS
On October 31, 1997 the Company sold 2,000,000 shares for $1,000,000 and
paid finder's fees and related offering costs of $47,894 and issued warrants to
purchase an additional 1,180,000 shares for $690,000 on or before October 31,
1997 to 11 non-United States persons or entities pursuant to Regulation S
adopted under the Securities Act. William E. Grafham, the Company's President, a
citizen of Canada and a resident of Grand Cayman, BWI, purchased 200,000 shares
and 100,000 warrants for $100,000. The shares are restricted from transfer
except in accordance with applicable United States' laws and the purchasers each
agreed to resell the securities to a "U.S. Person" as defined in Regulation S,
only in accordance with applicable laws. All of the Common Stock and the shares
underlying the warrants have been registered for resale by the holders.
On November 11, 1997 the Company completed the acquisition of a 25% working
interest in the Fiji and Bali natural gas exploration and development prospects
in California from George H. Fancher Jr. ("Fancher"), subject to a net .625%
overriding royalty interest retained by Mr. Fancher. The prospects together
total over 30,000 acres and are located in the southern part of the Sacramento
Basin. See "Business--Principal Properties." The Company paid $907,951 in cash
and issued 2,250,000 shares at a deemed value of $300,000 for the property. The
cash payment was an amount which equaled all but $300,000 of Mr. Fancher's costs
and expenses incurred in acquisition of the properties before transfer to the
Company. The Company also paid $6,247 to Mr. Fancher representing interest on a
portion of Mr. Fancher's cost between the time that the agreement to acquire the
properties was made and the date of completion of the transaction As additional
consideration, the Company agreed to issue 500,000 additional restricted shares
to Mr. Fancher if the gross revenue received by the Company from the prospects
is at least equal to all direct costs of the Company associated with acquiring
the interest in the prospects and drilling and other related expenses by
December 31, 1999. At December 31, 1997 the Company had incurred direct costs of
approximately $1,275,491, including the cash payment to Mr. Fancher.
In 1997 the Company paid $18,000 to Arizona Corporation Management, Inc., a
corporation owned by William E. Grafham, as reimbursement for office and related
expenses and for rent. The Company has a month-to-month agreement to pay $2,000
per month to the corporation for office space, use of certain office equipment
and for limited administrative services. The Company also has an arrangement
with George H. Fancher Jr., pursuant to which Mr. Fancher was paid $2,000 in
1997 and will be paid $2,000 per month in 1998 for office facilities, use of
certain office equipment and limited administrative and technical support.
On June 2, 1997 the Company sold 2,500,000 shares for $500,000 and issued
warrants to purchase an additional 2,500,000 shares for $500,000 to eight
purchasers in private transactions with non-United States residents.
On December 1, 1996 Jean Boyd, then a director and an officer of the
Company, was issued 636,700 shares of Common Stock at a deemed value of $0.001
per share in satisfaction of an obligation of $6,367 owed to her for Company
expenses advanced by her in previous years.
31
<PAGE>
PLAN OF DISTRIBUTION
Shares of Common Stock Offered by the Company
The offering of shares of Common Stock by the Company is being conducted by
the Company on a 300,000 share minimum (the "Minimum Offering"), 3,000,000 share
maximum (the "Maximum Offering") "best efforts" basis at an offering price of
$1.00 per share. The Company's officers and directors will offer the shares of
Common Stock on behalf of the Company and it will receive no commissions or
other remuneration. In addition, the Company may engage one or more brokers or
dealers which are members of the National Association of Securities Dealers,
Inc. ("NASD') and which are registered as such with the United States Securities
and Exchange Commission to act as nonexclusive agents on behalf of the Company
to offer and sell the shares of Common Stock. Any such participating brokers and
dealers may be paid a commission of up to 10% of the purchase price of Common
Stock sold by them. No one has made any commitment to purchase or sell any or
all of the shares of Common Stock offered by the Company. It is not anticipated
that any broker or dealer would sell more than 10% of the shares of Common stock
offered by the Company. The officers and directors of the Company and any
selected broker or dealers will use their best efforts to identify purchasers
for the shares during the offering period.
All proceeds from subscriptions with respect to shares of Common Stock
offered and sold by the Company will be deposited promptly with
__________________, Denver, Colorado, as Escrow Agent, pursuant to an Escrow
Agreement between the Company and the Escrow Agent. Funds received from
subscriptions will be transmitted to the Escrow Agent no later than noon of the
business day following receipt by the Company and any selected dealers. Unless
the Company has completed at least the Minimum Offering and deposited the
proceeds with the Escrow Agent with 180 days from the date of this Prospectus
(which date may be extended for up to an additional 60 days without notice by
the Company), subscriptions will be refunded promptly to subscribers in full
without deduction therefrom or interest thereon. During the 180-day offering
period and any extension, no subscriber will be entitled to a refund of any
subscription.
The Company may sell shares of Common Stock to interested subscribers if
they reside in a state in which the shares may be sold and in which the Company
is permitted to sell the shares. The Company is not obligated to sell any shares
to any person. Additionally, officers, directors and present shareholders of the
Company and affiliates or persons associated with such persons may purchase some
of the shares offered, including making purchases of amounts necessary to
complete the Minimum Offering within the offering period. Such persons may
purchase a substantial portion of the shares of Common Stock offered by the
Company. The proceeds from this Offering will not be utilized, directly or
indirectly, to enable anyone to purchase shares of Common Stock offered by the
Company. To the extent that officers, directors, current shareholders and their
affiliates or associates purchase shares offered by the Company in the Offering,
the number of shares in the Minimum Offering required to be purchased by the
general public will be reduced by a like amount and under such circumstances the
control of the Company by the present shareholders would be increased. The
officers and directors of the Company may be deemed to be "underwriters" as such
term is defined under the Securities Act.
Certain provisions included in the Company's Articles of Incorporation and
Bylaws require the Company to indemnify officers or directors for certain
liabilities incurred while serving as an officer or director of the Company.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions, or otherwise, the Company has been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and would, therefore,
be unenforceable.
32
<PAGE>
Sale of Shares by Selling Securityholders
The Selling Securityholders described in the table above hold a total of
2,000,000 shares of outstanding Common Stock and warrants entitling them to
purchase up to 3,680,000 additional shares of Common Stock. The outstanding
shares and the shares to be issued upon exercise of the warrants are restricted
securities as defined in Rule 144 adopted under the Securities Act while held by
the Selling Securities.
The Selling Securityholders (or their pledgees, donees, transferees, or
other successors in interest) from time to time may sell all or a portion of the
Shares "at the market" to or through a market maker or into an existing trading
market, in private sales, including direct sales to purchasers, or otherwise at
prevailing market prices or at negotiated or fixed prices. By way of example,
and not by way of limitation, the Shares may be sold by one or more of the
following methods: (a) a block trade in which a broker or dealer so engaged will
attempt to sell the Shares as agent but may purchase and resell a portion of the
block as principal to facilitate the transaction; (b) purchases by a broker or
dealer as principal and resale by such broker or dealer for its account pursuant
to this Prospectus; (c) an exchange distribution in accordance with the rules of
such exchange; and (d) ordinary brokerage transactions and transactions in which
the broker solicits purchasers. In effecting sales, brokers or dealers engaged
by the seller may arrange for other brokers or dealers to participate. Brokers
or dealers will receive commissions or discounts from the seller in amounts to
be negotiated with the Selling Securityholder immediately prior to the sale. It
is anticipated that the per share selling price for the Shares will be at or
between the "bid" and "asked" prices of the Company's Common Stock, if any, as
quoted in the over-the-counter market immediately preceding the sale. Such
brokers or dealers and any other participating brokers or dealers may be deemed
to be "underwriters" within the meaning of the Securities Act, in connection
with such sales. Expenses of any such sale will be borne by the parties as they
may agree.
In addition, any securities covered by the Prospectus which qualify for
sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than pursuant to the Prospectus.
The Selling Securityholders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of the Shares
against certain liabilities, including liabilities arising under the Securities
Act. Any commissions paid or any discounts or concessions allowed to any such
broker-dealer which purchases Shares as principal or any profits received on the
resale of such Shares may be deemed to be underwriting discounts and commissions
under the Securities Act.
In order to comply with certain state securities laws, if applicable, the
Shares may not be sold in certain states unless the Shares have been registered
or qualified for sale in such states or an exemption from registration or
qualification is available and is complied with.
The Shares offered hereby will be sold by the Selling Securityholders (or
their pledgees, donees, transferees or other successors in interest) acting as
principals for their own account. The Company will receive none of the proceeds
from such sales.
No underwriting arrangements exist as of the date of this Prospectus for
any Selling Securityholders to sell its shares. Upon being advised of any
underwriting arrangements that may be entered into by a Selling Securityholder
after the date of this Prospectus, the Company will prepare a supplement to this
Prospectus to disclose such arrange ments.
Certain Provisions of the Articles of Incorporation, Bylaws and Nevada Law
The Company's ability to issue shares of new classes of preferred stock and
to determine the rights, preferences, privileges, designations and limitations
of such stock, including the dividend rights, dividend rate, conversion rights,
voting rights, terms of redemption and other terms of conditions of such stock,
33
<PAGE>
could make it more difficult for a person to engage in, or discourage a person
from engaging in, a change in control transaction without the cooperation of
management.
The Company's Articles of Incorporation contain a provision, authorized
under Nevada law, which limits the liability of directors or officers of the
Company for monetary damages for breach of fiduciary duty as an officer or
director other than for intentional misconduct, fraud or a knowing violation of
law or for payment of a dividend in violation of Nevada law. Such provision
limits recourse for money damages which might otherwise be available to the
Company or stockholders for negligence by individuals while acting as officers
or directors of the Company. The Restated Articles of Incorporation do not
provide for the elimination of or any limitation on the personal liability of
directors for (i) any breach of the director's duty of loyalty to the Company or
its shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful corporate
distributions, or (iv) any transaction from which such director derives an
improper personal benefit. Although this provision would not prohibit injunctive
or similar actions against directors or officers, the practical effect of such
relief would be limited.
The Articles of Incorporation and Bylaws also contain provisions requiring
the Company to indemnify officers, directors and certain employees for certain
liabilities incurred in connection with actions taken on behalf of the Company,
including expenses incurred in defending against such liabilities. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Anti-Takeover Statutes
The Nevada General Corporation Law ("Nevada GCL") contains two provisions,
described below as "Combination Provisions" and the "Control Share Act," that
may make more difficult the accomplishment of unsolicited or hostile takeover
transactions.
Restrictions on Certain Combinations Between Nevada Resident Corporations
and Interested Stockholders. The Nevada GCL includes certain provisions (the
"Combination Provisions") prohibiting certain "combinations" (generally defined
to include certain mergers, disposition of assets transactions, and share
issuance or transfer transactions) between a resident domestic corporation and
an "interested stockholder" (generally defined to be the beneficial owner of 10%
or more of the voting power of the outstanding shares of the corporation),
except those which are approved by the board of directors before the interested
stockholder first obtained a 10% interest in the corporation's stock. There are
additional exceptions to the prohibition, which apply to combinations if they
occur more than five years after the interested stockholder's date of acquiring
shares. The Combination Provisions apply unless the corporation elects against
their application in its original articles of incorporation or an amendment
thereto, or in its bylaws. The Company's Articles of incorporation and Bylaws do
not currently contain a provision rendering the Combination Provisions
inapplicable.
Nevada Control Share Act. Nevada's Control share Acquisition Act (the
"Control Share Act") imposes procedural hurdles on and curtails greenmail
practices of corporate raiders. The Control Share Act temporarily
disenfranchises the voting power of "control shares" of a person or group
("Acquiring Person") purchasing a "controlling interest" in an "issuing
corporation" (as defined in the Nevada GCL) not opting out of the Control Share
Act. In this regard, the Control Share Act will apply to an "issuing
corporation" unless, before an acquisition is made, the articles of
incorporation or bylaws in effect to the 10th day following the acquisition of a
controlling interest provide that it is inapplicable. The Company's Articles of
Incorporation and Bylaws do not currently contain a provision rendering the
Control Share Act inapplicable.
34
<PAGE>
Under the Control Share Act, an "issuing corporation" is a corporation
organized in Nevada which has 200 or more stockholders, at least 100 of whom are
stockholders of record (which for this purpose includes registered and
beneficial owners) and residents of Nevada, and which does business in Nevada
directly or through an affiliated company. The status of the Company and its
shareholders at the time of the occurrence of a transaction governed by the
Control Share Act (assuming that the Company's Articles of Incorporation or
Bylaws have not theretofore been amended to include opting out provisions) would
determine whether the Control Share Act is applicable.
The Control Share Act requires an Acquiring Person to take certain
procedural steps before he or it can obtain the full voting power of the control
shares. "Control shares" are the shares of a corporation (1) acquired or offered
to be acquired which will enable the Acquiring Person to own a "controlling
Interest, " and (2) acquired within 90 days immediately preceding that date. A
"Controlling interest" is defined as the ownership of shares which would enable
the Acquiring Person to exercise certain graduated amounts (beginning with 1/5)
of all voting power of the corporation. The Acquiring Person may not vote any
control shares without first obtaining approval from the stockholders not
characterized as "interested stockholders" (as defined in the act).
The Company Articles of Incorporation and Bylaws do not include provisions
which preclude effectiveness of the Control Share Act.
The Control share Act permits a corporation to redeem the control shares in
the following two instances, if so provided in the articles of incorporation or
bylaws of the corporation in effect on the 10th day following the acquisition of
a controlling interest: (1) if the Acquiring Person fails to deliver the
Offeror's Statement to the corporation within 10 days after the Acquiring
Person's acquisition of the control shares; or (2) an Offeror's Statement is
delivered, but the control shares are not accorded full voting rights by the
stockholders. The Company's Articles of Incorporation and Bylaws do not address
this matter.
Shares Available for Future Sale
Upon completion of this Offering, the Company will have 8,071,704 shares of
Common Stock outstanding if the Minimum Offering is completed and 10,771,704
outstanding if the Maximum Offering is completed assuming no exercise of (1)
outstanding warrants for the purchase of up to 3,680,000 shares or (2)
outstanding stock options for the purchase of 810,000 shares. All shares sold in
this Offering will be freely transferable by persons other than "affiliates" of
the Company (as that term is defined under the Securities Act), without
restriction or further registration under the Securities Act.
The remaining outstanding shares of Common Stock will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exception from registration is available, including the exemption contained in
Rule 144.
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate" as
that term is defined in Rule 144, is entitled to sell into a public market,
within any three-month period, a number of "restricted" shares that does not
exceed the greater of 1% of their then outstanding shares of Common Stock or the
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company. Rule 144(k) provides that a person who is not
deemed an "affiliate" and who has beneficially owned shares for at least three
years is entitled to sell such shares at any time under Rule 144 without regard
to the limitations described above.
35
<PAGE>
DESCRIPTION OF SECURITIES
Authorized Stock
The authorized capital stock of the Company consists of 95,000,000 shares
of Common Stock, $0.001 par value per share, and 5,000,000 shares of preferred
stock, $0.001 par value per share. All of the issued and outstanding capital
stock of the Company is fully paid and nonassessable. The following summary
descriptions of the Company's preferred stock and Common Stock are qualified in
their entirety by reference to the Company's Restated Articles of Incorporation,
which were filed as exhibits to the Registration Statement of which this
Prospectus is a part and which are available from the Company upon request. See
"Additional Information."
Common Stock
As of the date of this Prospectus, there were 7,771,704 shares of Common
Stock outstanding, held of record by 522 shareholders. The holders of Common
Stock are entitled to receive ratable dividends when and as declared by the
Board of Directors from funds legally available therefor and to one vote for
each share held of record on each matter submitted to a vote of shareholders. In
the event of a liquidation, dissolution or winding-up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after
payments to creditors and other payments required by law. Holders of Common
Stock have no preemptive rights and no rights to convert their Common Stock into
any other securities. The outstanding shares of Common Stock are fully paid and
nonassessable.
Preferred Stock
There are no shares of preferred stock outstanding. The Company may issue
from time to time in one or more series with such distinctive designations,
rights, preferences and limitations as the Board of Directors shall determine.
The Board of Directors has the authority to determine the rate of dividend,
redemption features, amounts payable upon liquidation, sinking fund provisions,
conversion features and voting powers.
Warrants
General. The following is a brief summary of the material provisions of the
outstanding stock purchase warrants.
As of December 31, 1997, the Company had outstanding 3,680,000 warrants
held by 21 persons. Each warrant entitles the holder thereof to purchase at any
time in whole or in part over a one year period from the date the warrant was
issued, one share of Common Stock at a specified exercise price, subject to
adjustment referred to below. The exercise prices and expiration dates of the
outstanding warrants are: (1) $0.20 per share for 2,500,000 warrants expiring
June 2, 1998, (2) $0.50 per share for 180,000 warrants expiring October 31, 1998
and (3) $0.60 per share for 1,000,000 warrants also expiring October 31, 1998.
The exercise price and number of shares of Common Stock purchasable upon the
exercise of the warrants are subject to adjustment upon the occurrence of
certain events, including stock dividends, stock splits, combinations and
reclassification of the Common Stock, or sale by the Company of shares of its
Common stock or other securities convertible into Common Stock at a price below
the then applicable exercise price of the warrants. The holder of a warrant may
exercise such warrant by surrendering the certificate representing the warrant
to the Company at its offices in Scottsdale, Arizona and accompanied by payment.
Warrants are issuable in minimum increments of 1,000 shares and no fractional
shares will be issued upon exercise of the warrants.
The Warrants are, and shares of Common Stock of the Company issued upon
exercise of the warrants shall be, nontransferable without the prior written
consent of the Company and may be transferred only in accordance with the
36
<PAGE>
Securities Act. The shares of Common Stock which would be issued upon exercise
of the outstanding warrants have been registered for resale by the holders. See
"Principal and Selling Securityholders."
Transfer Agent and Warrant Agent
Atlas Stock Transfer Corp., Salt Lake City, Utah, is the transfer agent for
the Common Stock.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock being offered
hereby by the Company and by the Selling Securityholders have been passed upon
for the Company by Alan W. Peryam, LLC, Denver, Colorado. Alan W. Peryam was a
director of the Company between March 17, 1997 and May 15, 1997.
EXPERTS
The balance sheet of the Company as of December 31, 1997 and the statements
of operations, shareholders' equity and cash flows for the fiscal years ended
December 31, 1997 have been included herein in reliance upon the report of
Wheeler Wasoff, P.C., Denver, Colorado, independent certified public
accountants, and the balance sheet as of December 31, 1996 and the statements of
operations, shareholders' equity and cash flows for the fiscal year ended
December 31, 1996 are included herein in reliance upon the report of Darrell
Schvanveldt, CPA, Salt Lake City, Utah, given upon the authority of those firms
as experts in accounting and auditing. The replacement of auditors for the
Company in 1997 was related to the relocation of the Company's executive offices
to Denver, Colorado. The report of Mr. Schvanveldt, the prior accountant for the
Company's financial statements for each of the two fiscal years ending December
31, 1996, was qualified as to the Company's ability to continue as a going
concern. There have been no disagreements between the Company and the former
accountant.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form SB-2
("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act") with respect to the Securities offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the SEC. For further information with respect to the
Company and the securities offered hereby, reference is hereby made to the
Registration Statement and such exhibits and schedules thereto, which may be
examined at the SEC's offices without charge, or copies of which may be obtained
from the SEC upon payment of the prescribed fees. Statements made in this
Prospectus as to the contents of any contract, agreement or document are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement, and each such statement is qualified in its entirety by such
reference. The Company is a reporting company registered under the Securities
Exchange Act of 1934, as amended ("1934 Act") and in accordance therewith files
reports and other information with the SEC. All of such reports and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
regional offices of the SEC located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. The Commission maintains a web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of such site is
http:\\www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and, upon request, quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
37
<PAGE>
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of terms commonly used in
the oil and natural gas industry and this Prospectus. Unless otherwise indicated
in this Prospectus, natural gas volumes are stated at the legal pressure base of
the state or area in which the reserves are located and at 60 degrees
Fahrenheit.
Amplitude Versus Offset ("AVO"). A seismic technology which utilizes
measurement of the variation of seismic reflection amplitude with offset between
source and receiver. The variation in the strength of the recorded reflections
as the horizontal distance between the source and receiver is changed is a
comparison of "amplitude" with the distance (or "offset").
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to oil or other liquid hydrocarbons.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf of
natural gas to one Bbl of oil, condensate or natural gas liquids.
Completion. The installation of permanent equipment for the production of
oil or natural gas.
Developed acreage. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry hole. A well found to be incapable of producing either oil or natural
gas in sufficient quantities to justify completion of an oil or natural gas
well.
Exploratory well. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which the Company has a working interest.
LOE. Lease operating expenses.
Mcf. One thousand cubic feet of natural gas.
Net acres or net wells. Gross acres or wells multiplied, in each case, by
the percentage working interest owned by the Company.
Net production. Production that is owned by the Company less royalties and
production due others.
Oil. Crude oil or condensate.
Operator. The individual or company responsible for the exploration,
development, and production of an oil or natural gas well or lease.
38
<PAGE>
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test.
The area of a reservoir considered proved includes (A) that portion
delineated by drilling and defined by natural gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as economically productive
on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
(ii) Reserves which can be produced economically through
application of improved recovery techniques (such as fluid injection)
are included in the "proved" classification when successful testing by
a pilot project, or the operation of an installed program in the
reservoir, provides support for the engineering analysis on which the
project or program was based.
(iii) Estimates of proved reserves do not include the following:
(A) oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves"; (B) crude
oil, natural gas and natural gas liquids, the recovery of which is
subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors; (C) crude oil, natural
gas and natural gas liquids that may occur in undrilled prospects; and
(D) crude oil, natural gas and natural gas liquids that may be
recovered from oil shales, coal, gilsonite and other such sources.
Receiver. A sensitive device used to record reflections of acoustic (sound)
waves reflected from rock layers within the earth to the receiver at the
surface.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reserves. Proved reserves.
Royalty. An interest in an oil and natural gas lease that gives the owner
of the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale thereof), but generally does not require
the owner to pay any portion of the costs of drilling or operating the wells on
the leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of the leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.
Seismic. Technology which measures amplitude of sound waves reflected from
subsurface geological structures. The seismic data is acquired in the field and
processed to yield information about the anticipated subsurface stratigraphy.
2-D seismic. When both sources and receivers are confined to a line, such
as a road or trail, the resulting image is a cross-section of two-dimensional
representation of the earth with the horizontal dimension being the distance
along the line and the vertical dimension being the time it takes the source
energy to be reflected and returned to the receivers.
39
<PAGE>
3-D seismic. When the sources and receivers are not confined to a line but
occupy an area, such as a section or township, they produce a three-dimensional
representation of the earth with the two horizontal dimensions being north and
south and the vertical dimension being time.
Source. The energy used to produce the acoustic waves recorded at the
receivers. In the Sacramental Basin the source is a small charge of dynamite
detonated in a shallow drilled drill hole.
Undeveloped acreage. Lease acres on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether or not such acreage contains proved
reserves. Included within undeveloped acreage are those lease acres(held by
production under the terms of a lease) that are not within the spacing unit
containing, or acreage assigned to, the productive well holding such lease.
Working interest. An interest in an oil and natural gas lease that gives
the owner of the interest the right to drill for and produce oil and natural gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations. The share of production to which a working
interest owner is entitled will always be smaller than the share of costs that
the working interest owner is required to bear, with the balance of the
production accruing to the owners of royalties. For example, the owner of a 100%
working interest in a lease burdened only by a landowner's royalty of 12.5%
would be required to pay 100% of the costs of a well but would be entitled to
retain 87.5% of the production.
Workover. Operations on a producing well to restore or increase production.
40
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
No person has been authorized to give any
information or to make any representation in
connection with the offering being made hereby not
contained in this Prospectus, and, if given or
made, such information or representation must not
be relied upon as having been authorized. This
Prospectus does not constitute an offer to sell or
solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction in
which it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an
implication that information contained herein is
correct as of any time subsequent to the date
hereof.
FAN ENERGY INC.
-------------------------
Page No.
-------
PROSPECTUS SUMMARY.......................................3
RISK FACTORS.............................................7 3,000,000
USE OF PROCEEDS.........................................14 Shares of Common Stock
COMPARATIVE DATA........................................15
DIVIDEND POLICY AND RELATED
STOCKHOLDER MATTERS.................................16
MANAGEMENT'S DISCUSSION AND
ANALYSIS AND PLAN OF OPERATION......................16 -------------
BUSINESS AND PROPERTIES.................................18
MANAGEMENT..............................................25 PROSPECTUS
EXECUTIVE COMPENSATION..................................27 -------------
PRINCIPAL AND SELLING SECURITYHOLDERS...................29
CERTAIN TRANSACTIONS....................................31
PLAN OF DISTRIBUTION....................................32
DESCRIPTION OF SECURITIES...............................36
LEGAL MATTERS...........................................37
EXPERTS.................................................37
ADDITIONAL INFORMATION..................................37
GLOSSARY OF OIL AND NATURAL GAS TERMS...................38
FINANCIAL STATEMENTS ................................. F-1
March _, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report F-2 - F-3
Balance Sheet
December 31, 1997 F-4
Statements of Operations
Years ended December 31, 1996 and 1997 F-5
Statement of Stockholders' Equity
Years ended December 31, 1996 and 1997 F-6
Statements of Cash Flows
Years ended December 31, 1996 and 1997 F-7 - F-8
Notes To Financial Statements F-9 - F-17
F - 1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders FAN ENERGY INC.
We have audited the accompanying balance sheet of Fan Energy Inc. (a development
stage company) as of December 31, 1997 and the related statements of operations,
stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fan Energy Inc. as of December
31, 1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred losses from its initial
operations and has not commenced principal operations that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Wheeler Wasoff, P.C.
WHEELER WASOFF, P.C.
Denver, Colorado
January 30, 1998
F - 2
<PAGE>
SCHVANEVELDT AND COMPANY
Certified Public Accountant
275 E. South Temple, Suite 300
Salt Lake City, Utah 84111
(801) 521-2392
Independent Auditor's Report
----------------------------
Board of Directors
Eastern Star Mining, Inc.
I have audited the accompanying statements of operations, stockholders equity
and cash flows of Eastern Star Mining, Inc., for the year ended December 31,
1996. These financial statements are the responsibility of the Company's
management. My responsibility is to express on opinion on these financial
statements based on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the aforementioned financial statements present fairly, in all
material respects the financial position of Eastern Star Mining, Inc., as of
December 31, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the company
will continue as a going concern. The Company has an accumulated deficit and
negative cash flows. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management plans in regard to these
matters are also discussed in Note #5. The financial statements do not include
any adjustment that might result from the outcome of the uncertainty.
/s/ Schvaneveldt and Company
SCHVANEVELDT AND COMPANY
February 15, 1997
Salt Lake City, Utah
F - 3
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
BALANCE SHEET
December 31, 1997
ASSETS
<S> <C>
CURRENT ASSET
Cash .................................................................... $ 424,717
-----------
Total Current Asset ................................................... 424,717
UNDEVELOPED OIL AND GAS PROPERTIES ........................................ 1,275,491
DEFERRED OFFERING COSTS ................................................... 10,383
-----------
$ 1,710,591
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................................ $ 5,315
-----------
Total Current Liabilities ............................................. 5,315
-----------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 6)
STOCKHOLDERS' EQUITY (Note 4)
Preferred stock, $.01 par value
Authorized - 5,000,000 shares
Issued - none ..................................................... --
Common stock, $.001 par value
Authorized - 95,000,000 shares
Issued and outstanding - 7,771,704 shares ......................... 7,772
Additional paid-in capital .............................................. 2,300,884
Deficit accumulated during the development stage ........................ (703,880)
Additional paid-in capital stock options ................................ 100,500
-----------
1,705,276
-----------
$ 1,710,591
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 4
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Years ended December 31, 1996 and 1997
Cumulative
Amounts from
Jan. 1, 1997 to
1996 1997 Dec. 31, 1997
---- ---- ----------------
<S> <C> <C> <C>
REVENUES .................................. $ -- $ -- $ --
-------------- ----------- -----------
OPERATING EXPENSES
General and administrative .............. -- 192,985 192,985
Interest (Note 3) ....................... -- 6,247 6,247
-------------- ----------- -----------
-- 199,232 199,232
-------------- ----------- -----------
NET (LOSS) ................................ $ -- $ (199,232) $ (199,232)
============== =========== ===========
NET (LOSS) PER COMMON SHARE ............... $ -- $ (.03) $ (.03)
============== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING ..................... 189,077 7,771,704 7,771,704
============== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 5
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1997
Deficit Additional
Accumulated Paid-In
Common Stock Additional During the Capital
-------------------- Paid-In Development Stock
Shares Amount Capital Stage Options
------ ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 .............................. 135,004 $ 135 $ 498,146 $ (504,648) $ --
Issuance of common stock as satisfaction of
accounts payable - related ........................ 636,700 637 5,730 -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 ............................ 771,704 772 503,876 (504,648) --
Sale of common stock and warrants pursuant to
private placement, at $.20 per unit ............... 2,500,000 2,500 497,500 -- --
Cost of private placement offering .................... -- -- (430) -- --
Issuance of common stock for services, valued at
$.20 per share .................................... 250,000 250 49,750 -- --
Sale of common stock and warrants pursuant to
private placement, at $.50 per unit ............... 2,000,000 2,000 998,000 -- --
Costs of private placement offering ................... -- -- (52,439) -- --
Issuance of common stock for property, valued at
$.133 per share ................................... 2,250,000 2,250 297,750 -- --
Issuance of common stock warrants for offering
costs ............................................. -- -- 4,545 -- --
Issuance of stock options ............................. -- -- 2,332 -- 100,500
Net (loss) ............................................ -- -- -- (199,232) --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ............................ 7,771,704 $ 7,772 $ 2,300,884 $ (703,880) $ 100,500
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 6
<PAGE>
<TABLE>
<CAPTION>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1997
Cumulative
Amounts from
Jan. 1 to
1996 1997 Dec. 31, 1997
---- ---- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) ...................................................... $ -- $ (199,232) $ (199,232)
Adjustments to reconcile net (loss) to net
cash provided by operating activities ....................... -- -- --
Stock options ................................................. 102,832 102,832
Stock for services ............................................ -- 50,000 50,000
Changes in assets and liabilities
Increase in accounts payable ................................ -- 5,315 5,315
Other ....................................................... -- (10,383) (10,383)
----------- ----------- -----------
Net cash (used) by operating activities ......................... -- (51,468) (51,468)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid for unproved oil and gas properties ................... -- (975,491) (975,491)
----------- ----------- -----------
Net cash (used) in investing activities ......................... -- (975,491) (975,491)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock .............................. -- 1,500,000 1,500,000
Cash paid for offering costs .................................... -- (48,324) (48,324)
----------- ----------- -----------
Net cash provided by financing activities ....................... -- 1,451,676 1,451,676
----------- ----------- -----------
NET INCREASE IN CASH .............................................. -- 424,717 424,717
CASH, BEGINNING OF PERIODS ........................................ -- -- --
----------- ----------- -----------
CASH, END OF PERIODS .............................................. $ -- $ 424,717 $ 424,717
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F - 7
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1996 and 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the year ended December 31, 1997 the Company paid cash for interest of
$6,247.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1996 the Company issued 636,700 shares of
common stock valued at $6,367 ($.01 per share) in full satisfaction of amounts
due a former officer/director of the Company.
During the year ended December 31, 1997 the Company:
o issued 2,250,000 shares of common stock, valued at $300,000 ($.133 per
share), as partial consideration for unproved oil and gas properties.
o issued 680,000 options to purchase common stock to officers, directors and
consultants, valued at $102,832.
o issued 250,000 shares of common stock for services, valued at $50,000 ($.20
per share).
o issued 180,000 warrants to purchase shares of common stock as partial
consideration for finders fees in conjunction with the private placement
sale of common stock, valued at $4,545.
The accompanying notes are an integral part of the financial statements.
F - 8
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 1 - ORGANIZATION
Fan Energy Inc. (the "Company") is an independent energy company engaged
in the exploration and acquisition of crude oil and natural gas
reserves. Originally formed as an Idaho corporation in the early 1900s,
the Company's predecessor was not successful in the exploration of
mining properties. In 1988 the predecessor was merged into a
newly-formed Nevada corporation as Eastern Star Mining, Inc. and it was
inactive thereafter, with no assets or liabilities through the end of
1996. In early 1997 the corporation was reactivated when the holder of a
majority of the outstanding common stock transferred control of the
inactive corporation. The transferee elected new directors and officers
and caused the Company to effect a 10-into-1 reverse stock split. The
name of the corporation was changed to Fan Energy Inc. in December 1997.
Effective with the change in control and reactivation, the Company
undertook development stage activities as defined by Statement of
Financial Accounting Standards (SFAS) No. 7 and is considered a
development stage company effective January 1, 1997. Its principal
activities have been raising capital through the sale of its securities
and acquiring an undivided minority interest in two oil and natural gas
exploratory prospects in California for cash and common stock.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OIL AND GAS PROPERTIES
The Company follows the full cost method to account for its oil and gas
exploration and development activities. Under the full cost method, all
costs incurred which are directly related to oil and gas exploration
and development are capitalized and subjected to depreciation and
depletion. Depletable costs also include estimates of future
development costs of proved reserves. Costs related to undeveloped oil
and gas properties may be excluded from depletable costs until such
properties are evaluated as either proved or unproved. The net
capitalized costs are subject to a ceiling limitation. Gains or losses
upon disposition of oil and gas properties are treated as adjustments
to capitalized costs, unless the disposition represents a significant
portion of the Company's proved reserves. A separate cost center is
maintained for expenditures applicable to each country in which the
Company conducts exploration and/or production activities.
Undeveloped oil and gas properties consist of leases and acreage
acquired by the Company for its exploration and development activities.
As of December 31, 1997, no exploration had been commenced on the
properties. The cost of these nonproducing leases is recorded at the
lower of cost or fair market value.
In January 1998 an unsuccessful exploratory well was drilled and
abandoned as a dry hole on one of the Company's prospects.
F - 9
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" which
requires that long-lived assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The adoption of
SFAS 121 has not had an impact on the Company's financial statements,
as the Company has determined that no impairment loss for 1997 need to
be recognized for applicable assets of continuing operations.
DEFERRED OFFERING COSTS
Deferred offering costs consist of costs incurred in connection with a
proposed public offering of the Company's common stock. If the offering
is successful, costs incurred will be charged against the proceeds of
the offering. If the offering is not successful, costs incurred will be
charged to operations.
INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, "Accounting for
Income Taxes". SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
At December 31, 1997, the Company had a net operating loss carryforward
of approximately $95,000 that may be offset against future taxable
income through 2012.
The Company has fully reserved the tax benefits of these operating
losses because the likelihood of realization of the tax benefits cannot
be determined.
The $21,900 tax benefit of the loss carryforward has been offset by a
valuation allowance of the same amount. The total tax benefit is
attributable to 1997.
Temporary differences between the time of reporting certain items for
financial and tax reporting purposes consist primarily of compensation
expense related to the issuance of stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported
F - 10
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(LOSS) PER COMMON SHARE
(Loss) per common share is computed based on the weighted average
number of common shares outstanding during each period. Common shares
issued from reactivation as a development stage company, and prior to
completion of the Company's proposed initial public offering (Note 7),
are considered outstanding for 1997. Common stock equivalents,
consisting of warrants and options, are not considered in the
calculation of net loss per share as their inclusion would be
antidilutive.
In February 1997 SFAS No. 128, "Earnings Per Share" was issued
effective for periods ending after December 15, 1997. There is no
impact on the Company's financial statements from adoption of SFAS No.
128.
SHARED BASED COMPENSATION
In October 1995 SFAS No. 123" Accounting for Stock-Based Compensation"
was issued. This standard defines a fair value based method of
accounting for an employee stock option or similar equity instrument.
This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to
continue to measure compensation using the intrinsic value approach
under Accounting Principles Board (APB) Opinion No. 25. The Company has
elected to utilize APB No. 25 for measurement; and will, pursuant to
SFAS No. 123, disclose supplementally the pro forma effects on net
income and earnings per share of using the new measurement criteria.
During the year ended December 31, 1997, the Company issued warrants
and options to purchase shares of its common stock (Note 4).
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three
months or less at the time of purchase. On occasion, the Company has
cash in banks in excess of federally insured amounts.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash. The Company maintains
cash accounts at one financial institution. At December 31, 1997 cash
on deposit at this financial institution exceeded federally insured
F - 11
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts by approximately $325,000. The Company periodically evaluates
the credit worthiness of financial institutions, and maintains cash
accounts only in large high quality financial institutions, thereby
minimizing exposure for deposits in excess of federally insured
amounts.
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a going concern, which
contemplates the realization of assets and extinguishment of
liabilities in the normal course of business.
As previously discussed, the Company is in the development stage and
has not realized revenues from its planned operations. As such, the
Company, as of December 31, 1997 has incurred net operating losses
since reactivation as a development stage company of $199,232 and does
not have sufficient working capital to fund its planned operations
during the next twelve months. Although sufficient funds are available
to meet general and administrative expenses and capital costs
associated with existing oil and gas properties for 1998, additional
funding will be required to complete the Company's planned drilling
program and put successful wells into production. These circumstances
raise substantial doubt about the Company's ability to continue as a
going concern. In order to meet the Company's continuing financing
needs, management of the Company intends to raise working capital
through the sale of common stock or other securities, or through other
financings.
The Company's financial statements do not include any adjustments
related to the realization of the carrying value of assets or the
amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
The ability of the Company to continue operations as a going concern is
dependent upon its success in obtaining capital through sale of common
stock or other securities and ultimately achieving profitable
operations.
NEW TECHNICAL PRONOUNCEMENTS
In February 1997 SFAS No. 129, "Disclosure of Information about Capital
Structure" was issued effective for periods ending after December 15,
1997. The Company has adopted the disclosure provisions of SFAS No. 129
effective with the fiscal year ended December 31, 1997.
In June 1997 SFAS No. 130, "Reporting Comprehensive Income" was issued
effective for fiscal years beginning after December 31, 1997, with
F - 12
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earlier application permitted. The Company has elected to adopt SFAS
No. 130 effective with the fiscal year ended December 31, 1998.
Adoption of SFAS No. 130 is not expected to have a material impact on
the Company's financial statements.
In June 1997 SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" was issued effective for fiscal years
beginning after December 31, 1997, with earlier application permitted.
The Company has elected to adopt SFAS No. 131 effective with the fiscal
year ended December 31, 1998. Adoption of SFAS No. 131 is not expected
to have a material impact on the Company's financial statements.
NOTE 3 - OIL AND GAS PROPERTIES
In 1997 the Company acquired a 25% undivided working interest in two
natural gas exploration and development prospects located in the
southern part of the Sacramento Basin in California. The Company paid
$907,951 in cash and issued 2,250,000 shares of common stock, valued at
$300,000 ($.133 per share), for the properties. The total value of cash
paid and stock issued approximates the transferor's historical basis in
the property of $1,207,951. As additional consideration, the Company
agreed to issue 500,000 additional restricted shares to the transferor
if the gross revenue received by the Company from the prospects is at
least equal to all direct costs of the Company associated with
acquiring the interest in the prospects and drilling and other related
expenses by December 31, 1999. The Company paid to the transferor
interest in the amount of $6,247 (8% per annum) for funds advanced by
the transferor on the property from the date of the acquisition
agreement (August 27, 1997) to the closing of the agreement (November
11, 1997). Concurrently with the closing, the transferor became a
director and officer of the Company.
The Company may be subject to various possible contingencies which are
primarily from interpretations of federal and state laws and
regulations affecting the oil and gas industry. Although management
believes it has complied with the various laws and regulations, new
rulings and interpretations may require the Company to make
adjustments.
F - 13
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 4 - STOCKHOLDERS' EQUITY
COMMON STOCK
In 1996 the Company issued 636,700 shares of common stock, valued at
$6,367 ($.01 per share), to a former officer/director of the Company in
satisfaction of an obligation owed for Company expenses previously
advanced.
In 1997, the Company completed the sale of common stock and warrants
pursuant to a private placements as follows:
o 2,500,000 units, at a price of $.20 per unit, consisting of
2,500,000 shares of common stock and warrants to purchase
2,500,000 shares of common stock at an exercise price of $.20 per
share before June 2, 1998. Proceeds to the Company were $500,000,
before costs of the offering of $430.
o 2,000,000 units, at a price of $.50 per unit, consisting of
2,000,000 shares of common stock and warrants to purchase
1,000,000 shares of common stock at an exercise price of $.60 per
share before October 31, 1998. Proceeds to the Company were
$1,000,000 before costs of the offering of $52,439.
In 1997 the Company issued shares of common stock for non-cash
consideration, as follows:
o 250,000 shares for services, of which 150,000 shares are to
officers and directors, valued at $50,000 ($.20 per share).
o 2,250,000 shares to an officer/director as partial compensation
for the acquisition of oil and gas prospects, valued at $300,000
($.133 per share).
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE
At December 31, 1997 the Company's accumulated deficit is comprised of
the following:
Accumulated deficit prior to development stage
(through December 31, 1996) $(504,648)
Deficit accumulated during the development stage
(January 1 to December 31, 1997) (199,232)
----------
$(703,880)
F - 14
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
In 1997 the Company issued warrants to purchase 180,000 shares of
common stock at an exercise price of $.50 per share through October 31,
1998 as partial consideration for a finders fee in conjunction with the
private placement sale of $.50 units described above. The warrants are
valued at $4,545, using the Black-Scholes option pricing model.
At December 31, 1997 the status of outstanding warrants is as follows:
Issue Shares Exercise Expiration
Date Exercisable Price Date
June 3, 1997 2,500,000 $.20 June 2, 1998
October 31, 1997 1,000,000 $.60 October 31, 1998
October 31, 1997 180,000 $.50 October 31, 1998
The per share weighted-average grant date fair value and per share
weighted average exercise price of warrants granted during 1997 are
$.01 and $.32, respectively.
STOCK OPTION PLAN
In July 1997 the Company adopted its 1997 Statutory and Nonstatutory
Incentive Stock Option Plan (the Plan) allowing for the issuance of
incentive stock options and nonstatutory stock options to purchase an
aggregate 1,000,000 shares of common stock to directors, officers,
employees and consultants of the Company. The Plan is administered by
the Board of Directors.
The Plan provides that incentive stock options be granted at an
exercise price equal to the fair market value of the common shares of
the Company on the date of the grant and must be at least 110% of fair
market value when granted to a 10% or more shareholder. The term of all
stock options granted under the Plan may not exceed ten years, and no
later than three months after termination of employment, except the
term of incentive stock options granted to a 10% or more shareholder
which may not exceed five years.
F - 15
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1997 the status of outstanding options granted pursuant
to the Plan was as follows:
<TABLE>
<CAPTION>
Unvested
Grant Options Options Options Exercise
Date Granted Vested Outstanding Price
<S> <C> <C> <C> <C> <C>
Officer/Director Jul. 2, 1997 130,000 - 130,000 $.20-.22
Officers/Directors Oct. 30, 1997 670,000 670,000 - .35
Other Oct. 30, 1997 10,000 10,000 - .35
------- ------- ---
810,000 680,000 130,000
======= ======= =======
</TABLE>
The weighted average contractual life of options outstanding at
December 31, 1997 was 9.4 years.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant date consistent with
the provisions of SFAS No. 123, the Company's net loss and loss per
share for 1997 would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
<S> <C>
Net (loss) applicable to common stockholders - as reported $(199,232)
========
Net (loss) applicable to common stockholders - pro forma (254,950)
========
(Loss) per share - as reported (.03)
========
(Loss) per share - pro forma (.03)
========
Weighted average fair value of options granted in 1997 .20
========
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants: dividend yield of 0%;
expected volatility of 0%; discount rate of 5.50%; and expected lives
of 5 years.
At December 31, 1997 the number of options exercisable was 680,000 and
the weighted average exercise price of these options was $.35.
The Company has recognized as compensation expense $100,500 for 670,000
options issued October 30, 1997 to Officers/Directors, pursuant to APB
No. 25, and $2,332 for 10,000 options issued to non-employees, pursuant
to SFAS No. 123. Those options were issued at an exercise price of $.15
per share less than the then private placement cost of common stock.
F - 16
<PAGE>
FAN ENERGY INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997
NOTE 4 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK SPLIT
Effective January 1, 1997 the Company effected a 10-into-1 reverse
stock split. The Company did not change the authorized number of common
shares or par value of the common stock. All information in these notes
and the accompanying financial statements gives retroactive effect to
the 10-into-1 reverse stock split.
NOTE 5 - RELATED PARTY TRANSACTIONS
In 1997 the Company paid an aggregate $10,000 to entities controlled by
Officers/Directors of the Company for office space and administrative
services in Scottsdale, Arizona ($8,000) and Denver, Colorado ($2,000),
at the rate of $2,000 per month.
In November 1997 the Company entered into a one year agreement with its
Secretary/Treasurer to provide financial and other services to the
Company for $2,500 per month. During 1997 the Company paid the
Secretary/Treasurer $10,027 for services provided and issued 50,000
shares of common stock, valued at $10,000 ($.20 per share).
NOTE 6 - COMMITMENTS
In November 1997 the Company's Board of Director's approved the
issuance of an aggregate 215,000 shares of common stock to officers and
directors of the Company for services to be performed through June 30,
1998, at a deemed value of $.50 per share.
NOTE 7 - PROPOSED STOCK OFFERING
In November 1997, the Company's Board of Directors approved the filing
of a Registration Statement on Form SB-2 with the Securities and
Exchange Commission relating to an initial public offering of a minimum
300,000 shares and a maximum 3,000,000 shares of the Company's common
stock at a price of $1.00 per share, on a "best efforts" basis by the
officers and directors of the Company.
F - 17
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article ELEVENTH of the Registrant's Restated Articles of Incorporation
provides that no director or officer of the Registrant shall be personally
liable to the Registrant or any of its stockholders for damages for breach of
fiduciary duty as a director or officer, except that such provision will not
eliminate or limit the liability of a director or officer for any act or
omission which involves intentional misconduct, fraud or a knowing violation of
law or for the payment of any dividend in violation of Section 78.300 of the
Nevada Revised Statutes.
Section 78.751 of the Nevada Revised Statutes permits the Registrant to
indemnify its directors, officers, employees and agents if such person 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, has no reasonable cause to believe his conduct was
unlawful.
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, the
corporation must provide indemnification against expenses, including attorneys'
fees, actually and reasonably incurred by him in connection with the defense.
Article TWELFTH of the Registrant's Restated Articles of Incorporation
provides as follows:
TWELFTH: The corporation shall, to the fullest extent
permitted by Nevada law as in effect from time to time, indemnify
any person against all liability and expense (including
attorneys' fees) incurred by reason of the fact that he is or was
a director or officer of the corporation or, while serving as a
director or officer of the corporation, he is or was serving at
the request of the corporation as a director, officer, partner or
trustee of, or in any similar managerial or fiduciary position
of, or as an employee or agent of, another corporation,
partnership, joint venture, trust, association, or other entity.
Expenses (including attorneys' fees) incurred in defending an
action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or
proceeding to the fullest extent and under the circumstances
permitted by Nevada law. The corporation may purchase and
maintain insurance on behalf of any person who is or was a
director, officer, employee, fiduciary or agent of the
corporation against any liability asserted against and incurred
by such person in any such capacity or arising out of such
person;'s position, whether or not the corporation would have the
power to indemnify against such liability under the provisions of
this Section TWELFTH. The indemnification provided by this
Section TWELFTH shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under these Articles
of Incorporation, any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise, and shall inure to the
benefit of their heirs, executors and administrators. The
provisions of this Section TWELFTH shall not be deemed to
preclude the corporation from indemnifying other persons from
similar or other expenses and liabilities as the Board of
Directors or the stockholders may determine in a specific
instance or by resolution of general application.
Article VI, Section 1 of the Registrant's Bylaws provides that the
Registrant shall provide indemnification to Registrant's officers, directors and
employees to the fullest extent permitted under the Nevada General Corporation
Law.
Item 25. Other Expenses of Issuance and Distribution.
Expenses (none of which will be paid or reimbursed by the Selling
Shareholders to the Registrant) payable in connection with the issuance and
distribution of the securities being registered hereby are as follows:
II-1
<PAGE>
Securities and Exchange Commission Registration Fee.......... $ 2,561*
Accounting Fees and Expenses................................. 7,500*
Legal Fees and Expenses...................................... 15,000*
Printing, Freight and Engraving.............................. 2,500*
Miscellaneous................................................ 1,438*
-----
Total................................................. $29,000*
- ----------------------
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
The following is information with respect to all unregistered securities
sold by the Registrant within the past three years:
(a) On December 15, 1996 the Registrant issued 636,700 shares of Common
Stock, valued at $6,367 to an officer and director of the Registrant in
satisfaction of an obligation owed by the Registrant to the officer for expenses
of $6,367 advanced on behalf of the Registrant by such person. The issuance of
the shares was exempt from registration under Section 4(2) of the Securities
Act, as the person to whom the shares were issued, the President and a director
of the Registrant, had full knowledge of the business and affairs of the
Registrant, certificates representing the shares were marked with a restrictive
legend and the shares were taken for investment.
(b) On June 2, 1997 the Registrant issued 2,500,000 shares of its Common
Stock and 2,500,000 stock purchase warrants to eight non-U.S. citizens for
$500,000 in a private transaction. Each of the warrants entitles the holder to
purchase one additional share of Common Stock of the Registrant at an exercise
price of $0.20 per share on or before June 2, 1998. No underwriter was involved
in the transaction and there were no underwriting discounts or commissions. The
issuance of the securities was exempt from registration under Rule 504 adopted
under Regulation D of the Securities Act. Form D was filed by the Registrant.
(c) On August 29, 1997 the Registrant issued 2,250,000 shares of its Common
Stock to George H. Fancher Jr. in connection with the acquisition by the
Registrant of oil and gas properties. Upon issuance of the shares, certificates
representing the shares were delivered to an escrow agent pending completion of
the acquisition trans action. The acquisition transaction was completed on or
about November 11, 1997 at which time the shares were delivered to Mr. Fancher.
In the transaction, the Registrant received an assignment of Mr. Fancher's
undivided interest in two natural gas exploration and development prospects
located in the southern part of the Sacramento Basin in California. The
Registrant paid $907,951 in cash and issued the 2,250,000 shares of Common
Stock, valued at $300,000, for the properties. The total of the cash and the
stock is intended to be equal to Mr. Fancher's cost in acquiring and developing
the property prior to transfer to the Registrant. No underwriter was involved in
the transaction. The issuance of the securities to Mr. Fancher was exempt under
Section 4(2) of the Securities Act. Mr. Fancher acquired the securities for
investment, certificates representing the securities were marked with a
restrictive legend and stop transfer instructions were placed with the
Registrant's stock transfer agent.
(d) On September 15, 1997 the Registrant issued 250,000 shares of its
Common Stock to six persons for services valued at $50,000. The services
provided by two persons who are directors of the Registrant, one person who is
an officer, one person who provided office and administrative services and two
persons who are consultants. No underwriter was involved in the transactions.
The issuance of the securities was exempt from registration pursuant to Section
4(2) of the Securities Act. Each of the persons to whom the shares were issued
had full knowledge about the business and affairs of the Registrant, each agreed
to take the shares issued for investment purposes, the certificates representing
the securities each bear a restrictive legend and stop transfer instructions
were entered with the Registrant's stock transfer agent.
(e) On October 31, 1997 the Registrant issued 2,000,000 shares of its
Common Stock and warrants to purchase 1,000,000 shares of Common Stock to 10
non-U.S. citizens for $1,000,000. Each of the warrants entitles the holder to
purchase one additional share of Common Stock at an exercise price of $0.60 per
II-2
<PAGE>
share on or before October 31, 1998. The Registrant issued cash finder's fees
totaling $45,000 and issued warrants entitling the holders to purchase up to
180,000 shares of Common Stock at $0.50 per share to three nonaffiliated,
non-U.S. citizen finders in connection with the transaction. The Registrant's
President, William E. Grafham, participated in the private placement and
purchased 200,000 shares and 100,000 warrants for $100,000. The issuance of the
securities was exempt from registration pursuant to Regulation S adopted under
the Securities Act. Each of the purchasers agreed that no sale of any of the
securities would be made to any U.S. Person, as defined in Regulation S, except
in compliance with the Securities Act.
Item 27. Exhibits.
The following is a list of all exhibits filed as part of this Registration
Statement.
Exhibit No. Description and Method of Filing
---------- --------------------------------
(3.1) Restated Articles of Incorporation of Eastern Star Mining, Inc.,
as filed with the Nevada Secretary of State February 7, 1997.
(3.2) Certificate of Amendment of Articles of Incorporation of Eastern
Star Mining, Inc., as filed with the Nevada Secretary of State
May 19, 1997.
(3.3) Certificate of Amendment of Articles of Incorporation of Eastern
Star Mining, Inc., as filed with the Nevada Secretary of State
May 28, 1997.
(3.4) Certificate of Amendment of Articles of Incorporation of Eastern
Star Holdings, Inc., as filed with the Nevada Secretary of State
December 10, 1997.
(3.5) Bylaws of Registrant adopted December 31, 1997.
(5.1) Opinion dated March 6, 1998, of Alan W. Peryam, LLC regarding
legality of the securities being registered.
(10.1) Letter Agreement dated August 27, 1997 between Registrant and
George H. Fancher Jr. d/b/a Fancher Oil Company.
(10.2) Assignment and Assumption Agreement dated August 29, 1997
between Registrant and George H. Fancher Jr.
(10.3) Agreement With Arizona Corporate Management, Inc. dated November
1, 1998.
(10.4) 1997 Incentive and Nonstatutory Stock Option Plan.
(10.5) Letter regarding conflicts of interest dated March 6, 1998
between Registrant and George H. Fancher Jr.
(23.1) Consent of Wheeler Wasoff, P.C., Independent Certified Public
Accountants.
(23.2) Consent of Darrell Schvanveldt, Certified Public Accountant.
(23.3) Consent dated March 6, 1998 of Alan W. Peryam, LLC
(24) Power of Attorney.
(27) Financial Data Schedule.
(28) Form of Fund Escrow Agreement.*
---------------------
* To be filed by amendment.
II-3
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(iii)Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its legal counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City and County
of Denver, State of Colorado on March 10, 1998.
FAN ENERGY INC.
By /s/ William E. Grafham
-----------------------------------------------
William E. Grafham, Chief Executive Officer
By /s/ Rex L. Utsler
-----------------------------------------------
Rex L. Utsler, Director
By /s/ Albert A. Golusinh
-----------------------------------------------
Albert A. Golusin, Principal Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:
Signature Title Date
- --------- ----- ----
/s/ Willaim E. Grafham Director March 10, 1998
- ----------------------------------------
William E. Grafham
/s/ George H. Fancher Jr. Director March 10, 1998
- ----------------------------------------
George H. Fancher Jr.
/s/ Jeffrey J. Scott Director March 10, 1998
- ----------------------------------------
Jeffrey J. Scott
/s/ Rex L. Utsler Director March 10, 1998
- ---------------------------------------
Rex L. Utsler, Director
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page No.
------ ----------- -------
<S> <C> <C>
(3.1) Restated Articles of Incorporation of Eastern Star Mining, Inc.,
as filed with the Nevada Secretary of State February 7, 1997.
(3.2) Certificate of Amendment of Articles of Incorporation of Eastern
Star Mining, Inc., as filed with the Nevada Secretary of State
May 19, 1997.
(3.3) Certificate of Amendment of Articles of Incorporation of Eastern
Star Mining, Inc., as filed with the Nevada Secretary of State
May 28, 1997.
(3.4) Certificate of Amendment of Articles of Incorporation of Eastern
Star Holdings, Inc., as filed with the Nevada Secretary of State
December 10, 1997.
(3.5) Bylaws of Registrant adopted December 31, 1997.
(5.1) Opinion dated March 6, 1998, of Alan W. Peryam, LLC regarding
legality of the securities being registered.
(10.1) Letter Agreement dated August 27, 1997 between Registrant and
George H. Fancher Jr. d/b/a Fancher Oil Company.
(10.2) Assignment and Assumption Agreement dated August 29, 1997
between Registrant and George H. Fancher Jr.
(10.3) Agreement With Arizona Corporate Management, Inc. dated November
1, 1998.
(10.4) 1997 Incentive and Nonstatutory Stock Option Plan.
(10.5) Letter regarding conflicts of interest dated March 6, 1998
between Registrant and George H. Fancher Jr.
(10.6) Assignment and Assumption Agreement dated August 29, 1997
between Registrant and George H. Fancher Jr.
(23.1) Consent of Wheeler Wasoff, P.C., Independent Certified Public
Accountants.
(23.2) Consent of Darrell Schvanveldt, Certified Public Accountant.
(23.3) Consent dated March 6, 1998 of Alan W. Peryam, LLC
(24) Power of Attorney.
(27) Financial Data Schedule.
(28) Form of Fund Escrow Agreement.* N/A
</TABLE>
RESTATED ARTICLES OF INCORPORATION
OF
EASTERN STAR MINING, INC.
The undersigned, who are the President and Secretary of Eastern Star
Mining, Inc., a Nevada corporation, in compliance with NRS 78.404, and being
authorized and directed by the Board of Directors of Eastern Star Mining, Inc.,
hereby certify that:
1. Pursuant to the Articles and Agreement of Merger dated June 23, 1989,
and filed with the Secretary of State of Nevada August 24, 1989, Eastern Star
Mining, Inc., an Idaho corporation, was merged with and into Eastern Star
Mining, Inc., a Nevada corporation. Immediately prior to the time of the merger
there were 1,349,819 common shares of Eastern Star Mining, Inc., an Idaho
corporation, and one share of Eastern Star Mining, Inc., a Nevada corporation
outstanding, notwithstanding that the Articles of Agreement of Merger mistakenly
recited that 1,349,819 common shares of the Nevada corporation were issued and
outstanding prior to the merger.
As a result, the number of shares of outstanding common stock of Eastern
Star Mining, Inc., the surviving corporation in the merger, was incorrectly
stated in the Articles and Agreement of Merger. At and subsequent to the
effective date of the merger between Eastern Star Mining, Inc. (an Idaho
corporation) and Eastern Star Mining, Inc. (a Nevada corporation), which was the
surviving corporation following the merger, there were 1,349,819 shares of
common stock, par value $0.001 of the surviving corporation issued and
outstanding.
2. Effective November 5, 1996 resolutions were adopted by unanimous written
consent of the Board of Directors declaring the advisability and desirability of
amending and restating the Articles of Incorporation of Eastern Star Mining,
Inc., and calling a special meeting of the shareholders for the consideration
thereof to-wit:
RESOLVED, that, subject to the ratification and approval of the
shareholders of Eastern Star Mining, Inc., the Articles of
Incorporation shall be amended and restated as permitted by NRS
78.385.1(e) and 78.403 to read, as so amended and restated, as set
forth below.
3. Pursuant to NRS 78.320.1, a formal meeting of the shareholders of
Eastern Star Mining, Inc. was not called or noticed, but written consent of
shareholders holding at least a majority of the voting power of the corporation
was secured to take effect as of November 11, 1996, approving, by resolution,
the action of the Board of Directors in amending and restating the Articles of
Incorporation to read as so amended and restated as follows:
FIRST; The name of the corporation is Eastern Star Mining, Inc.
SECOND: The registered agent for the corporation and the location of the
principal office of this corporation within the state of Nevada is Marilyn K.
Radloff, 115 Taurus Circle, Reno, Nevada, 89511.
<PAGE>
THIRD: The corporation shall have unlimited power to engage in and to do
any lawful act concerning any or all lawful businesses for which corporations
may be organized under the General Corporation Law of Nevada.
FOURTH: The aggregate number of shares which the corporation shall have
authority to issue is 100,000,000, of which 95,000,000 shares shall be common
stock, $0.001 par value ("Common Stock") and 5,000,000 shares shall be preferred
stock, $0.01 par value ("Preferred Stock"). the designations, preference,
limitations and relative rights of shares of each class of stock are as follows:
1. Common Stock. The rights of holders of Common Stock to receive dividends
or to share in the distribution of assets in the event of liquidation,
dissolution or winding up of the affairs of the corporation shall be subject to
the preferences, limitations and relative rights of the holders of Preferred
Stock. The holders of the Common Stock shall be entitled to one vote for each
share of Common Stock held by them of record at the time for determining the
holders thereof entitled to vote.
2. Preferred Stock. The corporation may issue the Preferred Stock from time
to time in one or more series with such distinctive designations, rights,
preferences and limitations as the Board of Directors shall determine. The Board
of Directors hereby is expressly vested with the authority to fix and determine
the relative rights and preferences of each such series of Preferred Stock to
the full extent permitted by these Articles of Incorporation and the General
Corporation Law of Nevada in respect to the following:
(a) The rate of dividend, if any, the time of payment of dividends,
when the dividends are cumulative, and the date from which any dividends shall
accrue;
(b) Whether shares may be redeemed and if so, the redemption price and
the terms and conditions of redemption;
(c) The amount payable upon shares in event of either voluntary or
involuntary liquidation;
(d) Sinking fund or other provisions, if any, for the redemption or
purchase of shares;
(e) The terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion; and
(f) Voting powers, if any.
Notwithstanding the fixing of the number of shares constituting the particular
series upon the issuance thereof, the Board of Directors may at any time
thereafter authorize the issuance of additional shares of the same series or may
reduce the number of shares constituting such series.
- 2 -
<PAGE>
The Board of Directors expressly is authorized to vary the provisions
relating to the foregoing matters between the various series of Preferred Stock,
but in all other respects the shares of each series shall be of equal rank with
each other, regardless of series. All Preferred Stock in any one series shall be
identical in all respects.
FIFTH: The members of the governing board shall be styled "directors." The
names and addresses of the persons who serve as directors until their successors
are duly elected and shall qualify are:
Name Address
- ---- -------
Jean P. Boyd..................................... 265 Kern Avenue
Morro Bay, California 93442
Cindy Mendez..................................... 4526 North Laureen
Fresno, California 93726
Dan Reddell...................................... 2541 Nutmeg Avenue
Morro Bay, California 93441
The number of directors servicing on the Board of Directors at any one time
shall be not less than three nor more than nine, the exact number to be set by
the Bylaws.
SIXTH: The capital stock of this corporation shall not be subject to
assessment to pay the debts of the corporation, and, in this particular, these
Articles of Incorporation shall not be subject to amendment; provided, however,
that nothing contained in this Article SIXTH shall prohibit the subscription for
shares of the Company's capital stock from being paid in full at such time or in
such installments as determined by the Board of Directors of the corporation.
SEVENTH: The corporation shall have perpetual existence.
EIGHTH: No holder of shares of stock of any class of the corporation,
whether now or hereafter authorized, shall have the preemptive right to
purchase, receive or subscribe for any of the unissued stock of the corporation,
or for any stock of the corporation hereafter authorized to be issued, or for
bonds, debentures, or other securities convertible into stock of any class of
the corporation, or for stock held in the treasury of the corporation; and all
such unissued and additional shares of stock, bonds, debentures, or other
securities convertible into stock of any class of the corporation as well as
stock held in the treasury of the corporation, however, the same may be
acquired, may be issued and disposed of by the Board of Directors to such person
or persons and on such terms and for such consideration (so far as may be
permitted by law) as the Board of Directors in their absolute discretion may
deem advisable.
NINTH: Cumulative voting in the election of directors is not permitted. A
majority of the outstanding shares of the corporation entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
stockholders.
- 3 -
<PAGE>
ELEVENTH: No director or officer of the corporation shall be personally
liable to the corporation or any of its stockholders for damages for breach of
fiduciary duty as a director o officer, except that such provisions will not
eliminate or limit the liability of a director or officer for any act or
omission which involves intentional misconduct, fraud, or a knowing violation of
law or for the payment of any dividend in violation of Section 78.300 of the
Nevada Revised Statutes.
TWELFTH: The corporation shall, to the fullest extent permitted by Nevada
law as in effect from time to time, indemnify any person against all liability
and expense (including attorneys' fees) incurred by reason of the fact that he
is or was a director or officer of the corporation or, while serving as a
director or officer of the corporation, he is or was serving at the request of
the corporation as a director, officer, partner or trustee of, or in any similar
managerial or fiduciary position of, or as an employee or agent of, another
corporation, partnership, joint venture, trust, association, or other entity.
Expenses (including attorneys' fees) incurred in defending an action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding to the fullest extent and under the
circumstances permitted by Nevada law. The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee,
fiduciary or agent of the corporation against any liability asserted against and
incurred by such person in any such capacity or arising out of such person;'s
position, whether or not the corporation would have the power to indemnify
against such liability under the provisions of this Section TWELFTH. The
indemnification provided by this Section TWELFTH shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under these
Articles of Incorporation, any bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise, and shall inure to the benefit of their
heirs, executors and administrators. The provisions of this Section TWELFTH
shall not be deemed to preclude the corporation from indemnifying other persons
from similar or other expenses and liabilities as the Board of Directors or the
stockholders may determine in a specific instance or by resolution of general
application.
THIRTEENTH: The directors of this corporation shall be subject to the
doctrine of corporate opportunities only insofar as it applies to business
opportunities which this corporation has expressed an interest as determined
from time to time by the corporation's Board of Directors as evidenced by
resolutions appearing in the corporation's minutes. When such areas of interest
are delineated, all such business opportunities within such areas of interest
which come to the attention of the directors of this corporation shall be
disclosed promptly to this corporation and made available to it. The Board of
Directors may reject any business opportunity presented to it for any valid
business reasons and thereafter any officer or director may avail himself
(herself) of such opportunity. Until such time as this corporation shall be free
- 4 -
<PAGE>
to engage in such areas of interest on their own and this doctrine shall not
limit the rights of any director of this corporation to continue a business
existing prior to the time that such area of interest is designated by this
corporation. This provision shall not be construed to release any employee of
the corporation from any duties which he may have as an employee to the
corporation.
FOURTEENTH: No contract or other transaction between the corporation and
one or more of its directors or officers, or between the corporation and any
corporation, firm or association in which one or more of its directors or
officers are directors or officers or are financially interested, shall be
either void or voidable solely due to such financial interest or association or
solely because any such director or officer is present at the meeting of the
Board of Directors or a committee thereof which authorizes or approves the
contract or transaction, or because the vote or votes of common or interested
directors are counted for such purpose, so long as either (i) the fact of the
common directorship or financial interest is disclosed or known to the
corporation's Board of Directors or committee and noted in the Minutes and the
Board or committee authorizes, approves, or ratifies the contract or transaction
in good faith by a vote sufficient for the purpose without counting the vote or
votes of such director or directors; (ii) the fact of the common directorship or
financial interest is disclosed or known to the stockholders, and they approve
or ratify the contract or transaction in good faith by a majority vote or
written consent of the stockholders holding a majority of the shares entitled to
vote and the votes of the common or interested directors or officers shall be
counted in any such vote of the stockholders; or (iii) the contract or
transaction is fair as to the corporation at the time it is authorized or
approved. The common or interested directors maybe counted in determining the
presence of a quorum at a meeting of the Board of Directors or a committee
thereof which authorizes, approves, or ratifies a contract or transaction, and
if the vote of the common or interest directors is not counted at such meeting,
then a majority of the disinterested directors may authorize, approve or ratify
a contract or transaction.
FIFTEENTH: Nothing contained in these Articles of Incorporation shall
prohibit the corporation from declaring and paying dividends on its outstanding
common or preferred stock in assets other than cash, including the corporation's
common or preferred stock, so long as such dividends are paid out of the excess
of its assets over liabilities, including capital, or if no excess, out of its
net profits for the fiscal year then current and the preceding fiscal year, or
out of its net profits for the preceding fiscal year, but not otherwise, in
accordance with the provisions of the General Corporation Law of Nevada.
SIXTEENTH: The directors of this corporation are authorized to adopt,
confirm, ratify, alter, amend, rescind, and repeal Bylaws or any portion thereof
from time to time.
4. The foregoing resolutions adopting the Restated Articles of
Incorporation are true, correct, and exact copies of the resolutions adopted
effective November 5, 1996 and November 11, 1996; and they are currently in full
force and effect and have not been altered, amended, modified, rescinded, or
revoked.
- 5 -
<PAGE>
IN WITNESS WHEREOF, the undersigned President and Secretary of Eastern Star
Mining, Inc. have executed this Restated Articles of Incorporation this 6th day
of January, 1997.
EASTERN STAR MINING, INC.
By /s/ Jean P. Boyd
--------------------------------------
Jean P. Boyd, President
By /s/ Dan Reddell
---------------------------------------
Dan Reddell, Secretary
STATE OF CALIFORNIA )
) ss.
COUNTY OF SAN LUIS OBISPO )
On 1/6/97, before me, Cheryl Snyder-Horne, personally appeared Jean P. Boyd
and Dan Reddell, personally known to me to be the person(s) whose name(s) are
subscribed to the within instrument and acknowledged to me that they executed
the same in their authorized capacity(ies), and that by their signature(s) on
the instrument the person(s) or the entity upon behalf of which the person(s)
acted, executed the instrument.
WITNESS my hand and official seal.
(S E A L) /s/ Cheryl Snyder-Horne
-----------------------------------
Notary Public--California
San Luis Obispo County
My commission expires July 21, 1998
- 6 -
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
EASTERN STAR MINING, INC.
We, the undersigned, Alan W. Peryam, President and James H. Petersen,
Secretary of Eastern Star Mining, Inc., do hereby certify:
That the Board of Directors of said corporation at a meeting duly
convened and held pursuant unanimous written consent as of the 21st day of
March, 1997, adopted a resolution to amend the Articles of Incorporation as
follows:
Article FOURTH is hereby amended to read as follows;
FOURTH: Effective upon filing of this Certificate of Amendment of
Articles of Incorporation with the Secretary of State of Nevada, a reverse
stock split of outstanding stock of the Company is adopted pursuant to
which each share of common stock outstanding prior to the effective date
shall thereafter equal one-tenth of one share of common stock, thus
effecting a ten-into-one reverse stock split. Any fractional share of
common stock which would be held by a stockholder as a result of the
reverse stock split shall be rounded up to the next largest whole number of
shares of common stock as of the effective date of the reverse stock split.
The reverse stock split shall reduce the number of outstanding shares of
common stock from 7,717,019 shares outstanding immediately before the
reverse stock split to 771,702 shares outstanding immediately after the
reverse stock split. Certificates representing shares of the Company's
Common Stock outstanding immediately prior to the reverse stock split shall
thereafter represent one-tenth the number of shares reflected on the share
certificate.
All other terms and provisions set forth in Article FOURTH of the
Articles of Incorporation as heretofore restated shall remain in full force
and effect.
All other terms and provisions set forth in Article FOURTH of the
Article of the Articles of Incorporation as heretofore restated shall
remain in full force and effect.
The number of shares of the Corporation outstanding and entitled to vote on
the Amendment to the Articles of Incorporation is 7,717,019 shares of common
stock and that the said Amendment to the Articles of Incorporation have been
consented to and approved by a majority vote of the stockholders holding at
least a majority of each class of stock of Corporation outstanding and entitled
to vote thereon.
/s/ Alan W. Peryam
-------------------------------------
Alan W. Peryam, President
/s/ James H. Petersen
-------------------------------------
James H. Petersen, Secretary
STATE OF COLORADO )
CITY AND ) ss.
COUNTY OF DENVER )
On March 31, 1997, personally appeared before me, a Notary Public, Alan W.
Peryam and James H. Petersen, who acknowledged that they executed the above
instrument on behalf of Eastern Star Mining, Inc., and that the facts stated
therein are true.
My commission expires: 2/27/00
/s/ Bobbie L. Knight
-------------------------------------
Notary Public
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
EASTERN STAR MINING, INC.
We the undersigned, Alan W. Peryam, President, and James H. Petersen,
Secretary, of Eastern Star Mining, Inc., do hereby certify:
That the Board of Directors of said corporation at a meeting duly convened
and held by written consent effective on the 9th day of May, 1997, adopted a
resolution to amend the Restated Articles of Incorporation as heretofore
amended, to change the name of the corporation, as follows:
Article FIRST is hereby amended to read in its entirety as follows:
FIRST: The name of the corporation is Eastern Star Holdings, Inc.
The number of shares of the corporation outstanding and entitled to vote on
the Amendment to the Articles of Incorporation is 771,702; that the said change
in the name of the corporation and the Amendment to the Articles of
Incorporation have been consented to and approved by the unanimous written
consent of stockholders holding at least a majority of each class of stock of
the corporation outstanding and entitled to vote thereof.
/s/ Alan W. Peryam
--------------------------------------
Alan W. Peryam
/s/ James H. Petersen
--------------------------------------
James H. Petersen
STATE OF COLORADO )
CITY AND ) ss.
COUNTY OF DENVER )
On May 22, 1997, personally appeared before me, a notary public, Alan W.
Peryam and James H. Petersen, who acknowledged that they executed the above
Certificate of Amendment to the Articles of Incorporation and that the facts
stated therein are true.
My commission expires: 2/27/00
/s/ Bobbie L. Knight
--------------------------------------
Notary Public
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
EASTERN STAR HOLDINGS, INC.
We the undersigned, William E. Grahfam, President and Albert Golusin,
Secretary, of Eastern Star Holdings, Inc., do hereby certify:
That the Board of Directors of said corporation at a meeting duly convened
and held by unanimous written consent effective on the November 21, 1997,
adopted a resolution to amend the Restated Articles of Incorporation as
heretofore amended, to change the name of the corporation, as follows:
Article FIRST is hereby amended to read in its entirety as follows:
FIRST: The name of the corporation is Fan Energy Inc.
The number of shares of the corporation outstanding and entitled to vote on
the Amendment to the Articles of Incorporation is 7,771,704; that the said
change in the name of the corporation and the Amendment to the Articles of
Incorporation have been consented to and approved by the written consent of
stockholders holding at least a majority of each class of stock of the
corporation outstanding and entitled to vote thereon.
/s/ William E. Grafham
---------------------------------------
William E. Grafham
/s/ Albert Golusin
---------------------------------------
Albert Golusin
STATE OF ARIZONA )
) ss.
COUNTY OF MARICOPA )
On November 30, 1997, personally appeared before me, a notary public,
William E. Grafham and Albert Golusin, who acknowledged that they executed the
above Certificate of Amendment to the Articles of Incorporation and that the
facts stated therein are true.
My commission expires: 6/13/2001
/s/ Susan D. Bower
---------------------------------------
Notary Public-State of Arizona
Maricopa County
BYLAWS
OF
FAN ENERGY INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the corporation in the
state of Nevada shall be located at Reno, Nevada or at such other location as
shall be designated by the Board of Directors from time to time in the future.
The corporation may have such other offices, either within or without the state
of Nevada, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
Section 2. Registered Office. The registered office of the corporation may
be, but need not be, identical with the principal office, and the address of the
registered office may be changed from time to time by the board of directors.
Section 3. Other Offices. The corporation may have such other offices,
either within or outside Nevada, as the board of directors may designate or as
the business of the corporation may require from time to time.
ARTICLE II
Stockholders
Section 1. Annual Meetings. Unless otherwise directed and fixed by the
Board of Directors, the annual meeting of the stockholders shall be held during
the second fiscal quarter of each year at such time and place as the Chairman,
Chief Executive Officer, President, Vice President or Secretary shall designate,
for the purpose of electing directors and for the transaction of such other
business as may come before the meeting.
Section 2. Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute, may be called by
the Chairman, Chief Executive Officer, President or by the Board of Directors,
and shall be called by the President at the request of the holders of not less
than one-third of all of the outstanding shares of the corporation entitled to
vote at the meeting.
Section 3. Place of Meeting. The Board of Directors may designate any
place, either within or without the state of Nevada, as the place of meeting for
any annual meeting or for any special meeting called by the Board of Directors.
A waiver of notice signed by all stockholders entitled to vote at a meeting may
designate any place, either within or without the state of Nevada, as the place
1
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for the holding of such meeting. If no designation is made, or if a special
meeting be otherwise called, the place of meeting shall be the registered office
of the corporation in the state of Nevada.
Section 4. Notice of Meeting. Whenever stockholders are required or
permitted to take any action at a meeting, written notice of the meeting shall
be given stating the place, day and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. The
notice shall be delivered not less than ten days nor more than sixty days before
the date of the meeting, either personally or by mail, by or at the direction of
the Chairman, Chief Executive Officer, President, Vice President or the
Secretary to each stockholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed given as to any stockholder of record, when
deposited in the United States mail, addressed to the stockholder at his address
as it appears on the stock transfer books of the corporation, with postage
thereon prepaid.
When a meeting is adjourned to another time or place, it shall not be
necessary to give any notice of the adjourned meeting if the time and place to
which the meeting is adjourned are announced at the meeting at which the
adjournment is taken except as provided by the General Corporation Law of
Nevada, and at the adjourned meeting any business may be transacted that might
have been transacted on the original date of the meeting.
If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 5. Fixing Date for Determination of Stockholders of Record. In
order to determine the stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, 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 change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance a record date, which shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action. If no record date is fixed by the Board of Directors, the record date
shall be determined in accordance with the provision of the General Corporation
Law of Nevada.
Section 6. List of Stockholders. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least 10 days before every
meeting of the stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten days prior to the meeting, either at a place within the city
where the meeting is to be held (which place shall be specified in the notice of
2
<PAGE>
the meeting) or, if not so specified, at the place where said meeting is to be
held, and the list shall be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who may be present. Upon the willful neglect or refusal of the directors to
produce such a list at any meeting for the election of directors, they shall be
ineligible for election to any office at such meeting.
Section 7. Stockholder's Right of Inspection. Any person who has been a
stockholder of record of the corporation for at least six months immediately
preceding his demand, or any person holding, thereunto authorized in writing by
the holders of, at least five percent of all its outstanding shares, upon at
least five days' written demand, or any judgment creditor of the corporation
without prior demand, shall have the right to inspect in person or by agent or
attorney, during usual business hours, the stock ledger or duplicate stock
ledger, whether kept in the principal office of the corporation in this state or
elsewhere, and to make extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a stockholder. In every instance
where an attorney or other agent shall be the person who seeks the right of
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing which authorizes the attorney or the agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in this state or at its principal place of
business.
Section 8. Quorum. A majority of the outstanding shares of the corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. If a quorum is present, the affirmative vote of
the majority of the shares represented at the meeting and entitled to vote on
the subject matter (including, but not limited to, the adoption of an incentive
stock option plan) shall be the act of the stockholders, unless the vote of a
greater proportion or number of voting by classes is required by the General
Corporation Law of Nevada or the Articles of Incorporation. If less than a
majority of the outstanding shares are represented at a meeting, a majority of
the shares so represented may adjourn the meeting from time to time without
further notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 9. Method of Voting. The vote upon any question before the meeting
need not be by ballot. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the Articles of Incorporation a different vote is required in which case such
express provision shall govern and control the decision of such question.
Section 10. Voting Rights of Stockholders and Proxies. Each stockholder of
record entitled to vote in accordance with the laws of the state of Nevada, the
Articles of Incorporation or these Bylaws, shall at every meeting of the
3
<PAGE>
stockholders be entitled to one vote in person or by proxy for each share, or
fraction thereof, of stock entitled to vote standing in his name on the books of
the corporation, but no proxy shall be voted on after six months from its date,
unless the proxy provides for a longer period.
At all meetings of stockholders, a stockholder may vote by proxy by signing
an appointment form or similar writing, either personally or by his duly
authorized attorney-in-fact. A stockholder may also appoint a proxy by
transmitting or authorizing the transmission of a telegram, teletype, or other
electronic transmission providing a written statement of the appointment to the
proxy, a proxy solicitor, proxy support service organization, or other person
duly authorized by the proxy to receive appointments as agent for the proxy, or
to the corporation. The transmitted appointment shall set forth or be
transmitted with written evidence from which it can be determined that the
stockholder transmitted or authorized the transmission of the appointment. The
proxy appointment form or similar writing shall be filed with the secretary of
the corporation before or at the time of the meeting. The appointment of a proxy
is effective when received by the corporation and is valid for eleven months
unless a different period is expressly provided in the appointment form or
similar writing.
Any complete copy, including an electronically transmitted facsimile, of an
appointment of a proxy may be substituted for or used in lieu of the original
appointment for any purpose for which the original appointment could be used.
Revocation of a proxy does not affect the right of the corporation to
accept the proxy's authority unless (i) the corporation had notice that the
appointment was coupled with an interest and notice that such interest is
extinguished is received by the secretary or other officer or agent authorized
to tabulate votes before the proxy exercises his authority under the
appointment, or (ii) other notice of the revocation of the appointment is
received by the secretary or other officer or agent authorized to tabulate votes
before the proxy exercises his authority under the appointment. Other notice of
revocation may, in the discretion of the corporation, be deemed to include the
appearance at a stockholders' meeting of the stockholder who granted the proxy
and his voting in person on any matter subject to a vote at such meeting.
The death or incapacity of the stockholder appointing a proxy does not
affect the right of the corporation to accept the proxy's authority unless
notice of the death or incapacity is received by the secretary or other officer
or agent authorized to tabulate votes before the proxy exercises his authority
under the appointment.
The corporation shall not be required to recognize an appointment made
irrevocable if it has received a writing revoking the appointment signed by the
stockholder (including a stockholder who is a successor to the stockholder who
granted the proxy) either personally or by his attorney-in-fact, notwithstanding
that the revocation may be a breach of an obligation of the stockholder to
another person not to revoke the appointment.
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Subject to Section 16 and any express limitation on the proxy's authority
appearing on the appointment form, the corporation is entitled to accept the
proxy's vote or other action as that of the stockholder making the appointment.
Section 11. Recognition Procedure for Beneficial Owners. The board of
directors may adopt by resolution a procedure whereby a stockholder of the
corporation may certify in writing to the corporation that all or a portion of
the shares registered in the name of such stockholder are held for the account
of a specified person or persons. The resolution may set forth (i) the types of
nominees to which it applies, (ii) the rights or privileges that the corporation
will recognize in a beneficial owner, which may include rights and privileges
other than voting, (iii) the form of certification and the information to be
contained therein, (iv) if the certification is with respect to a record date,
the time within which the certification must be received by the corporation, (v)
the period for which the nominee's use of the procedure is effective, and (vi)
such other provisions with respect to the procedure as the board deems necessary
or desirable. Upon receipt by the corporation of a certificate complying with
the procedure established by the board of directors, the persons specified in
the certification shall be deemed, for the purpose or purposes set forth in the
certification, to be the registered holders of the number of shares specified in
place of the stockholder making the certification.
Section 12. Ownership of its Own Stock. Shares of its own stock belonging
to the corporation or to another corporation, if a majority of the shares
entitled to vote in the election of directors of such other corporation is held,
directly or indirectly, by the corporation, shall neither be entitled to vote
nor counted for quorum purposes. Nothing in this section shall be construed as
limiting the right of the corporation to vote any shares of stock held by it in
a fiduciary capacity.
Section 13. Voting by Fiduciaries and Pledgors. Persons holding stock in a
fiduciary capacity shall be entitled to vote the shares so held, and persons
whose stock is pledged shall be entitled to vote, unless in the transfer by the
pledgor on the books of the corporation he has expressly empowered the pledgee
to vote thereon, in which case only the pledgee, or his proxy, may represent
said stock and vote thereon.
Section 14. No Cumulative Voting. There shall be no cumulative voting of
shares.
Section 15. Informal Action by Stockholders and Ratification. Any action
required to be taken at a meeting of the stockholders, or any other action which
may be taken at a meeting of the stockholders, may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by
stockholders in the manner provided for under the General Corporation Law of
Nevada. If any meeting is irregular due to a lack of notice or written consent,
the proceedings of the meeting may be ratified and approved and rendered valid
and such irregularity or defect waived by a writing signed by all stockholders
having the right to vote at such meeting.
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Section 16. Corporation's Acceptance of Votes. If the name signed on a
vote, consent, waiver, proxy appointment, or proxy appointment revocation
corresponds to the name of a stockholder, the corporation, if acting in good
faith, is entitled to accept the vote, consent, waiver, proxy appointment or
proxy appointment revocation and give it effect as the act of the stockholder.
If the name signed on a vote, consent, waiver, proxy appointment or proxy
appointment revocation does not correspond to the name of a stockholder, the
corporation, if acting in good faith, is nevertheless entitled to accept the
vote, consent, waiver, proxy appointment or proxy appointment revocation and to
give it effect as the act of the stockholder if:
(i) the stockholder is an entity and the name signed purports to be
that of an officer or agent of the entity;
(ii) the name signed purports to be that of an administrator,
executor, guardian or conservator representing the stockholder and, if the
corporation requests, evidence of fiduciary status acceptable to the
corporation has been presented with respect to the vote, consent, waiver,
proxy appointment or proxy appointment revocation;
(iii) the name signed purports to be that of a receiver or trustee in
bankruptcy of the stockholder and, if the corporation requests, evidence of
this status acceptable to the corporation has been presented with respect
to the vote, consent, waiver, proxy appoint ment or proxy appointment
revocation;
(iv) the name signed purports to be that of a pledgee, beneficial
owner or attorney-in-fact of the stockholder and, if the corporation
requests, evidence acceptable to the corporation of the signatory's
authority to sign for the stockholder has been presented with respect to
the vote, consent, waiver, proxy appointment or proxy appointment
revocation;
(v) two or more persons are the stockholder as co-tenants or
fiduciaries and the name signed purports to be the name of at least one of
the co-tenants or fiduciaries, and the person signing appears to be acting
on behalf of all the co-tenants or fiduciaries; or
(vi) the acceptance of the vote, consent, waiver, proxy appointment or
proxy appointment revocation is otherwise proper under rules established by
the corporation that are not inconsistent with this Section 16.
The corporation is entitled to reject a vote, consent, waiver, proxy
appointment or proxy appointment revocation if the secretary or other officer or
agent authorized to tabulate votes, acting in good faith, has reasonable basis
for doubt about the validity of the signature on it or about the signatory's
authority to sign for the stockholder.
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Neither the corporation nor its officers nor any agent who accepts or
rejects a vote, consent, waiver, proxy appointment or proxy appointment
revocation in good faith and in accordance with the standards of this Section is
liable in damages for the consequences of the acceptance or rejection.
Section 17. Meetings by Telecommunication. Any or all of the stockholders
may participate in an annual or special stockholders' meeting by, or the meeting
may be conducted through the use of, any means of communication by which all
persons participating in the meeting may hear each other during the meeting. A
stockholder participating in a meeting by this means is deemed to be present in
person at the meeting.
ARTICLE III
Board of Directors
Section 1. General Powers. The business and affairs of the corporation
shall be managed by its Board of Directors, except as otherwise may be provided
in the Articles. One member of the Board of Directors may be appointed by the
directors to the position of Chairman of the Board. If the position is filled,
the Chairman of the Board, when present, shall preside at all meetings of the
stockholders and of the Board of Directors and shall perform all duties incident
to the office of Chairman of the Board and such other duties as may be
prescribed by the Board of Directors from time to time. The Board of Directors,
by resolution adopted by a majority of the full Board of Directors, may
designate from among its members an executive committee and/or one or more other
committees, each of which shall have the authority provided for in such
resolution subject to the limitations on such authority provided in the General
Corporation Law of Nevada.
Section 2. Number, Tenure and Qualification. A majority of the directors
may adopt a resolution amending this Section 2 to increase or decrease the
number of directors from time to time, but in no event shall there be less than
three (3) or more than nine (9) directors. Each director shall hold office until
the next annual or special meeting of stockholders at which a new Board of
Directors is elected and until his successor shall have been elected and
qualified. Directors need not be residents of Nevada or stockholders of the
corporation.
Section 3. Regular Meetings. A regular meeting of the Board of Directors
shall be held without notice other than this Bylaw immediately after, and at the
same place as, the annual meeting of stockholders. The Board of Directors may
provide, by resolution, the time and place, either within or without Nevada, for
the holding of additional regular meetings without other notice than such
resolution.
Section 4. Special Meetings. Special meetings of the Board of Directors may
be called by or at the request of the Chairman of the Board, or, if a Chairman
of the Board has not been elected, by the President, or, by a majority of the
directors. The person or persons authorized to call special meetings of the
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Board of Directors may fix any place, either within or without the state of
Nevada, as the place for holding any special meeting of the Board of Directors
called by them.
Section 5. Notice. Notice of any special meeting shall be given at least
two days previous thereto by written notice delivered personally or mailed to
each director at his business address, by telegram, or by electronic facsimile
transmission. If mailed, such notice shall be deemed to be delivered when
deposited in the United States Mail so addressed, with postage thereon prepaid.
If notice be given by telegram, such notice shall be deemed to be delivered when
the telegram is delivered to the telegraph company. Any director may waive
notice of any meeting. The attendance of a director at a meeting constitutes a
waiver of notice of such meeting, except in cases in which a director attends a
meeting for the express purposes of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be trans acted at, nor the purpose of, any regular or special meeting of the
Board of Directors need be specified in the notice or waiver of notice of such
meeting.
Section 6. Quorum. A majority of the number of directors fixed by Section 6
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors, but if less than such majority is present at a meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice.
Section 7. Manner of Acting. Unless a greater number of directors are
required under these Bylaws or the corporation's Articles of Incorporation, the
act of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
Section 8. Vacancies and Newly Created Directorships. All vacancies,
including those caused by an increase in the number of directors, may be filled
by a majority of the remaining directors, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until
their successors shall be elected and qualified, or until their earlier
resignation or removal. When one or more directors shall give notice of his or
their resignation to the Board, effective at a future date, the Board shall have
power to fill such vacancy or vacancies to take effect when such resignation or
resignations shall become effective, each director so appointed to hold office
during the remainder of the term of office of the resigning director or
directors.
Section 9. Compensation. By resolution of the Board of Directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors, may be paid a fixed sum for attendance at each meeting
of the Board of Directors or a stated salary as director; and may be paid such
other compensation for serving as a director of the corporation as may be
determined by the Board of Directors. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor.
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Section 10. Presumption of Assent. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
Section 11. Informal Action by Directors. Any action required to be taken
at a meeting of the Board of Directors, or any other action which may be taken
at a meeting of the Board of Directors or any committees thereof, may be taken
without a meeting if a consent in writing, setting forth the action so taken (or
counterparts thereof), shall be signed by all of the directors with respect to
the subject matter thereof.
Section 12. Committees. The Board of Directors may, by resolution passed by
a majority of the whole Board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he, she or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation to be affixed to all papers which may require it; but
no such committee shall have the power or authority in reference to amending the
Articles of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of a dissolution,
or amending the Bylaws of the corporation; and unless the resolution or the
Articles of Incorporation expressly so provide, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
Such committee or committees shall have such name or names as may be determined
from time to time by resolution adopted by the Board of Directors. Each
committee shall keep regular minutes of its meetings and report the same to the
Board of Directors when required.
The provisions of these bylaws which govern meetings, notice, waiver of
notice, quorum, voting requirements and action without a meeting of the board of
directors, shall apply to committees and their members appointed under this
Section 12.
Neither the designation of any such committee, the delegation of authority
to such committee, nor any action by such committee pursuant to its authority
shall alone constitute compliance by any member of the board of directors or a
member of the committee in question with his responsibility to conform to the
standard of care applicable to directors.
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Section 13. Telephonic Meetings. The board of directors may permit any
director (or any member of a committee designated by the board) to participate
in a regular or special meeting of the board of directors or a committee thereof
through the use of any means of communication by which all directors
participating in the meeting can hear each other during the meeting. A director
participating in a meeting in this manner is deemed to be present in person at
the meeting.
Section 14. Standard of Care. A director shall perform his duties as a
director, including without limitation his duties as a member of any committee
of the board, in good faith, in a manner he reasonably believes to be in the
best interests of the corporation, and with the care an ordinarily prudent
person in a like position would exercise under similar circumstances. In
performing his duties, a director shall be entitled to rely on information,
opinions, reports or statements, including financial statements and other
financial data, in each case prepared or presented by the persons herein
designated. However, he shall not be considered to be acting in good faith if he
has knowledge concerning the matter in question that would cause such reliance
to be unwarranted. A director shall not be liable to the corporation or its
stockholders for any action he takes or omits to take as a director if, in
connection with such action or omission, he performs his duties in compliance
with this Section 14.
The designated persons on whom a director is entitled to rely are (i) one
or more officers or employees of the corporation whom the director reasonably
believes to be reliable and competent in the matters presented, (ii) legal
counsel, public accountant, or other person as to matters which the director
reasonably believes to be within such person's professional or expert
competence, or (iii) a committee of the board of directors on which the director
does not serve if the director reasonably believes the committee merits
confidence.
ARTICLE IV
Officers and Agents
Section 1. General. The officers of the corporation shall be a chairman (if
elected), a president, a secretary and a treasurer, each of whom shall be a
natural person eighteen years of age or older. The board of directors or an
officer or officers authorized by the board may appoint such other officers,
assistant officers, committees and agents, assistant secretaries and assistant
treasurers, as they may consider necessary. The board of directors or the
officer or officers authorized by the board shall from time to time determine
the procedure for the appointment of officers, their term of office, their
authority and duties and their compensation. One person may hold more than one
office. In all cases where the duties of any officer, agent or employee are not
prescribed by the bylaws or by the board of directors, such officer, agent or
employee shall follow the orders and instructions of the president of the
corporation.
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Section 2. Appointment and Term of Office. The officers of the corporation
shall be appointed by the board of directors at each annual meeting of the board
held after each annual meeting of the stockholders. If the appointment of
officers is not made at such meeting or if an officer or officers are to be
appointed by another officer or officers of the corporation, such appointments
shall be made as soon thereafter as conveniently may be. Each officer shall hold
office until the first of the following occurs: his successor shall have been
duly appointed and qualified, his death, his resignation, or his removal in the
manner provided in Section 3.
Section 3. Resignation and Removal. An officer may resign at any time by
giving written notice of resignation to the corporation. The resignation is
effective when the notice is received by the corporation unless the notice
specifies a later effective date.
Any officer or agent may be removed at any time with or without cause by
the board of directors or an officer or officers authorized by the board or by
the stockholders. Such removal does not affect the contract rights, if any, of
the corporation or of the person so removed. The appointment of an officer or
agent shall not in itself create contract rights.
Section 4. Vacancies. A vacancy in any office, however occurring may be
filled by the board of directors, or by the officer or officers authorized by
the board, for the unexpired portion of the officer's term. If an officer
resigns and his resignation is made effective at a later date, the board of
directors, or officer or officers authorized by the board, may permit the
officer to remain in office until the effective date and may fill the pending
vacancy before the effective date if the board of directors or officer or
officers authorized by the board provide that the successor shall not take
office until the effective date. In the alternative, the board of directors, or
officer or officers authorized by the board of directors, may remove the officer
at any time before the effective date and may fill the resulting vacancy.
Section 5. Chairman of the Board. The Chairman of the Board of Directors,
if elected, or failing his election, the Chief Executive Officer, shall be the
principal operating officer of the corporation and in general supervise and
control of the day-to-day business and affairs of the corporation, shall report
to the Board of Directors, shall preside at all meetings of the stockholders and
the Board of Directors and shall perform such other duties as may be prescribed
from time to time by the Board of Directors or by the Bylaws.
Section 6. Chief Executive Officer. The Chief Executive Officer of the
corporation, in the absence of the Chairman, shall preside at all meetings of
the stockholders and the Board of Directors and shall be the principal executive
officer of the Corporation and shall perform such other duties as may be
prescribed from time to time by the Board of Directors or by the Bylaws. The
Chief Executive Officer shall be authorized and empowered to act on behalf of
the corporation, to sign certificates, contracts and other instruments of the
corporation which may be authorized by the Board of Directors, required by law
or are otherwise necessary with the same force and effect as if such instruments
were signed by the President. If no Chief Executive Officer is elected by the
Board of Directors, the President shall perform the duties of the Chief
Executive Officer.
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Section 7. President. The President shall report to the Chief Executive
Officer, if such an officer is elected by the Board of Directors. If a Chief
Executive Officer is not elected by the Board of Directors or in the event the
Chief Executive Officer is unable to serve as the principal executive officer of
the corporation, then the President shall be the principal executive officer of
the Corporation. The President shall preside at meetings of the stockholders in
the absence of the Chairman and Chief Executive officer. The President may sign
with the Treasurer, Assistant Treasurer, Secretary, Assistant Secretary, or any
other proper officer of the corporation thereunto authorized by the Board of
Directors, including the Chairman or the Chief Executive Officer, certificates
for shares of the corporation, any deeds, mortgages, bonds, contracts or other
instruments which the Board of Directors has authorized to be executed, except
in cases in which the signing and execution thereof shall be expressly delegated
by the Board of Directors or by these bylaws to some other officer or agent of
the corporation, or shall be required by law to be otherwise signed or executed;
and in general shall perform all duties as may from time to time be prescribed
by the Chairman, Chief Executive Officer or the Board of Directors.
Section 8. Vice Presidents. If elected, the vice presidents shall assist
the chairman of the board and the president and shall perform such duties as may
be assigned to them by the chairman of the board and the president or by the
board of directors. In the absence of the chairman of the board and the
president, the vice president, if any (or, if more than one, the vice presidents
in the order designated by the board of directors, or if the board makes no such
designation, then the vice president designated by the chairman of the board or
by the president, or if neither the board, the chairman of the board nor the
president makes any such designation, the senior vice president as determined by
first election to that office), shall have the powers and perform the duties of
the chairman of the board and the president.
Section 9. Secretary. The secretary shall (i) prepare and maintain as
permanent records the minutes of the proceedings of the stockholders and the
board of directors, a record of all actions taken by the stockholders or board
of directors without a meeting, a record of all actions taken by a committee of
the board of directors in place of the board of directors on behalf of the
corporation, and a record of all waivers of notice of meetings of stockholders
and of the board of directors or any committee thereof, (ii) see that all
notices are duly given in accordance with the provisions of these bylaws and as
required by law, (iii) serve as custodian of the corporate records and of the
seal of the corporation and affix the seal to all documents when authorized by
the board of directors, (iv) keep at the corporation's registered office or
principal place of business a record containing the names and addresses of all
stockholders in a form that permits preparation of a list of stockholders
arranged by voting group and by class or series of shares within each voting
group, that is alphabetical within each class or series and that shows the
address of, and the number of shares of each class or series held by, each
stockholder, unless such a record shall be kept at the office of the
corporation's transfer agent or registrar, (v) maintain at the corporation's
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principal office the originals or copies of the corporation's articles of
incorporation, bylaws, minutes of all stockholders' meetings and records of all
action taken by stockholders without a meeting for the past three years, all
written communications within the past three years to stockholders as a group or
to the holders of any class or series of shares as a group, a list of the names
and business addresses of the current directors and officers, a copy of the
corporation's most recent corporate report filed with the Secretary of State,
and financial statements showing in reasonable detail the corporation's assets
and liabilities and results of operations for the last three years, (vi) have
general charge of the stock transfer books of the corporation, unless the
corporation has a transfer agent, (vii) authenticate records of the corporation,
and (viii) in general, perform all duties incident to the office of secretary
and such other duties as from time to time may be assigned to him by the
president or by the board of directors. The directors and/or stockholders may
however respectively designate a person other than the secretary or assistant
secretary to keep the minutes of their respective meetings.
Any books, records, or minutes of the corporation may be in written form or
in any form capable of being converted into written form within a reasonable
time.
Section 10. Treasurer. The treasurer shall be the principal financial
officer of the corporation, shall have the care and custody of all funds,
securities, evidences of indebtedness and other personal property of the
corporation and shall deposit the same in accordance with the instructions of
the board of directors. He shall receive and give receipts and acquittances for
money paid in on account of the corporation, and shall pay out of the
corporation's funds on hand all bills, payrolls and other just debts of the
corporation of whatever nature upon maturity. He shall perform all other duties
incident to the office of the treasurer and, upon request of the board, shall
make such reports to it as may be required at any time. He shall, if required by
the board, give the corporation a bond in such sums and with such sureties as
shall be satisfactory to the board, conditioned upon the faithful performance of
his duties and for the restoration to the corporation of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the corporation. He shall have such other powers and
perform such other duties as may from time to time be prescribed by the board of
directors or the president. The assistant treasurers, if any, shall have the
same powers and duties, subject to the supervision of the treasurer.
The treasurer shall also be the principal accounting officer of the
corporation. He shall prescribe and maintain the methods and systems of
accounting to be followed, keep complete books and records of account as
required by applicable laws, prepare and file all local, state and federal tax
returns, prescribe and maintain an adequate system of internal audit and prepare
and furnish to the president and the board of directors statements of account
showing the financial position of the corporation and the results of its
operations.
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Section 11. Assistant Secretaries and Assistant Treasurers. The Assistant
Secretaries, when authorized by the Board of Directors, may sign with the
President or a Vice President certificates for shares of the corporation the
issuance of which shall have been authorized by a resolution of the Board of
Directors. The Assistant Treasurers shall respectively, if required by the Board
of Directors, give bonds for the faithful discharge of their duties in such sums
and with such sureties as the Board of Directors shall determine. The Assistant
Secretaries and Assistant Treasurers, in general, shall perform such duties as
shall be assigned to them by the Secretary or the Treasurer, respectively, or by
the President or the Board of Directors.
Section 12. Salaries. The salaries of the officers shall be fixed from time
to time by the Board of Directors and no officer shall be prevented from
receiving such salary by reason of the fact that he is also a director of the
corporation.
ARTICLE V
Stock
Section 1. Certificates. The board of directors shall be authorized to
issue any of its classes of shares with or without certificates. The fact that
the shares are not represented by certificates shall have no effect on the
rights and obligations of stockholders. If the shares are represented by
certificates, such shares shall be represented by consecutively numbered
certificates signed, either manually or by facsimile, in the name of the
corporation by the president and secretary or by one or more other persons
designated by the board of directors. In case any officer who has signed or
whose facsimile signature has been placed upon such certificate shall have
ceased to be such officer before such certificate is issued, such certificate
may nonetheless be issued by the corporation with the same effect as if he were
such officer at the date of its issue. Certificates of stock shall be in such
form and shall contain such information consistent with law as shall be
prescribed by the board of directors. If shares are not represented by
certificates, within a reasonable time following the issue or transfer of such
shares, the corporation shall send the stockholder a complete written statement
of all of the information required to be provided to holders of uncertificated
shares by applicable laws. Notwithstanding the adoption of such a resolution by
the Board of Directors, every holder of stock represented by certificates and
upon request, every holder of uncertificated shares shall be entitled to have a
certificate signed by, or in the name of the corporation by the Chairman or Vice
Chairman of the Board of Directors, or the President or Vice President and by
the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary of such corporation representing the number of shares registered in
certificate form. Any or all the signatures on the certificate may be a
facsimile. All certificates surrendered to the corporation for transfer shall be
canceled and no new certificate shall be issued until the former certificate for
a like number of shares hall have been surrendered and canceled, except that in
case of a lost, destroyed or mutilated certificate a new one may be issued
therefor upon such terms and indemnity to the corporation as the Board of
Directors may prescribe.
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Section 2. Consideration for Shares. Certificated or uncertificated shares
shall not be issued until the shares represented thereby are fully paid. The
board of directors may authorize the issuance of shares for consideration
consisting of any tangible or intangible property or benefit to the corporation,
including cash, promissory notes, services performed or other securities of the
corporation. Future services shall not constitute payment or partial payment for
shares of the corporation. The promissory note of a subscriber or an affiliate
of a subscriber shall not constitute payment or partial payment for shares of
the corporation unless the note is negotiable and is secured by collateral,
other than the shares being purchased, having a fair market value at least equal
to the principal amount of the note. For purposes of this Section 2, "promissory
note" means a negotiable instrument on which there is an obligation to pay
independent of collateral and does not include a non-recourse note.
Section 3. Lost Certificates. In case of the alleged loss, destruction or
mutilation of a certificate of stock, the board of directors may direct the
issuance of a new certificate in lieu thereof upon such terms and conditions in
conformity with law as the board may prescribe. The board of directors may in
its discretion require an affidavit of lost certificate and/or a bond in such
form and amount and with such surety as it may determine before issuing a new
certificate.
Section 4. Transfer of Shares. Transfer of shares of the corporation shall
be made only on the stock transfer books of the corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the corporation, and on
surrender for cancellation of the certificate for such shares. The person in
whose name shares stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes. Upon surrender to the
corporation or to a transfer agent of the corporation of a certificate of stock
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, and receipt of such documentary stamps as may be required
by law and evidence of compliance with all applicable securities laws and other
restrictions, the corporation shall issue a new certificate to the person
entitled thereto, and cancel the old certificate. Every such transfer of stock
shall be entered on the stock books of the corporation which shall be kept at
its principal office or by the person and the place designated by the board of
directors.
Except as otherwise expressly provided in these bylaws, and except for the
assertion of dissenters' rights as provided under applicable Nevada law, the
corporation shall be entitled to treat the registered holder of any shares of
the corporation as the owner thereof for all purposes, and the corporation shall
not be bound to recognize any equitable or other claim to, or interest in, such
shares or rights deriving from such shares on the part of any person other than
the registered holder, including without limitation any purchaser, assignee or
transferee of such shares or rights deriving from such shares, unless and until
such other person becomes the registered holder of such shares, whether or not
the corporation shall have either actual or constructive notice of the claimed
interest of such other person.
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Section 5. Transfer Agent, Registrars and Paying Agents. The board may at
its discretion appoint one or more transfer agents, registrars and agents for
making payment upon any class of stock, bond, debenture or other security of the
corporation. Such agents and registrars may be located either within or outside
Nevada. They shall have such rights and duties and shall be entitled to such
compensation as may be agreed.
ARTICLE VI
Indemnification of Certain Persons
Section 1. Indemnification. For purposes of Article VI, a "Proper Person"
means 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, and whether formal or informal, by
reason of the fact that he is or was a director, officer, employee, fiduciary or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, partner, trustee, employee, fiduciary or agent of any
foreign or domestic profit or nonprofit corporation or of any partnership, joint
venture, trust, profit or nonprofit unincorporated association, limited
liability company, or other enterprise or employee benefit plan. The corporation
shall indemnify any Proper Person against reasonably incurred expenses
(including attorneys' fees), judgments, penalties, fines (including any excise
tax assessed with respect to an employee benefit plan) and amounts paid in
settlement reasonably incurred by him in connection with such action, suit or
proceeding if it is determined by the groups set forth in Section 4 of this
Article that he conducted himself in good faith and that he reasonably believed
(i) in the case of conduct in his official capacity with the corporation, that
his conduct was in the corporation's best interests, or (ii) in all other cases
(except criminal cases), that his conduct was at least not opposed to the
corporation's best interests, or (iii) in the case of any criminal proceeding,
that he had no reasonable cause to believe his conduct was unlawful. A Proper
Person will be deemed to be acting in his official capacity while acting as a
director, officer, employee or agent on behalf of this corporation and not while
acting on this corporation's behalf for some other entity.
No indemnification shall be made under this Article VI to a Proper Person
with respect to any claim, issue or matter in connection with a proceeding by or
in the right of a corporation in which the Proper Person was adjudged liable to
the corporation or in connection with any proceeding charging that the Proper
Person derived an improper personal benefit, whether or not involving action in
an official capacity, in which he was adjudged liable on the basis that he
derived an improper personal benefit. Further, indemnification under this
Section in connection with a proceeding brought by or in the right of the
corporation shall be limited to reasonable expenses, including attorneys' fees,
incurred in connection with the proceeding.
Section 2. Right to Indemnification. The corporation shall indemnify any
Proper Person who was wholly successful, on the merits or otherwise, in defense
of any action, suit, or proceeding as to which he was entitled to
indemnification under Section l of this Article VI against expenses (including
<PAGE>
attorneys' fees) reasonably incurred by him in connection with the proceeding
without the necessity of any action by the corporation other than the
determination in good faith that the defense has been wholly successful.
Section 3. Effect of Termination of Action. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction, or upon a plea
of nolo contendere or its equivalent shall not of itself create a presumption
that the person seeking indemnification did not meet the standards of conduct
described in Section l of this Article VI. Entry of a judgment by consent as
part of a settlement shall not be deemed an adjudication of liability, as
described in Section 2 of this Article VI.
Section 4. Groups Authorized to Make Indemnification Determination. Except
where there is a right to indemnification as set forth in Sections 1 or 2 of
this Article or where indemnification is ordered by a court in Section 5, any
indemnification shall be made by the corporation only as authorized in the
specific case upon a determination by a proper group that indemnification of the
Proper Person is permissible under the circumstances because he has met the
applicable standards of conduct set forth in Section l of this Article. This
determination shall be made by the board of directors by a majority vote of
those present at a meeting at which a quorum is present, which quorum shall
consist of directors not parties to the proceeding ("Quorum"). If a Quorum
cannot be obtained, the determination shall be made by a majority vote of a
committee of the board of directors designated by the board, which committee
shall consist of two or more directors not parties to the proceeding, except
that directors who are parties to the proceeding may participate in the
designation of directors for the committee. If a Quorum of the board of
directors cannot be obtained and the committee cannot be established, or even if
a Quorum is obtained or the committee is designated and a majority of the
directors constituting such Quorum or committee so directs, the determination
shall be made by (i) independent legal counsel selected by a vote of the board
of directors or the committee in the manner specified in this Section 4 or, if a
Quorum of the full board of directors cannot be obtained and a committee cannot
be established, by independent legal counsel selected by a majority vote of the
full board (including directors who are parties to the action) or (ii) a vote of
the stockholders.
Section 5. Court-Ordered Indemnification. Any Proper Person may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction for mandatory indemnification under Section 2 of this
Article, including indemnifica tion for reasonable expenses incurred to obtain
court-ordered indemnification. If the court determines that such Proper Person
is fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not he met the standards of conduct set forth in
Section l of this Article or was adjudged liable in the proceeding, the court
may order such indemnification as the court deems proper except that if the
Proper Person has been adjudged liable, indemnifica tion shall be limited to
reasonable expenses incurred in connection with the proceeding and reasonable
expenses incurred to obtain court-ordered indemnification.
17
<PAGE>
Section 6. Advance of Expenses. Reasonable expenses (including attorneys'
fees) incurred in defending an action, suit or proceeding as described in
Section 1 may be paid by the corporation to any Proper Person in advance of the
final disposition of such action, suit or proceeding upon receipt of (i) a
written affirmation of such Proper Person's good faith belief that he has met
the standards of conduct prescribed by Section l of this Article VI, (ii) a
written undertaking, executed personally or on the Proper Person's behalf, to
repay such advances if it is ultimately determined that he did not meet the
prescribed standards of conduct (the undertaking shall be an unlimited general
obligation of the Proper Person but need not be secured and may be accepted
without reference to financial ability to make repayment), and (iii) a
determination is made by the proper group (as described in Section 4 of this
Article VI) that the facts as then known to the group would not preclude
indemnification. Determination and authorization of payments shall be made in
the same manner specified in Section 4 of this Article VI.
Section 7. Witness Expenses. The sections of this Article VI do not limit
the corporation's authority to pay or reimburse expenses incurred by a director
in connection with an appearance as a witness in a proceeding at a time when he
has not been made a named defendant or respondent in the proceeding.
Section 8. Report to Stockholders. Any indemnification of or advance of
expenses to a director in accordance with this Article VI, if arising out of a
proceeding by or on behalf of the corporation, shall be reported in writing to
the stockholders with or before the notice of the next stockholders' meeting. If
the next stockholder action is taken without a meeting at the instigation of the
board of directors, such notice shall be given to the stockholders at or before
the time the first stockholder signs a writing consenting to such action.
ARTICLE VII
Provision of Insurance
Section 1. Selection by Directors. By action of the board of directors,
notwithstanding any interest of the directors in the action, the corporation may
purchase and maintain insurance, in such scope and amounts as the board of
directors deems appropriate, on behalf of any person who is or was a director,
officer, employee, fiduciary or agent of the corporation, or who, while a
director, officer, employee, fiduciary or agent of the corporation, is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee, fiduciary or agent of any other foreign or domestic
corporation or of any partnership, joint venture, trust, profit or nonprofit
unincorporated association limited liability company or other enterprise or
employee benefit plan, against any liability asserted against, or incurred by,
him in that capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of Article VI or applicable law. Any such insurance may be
procured from any insurance company designated by the board of directors of the
corporation, including any insurance company in which the corporation has an
equity interest or any other interest, through stock ownership or otherwise.
18
<PAGE>
ARTICLE VIII
Miscellaneous
Section 1. Seal. The corporate seal of the corporation shall be circular in
form and shall contain the name of the corporation and the words, "corporate
seal."
Section 2. Fiscal Year. The fiscal year of the corporation shall be as
established by the board of directors.
Section 3. Amendments. These Bylaws and any amendment thereof may be
altered, amended or repealed, or new Bylaws may be adopted, by the Board of
Directors at any regular or special meeting by the affirmative vote of a
majority of all the members of the Board, provided in the case of any special
meeting at which all the members of the Board are not present, that the notice
of such meeting shall have stated the amendment of the Bylaws and any amendment
thereof, including the Bylaws adopted by the Board of Directors, may be altered,
amended or repealed and other Bylaws may be adopted by the holders of a majority
of the total outstanding stock of the corporation entitled to vote at any annual
meeting or at any special meeting, provided, in the case of any special meeting,
that notice of such proposed alteration, amendment, repeal or adoption is
included in the notice of the meeting.
Section 4. Gender. The masculine gender is used in these bylaws as a matter
of convenience only and shall be interpreted to include the feminine and neuter
genders as the circumstances indicate.
Section 5. Conflicts. In the event of any irreconcilable conflict between
these bylaws and either the corporation's articles of incorporation or
applicable law, the latter shall control.
Section 6. Definitions. Except as otherwise specifically provided in these
bylaws, all terms used in these bylaws shall have the same definition as in the
General Corporation Law of Nevada.
Section 7. Waiver of Notice. Whenever any notice is required to be given to
any stockholder or director of the corporation under the provisions of these
Bylaws or under the provisions of the Articles of Incorporation or under the
provisions of the General Corporation Law of Nevada, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice.
19
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Secretary of the
corporation, do hereby certify that the above and foregoing Bylaws were duly
adopted as the Bylaws of said corporation at a meeting of the directors thereof
held by consent on December 31, 1997.
/s/ Albert Golusin
- ------------------- --------------------------------
Date Secretary
20
ALAN W. PERYAM, LLC
1120 Lincoln Street, Suite 1000
Denver, Colorado 80203
March 10, 1998
Fan Energy Inc.
1801 Broadway, Suite 720
Denver, Colorado 80202
Gentlemen:
We refer to the Registration Statement on Form SB-2 ("Registration
Statement") of Fan Energy Inc., a Nevada corporation ("Company"), to be filed
with the United States Securities and Exchange Commission on or about March 10,
1998, relating to the offer and sale of up to 3,000,000 shares of $0.001 par
value common stock (the "Common Stock") and 5,680,000 shares of Common Stock for
resale by holders of such securities as described therein.
We have reviewed such documents and records as we have deemed necessary to
enable us to express an informed opinion on the matters covered thereby and we
are of the opinion that the Common Stock described in the Registration statement
is, or will be, upon exercise of warrants in accordance with their terms upon
issuance, legally issued, fully paid and nonassessable.
Sincerely,
ALAN W. PERYAM, LLC
By /s/ Alan W. Peryam
---------------------------------
Alan W. Peryam
EASTERN STAR HOLDINGS INC.
George H. Fancher Jr. d/b/a
FANCHER OIL COMPANY August 27, 1997
1801 Broadway
Suite 720
Denver, Colorado
Re: Fiji Prospect - Yolo County - California ("Fiji Prospect")
Bali Prospect - Solano County - California ("Bali Prospect")
- --------------------------------------------------------------------------------
The Agreement will constitute our understanding regarding Eastern Star Holdings
Inc. ("Eastern Star") purchase of an interest in the captioned prospects from
George H. Fancher Jr. d/b/a Fancher Oil Company ("Fancher"). The terms of the
Agreement are as follows:
1. Interest to be Acquired
1.1. Fancher will sell and Eastern Star will purchase all of
Fancher's right, title and interest, (the "Interest") in the
Slawson Exploration Company, Inc. participation agreements
("SPA") relating to the Fiji Prospect and the Bali Prospect,
such agreements being attached hereto as Schedule "A". The
SPA provide that Fancher has the right to acquire 25% of all
interest acquired by Slawson Exploration Company, Inc. in
the Fiji Prospect and Bali Prospect.
2. Consideration
2.1. In consideration of the sale of the Interest in the SPA,
Eastern Star shall issue to George H. Fancher Jr. a total of
2,250,000 shares as follows:
(a) 1,500,000 shares (the "Acquisition Shares") to be
issued on Escrow Closing (as defined below);
(b) 750,000 shares (the "Performance Shares") to be issued
on Escrow Closing to be released to Fancher at such
time as there are a minimum of 10 wells which have been
drilled with initial production rates of at least
1,500,000 cubic feet per day per well. The parties
agree to execute and deliver that form of Escrow
Agreement attached hereto as Schedule "B".
2.2. Fancher shall not be entitled to exercise any voting rights
attached to Acquisition Shares or the Performance Shares
prior to the Final Closing (as defined below). All shares
issued to Fancher shall be subject to any and all hold
periods required by appropriate securities legislation.
<PAGE>
Page 2 of 5
2.3. In addition to the Acquisition Shares and Performance
Shares, Eastern Star shall pay to Fancher on Escrow Closing,
an amount equal to Fancher's total cash investment in the
SPA less $300,000 (US). As at July 31, 1997, the amount that
would have been payable to Fancher was approximately
$360,000 (US).
2.4. Fancher shall retain a 2 1/2% gross overriding royalty
proportionately reduced leasehold interest actually acquired
by Eastern Star pursuant to the SPA (ie. if Eastern Star
acquires a 25% working interest, then the Fancher over
riding royalty interest will be 0.625%).
3. Bonus
3.1. Fancher shall be entitled to be issued a further 500,000
shares (the "Bonus Shares") of Eastern Star as a bonus if
the Interest payout occurs on or before December 31, 1999 or
at such later date as the parties may mutually agree. Payout
shall be defined as that time at which gross revenues
received by Eastern Star equal all direct costs of Eastern
Star associated with acquiring the acreage and drilling the
prospects including but not limited to the cash payment to
Fancher described in sections 2.3 and 6.2 (excluding
interest paid at Final Closing), seismic, drilling,
completing, LOE, production taxes, and royalties.
4. Representations/Warranties - Fancher
4.1. Fancher represents and warrants as follows:
(a) the SPA is valid, subsisting and enforceable in
accordance with its terms and Fancher is in compliance
with all terms, conditions, obligations and agreements
as required of Fancher under the SPA;
(b) Fancher is the sole and beneficial owner of the
Interest and there are no other rights, options,
encumbrances or liens relating to the Interest;
(c) subject to the consent of Slawson Exploration Company,
Inc., Fancher has the right and ability to enter into
this Agreement and that this Agreement when signed is
binding and enforceable in accordance with its terms;
(d) there are no actual, pending, or threatened actions,
suits, claims or proceedings regarding the Interest
and/or the SPA; and
(e) Fancher is not aware of any material fact or
circumstance which has not been disclosed which should
be disclosed in order to prevent the representations
and warranties provided herein from being misleading.
<PAGE>
Page 3 of 5
5. Covenants- Eastern Star
5.1. Eastern Star covenants to use its reasonable best efforts to
fulfill the following conditions:
(a) Eastern Star shares being approved for listing on the
NASDAQ bulletin board on or before October 31, 1997;
and
(b) Eastern Star closing a private placement of its
securities for minimum gross proceeds of $1,000,000
(US) on or before October 31, 1997 on terms mutually
agreed to by the parties.
5.2. Eastern Star further covenants that it shall use its
reasonable best efforts to complete the private placement as
described in section 5.1(b) above on or before October 1,
1997 subject only to the shares of Eastern Star being listed
on the NASDAQ bulletin board.
5.3. Eastern Star represents and warrants to Fancher that as of
the date of this Agreement the capital structure of Eastern
Star is as set forth in Schedule "C" attached hereto and
made a part hereof.
6. Closing of Purchase and Sale - Escrow
6.1. The interim closing of the purchase and sale of the Interest
shall be completed on or before August 31, 1997 (the "Escrow
Closing") with the Interest and the Acquisition Shares and
Performance Shares being held in escrow subject to
completion of the listing and financing as described in
section 5.1(a) and 5.1(b) above.
6.2. At Escrow Closing, Eastern Star shall pay to Fancher the
amount as required by section 2.3 herein and at Final
Closing (as defined below)_ Eastern Star shall reimburse
Fancher for any and all further funds advanced by Fancher in
accordance with the Interest with interest at the rate of 8%
per annum.
6.3. At Escrow Closing, Fancher shall deliver into escrow any and
all documentation required to transfer the Interest as of
the date of Escrow Closing subject only to the Final
Closing, including without limitation, evidence of the
consent of Slawson Exploration Company, Inc..
7. Remedy for Failure to Comply with Covenants
7.1. In the event that Eastern Star fails to timely achieve all
of the conditions set forth in section 5.1(a) and 5.1(b),
then the transfer for the SPA to Eastern Star shall be
deemed rescinded and cancelled and William E. Grafham, or
any assignee of William E. Grafham acceptable to Fancher
(herein collectively referred to as "Grafham") shall be
required to purchase from Fancher a 12 1/2% working interest
in the SPA effective November 1, 1997. In such event, the
following shall apply:
(a) Fancher shall return the Acquisition Shares and
Performance Shares to Eastern Star and quitclaim all
right to the Bonus Shares, and Eastern Star shall quit
claim and release any and all right, title interest and
entitlement to the Interest free and clear of any
assignment or encumbrance arising by, through or under
Eastern Star;
(b) Grafham shall reimburse Eastern Star for any and all
funds paid to Fancher pursuant to the terms of this
Agreement;
<PAGE>
Page 4 of 5
(c) Grafham shall pay to Fancher an amount which is equal
to the difference between $900,000 (US) and the cash
paid to Fancher by Eastern Star to November 1, 1997;
(d) Fancher shall sell, assign and set over to Grafham, a
12 1/2% working interest in the SPA subject to a
proportionately reduced 2 1/2% overriding royalty
interest;; and
(e) Grafham shall be responsible for his proportionate
share of funding of the SPA after Fancher has paid
$1,200,000 (US) of total project costs associated with
Fancher's original 25% working interest.
7.2. Fancher agrees that Eastern Star's failure satisfy the
conditions set forth in section 5.1(a) and 5.1(b) herein
shall only entitle Fancher to those remedies in section 7.1
and Fancher hereby agrees to waive and release Eastern Star
from any and all damages, actions, claims, liabilities and
remedies arising directly or indirectly from such failure to
satisfy such conditions.
8. Closing of Purchase and Sale - Final
8.1. In the event Eastern Star satisfies all of the conditions
set forth in section 5.1(a) and 5.1(b), then on or before
November 1, 1997 (the "Final Closing"), Fancher shall
receive the Acquisition Shares and the payment required by
section 6.2 and Eastern Star shall receive all documents
transferring the Interest to Eastern Star.
9. Management
9.1. On Final Closing the management of Eastern Star shall be
composed of the following:
Fancher Director/Chairman
Grafham Director/CEO/President
Scott Director
Utsler Director
10. Incorporation of Subsidiary/Name Change
10.1. Eastern Star shall purchase the Interest through, or at the
election of Eastern Star on or before the Final Closing,
transfer the Interest to, a wholly-owned subsidiary to be
incorporated under the law of Nevada or Colorado, at the
election of Eastern Star prior to the Final Closing. In
addition, the parties agree to change the name of Eastern
Star to such other name as the parties may agree. Corporate
structure will be subject to further discussions.
11. Stock Restrictions
11.1. Eastern Star, Grafham and Fancher shall mutually agree on
an acceptable trading restrictions on certain free trading
shares of Eastern Star to be identified by Grafham and
Fancher.
<PAGE>
Page 5 of 5
12. SPA
12.1. Upon the execution of this Agreement by all the parties and
upon Eastern Star obtaining the Interest hereunder, or
Grafham obtaining an interest hereunder, all of the terms
and conditions of the SPA shall apply as if Eastern Star or
Grafham had been an original contracting party thereto.
If you agree with the foregoing terms and conditions, please sign in the space
indicated below and return one original letter to the undersigned
Yours truly,
Eastern Star Holdings Inc. The foregoing terms and conditions are
Per: hereby accepted and agreed.
Albert Golusin George H. Fancher Jr. d/b/a
Director Fancher Oil Company
:jm
William E. Grafham
<PAGE>
Schedule "A"
Slawson
exploration company, inc.
Rocky Mountain Division
1625 Broadway, Suite 1450
Denver, Colorado 80202-4714
(303) 592-8880 - FAX (303) 592-8881
April 23, 1997
Fanchcr Oil Company 1801 I Broadway, Suite 720 Denver, CO 80202
Attn: Mr. George H. Fancher, Jr,
RE RM 96-002 Fiji Prospect
Participation Agreement
Yolo County, California
Gentleman:
In this Participation Agreement, Slawson Exploration Company, Inc., a Kansas
Corporation d/b/a Donald C. Slawson Exploration Company, Me. within the State of
California, shall hereinafter be referred to as "Slawson" and Fancher Oil
Company shall hereinafter be referred to as "Fancher".
This Agreement will constitute our understanding regarding Fancher's purchase of
an interest in Slawson's Fiji Prospect and the formation of an Area of Mutual
Interest.
The terms of this agreement are as follows:
1. Slawson is in the process of acquiring leasehold within the Fiji Prospect,
the general geographic area for which is set out on Exhibit " I ", attached
hereto and made a part hereof. Further, Slawson anticipates collecting and
processing approximately 25 square miles of 3D seismic within Fiji
Prospect.
2. Fancher has agreed to participate with Slawson for a proportionate 25%
share of leasehold acquisition and collection of 3D seismic data within the
Fiji Prospect. Maximum cost for seismic acquisition is estimated to be
$800,000. Land costs are estimated to be within a range of $250,000 to
$300,000, depending upon the amount of acreage eventually leased and the
price per acre. Fancher is responsible for spending its proportionate 25%
share of such amounts under tile terms of this agreement, assuming such
costs arc incurred within 12 months from the date hereof. If either or both
of such amounts are exceeded, Fancher may participate in additional
expenditures on a selected basis, under tile terms of this agreement.
Fancher agrees to be bound by the terms and provisions of leasehold in
which it participates. Slawson shall be responsible for the remaining 75%
of such obligations and shall hold Fancher harmless therefrom.
3. Fancher will reimburse Slawson for all leasehold and geophysical costs on
the basis of cost plus 35%, so that Fancher's share. of actual costs is
33.75%. Slawson is currently in the process of acquiring leasehold in the
Fiji Prospect area. Simultaneous with the execution of this agreement,
Fancher will reimburse Slawson the sum of $117,787.50 which represents
leasehold, brokerage and seismic permitting costs incurred or anticipated
through April, 1997. Reimbursement for remaining costs, or estimates of
such costs, which may be made from time to time, will be made to Slawson by
<PAGE>
Fiji Participation Agreement
Fancher Oil Company
Page 2
April 23, 1997
Fancher within 15 days from receipt of an invoice. Slawson agrees to pay
the remaining 66.25% of costs or to find other participants to pay such
costs.
4. An Area of Mutual Interest ("AMI") is hereby established consisting of
lands lying within Township 6 North, Ranges 3 and 4 East, Yolo County,
California. The AMI will be comprised of all lands located within the final
outline of the 3D seismic survey that is being conducted under the terms of
this agreement. When available, an outline of the survey, and thus the AMI,
will be attached hereto as Exhibit "2". This AMI shall remain in effect for
the term of any oil and gas leases which become subject to this agreement,
whether by acquisition, extension or renewal, and shall thereafter
terminate unless production is established on any portion of said lands
through this agreement, and shall then continue so long as there is
production. Fanchcr shall be obligated to acquire its proportionate share
of all leasehold acquired by Slawson within the AMI up to a maximum gross
(unpromoted) expenditure of $300,000. If this amount is exceeded, and if
additional expenditures are incurred for acquisition, Slawson will promptly
notify Fancher in writing of such acquisition, describing same and the cost
thereof. Fancher will have 10 days from receipt of such notice to elect
whether or not to participate for its proportionate share of such
acquisition, insofar only as same covers lands in the subject AMI. The
failure of Fancher to reply positively within the 10 day time period will
be deemed an election not to participate in the acquisition. Fancher shall
not acquire any interest within this AMI except through this agreement,
while in effect, without the express written consent of Slawson.
5. Slawson shall be responsible for payment of all delay rentals, minimum and
shut-in royalties, as well as any other payments required to maintain
leases in full force and effect. Slawson shall not be liable for failure to
properly make such payments, in the absence of gross negligence. Upon
receipt of an invoice, Fancher shall, within 20 days, reimburse Slawson for
its proportionate share of such payments, or, at Fancher's election, notify
Slawson that it no longer desires to hold an interest in the applicable
lease(s), in which case Fancher's interest shall be relinquished to
Slawson.
6. Slawson will retain Fancher's proportionate share of title to all acquired
leasehold and/or farmin agreements beneficially for Fancher until such time
as a well is drilled and completed and a pooling agreement, if required,
has been filed. Slawson will then deliver an assignment to Fancher of its
proportionate share of leasehold in the revenue sharing unit or acreage
held by the well's production, on a well-by-well basis, subject to
obtaining any required consent to assign under the provisions of the lease
and/or farmin agreements. If such consent to assign cannot be readily
obtained, Slawson shall hold title to the leasehold and agreements on
behalf of Fancher. If such consent is obtained, Slawson will promptly make
assignment under the terms of this paragraph. The intent of this paragraph
is for Slawson to hold title beneficially for Fancher in order to avoid the
administrative time and expense involved in making assignments; however,
notwithstanding the provisions of this paragraph, Fancher may demand
assignment from Slawson of all leasehold to which it holds an interest
under the terms of this agreement. If such a request is made, Slawson will
make all reasonable efforts to provide the assignment in a timely manner,
subject to the provisions of this agreement. All leasehold acquired by any
method under this agreement (whether by Slawson or Fancher) will be subject
to a proportionately reduced 3.50% of 8/8ths overriding royalty interest in
favor of Slawson.
<PAGE>
Fiji Participation Agreement
Fancher Oil Company
Page 3
April 23, 1997
7. It is anticipated that Slawson will propose wells to be drilled within this
AMI on an ongoing basis. At the time of proposal, Slawson will provide
Fancher with written notice of its intended operation, specifying the
location of the well, estimated spud date, the depth and formation(s) to be
drilled, and an Authorization For Expenditure ("AFE") setting out estimated
dry hole and completion costs, and any other pertinent information. It is
expressly understood that Slawson will make best efforts to insure that its
AFEs represent actual anticipated costs. Upon receipt of notice of a
proposed well, Fancher shall have 20 days within which to notify Slawson,
in writing, of its election to participate. The failure of Fancher to so
elect within the time specified shall be deemed an election by Fancher not
to participate in the proposed well. If Fancher elects not to participate
in a proposed well, or is deemed to have so elected, it shall forfeit all
of its interest in the leasehold, farmins, options, etc. covering the lands
within the revenue sharing unit for the proposed well. Excepted from this
forfeiture would be: a) any area then established as a revenue sharing unit
for a producing well in which Fancher has previously participated, or b) a
well which is drilling or which has not spud, but in which Fancher has
committed to participate.
Should Fancher elect to participate in a well, it will be obligated to
participate in the entire proposed operation to casing point. An election
to participate will also obligate Fancher to acquire its proportionate
share of all interest acquired by Slawson in the well through lease
acquisition, farmin acreage and/or non-consent interest (wherein the
non-consent interest is acquired from a third party, unrelated to the
Slawson, Fancher and the other participants in Fiji Prospect, and where
said non-consent interest is required to make up 100% of the drillsite
working interest available for Slawson, Fancher and the other participants
in Fiji Prospect). In order to be entitled to the benefits of this numbered
paragraph, Slawson shall, within 90 days from expiration of the initial
notice period, spud the proposed well. The parties agree to make any and
all assignments, necessary to accomplish the above provisions. Except in
the case of an expiring lease, farmout agreement, farmout option agreement
or similar circumstance, only one well proposal may be made every 20 days
under the terms of this numbered paragraph. In all instances within this
numbered paragraph, the names Slawson and Fancher may be interchanged so
that either party may propose wells. It is recognized that there are
additional working interest owners in this project area that have ongoing
working interest capabilities in each proposed well. Further, it is
recognized that said additional working interest owners in this project
area have the ability to propose wells as set forth herein.
8. Fancher shall pay a $2,500 spud fee to Slawson for each well drilled under
the terms of this agreement, in which it participates.
9. An Operating Agreement in the form attached hereto as Exhibit "3" will be
executed for each well drilled under the terms of this agreement. The
Contract Area for each Operating Agreement will be comprised of the
designated revenue sharing unit for the well. In the event of a conflict
between the terms of this agreement and any such Operating Agreement, the
terms of this agreement shall prevail.
10. It is understood that the parties hereto may be required to negotiate
operating agreements with third parties. The parties agree that if there
are any conflicts between the Operating Agreement attached hereto and any
third party operating agreement, the terms of the Operating Agreement
attached hereto shall control the relationship between Slawson and Fancher.
<PAGE>
Fiji Participation Agreement
Fancher Oil Company
Page 4
April 23, 1997
11. An Escrow Agreement in the form attached hereto as Exhibit "4" shall be
entered into between Slawson and Fancher for each well drilled under the
terms of this agreement. Article 1 of the Escrow Agreement provides a date
by which the participants in the well will deposit their funds into the
Escrow Account. Such date will be established by Slawson to be
approximately 10 days prior to spud of each well. If Fancher fails to
deposit its share of the applicable costs, including its spud fee as set
out in paragraph 8 of this agreement, by this date, it will be assumed that
Fancher does not wish to participate in the well. In this event, Slawson
shall give Fancher notice that it has not received its funds and Fancher
will either deliver such funds to Slawson by 1:00 PM MST on the next
business day or be subject to the provisions of paragraph 7 of this
agreement, covering non participation. Slawson shall be obligated to place
funds received from all participants in the same escrow account, in
pro-rata amounts based on their share of costs.
12. Fancher's representatives shall have free access to any well within the
Fiji Prospect in which it participates at all times and to all records
pertaining thereto. In addition, all geological information obtained in the
drilling of any well, in which Fancher participates, shall be made
available. Fancher may provide a list of its geological requirements to
Slawson, which shall be provided by Slawson, as reasonable.
13. If Slawson terminates its legal existence, transfers its interest to a
successor and no longer owns an interest in the Fiji Prospect, or becomes
insolvent or bankrupt, or is placed in receivership, it shall cease to be
Operator without any action by Fancher or Slawson's other Non-Operating
partners, except the selection of a successor. Slawson may be removed if it
fails or refuses to carry out its duties hereunder or is no longer capable
of serving as Operator by the affirmative vote of Fancher and Slawson's
other Non-Operating partners owning a majority interest based on ownership
in the Fiji Prospect, after excluding the voting interest of Slawson. 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 60 days
after the giving of notice of resignation by Slawson or action by the Non-
Operators to remove Slawson, unless a successor Operator has been selected
and assumes the duties of Operator at an earlier date. Slawson, after the
effective date of resignation or removal, shall be bound by the terms
hereof as Non-Operator. A change of a corporate name or structure of
Slawson or transfer of Slawson's interest to any single subsidiary or
parent corporation shall not be the basis for removal of Slawson.
Upon the resignation or removal of Slawson, a successor Operator shall be
selected by the affirmative vote of Fancher and Slawson's other
Non-Operating partners owning a majority interest based on the ownership in
the Fiji Prospect. The successor Operator shall be selected from the
parties owning an interest in the Fiji Prospect at the time such successor
Operator is selected. If Slawson is removed or is deemed to have resigned,
fails to vote or votes only to succeed itself, the successor Operator shall
be selected by the affirmative vote of Fancher and Slawson's other
Non-Operating partners in the Fiji Prospect owning a majority interest, and
after excluding the voting interest of Slawson.
This provision shall also apply to the resignation or removal of any
successor Operator.
<PAGE>
Fiji Participation Agreement
Fancher Oil Company
Page 5
April 23, 1997
14. The parties hereto agree that all disputes between them arising out of, or
in connection with, this Agreement shall be resolved by arbitration as
provided herein. This agreement to arbitrate shall survive the rescission
or termination of this contract. All arbitration shall be conducted
pursuant to the Commercial Arbitration Rules of the American Arbitration
Association. If available, the panel used shall be selected from
arbitrators having at least 10 years of oil and gas experience and employed
by the American Arbitration Association and the decision of the arbitrators
shall be final and binding on all parties. All arbitration shall be
undertaken pursuant to the Federal Arbitration Act, where applicable, and
the decision of the arbitrators shall be enforceable in any court of
competent jurisdiction.
15. Fancher will have full access to all seismic data and interpretations
thereof, for which it shares the cost of acquisition. If such data is ever
sold, Fancher will be entitled to 25% of tile proceeds of such sale.
Fancher will not trade the data or allow third parties to review same,
without Slawson's express written consent.
16. All notices required herein shall be considered given when delivered
personally or when sent by facsimile or deposited in the U.S. Mail properly
addressed as follows:
Slawson Exploration Company, Inc. Fancher Oil Company
1612 Broadway, Suite 1450 1801 Broadway, Suite 720
Denver, CO 80202 Denver, CO 80202
FAX: (303) 592-8881 FAX: (303) 296-2433
17. The liabilities of the parties shall be several and not joint or
collective, and each party shall be responsible only for its share of the
costs and liabilities incurred as provided herein. It is not the purpose or
intention of this agreement to create any partnership, mining partnership
or association, and neither this agreement nor the operations herein shall
be construed or considered as creating any such legal relationship.
18. The terms and covenants hereof shall extend to, and be binding on, the
parties hereto, their heirs, successors, legal representatives and assigns;
however, Fancher will not assign its interest in this agreement without the
express written consent of Slawson. Such consent shall not be unreasonably
withheld. This agreement sets forth the entire agreement between the
parties hereto, and there are no oral agreements not set out herein in
writing.
If the foregoing terms correctly set forth our understanding, please execute and
return one copy of this agreement.
Very Truly Yours.
/s/ Bruce Branson
Bruce Branson
District Landman
AGREED TO AND ACCEPTED THIS 29th DAY OF April, 1997
FANCHER OIL COMPANY
By /s/ George H. Fancher Jr.
- ------------------------------------------
<PAGE>
FANCHER OIL COMPANY
- --------------------------------------------------------------------------------
Trinty Place - Suite 720 - 1801 Broadway - Denver, Colorado 80202-3835 - (303)
296-6600 - Fax (303) 296-2433
Slawson Exploration Company, Inc. April 29, 1997
1625 Broadway
Suite 1450
Denver, Colorado 80202-4714
Attention: Bruce Branson
RE: Fiji Prospect
Participation Agreement/JOA
Yolo County, California
Gentlemen,
Enclosed please find one copy of the referenced agreement which has been
executed on behalf of George H. Fancher, Jr. dba Fancher Oil Company, subject to
the following modifications:
1. All references to Fancher Oil Company in said prospect documents and
agreements shall be amended to read George H. Fancher, Jr. dba Fancher
Oil Company (Fancher).
2. Paragraph 3, page 2. Change the 15 day reimbursement on invoices to 30
days.
3. Paragraph 4, page 2. The time period under the AMI to respond to
acquisitions notices will be amended to 20 days.
4. Paragraph 5, page 2. Rental invoices will be reimbursed within 30 days
from receipt thereof.
5. Paragraph 6, page 2. Slawson agrees to provide Lease Exhibits,
spreadsheets and/or plats showing all leasehold and leasehold
acquisitions to Fancher upon request. Should Fancher elect to receive
assignments of all acquired leasehold, Slawson will make a good faith
effort to provide said assignments within 30 days.
6. Paragraph 7, page 3. Fancher will have 30 days from receipt of any
well proposal within the AMI in which to elect to participate for his
working interest share. In addition to the AFE and plat Slawson agrees
to provide a geologic prognosis and a Drilling Title Opinion and/or an
Abstract and Attorney's opinion for Fancher's review.
7. Paragraph 11, page 3. Slawson agrees to provide the Escrow Agreement
referred to as Exhibit "4" approximately 30 days prior to spud of each
well.
8. Paragraph 15, page 4. Fancher will receive a license to all seismic
data acquired under this Agreement in which he shares in the cost of
said acquisition.
<PAGE>
If these modifications arc acceptable to Slawson, please so indicate by signing
both copies of this letter and returning one fully executed copy to this office
for inclusion in our files. If you have any questions please contact me at the
letterhead number or Mike Fitzgerald at 863-4483 or 290-8683. Thank you for your
time and cooperation.
Yours Very Truly,
/s/ George H. Fancher Jr.
George H. Fancher Jr., dba
Fancher Oil Company
Agreed to and Accepted this 30th day of April, 1997.
Slawson Exploration Company, Inc.
/s/ J. Bruce Branson
- ------------------------------------------
J. Bruce Branson
Title District Landman
<PAGE>
Slawson exploration company, inc.
Rocky Mountain Division
1625 Broadway, Suite 1450
Denver, Colorado 80202-4714
(303) 592-8880 - FAX (303) 592-8881
April 23, 1997
Fancher Oil Company
1801 B roadway, Suite 720
Denver, CO 80202
Attn: Mr. George H. Fancher, Jr.
RE: RM 96-004 Bali Prospect
Participation Agreement
Solano County, California
Gentlemen:
In this Participation Agreement, Slawson Exploration Company, Inc., a Kansas
Corporation d/b/a Donald C. Slawson Exploration Company, Inc. within the State
of California, shall hereinafter be referred to as "Slawson" and Fancher Oil
Company shall hereinafter be referred to as Fanchcr".
This Agreement will constitute our understanding regarding Fancher's purchase of
an interest in Slawson's Bali Prospect and the formation of an Area of Mutual
Interest.
The terms of this agreement are as follows:
1. Slawson is in the process of acquiring leasehold within the Bali Prospect,
the general geographic area for which is set out on Exhibit "1 ", attached
hereto and made a part hereof. Further, Slawson anticipates collecting and
processing approximately 40 square miles of 3D seismic within Bali
Prospect.
2. Fancher has agreed to participate with Slawson for a proportionate 25%
share of leasehold acquisition and collection of 3D seismic data within the
Bali Prospect. Maximum cost for seismic acquisition is estimated to be
$1,280,000. Land costs are estimated to be within a range of $180,000 to
$370,000, depending upon the amount of acreage eventually leased and the
price per acre, Fancher is responsible for spending its proportionate 25%
share of such amounts under the terms of this agreement, assuming such
costs are incurred within 12 months from the date hereof. If either or both
of such amounts an exceeded, Fancher may participate in additional
expenditures on a selected basis, under the terms of this agreement.
Fancher agrees to be bound by the terms and provisions of leasehold in
which it participates. Slawson shall be responsible for the remaining 75%
of such, obligations and shall hold Fancher harmless therefrom.
3. Fancher will reimburse Slawson for all leasehold and geophysical costs on
the basis. of cost plus 35%, so that Fancher's share of actual costs is
33.75%. Slawson is currently in the process of acquiring leasehold in the
Bali Prospect area. Simultaneous with the execution of this agreement,
Fancher will reimburse Slawson the sum of $38,812.50 which represents
leasehold and brokerage costs incurred or anticipated through April, 1997,
Reimbursement for remaining costs, or estimates of such costs, which may be
<PAGE>
Bali Participation Agreement
Fancher Oil Company
Page 2
April 25, 1997
made from time to time, will be made to Slawson by Fancher within 30 days
from receipt of an invoice. Slawson agrees to pay the remaining 66.25% of
costs or to find other participants to pay such costs.
4. An Area of Mutual Interest ("AMI") is hereby established consisting of
lands lying within Townships 7 and 8 North, Range 2 East, Solano County,
California. The AMI will be comprised of all lands located within the final
outline of the 3D seismic survey that is being conducted under the terms of
this agreement. When available, an outline of the survey, and thus the AMI,
will be attached hereto as. Exhibit "2". This* AM shall remain in effect
for the term of any oil and gas leases which become subject to this
agreement, whether by acquisition, extension or renewal. and shall
thereafter terminate unless production is established on any portion of
said lands through this agreement, and shall then continue so long as there
is production. Fancher shall be obligated to acquire its proportionate
share of all leasehold acquired by Slawson within the AMI up to a maximum
gross (unpromoted) expenditure of $370,000. If this amount is exceeded, and
if additional expenditure's are incurred for acquisition, Slawson will
promptly notify Fancher in writing of such acquisition, describing same and
the cost thereof. Fanchcr will have 20 days from receipt of such notice to.
elect whether or not to participate for its proportionate share of such
acquisition, insofar only as same covers lands in the subject AMI. The
failure of Fancher to reply positively within the 20 day time period will
be deemed an election not to participate in the acquisition. Fancher shall
not acquire any interest within this AMI except through this agreement,
while in effect, without the express written consent of Slawson.
5. Slawson shall be responsible for payment of all delay rentals, minimum and
shut-in royalties, as well as any other payments required to maintain
leases in full force and effect. Slawson shall not be liable for failure to
properly make such payments, in the absence of gross negligence. Upon
receipt of an invoice, Fancher shall, within 30 days, reimburse Slawson for
its proportionate share of such payments, or, at Fancher's election, notify
Slawson that it no longer desires to hold an interest in the applicable
lease(s), in which case Fancher's interest shall be relinquished to
Slawson..
6. Slawson will retain Fancher's proportionate share of title to all acquired
leasehold and/or farmin agreements beneficially for Fancher until such time
as a well is drilled and completed and a pooling agreement, if required,
has been filed. Slawson will then deliver an assignment to Fancher of its
proportional share of leasehold in the revenue sharing unit or acreage held
by the well's production, on a well-by-well basis, subject to obtaining any
required consent to assign under the provisions of the lease and/or farmin
agreements. If such consent to assign cannot be readily obtained, Slawson
shall hold title to the leasehold and agreements on behalf of Fancher. If
such consent is obtained, Slawson will promptly make assignment under the
terms of this paragraph, The intent of this paragraph is for Slawson to
hold title beneficially for Fancher in order to avoid the administrative
time and expense involved in making assignments; however, notwithstanding
the provisions of this paragraph, Fancher may demand assignment from
Slawson of all leasehold to which it holds an interest under the terms of
this agreement. If such a request is made, Slawson will make all reasonable
efforts to provide the assignment in a timely manner, subject to the
provisions of this agreement All leasehold acquired by any method under
this agreement (whether by Slawson or Fancher) will be subject to a
proportionately reduced 3.50% of 8/8ths overriding royalty interest in
favor of Slawson.
7. It is anticipated that Slawson will propose wells to be drilled within this
AMI on an ongoing basis. At the time of proposal. Slawson will provide
Fancher with written notice of its intended operation, specifying the
location of the well, estimated spud date, the depth and formation(s) to be
drilled, and an Authorization For Expenditure ("AFE") setting out estimated
dry hole and completion posts, and any other pertinent information. It is
<PAGE>
Bali Participation Agreement
Fancher Oil Company
Page 3
April 23, 1997
expressly understood that Slawson will make best efforts to insure that its
AFEs; present actual anticipated costs, Upon receipt of notice of a
proposed well, Fancher shall have 30 days within which to notify Slawson,
in writing, of its election to participate. The failure of Fancher to so
elect within the time specified shall be deemed an election by Fancher not
to participate in the proposed well. If Fancher elects not to participate
in a proposed well, or is deemed to have so elected, it shall forfeit all
of its interest in the leasehold, farmins, options, etc. covering the lands
within the revenue sharing unit for the proposed well. Excepted from this
forfeiture. would be: a) any area then established as a revenue sharing
unit for a producing well in which Fancher has previously participated, or
b) a well which is drilling or which has not spud, but in which Fancher has
committed to participate.
Should Fancher elect to participate in a well, it will be obligated to
participate in the entire proposed operation to casing point.. An election
to participate will also obligate Fancher to acquire its proportionate sham
of all interest acquired by Slawson in the well. through lease acquisition,
farmin acreage and/or non-consent interest (wherein the non-consent
interest is acquired from a third party, unrelated to the Slawson, Fancher
and the other participants in Bali Prospect, and where said non-consent
interest is required to make up 100% of the drillsite working interest
available for Slawson, Fancher and. the other participants in Bali
Prospect). In order to be entitled to the benefits of this numbered
paragraph, Slawson shall, within 90 days from expiration of the initial
notice period, spud the proposed well. The parties agree to make any and
all assignments necessary to accomplish the above provisions. Except in the
case of an expiring lease, farmout agreemen, farmout option agreement or
similar circumstance, only one well proposal may be made every 20 days
under the terms of this numbered paragraph. In all instances within this
numbered paragraph, the names Slawson and Fancher may be interchanged so
that either party may propose wells. It is recognized that there are
additional working interest owners in this project area that have ongoing
working interest capabilities in each proposed well. Further, it is
recognized that said additional working interest owners in this project
area have the ability to propose wells as set forth herein.
8. Fancher shall pay a $2,500 spud fee to Slawson for each well drilled under
the terms of this agreement, in which it participates.
9. An Operating Agreement in the form attached hereto as Exhibit "3" will be
executed for each well drilled under the terms of this agreement. The
Contract Area for each Operating Agreement will be comprised of the
designated revenue sharing unit for the well. In the event o a conflict
between the terms of this agreement and any such Operating Agreement, the
terms of this agreement shall prevail.
10. It is understood that the parties hereto may be required to negociate
operating agreements with third parties. The parties agree that if there
are any conflicts between the Operating Agreement attached hereto and any
third party operating agreement, the terms of the Operating Agreement
attached hereto shall control the relationship between Slawson and Fancher.
11. An Escrow Agreement in the form attached hereto as Exhibit "4" shall be
entered into between Slawson and Fancher for each well drilled under the
terms of this agreement. Article 1 of the Escrow Agreement provides a date
by which the participants in the well will deposit their funds into the
Escrow Account. Such date will be established by Slawson to be
approximately 30 days prior to spud of each well. If Fancher fails to
<PAGE>
Bali Participation Agreement
Fancher Oil Company
Page 4
April 23, 1997
deposit its share of the applicable costs, including its spud fee as set
out in paragraph 8 of this agreement, by this date, it will be assumed that
Fancher does not wish to participate in the well. In this event, Slawson
shall give Fancher notice that it has not received its funds and Fancher
will either deliver such funds to Slawson by 1:00 PM MST on the next
business day or be subject to the provisions of paragraph 7 of this
agreement, covering non participation. Slawson shall be obligated to place
funds received from all participants in the same escrow account, in
pro-rata amounts based on their share of costs.
12. Fancher's representatives shall have free access to any well within the
Bali Prospect in which it participates at all times and to all records
pertaining thereto. In addition, all geological information obtained in the
drilling of any well, in which Fancher participates, shall be made
available. Fancher may provide a list of its geological requirements to
Slawson, which shall be provided by Slawson, as reasonable.
13. If Slawson terminates its legal existence, transfers its interest to a
successor and no longer owns an interest in the Bali Prospect, or becomes
insolvent or bankrupt, or is placed in receivership, it shall cease to be
Operator without any action by Fancher or Slawson's other Non-Operating
partners, except the selection of a successor. Slawson may be removed if it
fails or refuses to carry out its duties hereunder or is no longer capable
of serving as Operator by the affirmative vote of Fancher and Slawson's
other Non-Operating Partners owning a majority interest based on ownership
in the Bali Prospect, after excluding the voting interest of Slawson. 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 60 days
after the giving of notice of resignation by Slawson or action by the
Non-Operators to remove Slawson, unless a successor Operator has been
selected and assumes the duties of Operator at an earlier date. Slawson,
after the effective date of resignation or removal, shall be bound by the
term hereof as Non-Operator. A change of a corporate name or structure of
Slawson or transfer of Slawson's interest to any single subsidiary or
parent corporation shall not be the basis for removal of Slawson.
Upon the resignation or removal of Slawson, a successor Operator shall be
selected by the affirmative to of Fancher and Slawson's other Non-Operating
partners owning a majority interest based on the ownership in the Bali
Prospect. The successor Operator shall be selected from the parties owning
an interest in the Bali Prospect at the time such successor Operator is
selected, If Slawson is removed or is deemed to have resigned, fails to
vote or votes only to succeed itself, the successor Operator shall be
selected by the affirmative vote of Fancher and Slawson's other
Non-Operating partners in the Bali Prospect owning a majority interest, and
after excluding the voting interest of Slawson.
This provision shall also apply to the resignation or removal of any
successor Operator.
14. The parties hereto agree that all disputes between them arising out of, or
in connection with, this Agreement shall be resolved by arbitration as
provided herein. This agreement to arbitrate shall survive the recission or
termination of this contract. All arbitration shall be conducted pursuant
to the Commercial Arbitration Rules of the American Arbitration
Association. If available, the panel used shall be selected from
arbitrators having at least 10 years of oil and gas experience and employed
<PAGE>
Bali Participation Agreement
Fancher Oil Company
Page 5
April 23, 1997
by the American Arbitration Association and the decision of the arbitrators
shall be final and binding on all parties. All arbitration shall be
undertaken pursuant to the Federal Arbitration Act, where applicable, and
the decision of the arbitrators shall be enforceable in any court of
competent jurisdiction.
15. Fancher will have full access to all seismic data and interpretations
thereof, for which it shares the cost of acquisition. If such data is ever
sold, Fancher will be entitled to 25% of the proceeds of such sale. Fancher
will not trade the data or allow third parties to review same, without
Slawson's express written consent.
16. All notices required herein shall be considered given when delivered
personally or when sent by facsimile or deposited in the U.S. Mail properly
addressed as follows:
Slawson Exploration Company, Inc. Fancher Oil Company
1612 Broadway, Suite 1450 1801 Broadway, Suite 720
Denver, CO 80202 Denver, CO 80202
FAX: (303) 592-8881 FAX, (303) 296-2433
17. The liabilities of the parties shall be several and not joint or
collective, and each party shall be responsible only for its share of the
costs and liabilities incurred as provided herein. It is not the purpose or
intention of this agreement to create any partnership, mining partnership
or association, and neither this agreement nor the operations herein shall
be construed or considered as creating any such legal relationship.
18. The terms and covenants hereof shall extend to, and be binding on, the
parties hereto, their heirs, successors, legal representatives and assigns;
however, Fancher will not assign its interest in this agreement without the
express written consent of Slawson. Such consent shall not be unreasonably
withheld. This agreement sets forth the entire agreement between the,
parties hereto, and there are no oral agreements not set out herein in
writing.
If the foregoing terms correctly set forth our understanding, please execute and
return one copy of this agreement.
Very Truly Yours,
/s/ Bruce Branson
Bruce Branson
District Landman
AGREED TO AND ACCEPTED THIS 29TH DAY OF APRIL, 1997
FANCHER OIL COMPANY
By /s/ George H. Fancher Jr.
----------------------------------
<PAGE>
FANCHER OIL COMPANY
- --------------------------------------------------------------------------------
Trinty Place - Suite 720 - 1801 Broadway - Denver, Colorado 80202-3835 - (303)
296-6600 - Fax (303) 296-2433
Slawson Exploration Company, Inc. April 29, 1997
1625 Broadway
Suite 1450
Denver, Colorado 80202-4714
Attention: Bruce Branson
RE: Bali Prospect
Participation Agreement/JOA
Solana County, California
Gentlemen,
Enclosed please find one copy of the referenced agreement which has been
executed on behalf of George H. Fancher, Jr. dba Fancher Oil Company, subject to
the following modifications.
1. All references to Fancher Oil Company in said prospect documents and
agreements shall be amended to read George H. Fancher, Jr. dba Fancher
Oil Company (Fancher).
2. Paragraph 3, page 2. Change the 15 day reimbursement on invoices to 30
days.
3. Paragraph 4, page 2. The time period under the AMI to respond to
acquisitions notices will be amended to 20 days.
4. Paragraph 5, page 2. Rental invoices will be reimbursed within 30 days
from receipt thereof.
5. Paragraph 6, page 2, Slawson agrees to provide Lease Exhibits,
spreadsheets and/or plats showing all leasehold and leasehold
acquisitions to Fancher upon request. Should Fancher elect to receive
assignments of all acquired leasehold, Slawson will make a good faith
effort to provide said assignments within 30 days.
6. Paragraph 7, page 3. Fancher will have 30 days from receipt of any
well proposal within the AMI in which to elect to participate for his
working interest share. in addition to the AFE and plat Slawson agrees
to provide a geologic prognosis and a Drilling. Title Opinion and/or
an Abstract and Attorney's opinion for Fancher's review.
7. Paragraph 11, page 3. Slawson agrees to provide the Escrow Agreement
referred to as Exhibit "4" approximately 30 days prior to spud of each
well.
8. Paragraph 15, page 4. Fancher will receive a license to all seismic
data acquired under this Agreement in which he shares in the cost of
said acquisition.
<PAGE>
If these modifications arc acceptable to Slawson, please so indicate by signing
both copies of this letter and returning one fully executed copy to this office
for inclusion in our files. If you have any questions please contact me at the
letterhead number or Mike Fitzgerald at 863-4483 or 290-8683. Thank you for your
time and cooperation.
Yours Very Truly,
/s/ George H. Fancher Jr.
George H. Fancher Jr., dba
Fancher Oil Company
Agreed to and Accepted this 30th day of April, 1997.
Slawson Exploration Company, Inc.
/s/ J. Bruce Branson
- ------------------------------------------
J. Bruce Branson
Title District Landman
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement dated as of August 29, 1997, from
George H. Fancher, Jr., d/b/a Fancher Oil Company ("Assignor") to Eastern Star
Holdings Inc. ("Assignee"),
RECITALS
A. Assignor is a party to those certain Participation Agreements in letter
form both dated April 23, 1997, as amended by acceptance letters dated
April 29, 1997, all between Assignor and Slawson Exploration Company,
Inc. d/b/a Donald C. Slawson Exploration Company, Inc., within the
State of California ("Slawson") (as so amended, the "Agreements").
These Agreements cover rights to be earned by Assignor in Slawson's
Fiji and Bali Prospects in Yolo and Solano Counties, California.
B. Assignor desires to assign to Assignee and Assignee desires to receive
from Assignor, and to assume all of Assignor's obligations under, the
Agreements.
ASSIGNMENT AND ASSUMPTION
IN CONSIDERATION of the above Recitals and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties do hereby agree as follows:
1. Assignment. Assignor hereby transfers, sells, assigns, and conveys all
of its right, title, and interest in and to the Agreements to Assignee
and its predecessors and assigns.
2. Assumption. Assignee hereby accepts all of Assignor's right, title,
and interest in and to the Agreements, and agrees to perform all of
Assignor"s obligations thereunder, and to indemnify and hold harmless
Assignor from any and all costs, expenses, liabilities, and claims
arising out of performance of said Agreements after the date of this
Assignment and Assumption.
3. Agreement. This Assignment and Assumption Agreement is in furtherance
of that certain agreement dated as of August 27, 1997, between
Assignor and Assignee. All terms, conditions, representation,
warranties, and covenants set forth in such agreement are incorporated
into this agreement as if fully set forth herein.
1
<PAGE>
4. Counterparts. This Assignment and Assumption Agreement may be executed
in any number of counterparts, each of which, when so executed, shall
be deemed an original and all of which taken together shall constitute
one and the same instrument.
5. Governing Law. This Assignment and Assumption Agreement shall be
deemed to be an agreement made under the laws of the State of Colorado
and for all purposes shall be governed by and construed in accordance
with such laws without regard to conflict of law provisions.
EXECUTED as of the date first above written.
GEORGE H. FANCHER, JR., d/b/a
FANCHER OIL COMPANY
-------------------------------------
George H. Fancher, Jr.
EASTERN STAR HOLDINGS, INC.
-------------------------------------
Title:
2
AGREEMENT FOR RENT
THIS AGREEMENT, is effective November 1, 1997 and is between Arizona
Corporate Management, Inc. ("Landlord") and Fan Energy Inc. (formerly Eastern
Star Holdings, Inc.)("Tenant").
1. Rent of Office Space. Landlord agrees to rent to Tenant office space on
a shared, nonexclusive basis at Landlord's premises at 14555 North Scottsdale
Road, No. 200, Scottsdale, Arizona 85254. Tenant shall be entitled to reasonable
use of Landlord's office facilities, including file storage, office space and
secretarial services as required. In addition, Tenant shall be entitled to use
Landlord's office equipment, including fax machine, copy machine, proprietary
telephone equipment and any other office equipment which Landlord has available
in the premises.
2. Term. This Agreement shall be on a month-to-month basis and may be
terminated by Tenant upon 30 days prior notice to Landlord. Landlord must
furnish Tenant with at least three months prior notice if Landlord intends to
terminate this Agreement and Tenant shall be entitled to continue to use the
premises following receipt of notice until termination.
3. Obligation to Pay Rent. Tenant shall pay to Landlord, as rent, a total
of $2,000 monthly, payable at the beginning of each month. Tenant shall
reimburse Landlord for any long distance telephone expenses, or similar
out-of-pocket expenses incurred by Landlord on behalf of the Tenant. Such
reimbursement shall be paid monthly, as charged to Tenant by Landlord.
4. Access to Premises. While this Agreement is in effect, Tenant shall have
reasonable access to the premises and may make reasonable use thereof, subject
to the right of Landlord and any other tenant similar to the Tenant to use the
premises. Tenant shall be subject to reasonable rules and practices established
Landlord from time to time regarding use of the premises.
LANDLORD:
ARIZONA CORPORATE MANAGEMENT, INC.
By /s/ William E. Grafham
------------------------------------------
Authorized Officer
TENANT:
FAN ENERGY INC.
By /s/ Albert A. Golusin
------------------------------------------
Authorized Officer
EASTERN STAR HOLDINGS, INC.
1997 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1. Purpose of Plan. The purpose of this 1997 Incentive and Nonstatutory
Stock Option Plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to the
Employees, Directors and Consultants of Eastern Star Holdings, Inc. (the
"Company") and to promote the success of the Company's business. Options granted
hereunder may be either "incentive stock options," as defined in Section 422 of
the Internal Revenue Code of 1986, as amended, or "nonstatutory stock options,"
at the discretion of the Board and as reflected in the terms of the written
stock option agreement.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company, or if a
Committee is appointed, "Board" shall refer to the Committee if the context
so requires.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the common stock of the Company.
(d) "Company" shall mean Eastern Star Holdings, Inc., a Nevada
corporation.
(e) "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan, if one
is appointed, or the Board if no committee is appointed.
(f) "Consultant" shall mean any person who is engaged by the Company
or any Subsidiary to render consulting services and is compensated for such
consulting services.
(g) "Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of sick leave,
military leave, or any other leave of absence approved by the Board;
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.
(h) "Employee" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the
Company.
(i) "Incentive Stock Option" shall mean an Option which is intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code and which shall be clearly identified as such in the written Stock
Option Agreement provided by the Company to each Optionee granted an
Incentive Stock Option under the Plan.
(j) "Non-Employee Director" shall mean a director who:
(i) Is not currently an officer (as defined in Section 16a-1(f)
of the Securities Exchange Act of 1934, as amended) of the Company or
a Parent or Subsidiary of the Company, or otherwise currently employed
by the Company or a Parent or Subsidiary of the Company;
(ii) Does not receive compensation, either directly or
indirectly, from the Company or a Parent or Subsidiary of the Company,
for services rendered as a Consultant or in any capacity other than as
a director, except for an amount that does not exceed the dollar
amount for which disclosure would be required pursuant to Item 404(a)
of Regulation S-K adopted by the United States Securities and Exchange
Commission; and
<PAGE>
(iii) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to Item 404(a) of
Regulation S-K adopted by the United States Securities and Exchange
Commission.
(k) "Nonstatutory Stock Option" shall mean an Option granted under
this Plan which does not qualify as an Incentive Stock Option and which
shall be clearly identified as such in the written Stock Option Agreement
provided by the Company to each Optionee granted a Nonstatutory Stock
Option under this Plan. To the extent that the aggregate fair market value
of Optioned Stock to which Incentive Stock Options granted under Options to
an Employee are exercisable for the first time during any calendar year
(under the Plan and all plans of the Company or any Parent or Subsidiary)
exceeds $100,000, such Options shall be treated as Nonstatutory Stock
Options under the Plan. The aggregate fair market value of the Optioned
Stock shall be determined as of the date of grant of each Option and the
determination of which Incentive Stock Options shall be treated as
qualified incentive stock options under Section 422 of the Code and which
Incentive Stock Options exercisable for the first time in a particular year
in excess of the $100,000 limitation shall be treated as Nonstatutory Stock
Options shall be determined based on the order in which such Options were
granted in accordance with Section 422(d) of the Code.
(l) "Option" shall mean an Incentive Stock Option, a Nonstatutory
Stock Option or both as identified in a written Stock Option Agreement
representing such stock option granted pursuant to the Plan.
(m) "Optioned Stock" shall mean the Common Stock subject to an Option.
(n) "Optionee" shall mean an Employee or other person who is granted
an Option.
(o) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(p) "Plan" shall mean this 1997 Incentive and Nonstatutory Stock
Option Plan.
(q) "Share" shall mean a share of the Common Stock of the Company, as
adjusted in accordance with Section 11 of the Plan.
(r) "Stock Option Agreement" shall mean the agreement to be entered
into between the Company and each Optionee which shall set forth the terms
and conditions of each Option granted to each Optionee, including the
number of Shares underlying such Option and the exercise price of each
Option granted to such Optionee under such agreement.
(s) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,000,000 shares of Common Stock. The Shares may be
authorized, but unissued, or reacquired Common Stock. If an Option should expire
or become unexercisable for any reason without having been exercised in full,
the unpurchased Shares which were subject thereto shall, unless the Plan shall
have been terminated, become available for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure. The Plan shall be administered by the Board or a
Committee appointed by the Board consisting of two or more Non-Employee
Directors to administer the Plan on behalf of the Board, subject to such
terms and conditions as the Board may prescribe. If the Company has a class
of its equity securities registered under the Securities Exchange Act of
1934, as amended ("1934 Act"), the Board shall appoint such a Committee.
2
<PAGE>
(i) Once appointed, the Committee shall continue to serve until
otherwise directed by the Board (which for purposes of this paragraph
(a)(i) of this Section 4 shall be the Board of Directors of the
Company). From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with
or without cause) and appoint new members in substitution therefor,
fill vacancies however caused, or remove all members of the Committee
and thereafter directly administer the Plan.
(ii) Members of the Board who are granted, or have been granted,
Options may vote on any matters affecting the administration of the
Plan or the grant of any Options pursuant to the Plan.
(b) Powers of the Board. Subject to the provisions of the Plan, the
Board (or the Committee, subject to the approval of the Board) shall have
the authority, in its discretion:
(i) To grant Incentive Stock Options, in accordance with Section
422 of the Code, and Nonstatutory Stock Options or both as provided
and identified in a separate written Stock Option Agreement to each
Optionee granted such Option or Options under the Plan; provided
however, that in no event shall an Incentive Stock Option and a
Nonstatutory Stock Option granted to any Optionee under a single Stock
Option Agreement be subject to a "tandem" exercise arrangement such
that the exercise of one such Option affects the Optionee's right to
exercise the other Option granted under such Stock Option Agreement;
(ii) To determine, upon review of relevant information and in
accordance with Section 8(b) of the Plan, the fair market value of the
Common Stock;
(iii) To determine the exercise price per Share of Options to be
granted, which exercise price shall be determined in accordance with
Section 8(a) of the Plan;
(iv) To determine the Employees or other persons to whom, and the
time or times at which, Options shall be granted and the number of
Shares to be represented by each Option;
(v) To interpret the Plan;
(vi) To prescribe, amend and rescind rules and regulations
relating to the Plan;
(vii) To determine the terms and provisions of each Option
granted (which need not be identical) and, with the consent of the
holder thereof, modify or amend each Option;
(viii) To accelerate or defer (with the consent of the Optionee)
the exercise date of any Option, consistent with the provisions of
Section 7 of the Plan;
(ix) To authorize any person to execute on behalf of the Company
any instrument required to effectuate the grant of an Option
previously granted by the Board; and
(x) To make all other determinations deemed necessary or
advisable for the administration of the Plan.
(xi) To determine whether a holder of Nonstatutory Stock Options
granted under this Plan shall have engaged in conduct which is
contrary to the best interests of the Company and whose Nonstatutory
Stock Option is therefore subject to cancellation as set forth in
Section 7.
3
<PAGE>
(c) Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees
and any other permissible holders of any Options granted under the Plan.
5. Eligibility.
(a) Persons Eligible. Options may be granted to any person selected by
the Board. Incentive Stock Options may be granted only to Employees. An
Employee, who is also a director of the Company, its Parent or a
Subsidiary, shall be treated as an Employee for purposes of this Section 5.
An Employee or other person who has been granted an Option may, if he is
otherwise eligible, at the discretion of the Committee, if a Committee has
been appointed, or the Board, be granted an additional Option or Options.
(b) No Effect on Relationship. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or other
relationship with the Company nor shall it interfere in any way with his
right or the Company's right to terminate his employment or other
relationship at any time.
6. Term of Plan. The Plan became effective on the date first approved and
adopted by the Board of Directors, as set forth on the last page of this Plan.
It shall continue in effect for 10 years from the date of such approval and
adoption, unless sooner terminated under Section 13 of the Plan.
7. Term of Option. The term of each Option shall be 10 years from the date
of grant thereof or such shorter term as may be provided in the Stock Option
Agreement. However, in the case of an Incentive Stock Option granted to an
Optionee who, at the time the Option is granted, owns stock representing more
than 10% of the total combined voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five years
from the date of grant thereof or such shorter time as may be provided in the
Stock Option Agreement.
The Nonstatutory Stock Options granted to, and held by, any person under
this Plan, may be deemed canceled and forfeited by the Board, if the Board, in
its sole discretion, determines that the conduct of the holder of such
Nonstatutory Stock Option has been contrary to the best interests of the Company
and could reasonably be deemed by the Board to have a material adverse effect on
the Company or the business of the Company.
8. Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be no less than the fair
market value of Shares of common stock as of the date of grant of the
option or such higher price as may be determined by the Board, but the per
Share exercise price under an Incentive Stock Option shall be subject to
the following:
(i) If granted to an Employee who, at the time of the grant of
such Incentive Stock Option, owns stock representing more than 10% of
the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall not be less than
110% of the fair market value per Share on the date of grant.
(ii) If granted to any other Employee, the per Share exercise
price shall not be less than 100% of the fair market value per Share
on the date of grant.
(b) Determination of Fair Market Value. The fair market value per
Share on the date of grant shall be determined as follows:
4
<PAGE>
(i) If the Common Stock is listed on the New York Stock Exchange,
the American Stock Exchange or such other securities exchange
designated by the Board, or admitted to unlisted trading privileges on
any such exchange, or if the Common Stock is quoted on a National
Association of Securities Dealers, Inc. system that reports closing
prices, the fair market value shall be the closing price of the Common
Stock as reported by such exchange or system on the day the fair
market value is to be determined, or if no such price is reported for
such day, then the determination of such closing price shall be as of
the last immediately preceding day on which the closing price is so
reported;
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges or so quoted, the fair market value shall be the
average of the last reported highest bid and the lowest asked prices
quoted on the National Association of Securities Dealers, Inc.
Automated Quotations System or, if not so quoted, then by the National
Quotation Bureau, Inc. on the day the fair market value is determined;
or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges or so quoted, and bid and asked prices are
not reported, the fair market value shall be determined in such
reasonable manner as may be prescribed by the Board.
(c) Consideration and Method of Payment. The consideration to be paid
for the Shares to be issued upon exercise of an Option, including the
method of payment, shall be determined by the Board and may consist
entirely of cash, check, other shares of Common Stock having a fair market
value on the date of exercise equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, or any combination of
such methods of payment, or such other consideration and method of payment
for the issuance of Shares to the extent permitted under the Nevada
Business Corporation Act.
9. Exercise of Option.
(a) Procedure for Exercise: Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible
under the terms of the Plan.
In the sole discretion of the Board, at the time of the grant of an
Option or subsequent thereto but prior to the exercise of an Option, an
Optionee may be provided with the right to exchange, in a cashless
transaction, all or part of the Option for Common Stock of the Company on
terms and conditions determined by the Board.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received
by the Company. Full payment, as authorized by the Board, may consist of a
consideration and method of payment allowable under Section 8(c) and this
Section 9(a) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of the duly authorized
transfer agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
5
<PAGE>
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of
the Plan and for exercise under the Option, by the number of Shares as to
which the Option is exercised.
(b) Termination of Status as an Employee. In the case of an Incentive
Stock Option, if any Employee ceases to serve as an Employee, he may, but
only within such period of time not exceeding three months as is determined
by the Board at the time of grant of the Option, after the date he ceases
to be an Employee of the Company, exercise his Option to the extent that he
was entitled to exercise the Option at the date of such termination. To the
extent that he was not entitled to exercise the Option at the date of such
termination, or if he does not exercise any portion of the Option which he
was entitled to exercise at the date of termination within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the case of an Incentive Stock Option,
notwithstanding the provisions of Section 9(b) above, in the event an
Employee is unable to continue his employment with the Company as a result
of his total and permanent disability (as defined in Section 22(e)(3) of
the Code), he may, but only within such period of time not exceeding 12
months as is determined by the Board at the time of grant of the Option
from the date of termination, exercise his Option to the extent he was
entitled to exercise it at the date of such termination. To the extent that
he was not entitled to exercise the Option at the date of termination, or
if he does not exercise any portion of the Option which he was entitled to
exercise at the date of disability within the time specified herein, the
Option shall terminate.
(d) Death of Optionee. In the case of an Incentive Stock Option, in
the event of the death of the Optionee:
(i) During the term of the Option if the Optionee was at the time
of his death an Employee the Company and had been in Continuous Status
as an Employee or Consultant since the date of grant of the Option,
the Option may be exercised, at any time within 12 months following
the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have
accrued had the Optionee continued living and remained in Continuous
Status as an Employee 12 months after the date of death; or
(ii) Within such period of time not exceeding three months as is
determined by the Board at the time of grant of the Option after the
termination of Continuous Status as an Employee, the Option may be
exercised, at any time within 12 months following the date of death,
by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of termination.
10. Nontransferability of Options. In the case of an Incentive Stock
Option, the Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner (a "sale or other transfer") other
than by will or by the laws of descent and distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee. In the case of a
nonstatutory stock option, an Option may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner during the period ending
one year from the date of grant and thereafter only (i) after written notice to
the Board and (ii) in a manner which is in compliance with all applicable
provisions of the Securities Act of 1933, as amended ("1933 Act") and the 1934
Act to the reasonable satisfaction of the Company. Upon any permitted sale or
other transfer, the transferee shall remain subject to all terms and conditions
of the Plan and the Stock Option Agreement.
6
<PAGE>
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of Shares covered
by each outstanding Option, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of any
Option, as well as the price per Share covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of the proposed sale of all or substantially all of the assets of the Company,
or the merger of the Company with or into another corporation in a transaction
in which the Company is not the survivor, the Option shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or subsidiary of such successor corporation, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
that the Optionee shall have the right to exercise the Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of such a merger or sale of assets, the
Board shall notify the Optionee that the Option shall be fully exercisable for a
period of 30 days from the date of such notice, and the Option will terminate
upon the expiration of such period.
12. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or other
person to whom an Option is so granted within a reasonable time after the date
of such grant. Within a reasonable time after the date of the grant of an
Option, the Company shall enter into and deliver to each Employee or other
person granted such Option a written Stock Option Agreement as provided in
Sections 2(r) and 16 hereof, setting forth the terms and conditions of such
Option and separately identifying the portion of the Option which is an
Incentive Stock Option and/or the portion of such Option which is a Nonstatutory
Stock Option.
13. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may amend or terminate the
Plan from time to time in such respects as the Board may deem advisable;
provided that, the following revisions or amendments shall require approval
of the shareholders of the Company in the manner described in Section 17 of
the Plan:
(i) An increase in the number of Shares subject to the Plan above
1,000,000 Shares, other than in connection with an adjustment under
Section 11 of the Plan;
7
<PAGE>
(ii) Any change in the designation of the class of Employees
eligible to be granted Incentive Stock Options; or
(iii) Any material amendment under the Plan that would have to be
approved by the shareholders of the Company for the Board to continue
to be able to grant Incentive Stock Options under the Plan.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if the Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the 1933 Act, the 1934 Act,
the rules and regulations promulgated thereunder, applicable state securities
laws, and the requirements of any stock exchange upon which the Shares may then
be listed, and shall be further subject to the approval of legal counsel for the
Company with respect to such compliance.
As a condition to the existence of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares and such other
representations and warranties which in the opinion of legal counsel for the
Company, are necessary or appropriate to establish an exemption from the
registration requirements under applicable federal and state securities laws
with respect to the acquisition of such Shares.
15. Reservation of Shares. The Company, during the term of this Plan, will
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's legal counsel to be necessary for the lawful issuance
and sale of any Share hereunder, shall relieve the Company of any liability
relating to the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
16. Option Agreement. Each Option granted to an Employee or other persons
shall be evidenced by a written Stock Option Agreement. The Stock Option
Agreement shall be in the form and shall include the terms and conditions set
forth on Exhibit A attached hereto.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company. Such shareholder approval and any
shareholder approval required under Section 13 of the Plan, may be obtained at a
duly held shareholders meeting by the affirmative vote of the holders of a
majority of the outstanding shares of the voting stock of the Company, who are
present or represented and entitled to vote thereon, or by unanimous written
consent of the shareholders in accordance with the provisions of the Nevada
Business Corporation Act.
18. Information to Optionees. The Company shall provide to each Optionee,
during the period for which such Optionee has one or more Options outstanding,
copies of all annual reports and other information which are provided to all
shareholders of the Company. The Company shall not be required to provide such
information if the issuance of Options under the Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
8
<PAGE>
19. Gender. As used herein, the masculine, feminine and neuter genders
shall be deemed to include the others in all cases where they would so apply.
20. CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE
GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
NEVADA.
Adopted by Directors: Effective May 9, 1997
Adopted by Shareholders: Effective May 15, 1997
EASTERN STAR HOLDINGS, INC..
organized under the laws of Nevada
By /s/ William E. Grafham
----------------------------------
William E. Grafham, Chairman
ATTEST:
/s/ Albert Golusin
- --------------------------------------
Albert Golusin, Secretary
FANCHER OIL COMPANY
- --------------------------------------------------------------------------------
Trinty Place - Suite 720 - 1801 Broadway - Denver, Colorado 80202-3835 - (303)
296-6600 - Fax (303) 296-2433
March 6, 1998
Mr. William E. Grafham, President
FAN Energy Inc.
1801 Broadway, Suite 720
Denver, Colorado 80202
Re: Certain Understandings Regarding
Conflicts of Interest
Dear Bill:
This letter is intended to set forth the understandings and agreements
which we have regarding potential conflicts of interest which may exist or which
might develop between FAN Energy Inc. (Company) and George H. Fancher, Jr.,
(d/b/a Fancher Oil Company), a/k/a Fancher Oil LLC and Fancher Resources, LLC. I
am suggesting that these conflicts and potential conflicts be handled in the
manner set forth below. If this suggested resolution of these issues is
acceptable to you and to the other directors of the Company, I suggest that
these understandings be adopted as applicable to all potential conflicts.
1. I will continue to engage in the oil and gas business for my own
account much as I have done in the past. I will not be expected to
report to or account to the Company regarding any of my business
activities.
2. I agree that when an oil and gas project is developed by me or any of
the other entities through which I conduct my oil and gas business,
and which is offered for participation to others, I will make the
participation available to FAN Energy Inc., if in my discretion, the
project would be appropriate for the Company. This will be done by
notifying you of the project, including anticipated costs, timing,
etc. The terms offered to the Company will be no less favorable to the
Company than are available to any third party participant.
3. Likewise, when an oil and gas project developed by others is presented
to me for my participation, if participation by FAN Energy Inc.
appears appropriate in the project to me in my sole discretion, I will
pass on the opportunity for the Company to participate. I may also
participate individually. The terms of such a project to be offered to
the Company will be no less favorable to the Company than are
available to me.
<PAGE>
Mr. William E. Grafham, President
FAN Energy Inc.
March 6, 1998
Page Two
4. The Company will not participate in any project presented by me unless
a majority of the other directors, acting on behalf of the Company,
approve the participation.
5. From time to time I or an entity controlled by me may serve as the
Operator of an oil and gas project in which the Company is or becomes
a participant. In such event, charges made by me as Operator to the
Company for its share of costs and expenses will not exceed the rate
for such charges or expenses made to other unaffiliated participants
In the project.
Please review the above. Assuming they are acceptable to you and the other
directors, I suggest that a summary of the above understandings be included in
the registration statement and other public documents which were prepared on
behalf of the Company. Also, the understanding set forth above should be
applicable to all other officers and directors.
Sincerely,
/s/ George H. Fancher Jr.
George H. Fancher, Jr.
GHF:jh
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT'S CONSENT
We consent to the incorporation by reference in the Registration Statement of
Fan Energy Inc. on Form SB-2 of our report dated January 30, 1998 on our audit
of the financial statements of Fan Energy Inc. as of December 31, 1997.
/s/ Wheeler Wasoff, P.C.
WHEELER WASOFF, P.C.
Denver, Colorado
March 9, 1998
SCHVANEVELDT AND COMPANY
Certified Public Accountant
275 E. South Temple, Suite 300
Salt Lake City, Utah 84111
(801) 521-2392
Consent of Independent Auditor
TO THE BOARD OF DIRECTORS OF EASTERN STAR MINING INC.
I hereby consent to the use in the Registration Statement and Prospectus to
be used in connection with a public offering of securities, which you are filing
with the Securities & Exchange Commission of our Opinion dated February 15,
1997, relating to the Financial Statements of Eastern Star Mining, Inc., and
subsequently included in the Prospectus, constituting a part of the Registration
Statement. We also consent to the reference to us in the Prospectus under the
heading "EXPERTS".
/s/ Schvaneveldt and Company
SCHVANEVELDT AND COMPANY
March 9, 1998
Salt Lake City, Utah
CONSENT OF ATTORNEY
Reference is made to the Registration Statement on Form SB-2 pursuant to
which certain Selling Securityholders described therein propose to sell a
maximum of 3,000,000 shares of the $0.001 par value common stock ("Common
Stock") of the Company. Reference is also made to the opinion dated March 10,
1998 included as Exhibit (5.1) to the Registration Statement relating to the
legality of the securities proposed to be issued and to be sold.
I hereby consent to the filing of the opinion dated March 10, 1998, as an
exhibit to the Company's Registration Statement on Form SB-2 and reference to
the undersigned in the Registration Statement under the caption "Legal Matters."
/s/ Alan W. Peryam
------------------------------------
Alan W. Peryam
Denver, Colorado
Dated: March 10, 1998
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints William
E. Grafham and Albert A. Golusin, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him in his name, place and stead, in his capacity as an
officer, director, or both of Fan Energy Inc., a Nevada corporation ("Company"),
to sign the Company's Registration Statement on Form SB-2, and any and all
amendments thereto (including post-effective amendments) and to file the same
with the United States Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact or
agents or any of them, or their or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Willaim E. Grafham Director March 10, 1998
- ----------------------------------------
William E. Grafham
/s/ George H. Fancher Jr. Director March 10, 1998
- ----------------------------------------
George H. Fancher Jr.
/s/ Jeffrey J. Scott Director March 10, 1998
- ----------------------------------------
Jeffrey J. Scott
/s/ Rex L. Utsler Director March 10, 1998
- ---------------------------------------
Rex L. Utsler, Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1997 AND RELATED STATEMENTS OF OPERATIONS AND
STOCKHOLDERS' EQUITY.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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